[Congressional Record (Bound Edition), Volume 163 (2017), Part 14]
[House]
[Pages 19873-20080]
[From the U.S. Government Publishing Office, www.gpo.gov]




           CONFERENCE REPORT ON H.R. 1, TAX CUTS AND JOBS ACT

  Mr. BRADY of Texas submitted the following conference report and 
statement on the bill (H.R. 1) to provide for reconciliation pursuant 
to titles II and V of the concurrent resolution on the budget for 
fiscal year 2018:

                  Conference Report (H. Rept. 115-466)

       The committee of conference on the disagreeing votes of the 
     two Houses on the amendment of the Senate to the bill (H.R. 
     1), to provide for reconciliation pursuant to titles II and V 
     of the concurrent resolution on the budget for fiscal year 
     2018, 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:

                                TITLE I

     SEC. 11000. SHORT TITLE, ETC.

       (a) Short Title.--This title may be cited as the ``Tax Cuts 
     and Jobs Act''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this title 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.

                   Subtitle A--Individual Tax Reform

                        PART I--TAX RATE REFORM

     SEC. 11001. MODIFICATION OF RATES.

       (a) In General.--Section 1 is amended by adding at the end 
     the following new subsection:
       ``(j) Modifications for Taxable Years 2018 Through 2025.--
       ``(1) In general.--In the case of a taxable year beginning 
     after December 31, 2017, and before January 1, 2026--
       ``(A) subsection (i) shall not apply, and
       ``(B) this section (other than subsection (i)) shall be 
     applied as provided in paragraphs (2) through (6).
       ``(2) Rate tables.--
       ``(A) Married individuals filing joint returns and 
     surviving spouses.--The following table shall be applied in 
     lieu of the table contained in subsection (a):


 
           ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $19,050.............................  10% of taxable income.
Over $19,050 but not over $77,400............  $1,905, plus 12% of the
                                                excess over $19,050.
Over $77,400 but not over $165,000...........  $8,907, plus 22% of the
                                                excess over $77,400.
Over $165,000 but not over $315,000..........  $28,179, plus 24% of the
                                                excess over $165,000.
Over $315,000 but not over $400,000..........  $64,179, plus 32% of the
                                                excess over $315,000.
Over $400,000 but not over $600,000..........  $91,379, plus 35% of the
                                                excess over $400,000.
Over $600,000................................  $161,379, plus 37% of the
                                                excess over $600,000.

       ``(B) Heads of households.--The following table shall be 
     applied in lieu of the table contained in subsection (b):


 
           ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $13,600.............................  10% of taxable income.
Over $13,600 but not over $51,800............  $1,360, plus 12% of the
                                                excess over $13,600.
Over $51,800 but not over $82,500............  $5,944, plus 22% of the
                                                excess over $51,800.
Over $82,500 but not over $157,500...........  $12,698, plus 24% of the
                                                excess over $82,500.
Over $157,500 but not over $200,000..........  $30,698, plus 32% of the
                                                excess over $157,500.
Over $200,000 but not over $500,000..........  $44,298, plus 35% of the
                                                excess over $200,000.
Over $500,000................................  $149,298, plus 37% of the
                                                excess over $500,000.

       ``(C) Unmarried individuals other than surviving spouses 
     and heads of households.--The following table shall be 
     applied in lieu of the table contained in subsection (c):


[[Page 19874]]



 
           ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $9,525..............................  10% of taxable income.
Over $9,525 but not over $38,700.............  $952.50, plus 12% of the
                                                excess over $9,525.
Over $38,700 but not over $82,500............  $4,453.50, plus 22% of
                                                the excess over $38,700.
Over $82,500 but not over $157,500...........  $14,089.50, plus 24% of
                                                the excess over $82,500.
Over $157,500 but not over $200,000..........  $32,089.50, plus 32% of
                                                the excess over
                                                $157,500.
Over $200,000 but not over $500,000..........  $45,689.50, plus 35% of
                                                the excess over
                                                $200,000.
Over $500,000................................  $150,689.50, plus 37% of
                                                the excess over
                                                $500,000.

       ``(D) Married individuals filing separate returns.--The 
     following table shall be applied in lieu of the table 
     contained in subsection (d):


 
           ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $9,525..............................  10% of taxable income.
Over $9,525 but not over $38,700.............  $952.50, plus 12% of the
                                                excess over $9,525.
Over $38,700 but not over $82,500............  $4,453.50, plus 22% of
                                                the excess over $38,700.
Over $82,500 but not over $157,500...........  $14,089.50, plus 24% of
                                                the excess over $82,500.
Over $157,500 but not over $200,000..........  $32,089.50, plus 32% of
                                                the excess over
                                                $157,500.
Over $200,000 but not over $300,000..........  $45,689.50, plus 35% of
                                                the excess over
                                                $200,000.
Over $300,000................................  $80,689.50, plus 37% of
                                                the excess over
                                                $300,000.

       ``(E) Estates and trusts.--The following table shall be 
     applied in lieu of the table contained in subsection (e):


 
           ``If taxable income is:                    The tax is:
------------------------------------------------------------------------
Not over $2,550..............................  10% of taxable income.
Over $2,550 but not over $9,150..............  $255, plus 24% of the
                                                excess over $2,550.
Over $9,150 but not over $12,500.............  $1,839, plus 35% of the
                                                excess over $9,150.
Over $12,500.................................  $3,011.50, plus 37% of
                                                the excess over $12,500.

       ``(F) References to rate tables.--Any reference in this 
     title to a rate of tax under subsection (c) shall be treated 
     as a reference to the corresponding rate bracket under 
     subparagraph (C) of this paragraph, except that the reference 
     in section 3402(q)(1) to the third lowest rate of tax 
     applicable under subsection (c) shall be treated as a 
     reference to the fourth lowest rate of tax under subparagraph 
     (C).
       ``(3) Adjustments.--
       ``(A) No adjustment in 2018.--The tables contained in 
     paragraph (2) shall apply without adjustment for taxable 
     years beginning after December 31, 2017, and before January 
     1, 2019.
       ``(B) Subsequent years.--For taxable years beginning after 
     December 31, 2018, the Secretary shall prescribe tables which 
     shall apply in lieu of the tables contained in paragraph (2) 
     in the same manner as under paragraphs (1) and (2) of 
     subsection (f) (applied without regard to clauses (i) and 
     (ii) of subsection (f)(2)(A)), except that in prescribing 
     such tables--
       ``(i) subsection (f)(3) shall be applied by substituting 
     `calendar year 2017' for `calendar year 2016' in subparagraph 
     (A)(ii) thereof,
       ``(ii) subsection (f)(7)(B) shall apply to any unmarried 
     individual other than a surviving spouse or head of 
     household, and
       ``(iii) subsection (f)(8) shall not apply.
       ``(4) Special rules for certain children with unearned 
     income.--
       ``(A) In general.--In the case of a child to whom 
     subsection (g) applies for the taxable year, the rules of 
     subparagraphs (B) and (C) shall apply in lieu of the rule 
     under subsection (g)(1).
       ``(B) Modifications to applicable rate brackets.--In 
     determining the amount of tax imposed by this section for the 
     taxable year on a child described in subparagraph (A), the 
     income tax table otherwise applicable under this subsection 
     to the child shall be applied with the following 
     modifications:
       ``(i) 24-percent bracket.--The maximum taxable income which 
     is taxed at a rate below 24 percent shall not be more than 
     the sum of--

       ``(I) the earned taxable income of such child, plus
       ``(II) the minimum taxable income for the 24-percent 
     bracket in the table under paragraph (2)(E) (as adjusted 
     under paragraph (3)) for the taxable year.

       ``(ii) 35-percent bracket.--The maximum taxable income 
     which is taxed at a rate below 35 percent shall not be more 
     than the sum of--

       ``(I) the earned taxable income of such child, plus
       ``(II) the minimum taxable income for the 35-percent 
     bracket in the table under paragraph (2)(E) (as adjusted 
     under paragraph (3)) for the taxable year.

       ``(iii) 37-percent bracket.--The maximum taxable income 
     which is taxed at a rate below 37 percent shall not be more 
     than the sum of--

       ``(I) the earned taxable income of such child, plus
       ``(II) the minimum taxable income for the 37-percent 
     bracket in the table under paragraph (2)(E) (as adjusted 
     under paragraph (3)) for the taxable year.

       ``(C) Coordination with capital gains rates.--For purposes 
     of applying section 1(h) (after the modifications under 
     paragraph (5)(A))--
       ``(i) the maximum zero rate amount shall not be more than 
     the sum of--

       ``(I) the earned taxable income of such child, plus
       ``(II) the amount in effect under paragraph (5)(B)(i)(IV) 
     for the taxable year, and

       ``(ii) the maximum 15-percent rate amount shall not be more 
     than the sum of--

       ``(I) the earned taxable income of such child, plus
       ``(II) the amount in effect under paragraph (5)(B)(ii)(IV) 
     for the taxable year.

       ``(D) Earned taxable income.--For purposes of this 
     paragraph, the term `earned taxable income' means, with 
     respect to any child for any taxable year, the taxable income 
     of such child reduced (but not below zero) by the net 
     unearned income (as defined in subsection (g)(4)) of such 
     child.
       ``(5) Application of current income tax brackets to capital 
     gains brackets.--
       ``(A) In general.--Section 1(h)(1) shall be applied--
       ``(i) by substituting `below the maximum zero rate amount' 
     for `which would (without regard to this paragraph) be taxed 
     at a rate below 25 percent' in subparagraph (B)(i), and
       ``(ii) by substituting `below the maximum 15-percent rate 
     amount' for `which would (without regard to this paragraph) 
     be taxed at a rate below 39.6 percent' in subparagraph 
     (C)(ii)(I).
       ``(B) Maximum amounts defined.--For purposes of applying 
     section 1(h) with the modifications described in subparagraph 
     (A)--
       ``(i) Maximum zero rate amount.--The maximum zero rate 
     amount shall be--

       ``(I) in the case of a joint return or surviving spouse, 
     $77,200,
       ``(II) in the case of an individual who is a head of 
     household (as defined in section 2(b)), $51,700,
       ``(III) in the case of any other individual (other than an 
     estate or trust), an amount equal to \1/2\ of the amount in 
     effect for the taxable year under subclause (I), and
       ``(IV) in the case of an estate or trust, $2,600.

       ``(ii) Maximum 15-percent rate amount.--The maximum 15-
     percent rate amount shall be--

       ``(I) in the case of a joint return or surviving spouse, 
     $479,000 (\1/2\ such amount in the case of a married 
     individual filing a separate return),
       ``(II) in the case of an individual who is the head of a 
     household (as defined in section 2(b)), $452,400,
       ``(III) in the case of any other individual (other than an 
     estate or trust), $425,800, and
       ``(IV) in the case of an estate or trust, $12,700.

       ``(C) Inflation adjustment.--In the case of any taxable 
     year beginning after 2018, each of the dollar amounts in 
     clauses (i) and (ii) of subparagraph (B) shall be increased 
     by an amount equal to--
       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     subsection (f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2017' 
     for `calendar year 2016' in subparagraph (A)(ii) thereof.
     If any increase under this subparagraph is not a multiple of 
     $50, such increase shall be rounded to the next lowest 
     multiple of $50.

[[Page 19875]]

       ``(6) Section 15 not to apply.--Section 15 shall not apply 
     to any change in a rate of tax by reason of this 
     subsection.''.
       (b) Due Diligence Tax Preparer Requirement With Respect to 
     Head of Household Filing Status.--Subsection (g) of section 
     6695 is amended to read as follows:
       ``(g) Failure to Be Diligent in Determining Eligibility for 
     Certain Tax Benefits.--Any person who is a tax return 
     preparer with respect to any return or claim for refund who 
     fails to comply with due diligence requirements imposed by 
     the Secretary by regulations with respect to determining--
       ``(1) eligibility to file as a head of household (as 
     defined in section 2(b)) on the return, or
       ``(2) eligibility for, or the amount of, the credit 
     allowable by section 24, 25A(a)(1), or 32,
     shall pay a penalty of $500 for each such failure.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 11002. INFLATION ADJUSTMENTS BASED ON CHAINED CPI.

       (a) In General.--Subsection (f) of section 1 is amended by 
     striking paragraph (3) and by inserting after paragraph (2) 
     the following new paragraph:
       ``(3) Cost-of-living adjustment.--For purposes of this 
     subsection--
       ``(A) In general.--The cost-of-living adjustment for any 
     calendar year is the percentage (if any) by which--
       ``(i) the C-CPI-U for the preceding calendar year, exceeds
       ``(ii) the CPI for calendar year 2016, multiplied by the 
     amount determined under subparagraph (B).
       ``(B) Amount determined.--The amount determined under this 
     clause is the amount obtained by dividing--
       ``(i) the C-CPI-U for calendar year 2016, by
       ``(ii) the CPI for calendar year 2016.
       ``(C) Special rule for adjustments with a base year after 
     2016.--For purposes of any provision of this title which 
     provides for the substitution of a year after 2016 for `2016' 
     in subparagraph (A)(ii), subparagraph (A) shall be applied by 
     substituting `the C-CPI-U for calendar year 2016' for `the 
     CPI for calendar year 2016' and all that follows in clause 
     (ii) thereof.''.
       (b) C-CPI-U.--Subsection (f) of section 1 is amended by 
     striking paragraph (7), by redesignating paragraph (6) as 
     paragraph (7), and by inserting after paragraph (5) the 
     following new paragraph:
       ``(6) C-CPI-U.--For purposes of this subsection--
       ``(A) In general.--The term `C-CPI-U' means the Chained 
     Consumer Price Index for All Urban Consumers (as published by 
     the Bureau of Labor Statistics of the Department of Labor). 
     The values of the Chained Consumer Price Index for All Urban 
     Consumers taken into account for purposes of determining the 
     cost-of-living adjustment for any calendar year under this 
     subsection shall be the latest values so published as of the 
     date on which such Bureau publishes the initial value of the 
     Chained Consumer Price Index for All Urban Consumers for the 
     month of August for the preceding calendar year.
       ``(B) Determination for calendar year.--The C-CPI-U for any 
     calendar year is the average of the C-CPI-U as of the close 
     of the 12-month period ending on August 31 of such calendar 
     year.''.
       (c) Application to Permanent Tax Tables.--
       (1) In general.--Section 1(f)(2)(A) is amended to read as 
     follows:
       ``(A) except as provided in paragraph (8), by increasing 
     the minimum and maximum dollar amounts for each bracket for 
     which a tax is imposed under such table by the cost-of-living 
     adjustment for such calendar year, determined--
       ``(i) except as provided in clause (ii), by substituting 
     `1992' for `2016' in paragraph (3)(A)(ii), and
       ``(ii) in the case of adjustments to the dollar amounts at 
     which the 36 percent rate bracket begins or at which the 39.6 
     percent rate bracket begins, by substituting `1993' for 
     `2016' in paragraph (3)(A)(ii),''.
       (2) Conforming amendments.--Section 1(i) is amended--
       (A) by striking ``for `1992' in subparagraph (B)'' in 
     paragraph (1)(C) and inserting ``for `2016' in subparagraph 
     (A)(ii)'', and
       (B) by striking ``subsection (f)(3)(B) shall be applied by 
     substituting `2012' for `1992' '' in paragraph (3)(C) and 
     inserting ``subsection (f)(3)(A)(ii) shall be applied by 
     substituting `2012' for `2016' ''.
       (d) Application to Other Internal Revenue Code of 1986 
     Provisions.--
       (1) The following sections are each amended by striking 
     ``for `calendar year 1992' in subparagraph (B)'' and 
     inserting ``for `calendar year 2016' in subparagraph 
     (A)(ii)'':
       (A) Section 23(h)(2).
       (B) Paragraphs (1)(A)(ii) and (2)(A)(ii) of section 25A(h).
       (C) Section 25B(b)(3)(B).
       (D) Subsection (b)(2)(B)(ii)(II), and clauses (i) and (ii) 
     of subsection (j)(1)(B), of section 32.
       (E) Section 36B(f)(2)(B)(ii)(II).
       (F) Section 41(e)(5)(C)(i).
       (G) Subsections (e)(3)(D)(ii) and (h)(3)(H)(i)(II) of 
     section 42.
       (H) Section 45R(d)(3)(B)(ii).
       (I) Section 55(d)(4)(A)(ii).
       (J) Section 62(d)(3)(B).
       (K) Section 63(c)(4)(B).
       (L) Section 125(i)(2)(B).
       (M) Section 135(b)(2)(B)(ii).
       (N) Section 137(f)(2).
       (O) Section 146(d)(2)(B).
       (P) Section 147(c)(2)(H)(ii).
       (Q) Section 151(d)(4)(B).
       (R) Section 179(b)(6)(A)(ii).
       (S) Subsections (b)(5)(C)(i)(II) and (g)(8)(B) of section 
     219.
       (T) Section 220(g)(2).
       (U) Section 221(f)(1)(B).
       (V) Section 223(g)(1)(B).
       (W) Section 408A(c)(3)(D)(ii).
       (X) Section 430(c)(7)(D)(vii)(II).
       (Y) Section 512(d)(2)(B).
       (Z) Section 513(h)(2)(C)(ii).
       (AA) Section 831(b)(2)(D)(ii).
       (BB) Section 877A(a)(3)(B)(i)(II).
       (CC) Section 2010(c)(3)(B)(ii).
       (DD) Section 2032A(a)(3)(B).
       (EE) Section 2503(b)(2)(B).
       (FF) Section 4261(e)(4)(A)(ii).
       (GG) Section 5000A(c)(3)(D)(ii).
       (HH) Section 6323(i)(4)(B).
       (II) Section 6334(g)(1)(B).
       (JJ) Section 6601(j)(3)(B).
       (KK) Section 6651(i)(1).
       (LL) Section 6652(c)(7)(A).
       (MM) Section 6695(h)(1).
       (NN) Section 6698(e)(1).
       (OO) Section 6699(e)(1).
       (PP) Section 6721(f)(1).
       (QQ) Section 6722(f)(1).
       (RR) Section 7345(f)(2).
       (SS) Section 7430(c)(1).
       (TT) Section 9831(d)(2)(D)(ii)(II).
       (2) Sections 41(e)(5)(C)(ii) and 68(b)(2)(B) are each 
     amended--
       (A) by striking ``1(f)(3)(B)'' and inserting 
     ``1(f)(3)(A)(ii)'', and
       (B) by striking ``1992'' and inserting ``2016''.
       (3) Section 42(h)(6)(G) is amended--
       (A) by striking ``for `calendar year 1987' '' in clause 
     (i)(II) and inserting ``for `calendar year 2016' in 
     subparagraph (A)(ii) thereof'', and
       (B) by striking ``if the CPI for any calendar year'' and 
     all that follows in clause (ii) and inserting ``if the C-CPI-
     U for any calendar year (as defined in section 1(f)(6)) 
     exceeds the C-CPI-U for the preceding calendar year by more 
     than 5 percent, the C-CPI-U for the base calendar year shall 
     be increased such that such excess shall never be taken into 
     account under clause (i). In the case of a base calendar year 
     before 2017, the C-CPI-U for such year shall be determined by 
     multiplying the CPI for such year by the amount determined 
     under section 1(f)(3)(B).''.
       (4) Section 59(j)(2)(B) is amended by striking ``for `1992' 
     in subparagraph (B)'' and inserting ``for `2016' in 
     subparagraph (A)(ii)''.
       (5) Section 132(f)(6)(A)(ii) is amended by striking ``for 
     `calendar year 1992' '' and inserting ``for `calendar year 
     2016' in subparagraph (A)(ii) thereof''.
       (6) Section 162(o)(3) is amended by striking ``adjusted for 
     changes in the Consumer Price Index (as defined in section 
     1(f)(5)) since 1991'' and inserting ``adjusted by increasing 
     any such amount under the 1991 agreement by an amount equal 
     to--
       ``(A) such amount, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, by substituting `calendar year 1990' for 
     `calendar year 2016' in subparagraph (A)(ii) thereof''.
       (7) So much of clause (ii) of section 213(d)(10)(B) as 
     precedes the last sentence is amended to read as follows:
       ``(ii) Medical care cost adjustment.--For purposes of 
     clause (i), the medical care cost adjustment for any calendar 
     year is the percentage (if any) by which--

       ``(I) the medical care component of the C-CPI-U (as defined 
     in section 1(f)(6)) for August of the preceding calendar 
     year, exceeds
       ``(II) such component of the CPI (as defined in section 
     1(f)(4)) for August of 1996, multiplied by the amount 
     determined under section 1(f)(3)(B).''.

       (8) Subparagraph (B) of section 280F(d)(7) is amended to 
     read as follows:
       ``(B) Automobile price inflation adjustment.--For purposes 
     of this paragraph--
       ``(i) In general.--The automobile price inflation 
     adjustment for any calendar year is the percentage (if any) 
     by which--

       ``(I) the C-CPI-U automobile component for October of the 
     preceding calendar year, exceeds
       ``(II) the automobile component of the CPI (as defined in 
     section 1(f)(4)) for October of 1987, multiplied by the 
     amount determined under 1(f)(3)(B).

       ``(ii) C-CPI-U automobile component.--The term `C-CPI-U 
     automobile component' means the automobile component of the 
     Chained Consumer Price Index for All Urban Consumers (as 
     described in section 1(f)(6)).''.
       (9) Section 911(b)(2)(D)(ii)(II) is amended by striking 
     ``for `1992' in subparagraph (B)'' and inserting ``for `2016' 
     in subparagraph (A)(ii)''.
       (10) Paragraph (2) of section 1274A(d) is amended to read 
     as follows:
       ``(2) Adjustment for inflation.--In the case of any debt 
     instrument arising out of a sale or exchange during any 
     calendar year after 1989, each dollar amount contained in the 
     preceding provisions of this section shall be increased by an 
     amount equal to--
       ``(A) such amount, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, by substituting `calendar year 1988' for 
     `calendar year 2016' in subparagraph (A)(ii) thereof.

     Any increase under the preceding sentence shall be rounded to 
     the nearest multiple of $100 (or, if such increase is a 
     multiple of $50, such increase

[[Page 19876]]

     shall be increased to the nearest multiple of $100).''.
       (11) Section 4161(b)(2)(C)(i)(II) is amended by striking 
     ``for `1992' in subparagraph (B)'' and inserting ``for `2016' 
     in subparagraph (A)(ii)''.
       (12) Section 4980I(b)(3)(C)(v)(II) is amended by striking 
     ``for `1992' in subparagraph (B)'' and inserting ``for `2016' 
     in subparagraph (A)(ii)''.
       (13) Section 6039F(d) is amended by striking ``subparagraph 
     (B) thereof shall be applied by substituting `1995' for 
     `1992' '' and inserting ``subparagraph (A)(ii) thereof shall 
     be applied by substituting `1995' for `2016' ''.
       (14) Section 7872(g)(5) is amended to read as follows:
       ``(5) Adjustment of limit for inflation.--In the case of 
     any loan made during any calendar year after 1986, the dollar 
     amount in paragraph (2) shall be increased by an amount equal 
     to--
       ``(A) such amount, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, by substituting `calendar year 1985' for 
     `calendar year 2016' in subparagraph (A)(ii) thereof.

     Any increase under the preceding sentence shall be rounded to 
     the nearest multiple of $100 (or, if such increase is a 
     multiple of $50, such increase shall be increased to the 
     nearest multiple of $100).''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

 PART II--DEDUCTION FOR QUALIFIED BUSINESS INCOME OF PASS-THRU ENTITIES

     SEC. 11011. DEDUCTION FOR QUALIFIED BUSINESS INCOME.

       (a) In General.--Part VI of subchapter B of chapter 1 is 
     amended by adding at the end the following new section:

     ``SEC. 199A. QUALIFIED BUSINESS INCOME.

       ``(a) In General.--In the case of a taxpayer other than a 
     corporation, there shall be allowed as a deduction for any 
     taxable year an amount equal to the sum of--
       ``(1) the lesser of--
       ``(A) the combined qualified business income amount of the 
     taxpayer, or
       ``(B) an amount equal to 20 percent of the excess (if any) 
     of--
       ``(i) the taxable income of the taxpayer for the taxable 
     year, over
       ``(ii) the sum of any net capital gain (as defined in 
     section 1(h)), plus the aggregate amount of the qualified 
     cooperative dividends, of the taxpayer for the taxable year, 
     plus
       ``(2) the lesser of--
       ``(A) 20 percent of the aggregate amount of the qualified 
     cooperative dividends of the taxpayer for the taxable year, 
     or
       ``(B) taxable income (reduced by the net capital gain (as 
     so defined)) of the taxpayer for the taxable year.

     The amount determined under the preceding sentence shall not 
     exceed the taxable income (reduced by the net capital gain 
     (as so defined)) of the taxpayer for the taxable year.
       ``(b) Combined Qualified Business Income Amount.--For 
     purposes of this section--
       ``(1) In general.--The term `combined qualified business 
     income amount' means, with respect to any taxable year, an 
     amount equal to--
       ``(A) the sum of the amounts determined under paragraph (2) 
     for each qualified trade or business carried on by the 
     taxpayer, plus
       ``(B) 20 percent of the aggregate amount of the qualified 
     REIT dividends and qualified publicly traded partnership 
     income of the taxpayer for the taxable year.
       ``(2) Determination of deductible amount for each trade or 
     business.--The amount determined under this paragraph with 
     respect to any qualified trade or business is the lesser of--
       ``(A) 20 percent of the taxpayer's qualified business 
     income with respect to the qualified trade or business, or
       ``(B) the greater of--
       ``(i) 50 percent of the W-2 wages with respect to the 
     qualified trade or business, or
       ``(ii) the sum of 25 percent of the W-2 wages with respect 
     to the qualified trade or business, plus 2.5 percent of the 
     unadjusted basis immediately after acquisition of all 
     qualified property.
       ``(3) Modifications to limit based on taxable income.--
       ``(A) Exception from limit.--In the case of any taxpayer 
     whose taxable income for the taxable year does not exceed the 
     threshold amount, paragraph (2) shall be applied without 
     regard to subparagraph (B).
       ``(B) Phase-in of limit for certain taxpayers.--
       ``(i) In general.--If--

       ``(I) the taxable income of a taxpayer for any taxable year 
     exceeds the threshold amount, but does not exceed the sum of 
     the threshold amount plus $50,000 ($100,000 in the case of a 
     joint return), and
       ``(II) the amount determined under paragraph (2)(B) 
     (determined without regard to this subparagraph) with respect 
     to any qualified trade or business carried on by the taxpayer 
     is less than the amount determined under paragraph (2)(A) 
     with respect such trade or business,

     then paragraph (2) shall be applied with respect to such 
     trade or business without regard to subparagraph (B) thereof 
     and by reducing the amount determined under subparagraph (A) 
     thereof by the amount determined under clause (ii).
       ``(ii) Amount of reduction.--The amount determined under 
     this subparagraph is the amount which bears the same ratio to 
     the excess amount as--

       ``(I) the amount by which the taxpayer's taxable income for 
     the taxable year exceeds the threshold amount, bears to
       ``(II) $50,000 ($100,000 in the case of a joint return).

       ``(iii) Excess amount.--For purposes of clause (ii), the 
     excess amount is the excess of--

       ``(I) the amount determined under paragraph (2)(A) 
     (determined without regard to this paragraph), over
       ``(II) the amount determined under paragraph (2)(B) 
     (determined without regard to this paragraph).

       ``(4) Wages, etc.--
       ``(A) In general.--The term `W-2 wages' means, with respect 
     to any person for any taxable year of such person, 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 qualified 
     business income.--Such term shall not include any amount 
     which is not properly allocable to qualified business income 
     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.
       ``(5) Acquisitions, dispositions, and short taxable 
     years.--The Secretary shall provide for the application of 
     this subsection in cases of a short taxable year or where the 
     taxpayer acquires, or disposes of, the major portion of a 
     trade or business or the major portion of a separate unit of 
     a trade or business during the taxable year.
       ``(6) Qualified property.--For purposes of this section:
       ``(A) In general.--The term `qualified property' means, 
     with respect to any qualified trade or business for a taxable 
     year, tangible property of a character subject to the 
     allowance for depreciation under section 167--
       ``(i) which is held by, and available for use in, the 
     qualified trade or business at the close of the taxable year,
       ``(ii) which is used at any point during the taxable year 
     in the production of qualified business income, and
       ``(iii) the depreciable period for which has not ended 
     before the close of the taxable year.
       ``(B) Depreciable period.--The term `depreciable period' 
     means, with respect to qualified property of a taxpayer, the 
     period beginning on the date the property was first placed in 
     service by the taxpayer and ending on the later of--
       ``(i) the date that is 10 years after such date, or
       ``(ii) the last day of the last full year in the applicable 
     recovery period that would apply to the property under 
     section 168 (determined without regard to subsection (g) 
     thereof).
       ``(c) Qualified Business Income.--For purposes of this 
     section--
       ``(1) In general.--The term `qualified business income' 
     means, for any taxable year, the net amount of qualified 
     items of income, gain, deduction, and loss with respect to 
     any qualified trade or business of the taxpayer. Such term 
     shall not include any qualified REIT dividends, qualified 
     cooperative dividends, or qualified publicly traded 
     partnership income.
       ``(2) Carryover of losses.--If the net amount of qualified 
     income, gain, deduction, and loss with respect to qualified 
     trades or businesses of the taxpayer for any taxable year is 
     less than zero, such amount shall be treated as a loss from a 
     qualified trade or business in the succeeding taxable year.
       ``(3) Qualified items of income, gain, deduction, and 
     loss.--For purposes of this subsection--
       ``(A) In general.--The term `qualified items of income, 
     gain, deduction, and loss' means items of income, gain, 
     deduction, and loss to the extent such items are--
       ``(i) effectively connected with the conduct of a trade or 
     business within the United States (within the meaning of 
     section 864(c), determined by substituting `qualified trade 
     or business (within the meaning of section 199A)' for 
     `nonresident alien individual or a foreign corporation' or 
     for `a foreign corporation' each place it appears), and
       ``(ii) included or allowed in determining taxable income 
     for the taxable year.
       ``(B) Exceptions.--The following investment items shall not 
     be taken into account as a qualified item of income, gain, 
     deduction, or loss:
       ``(i) Any item of short-term capital gain, short-term 
     capital loss, long-term capital gain, or long-term capital 
     loss.
       ``(ii) Any dividend, income equivalent to a dividend, or 
     payment in lieu of dividends described in section 
     954(c)(1)(G).
       ``(iii) Any interest income other than interest income 
     which is properly allocable to a trade or business.
       ``(iv) Any item of gain or loss described in subparagraph 
     (C) or (D) of section 954(c)(1) (applied by substituting 
     `qualified trade or business' for `controlled foreign 
     corporation').
       ``(v) Any item of income, gain, deduction, or loss taken 
     into account under section 954(c)(1)(F) (determined without 
     regard to clause (ii) thereof and other than items 
     attributable to notional principal contracts entered into in 
     transactions qualifying under section 1221(a)(7)).
       ``(vi) Any amount received from an annuity which is not 
     received in connection with the trade or business.

[[Page 19877]]

       ``(vii) Any item of deduction or loss properly allocable to 
     an amount described in any of the preceding clauses.
       ``(4) Treatment of reasonable compensation and guaranteed 
     payments.--Qualified business income shall not include--
       ``(A) reasonable compensation paid to the taxpayer by any 
     qualified trade or business of the taxpayer for services 
     rendered with respect to the trade or business,
       ``(B) any guaranteed payment described in section 707(c) 
     paid to a partner for services rendered with respect to the 
     trade or business, and
       ``(C) to the extent provided in regulations, any payment 
     described in section 707(a) to a partner for services 
     rendered with respect to the trade or business.
       ``(d) Qualified Trade or Business.--For purposes of this 
     section--
       ``(1) In general.--The term `qualified trade or business' 
     means any trade or business other than--
       ``(A) a specified service trade or business, or
       ``(B) the trade or business of performing services as an 
     employee.
       ``(2) Specified service trade or business.--The term 
     `specified service trade or business' means any trade or 
     business--
       ``(A) which is described in section 1202(e)(3)(A) (applied 
     without regard to the words `engineering, architecture,') or 
     which would be so described if the term `employees or owners' 
     were substituted for `employees' therein, or
       ``(B) which involves the performance of services that 
     consist of investing and investment management, trading, or 
     dealing in securities (as defined in section 475(c)(2)), 
     partnership interests, or commodities (as defined in section 
     475(e)(2)).
       ``(3) Exception for specified service businesses based on 
     taxpayer's income.--
       ``(A) In general.--If, for any taxable year, the taxable 
     income of any taxpayer is less than the sum of the threshold 
     amount plus $50,000 ($100,000 in the case of a joint return), 
     then--
       ``(i) any specified service trade or business of the 
     taxpayer shall not fail to be treated as a qualified trade or 
     business due to paragraph (1)(A), but
       ``(ii) only the applicable percentage of qualified items of 
     income, gain, deduction, or loss, and the W-2 wages and the 
     unadjusted basis immediately after acquisition of qualified 
     property, of the taxpayer allocable to such specified service 
     trade or business shall be taken into account in computing 
     the qualified business income, W-2 wages, and the unadjusted 
     basis immediately after acquisition of qualified property of 
     the taxpayer for the taxable year for purposes of applying 
     this section.
       ``(B) Applicable percentage.--For purposes of subparagraph 
     (A), the term `applicable percentage' means, with respect to 
     any taxable year, 100 percent reduced (not below zero) by the 
     percentage equal to the ratio of--
       ``(i) the taxable income of the taxpayer for the taxable 
     year in excess of the threshold amount, bears to
       ``(ii) $50,000 ($100,000 in the case of a joint return).
       ``(e) Other Definitions.--For purposes of this section--
       ``(1) Taxable income.--Taxable income shall be computed 
     without regard to the deduction allowable under this section.
       ``(2) Threshold amount.--
       ``(A) In general.--The term `threshold amount' means 
     $157,500 (200 percent of such amount in the case of a joint 
     return).
       ``(B) Inflation adjustment.--In the case of any taxable 
     year beginning after 2018, the dollar amount in subparagraph 
     (A) shall be increased by an amount equal to--
       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2017' 
     for `calendar year 2016' in subparagraph (A)(ii) thereof.

     The amount of any increase under the preceding sentence shall 
     be rounded as provided in section 1(f)(7).
       ``(3) Qualified reit dividend.--The term `qualified REIT 
     dividend' means any dividend from a real estate investment 
     trust received during the taxable year which--
       ``(A) is not a capital gain dividend, as defined in section 
     857(b)(3), and
       ``(B) is not qualified dividend income, as defined in 
     section 1(h)(11).
       ``(4) Qualified cooperative dividend.--The term `qualified 
     cooperative dividend' means any patronage dividend (as 
     defined in section 1388(a)), any per-unit retain allocation 
     (as defined in section 1388(f)), and any qualified written 
     notice of allocation (as defined in section 1388(c)), or any 
     similar amount received from an organization described in 
     subparagraph (B)(ii), which--
       ``(A) is includible in gross income, and
       ``(B) is received from--
       ``(i) an organization or corporation described in section 
     501(c)(12) or 1381(a), or
       ``(ii) an organization which is governed under this title 
     by the rules applicable to cooperatives under this title 
     before the enactment of subchapter T.
       ``(5) Qualified publicly traded partnership income.--The 
     term `qualified publicly traded partnership income' means, 
     with respect to any qualified trade or business of a 
     taxpayer, the sum of--
       ``(A) the net amount of such taxpayer's allocable share of 
     each qualified item of income, gain, deduction, and loss (as 
     defined in subsection (c)(3) and determined after the 
     application of subsection (c)(4)) from a publicly traded 
     partnership (as defined in section 7704(a)) which is not 
     treated as a corporation under section 7704(c), plus
       ``(B) any gain recognized by such taxpayer upon disposition 
     of its interest in such partnership to the extent such gain 
     is treated as an amount realized from the sale or exchange of 
     property other than a capital asset under section 751(a).
       ``(f) Special Rules.--
       ``(1) Application to partnerships and s corporations.--
       ``(A) In general.--In the case of a partnership or S 
     corporation--
       ``(i) this section shall be applied at the partner or 
     shareholder level,
       ``(ii) each partner or shareholder shall take into account 
     such person's allocable share of each qualified item of 
     income, gain, deduction, and loss, and
       ``(iii) each partner or shareholder shall be treated for 
     purposes of subsection (b) as having W-2 wages and unadjusted 
     basis immediately after acquisition of qualified property for 
     the taxable year in an amount equal to such person's 
     allocable share of the W-2 wages and the unadjusted basis 
     immediately after acquisition of qualified property of the 
     partnership or S corporation for the taxable year (as 
     determined under regulations prescribed by the Secretary).

     For purposes of clause (iii), a partner's or shareholder's 
     allocable share of W-2 wages shall be determined in the same 
     manner as the partner's or shareholder's allocable share of 
     wage expenses. For purposes of such clause, partner's or 
     shareholder's allocable share of the unadjusted basis 
     immediately after acquisition of qualified property shall be 
     determined in the same manner as the partner's or 
     shareholder's allocable share of depreciation. For purposes 
     of this subparagraph, in the case of an S corporation, an 
     allocable share shall be the shareholder's pro rata share of 
     an item.
       ``(B) Application to trusts and estates.--Rules similar to 
     the rules under section 199(d)(1)(B)(i) (as in effect on 
     December 1, 2017) for the apportionment of W-2 wages shall 
     apply to the apportionment of W-2 wages and the apportionment 
     of unadjusted basis immediately after acquisition of 
     qualified property under this section.
       ``(C) Treatment of trades or business in puerto rico.--
       ``(i) In general.--In the case of any taxpayer with 
     qualified business income from sources within the 
     commonwealth of Puerto Rico, if all such income is taxable 
     under section 1 for such taxable year, then for purposes of 
     determining the qualified business income of such taxpayer 
     for such taxable year, the term `United States' shall include 
     the Commonwealth of Puerto Rico.
       ``(ii) Special rule for applying limit.--In the case of any 
     taxpayer described in clause (i), the determination of W-2 
     wages of such taxpayer with respect to any qualified trade or 
     business conducted in Puerto Rico shall be made without 
     regard to any exclusion under section 3401(a)(8) for 
     remuneration paid for services in Puerto Rico.
       ``(2) Coordination with minimum tax.--For purposes of 
     determining alternative minimum taxable income under section 
     55, qualified business income shall be determined without 
     regard to any adjustments under sections 56 through 59.
       ``(3) Deduction limited to income taxes.--The deduction 
     under subsection (a) shall only be allowed for purposes of 
     this chapter.
       ``(4) Regulations.--The Secretary shall prescribe such 
     regulations as are necessary to carry out the purposes of 
     this section, including regulations--
       ``(A) for requiring or restricting the allocation of items 
     and wages under this section and such reporting requirements 
     as the Secretary determines appropriate, and
       ``(B) for the application of this section in the case of 
     tiered entities.
       ``(g) Deduction Allowed to Specified Agricultural or 
     Horticultural Cooperatives.--
       ``(1) In general.--In the case of any taxable year of a 
     specified agricultural or horticultural cooperative beginning 
     after December 31, 2017, there shall be allowed a deduction 
     in an amount equal to the lesser of--
       ``(A) 20 percent of the excess (if any) of--
       ``(i) the gross income of a specified agricultural or 
     horticultural cooperative, over
       ``(ii) the qualified cooperative dividends (as defined in 
     subsection (e)(4)) paid during the taxable year for the 
     taxable year, or
       ``(B) the greater of--
       ``(i) 50 percent of the W-2 wages of the cooperative with 
     respect to its trade or business, or
       ``(ii) the sum of 25 percent of the W-2 wages of the 
     cooperative with respect to its trade or business, plus 2.5 
     percent of the unadjusted basis immediately after acquisition 
     of all qualified property of the cooperative.
       ``(2) Limitation.--The amount determined under paragraph 
     (1) shall not exceed the taxable income of the specified 
     agricultural or horticultural for the taxable year.
       ``(3) Specified agricultural or horticultural 
     cooperative.--For purposes of this subsection, the term 
     `specified agricultural or horticultural cooperative' means 
     an organization to which part I of subchapter T applies which 
     is engaged in--
       ``(A) the manufacturing, production, growth, or extraction 
     in whole or significant part of any agricultural or 
     horticultural product,
       ``(B) the marketing of agricultural or horticultural 
     products which its patrons have so

[[Page 19878]]

     manufactured, produced, grown, or extracted, or
       ``(C) the provision of supplies, equipment, or services to 
     farmers or to organizations described in subparagraph (A) or 
     (B).
       ``(h) Anti-abuse Rules.--The Secretary shall--
       ``(1) apply rules similar to the rules under section 
     179(d)(2) in order to prevent the manipulation of the 
     depreciable period of qualified property using transactions 
     between related parties, and
       ``(2) prescribe rules for determining the unadjusted basis 
     immediately after acquisition of qualified property acquired 
     in like-kind exchanges or involuntary conversions.
       ``(i) Termination.--This section shall not apply to taxable 
     years beginning after December 31, 2025.''.
       (b) Treatment of Deduction in Computing Adjusted Gross and 
     Taxable Income.--
       (1) Deduction not allowed in computing adjusted gross 
     income.--Section 62(a) is amended by adding at the end the 
     following new sentence: ``The deduction allowed by section 
     199A shall not be treated as a deduction described in any of 
     the preceding paragraphs of this subsection.''.
       (2) Deduction allowed to nonitemizers.--Section 63(b) is 
     amended by striking ``and'' at the end of paragraph (1), by 
     striking the period at the end of paragraph (2) and inserting 
     ``, and'', and by adding at the end the following new 
     paragraph:
       ``(3) the deduction provided in section 199A.''.
       (3) Deduction allowed to itemizers without limits on 
     itemized deductions.--Section 63(d) is amended by striking 
     ``and'' at the end of paragraph (1), by striking the period 
     at the end of paragraph (2) and inserting ``, and'', and by 
     adding at the end the following new paragraph:
       ``(3) the deduction provided in section 199A.''.
       (4) Conforming amendment.--Section 3402(m)(1) is amended by 
     inserting ``and the estimated deduction allowed under section 
     199A'' after ``chapter 1''.
       (c) Accuracy-related Penalty on Determination of Applicable 
     Percentage.--Section 6662(d)(1) is amended by inserting at 
     the end the following new subparagraph:
       ``(C) Special rule for taxpayers claiming section 199a 
     deduction.--In the case of any taxpayer who claims the 
     deduction allowed under section 199A for the taxable year, 
     subparagraph (A) shall be applied by substituting `5 percent' 
     for `10 percent'.''.
       (d) Conforming Amendments.--
       (1) Section 172(d) is amended by adding at the end the 
     following new paragraph:
       ``(8) Qualified business income deduction.--The deduction 
     under section 199A shall not be allowed.''.
       (2) Section 246(b)(1) is amended by inserting ``199A,'' 
     before ``243(a)(1)''.
       (3) Section 613(a) is amended by inserting ``and without 
     the deduction under section 199A'' after ``and without the 
     deduction under section 199''.
       (4) Section 613A(d)(1) is amended by redesignating 
     subparagraphs (C), (D), and (E) as subparagraphs (D), (E), 
     and (F), respectively, and by inserting after subparagraph 
     (B), the following new subparagraph:
       ``(C) any deduction allowable under section 199A,''.
       (5) Section 170(b)(2)(D) is amended by striking ``and'' in 
     clause (iv), by striking the period at the end of clause (v), 
     and by adding at the end the following new clause:
       ``(vi) section 199A(g).''.
       (6) The table of sections for part VI of subchapter B of 
     chapter 1 is amended by inserting at the end the following 
     new item:

``Sec. 199A. Qualified business income.''.

       (e) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 11012. LIMITATION ON LOSSES FOR TAXPAYERS OTHER THAN 
                   CORPORATIONS.

       (a) In General.--Section 461 is amended by adding at the 
     end the following new subsection:
       ``(l) Limitation on Excess Business Losses of Noncorporate 
     Taxpayers.--
       ``(1) Limitation.--In the case of taxable year of a 
     taxpayer other than a corporation beginning after December 
     31, 2017, and before January 1, 2026--
       ``(A) subsection (j) (relating to limitation on excess farm 
     losses of certain taxpayers) shall not apply, and
       ``(B) any excess business loss of the taxpayer for the 
     taxable year shall not be allowed.
       ``(2) Disallowed loss carryover.--Any loss which is 
     disallowed under paragraph (1) shall be treated as a net 
     operating loss carryover to the following taxable year under 
     section 172.
       ``(3) Excess business loss.--For purposes of this 
     subsection--
       ``(A) In general.--The term `excess business loss' means 
     the excess (if any) of--
       ``(i) the aggregate deductions of the taxpayer for the 
     taxable year which are attributable to trades or businesses 
     of such taxpayer (determined without regard to whether or not 
     such deductions are disallowed for such taxable year under 
     paragraph (1)), over
       ``(ii) the sum of--

       ``(I) the aggregate gross income or gain of such taxpayer 
     for the taxable year which is attributable to such trades or 
     businesses, plus
       ``(II) $250,000 (200 percent of such amount in the case of 
     a joint return).

       ``(B) Adjustment for inflation.--In the case of any taxable 
     year beginning after December 31, 2018, the $250,000 amount 
     in subparagraph (A)(ii)(II) shall be increased by an amount 
     equal to--
       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `2017' for `2016' in 
     subparagraph (A)(ii) thereof.

     If any amount as increased under the preceding sentence is 
     not a multiple of $1,000, such amount shall be rounded to the 
     nearest multiple of $1,000.
       ``(4) Application of subsection in case of partnerships and 
     s corporations.--In the case of a partnership or S 
     corporation--
       ``(A) this subsection shall be applied at the partner or 
     shareholder level, and
       ``(B) each partner's or shareholder's allocable share of 
     the items of income, gain, deduction, or loss of the 
     partnership or S corporation for any taxable year from trades 
     or businesses attributable to the partnership or S 
     corporation shall be taken into account by the partner or 
     shareholder in applying this subsection to the taxable year 
     of such partner or shareholder with or within which the 
     taxable year of the partnership or S corporation ends.

     For purposes of this paragraph, in the case of an S 
     corporation, an allocable share shall be the shareholder's 
     pro rata share of an item.
       ``(5) Additional reporting.--The Secretary shall prescribe 
     such additional reporting requirements as the Secretary 
     determines necessary to carry out the purposes of this 
     subsection.
       ``(6) Coordination with section 469.--This subsection shall 
     be applied after the application of section 469.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

          PART III--TAX BENEFITS FOR FAMILIES AND INDIVIDUALS

     SEC. 11021. INCREASE IN STANDARD DEDUCTION.

       (a) In General.--Subsection (c) of section 63 is amended by 
     adding at the end the following new paragraph:
       ``(7) Special rules for taxable years 2018 through 2025.--
     In the case of a taxable year beginning after December 31, 
     2017, and before January 1, 2026--
       ``(A) Increase in standard deduction.--Paragraph (2) shall 
     be applied--
       ``(i) by substituting `$18,000' for `$4,400' in 
     subparagraph (B), and
       ``(ii) by substituting `$12,000' for `$3,000' in 
     subparagraph (C).
       ``(B) Adjustment for inflation.--
       ``(i) In general.--Paragraph (4) shall not apply to the 
     dollar amounts contained in paragraphs (2)(B) and (2)(C).
       ``(ii) Adjustment of increased amounts.--In the case of a 
     taxable year beginning after 2018, the $18,000 and $12,000 
     amounts in subparagraph (A) shall each be increased by an 
     amount equal to--

       ``(I) such dollar amount, multiplied by
       ``(II) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `2017' for `2016' in 
     subparagraph (A)(ii) thereof.

     If any increase under this clause is not a multiple of $50, 
     such increase shall be rounded to the next lowest multiple of 
     $50.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 11022. INCREASE IN AND MODIFICATION OF CHILD TAX CREDIT.

       (a) In General.--Section 24 is amended by adding at the end 
     the following new subsection:
       ``(h) Special Rules for Taxable Years 2018 Through 2025.--
       ``(1) In general.--In the case of a taxable year beginning 
     after December 31, 2017, and before January 1, 2026, this 
     section shall be applied as provided in paragraphs (2) 
     through (7).
       ``(2) Credit amount.--Subsection (a) shall be applied by 
     substituting `$2,000' for `$1,000'.
       ``(3) Limitation.--In lieu of the amount determined under 
     subsection (b)(2), the threshold amount shall be $400,000 in 
     the case of a joint return ($200,000 in any other case).
       ``(4) Partial credit allowed for certain other 
     dependents.--
       ``(A) In general.--The credit determined under subsection 
     (a) (after the application of paragraph (2)) shall be 
     increased by $500 for each dependent of the taxpayer (as 
     defined in section 152) other than a qualifying child 
     described in subsection (c).
       ``(B) Exception for certain noncitizens.--Subparagraph (A) 
     shall not apply with respect to any individual who would not 
     be a dependent if subparagraph (A) of section 152(b)(3) were 
     applied without regard to all that follows `resident of the 
     United States'.
       ``(C) Certain qualifying children.--In the case of any 
     qualifying child with respect to whom a credit is not allowed 
     under this section by reason of paragraph (7), such child 
     shall be treated as a dependent to whom subparagraph (A) 
     applies.
       ``(5) Maximum amount of refundable credit.--
       ``(A) In general.--The amount determined under subsection 
     (d)(1)(A) with respect to any qualifying child shall not 
     exceed $1,400, and such subsection shall be applied without 
     regard to paragraph (4) of this subsection.
       ``(B) Adjustment for inflation.--In the case of a taxable 
     year beginning after 2018, the $1,400 amount in subparagraph 
     (A) shall be increased by an amount equal to--

[[Page 19879]]

       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `2017' for `2016' in 
     subparagraph (A)(ii) thereof.

     If any increase under this clause is not a multiple of $100, 
     such increase shall be rounded to the next lowest multiple of 
     $100.
       ``(6) Earned income threshold for refundable credit.--
     Subsection (d)(1)(B)(i) shall be applied by substituting 
     `$2,500' for `$3,000'.
       ``(7) Social security number required.--No credit shall be 
     allowed under this section to a taxpayer with respect to any 
     qualifying child unless the taxpayer includes the social 
     security number of such child on the return of tax for the 
     taxable year. For purposes of the preceding sentence, the 
     term `social security number' means a social security number 
     issued to an individual by the Social Security 
     Administration, but only if the social security number is 
     issued--
       ``(A) to a citizen of the United States or pursuant to 
     subclause (I) (or that portion of subclause (III) that 
     relates to subclause (I)) of section 205(c)(2)(B)(i) of the 
     Social Security Act, and
       ``(B) before the due date for such return.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 11023. INCREASED LIMITATION FOR CERTAIN CHARITABLE 
                   CONTRIBUTIONS.

       (a) In General.--Section 170(b)(1) is amended by 
     redesignating subparagraph (G) as subparagraph (H) and by 
     inserting after subparagraph (F) the following new 
     subparagraph:
       ``(G) Increased limitation for cash contributions.--
       ``(i) In general.--In the case of any contribution of cash 
     to an organization described in subparagraph (A), the total 
     amount of such contributions which may be taken into account 
     under subsection (a) for any taxable year beginning after 
     December 31, 2017, and before January 1, 2026, shall not 
     exceed 60 percent of the taxpayer's contribution base for 
     such year.
       ``(ii) Carryover.--If the aggregate amount of contributions 
     described in clause (i) exceeds the applicable limitation 
     under clause (i) for any taxable year described in such 
     clause, such excess shall be treated (in a manner consistent 
     with the rules of subsection (d)(1)) as a charitable 
     contribution to which clause (i) applies in each of the 5 
     succeeding years in order of time.
       ``(iii) Coordination with subparagraphs (a) and (b).--

       ``(I) In general.--Contributions taken into account under 
     this subparagraph shall not be taken into account under 
     subparagraph (A).
       ``(II) Limitation reduction.--For each taxable year 
     described in clause (i), and each taxable year to which any 
     contribution under this subparagraph is carried over under 
     clause (ii), subparagraph (A) shall be applied by reducing 
     (but not below zero) the contribution limitation allowed for 
     the taxable year under such subparagraph by the aggregate 
     contributions allowed under this subparagraph for such 
     taxable year, and subparagraph (B) shall be applied by 
     treating any reference to subparagraph (A) as a reference to 
     both subparagraph (A) and this subparagraph.''.

       (b) Effective Date.--The amendment made by this section 
     shall apply to contributions in taxable years beginning after 
     December 31, 2017.

     SEC. 11024. INCREASED CONTRIBUTIONS TO ABLE ACCOUNTS.

       (a) Increase in Limitation for Contributions From 
     Compensation of Individuals With Disabilities.--
       (1) In general.--Section 529A(b)(2)(B) is amended to read 
     as follows:
       ``(B) except in the case of contributions under subsection 
     (c)(1)(C), if such contribution to an ABLE account would 
     result in aggregate contributions from all contributors to 
     the ABLE account for the taxable year exceeding the sum of--
       ``(i) the amount in effect under section 2503(b) for the 
     calendar year in which the taxable year begins, plus
       ``(ii) in the case of any contribution by a designated 
     beneficiary described in paragraph (7) before January 1, 
     2026, the lesser of--

       ``(I) compensation (as defined by section 219(f)(1)) 
     includible in the designated beneficiary's gross income for 
     the taxable year, or
       ``(II) an amount equal to the poverty line for a one-person 
     household, as determined for the calendar year preceding the 
     calendar year in which the taxable year begins.''.

       (2) Responsibility for contribution limitation.--Paragraph 
     (2) of section 529A(b) is amended by adding at the end the 
     following: ``A designated beneficiary (or a person acting on 
     behalf of such beneficiary) shall maintain adequate records 
     for purposes of ensuring, and shall be responsible for 
     ensuring, that the requirements of subparagraph (B)(ii) are 
     met.''
       (3) Eligible designated beneficiary.--Section 529A(b) is 
     amended by adding at the end the following:
       ``(7) Special rules related to contribution limit.--For 
     purposes of paragraph (2)(B)(ii)--
       ``(A) Designated beneficiary.--A designated beneficiary 
     described in this paragraph is an employee (including an 
     employee within the meaning of section 401(c)) with respect 
     to whom--
       ``(i) no contribution is made for the taxable year to a 
     defined contribution plan (within the meaning of section 
     414(i)) with respect to which the requirements of section 
     401(a) or 403(a) are met,
       ``(ii) no contribution is made for the taxable year to an 
     annuity contract described in section 403(b), and
       ``(iii) no contribution is made for the taxable year to an 
     eligible deferred compensation plan described in section 
     457(b).
       ``(B) Poverty line.--The term `poverty line' has the 
     meaning given such term by section 673 of the Community 
     Services Block Grant Act (42 U.S.C. 9902).''.
       (b) Allowance of Saver's Credit for ABLE Contributions by 
     Account Holder.--Section 25B(d)(1) is amended by striking 
     ``and'' at the end of subparagraph (B)(ii), by striking the 
     period at the end of subparagraph (C) and inserting ``, 
     and'', and by inserting at the end the following:
       ``(D) the amount of contributions made before January 1, 
     2026, by such individual to the ABLE account (within the 
     meaning of section 529A) of which such individual is the 
     designated beneficiary.''.
       (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. 11025. ROLLOVERS TO ABLE PROGRAMS FROM 529 PROGRAMS.

       (a) In General.--Clause (i) of section 529(c)(3)(C) is 
     amended by striking ``or'' at the end of subclause (I), by 
     striking the period at the end of subclause (II) and 
     inserting ``, or'', and by adding at the end the following:

       ``(III) before January 1, 2026, to an ABLE account (as 
     defined in section 529A(e)(6)) of the designated beneficiary 
     or a member of the family of the designated beneficiary.

     Subclause (III) shall not apply to so much of a distribution 
     which, when added to all other contributions made to the ABLE 
     account for the taxable year, exceeds the limitation under 
     section 529A(b)(2)(B)(i).''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to distributions after the date of the enactment 
     of this Act.

     SEC. 11026. TREATMENT OF CERTAIN INDIVIDUALS PERFORMING 
                   SERVICES IN THE SINAI PENINSULA OF EGYPT.

       (a) In General.--For purposes of the following provisions 
     of the Internal Revenue Code of 1986, with respect to the 
     applicable period, a qualified hazardous duty area shall be 
     treated in the same manner as if it were a combat zone (as 
     determined under section 112 of such Code):
       (1) Section 2(a)(3) (relating to special rule where 
     deceased spouse was in missing status).
       (2) Section 112 (relating to the exclusion of certain 
     combat pay of members of the Armed Forces).
       (3) Section 692 (relating to income taxes of members of 
     Armed Forces on death).
       (4) Section 2201 (relating to members of the Armed Forces 
     dying in combat zone or by reason of combat-zone-incurred 
     wounds, etc.).
       (5) Section 3401(a)(1) (defining wages relating to combat 
     pay for members of the Armed Forces).
       (6) Section 4253(d) (relating to the taxation of phone 
     service originating from a combat zone from members of the 
     Armed Forces).
       (7) Section 6013(f)(1) (relating to joint return where 
     individual is in missing status).
       (8) Section 7508 (relating to time for performing certain 
     acts postponed by reason of service in combat zone).
       (b) Qualified Hazardous Duty Area.--For purposes of this 
     section, the term ``qualified hazardous duty area'' means the 
     Sinai Peninsula of Egypt, if as of the date of the enactment 
     of this section any member of the Armed Forces of the United 
     States is entitled to special pay under section 310 of title 
     37, United States Code (relating to special pay; duty subject 
     to hostile fire or imminent danger), for services performed 
     in such location. Such term includes such location only 
     during the period such entitlement is in effect.
       (c) Applicable Period.--
       (1) In general.--Except as provided in paragraph (2), the 
     applicable period is--
       (A) the portion of the first taxable year ending after June 
     9, 2015, which begins on such date, and
       (B) any subsequent taxable year beginning before January 1, 
     2026.
       (2) Withholding.--In the case of subsection (a)(5), the 
     applicable period is--
       (A) the portion of the first taxable year ending after the 
     date of the enactment of this Act which begins on such date, 
     and
       (B) any subsequent taxable year beginning before January 1, 
     2026.
       (d) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     provisions of this section shall take effect on June 9, 2015.
       (2) Withholding.--Subsection (a)(5) shall apply to 
     remuneration paid after the date of the enactment of this 
     Act.

     SEC. 11027. TEMPORARY REDUCTION IN MEDICAL EXPENSE DEDUCTION 
                   FLOOR.

       (a) In General.--Subsection (f) of section 213 is amended 
     to read as follows:
       ``(f) Special Rules for 2013 Through 2018.--In the case of 
     any taxable year--
       ``(1) beginning after December 31, 2012, and ending before 
     January 1, 2017, in the case of a taxpayer if such taxpayer 
     or such taxpayer's spouse has attained age 65 before the 
     close of such taxable year, and
       ``(2) beginning after December 31, 2016, and ending before 
     January 1, 2019, in the case of any taxpayer,

     subsection (a) shall be applied with respect to a taxpayer by 
     substituting `7.5 percent' for `10 percent'.''.
       (b) Minimum Tax Preference Not to Apply.--Section 
     56(b)(1)(B) is amended by adding at the end the following new 
     sentence:``This

[[Page 19880]]

     subparagraph shall not apply to taxable years beginning after 
     December 31, 2016, and ending before January 1, 2019''.
       (c) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2016.

     SEC. 11028. RELIEF FOR 2016 DISASTER AREAS.

       (a) In General.--For purposes of this section, the term 
     ``2016 disaster area'' means any area with respect to which a 
     major disaster has been declared by the President under 
     section 401 of the Robert T. Stafford Disaster Relief and 
     Emergency Assistance Act during calendar year 2016.
       (b) Special Rules for Use of Retirement Funds With Respect 
     to Areas Damaged by 2016 Disasters.--
       (1) Tax-favored withdrawals from retirement plans.--
       (A) In general.--Section 72(t) of the Internal Revenue Code 
     of 1986 shall not apply to any qualified 2016 disaster 
     distribution.
       (B) Aggregate dollar limitation.--
       (i) In general.--For purposes of this subsection, the 
     aggregate amount of distributions received by an individual 
     which may be treated as qualified 2016 disaster distributions 
     for any taxable year shall not exceed the excess (if any) 
     of--

       (I) $100,000, over
       (II) the aggregate amounts treated as qualified 2016 
     disaster distributions received by such individual for all 
     prior taxable years.

       (ii) Treatment of plan distributions.--If a distribution to 
     an individual would (without regard to clause (i)) be a 
     qualified 2016 disaster distribution, a plan shall not be 
     treated as violating any requirement of this title merely 
     because the plan treats such distribution as a qualified 2016 
     disaster distribution, unless the aggregate amount of such 
     distributions from all plans maintained by the employer (and 
     any member of any controlled group which includes the 
     employer) to such individual exceeds $100,000.
       (iii) Controlled group.--For purposes of clause (ii), the 
     term ``controlled group'' means any group treated as a single 
     employer under subsection (b), (c), (m), or (o) of section 
     414 of the Internal Revenue Code of 1986.
       (C) Amount distributed may be repaid.--
       (i) In general.--Any individual who receives a qualified 
     2016 disaster distribution may, at any time during the 3-year 
     period beginning on the day after the date on which such 
     distribution was received, make one or more contributions in 
     an aggregate amount not to exceed the amount of such 
     distribution to an eligible retirement plan of which such 
     individual is a beneficiary and to which a rollover 
     contribution of such distribution could be made under section 
     402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16) of the 
     Internal Revenue Code of 1986, as the case may be.
       (ii) Treatment of repayments of distributions from eligible 
     retirement plans other than iras.--For purposes of the 
     Internal Revenue Code of 1986, if a contribution is made 
     pursuant to clause (i) with respect to a qualified 2016 
     disaster distribution from an eligible retirement plan other 
     than an individual retirement plan, then the taxpayer shall, 
     to the extent of the amount of the contribution, be treated 
     as having received the qualified 2016 disaster distribution 
     in an eligible rollover distribution (as defined in section 
     402(c)(4) of the Internal Revenue Code of 1986) and as having 
     transferred the amount to the eligible retirement plan in a 
     direct trustee to trustee transfer within 60 days of the 
     distribution.
       (iii) Treatment of repayments for distributions from 
     iras.--For purposes of the Internal Revenue Code of 1986, if 
     a contribution is made pursuant to clause (i) with respect to 
     a qualified 2016 disaster distribution from an individual 
     retirement plan (as defined by section 7701(a)(37) of the 
     Internal Revenue Code of 1986), then, to the extent of the 
     amount of the contribution, the qualified 2016 disaster 
     distribution shall be treated as a distribution described in 
     section 408(d)(3) of such Code and as having been transferred 
     to the eligible retirement plan in a direct trustee to 
     trustee transfer within 60 days of the distribution.
       (D) Definitions.--For purposes of this paragraph--
       (i) Qualified 2016 disaster distribution.--Except as 
     provided in subparagraph (B), the term ``qualified 2016 
     disaster distribution'' means any distribution from an 
     eligible retirement plan made on or after January 1, 2016, 
     and before January 1, 2018, to an individual whose principal 
     place of abode at any time during calendar year 2016 was 
     located in a disaster area described in subsection (a) and 
     who has sustained an economic loss by reason of the events 
     giving rise to the Presidential declaration described in 
     subsection (a) which was applicable to such area.
       (ii) Eligible retirement plan.--The term ``eligible 
     retirement plan'' shall have the meaning given such term by 
     section 402(c)(8)(B) of the Internal Revenue Code of 1986.
       (E) Income inclusion spread over 3-year period.--
       (i) In general.--In the case of any qualified 2016 disaster 
     distribution, unless the taxpayer elects not to have this 
     subparagraph apply for any taxable year, any amount required 
     to be included in gross income for such taxable year shall be 
     so included ratably over the 3-taxable-year period beginning 
     with such taxable year.
       (ii) Special rule.--For purposes of clause (i), rules 
     similar to the rules of subparagraph (E) of section 
     408A(d)(3) of the Internal Revenue Code of 1986 shall apply.
       (F) Special rules.--
       (i) Exemption of distributions from trustee to trustee 
     transfer and withholding rules.--For purposes of sections 
     401(a)(31), 402(f), and 3405 of the Internal Revenue Code of 
     1986, qualified 2016 disaster distribution shall not be 
     treated as eligible rollover distributions.
       (ii) Qualified 2016 disaster distributions treated as 
     meeting plan distribution requirements.--For purposes of the 
     Internal Revenue Code of 1986, a qualified 2016 disaster 
     distribution shall be treated as meeting the requirements of 
     sections 401(k)(2)(B)(i), 403(b)(7)(A)(ii), 403(b)(11), and 
     457(d)(1)(A) of the Internal Revenue Code of 1986.
       (2) Provisions relating to plan amendments.--
       (A) In general.--If this paragraph applies to any amendment 
     to any plan or annuity contract, such plan or contract shall 
     be treated as being operated in accordance with the terms of 
     the plan during the period described in subparagraph 
     (B)(ii)(I).
       (B) Amendments to which subsection applies.--
       (i) In general.--This paragraph shall apply to any 
     amendment to any plan or annuity contract which is made--

       (I) pursuant to any provision of this section, or pursuant 
     to any regulation under any provision of this section, and
       (II) on or before the last day of the first plan year 
     beginning on or after January 1, 2018, or such later date as 
     the Secretary prescribes.

     In the case of a governmental plan (as defined in section 
     414(d) of the Internal Revenue Code of 1986), subclause (II) 
     shall be applied by substituting the date which is 2 years 
     after the date otherwise applied under subclause (II).
       (ii) Conditions.--This paragraph shall not apply to any 
     amendment to a plan or contract unless such amendment applies 
     retroactively for such period, and shall not apply to any 
     such amendment unless the plan or contract is operated as if 
     such amendment were in effect during the period--

       (I) beginning on the date that this section or the 
     regulation described in clause (i)(I) takes effect (or in the 
     case of a plan or contract amendment not required by this 
     section or such regulation, the effective date specified by 
     the plan), and
       (II) ending on the date described in clause (i)(II) (or, if 
     earlier, the date the plan or contract amendment is adopted).

       (c) Special Rules for Personal Casualty Losses Related to 
     2016 Major Disaster.--
       (1) In general.--If an individual has a net disaster loss 
     for any taxable year beginning after December 31, 2015, and 
     before January 1, 2018--
       (A) the amount determined under section 165(h)(2)(A)(ii) of 
     the Internal Revenue Code of 1986 shall be equal to the sum 
     of--
       (i) such net disaster loss, and
       (ii) so much of the excess referred to in the matter 
     preceding clause (i) of section 165(h)(2)(A) of such Code 
     (reduced by the amount in clause (i) of this subparagraph) as 
     exceeds 10 percent of the adjusted gross income of the 
     individual,
       (B) section 165(h)(1) of such Code shall be applied by 
     substituting ``$500'' for ``$500 ($100 for taxable years 
     beginning after December 31, 2009)'',
       (C) the standard deduction determined under section 63(c) 
     of such Code shall be increased by the net disaster loss, and
       (D) section 56(b)(1)(E) of such Code shall not apply to so 
     much of the standard deduction as is attributable to the 
     increase under subparagraph (C) of this paragraph.
       (2) Net disaster loss.--For purposes of this subsection, 
     the term ``net disaster loss'' means the excess of qualified 
     disaster-related personal casualty losses over personal 
     casualty gains (as defined in section 165(h)(3)(A) of the 
     Internal Revenue Code of 1986).
       (3) Qualified disaster-related personal casualty losses.--
     For purposes of this paragraph, the term ``qualified 
     disaster-related personal casualty losses'' means losses 
     described in section 165(c)(3) of the Internal Revenue Code 
     of 1986 which arise in a disaster area described in 
     subsection (a) on or after January 1, 2016, and which are 
     attributable to the events giving rise to the Presidential 
     declaration described in subsection (a) which was applicable 
     to such area.

                           PART IV--EDUCATION

     SEC. 11031. TREATMENT OF STUDENT LOANS DISCHARGED ON ACCOUNT 
                   OF DEATH OR DISABILITY.

       (a) In General.--Section 108(f) is amended by adding at the 
     end the following new paragraph:
       ``(5) Discharges on account of death or disability.--
       ``(A) In general.--In the case of an individual, gross 
     income does not include any amount which (but for this 
     subsection) would be includible in gross income for such 
     taxable year by reasons of the discharge (in whole or in 
     part) of any loan described in subparagraph (B) after 
     December 31, 2017, and before January 1, 2026, if such 
     discharge was--
       ``(i) pursuant to subsection (a) or (d) of section 437 of 
     the Higher Education Act of 1965 or the parallel benefit 
     under part D of title IV of such Act (relating to the 
     repayment of loan liability),
       ``(ii) pursuant to section 464(c)(1)(F) of such Act, or
       ``(iii) otherwise discharged on account of the death or 
     total and permanent disability of the student.
       ``(B) Loans described.--A loan is described in this 
     subparagraph if such loan is--
       ``(i) a student loan (as defined in paragraph (2)), or

[[Page 19881]]

       ``(ii) a private education loan (as defined in section 
     140(7) of the Consumer Credit Protection Act (15 U.S.C. 
     1650(7))).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to discharges of indebtedness after December 31, 
     2017.

     SEC. 11032. 529 ACCOUNT FUNDING FOR ELEMENTARY AND SECONDARY 
                   EDUCATION.

       (a) In General.--
       (1) In general.--Section 529(c) is amended by adding at the 
     end the following new paragraph:
       ``(7) Treatment of elementary and secondary tuition.--Any 
     reference in this subsection to the term `qualified higher 
     education expense' shall include a reference to--
       ``(A) expenses for tuition in connection with enrollment or 
     attendance at an elementary or secondary public, private, or 
     religious school, and
       ``(B) expenses for--
       ``(i) curriculum and curricular materials,
       ``(ii) books or other instructional materials,
       ``(iii) online educational materials,
       ``(iv) tuition for tutoring or educational classes outside 
     of the home (but only if the tutor or instructor is not 
     related (within the meaning of section 152(d)(2)) to the 
     student),
       ``(v) dual enrollment in an institution of higher 
     education, and
       ``(vi) educational therapies for students with 
     disabilities,

     in connection with a homeschool (whether treated as a 
     homeschool or a private school for purposes of applicable 
     State law).''.
       (2) Limitation.--Section 529(e)(3)(A) is amended by adding 
     at the end the following: ``The amount of cash distributions 
     from all qualified tuition programs described in subsection 
     (b)(1)(A)(ii) with respect to a beneficiary during any 
     taxable year shall, in the aggregate, include not more than 
     $10,000 in expenses described in subsection (c)(7) incurred 
     during the taxable year.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to distributions made after December 31, 2017.

                   PART V--DEDUCTIONS AND EXCLUSIONS

     SEC. 11041. SUSPENSION OF DEDUCTION FOR PERSONAL EXEMPTIONS.

       (a) In General.--Subsection (d) of section 151 is amended--
       (1) by striking ``In the case of'' in paragraph (4) and 
     inserting ``Except as provided in paragraph (5), in the case 
     of'', and
       (2) by adding at the end the following new paragraph:
       ``(5) Special rules for taxable years 2018 through 2025.--
     In the case of a taxable year beginning after December 31, 
     2017, and before January 1, 2026--
       ``(A) Exemption amount.--The term `exemption amount' means 
     zero.
       ``(B) References.--For purposes of any other provision of 
     this title, the reduction of the exemption amount to zero 
     under subparagraph (A) shall not be taken into account in 
     determining whether a deduction is allowed or allowable, or 
     whether a taxpayer is entitled to a deduction, under this 
     section.''.
       (b) Application to Estates and Trusts.--Section 
     642(b)(2)(C) is amended by adding at the end the following 
     new clause:
       ``(iii) Years when personal exemption amount is zero.--

       ``(I) In general.--In the case of any taxable year in which 
     the exemption amount under section 151(d) is zero, clause (i) 
     shall be applied by substituting `$4,150' for `the exemption 
     amount under section 151(d)'.
       ``(II) Inflation adjustment.--In the case of any taxable 
     year beginning in a calendar year after 2018, the $4,150 
     amount in subparagraph (A) shall be increased in the same 
     manner as provided in section 6334(d)(4)(C).''.

       (c) Modification of Wage Withholding Rules.--
       (1) In general.--Section 3402(a)(2) is amended by striking 
     ``means the amount'' and all that follows and inserting 
     ``means the amount by which the wages exceed the taxpayer's 
     withholding allowance, prorated to the payroll period.''.
       (2) Conforming amendments.--
       (A) Section 3401 is amended by striking subsection (e).
       (B) Paragraphs (1) and (2) of section 3402(f) are amended 
     to read as follows:
       ``(1) In general.--Under rules determined by the Secretary, 
     an employee receiving wages shall on any day be entitled to a 
     withholding allowance determined based on--
       ``(A) whether the employee is an individual for whom a 
     deduction is allowable with respect to another taxpayer under 
     section 151;
       ``(B) if the employee is married, whether the employee's 
     spouse is entitled to an allowance, or would be so entitled 
     if such spouse were an employee receiving wages, under 
     subparagraph (A) or (D), but only if such spouse does not 
     have in effect a withholding allowance certificate claiming 
     such allowance;
       ``(C) the number of individuals with respect to whom, on 
     the basis of facts existing at the beginning of such day, 
     there may reasonably be expected to be allowable a credit 
     under section 24(a) for the taxable year under subtitle A in 
     respect of which amounts deducted and withheld under this 
     chapter in the calendar year in which such day falls are 
     allowed as a credit;
       ``(D) any additional amounts to which the employee elects 
     to take into account under subsection (m), but only if the 
     employee's spouse does not have in effect a withholding 
     allowance certificate making such an election;
       ``(E) the standard deduction allowable to such employee 
     (one-half of such standard deduction in the case of an 
     employee who is married (as determined under section 7703) 
     and whose spouse is an employee receiving wages subject to 
     withholding); and
       ``(F) whether the employee has withholding allowance 
     certificates in effect with respect to more than 1 employer.
       ``(2) Allowance certificates.--
       ``(A) On commencement of employment.--On or before the date 
     of the commencement of employment with an employer, the 
     employee shall furnish the employer with a signed withholding 
     allowance certificate relating to the withholding allowance 
     claimed by the employee, which shall in no event exceed the 
     amount to which the employee is entitled.
       ``(B) Change of status.--If, on any day during the calendar 
     year, an employee's withholding allowance is in excess of the 
     withholding allowance to which the employee would be entitled 
     had the employee submitted a true and accurate withholding 
     allowance certificate to the employer on that day, the 
     employee shall within 10 days thereafter furnish the employer 
     with a new withholding allowance certificate. If, on any day 
     during the calendar year, an employee's withholding allowance 
     is greater than the withholding allowance claimed, the 
     employee may furnish the employer with a new withholding 
     allowance certificate relating to the withholding allowance 
     to which the employee is so entitled, which shall in no event 
     exceed the amount to which the employee is entitled on such 
     day.
       ``(C) Change of status which affects next calendar year.--
     If on any day during the calendar year the withholding 
     allowance to which the employee will be, or may reasonably be 
     expected to be, entitled at the beginning of the employee's 
     next taxable year under subtitle A is different from the 
     allowance to which the employee is entitled on such day, the 
     employee shall, in such cases and at such times as the 
     Secretary shall by regulations prescribe, furnish the 
     employer with a withholding allowance certificate relating to 
     the withholding allowance which the employee claims with 
     respect to such next taxable year, which shall in no event 
     exceed the withholding allowance to which the employee will 
     be, or may reasonably be expected to be, so entitled.''.
       (C) Subsections (b)(1), (b)(2), (f)(3), (f)(4), (f)(5), 
     (f)(7) (including the heading thereof), (g)(4), (l)(1), 
     (l)(2), and (n) of section 3402 are each amended by striking 
     ``exemption'' each place it appears and inserting 
     ``allowance''.
       (D) The heading of section 3402(f) is amended by striking 
     ``Exemptions'' and inserting ``Allowance''.
       (E) Section 3402(m) is amended by striking ``additional 
     withholding allowances or additional reductions in 
     withholding under this subsection. In determining the number 
     of additional withholding allowances'' and inserting ``an 
     additional withholding allowance or additional reductions in 
     withholding under this subsection. In determining the 
     additional withholding allowance''.
       (F) Paragraphs (3) and (4) of section 3405(a) (and the 
     heading for such paragraph (4)) are each amended by striking 
     ``exemption'' each place it appears and inserting 
     ``allowance''.
       (G) Section 3405(a)(4) is amended by striking ``shall be 
     determined'' and all that follows through ``3 withholding 
     exemptions'' and inserting ``shall be determined under rules 
     prescribed by the Secretary''.
       (d) Exception for Determining Property Exempt From Levy.--
     Section 6334(d) is amended by adding at the end the following 
     new paragraph:
       ``(4) Years when personal exemption amount is zero.--
       ``(A) In general.--In the case of any taxable year in which 
     the exemption amount under section 151(d) is zero, paragraph 
     (2) shall not apply and for purposes of paragraph (1) the 
     term `exempt amount' means an amount equal to--
       ``(i) the sum of the amount determined under subparagraph 
     (B) and the standard deduction, divided by
       ``(ii) 52.
       ``(B) Amount determined.--For purposes of subparagraph (A), 
     the amount determined under this subparagraph is $4,150 
     multiplied by the number of the taxpayer's dependents for the 
     taxable year in which the levy occurs.
       ``(C) Inflation adjustment.--In the case of any taxable 
     year beginning in a calendar year after 2018, the $4,150 
     amount in subparagraph (B) shall be increased by an amount 
     equal to--
       ``(i) such dollar amount, multiplied by
       ``(ii) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `2017' for `2016' in 
     subparagraph (A)(ii) thereof.

     If any increase determined under the preceding sentence is 
     not a multiple of $100, such increase shall be rounded to the 
     next lowest multiple of $100.
       ``(D) Verified statement.--Unless the taxpayer submits to 
     the Secretary a written and properly verified statement 
     specifying the facts necessary to determine the proper amount 
     under subparagraph (A), subparagraph (A) shall be applied as 
     if the taxpayer were a married individual filing a separate 
     return with no dependents.''.
       (e) Persons Required to Make Returns of Income.--Section 
     6012 is amended by adding at the end the following new 
     subsection:
       ``(f) Special Rule for Taxable Years 2018 Through 2025.--In 
     the case of a taxable year beginning after December 31, 2017, 
     and before January 1, 2026, subsection (a)(1) shall not

[[Page 19882]]

     apply, and every individual who has gross income for the 
     taxable year shall be required to make returns with respect 
     to income taxes under subtitle A, except that a return shall 
     not be required of--
       ``(1) an individual who is not married (determined by 
     applying section 7703) and who has gross income for the 
     taxable year which does not exceed the standard deduction 
     applicable to such individual for such taxable year under 
     section 63, or
       ``(2) an individual entitled to make a joint return if--
       ``(A) the gross income of such individual, when combined 
     with the gross income of such individual's spouse, for the 
     taxable year does not exceed the standard deduction which 
     would be applicable to the taxpayer for such taxable year 
     under section 63 if such individual and such individual's 
     spouse made a joint return,
       ``(B) such individual and such individual's spouse have the 
     same household as their home at the close of the taxable 
     year,
       ``(C) such individual's spouse does not make a separate 
     return, and
       ``(D) neither such individual nor such individual's spouse 
     is an individual described in section 63(c)(5) who has income 
     (other than earned income) in excess of the amount in effect 
     under section 63(c)(5)(A).''.
       (f) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after December 31, 2017.
       (2) Wage withholding.--The Secretary of the Treasury may 
     administer section 3402 for taxable years beginning before 
     January 1, 2019, without regard to the amendments made by 
     subsections (a) and (c).

     SEC. 11042. LIMITATION ON DEDUCTION FOR STATE AND LOCAL, ETC. 
                   TAXES.

       (a) In General.--Subsection (b) of section 164 is amended 
     by adding at the end the following new paragraph:
       ``(6) Limitation on individual deductions for taxable years 
     2018 through 2025.--In the case of an individual and a 
     taxable year beginning after December 31, 2017, and before 
     January 1, 2026--
       ``(A) foreign real property taxes shall not be taken into 
     account under subsection (a)(1), and
       ``(B) the aggregate amount of taxes taken into account 
     under paragraphs (1), (2), and (3) of subsection (a) and 
     paragraph (5) of this subsection for any taxable year shall 
     not exceed $10,000 ($5,000 in the case of a married 
     individual filing a separate return).

     The preceding sentence shall not apply to any foreign taxes 
     described in subsection (a)(3) or to any taxes described in 
     paragraph (1) and (2) of subsection (a) which are paid or 
     accrued in carrying on a trade or business or an activity 
     described in section 212. For purposes of subparagraph (B), 
     an amount paid in a taxable year beginning before January 1, 
     2018, with respect to a State or local income tax imposed for 
     a taxable year beginning after December 31, 2017, shall be 
     treated as paid on the last day of the taxable year for which 
     such tax is so imposed.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2016.

     SEC. 11043. LIMITATION ON DEDUCTION FOR QUALIFIED RESIDENCE 
                   INTEREST.

       (a) In General.--Section 163(h)(3) is amended by adding at 
     the end the following new subparagraph:
       ``(F) Special rules for taxable years 2018 through 2025.--
       ``(i) In general.--In the case of taxable years beginning 
     after December 31, 2017, and before January 1, 2026--

       ``(I) Disallowance of home equity indebtedness interest.--
     Subparagraph (A)(ii) shall not apply.
       ``(II) Limitation on acquisition indebtedness.--
     Subparagraph (B)(ii) shall be applied by substituting 
     `$750,000 ($375,000' for `$1,000,000 ($500,000'.
       ``(III) Treatment of indebtedness incurred on or before 
     december 15, 2017.--Subclause (II) shall not apply to any 
     indebtedness incurred on or before December 15, 2017, and, in 
     applying such subclause to any indebtedness incurred after 
     such date, the limitation under such subclause shall be 
     reduced (but not below zero) by the amount of any 
     indebtedness incurred on or before December 15, 2017, which 
     is treated as acquisition indebtedness for purposes of this 
     subsection for the taxable year.
       ``(IV) Binding contract exception.--In the case of a 
     taxpayer who enters into a written binding contract before 
     December 15, 2017, to close on the purchase of a principal 
     residence before January 1, 2018, and who purchases such 
     residence before April 1, 2018, subclause (III) shall be 
     applied by substituting `April 1, 2018' for `December 15, 
     2017'.

       ``(ii) Treatment of limitation in taxable years after 
     december 31, 2025.--In the case of taxable years beginning 
     after December 31, 2025, the limitation under subparagraph 
     (B)(ii) shall be applied to the aggregate amount of 
     indebtedness of the taxpayer described in subparagraph (B)(i) 
     without regard to the taxable year in which the indebtedness 
     was incurred.
       ``(iii) Treatment of refinancings of indebtedness.--

       ``(I) In general.--In the case of any indebtedness which is 
     incurred to refinance indebtedness, such refinanced 
     indebtedness shall be treated for purposes of clause (i)(III) 
     as incurred on the date that the original indebtedness was 
     incurred to the extent the amount of the indebtedness 
     resulting from such refinancing does not exceed the amount of 
     the refinanced indebtedness.
       ``(II) Limitation on period of refinancing.--Subclause (I) 
     shall not apply to any indebtedness after the expiration of 
     the term of the original indebtedness or, if the principal of 
     such original indebtedness is not amortized over its term, 
     the expiration of the term of the 1st refinancing of such 
     indebtedness (or if earlier, the date which is 30 years after 
     the date of such 1st refinancing).

       ``(iv) Coordination with exclusion of income from discharge 
     of indebtedness.--Section 108(h)(2) shall be applied without 
     regard to this subparagraph.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 11044. MODIFICATION OF DEDUCTION FOR PERSONAL CASUALTY 
                   LOSSES.

       (a) In General.--Subsection (h) of section 165 is amended 
     by adding at the end the following new paragraph:
       ``(5) Limitation for taxable years 2018 through 2025.--
       ``(A) In general.--In the case of an individual, except as 
     provided in subparagraph (B), any personal casualty loss 
     which (but for this paragraph) would be deductible in a 
     taxable year beginning after December 31, 2017, and before 
     January 1, 2026, shall be allowed as a deduction under 
     subsection (a) only to the extent it is attributable to a 
     Federally declared disaster (as defined in subsection 
     (i)(5)).
       ``(B) Exception related to personal casualty gains.--If a 
     taxpayer has personal casualty gains for any taxable year to 
     which subparagraph (A) applies--
       ``(i) subparagraph (A) shall not apply to the portion of 
     the personal casualty loss not attributable to a Federally 
     declared disaster (as so defined) to the extent such loss 
     does not exceed such gains, and
       ``(ii) in applying paragraph (2) for purposes of 
     subparagraph (A) to the portion of personal casualty loss 
     which is so attributable to such a disaster, the amount of 
     personal casualty gains taken into account under paragraph 
     (2)(A) shall be reduced by the portion of such gains taken 
     into account under clause (i).''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to losses incurred in taxable years beginning 
     after December 31, 2017.

     SEC. 11045. SUSPENSION OF MISCELLANEOUS ITEMIZED DEDUCTIONS.

       (a) In General.--Section 67 is amended by adding at the end 
     the following new subsection:
       ``(g) Suspension for Taxable Years 2018 Through 2025.--
     Notwithstanding subsection (a), no miscellaneous itemized 
     deduction shall be allowed for any taxable year beginning 
     after December 31, 2017, and before January 1, 2026.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 11046. SUSPENSION OF OVERALL LIMITATION ON ITEMIZED 
                   DEDUCTIONS.

       (a) In General.--Section 68 is amended by adding at the end 
     the following new subsection:
       ``(f) Section Not to Apply.--This section shall not apply 
     to any taxable year beginning after December 31, 2017, and 
     before January 1, 2026.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 11047. SUSPENSION OF EXCLUSION FOR QUALIFIED BICYCLE 
                   COMMUTING REIMBURSEMENT.

       (a) In General.--Section 132(f) is amended by adding at the 
     end the following new paragraph:
       ``(8) Suspension of qualified bicycle commuting 
     reimbursement exclusion.--Paragraph (1)(D) shall not apply to 
     any taxable year beginning after December 31, 2017, and 
     before January 1, 2026.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 11048. SUSPENSION OF EXCLUSION FOR QUALIFIED MOVING 
                   EXPENSE REIMBURSEMENT.

       (a) In General.--Section 132(g) is amended--
       (1) by striking ``For purposes of this section, the term'' 
     and inserting ``For purposes of this section--
       ``(1) In general.--The term'', and
       (2) by adding at the end the following new paragraph:
       ``(2) Suspension for taxable years 2018 through 2025.--
     Except in the case of a member of the Armed Forces of the 
     United States on active duty who moves pursuant to a military 
     order and incident to a permanent change of station, 
     subsection (a)(6) shall not apply to any taxable year 
     beginning after December 31, 2017, and before January 1, 
     2026.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 11049. SUSPENSION OF DEDUCTION FOR MOVING EXPENSES.

       (a) In General.--Section 217 is amended by adding at the 
     end the following new subsection:
       ``(k) Suspension of Deduction for Taxable Years 2018 
     Through 2025.--Except in the case of an individual to whom 
     subsection (g) applies, this section shall not apply to any 
     taxable year beginning after December 31, 2017, and before 
     January 1, 2026.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 11050. LIMITATION ON WAGERING LOSSES.

       (a) In General.--Section 165(d) is amended by adding at the 
     end the following: ``For purposes of the preceding sentence, 
     in the case of taxable

[[Page 19883]]

     years beginning after December 31, 2017, and before January 
     1, 2026, the term `losses from wagering transactions' 
     includes any deduction otherwise allowable under this chapter 
     incurred in carrying on any wagering transaction.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 11051. REPEAL OF DEDUCTION FOR ALIMONY PAYMENTS.

       (a) In General.--Part VII of subchapter B is amended by 
     striking by striking section 215 (and by striking the item 
     relating to such section in the table of sections for such 
     subpart).
       (b) Conforming Amendments.--
       (1) Corresponding repeal of provisions providing for 
     inclusion of alimony in gross income.--
       (A) Subsection (a) of section 61 is amended by striking 
     paragraph (8) and by redesignating paragraphs (9) through 
     (15) as paragraphs (8) through (14), respectively.
       (B) Part II of subchapter B of chapter 1 is amended by 
     striking section 71 (and by striking the item relating to 
     such section in the table of sections for such part).
       (C) Subpart F of part I of subchapter J of chapter 1 is 
     amended by striking section 682 (and by striking the item 
     relating to such section in the table of sections for such 
     subpart).
       (2) Related to repeal of section 215.--
       (A) Section 62(a) is amended by striking paragraph (10).
       (B) Section 3402(m)(1) is amended by striking ``(other than 
     paragraph (10) thereof)''.
       (C) Section 6724(d)(3) is amended by striking subparagraph 
     (C) and by redesignating subparagraph (D) as subparagraph 
     (C).
       (3) Related to repeal of section 71.--
       (A) Section 121(d)(3) is amended--
       (i) by striking ``(as defined in section 71(b)(2))'' in 
     subparagraph (B), and
       (ii) by adding at the end the following new subparagraph:
       ``(C) Divorce or separation instrument.--For purposes of 
     this paragraph, the term `divorce or separation instrument' 
     means--
       ``(i) a decree of divorce or separate maintenance or a 
     written instrument incident to such a decree,
       ``(ii) a written separation agreement, or
       ``(iii) a decree (not described in clause (i)) requiring a 
     spouse to make payments for the support or maintenance of the 
     other spouse.''.
       (B) Section 152(d)(5) is amended to read as follows:
       ``(5) Special rules for support.--
       ``(A) In general.--For purposes of this subsection--
       ``(i) payments to a spouse of alimony or separate 
     maintenance payments shall not be treated as a payment by the 
     payor spouse for the support of any dependent, and
       ``(ii) in the case of the remarriage of a parent, support 
     of a child received from the parent's spouse shall be treated 
     as received from the parent.
       ``(B) Alimony or separate maintenance payment.--For 
     purposes of subparagraph (A), the term `alimony or separate 
     maintenance payment' means any payment in cash if--
       ``(i) such payment is received by (or on behalf of) a 
     spouse under a divorce or separation instrument (as defined 
     in section 121(d)(3)(C)),
       ``(ii) in the case of an individual legally separated from 
     the individual's spouse under a decree of divorce or of 
     separate maintenance, the payee spouse and the payor spouse 
     are not members of the same household at the time such 
     payment is made, and
       ``(iii) there is no liability to make any such payment for 
     any period after the death of the payee spouse and there is 
     no liability to make any payment (in cash or property) as a 
     substitute for such payments after the death of the payee 
     spouse.''.
       (C) Section 219(f)(1) is amended by striking the third 
     sentence.
       (D) Section 220(f)(7) is amended by striking ``subparagraph 
     (A) of section 71(b)(2)'' and inserting ``clause (i) of 
     section 121(d)(3)(C)''.
       (E) Section 223(f)(7) is amended by striking ``subparagraph 
     (A) of section 71(b)(2)'' and inserting ``clause (i) of 
     section 121(d)(3)(C)''.
       (F) Section 382(l)(3)(B)(iii) is amended by striking 
     ``section 71(b)(2)'' and inserting ``section 121(d)(3)(C)''.
       (G) Section 408(d)(6) is amended by striking ``subparagraph 
     (A) of section 71(b)(2)'' and inserting ``clause (i) of 
     section 121(d)(3)(C)''.
       (4) Additional conforming amendments.--Section 7701(a)(17) 
     is amended--
       (A) by striking ``sections 682 and 2516'' and inserting 
     ``section 2516'', and
       (B) by striking ``such sections'' each place it appears and 
     inserting ``such section''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to--
       (1) any divorce or separation instrument (as defined in 
     section 71(b)(2) of the Internal Revenue Code of 1986 as in 
     effect before the date of the enactment of this Act) executed 
     after December 31, 2018, and
       (2) any divorce or separation instrument (as so defined) 
     executed on or before such date and modified after such date 
     if the modification expressly provides that the amendments 
     made by this section apply to such modification.

           PART VI--INCREASE IN ESTATE AND GIFT TAX EXEMPTION

     SEC. 11061. INCREASE IN ESTATE AND GIFT TAX EXEMPTION.

       (a) In General.--Section 2010(c)(3) is amended by adding at 
     the end the following new subparagraph:
       ``(C) Increase in basic exclusion amount.--In the case of 
     estates of decedents dying or gifts made after December 31, 
     2017, and before January 1, 2026, subparagraph (A) shall be 
     applied by substituting `$10,000,000' for `$5,000,000'.''.
       (b) Conforming Amendment.--Subsection (g) of section 2001 
     is amended to read as follows:
       ``(g) Modifications to Tax Payable.--
       ``(1) Modifications to gift tax payable to reflect 
     different tax rates.--For purposes of applying subsection 
     (b)(2) with respect to 1 or more gifts, the rates of tax 
     under subsection (c) in effect at the decedent's death shall, 
     in lieu of the rates of tax in effect at the time of such 
     gifts, be used both to compute--
       ``(A) the tax imposed by chapter 12 with respect to such 
     gifts, and
       ``(B) the credit allowed against such tax under section 
     2505, including in computing--
       ``(i) the applicable credit amount under section 
     2505(a)(1), and
       ``(ii) the sum of the amounts allowed as a credit for all 
     preceding periods under section 2505(a)(2).
       ``(2) Modifications to estate tax payable to reflect 
     different basic exclusion amounts.--The Secretary shall 
     prescribe such regulations as may be necessary or appropriate 
     to carry out this section with respect to any difference 
     between--
       ``(A) the basic exclusion amount under section 2010(c)(3) 
     applicable at the time of the decedent's death, and
       ``(B) the basic exclusion amount under such section 
     applicable with respect to any gifts made by the decedent.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to estates of decedents dying and gifts made 
     after December 31, 2017.

       PART VII--EXTENSION OF TIME LIMIT FOR CONTESTING IRS LEVY

     SEC. 11071. EXTENSION OF TIME LIMIT FOR CONTESTING IRS LEVY.

       (a) Extension of Time for Return of Property Subject to 
     Levy.--Subsection (b) of section 6343 is amended by striking 
     ``9 months'' and inserting ``2 years''.
       (b) Period of Limitation on Suits.--Subsection (c) of 
     section 6532 is amended--
       (1) by striking ``9 months'' in paragraph (1) and inserting 
     ``2 years'', and
       (2) by striking ``9-month'' in paragraph (2) and inserting 
     ``2-year''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to--
       (1) levies made after the date of the enactment of this 
     Act, and
       (2) levies made on or before such date if the 9-month 
     period has not expired under section 6343(b) of the Internal 
     Revenue Code of 1986 (without regard to this section) as of 
     such date.

                     PART VIII--INDIVIDUAL MANDATE

     SEC. 11081. ELIMINATION OF SHARED RESPONSIBILITY PAYMENT FOR 
                   INDIVIDUALS FAILING TO MAINTAIN MINIMUM 
                   ESSENTIAL COVERAGE.

       (a) In General.--Section 5000A(c) is amended--
       (1) in paragraph (2)(B)(iii), by striking ``2.5 percent'' 
     and inserting ``Zero percent'', and
       (2) in paragraph (3)--
       (A) by striking ``$695'' in subparagraph (A) and inserting 
     ``$0'', and
       (B) by striking subparagraph (D).
       (b) Effective Date.--The amendments made by this section 
     shall apply to months beginning after December 31, 2018.

                  Subtitle B--Alternative Minimum Tax

     SEC. 12001. REPEAL OF TAX FOR CORPORATIONS.

       (a) In General.--Section 55(a) is amended by striking 
     ``There'' and inserting ``In the case of a taxpayer other 
     than a corporation, there''.
       (b) Conforming Amendments.--
       (1) Section 38(c)(6) is amended by adding at the end the 
     following new subparagraph:
       ``(E) Corporations.--In the case of a corporation, this 
     subsection shall be applied by treating the corporation as 
     having a tentative minimum tax of zero.''.
       (2) Section 53(d)(2) is amended by inserting ``, except 
     that in the case of a corporation, the tentative minimum tax 
     shall be treated as zero'' before the period at the end.
       (3)(A) Section 55(b)(1) is amended to read as follows:
       ``(1) Amount of tentative tax.--
       ``(A) In general.--The tentative minimum tax for the 
     taxable year is the sum of--
       ``(i) 26 percent of so much of the taxable excess as does 
     not exceed $175,000, plus
       ``(ii) 28 percent of so much of the taxable excess as 
     exceeds $175,000.

     The amount determined under the preceding sentence shall be 
     reduced by the alternative minimum tax foreign tax credit for 
     the taxable year.
       ``(B) Taxable excess.--For purposes of this subsection, the 
     term `taxable excess' means so much of the alternative 
     minimum taxable income for the taxable year as exceeds the 
     exemption amount.
       ``(C) Married individual filing separate return.--In the 
     case of a married individual filing a separate return, 
     subparagraph (A) shall be applied by substituting 50 percent 
     of the dollar amount otherwise applicable under clause (i) 
     and clause (ii) thereof. For purposes of the preceding 
     sentence, marital status shall be determined under section 
     7703.''.
       (B) Section 55(b)(3) is amended by striking ``paragraph 
     (1)(A)(i)'' and inserting ``paragraph (1)(A)''.

[[Page 19884]]

       (C) Section 59(a) is amended--
       (i) by striking ``subparagraph (A)(i) or (B)(i) of section 
     55(b)(1) (whichever applies) in lieu of the highest rate of 
     tax specified in section 1 or 11 (whichever applies)'' in 
     paragraph (1)(C) and inserting ``section 55(b)(1) in lieu of 
     the highest rate of tax specified in section 1'', and
       (ii) in paragraph (2), by striking ``means'' and all that 
     follows and inserting ``means the amount determined under the 
     first sentence of section 55(b)(1)(A).''.
       (D) Section 897(a)(2)(A) is amended by striking ``section 
     55(b)(1)(A)'' and inserting ``section 55(b)(1)''.
       (E) Section 911(f) is amended--
       (i) in paragraph (1)(B)--
       (I) by striking ``section 55(b)(1)(A)(ii)'' and inserting 
     ``section 55(b)(1)(B)'', and
       (II) by striking ``section 55(b)(1)(A)(i)'' and inserting 
     ``section 55(b)(1)(A)'', and
       (ii) in paragraph (2)(B), by striking ``section 
     55(b)(1)(A)(ii)'' each place it appears and inserting 
     ``section 55(b)(1)(B)''.
       (4) Section 55(c)(1) is amended by striking ``, the section 
     936 credit allowable under section 27(b), and the Puerto Rico 
     economic activity credit under section 30A''.
       (5) Section 55(d), as amended by section 11002, is 
     amended--
       (A) by striking paragraph (2) and redesignating paragraphs 
     (3) and (4) as paragraphs (2) and (3), respectively,
       (B) in paragraph (2) (as so redesignated), by inserting 
     ``and'' at the end of subparagraph (B), by striking ``, and'' 
     at the end of subparagraph (C) and inserting a period, and by 
     striking subparagraph (D), and
       (C) in paragraph (3) (as so redesignated)--
       (i) by striking ``(b)(1)(A)(i)'' in subparagraph (B)(i) and 
     inserting ``(b)(1)(A)'', and
       (ii) by striking ``paragraph (3)'' in subparagraph (B)(iii) 
     and inserting ``paragraph (2)''.
       (6) Section 55 is amended by striking subsection (e).
       (7) Section 56(b)(2) is amended by striking subparagraph 
     (C) and by redesignating subparagraph (D) as subparagraph 
     (C).
       (8)(A) Section 56 is amended by striking subsections (c) 
     and (g).
       (B) Section 847 is amended by striking the last sentence of 
     paragraph (9).
       (C) Section 848 is amended by striking subsection (i).
       (9) Section 58(a) is amended by striking paragraph (3) and 
     redesignating paragraph (4) as paragraph (3).
       (10) Section 59 is amended by striking subsections (b) and 
     (f).
       (11) Section 11(d) is amended by striking ``the taxes 
     imposed by subsection (a) and section 55'' and inserting 
     ``the tax imposed by subsection (a)''.
       (12) Section 12 is amended by striking paragraph (7).
       (13) Section 168(k) is amended by striking paragraph (4).
       (14) Section 882(a)(1) is amended by striking ``, 55,''.
       (15) Section 962(a)(1) is amended by striking ``sections 11 
     and 55'' and inserting ``section 11''.
       (16) Section 1561(a) is amended--
       (A) by inserting ``and'' at the end of paragraph (1), by 
     striking ``, and'' at the end of paragraph (2) and inserting 
     a period, and by striking paragraph (3), and
       (B) by striking the last sentence.
       (17) Section 6425(c)(1)(A) is amended to read as follows:
       ``(A) the tax imposed by section 11 or 1201(a), or 
     subchapter L of chapter 1, whichever is applicable, over''.
       (18) Section 6655(e)(2) is amended by striking ``and 
     alternative minimum taxable income'' each place it appears in 
     subparagraphs (A) and (B)(i).
       (19) Section 6655(g)(1)(A) is amended by inserting ``plus'' 
     at the end of clause (i), by striking clause (ii), and by 
     redesignating clause (iii) as clause (ii).
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 12002. CREDIT FOR PRIOR YEAR MINIMUM TAX LIABILITY OF 
                   CORPORATIONS.

       (a) Credits Treated as Refundable.--Section 53 is amended 
     by adding at the end the following new subsection:
       ``(e) Portion of Credit Treated as Refundable.--
       ``(1) In general.--In the case of any taxable year of a 
     corporation beginning in 2018, 2019, 2020, or 2021, the 
     limitation under subsection (c) shall be increased by the AMT 
     refundable credit amount for such year.
       ``(2) AMT refundable credit amount.--For purposes of 
     paragraph (1), the AMT refundable credit amount is an amount 
     equal to 50 percent (100 percent in the case of a taxable 
     year beginning in 2021) of the excess (if any) of--
       ``(A) the minimum tax credit determined under subsection 
     (b) for the taxable year, over
       ``(B) the minimum tax credit allowed under subsection (a) 
     for such year (before the application of this subsection for 
     such year).
       ``(3) Credit refundable.--For purposes of this title (other 
     than this section), the credit allowed by reason of this 
     subsection shall be treated as a credit allowed under subpart 
     C (and not this subpart).
       ``(4) Short taxable years.--In the case of any taxable year 
     of less than 365 days, the AMT refundable credit amount 
     determined under paragraph (2) with respect to such taxable 
     year shall be the amount which bears the same ratio to such 
     amount determined without regard to this paragraph as the 
     number of days in such taxable year bears to 365.''.
       (b) Treatment of References.--Section 53(d) is amended by 
     adding at the end the following new paragraph:
       ``(3) AMT term references.--In the case of a corporation, 
     any references in this subsection to section 55, 56, or 57 
     shall be treated as a reference to such section as in effect 
     before the amendments made by Tax Cuts and Jobs Act.''.
       (c) Conforming Amendment.--Section 1374(b)(3)(B) is amended 
     by striking the last sentence thereof.
       (d) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning after December 31, 2017.
       (2) Conforming amendment.--The amendment made by subsection 
     (c) shall apply to taxable years beginning after December 31, 
     2021.

     SEC. 12003. INCREASED EXEMPTION FOR INDIVIDUALS.

       (a) In General.--Section 55(d), as amended by the preceding 
     provisions of this Act, is amended by adding at the end the 
     following new paragraph:
       ``(4) Special rule for taxable years beginning after 2017 
     and before 2026.--
       ``(A) In general.--In the case of any taxable year 
     beginning after December 31, 2017, and before January 1, 
     2026--
       ``(i) paragraph (1) shall be applied--

       ``(I) by substituting `$109,400' for `$78,750' in 
     subparagraph (A), and
       ``(II) by substituting `$70,300' for `$50,600' in 
     subparagraph (B), and

       ``(ii) paragraph (2) shall be applied--

       ``(I) by substituting `$1,000,000' for `$150,000' in 
     subparagraph (A),
       ``(II) by substituting `50 percent of the dollar amount 
     applicable under subparagraph (A)' for `$112,500' in 
     subparagraph (B), and
       ``(III) in the case of a taxpayer described in paragraph 
     (1)(D), without regard to the substitution under subclause 
     (I).

       ``(B) Inflation adjustment.--
       ``(i) In general.--In the case of any taxable year 
     beginning in a calendar year after 2018, the amounts 
     described in clause (ii) shall each be increased by an amount 
     equal to--

       ``(I) such dollar amount, multiplied by
       ``(II) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, determined by substituting `calendar year 2017' 
     for `calendar year 2016' in subparagraph (A)(ii) thereof.

       ``(ii) Amounts described.--The amounts described in this 
     clause are the $109,400 amount in subparagraph (A)(i)(I), the 
     $70,300 amount in subparagraph (A)(i)(II), and the $1,000,000 
     amount in subparagraph (A)(ii)(I).
       ``(iii) Rounding.--Any increased amount determined under 
     clause (i) shall be rounded to the nearest multiple of $100.
       ``(iv) Coordination with current adjustments.--In the case 
     of any taxable year to which subparagraph (A) applies, no 
     adjustment shall be made under paragraph (3) to any of the 
     numbers which are substituted under subparagraph (A) and 
     adjusted under this subparagraph.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

                Subtitle C--Business-related Provisions

                      PART I--CORPORATE PROVISIONS

     SEC. 13001. 21-PERCENT CORPORATE TAX RATE.

       (a) In General.--Subsection (b) of section 11 is amended to 
     read as follows:
       ``(b) Amount of Tax.--The amount of the tax imposed by 
     subsection (a) shall be 21 percent of taxable income.''.
       (b) Conforming Amendments.--
       (1) The following sections are each amended by striking 
     ``section 11(b)(1)'' and inserting ``section 11(b)'':
       (A) Section 280C(c)(3)(B)(ii)(II).
       (B) Paragraphs (2)(B) and (6)(A)(ii) of section 860E(e).
       (C) Section 7874(e)(1)(B).
       (2)(A) Part I of subchapter P of chapter 1 is amended by 
     striking section 1201 (and by striking the item relating to 
     such section in the table of sections for such part).
       (B) Section 12 is amended by striking paragraphs (4) and 
     (6), and by redesignating paragraph (5) as paragraph (4).
       (C) Section 453A(c)(3) is amended by striking ``or 1201 
     (whichever is appropriate)''.
       (D) Section 527(b) is amended--
       (i) by striking paragraph (2), and
       (ii) by striking all that precedes ``is hereby imposed'' 
     and inserting:
       ``(b) Tax Imposed.--A tax''.
       (E) Sections 594(a) is amended by striking ``taxes imposed 
     by section 11 or 1201(a)'' and inserting ``tax imposed by 
     section 11''.
       (F) Section 691(c)(4) is amended by striking ``1201,''.
       (G) Section 801(a) is amended--
       (i) by striking paragraph (2), and
       (ii) by striking all that precedes ``is hereby imposed'' 
     and inserting:
       ``(a) Tax Imposed.--A tax''.
       (H) Section 831(e) is amended by striking paragraph (1) and 
     by redesignating paragraphs (2) and (3) as paragraphs (1) and 
     (2), respectively.
       (I) Sections 832(c)(5) and 834(b)(1)(D) are each amended by 
     striking ``sec. 1201 and following,''.
       (J) Section 852(b)(3)(A) is amended by striking ``section 
     1201(a)'' and inserting ``section 11(b)''.
       (K) Section 857(b)(3) is amended--
       (i) by striking subparagraph (A) and redesignating 
     subparagraphs (B) through (F) as subparagraphs (A) through 
     (E), respectively,
       (ii) in subparagraph (C), as so redesignated--
       (I) by striking ``subparagraph (A)(ii)'' in clause (i) 
     thereof and inserting ``paragraph (1)'',

[[Page 19885]]

       (II) by striking ``the tax imposed by subparagraph 
     (A)(ii)'' in clauses (ii) and (iv) thereof and inserting 
     ``the tax imposed by paragraph (1) on undistributed capital 
     gain'',
       (iii) in subparagraph (E), as so redesignated, by striking 
     ``subparagraph (B) or (D)'' and inserting ``subparagraph (A) 
     or (C)'', and
       (iv) by adding at the end the following new subparagraph:
       ``(F) Undistributed capital gain.--For purposes of this 
     paragraph, the term `undistributed capital gain' means the 
     excess of the net capital gain over the deduction for 
     dividends paid (as defined in section 561) determined with 
     reference to capital gain dividends only.''.
       (L) Section 882(a)(1), as amended by section 12001, is 
     further amended by striking ``or 1201(a)''.
       (M) Section 904(b) is amended--
       (i) by striking ``or 1201(a)'' in paragraph (2)(C),
       (ii) by striking paragraph (3)(D) and inserting the 
     following:
       ``(D) Capital gain rate differential.--There is a capital 
     gain rate differential for any year if subsection (h) of 
     section 1 applies to such taxable year.'', and
       (iii) by striking paragraph (3)(E) and inserting the 
     following:
       ``(E) Rate differential portion.--The rate differential 
     portion of foreign source net capital gain, net capital gain, 
     or the excess of net capital gain from sources within the 
     United States over net capital gain, as the case may be, is 
     the same proportion of such amount as--
       ``(i) the excess of--

       ``(I) the highest rate of tax set forth in subsection (a), 
     (b), (c), (d), or (e) of section 1 (whichever applies), over
       ``(II) the alternative rate of tax determined under section 
     1(h), bears to

       ``(ii) that rate referred to in subclause (I).''.
       (N) Section 1374(b) is amended by striking paragraph (4).
       (O) Section 1381(b) is amended by striking ``taxes imposed 
     by section 11 or 1201'' and inserting ``tax imposed by 
     section 11''.
       (P) Sections 6425(c)(1)(A), as amended by section 12001, 
     and 6655(g)(1)(A)(i) are each amended by striking ``or 
     1201(a),''.
       (Q) Section 7518(g)(6)(A) is amended by striking ``or 
     1201(a)''.
       (3)(A) Section 1445(e)(1) is amended--
       (i) by striking ``35 percent'' and inserting ``the highest 
     rate of tax in effect for the taxable year under section 
     11(b)'', and
       (ii) by striking ``of the gain'' and inserting ``multiplied 
     by the gain''.
       (B) Section 1445(e)(2) is amended by striking ``35 percent 
     of the amount'' and inserting ``the highest rate of tax in 
     effect for the taxable year under section 11(b) multiplied by 
     the amount''.
       (C) Section 1445(e)(6) is amended--
       (i) by striking ``35 percent'' and inserting ``the highest 
     rate of tax in effect for the taxable year under section 
     11(b)'', and
       (ii) by striking ``of the amount'' and inserting 
     ``multiplied by the amount''.
       (D) Section 1446(b)(2)(B) is amended by striking ``section 
     11(b)(1)'' and inserting ``section 11(b)''.
       (4) Section 852(b)(1) is amended by striking the last 
     sentence.
       (5)(A) Part I of subchapter B of chapter 5 is amended by 
     striking section 1551 (and by striking the item relating to 
     such section in the table of sections for such part).
       (B) Section 535(c)(5) is amended to read as follows:
       ``(5) Cross reference.--For limitation on credit provided 
     in paragraph (2) or (3) in the case of certain controlled 
     corporations, see section 1561.''.
       (6)(A) Section 1561, as amended by section 12001, is 
     amended to read as follows:

     ``SEC. 1561. LIMITATION ON ACCUMULATED EARNINGS CREDIT IN THE 
                   CASE OF CERTAIN CONTROLLED CORPORATIONS.

       ``(a) In General.--The component members of a controlled 
     group of corporations on a December 31 shall, for their 
     taxable years which include such December 31, be limited for 
     purposes of this subtitle to one $250,000 ($150,000 if any 
     component member is a corporation described in section 
     535(c)(2)(B)) amount for purposes of computing the 
     accumulated earnings credit under section 535(c)(2) and (3). 
     Such amount shall be divided equally among the component 
     members of such group on such December 31 unless the 
     Secretary prescribes regulations permitting an unequal 
     allocation of such amount.
       ``(b) Certain Short Taxable Years.--If a corporation has a 
     short taxable year which does not include a December 31 and 
     is a component member of a controlled group of corporations 
     with respect to such taxable year, then for purposes of this 
     subtitle, the amount to be used in computing the accumulated 
     earnings credit under section 535(c)(2) and (3) of such 
     corporation for such taxable year shall be the amount 
     specified in subsection (a) with respect to such group, 
     divided by the number of corporations which are component 
     members of such group on the last day of such taxable year. 
     For purposes of the preceding sentence, section 1563(b) shall 
     be applied as if such last day were substituted for December 
     31.''.
       (B) The table of sections for part II of subchapter B of 
     chapter 5 is amended by striking the item relating to section 
     1561 and inserting the following new item:

``Sec. 1561. Limitation on accumulated earnings credit in the case of 
              certain controlled corporations.''.

       (7) Section 7518(g)(6)(A) is amended--
       (A) by striking ``With respect to the portion'' and 
     inserting ``In the case of a taxpayer other than a 
     corporation, with respect to the portion'', and
       (B) by striking ``(34 percent in the case of a 
     corporation)''.
       (c) Effective Date.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by subsections (a) and (b) 
     shall apply to taxable years beginning after December 31, 
     2017.
       (2) Withholding.--The amendments made by subsection (b)(3) 
     shall apply to distributions made after December 31, 2017.
       (3) Certain transfers.--The amendments made by subsection 
     (b)(6) shall apply to transfers made after December 31, 2017.
       (d) Normalization Requirements.--
       (1) In general.--A normalization method of accounting shall 
     not be treated as being used with respect to any public 
     utility property for purposes of section 167 or 168 of the 
     Internal Revenue Code of 1986 if the taxpayer, in computing 
     its cost of service for ratemaking purposes and reflecting 
     operating results in its regulated books of account, reduces 
     the excess tax reserve more rapidly or to a greater extent 
     than such reserve would be reduced under the average rate 
     assumption method.
       (2) Alternative method for certain taxpayers.--If, as of 
     the first day of the taxable year that includes the date of 
     enactment of this Act--
       (A) the taxpayer was required by a regulatory agency to 
     compute depreciation for public utility property on the basis 
     of an average life or composite rate method, and
       (B) the taxpayer's books and underlying records did not 
     contain the vintage account data necessary to apply the 
     average rate assumption method,

     the taxpayer will be treated as using a normalization method 
     of accounting if, with respect to such jurisdiction, the 
     taxpayer uses the alternative method for public utility 
     property that is subject to the regulatory authority of that 
     jurisdiction.
       (3) Definitions.--For purposes of this subsection--
       (A) Excess tax reserve.--The term ``excess tax reserve'' 
     means the excess of--
       (i) the reserve for deferred taxes (as described in section 
     168(i)(9)(A)(ii) of the Internal Revenue Code of 1986) as of 
     the day before the corporate rate reductions provided in the 
     amendments made by this section take effect, over
       (ii) the amount which would be the balance in such reserve 
     if the amount of such reserve were determined by assuming 
     that the corporate rate reductions provided in this Act were 
     in effect for all prior periods.
       (B) Average rate assumption method.--The average rate 
     assumption method is the method under which the excess in the 
     reserve for deferred taxes is reduced over the remaining 
     lives of the property as used in its regulated books of 
     account which gave rise to the reserve for deferred taxes. 
     Under such method, during the time period in which the timing 
     differences for the property reverse, the amount of the 
     adjustment to the reserve for the deferred taxes is 
     calculated by multiplying--
       (i) the ratio of the aggregate deferred taxes for the 
     property to the aggregate timing differences for the property 
     as of the beginning of the period in question, by
       (ii) the amount of the timing differences which reverse 
     during such period.
       (C) Alternative method.--The ``alternative method'' is the 
     method in which the taxpayer--
       (i) computes the excess tax reserve on all public utility 
     property included in the plant account on the basis of the 
     weighted average life or composite rate used to compute 
     depreciation for regulatory purposes, and
       (ii) reduces the excess tax reserve ratably over the 
     remaining regulatory life of the property.
       (4) Tax increased for normalization violation.--If, for any 
     taxable year ending after the date of the enactment of this 
     Act, the taxpayer does not use a normalization method of 
     accounting for the corporate rate reductions provided in the 
     amendments made by this section--
       (A) the taxpayer's tax for the taxable year shall be 
     increased by the amount by which it reduces its excess tax 
     reserve more rapidly than permitted under a normalization 
     method of accounting, and
       (B) such taxpayer shall not be treated as using a 
     normalization method of accounting for purposes of 
     subsections (f)(2) and (i)(9)(C) of section 168 of the 
     Internal Revenue Code of 1986.

     SEC. 13002. REDUCTION IN DIVIDEND RECEIVED DEDUCTIONS TO 
                   REFLECT LOWER CORPORATE INCOME TAX RATES.

       (a) Dividends Received by Corporations.--
       (1) In general.--Section 243(a)(1) is amended by striking 
     ``70 percent'' and inserting ``50 percent''.
       (2) Dividends from 20-percent owned corporations.--Section 
     243(c)(1) is amended--
       (A) by striking ``80 percent'' and inserting ``65 
     percent'', and
       (B) by striking ``70 percent'' and inserting ``50 
     percent''.
       (3) Conforming amendment.--The heading for section 243(c) 
     is amended by striking ``Retention of 80-percent Dividend 
     Received Deduction'' and inserting ``Increased Percentage''.
       (b) Dividends Received From FSC.--Section 245(c)(1)(B) is 
     amended--
       (1) by striking ``70 percent'' and inserting ``50 
     percent'', and
       (2) by striking ``80 percent'' and inserting ``65 
     percent''.
       (c) Limitation on Aggregate Amount of Deductions.--Section 
     246(b)(3) is amended--

[[Page 19886]]

       (1) by striking ``80 percent'' in subparagraph (A) and 
     inserting ``65 percent'', and
       (2) by striking ``70 percent'' in subparagraph (B) and 
     inserting ``50 percent''.
       (d) Reduction in Deduction Where Portfolio Stock Is Debt-
     financed.--Section 246A(a)(1) is amended--
       (1) by striking ``70 percent'' and inserting ``50 
     percent'', and
       (2) by striking ``80 percent'' and inserting ``65 
     percent''.
       (e) Income From Sources Within the United States.--Section 
     861(a)(2) is amended--
       (1) by striking ``100/70th'' and inserting ``100/50th'' in 
     subparagraph (B), and
       (2) in the flush sentence at the end--
       (A) by striking ``100/80th'' and inserting ``100/65th'', 
     and
       (B) by striking ``100/70th'' and inserting ``100/50th''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

                    PART II--SMALL BUSINESS REFORMS

     SEC. 13101. MODIFICATIONS OF RULES FOR EXPENSING DEPRECIABLE 
                   BUSINESS ASSETS.

       (a) Increase in Limitation.--
       (1) Dollar limitation.--Section 179(b)(1) is amended by 
     striking ``$500,000'' and inserting ``$1,000,000''.
       (2) Reduction in limitation.--Section 179(b)(2) is amended 
     by striking ``$2,000,000'' and inserting ``$2,500,000''.
       (3) Inflation adjustments.--
       (A) In general.--Subparagraph (A) of section 179(b)(6), as 
     amended by section 11002(d), is amended--
       (i) by striking ``2015'' and inserting ``2018'', and
       (ii) in clause (ii), by striking ``calendar year 2014'' and 
     inserting ``calendar year 2017''.
       (B) Sport utility vehicles.--Section 179(b)(6) is amended--
       (i) in subparagraph (A), by striking ``paragraphs (1) and 
     (2)'' and inserting ``paragraphs (1), (2), and (5)(A)'', and
       (ii) in subparagraph (B), by inserting ``($100 in the case 
     of any increase in the amount under paragraph (5)(A))'' after 
     ``$10,000''.
       (b) Section 179 Property To Include Qualified Real 
     Property.--
       (1) In general.--Subparagraph (B) of section 179(d)(1) is 
     amended to read as follows:
       ``(B) which is--
       ``(i) section 1245 property (as defined in section 
     1245(a)(3)), or
       ``(ii) at the election of the taxpayer, qualified real 
     property (as defined in subsection (f)), and''.
       (2) Qualified real property defined.--Subsection (f) of 
     section 179 is amended to read as follows:
       ``(f) Qualified Real Property.--For purposes of this 
     section, the term `qualified real property' means--
       ``(1) any qualified improvement property described in 
     section 168(e)(6), and
       ``(2) any of the following improvements to nonresidential 
     real property placed in service after the date such property 
     was first placed in service:
       ``(A) Roofs.
       ``(B) Heating, ventilation, and air-conditioning property.
       ``(C) Fire protection and alarm systems.
       ``(D) Security systems.''.
       (c) Repeal of Exclusion for Certain Property.--The last 
     sentence of section 179(d)(1) is amended by inserting 
     ``(other than paragraph (2) thereof)'' after ``section 
     50(b)''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to property placed in service in taxable years 
     beginning after December 31, 2017.

     SEC. 13102. SMALL BUSINESS ACCOUNTING METHOD REFORM AND 
                   SIMPLIFICATION.

       (a) Modification of Limitation on Cash Method of 
     Accounting.--
       (1) Increased limitation.--So much of section 448(c) as 
     precedes paragraph (2) is amended to read as follows:
       ``(c) Gross Receipts Test.--For purposes of this section--
       ``(1) In general.--A corporation or partnership meets the 
     gross receipts test of this subsection for any taxable year 
     if the average annual gross receipts of such entity for the 
     3-taxable-year period ending with the taxable year which 
     precedes such taxable year does not exceed $25,000,000.''.
       (2) Application of exception on annual basis.--Section 
     448(b)(3) is amended to read as follows:
       ``(3) Entities which meet gross receipts test.--Paragraphs 
     (1) and (2) of subsection (a) shall not apply to any 
     corporation or partnership for any taxable year if such 
     entity (or any predecessor) meets the gross receipts test of 
     subsection (c) for such taxable year.''.
       (3) Inflation adjustment.--Section 448(c) is amended by 
     adding at the end the following new paragraph:
       ``(4) Adjustment for inflation.--In the case of any taxable 
     year beginning after December 31, 2018, the dollar amount in 
     paragraph (1) shall be increased by an amount equal to--
       ``(A) such dollar amount, multiplied by
       ``(B) the cost-of-living adjustment determined under 
     section 1(f)(3) for the calendar year in which the taxable 
     year begins, by substituting `calendar year 2017' for 
     `calendar year 2016' in subparagraph (A)(ii) thereof.

     If any amount as increased under the preceding sentence is 
     not a multiple of $1,000,000, such amount shall be rounded to 
     the nearest multiple of $1,000,000.''.
       (4) Coordination with section 481.--Section 448(d)(7) is 
     amended to read as follows:
       ``(7) Coordination with section 481.--Any change in method 
     of accounting made pursuant to this section shall be treated 
     for purposes of section 481 as initiated by the taxpayer and 
     made with the consent of the Secretary.''.
       (5) Application of exception to corporations engaged in 
     farming.--
       (A) In general.--Section 447(c) is amended--
       (i) by inserting ``for any taxable year'' after ``not being 
     a corporation'' in the matter preceding paragraph (1), and
       (ii) by amending paragraph (2) to read as follows:
       ``(2) a corporation which meets the gross receipts test of 
     section 448(c) for such taxable year.''.
       (B) Coordination with section 481.--Section 447(f) is 
     amended to read as follows:
       ``(f) Coordination With Section 481.--Any change in method 
     of accounting made pursuant to this section shall be treated 
     for purposes of section 481 as initiated by the taxpayer and 
     made with the consent of the Secretary.''.
       (C) Conforming amendments.--Section 447 is amended--
       (i) by striking subsections (d), (e), (h), and (i), and
       (ii) by redesignating subsections (f) and (g) (as amended 
     by subparagraph (B)) as subsections (d) and (e), 
     respectively.
       (b) Exemption From UNICAP Requirements.--
       (1) In general.--Section 263A is amended by redesignating 
     subsection (i) as subsection (j) and by inserting after 
     subsection (h) the following new subsection:
       ``(i) Exemption for Certain Small Businesses.--
       ``(1) In general.--In the case of any taxpayer (other than 
     a tax shelter prohibited from using the cash receipts and 
     disbursements method of accounting under section 448(a)(3)) 
     which meets the gross receipts test of section 448(c) for any 
     taxable year, this section shall not apply with respect to 
     such taxpayer for such taxable year.
       ``(2) Application of gross receipts test to individuals, 
     etc.-- In the case of any taxpayer which is not a corporation 
     or a partnership, the gross receipts test of section 448(c) 
     shall be applied in the same manner as if each trade or 
     business of such taxpayer were a corporation or partnership.
       ``(3) Coordination with section 481.--Any change in method 
     of accounting made pursuant to this subsection shall be 
     treated for purposes of section 481 as initiated by the 
     taxpayer and made with the consent of the Secretary.''.
       (2) Conforming amendment.--Section 263A(b)(2) is amended to 
     read as follows:
       ``(2) Property acquired for resale.--Real or personal 
     property described in section 1221(a)(1) which is acquired by 
     the taxpayer for resale.''.
       (c) Exemption From Inventories.--Section 471 is amended by 
     redesignating subsection (c) as subsection (d) and by 
     inserting after subsection (b) the following new subsection:
       ``(c) Exemption for Certain Small Businesses.--
       ``(1) In general.--In the case of any taxpayer (other than 
     a tax shelter prohibited from using the cash receipts and 
     disbursements method of accounting under section 448(a)(3)) 
     which meets the gross receipts test of section 448(c) for any 
     taxable year--
       ``(A) subsection (a) shall not apply with respect to such 
     taxpayer for such taxable year, and
       ``(B) the taxpayer's method of accounting for inventory for 
     such taxable year shall not be treated as failing to clearly 
     reflect income if such method either--
       ``(i) treats inventory as non-incidental materials and 
     supplies, or
       ``(ii) conforms to such taxpayer's method of accounting 
     reflected in an applicable financial statement of the 
     taxpayer with respect to such taxable year or, if the 
     taxpayer does not have any applicable financial statement 
     with respect to such taxable year, the books and records of 
     the taxpayer prepared in accordance with the taxpayer's 
     accounting procedures.
       ``(2) Applicable financial statement.--For purposes of this 
     subsection, the term `applicable financial statement' has the 
     meaning given the term in section 451(b)(3).
       ``(3) Application of gross receipts test to individuals, 
     etc.--In the case of any taxpayer which is not a corporation 
     or a partnership, the gross receipts test of section 448(c) 
     shall be applied in the same manner as if each trade or 
     business of such taxpayer were a corporation or partnership.
       ``(4) Coordination with section 481.--Any change in method 
     of accounting made pursuant to this subsection shall be 
     treated for purposes of section 481 as initiated by the 
     taxpayer and made with the consent of the Secretary.''.
       (d) Exemption From Percentage Completion for Long-term 
     Contracts.--
       (1) In general.--Section 460(e)(1)(B) is amended--
       (A) by inserting ``(other than a tax shelter prohibited 
     from using the cash receipts and disbursements method of 
     accounting under section 448(a)(3))'' after ``taxpayer'' in 
     the matter preceding clause (i), and
       (B) by amending clause (ii) to read as follows:
       ``(ii) who meets the gross receipts test of section 448(c) 
     for the taxable year in which such contract is entered 
     into.''.
       (2) Conforming amendments.--Section 460(e) is amended by 
     striking paragraphs (2) and (3), by redesignating paragraphs 
     (4), (5), and (6) as

[[Page 19887]]

     paragraphs (3), (4), and (5), respectively, and by inserting 
     after paragraph (1) the following new paragraph:
       ``(2) Rules related to gross receipts test.--
       ``(A) Application of gross receipts test to individuals, 
     etc.-- For purposes of paragraph (1)(B)(ii), in the case of 
     any taxpayer which is not a corporation or a partnership, the 
     gross receipts test of section 448(c) shall be applied in the 
     same manner as if each trade or business of such taxpayer 
     were a corporation or partnership.
       ``(B) Coordination with section 481.--Any change in method 
     of accounting made pursuant to paragraph (1)(B)(ii) shall be 
     treated as initiated by the taxpayer and made with the 
     consent of the Secretary. Such change shall be effected on a 
     cut-off basis for all similarly classified contracts entered 
     into on or after the year of change.''.
       (e) Effective Date.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to taxable years beginning after December 31, 2017.
       (2) Preservation of suspense account rules with respect to 
     any existing suspense accounts.--So much of the amendments 
     made by subsection (a)(5)(C) as relate to section 447(i) of 
     the Internal Revenue Code of 1986 shall not apply with 
     respect to any suspense account established under such 
     section before the date of the enactment of this Act.
       (3) Exemption from percentage completion for long-term 
     contracts.--The amendments made by subsection (d) shall apply 
     to contracts entered into after December 31, 2017, in taxable 
     years ending after such date.

             PART III--COST RECOVERY AND ACCOUNTING METHODS

                        Subpart A--Cost Recovery

     SEC. 13201. TEMPORARY 100-PERCENT EXPENSING FOR CERTAIN 
                   BUSINESS ASSETS.

       (a) Increased Expensing.--
       (1) In general.--Section 168(k) is amended--
       (A) in paragraph (1)(A), by striking ``50 percent'' and 
     inserting ``the applicable percentage'', and
       (B) in paragraph (5)(A)(i), by striking ``50 percent'' and 
     inserting ``the applicable percentage''.
       (2) Applicable percentage.--Paragraph (6) of section 168(k) 
     is amended to read as follows:
       ``(6) Applicable percentage.--For purposes of this 
     subsection--
       ``(A) In general.--Except as otherwise provided in this 
     paragraph, the term `applicable percentage' means--
       ``(i) in the case of property placed in service after 
     September 27, 2017, and before January 1, 2023, 100 percent,
       ``(ii) in the case of property placed in service after 
     December 31, 2022, and before January 1, 2024, 80 percent,
       ``(iii) in the case of property placed in service after 
     December 31, 2023, and before January 1, 2025, 60 percent,
       ``(iv) in the case of property placed in service after 
     December 31, 2024, and before January 1, 2026, 40 percent, 
     and
       ``(v) in the case of property placed in service after 
     December 31, 2025, and before January 1, 2027, 20 percent.
       ``(B) Rule for property with longer production periods.--In 
     the case of property described in subparagraph (B) or (C) of 
     paragraph (2), the term `applicable percentage' means--
       ``(i) in the case of property placed in service after 
     September 27, 2017, and before January 1, 2024, 100 percent,
       ``(ii) in the case of property placed in service after 
     December 31, 2023, and before January 1, 2025, 80 percent,
       ``(iii) in the case of property placed in service after 
     December 31, 2024, and before January 1, 2026, 60 percent,
       ``(iv) in the case of property placed in service after 
     December 31, 2025, and before January 1, 2027, 40 percent, 
     and
       ``(v) in the case of property placed in service after 
     December 31, 2026, and before January 1, 2028, 20 percent.
       ``(C) Rule for plants bearing fruits and nuts.--In the case 
     of a specified plant described in paragraph (5), the term 
     `applicable percentage' means--
       ``(i) in the case of a plant which is planted or grafted 
     after September 27, 2017, and before January 1, 2023, 100 
     percent,
       ``(ii) in the case of a plant which is planted or grafted 
     after December 31, 2022, and before January 1, 2024, 80 
     percent,
       ``(iii) in the case of a plant which is planted or grafted 
     after December 31, 2023, and before January 1, 2025, 60 
     percent,
       ``(iv) in the case of a plant which is planted or grafted 
     after December 31, 2024, and before January 1, 2026, 40 
     percent, and
       ``(v) in the case of a plant which is planted or grafted 
     after December 31, 2025, and before January 1, 2027, 20 
     percent.''.
       (3) Conforming amendment.--
       (A) Paragraph (5) of section 168(k) is amended by striking 
     subparagraph (F).
       (B) Section 168(k) is amended by adding at the end the 
     following new paragraph:
       ``(8) Phase down.--In the case of qualified property 
     acquired by the taxpayer before September 28, 2017, and 
     placed in service by the taxpayer after September 27, 2017, 
     paragraph (6) shall be applied by substituting for each 
     percentage therein--
       ``(A) `50 percent' in the case of--
       ``(i) property placed in service before January 1, 2018, 
     and
       ``(ii) property described in subparagraph (B) or (C) of 
     paragraph (2) which is placed in service in 2018,
       ``(B) `40 percent' in the case of--
       ``(i) property placed in service in 2018 (other than 
     property described in subparagraph (B) or (C) of paragraph 
     (2)), and
       ``(ii) property described in subparagraph (B) or (C) of 
     paragraph (2) which is placed in service in 2019,
       ``(C) `30 percent' in the case of--
       ``(i) property placed in service in 2019 (other than 
     property described in subparagraph (B) or (C) of paragraph 
     (2)), and
       ``(ii) property described in subparagraph (B) or (C) of 
     paragraph (2) which is placed in service in 2020, and
       ``(D) `0 percent' in the case of--
       ``(i) property placed in service after 2019 (other than 
     property described in subparagraph (B) or (C) of paragraph 
     (2)), and
       ``(ii) property described in subparagraph (B) or (C) of 
     paragraph (2) which is placed in service after 2020.''.
       (b) Extension.--
       (1) In general.--Section 168(k) is amended--
       (A) in paragraph (2)--
       (i) in subparagraph (A)(iii), clauses (i)(III) and (ii) of 
     subparagraph (B), and subparagraph (E)(i), by striking 
     ``January 1, 2020'' each place it appears and inserting 
     ``January 1, 2027'', and
       (ii) in subparagraph (B)--

       (I) in clause (i)(II), by striking ``January 1, 2021'' and 
     inserting ``January 1, 2028'', and
       (II) in the heading of clause (ii), by striking ``pre-
     january 1, 2020'' and inserting ``pre-january 1, 2027'', and

       (B) in paragraph (5)(A), by striking ``January 1, 2020'' 
     and inserting ``January 1, 2027''.
       (2) Conforming amendments.--
       (A) Clause (ii) of section 460(c)(6)(B) is amended by 
     striking ``January 1, 2020 (January 1, 2021'' and inserting 
     ``January 1, 2027 (January 1, 2028''.
       (B) The heading of section 168(k) is amended by striking 
     ``Acquired After December 31, 2007, and Before January 1, 
     2020''.
       (c) Application to Used Property.--
       (1) In general.--Section 168(k)(2)(A)(ii) is amended to 
     read as follows:
       ``(ii) the original use of which begins with the taxpayer 
     or the acquisition of which by the taxpayer meets the 
     requirements of clause (ii) of subparagraph (E), and''.
       (2) Acquisition requirements.--Section 168(k)(2)(E)(ii) is 
     amended to read as follows:
       ``(ii) Acquisition requirements.--An acquisition of 
     property meets the requirements of this clause if--

       ``(I) such property was not used by the taxpayer at any 
     time prior to such acquisition, and
       ``(II) the acquisition of such property meets the 
     requirements of paragraphs (2)(A), (2)(B), (2)(C), and (3) of 
     section 179(d).'',

       (3) Anti-abuse rules.--Section 168(k)(2)(E) is further 
     amended by amending clause (iii)(I) to read as follows:

       ``(I) property is used by a lessor of such property and 
     such use is the lessor's first use of such property,''.

       (d) Exception for Certain Property.--Section 168(k), as 
     amended by this section, is amended by adding at the end the 
     following new paragraph:
       ``(9) Exception for certain property.--The term `qualified 
     property' shall not include--
       ``(A) any property which is primarily used in a trade or 
     business described in clause (iv) of section 163(j)(7)(A), or
       ``(B) any property used in a trade or business that has had 
     floor plan financing indebtedness (as defined in paragraph 
     (9) of section 163(j)), if the floor plan financing interest 
     related to such indebtedness was taken into account under 
     paragraph (1)(C) of such section.''.
       (e) Special Rule.--Section 168(k), as amended by this 
     section, is amended by adding at the end the following new 
     paragraph:
       ``(10) Special rule for property placed in service during 
     certain periods.--
       ``(A) In general.--In the case of qualified property placed 
     in service by the taxpayer during the first taxable year 
     ending after September 27, 2017, if the taxpayer elects to 
     have this paragraph apply for such taxable year, paragraphs 
     (1)(A) and (5)(A)(i) shall be applied by substituting `50 
     percent' for `the applicable percentage'.
       ``(B) Form of election.--Any election under this paragraph 
     shall be made at such time and in such form and manner as the 
     Secretary may prescribe.''.
       (f) Coordination With Section 280F.--Clause (iii) of 
     section 168(k)(2)(F) is amended by striking ``placed in 
     service by the taxpayer after December 31, 2017'' and 
     inserting ``acquired by the taxpayer before September 28, 
     2017, and placed in service by the taxpayer after September 
     27, 2017''.
       (g) Qualified Film and Television and Live Theatrical 
     Productions.--
       (1) In general.--Clause (i) of section 168(k)(2)(A), as 
     amended by section 13204, is amended--
       (A) in subclause (II), by striking ``or'',
       (B) in subclause (III), by adding ``or'' after the comma, 
     and
       (C) by adding at the end the following:
       ``(IV) which is a qualified film or television production 
     (as defined in subsection (d) of section 181) for which a 
     deduction would have been allowable under section 181 without 
     regard to subsections (a)(2) and (g) of such section or this 
     subsection, or
       ``(V) which is a qualified live theatrical production (as 
     defined in subsection (e) of section

[[Page 19888]]

     181) for which a deduction would have been allowable under 
     section 181 without regard to subsections (a)(2) and (g) of 
     such section or this subsection,''.
       (2) Production placed in service.--Paragraph (2) of section 
     168(k) is amended by adding at the end the following:
       ``(H) Production placed in service.--For purposes of 
     subparagraph (A)--
       ``(i) a qualified film or television production shall be 
     considered to be placed in service at the time of initial 
     release or broadcast, and
       ``(ii) a qualified live theatrical production shall be 
     considered to be placed in service at the time of the initial 
     live staged performance.''.
       (h) Effective Date.--
       (1) In general.--Except as provided by paragraph (2), the 
     amendments made by this section shall apply to property 
     which--
       (A) is acquired after September 27, 2017, and
       (B) is placed in service after such date.
     For purposes of the preceding sentence, property shall not be 
     treated as acquired after the date on which a written binding 
     contract is entered into for such acquisition.
       (2) Specified plants.--The amendments made by this section 
     shall apply to specified plants planted or grafted after 
     September 27, 2017.

     SEC. 13202. MODIFICATIONS TO DEPRECIATION LIMITATIONS ON 
                   LUXURY AUTOMOBILES AND PERSONAL USE PROPERTY.

       (a) Luxury Automobiles.--
       (1) In general.--280F(a)(1)(A) is amended--
       (A) in clause (i), by striking ``$2,560'' and inserting 
     ``$10,000'',
       (B) in clause (ii), by striking ``$4,100'' and inserting 
     ``$16,000'',
       (C) in clause (iii), by striking ``$2,450'' and inserting 
     ``$9,600'', and
       (D) in clause (iv), by striking ``$1,475'' and inserting 
     ``$5,760''.
       (2) Conforming amendments.--
       (A) Clause (ii) of section 280F(a)(1)(B) is amended by 
     striking ``$1,475'' in the text and heading and inserting 
     ``$5,760''.
       (B) Paragraph (7) of section 280F(d) is amended--
       (i) in subparagraph (A), by striking ``1988'' and inserting 
     ``2018'', and
       (ii) in subparagraph (B)(i)(II), by striking ``1987'' and 
     inserting ``2017''.
       (b) Removal of Computer Equipment From Listed Property.--
       (1) In general.--Section 280F(d)(4)(A) is amended--
       (A) by inserting ``and'' at the end of clause (iii),
       (B) by striking clause (iv), and
       (C) by redesignating clause (v) as clause (iv).
       (2) Conforming amendment.--Section 280F(d)(4) is amended by 
     striking subparagraph (B) and by redesignating subparagraph 
     (C) as subparagraph (B).
       (c) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2017, in taxable years ending after such date.

     SEC. 13203. MODIFICATIONS OF TREATMENT OF CERTAIN FARM 
                   PROPERTY.

       (a) Treatment of Certain Farm Property as 5-Year 
     Property.--Clause (vii) of section 168(e)(3)(B) is amended by 
     striking ``after December 31, 2008, and which is placed in 
     service before January 1, 2010'' and inserting ``after 
     December 31, 2017''.
       (b) Repeal of Required Use of 150-Percent Declining Balance 
     Method.--Section 168(b)(2) is amended by striking 
     subparagraph (B) and by redesignating subparagraphs (C) and 
     (D) as subparagraphs (B) and (C), respectively.
       (c) Effective Date.--The amendments made by this section 
     shall apply to property placed in service after December 31, 
     2017, in taxable years ending after such date.

     SEC. 13204. APPLICABLE RECOVERY PERIOD FOR REAL PROPERTY.

       (a) Improvements to Real Property.--
       (1) Elimination of qualified leasehold improvement, 
     qualified restaurant, and qualified retail improvement 
     property.--Subsection (e) of section 168 is amended--
       (A) in subparagraph (E) of paragraph (3)--
       (i) by striking clauses (iv), (v), and (ix),
       (ii) in clause (vii), by inserting ``and'' at the end,
       (iii) in clause (viii), by striking ``, and'' and inserting 
     a period, and
       (iv) by redesignating clauses (vi), (vii), and (viii), as 
     so amended, as clauses (iv), (v), and (vi), respectively, and
       (B) by striking paragraphs (6), (7), and (8).
       (2) Application of straight line method to qualified 
     improvement property.--Paragraph (3) of section 168(b) is 
     amended--
       (A) by striking subparagraphs (G), (H), and (I), and
       (B) by inserting after subparagraph (F) the following new 
     subparagraph:
       ``(G) Qualified improvement property described in 
     subsection (e)(6).''.
       (3) Alternative depreciation system.--
       (A) Electing real property trade or business.--Subsection 
     (g) of section 168 is amended--
       (i) in paragraph (1)--

       (I) in subparagraph (D), by striking ``and'' at the end,
       (II) in subparagraph (E), by inserting ``and'' at the end, 
     and
       (III) by inserting after subparagraph (E) the following new 
     subparagraph:

       ``(F) any property described in paragraph (8),'', and
       (ii) by adding at the end the following new paragraph:
       ``(8) Electing real property trade or business.--The 
     property described in this paragraph shall consist of any 
     nonresidential real property, residential rental property, 
     and qualified improvement property held by an electing real 
     property trade or business (as defined in 163(j)(7)(B)).''.
       (B) Qualified improvement property.--The table contained in 
     subparagraph (B) of section 168(g)(3) is amended--
       (i) by inserting after the item relating to subparagraph 
     (D)(ii) the following new item:
  ``(D)(v).........................................................20''

       , and

       (ii) by striking the item relating to subparagraph (E)(iv) 
     and all that follows through the item relating to 
     subparagraph (E)(ix) and inserting the following:
  ``(E)(iv).........................................................20 
  (E)(v)............................................................30 
  (E)(vi).........................................................35''.
       (C) Applicable recovery period for residential rental 
     property.--The table contained in subparagraph (C) of section 
     168(g)(2) is amended by striking clauses (iii) and (iv) and 
     inserting the following:
  ``(iii) Residential rental property.........................30 years 
  (iv) Nonresidential real property...........................40 years 
  (v) Any railroad grading or tunnel bore or water utility p50 years''.
       (4) Conforming amendments.--
       (A) Clause (i) of section 168(k)(2)(A) is amended--
       (i) in subclause (II), by inserting ``or'' after the comma,
       (ii) in subclause (III), by striking ``or'' at the end, and
       (iii) by striking subclause (IV).
       (B) Section 168 is amended--
       (i) in subsection (e), as amended by paragraph (1)(B), by 
     adding at the end the following:
       ``(6) Qualified improvement property.--
       ``(A) In general.--The term `qualified improvement 
     property' means any improvement to an interior portion of a 
     building which is nonresidential real property if such 
     improvement is placed in service after the date such building 
     was first placed in service.
       ``(B) Certain improvements not included.--Such term shall 
     not include any improvement for which the expenditure is 
     attributable to--
       ``(i) the enlargement of the building,
       ``(ii) any elevator or escalator, or
       ``(iii) the internal structural framework of the 
     building.'', and
       (ii) in subsection (k), by striking paragraph (3).
       (b) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to property 
     placed in service after December 31, 2017.
       (2) Amendments related to electing real property trade or 
     business.--The amendments made by subsection (a)(3)(A) shall 
     apply to taxable years beginning after December 31, 2017.

     SEC. 13205. USE OF ALTERNATIVE DEPRECIATION SYSTEM FOR 
                   ELECTING FARMING BUSINESSES.

       (a) In General.--Section 168(g)(1), as amended by section 
     13204, is amended by striking ``and'' at the end of 
     subparagraph (E), by inserting ``and'' at the end of 
     subparagraph (F), and by inserting after subparagraph (F) the 
     following new subparagraph:
       ``(G) any property with a recovery period of 10 years or 
     more which is held by an electing farming business (as 
     defined in section 163(j)(7)(C)),''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13206. AMORTIZATION OF RESEARCH AND EXPERIMENTAL 
                   EXPENDITURES.

       (a) In General.--Section 174 is amended to read as follows:

     ``SEC. 174. AMORTIZATION OF RESEARCH AND EXPERIMENTAL 
                   EXPENDITURES.

       ``(a) In General.--In the case of a taxpayer's specified 
     research or experimental expenditures for any taxable year--
       ``(1) except as provided in paragraph (2), no deduction 
     shall be allowed for such expenditures, and
       ``(2) the taxpayer shall--
       ``(A) charge such expenditures to capital account, and
       ``(B) be allowed an amortization deduction of such 
     expenditures ratably over the 5-year period (15-year period 
     in the case of any specified research or experimental 
     expenditures which are attributable to foreign research 
     (within the meaning of section 41(d)(4)(F))) beginning with 
     the midpoint of the taxable year in which such expenditures 
     are paid or incurred.
       ``(b) Specified Research or Experimental Expenditures.--For 
     purposes of this section, the term `specified research or 
     experimental expenditures' means, with respect to any taxable 
     year, research or experimental expenditures which are paid or 
     incurred by the taxpayer during such taxable year in 
     connection with the taxpayer's trade or business.
       ``(c) Special Rules.--
       ``(1) Land and other property.--This section shall not 
     apply to any expenditure for the acquisition or improvement 
     of land, or for the acquisition or improvement of property to 
     be used in connection with the research or experimentation 
     and of a character which is subject to the allowance under 
     section 167 (relating to allowance for depreciation, etc.) or 
     section 611 (relating to allowance for depletion); but for 
     purposes of this section allowances under section 167, and 
     allowances under section 611, shall be considered as 
     expenditures.
       ``(2) Exploration expenditures.--This section shall not 
     apply to any expenditure paid or

[[Page 19889]]

     incurred for the purpose of ascertaining the existence, 
     location, extent, or quality of any deposit of ore or other 
     mineral (including oil and gas).
       ``(3) Software development.--For purposes of this section, 
     any amount paid or incurred in connection with the 
     development of any software shall be treated as a research or 
     experimental expenditure.
       ``(d) Treatment Upon Disposition, Retirement, or 
     Abandonment.--If any property with respect to which specified 
     research or experimental expenditures are paid or incurred is 
     disposed, retired, or abandoned during the period during 
     which such expenditures are allowed as an amortization 
     deduction under this section, no deduction shall be allowed 
     with respect to such expenditures on account of such 
     disposition, retirement, or abandonment and such amortization 
     deduction shall continue with respect to such 
     expenditures.''.
       (b) Change in Method of Accounting.--The amendments made by 
     subsection (a) shall be treated as a change in method of 
     accounting for purposes of section 481 of the Internal 
     Revenue Code of 1986 and--
       (1) such change shall be treated as initiated by the 
     taxpayer,
       (2) such change shall be treated as made with the consent 
     of the Secretary, and
       (3) such change shall be applied only on a cut-off basis 
     for any research or experimental expenditures paid or 
     incurred in taxable years beginning after December 31, 2021, 
     and no adjustments under section 481(a) shall be made.
       (c) Clerical Amendment.--The table of sections for part VI 
     of subchapter B of chapter 1 is amended by striking the item 
     relating to section 174 and inserting the following new item:

``Sec. 174. Amortization of research and experimental expenditures.''.
       (d) Conforming Amendments.--
       (1) Section 41(d)(1)(A) is amended by striking ``expenses 
     under section 174'' and inserting ``specified research or 
     experimental expenditures under section 174''.
       (2) Subsection (c) of section 280C is amended--
       (A) by striking paragraph (1) and inserting the following:
       ``(1) In general.--If--
       ``(A) the amount of the credit determined for the taxable 
     year under section 41(a)(1), exceeds
       ``(B) the amount allowable as a deduction for such taxable 
     year for qualified research expenses or basic research 
     expenses,
     the amount chargeable to capital account for the taxable year 
     for such expenses shall be reduced by the amount of such 
     excess.'',
       (B) by striking paragraph (2),
       (C) by redesignating paragraphs (3) (as amended by this 
     Act) and (4) as paragraphs (2) and (3), respectively, and
       (D) in paragraph (2), as redesignated by subparagraph (C), 
     by striking ``paragraphs (1) and (2)'' and inserting 
     ``paragraph (1)''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred in taxable years 
     beginning after December 31, 2021.

     SEC. 13207. EXPENSING OF CERTAIN COSTS OF REPLANTING CITRUS 
                   PLANTS LOST BY REASON OF CASUALTY.

       (a) In General.--Section 263A(d)(2) is amended by adding at 
     the end the following new subparagraph:
       ``(C) Special temporary rule for citrus plants lost by 
     reason of casualty.--
       ``(i) In general.--In the case of the replanting of citrus 
     plants, subparagraph (A) shall apply to amounts paid or 
     incurred by a person (other than the taxpayer described in 
     subparagraph (A)) if--

       ``(I) the taxpayer described in subparagraph (A) has an 
     equity interest of not less than 50 percent in the replanted 
     citrus plants at all times during the taxable year in which 
     such amounts were paid or incurred and such other person 
     holds any part of the remaining equity interest, or
       ``(II) such other person acquired the entirety of such 
     taxpayer's equity interest in the land on which the lost or 
     damaged citrus plants were located at the time of such loss 
     or damage, and the replanting is on such land.

       ``(ii) Termination.--Clause (i) shall not apply to any cost 
     paid or incurred after the date which is 10 years after the 
     date of the enactment of the Tax Cuts and Jobs Act.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to costs paid or incurred after the date of the 
     enactment of this Act.

                     Subpart B--Accounting Methods

     SEC. 13221. CERTAIN SPECIAL RULES FOR TAXABLE YEAR OF 
                   INCLUSION.

       (a) Inclusion Not Later Than for Financial Accounting 
     Purposes.--Section 451 is amended by redesignating 
     subsections (b) through (i) as subsections (c) through (j), 
     respectively, and by inserting after subsection (a) the 
     following new subsection:
       ``(b) Inclusion Not Later Than for Financial Accounting 
     Purposes.--
       ``(1) Income taken into account in financial statement.--
       ``(A) In general.--In the case of a taxpayer the taxable 
     income of which is computed under an accrual method of 
     accounting, the all events test with respect to any item of 
     gross income (or portion thereof) shall not be treated as met 
     any later than when such item (or portion thereof) is taken 
     into account as revenue in--
       ``(i) an applicable financial statement of the taxpayer, or
       ``(ii) such other financial statement as the Secretary may 
     specify for purposes of this subsection.
       ``(B) Exception.--This paragraph shall not apply to--
       ``(i) a taxpayer which does not have a financial statement 
     described in clause (i) or (ii) of subparagraph (A) for a 
     taxable year, or
       ``(ii) any item of gross income in connection with a 
     mortgage servicing contract.
       ``(C) All events test.--For purposes of this section, the 
     all events test is met with respect to any item of gross 
     income if all the events have occurred which fix the right to 
     receive such income and the amount of such income can be 
     determined with reasonable accuracy.
       ``(2) Coordination with special methods of accounting.--
     Paragraph (1) shall not apply with respect to any item of 
     gross income for which the taxpayer uses a special method of 
     accounting provided under any other provision of this 
     chapter, other than any provision of part V of subchapter P 
     (except as provided in clause (ii) of paragraph (1)(B)).
       ``(3) Applicable financial statement.--For purposes of this 
     subsection, the term `applicable financial statement' means--
       ``(A) a financial statement which is certified as being 
     prepared in accordance with generally accepted accounting 
     principles and which is--
       ``(i) a 10-K (or successor form), or annual statement to 
     shareholders, required to be filed by the taxpayer with the 
     United States Securities and Exchange Commission,
       ``(ii) an audited financial statement of the taxpayer which 
     is used for--

       ``(I) credit purposes,
       ``(II) reporting to shareholders, partners, or other 
     proprietors, or to beneficiaries, or
       ``(III) any other substantial nontax purpose,

     but only if there is no statement of the taxpayer described 
     in clause (i), or
       ``(iii) filed by the taxpayer with any other Federal agency 
     for purposes other than Federal tax purposes, but only if 
     there is no statement of the taxpayer described in clause (i) 
     or (ii),
       ``(B) a financial statement which is made on the basis of 
     international financial reporting standards and is filed by 
     the taxpayer with an agency of a foreign government which is 
     equivalent to the United States Securities and Exchange 
     Commission and which has reporting standards not less 
     stringent than the standards required by such Commission, but 
     only if there is no statement of the taxpayer described in 
     subparagraph (A), or
       ``(C) a financial statement filed by the taxpayer with any 
     other regulatory or governmental body specified by the 
     Secretary, but only if there is no statement of the taxpayer 
     described in subparagraph (A) or (B).
       ``(4) Allocation of transaction price.--For purposes of 
     this subsection, in the case of a contract which contains 
     multiple performance obligations, the allocation of the 
     transaction price to each performance obligation shall be 
     equal to the amount allocated to each performance obligation 
     for purposes of including such item in revenue in the 
     applicable financial statement of the taxpayer.
       ``(5) Group of entities.--For purposes of paragraph (1), if 
     the financial results of a taxpayer are reported on the 
     applicable financial statement (as defined in paragraph (3)) 
     for a group of entities, such statement shall be treated as 
     the applicable financial statement of the taxpayer.''.
       (b) Treatment of Advance Payments.--Section 451, as amended 
     by subsection (a), is amended by redesignating subsections 
     (c) through (j) as subsections (d) through (k), respectively, 
     and by inserting after subsection (b) the following new 
     subsection:
       ``(c) Treatment of Advance Payments.--
       ``(1) In general.--A taxpayer which computes taxable income 
     under the accrual method of accounting, and receives any 
     advance payment during the taxable year, shall--
       ``(A) except as provided in subparagraph (B), include such 
     advance payment in gross income for such taxable year, or
       ``(B) if the taxpayer elects the application of this 
     subparagraph with respect to the category of advance payments 
     to which such advance payment belongs, the taxpayer shall--
       ``(i) to the extent that any portion of such advance 
     payment is required under subsection (b) to be included in 
     gross income in the taxable year in which such payment is 
     received, so include such portion, and
       ``(ii) include the remaining portion of such advance 
     payment in gross income in the taxable year following the 
     taxable year in which such payment is received.
       ``(2) Election.--
       ``(A) In general.--Except as otherwise provided in this 
     paragraph, the election under paragraph (1)(B) shall be made 
     at such time, in such form and manner, and with respect to 
     such categories of advance payments, as the Secretary may 
     provide.
       ``(B) Period to which election applies.--An election under 
     paragraph (1)(B) shall be effective for the taxable year with 
     respect to which it is first made and for all subsequent 
     taxable years, unless the taxpayer secures the consent of the 
     Secretary to revoke such election. For purposes of this 
     title, the computation of taxable income under an election 
     made under paragraph (1)(B) shall be treated as a method of 
     accounting.
       ``(3) Taxpayers ceasing to exist.--Except as otherwise 
     provided by the Secretary, the election under paragraph 
     (1)(B) shall not apply with respect to advance payments 
     received by the taxpayer during a taxable year if such 
     taxpayer ceases to exist during (or with the close of) such 
     taxable year.

[[Page 19890]]

       ``(4) Advance payment.--For purposes of this subsection--
       ``(A) In general.--The term `advance payment' means any 
     payment--
       ``(i) the full inclusion of which in the gross income of 
     the taxpayer for the taxable year of receipt is a permissible 
     method of accounting under this section (determined without 
     regard to this subsection),
       ``(ii) any portion of which is included in revenue by the 
     taxpayer in a financial statement described in clause (i) or 
     (ii) of subsection (b)(1)(A) for a subsequent taxable year, 
     and
       ``(iii) which is for goods, services, or such other items 
     as may be identified by the Secretary for purposes of this 
     clause.
       ``(B) Exclusions.--Except as otherwise provided by the 
     Secretary, such term shall not include--
       ``(i) rent,
       ``(ii) insurance premiums governed by subchapter L,
       ``(iii) payments with respect to financial instruments,
       ``(iv) payments with respect to warranty or guarantee 
     contracts under which a third party is the primary obligor,
       ``(v) payments subject to section 871(a), 881, 1441, or 
     1442,
       ``(vi) payments in property to which section 83 applies, 
     and
       ``(vii) any other payment identified by the Secretary for 
     purposes of this subparagraph.
       ``(C) Receipt.--For purposes of this subsection, an item of 
     gross income is received by the taxpayer if it is actually or 
     constructively received, or if it is due and payable to the 
     taxpayer.
       ``(D) Allocation of transaction price.--For purposes of 
     this subsection, rules similar to subsection (b)(4) shall 
     apply.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.
       (d) Coordination With Section 481.--
       (1) In general.--In the case of any qualified change in 
     method of accounting for the taxpayer's first taxable year 
     beginning after December 31, 2017--
       (A) such change shall be treated as initiated by the 
     taxpayer, and
       (B) such change shall be treated as made with the consent 
     of the Secretary of the Treasury.
       (2) Qualified change in method of accounting.--For purposes 
     of this subsection, the term ``qualified change in method of 
     accounting'' means any change in method of accounting which--
       (A) is required by the amendments made by this section, or
       (B) was prohibited under the Internal Revenue Code of 1986 
     prior to such amendments and is permitted under such Code 
     after such amendments.
       (e) Special Rules for Original Issue Discount.--
     Notwithstanding subsection (c), in the case of income from a 
     debt instrument having original issue discount--
       (1) the amendments made by this section shall apply to 
     taxable years beginning after December 31, 2018, and
       (2) the period for taking into account any adjustments 
     under section 481 by reason of a qualified change in method 
     of accounting (as defined in subsection (d)) shall be 6 
     years.

          PART IV--BUSINESS-RELATED EXCLUSIONS AND DEDUCTIONS

     SEC. 13301. LIMITATION ON DEDUCTION FOR INTEREST.

       (a) In General.--Section 163(j) is amended to read as 
     follows:
       ``(j) Limitation on Business Interest.--
       ``(1) In general.--The amount allowed as a deduction under 
     this chapter for any taxable year for business interest shall 
     not exceed the sum of--
       ``(A) the business interest income of such taxpayer for 
     such taxable year,
       ``(B) 30 percent of the adjusted taxable income of such 
     taxpayer for such taxable year, plus
       ``(C) the floor plan financing interest of such taxpayer 
     for such taxable year.
     The amount determined under subparagraph (B) shall not be 
     less than zero.
       ``(2) Carryforward of disallowed business interest.--The 
     amount of any business interest not allowed as a deduction 
     for any taxable year by reason of paragraph (1) shall be 
     treated as business interest paid or accrued in the 
     succeeding taxable year.
       ``(3) Exemption for certain small businesses.--In the case 
     of any taxpayer (other than a tax shelter prohibited from 
     using the cash receipts and disbursements method of 
     accounting under section 448(a)(3)) which meets the gross 
     receipts test of section 448(c) for any taxable year, 
     paragraph (1) shall not apply to such taxpayer for such 
     taxable year. In the case of any taxpayer which is not a 
     corporation or a partnership, the gross receipts test of 
     section 448(c) shall be applied in the same manner as if such 
     taxpayer were a corporation or partnership.
       ``(4) Application to partnerships, etc.--
       ``(A) In general.--In the case of any partnership--
       ``(i) this subsection shall be applied at the partnership 
     level and any deduction for business interest shall be taken 
     into account in determining the non-separately stated taxable 
     income or loss of the partnership, and
       ``(ii) the adjusted taxable income of each partner of such 
     partnership--

       ``(I) shall be determined without regard to such partner's 
     distributive share of any items of income, gain, deduction, 
     or loss of such partnership, and
       ``(II) shall be increased by such partner's distributive 
     share of such partnership's excess taxable income.

     For purposes of clause (ii)(II), a partner's distributive 
     share of partnership excess taxable income shall be 
     determined in the same manner as the partner's distributive 
     share of nonseparately stated taxable income or loss of the 
     partnership.
       ``(B) Special rules for carryforwards.--
       ``(i) In general.--The amount of any business interest not 
     allowed as a deduction to a partnership for any taxable year 
     by reason of paragraph (1) for any taxable year--

       ``(I) shall not be treated under paragraph (2) as business 
     interest paid or accrued by the partnership in the succeeding 
     taxable year, and
       ``(II) shall, subject to clause (ii), be treated as excess 
     business interest which is allocated to each partner in the 
     same manner as the non-separately stated taxable income or 
     loss of the partnership.

       ``(ii) Treatment of excess business interest allocated to 
     partners.--If a partner is allocated any excess business 
     interest from a partnership under clause (i) for any taxable 
     year--

       ``(I) such excess business interest shall be treated as 
     business interest paid or accrued by the partner in the next 
     succeeding taxable year in which the partner is allocated 
     excess taxable income from such partnership, but only to the 
     extent of such excess taxable income, and
       ``(II) any portion of such excess business interest 
     remaining after the application of subclause (I) shall, 
     subject to the limitations of subclause (I), be treated as 
     business interest paid or accrued in succeeding taxable 
     years.

     For purposes of applying this paragraph, excess taxable 
     income allocated to a partner from a partnership for any 
     taxable year shall not be taken into account under paragraph 
     (1)(A) with respect to any business interest other than 
     excess business interest from the partnership until all such 
     excess business interest for such taxable year and all 
     preceding taxable years has been treated as paid or accrued 
     under clause (ii).
       ``(iii) Basis adjustments.--

       ``(I) In general.--The adjusted basis of a partner in a 
     partnership interest shall be reduced (but not below zero) by 
     the amount of excess business interest allocated to the 
     partner under clause (i)(II).
       ``(II) Special rule for dispositions.--If a partner 
     disposes of a partnership interest, the adjusted basis of the 
     partner in the partnership interest shall be increased 
     immediately before the disposition by the amount of the 
     excess (if any) of the amount of the basis reduction under 
     subclause (I) over the portion of any excess business 
     interest allocated to the partner under clause (i)(II) which 
     has previously been treated under clause (ii) as business 
     interest paid or accrued by the partner. The preceding 
     sentence shall also apply to transfers of the partnership 
     interest (including by reason of death) in a transaction in 
     which gain is not recognized in whole or in part. No 
     deduction shall be allowed to the transferor or transferee 
     under this chapter for any excess business interest resulting 
     in a basis increase under this subclause.

       ``(C) Excess taxable income.--The term `excess taxable 
     income' means, with respect to any partnership, the amount 
     which bears the same ratio to the partnership's adjusted 
     taxable income as--
       ``(i) the excess (if any) of--

       ``(I) the amount determined for the partnership under 
     paragraph (1)(B), over
       ``(II) the amount (if any) by which the business interest 
     of the partnership, reduced by the floor plan financing 
     interest, exceeds the business interest income of the 
     partnership, bears to

       ``(ii) the amount determined for the partnership under 
     paragraph (1)(B).
       ``(D) Application to s corporations.--Rules similar to the 
     rules of subparagraphs (A) and (C) shall apply with respect 
     to any S corporation and its shareholders.
       ``(5) Business interest.--For purposes of this subsection, 
     the term `business interest' means any interest paid or 
     accrued on indebtedness properly allocable to a trade or 
     business. Such term shall not include investment interest 
     (within the meaning of subsection (d)).
       ``(6) Business interest income.--For purposes of this 
     subsection, the term `business interest income' means the 
     amount of interest includible in the gross income of the 
     taxpayer for the taxable year which is properly allocable to 
     a trade or business. Such term shall not include investment 
     income (within the meaning of subsection (d)).
       ``(7) Trade or business.--For purposes of this subsection--
       ``(A) In general.--The term `trade or business' shall not 
     include--
       ``(i) the trade or business of performing services as an 
     employee,
       ``(ii) any electing real property trade or business,
       ``(iii) any electing farming business, or
       ``(iv) the trade or business of the furnishing or sale of--

       ``(I) electrical energy, water, or sewage disposal 
     services,
       ``(II) gas or steam through a local distribution system, or
       ``(III) transportation of gas or steam by pipeline,

     if the rates for such furnishing or sale, as the case may be, 
     have been established or approved by a State or political 
     subdivision thereof, by any agency or instrumentality of the 
     United States, by a public service or public utility 
     commission or other similar body of any State or political 
     subdivision thereof, or by the governing or ratemaking body 
     of an electric cooperative.

[[Page 19891]]

       ``(B) Electing real property trade or business.--For 
     purposes of this paragraph, the term `electing real property 
     trade or business' means any trade or business which is 
     described in section 469(c)(7)(C) and which makes an election 
     under this subparagraph. Any such election shall be made at 
     such time and in such manner as the Secretary shall 
     prescribe, and, once made, shall be irrevocable.
       ``(C) Electing farming business.--For purposes of this 
     paragraph, the term `electing farming business' means--
       ``(i) a farming business (as defined in section 263A(e)(4)) 
     which makes an election under this subparagraph, or
       ``(ii) any trade or business of a specified agricultural or 
     horticultural cooperative (as defined in section 199A(g)(2)) 
     with respect to which the cooperative makes an election under 
     this subparagraph.
     Any such election shall be made at such time and in such 
     manner as the Secretary shall prescribe, and, once made, 
     shall be irrevocable.
       ``(8) Adjusted taxable income.--For purposes of this 
     subsection, the term `adjusted taxable income' means the 
     taxable income of the taxpayer--
       ``(A) computed without regard to--
       ``(i) any item of income, gain, deduction, or loss which is 
     not properly allocable to a trade or business,
       ``(ii) any business interest or business interest income,
       ``(iii) the amount of any net operating loss deduction 
     under section 172,
       ``(iv) the amount of any deduction allowed under section 
     199A, and
       ``(v) in the case of taxable years beginning before January 
     1, 2022, any deduction allowable for depreciation, 
     amortization, or depletion, and
       ``(B) computed with such other adjustments as provided by 
     the Secretary.
       ``(9) Floor plan financing interest defined.--For purposes 
     of this subsection--
       ``(A) In general.--The term `floor plan financing interest' 
     means interest paid or accrued on floor plan financing 
     indebtedness.
       ``(B) Floor plan financing indebtedness.--The term `floor 
     plan financing indebtedness' means indebtedness--
       ``(i) used to finance the acquisition of motor vehicles 
     held for sale or lease, and
       ``(ii) secured by the inventory so acquired.
       ``(C) Motor vehicle.--The term `motor vehicle' means a 
     motor vehicle that is any of the following:
       ``(i) Any self-propelled vehicle designed for transporting 
     persons or property on a public street, highway, or road.
       ``(ii) A boat.
       ``(iii) Farm machinery or equipment.
       ``(10) Cross references.--
       ``(A) For requirement that an electing real property trade 
     or business use the alternative depreciation system, see 
     section 168(g)(1)(F).
       ``(B) For requirement that an electing farming business use 
     the alternative depreciation system, see section 
     168(g)(1)(G).''.
       (b) Treatment of Carryforward of Disallowed Business 
     Interest in Certain Corporate Acquisitions.--
       (1) In general.--Section 381(c) is amended by inserting 
     after paragraph (19) the following new paragraph:
       ``(20) Carryforward of disallowed business interest.--The 
     carryover of disallowed business interest described in 
     section 163(j)(2) to taxable years ending after the date of 
     distribution or transfer.''.
       (2) Application of limitation.--Section 382(d) is amended 
     by adding at the end the following new paragraph:
       ``(3) Application to carryforward of disallowed interest.--
     The term `pre-change loss' shall include any carryover of 
     disallowed interest described in section 163(j)(2) under 
     rules similar to the rules of paragraph (1).''.
       (3) Conforming amendment.--Section 382(k)(1) is amended by 
     inserting after the first sentence the following: ``Such term 
     shall include any corporation entitled to use a carryforward 
     of disallowed interest described in section 381(c)(20).''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13302. MODIFICATION OF NET OPERATING LOSS DEDUCTION.

       (a) Limitation on Deduction.--
       (1) In general.--Section 172(a) is amended to read as 
     follows:
       ``(a) Deduction Allowed.--There shall be allowed as a 
     deduction for the taxable year an amount equal to the lesser 
     of--
       ``(1) the aggregate of the net operating loss carryovers to 
     such year, plus the net operating loss carrybacks to such 
     year, or
       ``(2) 80 percent of taxable income computed without regard 
     to the deduction allowable under this section.
     For purposes of this subtitle, the term `net operating loss 
     deduction' means the deduction allowed by this subsection.''.
       (2) Coordination of limitation with carrybacks and 
     carryovers.--Section 172(b)(2) is amended by striking ``shall 
     be computed--'' and all that follows and inserting ``shall--
       ``(A) be computed with the modifications specified in 
     subsection (d) other than paragraphs (1), (4), and (5) 
     thereof, and by determining the amount of the net operating 
     loss deduction without regard to the net operating loss for 
     the loss year or for any taxable year thereafter,
       ``(B) not be considered to be less than zero, and
       ``(C) not exceed the amount determined under subsection 
     (a)(2) for such prior taxable year.''.
       (3) Conforming amendment.--Section 172(d)(6) 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 adding at the end the following new 
     subparagraph:
       ``(C) subsection (a)(2) shall be applied by substituting 
     `real estate investment trust taxable income (as defined in 
     section 857(b)(2) but without regard to the deduction for 
     dividends paid (as defined in section 561))' for `taxable 
     income'.''.
       (b) Repeal of Net Operating Loss Carryback; Indefinite 
     Carryforward.--
       (1) In general.--Section 172(b)(1)(A) is amended--
       (A) by striking ``shall be a net operating loss carryback 
     to each of the 2 taxable years'' in clause (i) and inserting 
     ``except as otherwise provided in this paragraph, shall not 
     be a net operating loss carryback to any taxable year'', and
       (B) by striking ``to each of the 20 taxable years'' in 
     clause (ii) and inserting ``to each taxable year''.
       (2) Conforming amendment.--Section 172(b)(1) is amended by 
     striking subparagraphs (B) through (F).
       (c) Treatment of Farming Losses.--
       (1) Allowance of carrybacks.--Section 172(b)(1), as amended 
     by subsection (b)(2), is amended by adding at the end the 
     following new subparagraph:
       ``(B) Farming losses.--
       ``(i) In general.--In the case of any portion of a net 
     operating loss for the taxable year which is a farming loss 
     with respect to the taxpayer, such loss shall be a net 
     operating loss carryback to each of the 2 taxable years 
     preceding the taxable year of such loss.
       ``(ii) Farming loss.--For purposes of this section, the 
     term `farming loss' means the lesser of--

       ``(I) the amount which would be the net operating loss for 
     the taxable year if only income and deductions attributable 
     to farming businesses (as defined in section 263A(e)(4)) are 
     taken into account, or
       ``(II) the amount of the net operating loss for such 
     taxable year.

       ``(iii) Coordination with paragraph (2).--For purposes of 
     applying paragraph (2), a farming loss for any taxable year 
     shall be treated as a separate net operating loss for such 
     taxable year to be taken into account after the remaining 
     portion of the net operating loss for such taxable year.
       ``(iv) Election.--Any taxpayer entitled to a 2-year 
     carryback under clause (i) from any loss year may elect not 
     to have such clause apply to such loss year. Such election 
     shall be made in such manner as prescribed by the Secretary 
     and shall be made by the due date (including extensions of 
     time) for filing the taxpayer's return for the taxable year 
     of the net operating loss. Such election, once made for any 
     taxable year, shall be irrevocable for such taxable year.''.
       (2) Conforming amendments.--
       (A) Section 172 is amended by striking subsections (f), 
     (g), and (h), and by redesignating subsection (i) as 
     subsection (f).
       (B) Section 537(b)(4) is amended by inserting ``(as in 
     effect before the date of enactment of the Tax Cuts and Jobs 
     Act)'' after ``as defined in section 172(f)''.
       (d) Treatment of Certain Insurance Losses.--
       (1) Treatment of carryforwards and carrybacks.--Section 
     172(b)(1), as amended by subsections (b)(2) and (c)(1), is 
     amended by adding at the end the following new subparagraph:
       ``(C) Insurance companies.--In the case of an insurance 
     company (as defined in section 816(a)) other than a life 
     insurance company, the net operating loss for any taxable 
     year--
       ``(i) shall be a net operating loss carryback to each of 
     the 2 taxable years preceding the taxable year of such loss, 
     and
       ``(ii) shall be a net operating loss carryover to each of 
     the 20 taxable years following the taxable year of the 
     loss.''.
       (2) Exemption from limitation.--Section 172, as amended by 
     subsection (c)(2)(A), is amended by redesignating subsection 
     (f) as subsection (g) and inserting after subsection (e) the 
     following new subsection:
       ``(f) Special Rule for Insurance Companies.--In the case of 
     an insurance company (as defined in section 816(a)) other 
     than a life insurance company--
       ``(1) the amount of the deduction allowed under subsection 
     (a) shall be the aggregate of the net operating loss 
     carryovers to such year, plus the net operating loss 
     carrybacks to such year, and
       ``(2) subparagraph (C) of subsection (b)(2) shall not 
     apply.''.
       (e) Effective Date.--
       (1) Net operating loss limitation.--The amendments made by 
     subsections (a) and (d)(2) shall apply to losses arising in 
     taxable years beginning after December 31, 2017.
       (2) Carryforwards and carrybacks.--The amendments made by 
     subsections (b), (c), and (d)(1) shall apply to net operating 
     losses arising in taxable years ending after December 31, 
     2017.

     SEC. 13303. LIKE-KIND EXCHANGES OF REAL PROPERTY.

       (a) In General.--Section 1031(a)(1) is amended by striking 
     ``property'' each place it appears and inserting ``real 
     property''.
       (b) Conforming Amendments.--
       (1)(A) Paragraph (2) of section 1031(a) is amended to read 
     as follows:
       ``(2) Exception for real property held for sale.--This 
     subsection shall not apply to any exchange of real property 
     held primarily for sale.''.

[[Page 19892]]

       (B) Section 1031 is amended by striking subsection (i).
       (2) Section 1031 is amended by striking subsection (e).
       (3) Section 1031, as amended by paragraph (2), is amended 
     by inserting after subsection (d) the following new 
     subsection:
       ``(e) Application to Certain Partnerships.--For purposes of 
     this section, an interest in a partnership which has in 
     effect a valid election under section 761(a) to be excluded 
     from the application of all of subchapter K shall be treated 
     as an interest in each of the assets of such partnership and 
     not as an interest in a partnership.''.
       (4) Section 1031(h) is amended to read as follows:
       ``(h) Special Rules for Foreign Real Property.--Real 
     property located in the United States and real property 
     located outside the United States are not property of a like 
     kind.''.
       (5) The heading of section 1031 is amended by striking 
     ``property'' and inserting ``real property''.
       (6) The table of sections for part III of subchapter O of 
     chapter 1 is amended by striking the item relating to section 
     1031 and inserting the following new item:

``Sec. 1031. Exchange of real property held for productive use or 
              investment.''.
       (c) Effective Date.--
       (1) In general.--Except as otherwise provided in this 
     subsection, the amendments made by this section shall apply 
     to exchanges completed after December 31, 2017.
       (2) Transition rule.--The amendments made by this section 
     shall not apply to any exchange if--
       (A) the property disposed of by the taxpayer in the 
     exchange is disposed of on or before December 31 2017, or
       (B) the property received by the taxpayer in the exchange 
     is received on or before December 31, 2017.

     SEC. 13304. LIMITATION ON DEDUCTION BY EMPLOYERS OF EXPENSES 
                   FOR FRINGE BENEFITS.

       (a) No Deduction Allowed for Entertainment Expenses.--
       (1) In general.--Section 274(a) is amended--
       (A) in paragraph (1)(A), by striking ``unless'' and all 
     that follows through ``trade or business,'',
       (B) by striking the flush sentence at the end of paragraph 
     (1), and
       (C) by striking paragraph (2)(C).
       (2) Conforming amendments.--
       (A) Section 274(d) is amended--
       (i) by striking paragraph (2) and redesignating paragraphs 
     (3) and (4) as paragraphs (2) and (3), respectively, and
       (ii) in the flush text following paragraph (3) (as so 
     redesignated)--

       (I) by striking ``, entertainment, amusement, recreation, 
     or use of the facility or property,'' in item (B), and
       (II) by striking ``(D) the business relationship to the 
     taxpayer of persons entertained, using the facility or 
     property, or receiving the gift'' and inserting ``(D) the 
     business relationship to the taxpayer of the person receiving 
     the benefit'',

       (B) Section 274 is amended by striking subsection (l).
       (C) Section 274(n) is amended by striking ``and 
     Entertainment'' in the heading.
       (D) Section 274(n)(1) is amended to read as follows:
       ``(1) In general.--The amount allowable as a deduction 
     under this chapter for any expense for food or beverages 
     shall not exceed 50 percent of the amount of such expense 
     which would (but for this paragraph) be allowable as a 
     deduction under this chapter.''.
       (E) Section 274(n)(2) is amended--
       (i) in subparagraph (B), by striking ``in the case of an 
     expense for food or beverages,'',
       (ii) by striking subparagraph (C) and redesignating 
     subparagraphs (D) and (E) as subparagraphs (C) and (D), 
     respectively,
       (iii) by striking ``of subparagraph (E)'' the last sentence 
     and inserting ``of subparagraph (D)'', and
       (iv) by striking ``in subparagraph (D)'' in the last 
     sentence and inserting ``in subparagraph (C)''.
       (F) Clause (iv) of section 7701(b)(5)(A) is amended to read 
     as follows:
       ``(iv) a professional athlete who is temporarily in the 
     United States to compete in a sports event--

       ``(I) which is organized for the primary purpose of 
     benefiting an organization which is described in section 
     501(c)(3) and exempt from tax under section 501(a),
       ``(II) all of the net proceeds of which are contributed to 
     such organization, and,
       ``(III) which utilizes volunteers for substantially all of 
     the work performed in carrying out such event.''.

       (b) Only 50 Percent of Expenses for Meals Provided on or 
     Near Business Premises Allowed as Deduction.--Paragraph (2) 
     of section 274(n), as amended by subsection (a), is amended--
       (1) by striking subparagraph (B),
       (2) by redesignating subparagraphs (C) and (D) as 
     subparagraphs (B) and (C), respectively,
       (3) by striking ``of subparagraph (D)'' in the last 
     sentence and inserting ``of subparagraph (C)'', and
       (4) by striking ``in subparagraph (C)'' in the last 
     sentence and inserting ``in subparagraph (B)''.
       (c) Treatment of Transportation Benefits.--Section 274, as 
     amended by subsection (a), is amended--
       (1) in subsection (a)--
       (A) in the heading, by striking ``or Recreation'' and 
     inserting ``Recreation, or Qualified Transportation 
     Fringes'', and
       (B) by adding at the end the following new paragraph:
       ``(4) Qualified transportation fringes.--No deduction shall 
     be allowed under this chapter for the expense of any 
     qualified transportation fringe (as defined in section 
     132(f)) provided to an employee of the taxpayer.'', and
       (2) by inserting after subsection (k) the following new 
     subsection:
       ``(l) Transportation and Commuting Benefits.--
       ``(1) In general.--No deduction shall be allowed under this 
     chapter for any expense incurred for providing any 
     transportation, or any payment or reimbursement, to an 
     employee of the taxpayer in connection with travel between 
     the employee's residence and place of employment, except as 
     necessary for ensuring the safety of the employee.
       ``(2) Exception.--In the case of any qualified bicycle 
     commuting reimbursement (as described in section 
     132(f)(5)(F)), this subsection shall not apply for any 
     amounts paid or incurred after December 31, 2017, and before 
     January 1, 2026.''.
       (d) Elimination of Deduction for Meals Provided at 
     Convenience of Employer.--Section 274, as amended by 
     subsection (c), is amended--
       (1) by redesignating subsection (o) as subsection (p), and
       (2) by inserting after subsection (n) the following new 
     subsection:
       ``(o) Meals Provided at Convenience of Employer.--No 
     deduction shall be allowed under this chapter for--
       ``(1) any expense for the operation of a facility described 
     in section 132(e)(2), and any expense for food or beverages, 
     including under section 132(e)(1), associated with such 
     facility, or
       ``(2) any expense for meals described in section 119(a).''.
       (e) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to amounts 
     incurred or paid after December 31, 2017.
       (2) Effective date for elimination of deduction for meals 
     provided at convenience of employer.--The amendments made by 
     subsection (d) shall apply to amounts incurred or paid after 
     December 31, 2025.

     SEC. 13305. REPEAL OF DEDUCTION FOR INCOME ATTRIBUTABLE TO 
                   DOMESTIC PRODUCTION ACTIVITIES.

       (a) In General.--Part VI of subchapter B of chapter 1 is 
     amended by striking section 199 (and by striking the item 
     relating to such section in the table of sections for such 
     part).
       (b) Conforming Amendments.--
       (1) Sections 74(d)(2)(B), 86(b)(2)(A), 135(c)(4)(A), 
     137(b)(3)(A), 219(g)(3)(A)(ii), 221(b)(2)(C), 222(b)(2)(C), 
     246(b)(1), and 469(i)(3)(F)(iii) are each amended by striking 
     ``199,''.
       (2) Section 170(b)(2)(D), as amended by subtitle A, is 
     amended by striking clause (iv), and by redesignating clauses 
     (v) and (vi) as clauses (iv) and (v).
       (3) Section 172(d) is amended by striking paragraph (7).
       (4) Section 613(a), as amended by section 11011, is amended 
     by striking ``and without the deduction under section 199''.
       (5) Section 613A(d)(1), as amended by section 11011, is 
     amended by striking subparagraph (B) and by redesignating 
     subparagraphs (C), (D), (E), and (F) as subparagraphs (B), 
     (C), (D), and (E), respectively.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13306. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, 
                   AND OTHER AMOUNTS.

       (a) Denial of Deduction.--
       (1) In general.--Subsection (f) of section 162 is amended 
     to read as follows:
       ``(f) Fines, Penalties, and Other Amounts.--
       ``(1) In general.--Except as provided in the following 
     paragraphs of this subsection, no deduction otherwise 
     allowable shall be allowed under this chapter for any amount 
     paid or incurred (whether by suit, agreement, or otherwise) 
     to, or at the direction of, a government or governmental 
     entity in relation to the violation of any law or the 
     investigation or inquiry by such government or entity into 
     the potential violation of any law.
       ``(2) Exception for amounts constituting restitution or 
     paid to come into compliance with law.--
       ``(A) In general.--Paragraph (1) shall not apply to any 
     amount that--
       ``(i) the taxpayer establishes--

       ``(I) constitutes restitution (including remediation of 
     property) for damage or harm which was or may be caused by 
     the violation of any law or the potential violation of any 
     law, or
       ``(II) is paid to come into compliance with any law which 
     was violated or otherwise involved in the investigation or 
     inquiry described in paragraph (1),

       ``(ii) is identified as restitution or as an amount paid to 
     come into compliance with such law, as the case may be, in 
     the court order or settlement agreement, and
       ``(iii) in the case of any amount of restitution for 
     failure to pay any tax imposed under this title in the same 
     manner as if such amount were

[[Page 19893]]

     such tax, would have been allowed as a deduction under this 
     chapter if it had been timely paid.
     The identification under clause (ii) alone shall not be 
     sufficient to make the establishment required under clause 
     (i).
       ``(B) Limitation.--Subparagraph (A) shall not apply to any 
     amount paid or incurred as reimbursement to the government or 
     entity for the costs of any investigation or litigation.
       ``(3) Exception for amounts paid or incurred as the result 
     of certain court orders.--Paragraph (1) shall not apply to 
     any amount paid or incurred by reason of any order of a court 
     in a suit in which no government or governmental entity is a 
     party.
       ``(4) Exception for taxes due.--Paragraph (1) shall not 
     apply to any amount paid or incurred as taxes due.
       ``(5) Treatment of certain nongovernmental regulatory 
     entities.--For purposes of this subsection, the following 
     nongovernmental entities shall be treated as governmental 
     entities:
       ``(A) Any nongovernmental entity which exercises self-
     regulatory powers (including imposing sanctions) in 
     connection with a qualified board or exchange (as defined in 
     section 1256(g)(7)).
       ``(B) To the extent provided in regulations, any 
     nongovernmental entity which exercises self-regulatory powers 
     (including imposing sanctions) as part of performing an 
     essential governmental function.''.
       (2) Effective date.--The amendment made by this subsection 
     shall apply to amounts paid or incurred on or after the date 
     of the enactment of this Act, except that such amendments 
     shall not apply to amounts paid or incurred under any binding 
     order or agreement entered into before such date. Such 
     exception shall not apply to an order or agreement requiring 
     court approval unless the approval was obtained before such 
     date.
       (b) Reporting of Deductible Amounts.--
       (1) In general.--Subpart B of part III of subchapter A of 
     chapter 61 is amended by inserting after section 6050W the 
     following new section:

     ``SEC. 6050X. INFORMATION WITH RESPECT TO CERTAIN FINES, 
                   PENALTIES, AND OTHER AMOUNTS.

       ``(a) Requirement of Reporting.--
       ``(1) In general.--The appropriate official of any 
     government or any entity described in section 162(f)(5) which 
     is involved in a suit or agreement described in paragraph (2) 
     shall make a return in such form as determined by the 
     Secretary setting forth--
       ``(A) the amount required to be paid as a result of the 
     suit or agreement to which paragraph (1) of section 162(f) 
     applies,
       ``(B) any amount required to be paid as a result of the 
     suit or agreement which constitutes restitution or 
     remediation of property, and
       ``(C) any amount required to be paid as a result of the 
     suit or agreement for the purpose of coming into compliance 
     with any law which was violated or involved in the 
     investigation or inquiry.
       ``(2) Suit or agreement described.--
       ``(A) In general.--A suit or agreement is described in this 
     paragraph if--
       ``(i) it is--

       ``(I) a suit with respect to a violation of any law over 
     which the government or entity has authority and with respect 
     to which there has been a court order, or
       ``(II) an agreement which is entered into with respect to a 
     violation of any law over which the government or entity has 
     authority, or with respect to an investigation or inquiry by 
     the government or entity into the potential violation of any 
     law over which such government or entity has authority, and

       ``(ii) the aggregate amount involved in all court orders 
     and agreements with respect to the violation, investigation, 
     or inquiry is $600 or more.
       ``(B) Adjustment of reporting threshold.--The Secretary 
     shall adjust the $600 amount in subparagraph (A)(ii) as 
     necessary in order to ensure the efficient administration of 
     the internal revenue laws.
       ``(3) Time of filing.--The return required under this 
     subsection shall be filed at the time the agreement is 
     entered into, as determined by the Secretary.
       ``(b) Statements to Be Furnished to Individuals Involved in 
     the Settlement.--Every person required to make a return under 
     subsection (a) shall furnish to each person who is a party to 
     the suit or agreement a written statement showing--
       ``(1) the name of the government or entity, and
       ``(2) the information supplied to the Secretary under 
     subsection (a)(1).
     The written statement required under the preceding sentence 
     shall be furnished to the person at the same time the 
     government or entity provides the Secretary with the 
     information required under subsection (a).
       ``(c) Appropriate Official Defined.--For purposes of this 
     section, the term `appropriate official' means the officer or 
     employee having control of the suit, investigation, or 
     inquiry or the person appropriately designated for purposes 
     of this section.''.
       (2) Conforming amendment.--The table of sections for 
     subpart B of part III of subchapter A of chapter 61 is 
     amended by inserting after the item relating to section 6050W 
     the following new item:

``Sec. 6050X. Information with respect to certain fines, penalties, and 
              other amounts.''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to amounts paid or incurred on or after the date 
     of the enactment of this Act, except that such amendments 
     shall not apply to amounts paid or incurred under any binding 
     order or agreement entered into before such date. Such 
     exception shall not apply to an order or agreement requiring 
     court approval unless the approval was obtained before such 
     date.

     SEC. 13307. DENIAL OF DEDUCTION FOR SETTLEMENTS SUBJECT TO 
                   NONDISCLOSURE AGREEMENTS PAID IN CONNECTION 
                   WITH SEXUAL HARASSMENT OR SEXUAL ABUSE.

       (a) Denial of Deduction.--Section 162 is amended by 
     redesignating subsection (q) as subsection (r) and by 
     inserting after subsection (p) the following new subsection:
       ``(q) Payments Related to Sexual Harassment and Sexual 
     Abuse.--No deduction shall be allowed under this chapter 
     for--
       ``(1) any settlement or payment related to sexual 
     harassment or sexual abuse if such settlement or payment is 
     subject to a nondisclosure agreement, or
       ``(2) attorney's fees related to such a settlement or 
     payment.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred after the date of the 
     enactment of this Act.

     SEC. 13308. REPEAL OF DEDUCTION FOR LOCAL LOBBYING EXPENSES.

       (a) In General.--Section 162(e) is amended by striking 
     paragraphs (2) and (7) and by redesignating paragraphs (3), 
     (4), (5), (6), and (8) as paragraphs (2), (3), (4), (5), and 
     (6), respectively.
       (b) Conforming Amendment.--Section 6033(e)(1)(B)(ii) is 
     amended by striking ``section 162(e)(5)(B)(ii)'' and 
     inserting ``section 162(e)(4)(B)(ii)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred on or after the date 
     of the enactment of this Act.

     SEC. 13309. RECHARACTERIZATION OF CERTAIN GAINS IN THE CASE 
                   OF PARTNERSHIP PROFITS INTERESTS HELD IN 
                   CONNECTION WITH PERFORMANCE OF INVESTMENT 
                   SERVICES.

       (a) In General.--Part IV of subchapter O of chapter 1 is 
     amended--
       (1) by redesignating section 1061 as section 1062, and
       (2) by inserting after section 1060 the following new 
     section:

     ``SEC. 1061. PARTNERSHIP INTERESTS HELD IN CONNECTION WITH 
                   PERFORMANCE OF SERVICES.

       ``(a) In General.--If one or more applicable partnership 
     interests are held by a taxpayer at any time during the 
     taxable year, the excess (if any) of--
       ``(1) the taxpayer's net long-term capital gain with 
     respect to such interests for such taxable year, over
       ``(2) the taxpayer's net long-term capital gain with 
     respect to such interests for such taxable year computed by 
     applying paragraphs (3) and (4) of sections 1222 by 
     substituting `3 years' for `1 year',
     shall be treated as short-term capital gain, notwithstanding 
     section 83 or any election in effect under section 83(b).
       ``(b) Special Rule.--To the extent provided by the 
     Secretary, subsection (a) shall not apply to income or gain 
     attributable to any asset not held for portfolio investment 
     on behalf of third party investors.
       ``(c) Applicable Partnership Interest.--For purposes of 
     this section--
       ``(1) In general.--Except as provided in this paragraph or 
     paragraph (4), the term `applicable partnership interest' 
     means any interest in a partnership which, directly or 
     indirectly, is transferred to (or is held by) the taxpayer in 
     connection with the performance of substantial services by 
     the taxpayer, or any other related person, in any applicable 
     trade or business. The previous sentence shall not apply to 
     an interest held by a person who is employed by another 
     entity that is conducting a trade or business (other than an 
     applicable trade or business) and only provides services to 
     such other entity.
       ``(2) Applicable trade or business.--The term `applicable 
     trade or business' means any activity conducted on a regular, 
     continuous, and substantial basis which, regardless of 
     whether the activity is conducted in one or more entities, 
     consists, in whole or in part, of--
       ``(A) raising or returning capital, and
       ``(B) either--
       ``(i) investing in (or disposing of) specified assets (or 
     identifying specified assets for such investing or 
     disposition), or
       ``(ii) developing specified assets.
       ``(3) Specified asset.--The term `specified asset' means 
     securities (as defined in section 475(c)(2) without regard to 
     the last sentence thereof), commodities (as defined in 
     section 475(e)(2)), real estate held for rental or 
     investment, cash or cash equivalents, options or derivative 
     contracts with respect to any of the foregoing, and an 
     interest in a partnership to the extent of the partnership's 
     proportionate interest in any of the foregoing.
       ``(4) Exceptions.--The term `applicable partnership 
     interest' shall not include--
       ``(A) any interest in a partnership directly or indirectly 
     held by a corporation, or
       ``(B) any capital interest in the partnership which 
     provides the taxpayer with a right to share in partnership 
     capital commensurate with--
       ``(i) the amount of capital contributed (determined at the 
     time of receipt of such partnership interest), or
       ``(ii) the value of such interest subject to tax under 
     section 83 upon the receipt or vesting of such interest.

[[Page 19894]]

       ``(5) Third party investor.--The term `third party 
     investor' means a person who--
       ``(A) holds an interest in the partnership which does not 
     constitute property held in connection with an applicable 
     trade or business; and
       ``(B) is not (and has not been) actively engaged, and is 
     (and was) not related to a person so engaged, in (directly or 
     indirectly) providing substantial services described in 
     paragraph (1) for such partnership or any applicable trade or 
     business.
       ``(d) Transfer of Applicable Partnership Interest to 
     Related Person.--
       ``(1) In general.--If a taxpayer transfers any applicable 
     partnership interest, directly or indirectly, to a person 
     related to the taxpayer, the taxpayer shall include in gross 
     income (as short term capital gain) the excess (if any) of--
       ``(A) so much of the taxpayer's long-term capital gains 
     with respect to such interest for such taxable year 
     attributable to the sale or exchange of any asset held for 
     not more than 3 years as is allocable to such interest, over
       ``(B) any amount treated as short term capital gain under 
     subsection (a) with respect to the transfer of such interest.
       ``(2) Related person.--For purposes of this paragraph, a 
     person is related to the taxpayer if--
       ``(A) the person is a member of the taxpayer's family 
     within the meaning of section 318(a)(1), or
       ``(B) the person performed a service within the current 
     calendar year or the preceding three calendar years in any 
     applicable trade or business in which or for which the 
     taxpayer performed a service.
       ``(e) Reporting.--The Secretary shall require such 
     reporting (at the time and in the manner prescribed by the 
     Secretary) as is necessary to carry out the purposes of this 
     section.
       ``(f) Regulations.--The Secretary shall issue such 
     regulations or other guidance as is necessary or appropriate 
     to carry out the purposes of this section''.
       (b) Clerical Amendment.--The table of sections for part IV 
     of subchapter O of chapter 1 is amended by striking the item 
     relating to 1061 and inserting the following new items:

``Sec. 1061. Partnership interests held in connection with performance 
              of services.
``Sec. 1062. Cross references.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13310. PROHIBITION ON CASH, GIFT CARDS, AND OTHER NON-
                   TANGIBLE PERSONAL PROPERTY AS EMPLOYEE 
                   ACHIEVEMENT AWARDS.

       (a) In General.--Subparagraph (A) of section 274(j)(3) is 
     amended--
       (1) by striking ``The term'' and inserting the following:
       ``(i) In general.--The term''.
       (2) by redesignating clauses (i), (ii), and (iii) as 
     subclauses (I), (II), and (III), respectively, and conforming 
     the margins accordingly, and
       (3) by adding at the end the following new clause:
       ``(ii) Tangible personal property.--For purposes of clause 
     (i), the term `tangible personal property' shall not 
     include--

       ``(I) cash, cash equivalents, gift cards, gift coupons, or 
     gift certificates (other than arrangements conferring only 
     the right to select and receive tangible personal property 
     from a limited array of such items pre-selected or pre-
     approved by the employer), or
       ``(II) vacations, meals, lodging, tickets to theater or 
     sporting events, stocks, bonds, other securities, and other 
     similar items.''.

       (b) Effective Date.--The amendments made by this section 
     shall apply to amounts paid or incurred after December 31, 
     2017.

     SEC. 13311. ELIMINATION OF DEDUCTION FOR LIVING EXPENSES 
                   INCURRED BY MEMBERS OF CONGRESS.

       (a) In General.--Subsection (a) of section 162 is amended 
     in the matter following paragraph (3) by striking ``in excess 
     of $3,000''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 13312. CERTAIN CONTRIBUTIONS BY GOVERNMENTAL ENTITIES 
                   NOT TREATED AS CONTRIBUTIONS TO CAPITAL.

       (a) In General.--Section 118 is amended--
       (1) by striking subsections (b), (c), and (d),
       (2) by redesignating subsection (e) as subsection (d), and
       (3) by inserting after subsection (a) the following new 
     subsections:
       ``(b) Exceptions.--For purposes of subsection (a), the term 
     `contribution to the capital of the taxpayer' does not 
     include--
       ``(1) any contribution in aid of construction or any other 
     contribution as a customer or potential customer, and
       ``(2) any contribution by any governmental entity or civic 
     group (other than a contribution made by a shareholder as 
     such).
       ``(c) Regulations.--The Secretary shall issue such 
     regulations or other guidance as may be necessary or 
     appropriate to carry out this section, including regulations 
     or other guidance for determining whether any contribution 
     constitutes a contribution in aid of construction.''.
       (b) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to contributions 
     made after the date of enactment of this Act.
       (2) Exception.--The amendments made by this section shall 
     not apply to any contribution, made after the date of 
     enactment of this Act by a governmental entity, which is made 
     pursuant to a master development plan that has been approved 
     prior to such date by a governmental entity.

     SEC. 13313. REPEAL OF ROLLOVER OF PUBLICLY TRADED SECURITIES 
                   GAIN INTO SPECIALIZED SMALL BUSINESS INVESTMENT 
                   COMPANIES.

       (a) In General.--Part III of subchapter O of chapter 1 is 
     amended by striking section 1044 (and by striking the item 
     relating to such section in the table of sections of such 
     part).
       (b) Conforming Amendments.--Section 1016(a)(23) is 
     amended--
       (1) by striking ``1044,'', and
       (2) by striking ``1044(d),''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to sales after December 31, 2017.

     SEC. 13314. CERTAIN SELF-CREATED PROPERTY NOT TREATED AS A 
                   CAPITAL ASSET.

       (a) Patents, etc.--Section 1221(a)(3) is amended by 
     inserting ``a patent, invention, model or design (whether or 
     not patented), a secret formula or process,'' before ``a 
     copyright''.
       (b) Conforming Amendment.--Section 1231(b)(1)(C) is amended 
     by inserting ``a patent, invention, model or design (whether 
     or not patented), a secret formula or process,'' before ``a 
     copyright''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to dispositions after December 31, 2017.

                        PART V--BUSINESS CREDITS

     SEC. 13401. MODIFICATION OF ORPHAN DRUG CREDIT.

       (a) Credit Rate.--Subsection (a) of section 45C is amended 
     by striking ``50 percent'' and inserting ``25 percent''.
       (b) Election of Reduced Credit.--Subsection (b) of section 
     280C is amended by redesignating paragraph (3) as paragraph 
     (4) and by inserting after paragraph (2) the following new 
     paragraph:
       ``(3) Election of reduced credit.--
       ``(A) In general.--In the case of any taxable year for 
     which an election is made under this paragraph--
       ``(i) paragraphs (1) and (2) shall not apply, and
       ``(ii) the amount of the credit under section 45C(a) shall 
     be the amount determined under subparagraph (B).
       ``(B) Amount of reduced credit.--The amount of credit 
     determined under this subparagraph for any taxable year shall 
     be the amount equal to the excess of--
       ``(i) the amount of credit determined under section 45C(a) 
     without regard to this paragraph, over
       ``(ii) the product of--

       ``(I) the amount described in clause (i), and
       ``(II) the maximum rate of tax under section 11(b).

       ``(C) Election.--An election under this paragraph for any 
     taxable year shall be made not later than the time for filing 
     the return of tax for such year (including extensions), shall 
     be made on such return, and shall be made in such manner as 
     the Secretary shall prescribe. Such an election, once made, 
     shall be irrevocable.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13402. REHABILITATION CREDIT LIMITED TO CERTIFIED 
                   HISTORIC STRUCTURES.

       (a) In General.--Subsection (a) of section 47 is amended to 
     read as follows:
       ``(a) General Rule.--
       ``(1) In general.--For purposes of section 46, for any 
     taxable year during the 5-year period beginning in the 
     taxable year in which a qualified rehabilitated building is 
     placed in service, the rehabilitation credit for such year is 
     an amount equal to the ratable share for such year.
       ``(2) Ratable share.--For purposes of paragraph (1), the 
     ratable share for any taxable year during the period 
     described in such paragraph is the amount equal to 20 percent 
     of the qualified rehabilitation expenditures with respect to 
     the qualified rehabilitated building, as allocated ratably to 
     each year during such period.''.
       (b) Conforming Amendments.--
       (1) Section 47(c) is amended--
       (A) in paragraph (1)--
       (i) in subparagraph (A), by amending clause (iii) to read 
     as follows:
       ``(iii) such building is a certified historic structure, 
     and'',
       (ii) by striking subparagraph (B), and
       (iii) by redesignating subparagraphs (C) and (D) as 
     subparagraphs (B) and (C), respectively, and
       (B) in paragraph (2)(B), by amending clause (iv) to read as 
     follows:
       ``(iv) Certified historic structure.--Any expenditure 
     attributable to the rehabilitation of a qualified 
     rehabilitated building unless the rehabilitation is a 
     certified rehabilitation (within the meaning of subparagraph 
     (C)).''.
       (2) Paragraph (4) of section 145(d) is amended--
       (A) by striking ``of section 47(c)(1)(C)'' each place it 
     appears and inserting ``of section 47(c)(1)(B)'', and
       (B) by striking ``section 47(c)(1)(C)(i)'' and inserting 
     ``section 47(c)(1)(B)(i)''.
       (c) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to amounts paid 
     or incurred after December 31, 2017.
       (2) Transition rule.--In the case of qualified 
     rehabilitation expenditures with respect to any building--
       (A) owned or leased by the taxpayer during the entirety of 
     the period after December 31, 2017, and

[[Page 19895]]

       (B) with respect to which the 24-month period selected by 
     the taxpayer under clause (i) of section 47(c)(1)(B) of the 
     Internal Revenue Code (as amended by subsection (b)), or the 
     60-month period applicable under clause (ii) of such section, 
     begins not later than 180 days after the date of the 
     enactment of this Act,
     the amendments made by this section shall apply to such 
     expenditures paid or incurred after the end of the taxable 
     year in which the 24-month period, or the 60-month period, 
     referred to in subparagraph (B) ends.

     SEC. 13403. EMPLOYER CREDIT FOR PAID FAMILY AND MEDICAL 
                   LEAVE.

       (a) In General.--
       (1) Allowance of credit.--Subpart D of part IV of 
     subchapter A of chapter 1 is amended by adding at the end the 
     following new section:

     ``SEC. 45S. EMPLOYER CREDIT FOR PAID FAMILY AND MEDICAL 
                   LEAVE.

       ``(a) Establishment of Credit.--
       ``(1) In general.--For purposes of section 38, in the case 
     of an eligible employer, the paid family and medical leave 
     credit is an amount equal to the applicable percentage of the 
     amount of wages paid to qualifying employees during any 
     period in which such employees are on family and medical 
     leave.
       ``(2) Applicable percentage.--For purposes of paragraph 
     (1), the term `applicable percentage' means 12.5 percent 
     increased (but not above 25 percent) by 0.25 percentage 
     points for each percentage point by which the rate of payment 
     (as described under subsection (c)(1)(B)) exceeds 50 percent.
       ``(b) Limitation.--
       ``(1) In general.--The credit allowed under subsection (a) 
     with respect to any employee for any taxable year shall not 
     exceed an amount equal to the product of the normal hourly 
     wage rate of such employee for each hour (or fraction 
     thereof) of actual services performed for the employer and 
     the number of hours (or fraction thereof) for which family 
     and medical leave is taken.
       ``(2) Non-hourly wage rate.--For purposes of paragraph (1), 
     in the case of any employee who is not paid on an hourly wage 
     rate, the wages of such employee shall be prorated to an 
     hourly wage rate under regulations established by the 
     Secretary.
       ``(3) Maximum amount of leave subject to credit.--The 
     amount of family and medical leave that may be taken into 
     account with respect to any employee under subsection (a) for 
     any taxable year shall not exceed 12 weeks.
       ``(c) Eligible Employer.--For purposes of this section--
       ``(1) In general.--The term `eligible employer' means any 
     employer who has in place a written policy that meets the 
     following requirements:
       ``(A) The policy provides--
       ``(i) in the case of a qualifying employee who is not a 
     part-time employee (as defined in section 4980E(d)(4)(B)), 
     not less than 2 weeks of annual paid family and medical 
     leave, and
       ``(ii) in the case of a qualifying employee who is a part-
     time employee, an amount of annual paid family and medical 
     leave that is not less than an amount which bears the same 
     ratio to the amount of annual paid family and medical leave 
     that is provided to a qualifying employee described in clause 
     (i) as--

       ``(I) the number of hours the employee is expected to work 
     during any week, bears to
       ``(II) the number of hours an equivalent qualifying 
     employee described in clause (i) is expected to work during 
     the week.

       ``(B) The policy requires that the rate of payment under 
     the program is not less than 50 percent of the wages normally 
     paid to such employee for services performed for the 
     employer.
       ``(2) Special rule for certain employers.--
       ``(A) In general.--An added employer shall not be treated 
     as an eligible employer unless such employer provides paid 
     family and medical leave in compliance with a written policy 
     which ensures that the employer--
       ``(i) will not interfere with, restrain, or deny the 
     exercise of or the attempt to exercise, any right provided 
     under the policy, and
       ``(ii) will not discharge or in any other manner 
     discriminate against any individual for opposing any practice 
     prohibited by the policy.
       ``(B) Added employer; added employee.--For purposes of this 
     paragraph--
       ``(i) Added employee.--The term `added employee' means a 
     qualifying employee who is not covered by title I of the 
     Family and Medical Leave Act of 1993, as amended.
       ``(ii) Added employer.--The term `added employer' means an 
     eligible employer (determined without regard to this 
     paragraph), whether or not covered by that title I, who 
     offers paid family and medical leave to added employees.
       ``(3) Aggregation rule.--All persons which are treated as a 
     single employer under subsections (a) and (b) of section 52 
     shall be treated as a single taxpayer.
       ``(4) Treatment of benefits mandated or paid for by state 
     or local governments.--For purposes of this section, any 
     leave which is paid by a State or local government or 
     required by State or local law shall not be taken into 
     account in determining the amount of paid family and medical 
     leave provided by the employer.
       ``(5) No inference.--Nothing in this subsection shall be 
     construed as subjecting an employer to any penalty, 
     liability, or other consequence (other than ineligibility for 
     the credit allowed by reason of subsection (a) or recapturing 
     the benefit of such credit) for failure to comply with the 
     requirements of this subsection.
       ``(d) Qualifying Employees.--For purposes of this section, 
     the term `qualifying employee' means any employee (as defined 
     in section 3(e) of the Fair Labor Standards Act of 1938, as 
     amended) who--
       ``(1) has been employed by the employer for 1 year or more, 
     and
       ``(2) for the preceding year, had compensation not in 
     excess of an amount equal to 60 percent of the amount 
     applicable for such year under clause (i) of section 
     414(q)(1)(B).
       ``(e) Family and Medical Leave.--
       ``(1) In general.--Except as provided in paragraph (2), for 
     purposes of this section, the term `family and medical leave' 
     means leave for any 1 or more of the purposes described under 
     subparagraph (A), (B), (C), (D), or (E) of paragraph (1), or 
     paragraph (3), of section 102(a) of the Family and Medical 
     Leave Act of 1993, as amended, whether the leave is provided 
     under that Act or by a policy of the employer.
       ``(2) Exclusion.--If an employer provides paid leave as 
     vacation leave, personal leave, or medical or sick leave 
     (other than leave specifically for 1 or more of the purposes 
     referred to in paragraph (1)), that paid leave shall not be 
     considered to be family and medical leave under paragraph 
     (1).
       ``(3) Definitions.--In this subsection, the terms `vacation 
     leave', `personal leave', and `medical or sick leave' mean 
     those 3 types of leave, within the meaning of section 
     102(d)(2) of that Act.
       ``(f) Determinations Made by Secretary of Treasury.--For 
     purposes of this section, any determination as to whether an 
     employer or an employee satisfies the applicable requirements 
     for an eligible employer (as described in subsection (c)) or 
     qualifying employee (as described in subsection (d)), 
     respectively, shall be made by the Secretary based on such 
     information, to be provided by the employer, as the Secretary 
     determines to be necessary or appropriate.
       ``(g) Wages.--For purposes of this section, the term 
     `wages' has the meaning given such term by subsection (b) of 
     section 3306 (determined without regard to any dollar 
     limitation contained in such section). Such term shall not 
     include any amount taken into account for purposes of 
     determining any other credit allowed under this subpart.
       ``(h) Election to Have Credit Not Apply.--
       ``(1) In general.--A taxpayer may elect to have this 
     section not apply for any taxable year.
       ``(2) Other rules.--Rules similar to the rules of 
     paragraphs (2) and (3) of section 51(j) shall apply for 
     purposes of this subsection.
       ``(i) Termination.--This section shall not apply to wages 
     paid in taxable years beginning after December 31, 2019.''.
       (b) Credit Part of General Business Credit.--Section 38(b) 
     is amended by striking ``plus'' at the end of paragraph (35), 
     by striking the period at the end of paragraph (36) and 
     inserting ``, plus'', and by adding at the end the following 
     new paragraph:
       ``(37) in the case of an eligible employer (as defined in 
     section 45S(c)), the paid family and medical leave credit 
     determined under section 45S(a).''.
       (c) Credit Allowed Against AMT.--Subparagraph (B) of 
     section 38(c)(4) is amended by redesignating clauses (ix) 
     through (xi) as clauses (x) through (xii), respectively, and 
     by inserting after clause (viii) the following new clause:
       ``(ix) the credit determined under section 45S,''.
       (d) Conforming Amendments.--
       (1) Denial of double benefit.--Section 280C(a) is amended 
     by inserting ``45S(a),'' after ``45P(a),''.
       (2) Election to have credit not apply.--Section 6501(m) is 
     amended by inserting ``45S(h),'' after ``45H(g),''.
       (3) Clerical amendment.--The table of sections for subpart 
     D of part IV of subchapter A of chapter 1 is amended by 
     adding at the end the following new item:

``Sec. 45S. Employer credit for paid family and medical leave.''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to wages paid in taxable years beginning after 
     December 31, 2017.

     SEC. 13404. REPEAL OF TAX CREDIT BONDS.

       (a) In General.--Part IV of subchapter A of chapter 1 is 
     amended by striking subparts H, I, and J (and by striking the 
     items relating to such subparts in the table of subparts for 
     such part).
       (b) Payments to Issuers.--Subchapter B of chapter 65 is 
     amended by striking section 6431 (and by striking the item 
     relating to such section in the table of sections for such 
     subchapter).
       (c) Conforming Amendments.--
       (1) Part IV of subchapter U of chapter 1 is amended by 
     striking section 1397E (and by striking the item relating to 
     such section in the table of sections for such part).
       (2) Section 54(l)(3)(B) is amended by inserting ``(as in 
     effect before its repeal by the Tax Cuts and Jobs Act)'' 
     after ``section 1397E(I)''.
       (3) Section 6211(b)(4)(A) is amended by striking ``, and 
     6431'' and inserting ``and'' before ``36B''.
       (4) Section 6401(b)(1) is amended by striking ``G, H, I, 
     and J'' and inserting ``and G''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to bonds issued after December 31, 2017.

    PART VI--PROVISIONS RELATED TO SPECIFIC ENTITIES AND INDUSTRIES

                   Subpart A--Partnership Provisions

     SEC. 13501. TREATMENT OF GAIN OR LOSS OF FOREIGN PERSONS FROM 
                   SALE OR EXCHANGE OF INTERESTS IN PARTNERSHIPS 
                   ENGAGED IN TRADE OR BUSINESS WITHIN THE UNITED 
                   STATES.

       (a) Amount Treated as Effectively Connected.--

[[Page 19896]]

       (1) In general.--Section 864(c) is amended by adding at the 
     end the following:
       ``(8) Gain or loss of foreign persons from sale or exchange 
     of certain partnership interests.--
       ``(A) In general.--Notwithstanding any other provision of 
     this subtitle, if a nonresident alien individual or foreign 
     corporation owns, directly or indirectly, an interest in a 
     partnership which is engaged in any trade or business within 
     the United States, gain or loss on the sale or exchange of 
     all (or any portion of) such interest shall be treated as 
     effectively connected with the conduct of such trade or 
     business to the extent such gain or loss does not exceed the 
     amount determined under subparagraph (B).
       ``(B) Amount treated as effectively connected.--The amount 
     determined under this subparagraph with respect to any 
     partnership interest sold or exchanged--
       ``(i) in the case of any gain on the sale or exchange of 
     the partnership interest, is--

       ``(I) the portion of the partner's distributive share of 
     the amount of gain which would have been effectively 
     connected with the conduct of a trade or business within the 
     United States if the partnership had sold all of its assets 
     at their fair market value as of the date of the sale or 
     exchange of such interest, or
       ``(II) zero if no gain on such deemed sale would have been 
     so effectively connected, and

       ``(ii) in the case of any loss on the sale or exchange of 
     the partnership interest, is--

       ``(I) the portion of the partner's distributive share of 
     the amount of loss on the deemed sale described in clause 
     (i)(I) which would have been so effectively connected, or
       ``(II) zero if no loss on such deemed sale would be have 
     been so effectively connected.

     For purposes of this subparagraph, a partner's distributive 
     share of gain or loss on the deemed sale shall be determined 
     in the same manner as such partner's distributive share of 
     the non-separately stated taxable income or loss of such 
     partnership.
       ``(C) Coordination with united states real property 
     interests.--If a partnership described in subparagraph (A) 
     holds any United States real property interest (as defined in 
     section 897(c)) at the time of the sale or exchange of the 
     partnership interest, then the gain or loss treated as 
     effectively connected income under subparagraph (A) shall be 
     reduced by the amount so treated with respect to such United 
     States real property interest under section 897.
       ``(D) Sale or exchange.--For purposes of this paragraph, 
     the term `sale or exchange' means any sale, exchange, or 
     other disposition.
       ``(E) Secretarial authority.--The Secretary shall prescribe 
     such regulations or other guidance as the Secretary 
     determines appropriate for the application of this paragraph, 
     including with respect to exchanges described in section 332, 
     351, 354, 355, 356, or 361.''.
       (2) Conforming amendments.--Section 864(c)(1) is amended--
       (A) by striking ``and (7)'' in subparagraph (A), and 
     inserting ``(7), and (8)'', and
       (B) by striking ``or (7)'' in subparagraph (B), and 
     inserting ``(7), or (8)''.
       (b) Withholding Requirements.--Section 1446 is amended by 
     redesignating subsection (f) as subsection (g) and by 
     inserting after subsection (e) the following:
       ``(f) Special Rules for Withholding on Dispositions of 
     Partnership Interests.--
       ``(1) In general.--Except as provided in this subsection, 
     if any portion of the gain (if any) on any disposition of an 
     interest in a partnership would be treated under section 
     864(c)(8) as effectively connected with the conduct of a 
     trade or business within the United States, the transferee 
     shall be required to deduct and withhold a tax equal to 10 
     percent of the amount realized on the disposition.
       ``(2) Exception if nonforeign affidavit furnished.--
       ``(A) In general.--No person shall be required to deduct 
     and withhold any amount under paragraph (1) with respect to 
     any disposition if the transferor furnishes to the transferee 
     an affidavit by the transferor stating, under penalty of 
     perjury, the transferor's United States taxpayer 
     identification number and that the transferor is not a 
     foreign person.
       ``(B) False affidavit.--Subparagraph (A) shall not apply to 
     any disposition if--
       ``(i) the transferee has actual knowledge that the 
     affidavit is false, or the transferee receives a notice (as 
     described in section 1445(d)) from a transferor's agent or 
     transferee's agent that such affidavit or statement is false, 
     or
       ``(ii) the Secretary by regulations requires the transferee 
     to furnish a copy of such affidavit or statement to the 
     Secretary and the transferee fails to furnish a copy of such 
     affidavit or statement to the Secretary at such time and in 
     such manner as required by such regulations.
       ``(C) Rules for agents.--The rules of section 1445(d) shall 
     apply to a transferor's agent or transferee's agent with 
     respect to any affidavit described in subparagraph (A) in the 
     same manner as such rules apply with respect to the 
     disposition of a United States real property interest under 
     such section.
       ``(3) Authority of secretary to prescribe reduced amount.--
     At the request of the transferor or transferee, the Secretary 
     may prescribe a reduced amount to be withheld under this 
     section if the Secretary determines that to substitute such 
     reduced amount will not jeopardize the collection of the tax 
     imposed under this title with respect to gain treated under 
     section 864(c)(8) as effectively connected with the conduct 
     of a trade or business with in the United States.
       ``(4) Partnership to withhold amounts not withheld by the 
     transferee.--If a transferee fails to withhold any amount 
     required to be withheld under paragraph (1), the partnership 
     shall be required to deduct and withhold from distributions 
     to the transferee a tax in an amount equal to the amount the 
     transferee failed to withhold (plus interest under this title 
     on such amount).
       ``(5) Definitions.--Any term used in this subsection which 
     is also used under section 1445 shall have the same meaning 
     as when used in such section.
       ``(6) Regulations.--The Secretary shall prescribe such 
     regulations or other guidance as may be necessary to carry 
     out the purposes of this subsection, including regulations 
     providing for exceptions from the provisions of this 
     subsection.''.
       (c) Effective Dates.--
       (1) Subsection (a).--The amendments made by subsection (a) 
     shall apply to sales, exchanges, and dispositions on or after 
     November 27, 2017.
       (2) Subsection (b).--The amendment made by subsection (b) 
     shall apply to sales, exchanges, and dispositions after 
     December 31, 2017.

     SEC. 13502. MODIFY DEFINITION OF SUBSTANTIAL BUILT-IN LOSS IN 
                   THE CASE OF TRANSFER OF PARTNERSHIP INTEREST.

       (a) In General.--Paragraph (1) of section 743(d) is to read 
     as follows:
       ``(1) In general.--For purposes of this section, a 
     partnership has a substantial built-in loss with respect to a 
     transfer of an interest in the partnership if--
       ``(A) the partnership's adjusted basis in the partnership 
     property exceeds by more than $250,000 the fair market value 
     of such property, or
       ``(B) the transferee partner would be allocated a loss of 
     more than $250,000 if the partnership assets were sold for 
     cash equal to their fair market value immediately after such 
     transfer.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to transfers of partnership interests after 
     December 31, 2017.

     SEC. 13503. CHARITABLE CONTRIBUTIONS AND FOREIGN TAXES TAKEN 
                   INTO ACCOUNT IN DETERMINING LIMITATION ON 
                   ALLOWANCE OF PARTNER'S SHARE OF LOSS.

       (a) In General.--Subsection (d) of section 704 is amended--
       (1) by striking ``A partner's distributive share'' and 
     inserting the following:
       ``(1) In general.--A partner's distributive share'',
       (2) by striking ``Any excess of such loss'' and inserting 
     the following:
       ``(2) Carryover.--Any excess of such loss'', and
       (3) by adding at the end the following new paragraph:
       ``(3) Special rules.--
       ``(A) In general.--In determining the amount of any loss 
     under paragraph (1), there shall be taken into account the 
     partner's distributive share of amounts described in 
     paragraphs (4) and (6) of section 702(a).
       ``(B) Exception.--In the case of a charitable contribution 
     of property whose fair market value exceeds its adjusted 
     basis, subparagraph (A) shall not apply to the extent of the 
     partner's distributive share of such excess.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to partnership taxable years beginning after 
     December 31, 2017.

     SEC. 13504. REPEAL OF TECHNICAL TERMINATION OF PARTNERSHIPS.

       (a) In General.--Paragraph (1) of section 708(b) is 
     amended--
       (1) by striking ``, or'' at the end of subparagraph (A) and 
     all that follows and inserting a period, and
       (2) by striking ``only if--'' and all that follows through 
     ``no part of any business'' and inserting the following: 
     ``only if no part of any business''.
       (b) Conforming Amendment.--
       (1) Section 168(i)(7)(B) is amended by striking the second 
     sentence.
       (2) Section 743(e) is amended by striking paragraph (4) and 
     redesignating paragraphs (5), (6), and (7) as paragraphs (4), 
     (5), and (6).
       (c) Effective Date.--The amendments made by this section 
     shall apply to partnership taxable years beginning after 
     December 31, 2017.

                      Subpart B--Insurance Reforms

     SEC. 13511. NET OPERATING LOSSES OF LIFE INSURANCE COMPANIES.

       (a) In General.--Section 805(b) is amended by striking 
     paragraph (4) and by redesignating paragraph (5) as paragraph 
     (4).
       (b) Conforming Amendments.--
       (1) Part I of subchapter L of chapter 1 is amended by 
     striking section 810 (and by striking the item relating to 
     such section in the table of sections for such part).
       (2)(A) Part III of subchapter L of chapter 1 is amended by 
     striking section 844 (and by striking the item relating to 
     such section in the table of sections for such part).
       (B) Section 831(b)(3) is amended by striking ``except as 
     provided in section 844,''
       (3) Section 381 is amended by striking subsection (d).
       (4) Section 805(a)(4)(B)(ii) is amended to read as follows:
       ``(ii) the deduction allowed under section 172,''.
       (5) Section 805(a) is amended by striking paragraph (5).
       (6) Section 805(b)(2)(A)(iv) is amended to read as follows:
       ``(iv) any net operating loss carryback to the taxable year 
     under section 172, and''.
       (7) Section 953(b)(1)(B) is amended to read as follows:

[[Page 19897]]

       ``(B) So much of section 805(a)(8) as relates to the 
     deduction allowed under section 172.''.
       (8) Section 1351(i)(3) is amended by striking ``or the 
     operations loss deduction under section 810,''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to losses arising in taxable years beginning 
     after December 31, 2017.

     SEC. 13512. REPEAL OF SMALL LIFE INSURANCE COMPANY DEDUCTION.

       (a) In General.--Part I of subchapter L of chapter 1 is 
     amended by striking section 806 (and by striking the item 
     relating to such section in the table of sections for such 
     part).
       (b) Conforming Amendments.--
       (1) Section 453B(e) is amended--
       (A) by striking ``(as defined in section 806(b)(3))'' in 
     paragraph (2)(B), and
       (B) by adding at the end the following new paragraph:
       ``(3) Noninsurance business.--
       ``(A) In general.--For purposes of this subsection, the 
     term `noninsurance business' means any activity which is not 
     an insurance business.
       ``(B) Certain activities treated as insurance businesses.--
     For purposes of subparagraph (A), any activity which is not 
     an insurance business shall be treated as an insurance 
     business if--
       ``(i) it is of a type traditionally carried on by life 
     insurance companies for investment purposes, but only if the 
     carrying on of such activity (other than in the case of real 
     estate) does not constitute the active conduct of a trade or 
     business, or
       ``(ii) it involves the performance of administrative 
     services in connection with plans providing life insurance, 
     pension, or accident and health benefits.''.
       (2) Section 465(c)(7)(D)(v)(II) is amended by striking 
     ``section 806(b)(3)'' and inserting ``section 453B(e)(3)''.
       (3) Section 801(a)(2) is amended by striking subparagraph 
     (C).
       (4) Section 804 is amended by striking ``means--'' and all 
     that follows and inserting ``means the general deductions 
     provided in section 805.''.
       (5) Section 805(a)(4)(B), as amended by this Act, is 
     amended by striking clause (i) and by redesignating clauses 
     (ii), (iii), and (iv) as clauses (i), (ii), and (iii), 
     respectively.
       (6) Section 805(b)(2)(A), as amended by this Act, is 
     amended by striking clause (iii) and by redesignating clauses 
     (iv) and (v) as clauses (iii) and (iv), respectively.
       (7) Section 842(c) is amended by striking paragraph (1) and 
     by redesignating paragraphs (2) and (3) as paragraphs (1) and 
     (2), respectively.
       (8) Section 953(b)(1), as amended by section 13511, is 
     amended by striking subparagraph (A) and by redesignating 
     subparagraphs (B) and (C) as subparagraphs (A) and (B), 
     respectively.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13513. ADJUSTMENT FOR CHANGE IN COMPUTING RESERVES.

       (a) In General.--Paragraph (1) of section 807(f) is amended 
     to read as follows:
       ``(1) Treatment as change in method of accounting.--If the 
     basis for determining any item referred to in subsection (c) 
     as of the close of any taxable year differs from the basis 
     for such determination as of the close of the preceding 
     taxable year, then so much of the difference between--
       ``(A) the amount of the item at the close of the taxable 
     year, computed on the new basis, and
       ``(B) the amount of the item at the close of the taxable 
     year, computed on the old basis,
     as is attributable to contracts issued before the taxable 
     year shall be taken into account under section 481 as 
     adjustments attributable to a change in method of accounting 
     initiated by the taxpayer and made with the consent of the 
     Secretary.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13514. REPEAL OF SPECIAL RULE FOR DISTRIBUTIONS TO 
                   SHAREHOLDERS FROM PRE-1984 POLICYHOLDERS 
                   SURPLUS ACCOUNT.

       (a) In General.--Subpart D of part I of subchapter L is 
     amended by striking section 815 (and by striking the item 
     relating to such section in the table of sections for such 
     subpart).
       (b) Conforming Amendment.--Section 801 is amended by 
     striking subsection (c).
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.
       (d) Phased Inclusion of Remaining Balance of Policyholders 
     Surplus Accounts.--In the case of any stock life insurance 
     company which has a balance (determined as of the close of 
     such company's last taxable year beginning before January 1, 
     2018) in an existing policyholders surplus account (as 
     defined in section 815 of the Internal Revenue Code of 1986, 
     as in effect before its repeal), the tax imposed by section 
     801 of such Code for the first 8 taxable years beginning 
     after December 31, 2017, shall be the amount which would be 
     imposed by such section for such year on the sum of--
       (1) life insurance company taxable income for such year 
     (within the meaning of such section 801 but not less than 
     zero), plus
       (2) \1/8\ of such balance.

     SEC. 13515. MODIFICATION OF PRORATION RULES FOR PROPERTY AND 
                   CASUALTY INSURANCE COMPANIES.

       (a) In General.--Section 832(b)(5)(B) is amended--
       (1) by striking ``15 percent'' and inserting ``the 
     applicable percentage'', and
       (2) by inserting at the end the following new sentence: 
     ``For purposes of this subparagraph, the applicable 
     percentage is 5.25 percent divided by the highest rate in 
     effect under section 11(b).''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13516. REPEAL OF SPECIAL ESTIMATED TAX PAYMENTS.

       (a) In General.--Part III of subchapter L of chapter 1 is 
     amended by striking section 847 (and by striking the item 
     relating to such section in the table of sections for such 
     part).
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13517. COMPUTATION OF LIFE INSURANCE TAX RESERVES.

       (a) In General.--
       (1) Appropriate rate of interest.--The second sentence of 
     section 807(c) is amended to read as follows: ``For purposes 
     of paragraph (3), the appropriate rate of interest is the 
     highest rate or rates permitted to be used to discount the 
     obligations by the National Association of Insurance 
     Commissioners as of the date the reserve is determined.''.
       (2) Method of computing reserves.--Section 807(d) is 
     amended--
       (A) by striking paragraphs (1), (2), (4), and (5),
       (B) by redesignating paragraph (6) as paragraph (4),
       (C) by inserting before paragraph (3) the following new 
     paragraphs:
       ``(1) Determination of reserve.--
       ``(A) In general.--For purposes of this part (other than 
     section 816), the amount of the life insurance reserves for 
     any contract (other than a contract to which subparagraph (B) 
     applies) shall be the greater of--
       ``(i) the net surrender value of such contract, or
       ``(ii) 92.81 percent of the reserve determined under 
     paragraph (2).
       ``(B) Variable contracts.--For purposes of this part (other 
     than section 816), the amount of the life insurance reserves 
     for a variable contract shall be equal to the sum of--
       ``(i) the greater of--

       ``(I) the net surrender value of such contract, or
       ``(II) the portion of the reserve that is separately 
     accounted for under section 817, plus

       ``(ii) 92.81 percent of the excess (if any) of the reserve 
     determined under paragraph (2) over the amount in clause (i).
       ``(C) Statutory cap.--In no event shall the reserves 
     determined under subparagraphs (A) or (B) for any contract as 
     of any time exceed the amount which would be taken into 
     account with respect to such contract as of such time in 
     determining statutory reserves (as defined in paragraph (4)).
       ``(D) No double counting.--In no event shall any amount or 
     item be taken into account more than once in determining any 
     reserve under this subchapter.
       ``(2) Amount of reserve.--The amount of the reserve 
     determined under this paragraph with respect to any contract 
     shall be determined by using the tax reserve method 
     applicable to such contract.''.
       (D) by striking ``(other than a qualified long-term care 
     insurance contract, as defined in section 7702B(b)), a 2-year 
     full preliminary term method'' in paragraph (3)(A)(iii) and 
     inserting ``, the reserve method prescribed by the National 
     Association of Insurance Commissioners which covers such 
     contract as of the date the reserve is determined'',
       (E) by striking ``(as of the date of issuance)'' in 
     paragraph (3)(A)(iv)(I) and inserting ``(as of the date the 
     reserve is determined)'',
       (F) by striking ``as of the date of the issuance of'' in 
     paragraph (3)(A)(iv)(II) and inserting ``as of the date the 
     reserve is determined for'',
       (G) by striking ``in effect on the date of the issuance of 
     the contract'' in paragraph (3)(B)(i) and inserting 
     ``applicable to the contract and in effect as of the date the 
     reserve is determined'', and
       (H) by striking ``in effect on the date of the issuance of 
     the contract'' in paragraph (3)(B)(ii) and inserting 
     ``applicable to the contract and in effect as of the date the 
     reserve is determined''.
       (3) Special rules.--Section 807(e) is amended--
       (A) by striking paragraphs (2) and (5),
       (B) by redesignating paragraphs (3), (4), (6), and (7) as 
     paragraphs (2), (3), (4), and (5), respectively,
       (C) by amending paragraph (2) (as so redesignated) to read 
     as follows:
       ``(2) Qualified supplemental benefits.--
       ``(A) Qualified supplemental benefits treated separately.--
     For purposes of this part, the amount of the life insurance 
     reserve for any qualified supplemental benefit shall be 
     computed separately as though such benefit were under a 
     separate contract.
       ``(B) Qualified supplemental benefit.--For purposes of this 
     paragraph, the term `qualified supplemental benefit' means 
     any supplemental benefit described in subparagraph (C) if--
       ``(i) there is a separately identified premium or charge 
     for such benefit, and
       ``(ii) any net surrender value under the contract 
     attributable to any other benefit is not available to fund 
     such benefit.
       ``(C) Supplemental benefits.--For purposes of this 
     paragraph, the supplemental benefits described in this 
     subparagraph are any--
       ``(i) guaranteed insurability,
       ``(ii) accidental death or disability benefit,

[[Page 19898]]

       ``(iii) convertibility,
       ``(iv) disability waiver benefit, or
       ``(v) other benefit prescribed by regulations,
     which is supplemental to a contract for which there is a 
     reserve described in subsection (c).'', and
       (D) by adding at the end the following new paragraph:
       ``(6) Reporting rules.--The Secretary shall require 
     reporting (at such time and in such manner as the Secretary 
     shall prescribe) with respect to the opening balance and 
     closing balance of reserves and with respect to the method of 
     computing reserves for purposes of determining income.''.
       (4) Definition of life insurance contract.--Section 7702 is 
     amended--
       (A) by striking clause (i) of subsection (c)(3)(B) and 
     inserting the following:
       ``(i) reasonable mortality charges which meet the 
     requirements prescribed in regulations to be promulgated by 
     the Secretary or that do not exceed the mortality charges 
     specified in the prevailing commissioners' standard tables as 
     defined in subsection (f)(10),'' and
       (B) by adding at the end of subsection (f) the following 
     new paragraph:
       ``(10) Prevailing commissioners' standard tables.--For 
     purposes of subsection (c)(3)(B)(i), the term `prevailing 
     commissioners' standard tables' means the most recent 
     commissioners' standard tables prescribed by the National 
     Association of Insurance Commissioners which are permitted to 
     be used in computing reserves for that type of contract under 
     the insurance laws of at least 26 States when the contract 
     was issued. If the prevailing commissioners' standard tables 
     as of the beginning of any calendar year (hereinafter in this 
     paragraph referred to as the `year of change') are different 
     from the prevailing commissioners' standard tables as of the 
     beginning of the preceding calendar year, the issuer may use 
     the prevailing commissioners' standard tables as of the 
     beginning of the preceding calendar year with respect to any 
     contract issued after the change and before the close of the 
     3-year period beginning on the first day of the year of 
     change.''.
       (b) Conforming Amendments.--
       (1) Section 808 is amended by adding at the end the 
     following new subsection:
       ``(g) Prevailing State Assumed Interest Rate.--For purposes 
     of this subchapter--
       ``(1) In general.--The term `prevailing State assumed 
     interest rate' means, with respect to any contract, the 
     highest assumed interest rate permitted to be used in 
     computing life insurance reserves for insurance contracts or 
     annuity contracts (as the case may be) under the insurance 
     laws of at least 26 States. For purposes of the preceding 
     sentence, the effect of nonforfeiture laws of a State on 
     interest rates for reserves shall not be taken into account.
       ``(2) When rate determined.--The prevailing State assumed 
     interest rate with respect to any contract shall be 
     determined as of the beginning of the calendar year in which 
     the contract was issued.''.
       (2) Paragraph (1) of section 811(d) is amended by striking 
     ``the greater of the prevailing State assumed interest rate 
     or applicable Federal interest rate in effect under section 
     807'' and inserting ``the interest rate in effect under 
     section 808(g)''.
       (3) Subparagraph (A) of section 846(f)(6) is amended by 
     striking ``except that'' and all that follows and inserting 
     ``except that the limitation of subsection (a)(3) shall 
     apply, and''.
       (4) Section 848(e)(1)(B)(iii) is amended by striking 
     ``807(e)(4)'' and inserting ``807(e)(3)''.
       (5) Subparagraph (B) of section 954(i)(5) is amended by 
     striking ``shall be substituted for the prevailing State 
     assumed interest rate,'' and inserting ``shall apply,''.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to taxable years beginning after December 31, 2017.
       (2) Transition rule.--For the first taxable year beginning 
     after December 31, 2017, the reserve with respect to any 
     contract (as determined under section 807(d) of the Internal 
     Revenue Code of 1986) at the end of the preceding taxable 
     year shall be determined as if the amendments made by this 
     section had applied to such reserve in such preceding taxable 
     year.
       (3) Transition relief.--
       (A) In general.--If--
       (i) the reserve determined under section 807(d) of the 
     Internal Revenue Code of 1986 (determined after application 
     of paragraph (2)) with respect to any contract as of the 
     close of the year preceding the first taxable year beginning 
     after December 31, 2017, differs from
       (ii) the reserve which would have been determined with 
     respect to such contract as of the close of such taxable year 
     under such section determined without regard to paragraph 
     (2),
     then the difference between the amount of the reserve 
     described in clause (i) and the amount of the reserve 
     described in clause (ii) shall be taken into account under 
     the method provided in subparagraph (B).
       (B) Method.--The method provided in this subparagraph is as 
     follows:
       (i) If the amount determined under subparagraph (A)(i) 
     exceeds the amount determined under subparagraph (A)(ii), 1/8 
     of such excess shall be taken into account, for each of the 8 
     succeeding taxable years, as a deduction under section 
     805(a)(2) or 832(c)(4) of such Code, as applicable.
       (ii) If the amount determined under subparagraph (A)(ii) 
     exceeds the amount determined under subparagraph (A)(i), 1/8 
     of such excess shall be included in gross income, for each of 
     the 8 succeeding taxable years, under section 803(a)(2) or 
     832(b)(1)(C) of such Code, as applicable.

     SEC. 13518. MODIFICATION OF RULES FOR LIFE INSURANCE 
                   PRORATION FOR PURPOSES OF DETERMINING THE 
                   DIVIDENDS RECEIVED DEDUCTION.

       (a) In General.--Section 812 is amended to read as follows:

     ``SEC. 812. DEFINITION OF COMPANY'S SHARE AND POLICYHOLDER'S 
                   SHARE.

       ``(a) Company's Share.--For purposes of section 805(a)(4), 
     the term `company's share' means, with respect to any taxable 
     year beginning after December 31, 2017, 70 percent.
       ``(b) Policyholder's Share.--For purposes of section 807, 
     the term `policyholder's share' means, with respect to any 
     taxable year beginning after December 31, 2017, 30 
     percent.''.
       (b) Conforming Amendment.--Section 817A(e)(2) is amended by 
     striking ``, 807(d)(2)(B), and 812'' and inserting ``and 
     807(d)(2)(B)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13519. CAPITALIZATION OF CERTAIN POLICY ACQUISITION 
                   EXPENSES.

       (a) In General.--
       (1) Section 848(a)(2) is amended by striking ``120-month'' 
     and inserting ``180-month''.
       (2) Section 848(c)(1) is amended by striking ``1.75 
     percent'' and inserting ``2.09 percent''.
       (3) Section 848(c)(2) is amended by striking ``2.05 
     percent'' and inserting ``2.45 percent''.
       (4) Section 848(c)(3) is amended by striking ``7.7 
     percent'' and inserting ``9.2 percent''.
       (b) Conforming Amendments.--Section 848(b)(1) is amended by 
     striking ``120-month'' and inserting ``180-month''.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to net premiums for taxable years beginning after 
     December 31, 2017.
       (2) Transition rule.--Specified policy acquisition expenses 
     first required to be capitalized in a taxable year beginning 
     before January 1, 2018, will continue to be allowed as a 
     deduction ratably over the 120-month period beginning with 
     the first month in the second half of such taxable year.

     SEC. 13520. TAX REPORTING FOR LIFE SETTLEMENT TRANSACTIONS.

       (a) In General.--Subpart B of part III of subchapter A of 
     chapter 61, as amended by section 13306, is amended by adding 
     at the end the following new section:

     ``SEC. 6050Y. RETURNS RELATING TO CERTAIN LIFE INSURANCE 
                   CONTRACT TRANSACTIONS.

       ``(a) Requirement of Reporting of Certain Payments.--
       ``(1) In general.--Every person who acquires a life 
     insurance contract or any interest in a life insurance 
     contract in a reportable policy sale during any taxable year 
     shall make a return for such taxable year (at such time and 
     in such manner as the Secretary shall prescribe) setting 
     forth--
       ``(A) the name, address, and TIN of such person,
       ``(B) the name, address, and TIN of each recipient of 
     payment in the reportable policy sale,
       ``(C) the date of such sale,
       ``(D) the name of the issuer of the life insurance contract 
     sold and the policy number of such contract, and
       ``(E) the amount of each payment.
       ``(2) Statement to be furnished to persons with respect to 
     whom information is required.--Every person required to make 
     a return under this subsection shall furnish to each person 
     whose name is required to be set forth in such return a 
     written statement showing--
       ``(A) the name, address, and phone number of the 
     information contact of the person required to make such 
     return, and
       ``(B) the information required to be shown on such return 
     with respect to such person, except that in the case of an 
     issuer of a life insurance contract, such statement is not 
     required to include the information specified in paragraph 
     (1)(E).
       ``(b) Requirement of Reporting of Seller's Basis in Life 
     Insurance Contracts.--
       ``(1) In general.--Upon receipt of the statement required 
     under subsection (a)(2) or upon notice of a transfer of a 
     life insurance contract to a foreign person, each issuer of a 
     life insurance contract shall make a return (at such time and 
     in such manner as the Secretary shall prescribe) setting 
     forth--
       ``(A) the name, address, and TIN of the seller who 
     transfers any interest in such contract in such sale,
       ``(B) the investment in the contract (as defined in section 
     72(e)(6)) with respect to such seller, and
       ``(C) the policy number of such contract.
       ``(2) Statement to be furnished to persons with respect to 
     whom information is required.--Every person required to make 
     a return under this subsection shall furnish to each person 
     whose name is required to be set forth in such return a 
     written statement showing--
       ``(A) the name, address, and phone number of the 
     information contact of the person required to make such 
     return, and
       ``(B) the information required to be shown on such return 
     with respect to each seller whose name is required to be set 
     forth in such return.
       ``(c) Requirement of Reporting With Respect to Reportable 
     Death Benefits.--
       ``(1) In general.--Every person who makes a payment of 
     reportable death benefits during any taxable year shall make 
     a return for such taxable year (at such time and in such 
     manner as the Secretary shall prescribe) setting forth--

[[Page 19899]]

       ``(A) the name, address, and TIN of the person making such 
     payment,
       ``(B) the name, address, and TIN of each recipient of such 
     payment,
       ``(C) the date of each such payment,
       ``(D) the gross amount of each such payment, and
       ``(E) such person's estimate of the investment in the 
     contract (as defined in section 72(e)(6)) with respect to the 
     buyer.
       ``(2) Statement to be furnished to persons with respect to 
     whom information is required.--Every person required to make 
     a return under this subsection shall furnish to each person 
     whose name is required to be set forth in such return a 
     written statement showing--
       ``(A) the name, address, and phone number of the 
     information contact of the person required to make such 
     return, and
       ``(B) the information required to be shown on such return 
     with respect to each recipient of payment whose name is 
     required to be set forth in such return.
       ``(d) Definitions.--For purposes of this section:
       ``(1) Payment.--The term `payment' means, with respect to 
     any reportable policy sale, the amount of cash and the fair 
     market value of any consideration transferred in the sale.
       ``(2) Reportable policy sale.--The term `reportable policy 
     sale' has the meaning given such term in section 
     101(a)(3)(B).
       ``(3) Issuer.--The term `issuer' means any life insurance 
     company that bears the risk with respect to a life insurance 
     contract on the date any return or statement is required to 
     be made under this section.
       ``(4) Reportable death benefits.--The term `reportable 
     death benefits' means amounts paid by reason of the death of 
     the insured under a life insurance contract that has been 
     transferred in a reportable policy sale.''.
       (b) Clerical Amendment.--The table of sections for subpart 
     B of part III of subchapter A of chapter 61, as amended by 
     section 13306, is amended by inserting after the item 
     relating to section 6050X the following new item:

``Sec. 6050Y. Returns relating to certain life insurance contract 
              transactions.''.
       (c) Conforming Amendments.--
       (1) Subsection (d) of section 6724 is amended--
       (A) by striking ``or'' at the end of clause (xxiv) of 
     paragraph (1)(B), by striking ``and'' at the end of clause 
     (xxv) of such paragraph and inserting ``or'', and by 
     inserting after such clause (xxv) the following new clause:
       ``(xxvi) section 6050Y (relating to returns relating to 
     certain life insurance contract transactions), and'', and
       (B) by striking ``or'' at the end of subparagraph (HH) of 
     paragraph (2), by striking the period at the end of 
     subparagraph (II) of such paragraph and inserting ``, or'', 
     and by inserting after such subparagraph (II) the following 
     new subparagraph:
       ``(JJ) subsection (a)(2), (b)(2), or (c)(2) of section 
     6050Y (relating to returns relating to certain life insurance 
     contract transactions).''.
       (2) Section 6047 is amended--
       (A) by redesignating subsection (g) as subsection (h),
       (B) by inserting after subsection (f) the following new 
     subsection:
       ``(g) Information Relating to Life Insurance Contract 
     Transactions.--This section shall not apply to any 
     information which is required to be reported under section 
     6050Y.'', and
       (C) by adding at the end of subsection (h), as so 
     redesignated, the following new paragraph:
       ``(4) For provisions requiring reporting of information 
     relating to certain life insurance contract transactions, see 
     section 6050Y.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to--
       (1) reportable policy sales (as defined in section 
     6050Y(d)(2) of the Internal Revenue Code of 1986 (as added by 
     subsection (a)) after December 31, 2017, and
       (2) reportable death benefits (as defined in section 
     6050Y(d)(4) of such Code (as added by subsection (a)) paid 
     after December 31, 2017.

     SEC. 13521. CLARIFICATION OF TAX BASIS OF LIFE INSURANCE 
                   CONTRACTS.

       (a) Clarification With Respect to Adjustments.--Paragraph 
     (1) of section 1016(a) is amended by striking subparagraph 
     (A) and all that follows and inserting the following:
       ``(A) for--
       ``(i) taxes or other carrying charges described in section 
     266; or
       ``(ii) expenditures described in section 173 (relating to 
     circulation expenditures),
     for which deductions have been taken by the taxpayer in 
     determining taxable income for the taxable year or prior 
     taxable years; or
       ``(B) for mortality, expense, or other reasonable charges 
     incurred under an annuity or life insurance contract;''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to transactions entered into after August 25, 
     2009.

     SEC. 13522. EXCEPTION TO TRANSFER FOR VALUABLE CONSIDERATION 
                   RULES.

       (a) In General.--Subsection (a) of section 101 is amended 
     by inserting after paragraph (2) the following new paragraph:
       ``(3) Exception to valuable consideration rules for 
     commercial transfers.--
       ``(A) In general.--The second sentence of paragraph (2) 
     shall not apply in the case of a transfer of a life insurance 
     contract, or any interest therein, which is a reportable 
     policy sale.
       ``(B) Reportable policy sale.--For purposes of this 
     paragraph, the term `reportable policy sale' means the 
     acquisition of an interest in a life insurance contract, 
     directly or indirectly, if the acquirer has no substantial 
     family, business, or financial relationship with the insured 
     apart from the acquirer's interest in such life insurance 
     contract. For purposes of the preceding sentence, the term 
     `indirectly' applies to the acquisition of an interest in a 
     partnership, trust, or other entity that holds an interest in 
     the life insurance contract.''.
       (b) Conforming Amendment.--Paragraph (1) of section 101(a) 
     is amended by striking ``paragraph (2)'' and inserting 
     ``paragraphs (2) and (3)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to transfers after December 31, 2017.

     SEC. 13523. MODIFICATION OF DISCOUNTING RULES FOR PROPERTY 
                   AND CASUALTY INSURANCE COMPANIES.

       (a) Modification of Rate of Interest Used to Discount 
     Unpaid Losses.--Paragraph (2) of section 846(c) is amended to 
     read as follows:
       ``(2) Determination of annual rate.--The annual rate 
     determined by the Secretary under this paragraph for any 
     calendar year shall be a rate determined on the basis of the 
     corporate bond yield curve (as defined in section 
     430(h)(2)(D)(i), determined by substituting `60-month period' 
     for `24-month period' therein).''.
       (b) Modification of Computational Rules for Loss Payment 
     Patterns.--Section 846(d)(3) is amended by striking 
     subparagraphs (B) through (G) and inserting the following new 
     subparagraph:
       ``(B) Treatment of certain losses.--
       ``(i) 3-year loss payment pattern.--In the case of any line 
     of business not described in subparagraph (A)(ii), losses 
     paid after the 1st year following the accident year shall be 
     treated as paid equally in the 2nd and 3rd year following the 
     accident year.
       ``(ii) 10-year loss payment pattern.--

       ``(I) In general.--The period taken into account under 
     subparagraph (A)(ii) shall be extended to the extent required 
     under subclause (II).
       ``(II) Computation of extension.--The amount of losses 
     which would have been treated as paid in the 10th year after 
     the accident year shall be treated as paid in such 10th year 
     and each subsequent year in an amount equal to the amount of 
     the average of the losses treated as paid in the 7th, 8th, 
     and 9th years after the accident year (or, if lesser, the 
     portion of the unpaid losses not theretofore taken into 
     account). To the extent such unpaid losses have not been 
     treated as paid before the 24th year after the accident year, 
     they shall be treated as paid in such 24th year.''.

       (c) Repeal of Historical Payment Pattern Election.--Section 
     846, as amended by this Act, is amended by striking 
     subsection (e) and by redesignating subsections (f) and (g) 
     as subsections (e) and (f), respectively.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.
       (e) Transitional Rule.--For the first taxable year 
     beginning after December 31, 2017--
       (1) the unpaid losses and the expenses unpaid (as defined 
     in paragraphs (5)(B) and (6) of section 832(b) of the 
     Internal Revenue Code of 1986) at the end of the preceding 
     taxable year, and
       (2) the unpaid losses as defined in sections 807(c)(2) and 
     805(a)(1) of such Code at the end of the preceding taxable 
     year,
     shall be determined as if the amendments made by this section 
     had applied to such unpaid losses and expenses unpaid in the 
     preceding taxable year and by using the interest rate and 
     loss payment patterns applicable to accident years ending 
     with calendar year 2018, and any adjustment shall be taken 
     into account ratably in such first taxable year and the 7 
     succeeding taxable years. For subsequent taxable years, such 
     amendments shall be applied with respect to such unpaid 
     losses and expenses unpaid by using the interest rate and 
     loss payment patterns applicable to accident years ending 
     with calendar year 2018.

               Subpart C--Banks and Financial Instruments

     SEC. 13531. LIMITATION ON DEDUCTION FOR FDIC PREMIUMS.

       (a) In General.--Section 162, as amended by sections 13307, 
     is amended by redesignating subsection (r) as subsection (s) 
     and by inserting after subsection (q) the following new 
     subsection:
       ``(r) Disallowance of FDIC Premiums Paid by Certain Large 
     Financial Institutions.--
       ``(1) In general.--No deduction shall be allowed for the 
     applicable percentage of any FDIC premium paid or incurred by 
     the taxpayer.
       ``(2) Exception for small institutions.--Paragraph (1) 
     shall not apply to any taxpayer for any taxable year if the 
     total consolidated assets of such taxpayer (determined as of 
     the close of such taxable year) do not exceed 
     $10,000,000,000.
       ``(3) Applicable percentage.--For purposes of this 
     subsection, the term `applicable percentage' means, with 
     respect to any taxpayer for any taxable year, the ratio 
     (expressed as a percentage but not greater than 100 percent) 
     which--
       ``(A) the excess of--
       ``(i) the total consolidated assets of such taxpayer 
     (determined as of the close of such taxable year), over
       ``(ii) $10,000,000,000, bears to
       ``(B) $40,000,000,000.
       ``(4) FDIC premiums.--For purposes of this subsection, the 
     term `FDIC premium' means any assessment imposed under 
     section 7(b) of the Federal Deposit Insurance Act (12 U.S.C. 
     1817(b)).
       ``(5) Total consolidated assets.--For purposes of this 
     subsection, the term `total consolidated assets' has the 
     meaning given such term

[[Page 19900]]

     under section 165 of the Dodd-Frank Wall Street Reform and 
     Consumer Protection Act (12 U.S.C. 5365).
       ``(6) Aggregation rule.--
       ``(A) In general.--Members of an expanded affiliated group 
     shall be treated as a single taxpayer for purposes of 
     applying this subsection.
       ``(B) Expanded affiliated group.--
       ``(i) In general.--For purposes of this paragraph, the term 
     `expanded affiliated group' means an affiliated group as 
     defined in section 1504(a), determined--

       ``(I) by substituting `more than 50 percent' for `at least 
     80 percent' each place it appears, and
       ``(II) without regard to paragraphs (2) and (3) of section 
     1504(b).

       ``(ii) Control of non-corporate entities.--A partnership or 
     any other entity (other than a corporation) shall be treated 
     as a member of an expanded affiliated group if such entity is 
     controlled (within the meaning of section 954(d)(3)) by 
     members of such group (including any entity treated as a 
     member of such group by reason of this clause).''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13532. REPEAL OF ADVANCE REFUNDING BONDS.

       (a) In General.--Paragraph (1) of section 149(d) is amended 
     by striking ``as part of an issue described in paragraph (2), 
     (3), or (4).'' and inserting ``to advance refund another 
     bond.''.
       (b) Conforming Amendments.--
       (1) Section 149(d) is amended by striking paragraphs (2), 
     (3), (4), and (6) and by redesignating paragraphs (5) and (7) 
     as paragraphs (2) and (3).
       (2) Section 148(f)(4)(C) is amended by striking clause 
     (xiv) and by redesignating clauses (xv) to (xvii) as clauses 
     (xiv) to (xvi).
       (c) Effective Date.--The amendments made by this section 
     shall apply to advance refunding bonds issued after December 
     31, 2017.

                       Subpart D--S Corporations

     SEC. 13541. EXPANSION OF QUALIFYING BENEFICIARIES OF AN 
                   ELECTING SMALL BUSINESS TRUST.

       (a) No Look-through for Eligibility Purposes.--Section 
     1361(c)(2)(B)(v) is amended by adding at the end the 
     following new sentence: ``This clause shall not apply for 
     purposes of subsection (b)(1)(C).''.
       (b) Effective Date.--The amendment made by this section 
     shall take effect on January 1, 2018.

     SEC. 13542. CHARITABLE CONTRIBUTION DEDUCTION FOR ELECTING 
                   SMALL BUSINESS TRUSTS.

       (a) In General.--Section 641(c)(2) is amended by inserting 
     after subparagraph (D) the following new subparagraph:
       ``(E)(i) Section 642(c) shall not apply.
       ``(ii) For purposes of section 170(b)(1)(G), adjusted gross 
     income shall be computed in the same manner as in the case of 
     an individual, except that the deductions for costs which are 
     paid or incurred in connection with the administration of the 
     trust and which would not have been incurred if the property 
     were not held in such trust shall be treated as allowable in 
     arriving at adjusted gross income.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13543. MODIFICATION OF TREATMENT OF S CORPORATION 
                   CONVERSIONS TO C CORPORATIONS.

       (a) Adjustments Attributable to Conversion From S 
     Corporation to C Corporation.--Section 481 is amended by 
     adding at the end the following new subsection:
       ``(d) Adjustments Attributable to Conversion From S 
     Corporation to C Corporation.--
       ``(1) In general.--In the case of an eligible terminated S 
     corporation, any adjustment required by subsection (a)(2) 
     which is attributable to such corporation's revocation 
     described in paragraph (2)(A)(ii) shall be taken into account 
     ratably during the 6-taxable year period beginning with the 
     year of change.
       ``(2) Eligible terminated s corporation.--For purposes of 
     this subsection, the term `eligible terminated S corporation' 
     means any C corporation--
       ``(A) which--
       ``(i) was an S corporation on the day before the date of 
     the enactment of the Tax Cuts and Jobs Act, and
       ``(ii) during the 2-year period beginning on the date of 
     such enactment makes a revocation of its election under 
     section 1362(a), and
       ``(B) the owners of the stock of which, determined on the 
     date such revocation is made, are the same owners (and in 
     identical proportions) as on the date of such enactment.''.
       (b) Cash Distributions Following Post-termination 
     Transition Period From S Corporation Status.--Section 1371 is 
     amended by adding at the end the following new subsection:
       ``(f) Cash Distributions Following Post-termination 
     Transition Period.--In the case of a distribution of money by 
     an eligible terminated S corporation (as defined in section 
     481(d)) after the post-termination transition period, the 
     accumulated adjustments account shall be allocated to such 
     distribution, and the distribution shall be chargeable to 
     accumulated earnings and profits, in the same ratio as the 
     amount of such accumulated adjustments account bears to the 
     amount of such accumulated earnings and profits.''.

                          PART VII--EMPLOYMENT

                        Subpart A--Compensation

     SEC. 13601. MODIFICATION OF LIMITATION ON EXCESSIVE EMPLOYEE 
                   REMUNERATION.

       (a) Repeal of Performance-based Compensation and Commission 
     Exceptions for Limitation on Excessive Employee 
     Remuneration.--
       (1) In general.--Paragraph (4) of section 162(m) is amended 
     by striking subparagraphs (B) and (C) and by redesignating 
     subparagraphs (D), (E), (F), and (G) as subparagraphs (B), 
     (C), (D), and (E), respectively.
       (2) Conforming amendments.--
       (A) Paragraphs (5)(E) and (6)(D) of section 162(m) are each 
     amended by striking ``subparagraphs (B), (C), and (D)'' and 
     inserting ``subparagraph (B)''.
       (B) Paragraphs (5)(G) and (6)(G) of section 162(m) are each 
     amended by striking ``(F) and (G)'' and inserting ``(D) and 
     (E)''.
       (b) Modification of Definition of Covered Employees.--
     Paragraph (3) of section 162(m) is amended--
       (1) in subparagraph (A), by striking ``as of the close of 
     the taxable year, such employee is the chief executive 
     officer of the taxpayer or is'' and inserting ``such employee 
     is the principal executive officer or principal financial 
     officer of the taxpayer at any time during the taxable year, 
     or was'',
       (2) in subparagraph (B)--
       (A) by striking ``4'' and inserting ``3'', and
       (B) by striking ``(other than the chief executive 
     officer)'' and inserting ``(other than any individual 
     described in subparagraph (A))'', and
       (3) by striking ``or'' at the end of subparagraph (A), by 
     striking the period at the end of subparagraph (B) and 
     inserting ``, or'', and by adding at the end the following:
       ``(C) was a covered employee of the taxpayer (or any 
     predecessor) for any preceding taxable year beginning after 
     December 31, 2016.''.
       (c) Expansion of Applicable Employer.--
       (1) In general.--Section 162(m)(2) is amended to read as 
     follows:
       ``(2) Publicly held corporation.--For purposes of this 
     subsection, the term `publicly held corporation' means any 
     corporation which is an issuer (as defined in section 3 of 
     the Securities Exchange Act of 1934 (15 U.S.C. 78c))--
       ``(A) the securities of which are required to be registered 
     under section 12 of such Act (15 U.S.C. 78l), or
       ``(B) that is required to file reports under section 15(d) 
     of such Act (15 U.S.C. 78o(d)).''.
       (2) Conforming amendment.--Section 162(m)(3), as amended by 
     subsection (b), is amended by adding at the end the following 
     flush sentence:
       ``Such term shall include any employee who would be 
     described in subparagraph (B) if the reporting described in 
     such subparagraph were required as so described.''.
       (d) Special Rule for Remuneration Paid to Beneficiaries, 
     etc.--Paragraph (4) of section 162(m), as amended by 
     subsection (a), is amended by adding at the end the following 
     new subparagraph:
       ``(F) Special rule for remuneration paid to beneficiaries, 
     etc.--Remuneration shall not fail to be applicable employee 
     remuneration merely because it is includible in the income 
     of, or paid to, a person other than the covered employee, 
     including after the death of the covered employee.''.
       (e) Effective Date.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to taxable years 
     beginning after December 31, 2017.
       (2) Exception for binding contracts.--The amendments made 
     by this section shall not apply to remuneration which is 
     provided pursuant to a written binding contract which was in 
     effect on November 2, 2017, and which was not modified in any 
     material respect on or after such date.

     SEC. 13602. EXCISE TAX ON EXCESS TAX-EXEMPT ORGANIZATION 
                   EXECUTIVE COMPENSATION.

       (a) In General.--Subchapter D of chapter 42 is amended by 
     adding at the end the following new section:

     ``SEC. 4960. TAX ON EXCESS TAX-EXEMPT ORGANIZATION EXECUTIVE 
                   COMPENSATION.

       ``(a) Tax Imposed.--There is hereby imposed a tax equal to 
     the product of the rate of tax under section 11 and the sum 
     of--
       ``(1) so much of the remuneration paid (other than any 
     excess parachute payment) by an applicable tax-exempt 
     organization for the taxable year with respect to employment 
     of any covered employee in excess of $1,000,000, plus
       ``(2) any excess parachute payment paid by such an 
     organization to any covered employee.
     For purposes of the preceding sentence, remuneration shall be 
     treated as paid when there is no substantial risk of 
     forfeiture (within the meaning of section 457(f)(3)(B)) of 
     the rights to such remuneration.
       ``(b) Liability for Tax.--The employer shall be liable for 
     the tax imposed under subsection (a).
       ``(c) Definitions and Special Rules.--For purposes of this 
     section--
       ``(1) Applicable tax-exempt organization.--The term 
     `applicable tax-exempt organization' means any organization 
     which for the taxable year--
       ``(A) is exempt from taxation under section 501(a),
       ``(B) is a farmers' cooperative organization described in 
     section 521(b)(1),
       ``(C) has income excluded from taxation under section 
     115(1), or
       ``(D) is a political organization described in section 
     527(e)(1).
       ``(2) Covered employee.--For purposes of this section, the 
     term `covered employee' means

[[Page 19901]]

     any employee (including any former employee) of an applicable 
     tax-exempt organization if the employee--
       ``(A) is one of the 5 highest compensated employees of the 
     organization for the taxable year, or
       ``(B) was a covered employee of the organization (or any 
     predecessor) for any preceding taxable year beginning after 
     December 31, 2016.
       ``(3) Remuneration.--For purposes of this section:
       ``(A) In general.--The term `remuneration' means wages (as 
     defined in section 3401(a)), except that such term shall not 
     include any designated Roth contribution (as defined in 
     section 402A(c)) and shall include amounts required to be 
     included in gross income under section 457(f).
       ``(B) Exception for remuneration for medical services.--The 
     term `remuneration' shall not include the portion of any 
     remuneration paid to a licensed medical professional 
     (including a veterinarian) which is for the performance of 
     medical or veterinary services by such professional.
       ``(4) Remuneration from related organizations.--
       ``(A) In general.--Remuneration of a covered employee by an 
     applicable tax-exempt organization shall include any 
     remuneration paid with respect to employment of such employee 
     by any related person or governmental entity.
       ``(B) Related organizations.--A person or governmental 
     entity shall be treated as related to an applicable tax-
     exempt organization if such person or governmental entity--
       ``(i) controls, or is controlled by, the organization,
       ``(ii) is controlled by one or more persons which control 
     the organization,
       ``(iii) is a supported organization (as defined in section 
     509(f)(3)) during the taxable year with respect to the 
     organization,
       ``(iv) is a supporting organization described in section 
     509(a)(3) during the taxable year with respect to the 
     organization, or
       ``(v) in the case of an organization which is a voluntary 
     employees' beneficiary association described in section 
     501(c)(9), establishes, maintains, or makes contributions to 
     such voluntary employees' beneficiary association.
       ``(C) Liability for tax.--In any case in which remuneration 
     from more than one employer is taken into account under this 
     paragraph in determining the tax imposed by subsection (a), 
     each such employer shall be liable for such tax in an amount 
     which bears the same ratio to the total tax determined under 
     subsection (a) with respect to such remuneration as--
       ``(i) the amount of remuneration paid by such employer with 
     respect to such employee, bears to
       ``(ii) the amount of remuneration paid by all such 
     employers to such employee.
       ``(5) Excess parachute payment.--For purposes of 
     determining the tax imposed by subsection (a)(2)--
       ``(A) In general.--The term `excess parachute payment' 
     means an amount equal to the excess of any parachute payment 
     over the portion of the base amount allocated to such 
     payment.
       ``(B) Parachute payment.--The term `parachute payment' 
     means any payment in the nature of compensation to (or for 
     the benefit of) a covered employee if--
       ``(i) such payment is contingent on such employee's 
     separation from employment with the employer, and
       ``(ii) the aggregate present value of the payments in the 
     nature of compensation to (or for the benefit of) such 
     individual which are contingent on such separation equals or 
     exceeds an amount equal to 3 times the base amount.
       ``(C) Exception.--Such term does not include any payment--
       ``(i) described in section 280G(b)(6) (relating to 
     exemption for payments under qualified plans),
       ``(ii) made under or to an annuity contract described in 
     section 403(b) or a plan described in section 457(b),
       ``(iii) to a licensed medical professional (including a 
     veterinarian) to the extent that such payment is for the 
     performance of medical or veterinary services by such 
     professional, or
       ``(iv) to an individual who is not a highly compensated 
     employee as defined in section 414(q).
       ``(D) Base amount.--Rules similar to the rules of 
     280G(b)(3) shall apply for purposes of determining the base 
     amount.
       ``(E) Property transfers; present value.--Rules similar to 
     the rules of paragraphs (3) and (4) of section 280G(d) shall 
     apply.
       ``(6) Coordination with deduction limitation.--Remuneration 
     the deduction for which is not allowed by reason of section 
     162(m) shall not be taken into account for purposes of this 
     section.
       ``(d) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary to prevent avoidance of the 
     tax under this section, including regulations to prevent 
     avoidance of such tax through the performance of services 
     other than as an employee or by providing compensation 
     through a pass-through or other entity to avoid such tax.''.
       (b) Clerical Amendment.--The table of sections for 
     subchapter D of chapter 42 is amended by adding at the end 
     the following new item:

``Sec. 4960. Tax on excess tax-exempt organization executive 
              compensation.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13603. TREATMENT OF QUALIFIED EQUITY GRANTS.

       (a) In General.--Section 83 is amended by adding at the end 
     the following new subsection:
       ``(i) Qualified Equity Grants.--
       ``(1) In general.--For purposes of this subtitle--
       ``(A) Timing of inclusion.--If qualified stock is 
     transferred to a qualified employee who makes an election 
     with respect to such stock under this subsection, subsection 
     (a) shall be applied by including the amount determined under 
     such subsection with respect to such stock in income of the 
     employee in the taxable year determined under subparagraph 
     (B) in lieu of the taxable year described in subsection (a).
       ``(B) Taxable year determined.--The taxable year determined 
     under this subparagraph is the taxable year of the employee 
     which includes the earliest of--
       ``(i) the first date such qualified stock becomes 
     transferable (including, solely for purposes of this clause, 
     becoming transferable to the employer),
       ``(ii) the date the employee first becomes an excluded 
     employee,
       ``(iii) the first date on which any stock of the 
     corporation which issued the qualified stock becomes readily 
     tradable on an established securities market (as determined 
     by the Secretary, but not including any market unless such 
     market is recognized as an established securities market by 
     the Secretary for purposes of a provision of this title other 
     than this subsection),
       ``(iv) the date that is 5 years after the first date the 
     rights of the employee in such stock are transferable or are 
     not subject to a substantial risk of forfeiture, whichever 
     occurs earlier, or
       ``(v) the date on which the employee revokes (at such time 
     and in such manner as the Secretary provides) the election 
     under this subsection with respect to such stock.
       ``(2) Qualified stock.--
       ``(A) In general.--For purposes of this subsection, the 
     term `qualified stock' means, with respect to any qualified 
     employee, any stock in a corporation which is the employer of 
     such employee, if--
       ``(i) such stock is received--

       ``(I) in connection with the exercise of an option, or
       ``(II) in settlement of a restricted stock unit, and

       ``(ii) such option or restricted stock unit was granted by 
     the corporation--

       ``(I) in connection with the performance of services as an 
     employee, and
       ``(II) during a calendar year in which such corporation was 
     an eligible corporation.

       ``(B) Limitation.--The term `qualified stock' shall not 
     include any stock if the employee may sell such stock to, or 
     otherwise receive cash in lieu of stock from, the corporation 
     at the time that the rights of the employee in such stock 
     first become transferable or not subject to a substantial 
     risk of forfeiture.
       ``(C) Eligible corporation.--For purposes of subparagraph 
     (A)(ii)(II)--
       ``(i) In general.--The term `eligible corporation' means, 
     with respect to any calendar year, any corporation if--

       ``(I) no stock of such corporation (or any predecessor of 
     such corporation) is readily tradable on an established 
     securities market (as determined under paragraph (1)(B)(iii)) 
     during any preceding calendar year, and
       ``(II) such corporation has a written plan under which, in 
     such calendar year, not less than 80 percent of all employees 
     who provide services to such corporation in the United States 
     (or any possession of the United States) are granted stock 
     options, or are granted restricted stock units, with the same 
     rights and privileges to receive qualified stock.

       ``(ii) Same rights and privileges.--For purposes of clause 
     (i)(II)--

       ``(I) except as provided in subclauses (II) and (III), the 
     determination of rights and privileges with respect to stock 
     shall be made in a similar manner as under section 423(b)(5),
       ``(II) employees shall not fail to be treated as having the 
     same rights and privileges to receive qualified stock solely 
     because the number of shares available to all employees is 
     not equal in amount, so long as the number of shares 
     available to each employee is more than a de minimis amount, 
     and
       ``(III) rights and privileges with respect to the exercise 
     of an option shall not be treated as the same as rights and 
     privileges with respect to the settlement of a restricted 
     stock unit.

       ``(iii) Employee.--For purposes of clause (i)(II), the term 
     `employee' shall not include any employee described in 
     section 4980E(d)(4) or any excluded employee.
       ``(iv) Special rule for calendar years before 2018.--In the 
     case of any calendar year beginning before January 1, 2018, 
     clause (i)(II) shall be applied without regard to whether the 
     rights and privileges with respect to the qualified stock are 
     the same.
       ``(3) Qualified employee; excluded employee.--For purposes 
     of this subsection--
       ``(A) In general.--The term `qualified employee' means any 
     individual who--
       ``(i) is not an excluded employee, and
       ``(ii) agrees in the election made under this subsection to 
     meet such requirements as are determined by the Secretary to 
     be necessary to ensure that the withholding requirements of 
     the corporation under chapter 24 with respect to the 
     qualified stock are met.
       ``(B) Excluded employee.--The term `excluded employee' 
     means, with respect to any corporation, any individual--
       ``(i) who is a 1-percent owner (within the meaning of 
     section 416(i)(1)(B)(ii)) at any time during the calendar 
     year or who was such a 1 percent owner at any time during the 
     10 preceding calendar years,

[[Page 19902]]

       ``(ii) who is or has been at any prior time--

       ``(I) the chief executive officer of such corporation or an 
     individual acting in such a capacity, or
       ``(II) the chief financial officer of such corporation or 
     an individual acting in such a capacity,

       ``(iii) who bears a relationship described in section 
     318(a)(1) to any individual described in subclause (I) or 
     (II) of clause (ii), or
       ``(iv) who is one of the 4 highest compensated officers of 
     such corporation for the taxable year, or was one of the 4 
     highest compensated officers of such corporation for any of 
     the 10 preceding taxable years, determined with respect to 
     each such taxable year on the basis of the shareholder 
     disclosure rules for compensation under the Securities 
     Exchange Act of 1934 (as if such rules applied to such 
     corporation).
       ``(4) Election.--
       ``(A) Time for making election.--An election with respect 
     to qualified stock shall be made under this subsection no 
     later than 30 days after the first date the rights of the 
     employee in such stock are transferable or are not subject to 
     a substantial risk of forfeiture, whichever occurs earlier, 
     and shall be made in a manner similar to the manner in which 
     an election is made under subsection (b).
       ``(B) Limitations.--No election may be made under this 
     section with respect to any qualified stock if--
       ``(i) the qualified employee has made an election under 
     subsection (b) with respect to such qualified stock,
       ``(ii) any stock of the corporation which issued the 
     qualified stock is readily tradable on an established 
     securities market (as determined under paragraph (1)(B)(iii)) 
     at any time before the election is made, or
       ``(iii) such corporation purchased any of its outstanding 
     stock in the calendar year preceding the calendar year which 
     includes the first date the rights of the employee in such 
     stock are transferable or are not subject to a substantial 
     risk of forfeiture, unless--

       ``(I) not less than 25 percent of the total dollar amount 
     of the stock so purchased is deferral stock, and
       ``(II) the determination of which individuals from whom 
     deferral stock is purchased is made on a reasonable basis.

       ``(C) Definitions and special rules related to limitation 
     on stock redemptions.--
       ``(i) Deferral stock.--For purposes of this paragraph, the 
     term `deferral stock' means stock with respect to which an 
     election is in effect under this subsection.
       ``(ii) Deferral stock with respect to any individual not 
     taken into account if individual holds deferral stock with 
     longer deferral period.--Stock purchased by a corporation 
     from any individual shall not be treated as deferral stock 
     for purposes of subparagraph (B)(iii) if such individual 
     (immediately after such purchase) holds any deferral stock 
     with respect to which an election has been in effect under 
     this subsection for a longer period than the election with 
     respect to the stock so purchased.
       ``(iii) Purchase of all outstanding deferral stock.--The 
     requirements of subclauses (I) and (II) of subparagraph 
     (B)(iii) shall be treated as met if the stock so purchased 
     includes all of the corporation's outstanding deferral stock.
       ``(iv) Reporting.--Any corporation which has outstanding 
     deferral stock as of the beginning of any calendar year and 
     which purchases any of its outstanding stock during such 
     calendar year shall include on its return of tax for the 
     taxable year in which, or with which, such calendar year ends 
     the total dollar amount of its outstanding stock so purchased 
     during such calendar year and such other information as the 
     Secretary requires for purposes of administering this 
     paragraph.
       ``(5) Controlled groups.--For purposes of this subsection, 
     all persons treated as a single employer under section 414(b) 
     shall be treated as 1 corporation.
       ``(6) Notice requirement.--Any corporation which transfers 
     qualified stock to a qualified employee shall, at the time 
     that (or a reasonable period before) an amount attributable 
     to such stock would (but for this subsection) first be 
     includible in the gross income of such employee--
       ``(A) certify to such employee that such stock is qualified 
     stock, and
       ``(B) notify such employee--
       ``(i) that the employee may be eligible to elect to defer 
     income on such stock under this subsection, and
       ``(ii) that, if the employee makes such an election--

       ``(I) the amount of income recognized at the end of the 
     deferral period will be based on the value of the stock at 
     the time at which the rights of the employee in such stock 
     first become transferable or not subject to substantial risk 
     of forfeiture, notwithstanding whether the value of the stock 
     has declined during the deferral period,
       ``(II) the amount of such income recognized at the end of 
     the deferral period will be subject to withholding under 
     section 3401(i) at the rate determined under section 3402(t), 
     and
       ``(III) the responsibilities of the employee (as determined 
     by the Secretary under paragraph (3)(A)(ii)) with respect to 
     such withholding.

       ``(7) Restricted stock units.--This section (other than 
     this subsection), including any election under subsection 
     (b), shall not apply to restricted stock units.''.
       (b) Withholding.--
       (1) Time of withholding.--Section 3401 is amended by adding 
     at the end the following new subsection:
       ``(i) Qualified Stock for Which an Election Is in Effect 
     Under Section 83(i).--For purposes of subsection (a), 
     qualified stock (as defined in section 83(i)) with respect to 
     which an election is made under section 83(i) shall be 
     treated as wages--
       ``(1) received on the earliest date described in section 
     83(i)(1)(B), and
       ``(2) in an amount equal to the amount included in income 
     under section 83 for the taxable year which includes such 
     date.''.
       (2) Amount of withholding.--Section 3402 is amended by 
     adding at the end the following new subsection:
       ``(t) Rate of Withholding for Certain Stock.--In the case 
     of any qualified stock (as defined in section 83(i)(2)) with 
     respect to which an election is made under section 83(i)--
       ``(1) the rate of tax under subsection (a) shall not be 
     less than the maximum rate of tax in effect under section 1, 
     and
       ``(2) such stock shall be treated for purposes of section 
     3501(b) in the same manner as a non-cash fringe benefit.''.
       (c) Coordination With Other Deferred Compensation Rules.--
       (1) Election to apply deferral to statutory options.--
       (A) Incentive stock options.--Section 422(b) is amended by 
     adding at the end the following: ``Such term shall not 
     include any option if an election is made under section 83(i) 
     with respect to the stock received in connection with the 
     exercise of such option.''.
       (B) Employee stock purchase plans.--Section 423 is 
     amended--
       (i) in subsection (b)(5), by striking ``and'' before ``the 
     plan'' and by inserting ``, and the rules of section 83(i) 
     shall apply in determining which employees have a right to 
     make an election under such section'' before the semicolon at 
     the end, and
       (ii) by adding at the end the following new subsection:
       ``(d) Coordination With Qualified Equity Grants.--An option 
     for which an election is made under section 83(i) with 
     respect to the stock received in connection with its exercise 
     shall not be considered as granted pursuant an employee stock 
     purchase plan.''.
       (2) Exclusion from definition of nonqualified deferred 
     compensation plan.--Subsection (d) of section 409A is amended 
     by adding at the end the following new paragraph:
       ``(7) Treatment of qualified stock.--An arrangement under 
     which an employee may receive qualified stock (as defined in 
     section 83(i)(2)) shall not be treated as a nonqualified 
     deferred compensation plan with respect to such employee 
     solely because of such employee's election, or ability to 
     make an election, to defer recognition of income under 
     section 83(i).''.
       (d) Information Reporting.--Section 6051(a) is amended by 
     striking ``and'' at the end of paragraph (14)(B), by striking 
     the period at the end of paragraph (15) and inserting a 
     comma, and by inserting after paragraph (15) the following 
     new paragraphs:
       ``(16) the amount includible in gross income under 
     subparagraph (A) of section 83(i)(1) with respect to an event 
     described in subparagraph (B) of such section which occurs in 
     such calendar year, and
       ``(17) the aggregate amount of income which is being 
     deferred pursuant to elections under section 83(i), 
     determined as of the close of the calendar year.''.
       (e) Penalty for Failure of Employer to Provide Notice of 
     Tax Consequences.--Section 6652 is amended by adding at the 
     end the following new subsection:
       ``(p) Failure to Provide Notice Under Section 83(i).--In 
     the case of each failure to provide a notice as required by 
     section 83(i)(6), at the time prescribed therefor, unless it 
     is shown that such failure is due to reasonable cause and not 
     to willful neglect, there shall be paid, on notice and demand 
     of the Secretary and in the same manner as tax, by the person 
     failing to provide such notice, an amount equal to $100 for 
     each such failure, but the total amount imposed on such 
     person for all such failures during any calendar year shall 
     not exceed $50,000.''.
       (f) Effective Dates.--
       (1) In general.--Except as provided in paragraph (2), the 
     amendments made by this section shall apply to stock 
     attributable to options exercised, or restricted stock units 
     settled, after December 31, 2017.
       (2) Requirement to provide notice.--The amendments made by 
     subsection (e) shall apply to failures after December 31, 
     2017.
       (g) Transition Rule.--Until such time as the Secretary (or 
     the Secretary's delegate) issues regulations or other 
     guidance for purposes of implementing the requirements of 
     paragraph (2)(C)(i)(II) of section 83(i) of the Internal 
     Revenue Code of 1986 (as added by this section), or the 
     requirements of paragraph (6) of such section, a corporation 
     shall be treated as being in compliance with such 
     requirements (respectively) if such corporation complies with 
     a reasonable good faith interpretation of such requirements.

     SEC. 13604. INCREASE IN EXCISE TAX RATE FOR STOCK 
                   COMPENSATION OF INSIDERS IN EXPATRIATED 
                   CORPORATIONS.

       (a) In General.--Section 4985(a)(1) is amended by striking 
     ``section 1(h)(1)(C)'' and inserting ``section 1(h)(1)(D)''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to corporations first becoming expatriated 
     corporations (as defined in section 4985 of the Internal 
     Revenue Code of 1986) after the date of enactment of this 
     Act.

[[Page 19903]]



                      Subpart B--Retirement Plans

     SEC. 13611. REPEAL OF SPECIAL RULE PERMITTING 
                   RECHARACTERIZATION OF ROTH CONVERSIONS.

       (a) In General.--Section 408A(d)(6)(B) is amended by adding 
     at the end the following new clause:
       ``(iii) Conversions.--Subparagraph (A) shall not apply in 
     the case of a qualified rollover contribution to which 
     subsection (d)(3) applies (including by reason of 
     subparagraph (C) thereof).''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13612. MODIFICATION OF RULES APPLICABLE TO LENGTH OF 
                   SERVICE AWARD PLANS.

       (a) Maximum Deferral Amount.--Clause (ii) of section 
     457(e)(11)(B) is amended by striking ``$3,000'' and inserting 
     ``$6,000''.
       (b) Cost of Living Adjustment.--Subparagraph (B) of section 
     457(e)(11) is amended by adding at the end the following:
       ``(iii) Cost of living adjustment.--In the case of taxable 
     years beginning after December 31, 2017, the Secretary shall 
     adjust the $6,000 amount under clause (ii) at the same time 
     and in the same manner as under section 415(d), except that 
     the base period shall be the calendar quarter beginning July 
     1, 2016, and any increase under this paragraph that is not a 
     multiple of $500 shall be rounded to the next lowest multiple 
     of $500.''.
       (c) Application of Limitation on Accruals.--Subparagraph 
     (B) of section 457(e)(11), as amended by subsection (b), is 
     amended by adding at the end the following:
       ``(iv) Special rule for application of limitation on 
     accruals for certain plans.--In the case of a plan described 
     in subparagraph (A)(ii) which is a defined benefit plan (as 
     defined in section 414(j)), the limitation under clause (ii) 
     shall apply to the actuarial present value of the aggregate 
     amount of length of service awards accruing with respect to 
     any year of service. Such actuarial present value with 
     respect to any year shall be calculated using reasonable 
     actuarial assumptions and methods, assuming payment will be 
     made under the most valuable form of payment under the plan 
     with payment commencing at the later of the earliest age at 
     which unreduced benefits are payable under the plan or the 
     participant's age at the time of the calculation.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13613. EXTENDED ROLLOVER PERIOD FOR PLAN LOAN OFFSET 
                   AMOUNTS.

       (a) In General.--Paragraph (3) of section 402(c) is amended 
     by adding at the end the following new subparagraph:
       ``(C) Rollover of certain plan loan offset amounts.--
       ``(i) In general.--In the case of a qualified plan loan 
     offset amount, paragraph (1) shall not apply to any transfer 
     of such amount made after the due date (including extensions) 
     for filing the return of tax for the taxable year in which 
     such amount is treated as distributed from a qualified 
     employer plan.
       ``(ii) Qualified plan loan offset amount.--For purposes of 
     this subparagraph, the term `qualified plan loan offset 
     amount' means a plan loan offset amount which is treated as 
     distributed from a qualified employer plan to a participant 
     or beneficiary solely by reason of--

       ``(I) the termination of the qualified employer plan, or
       ``(II) the failure to meet the repayment terms of the loan 
     from such plan because of the severance from employment of 
     the participant.

       ``(iii) Plan loan offset amount.--For purposes of clause 
     (ii), the term `plan loan offset amount' means the amount by 
     which the participant's accrued benefit under the plan is 
     reduced in order to repay a loan from the plan.
       ``(iv) Limitation.--This subparagraph shall not apply to 
     any plan loan offset amount unless such plan loan offset 
     amount relates to a loan to which section 72(p)(1) does not 
     apply by reason of section 72(p)(2).
       ``(v) Qualified employer plan.--For purposes of this 
     subsection, the term `qualified employer plan' has the 
     meaning given such term by section 72(p)(4).''.
       (b) Conforming Amendments.--Section 402(c)(3) is amended--
       (1) by striking ``Transfer must be made within 60 days of 
     receipt'' in the heading and inserting ``Time limit on 
     transfers'', and
       (2) by striking ``subparagraph (B)'' in subparagraph (A) 
     and inserting ``subparagraphs (B) and (C)''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to plan loan offset amounts which are treated as 
     distributed in taxable years beginning after December 31, 
     2017.

                    PART VIII--EXEMPT ORGANIZATIONS

     SEC. 13701. EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE 
                   COLLEGES AND UNIVERSITIES.

       (a) In General.--Chapter 42 is amended by adding at the end 
     the following new subchapter:

   ``Subchapter H--Excise Tax Based on Investment Income of Private 
                       Colleges and Universities

``Sec. 4968. Excise tax based on investment income of private colleges 
              and universities.

     ``SEC. 4968. EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE 
                   COLLEGES AND UNIVERSITIES.

       ``(a) Tax Imposed.--There is hereby imposed on each 
     applicable educational institution for the taxable year a tax 
     equal to 1.4 percent of the net investment income of such 
     institution for the taxable year.
       ``(b) Applicable Educational Institution.--For purposes of 
     this subchapter--
       ``(1) In general.--The term `applicable educational 
     institution' means an eligible educational institution (as 
     defined in section 25A(f)(2))--
       ``(A) which had at least 500 tuition-paying students during 
     the preceding taxable year,
       ``(B) more than 50 percent of the tuition-paying students 
     of which are located in the United States,
       ``(C) which is not described in the first sentence of 
     section 511(a)(2)(B) (relating to State colleges and 
     universities), and
       ``(D) the aggregate fair market value of the assets of 
     which at the end of the preceding taxable year (other than 
     those assets which are used directly in carrying out the 
     institution's exempt purpose) is at least $500,000 per 
     student of the institution.
       ``(2) Students.--For purposes of paragraph (1), the number 
     of students of an institution (including for purposes of 
     determining the number of students at a particular location) 
     shall be based on the daily average number of full-time 
     students attending such institution (with part-time students 
     taken into account on a full-time student equivalent basis).
       ``(c) Net Investment Income.--For purposes of this section, 
     net investment income shall be determined under rules similar 
     to the rules of section 4940(c).
       ``(d) Assets and Net Investment Income of Related 
     Organizations.--
       ``(1) In general.--For purposes of subsections (b)(1)(C) 
     and (c), assets and net investment income of any related 
     organization with respect to an educational institution shall 
     be treated as assets and net investment income, respectively, 
     of the educational institution, except that--
       ``(A) no such amount shall be taken into account with 
     respect to more than 1 educational institution, and
       ``(B) unless such organization is controlled by such 
     institution or is described in section 509(a)(3) with respect 
     to such institution for the taxable year, assets and net 
     investment income which are not intended or available for the 
     use or benefit of the educational institution shall not be 
     taken into account.
       ``(2) Related organization.--For purposes of this 
     subsection, the term `related organization' means, with 
     respect to an educational institution, any organization 
     which--
       ``(A) controls, or is controlled by, such institution,
       ``(B) is controlled by 1 or more persons which also control 
     such institution, or
       ``(C) is a supported organization (as defined in section 
     509(f)(3)), or an organization described in section 
     509(a)(3), during the taxable year with respect to such 
     institution.''.
       (b) Clerical Amendment.--The table of subchapters for 
     chapter 42 is amended by adding at the end the following new 
     item:

   ``subchapter h--excise tax based on investment income of private 
                      colleges and universities''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 13702. UNRELATED BUSINESS TAXABLE INCOME SEPARATELY 
                   COMPUTED FOR EACH TRADE OR BUSINESS ACTIVITY.

       (a) In General.--Subsection (a) of section 512 is amended 
     by adding at the end the following new paragraph:
       ``(6) Special rule for organization with more than 1 
     unrelated trade or business.--In the case of any organization 
     with more than 1 unrelated trade or business--
       ``(A) unrelated business taxable income, including for 
     purposes of determining any net operating loss deduction, 
     shall be computed separately with respect to each such trade 
     or business and without regard to subsection (b)(12),
       ``(B) the unrelated business taxable income of such 
     organization shall be the sum of the unrelated business 
     taxable income so computed with respect to each such trade or 
     business, less a specific deduction under subsection (b)(12), 
     and
       ``(C) for purposes of subparagraph (B), unrelated business 
     taxable income with respect to any such trade or business 
     shall not be less than zero.''.
       (b) Effective Date.--
       (1) In general.--Except to the extent provided in paragraph 
     (2), the amendment made by this section shall apply to 
     taxable years beginning after December 31, 2017.
       (2) Carryovers of net operating losses.--If any net 
     operating loss arising in a taxable year beginning before 
     January 1, 2018, is carried over to a taxable year beginning 
     on or after such date--
       (A) subparagraph (A) of section 512(a)(6) of the Internal 
     Revenue Code of 1986, as added by this Act, shall not apply 
     to such net operating loss, and
       (B) the unrelated business taxable income of the 
     organization, after the application of subparagraph (B) of 
     such section, shall be reduced by the amount of such net 
     operating loss.

     SEC. 13703. UNRELATED BUSINESS TAXABLE INCOME INCREASED BY 
                   AMOUNT OF CERTAIN FRINGE BENEFIT EXPENSES FOR 
                   WHICH DEDUCTION IS DISALLOWED.

       (a) In General.--Section 512(a), as amended by this Act, is 
     further amended by adding at the end the following new 
     paragraph:
       ``(7) Increase in unrelated business taxable income by 
     disallowed fringe.--Unrelated business taxable income of an 
     organization

[[Page 19904]]

     shall be increased by any amount for which a deduction is not 
     allowable under this chapter by reason of section 274 and 
     which is paid or incurred by such organization for any 
     qualified transportation fringe (as defined in section 
     132(f)), any parking facility used in connection with 
     qualified parking (as defined in section 132(f)(5)(C)), or 
     any on-premises athletic facility (as defined in section 
     132(j)(4)(B)). The preceding sentence shall not apply to the 
     extent the amount paid or incurred is directly connected with 
     an unrelated trade or business which is regularly carried on 
     by the organization. The Secretary shall issue such 
     regulations or other guidance as may be necessary or 
     appropriate to carry out the purposes of this paragraph, 
     including regulations or other guidance providing for the 
     appropriate allocation of depreciation and other costs with 
     respect to facilities used for parking or for on-premises 
     athletic facilities.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to amounts paid or incurred after December 31, 
     2017.

     SEC. 13704. REPEAL OF DEDUCTION FOR AMOUNTS PAID IN EXCHANGE 
                   FOR COLLEGE ATHLETIC EVENT SEATING RIGHTS.

       (a) In General.--Section 170(l) is amended--
       (1) by striking paragraph (1) and inserting the following:
       ``(1) In general.--No deduction shall be allowed under this 
     section for any amount described in paragraph (2).'', and
       (2) in paragraph (2)(B), by striking ``such amount would be 
     allowable as a deduction under this section but for the fact 
     that''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to contributions made in taxable years beginning 
     after December 31, 2017.

     SEC. 13705. REPEAL OF SUBSTANTIATION EXCEPTION IN CASE OF 
                   CONTRIBUTIONS REPORTED BY DONEE.

       (a) In General.--Section 170(f)(8) is amended by striking 
     subparagraph (D) and by redesignating subparagraph (E) as 
     subparagraph (D).
       (b) Effective Date.--The amendments made by this section 
     shall apply to contributions made in taxable years beginning 
     after December 31, 2016.

                       PART IX--OTHER PROVISIONS

         Subpart A--Craft Beverage Modernization and Tax Reform

     SEC. 13801. PRODUCTION PERIOD FOR BEER, WINE, AND DISTILLED 
                   SPIRITS.

       (a) In General.--Section 263A(f) is amended--
       (1) by redesignating paragraph (4) as paragraph (5), and
       (2) by inserting after paragraph (3) the following new 
     paragraph:
       ``(4) Exemption for aging process of beer, wine, and 
     distilled spirits.--
       ``(A) In general.--For purposes of this subsection, the 
     production period shall not include the aging period for--
       ``(i) beer (as defined in section 5052(a)),
       ``(ii) wine (as described in section 5041(a)), or
       ``(iii) distilled spirits (as defined in section 
     5002(a)(8)), except such spirits that are unfit for use for 
     beverage purposes.
       ``(B) Termination.--This paragraph shall not apply to 
     interest costs paid or accrued after December 31, 2019.''.
       (b) Conforming Amendment.--Paragraph (5)(B)(ii) of section 
     263A(f), as redesignated by this section, is amended by 
     inserting ``except as provided in paragraph (4),'' before 
     ``ending on the date''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to interest costs paid or accrued in calendar 
     years beginning after December 31, 2017.

     SEC. 13802. REDUCED RATE OF EXCISE TAX ON BEER.

       (a) In General.--Paragraph (1) of section 5051(a) is 
     amended to read as follows:
       ``(1) In general.--
       ``(A) Imposition of tax.--A tax is hereby imposed on all 
     beer brewed or produced, and removed for consumption or sale, 
     within the United States, or imported into the United States. 
     Except as provided in paragraph (2), the rate of such tax 
     shall be the amount determined under this paragraph.
       ``(B) Rate.--Except as provided in subparagraph (C), the 
     rate of tax shall be $18 for per barrel.
       ``(C) Special rule.--In the case of beer removed after 
     December 31, 2017, and before January 1, 2020, the rate of 
     tax shall be--
       ``(i) $16 on the first 6,000,000 barrels of beer--

       ``(I) brewed by the brewer and removed during the calendar 
     year for consumption or sale, or
       ``(II) imported by the importer into the United States 
     during the calendar year, and

       ``(ii) $18 on any barrels of beer to which clause (i) does 
     not apply.
       ``(D) Barrel.--For purposes of this section, a barrel shall 
     contain not more than 31 gallons of beer, and any tax imposed 
     under this section shall be applied at a like rate for any 
     other quantity or for fractional parts of a barrel.''.
       (b) Reduced Rate for Certain Domestic Production.--
     Subparagraph (A) of section 5051(a)(2) is amended--
       (1) in the heading, by striking ``$7 a barrel'', and
       (2) by inserting ``($3.50 in the case of beer removed after 
     December 31, 2017, and before January 1, 2020)'' after 
     ``$7''.
       (c) Application of Reduced Tax Rate for Foreign 
     Manufacturers and Importers.--Subsection (a) of section 5051 
     is amended--
       (1) in subparagraph (C)(i)(II) of paragraph (1), as amended 
     by subsection (a), by inserting ``but only if the importer is 
     an electing importer under paragraph (4) and the barrels have 
     been assigned to the importer pursuant to such paragraph'' 
     after ``during the calendar year'', and
       (2) by adding at the end the following new paragraph:
       ``(4) Reduced tax rate for foreign manufacturers and 
     importers.--
       ``(A) In general.--In the case of any barrels of beer which 
     have been brewed or produced outside of the United States and 
     imported into the United States, the rate of tax applicable 
     under clause (i) of paragraph (1)(C) (referred to in this 
     paragraph as the `reduced tax rate') may be assigned by the 
     brewer (provided that the brewer makes an election described 
     in subparagraph (B)(ii)) to any electing importer of such 
     barrels pursuant to the requirements established by the 
     Secretary under subparagraph (B).
       ``(B) Assignment.--The Secretary shall, through such rules, 
     regulations, and procedures as are determined appropriate, 
     establish procedures for assignment of the reduced tax rate 
     provided under this paragraph, which shall include--
       ``(i) a limitation to ensure that the number of barrels of 
     beer for which the reduced tax rate has been assigned by a 
     brewer--

       ``(I) to any importer does not exceed the number of barrels 
     of beer brewed or produced by such brewer during the calendar 
     year which were imported into the United States by such 
     importer, and
       ``(II) to all importers does not exceed the 6,000,000 
     barrels to which the reduced tax rate applies,

       ``(ii) procedures that allow the election of a brewer to 
     assign and an importer to receive the reduced tax rate 
     provided under this paragraph,
       ``(iii) requirements that the brewer provide any 
     information as the Secretary determines necessary and 
     appropriate for purposes of carrying out this paragraph, and
       ``(iv) procedures that allow for revocation of eligibility 
     of the brewer and the importer for the reduced tax rate 
     provided under this paragraph in the case of any erroneous or 
     fraudulent information provided under clause (iii) which the 
     Secretary deems to be material to qualifying for such reduced 
     rate.
       ``(C) Controlled group.--For purposes of this section, any 
     importer making an election described in subparagraph (B)(ii) 
     shall be deemed to be a member of the controlled group of the 
     brewer, as described under paragraph (5).''.
       (d) Controlled Group and Single Taxpayer Rules.--Subsection 
     (a) of section 5051, as amended by this section, is amended--
       (1) in paragraph (2)--
       (A) by striking subparagraph (B), and
       (B) by redesignating subparagraph (C) as subparagraph (B), 
     and
       (2) by adding at the end the following new paragraph:
       ``(5) Controlled group and single taxpayer rules.--
       ``(A) In general.--Except as provided in subparagraph (B), 
     in the case of a controlled group, the 6,000,000 barrel 
     quantity specified in paragraph (1)(C)(i) and the 2,000,000 
     barrel quantity specified in paragraph (2)(A) shall be 
     applied to the controlled group, and the 6,000,000 barrel 
     quantity specified in paragraph (1)(C)(i) and the 60,000 
     barrel quantity specified in paragraph (2)(A) shall be 
     apportioned among the brewers who are members of such group 
     in such manner as the Secretary or their delegate shall by 
     regulations prescribe. For purposes of the preceding 
     sentence, the term `controlled group' has the meaning 
     assigned to it by subsection (a) of section 1563, except that 
     for such purposes the phrase `more than 50 percent' shall be 
     substituted for the phrase `at least 80 percent' in each 
     place it appears in such subsection. Under regulations 
     prescribed by the Secretary, principles similar to the 
     principles of the preceding two sentences shall be applied to 
     a group of brewers under common control where one or more of 
     the brewers is not a corporation.
       ``(B) Foreign manufacturers and importers.--For purposes of 
     paragraph (4), in the case of a controlled group, the 
     6,000,000 barrel quantity specified in paragraph (1)(C)(i) 
     shall be applied to the controlled group and apportioned 
     among the members of such group in such manner as the 
     Secretary shall by regulations prescribe. For purposes of the 
     preceding sentence, the term `controlled group' has the 
     meaning given such term under subparagraph (A). Under 
     regulations prescribed by the Secretary, principles similar 
     to the principles of the preceding two sentences shall be 
     applied to a group of brewers under common control where one 
     or more of the brewers is not a corporation.
       ``(C) Single taxpayer.--Pursuant to rules issued by the 
     Secretary, two or more entities (whether or not under common 
     control) that produce beer marketed under a similar brand, 
     license, franchise, or other arrangement shall be treated as 
     a single taxpayer for purposes of the application of this 
     subsection.''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to beer removed after December 31, 2017.

     SEC. 13803. TRANSFER OF BEER BETWEEN BONDED FACILITIES.

       (a) In General.--Section 5414 is amended--
       (1) by striking ``Beer may be removed'' and inserting ``(a) 
     In General--Beer may be removed'', and
       (2) by adding at the end the following:
       ``(b) Transfer of Beer Between Bonded Facilities.--
       ``(1) In general.--Beer may be removed from one bonded 
     brewery to another bonded brewery, without payment of tax, 
     and may be mingled

[[Page 19905]]

     with beer at the receiving brewery, subject to such 
     conditions, including payment of the tax, and in such 
     containers, as the Secretary by regulations shall prescribe, 
     which shall include--
       ``(A) any removal from one brewery to another brewery 
     belonging to the same brewer,
       ``(B) any removal from a brewery owned by one corporation 
     to a brewery owned by another corporation when--
       ``(i) one such corporation owns the controlling interest in 
     the other such corporation, or
       ``(ii) the controlling interest in each such corporation is 
     owned by the same person or persons, and
       ``(C) any removal from one brewery to another brewery 
     when--
       ``(i) the proprietors of transferring and receiving 
     premises are independent of each other and neither has a 
     proprietary interest, directly or indirectly, in the business 
     of the other, and
       ``(ii) the transferor has divested itself of all interest 
     in the beer so transferred and the transferee has accepted 
     responsibility for payment of the tax.
       ``(2) Transfer of liability for tax.--For purposes of 
     paragraph (1)(C), such relief from liability shall be 
     effective from the time of removal from the transferor's 
     bonded premises, or from the time of divestment of interest, 
     whichever is later.
       ``(3) Termination.--This subsection shall not apply to any 
     calendar quarter beginning after December 31, 2019.''.
       (b) Removal From Brewery by Pipeline.--Section 5412 is 
     amended by inserting ``pursuant to section 5414 or'' before 
     ``by pipeline''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to any calendar quarters beginning after December 
     31, 2017.

     SEC. 13804. REDUCED RATE OF EXCISE TAX ON CERTAIN WINE.

       (a) In General.--Section 5041(c) is amended by adding at 
     the end the following new paragraph:
       ``(8) Special rule for 2018 and 2019.--
       ``(A) In general.--In the case of wine removed after 
     December 31, 2017, and before January 1, 2020, paragraphs (1) 
     and (2) shall not apply and there shall be allowed as a 
     credit against any tax imposed by this title (other than 
     chapters 2, 21, and 22) an amount equal to the sum of--
       ``(i) $1 per wine gallon on the first 30,000 wine gallons 
     of wine, plus
       ``(ii) 90 cents per wine gallon on the first 100,000 wine 
     gallons of wine to which clause (i) does not apply, plus
       ``(iii) 53.5 cents per wine gallon on the first 620,000 
     wine gallons of wine to which clauses (i) and (ii) do not 
     apply,
     which are produced by the producer and removed during the 
     calendar year for consumption or sale, or which are imported 
     by the importer into the United States during the calendar 
     year.
       ``(B) Adjustment of credit for hard cider.--In the case of 
     wine described in subsection (b)(6), subparagraph (A) of this 
     paragraph shall be applied--
       ``(i) in clause (i) of such subparagraph, by substituting 
     `6.2 cents' for `$1',
       ``(ii) in clause (ii) of such subparagraph, by substituting 
     `5.6 cents' for `90 cents', and
       ``(iii) in clause (iii) of such subparagraph, by 
     substituting `3.3 cents' for `53.5 cents'.'',
       (b) Controlled Group and Single Taxpayer Rules.--Paragraph 
     (4) of section 5041(c) is amended by striking ``section 
     5051(a)(2)(B)'' and inserting ``section 5051(a)(5)''.
       (c) Allowance of Credit for Foreign Manufacturers and 
     Importers.--Subsection (c) of section 5041, as amended by 
     subsection (a), is amended--
       (1) in subparagraph (A) of paragraph (8), by inserting 
     ``but only if the importer is an electing importer under 
     paragraph (9) and the wine gallons of wine have been assigned 
     to the importer pursuant to such paragraph'' after ``into the 
     United States during the calendar year'', and
       (2) by adding at the end the following new paragraph:
       ``(9) Allowance of credit for foreign manufacturers and 
     importers.--
       ``(A) In general.--In the case of any wine gallons of wine 
     which have been produced outside of the United States and 
     imported into the United States, the credit allowable under 
     paragraph (8) (referred to in this paragraph as the `tax 
     credit') may be assigned by the person who produced such wine 
     (referred to in this paragraph as the `foreign producer'), 
     provided that such person makes an election described in 
     subparagraph (B)(ii), to any electing importer of such wine 
     gallons pursuant to the requirements established by the 
     Secretary under subparagraph (B).
       ``(B) Assignment.--The Secretary shall, through such rules, 
     regulations, and procedures as are determined appropriate, 
     establish procedures for assignment of the tax credit 
     provided under this paragraph, which shall include--
       ``(i) a limitation to ensure that the number of wine 
     gallons of wine for which the tax credit has been assigned by 
     a foreign producer--

       ``(I) to any importer does not exceed the number of wine 
     gallons of wine produced by such foreign producer during the 
     calendar year which were imported into the United States by 
     such importer, and
       ``(II) to all importers does not exceed the 750,000 wine 
     gallons of wine to which the tax credit applies,

       ``(ii) procedures that allow the election of a foreign 
     producer to assign and an importer to receive the tax credit 
     provided under this paragraph,
       ``(iii) requirements that the foreign producer provide any 
     information as the Secretary determines necessary and 
     appropriate for purposes of carrying out this paragraph, and
       ``(iv) procedures that allow for revocation of eligibility 
     of the foreign producer and the importer for the tax credit 
     provided under this paragraph in the case of any erroneous or 
     fraudulent information provided under clause (iii) which the 
     Secretary deems to be material to qualifying for such credit.
       ``(C) Controlled group.--For purposes of this section, any 
     importer making an election described in subparagraph (B)(ii) 
     shall be deemed to be a member of the controlled group of the 
     foreign producer, as described under paragraph (4).''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to wine removed after December 31, 2017.

     SEC. 13805. ADJUSTMENT OF ALCOHOL CONTENT LEVEL FOR 
                   APPLICATION OF EXCISE TAX RATES.

       (a) In General.--Paragraphs (1) and (2) of section 5041(b) 
     are each amended by inserting ``(16 percent in the case of 
     wine removed after December 31, 2017, and before January 1, 
     2020'' after ``14 percent''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to wine removed after December 31, 2017.

     SEC. 13806. DEFINITION OF MEAD AND LOW ALCOHOL BY VOLUME 
                   WINE.

       (a) In General.--Section 5041 is amended--
       (1) in subsection (a), by striking ``Still wines'' and 
     inserting ``Subject to subsection (h), still wines'', and
       (2) by adding at the end the following new subsection:
       ``(h) Mead and Low Alcohol by Volume Wine.--
       ``(1) In general.--For purposes of subsections (a) and 
     (b)(1), mead and low alcohol by volume wine shall be deemed 
     to be still wines containing not more than 16 percent of 
     alcohol by volume.
       ``(2) Definitions.--
       ``(A) Mead.--For purposes of this section, the term `mead' 
     means a wine--
       ``(i) containing not more than 0.64 gram of carbon dioxide 
     per hundred milliliters of wine, except that the Secretary 
     shall by regulations prescribe such tolerances to this 
     limitation as may be reasonably necessary in good commercial 
     practice,
       ``(ii) which is derived solely from honey and water,
       ``(iii) which contains no fruit product or fruit flavoring, 
     and
       ``(iv) which contains less than 8.5 percent alcohol by 
     volume.
       ``(B) Low alcohol by volume wine.--For purposes of this 
     section, the term `low alcohol by volume wine' means a wine--
       ``(i) containing not more than 0.64 gram of carbon dioxide 
     per hundred milliliters of wine, except that the Secretary 
     shall by regulations prescribe such tolerances to this 
     limitation as may be reasonably necessary in good commercial 
     practice,
       ``(ii) which is derived--

       ``(I) primarily from grapes, or
       ``(II) from grape juice concentrate and water,

       ``(iii) which contains no fruit product or fruit flavoring 
     other than grape, and
       ``(iv) which contains less than 8.5 percent alcohol by 
     volume.
       ``(3) Termination.--This subsection shall not apply to wine 
     removed after December 31, 2019.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to wine removed after December 31, 2017.

     SEC. 13807. REDUCED RATE OF EXCISE TAX ON CERTAIN DISTILLED 
                   SPIRITS.

       (a) In General.--Section 5001 is amended by redesignating 
     subsection (c) as subsection (d) and by inserting after 
     subsection (b) the following new subsection:
       ``(c) Reduced Rate for 2018 and 2019.--
       ``(1) In general.--In the case of a distilled spirits 
     operation, the otherwise applicable tax rate under subsection 
     (a)(1) shall be--
       ``(A) $2.70 per proof gallon on the first 100,000 proof 
     gallons of distilled spirits, and
       ``(B) $13.34 per proof gallon on the first 22,130,000 of 
     proof gallons of distilled spirits to which subparagraph (A) 
     does not apply,
     which have been distilled or processed by such operation and 
     removed during the calendar year for consumption or sale, or 
     which have been imported by the importer into the United 
     States during the calendar year.
       ``(2) Controlled groups.--
       ``(A) In general.--In the case of a controlled group, the 
     proof gallon quantities specified under subparagraphs (A) and 
     (B) of paragraph (1) shall be applied to such group and 
     apportioned among the members of such group in such manner as 
     the Secretary or their delegate shall by regulations 
     prescribe.
       ``(B) Definition.--For purposes of subparagraph (A), the 
     term `controlled group' shall have the meaning given such 
     term by subsection (a) of section 1563, except that `more 
     than 50 percent' shall be substituted for `at least 80 
     percent' each place it appears in such subsection.
       ``(C) Rules for non-corporations.--Under regulations 
     prescribed by the Secretary, principles similar to the 
     principles of subparagraphs (A) and (B) shall be applied to a 
     group under common control where one or more of the persons 
     is not a corporation.
       ``(D) Single taxpayer.--Pursuant to rules issued by the 
     Secretary, two or more entities (whether or not under common 
     control) that produce distilled spirits marketed under a 
     similar brand, license, franchise, or other arrangement shall 
     be treated as a single taxpayer for purposes of the 
     application of this subsection.

[[Page 19906]]

       ``(3) Termination.--This subsection shall not apply to 
     distilled spirits removed after December 31, 2019.''.
       (b) Conforming Amendment.--Section 7652(f)(2) is amended by 
     striking ``section 5001(a)(1)'' and inserting ``subsection 
     (a)(1) of section 5001, determined as if subsection (c)(1) of 
     such section did not apply''.
       (c) Application of Reduced Tax Rate for Foreign 
     Manufacturers and Importers.-- Subsection (c) of section 
     5001, as added by subsection (a), is amended--
       (1) in paragraph (1), by inserting ``but only if the 
     importer is an electing importer under paragraph (3) and the 
     proof gallons of distilled spirits have been assigned to the 
     importer pursuant to such paragraph'' after ``into the United 
     States during the calendar year'', and
       (2) by redesignating paragraph (3) as paragraph (4) and by 
     inserting after paragraph (2) the following new paragraph:
       ``(3) Reduced tax rate for foreign manufacturers and 
     importers.--
       ``(A) In general.--In the case of any proof gallons of 
     distilled spirits which have been produced outside of the 
     United States and imported into the United States, the rate 
     of tax applicable under paragraph (1) (referred to in this 
     paragraph as the `reduced tax rate') may be assigned by the 
     distilled spirits operation (provided that such operation 
     makes an election described in subparagraph (B)(ii)) to any 
     electing importer of such proof gallons pursuant to the 
     requirements established by the Secretary under subparagraph 
     (B).
       ``(B) Assignment.--The Secretary shall, through such rules, 
     regulations, and procedures as are determined appropriate, 
     establish procedures for assignment of the reduced tax rate 
     provided under this paragraph, which shall include--
       ``(i) a limitation to ensure that the number of proof 
     gallons of distilled spirits for which the reduced tax rate 
     has been assigned by a distilled spirits operation--

       ``(I) to any importer does not exceed the number of proof 
     gallons produced by such operation during the calendar year 
     which were imported into the United States by such importer, 
     and
       ``(II) to all importers does not exceed the 22,230,000 
     proof gallons of distilled spirits to which the reduced tax 
     rate applies,

       ``(ii) procedures that allow the election of a distilled 
     spirits operation to assign and an importer to receive the 
     reduced tax rate provided under this paragraph,
       ``(iii) requirements that the distilled spirits operation 
     provide any information as the Secretary determines necessary 
     and appropriate for purposes of carrying out this paragraph, 
     and
       ``(iv) procedures that allow for revocation of eligibility 
     of the distilled spirits operation and the importer for the 
     reduced tax rate provided under this paragraph in the case of 
     any erroneous or fraudulent information provided under clause 
     (iii) which the Secretary deems to be material to qualifying 
     for such reduced rate.
       ``(C) Controlled group.--
       ``(i) In general.--For purposes of this section, any 
     importer making an election described in subparagraph (B)(ii) 
     shall be deemed to be a member of the controlled group of the 
     distilled spirits operation, as described under paragraph 
     (2).
       ``(ii) Apportionment.--For purposes of this paragraph, in 
     the case of a controlled group, rules similar to section 
     5051(a)(5)(B) shall apply.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to distilled spirits removed after December 31, 
     2017.

     SEC. 13808. BULK DISTILLED SPIRITS.

       (a) In General.--Section 5212 is amended by adding at the 
     end the following sentence: ``In the case of distilled 
     spirits transferred in bond after December 31, 2017, and 
     before January 1, 2020, this section shall be applied without 
     regard to whether distilled spirits are bulk distilled 
     spirits.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply distilled spirits transferred in bond after 
     December 31, 2017.

                  Subpart B--Miscellaneous Provisions

     SEC. 13821. MODIFICATION OF TAX TREATMENT OF ALASKA NATIVE 
                   CORPORATIONS AND SETTLEMENT TRUSTS.

       (a) Exclusion for ANCSA Payments Assigned to Alaska Native 
     Settlement Trusts.--
       (1) In general.--Part III of subchapter B of chapter 1 is 
     amended by inserting before section 140 the following new 
     section:

     ``SEC. 139G. ASSIGNMENTS TO ALASKA NATIVE SETTLEMENT TRUSTS.

       ``(a) In General.--In the case of a Native Corporation, 
     gross income shall not include the value of any payments that 
     would otherwise be made, or treated as being made, to such 
     Native Corporation pursuant to, or as required by, any 
     provision of the Alaska Native Claims Settlement Act (43 
     U.S.C. 1601 et seq.), including any payment that would 
     otherwise be made to a Village Corporation pursuant to 
     section 7(j) of the Alaska Native Claims Settlement Act (43 
     U.S.C. 1606(j)), provided that any such payments--
       ``(1) are assigned in writing to a Settlement Trust, and
       ``(2) were not received by such Native Corporation prior to 
     the assignment described in paragraph (1).
       ``(b) Inclusion in Gross Income.--In the case of a 
     Settlement Trust which has been assigned payments described 
     in subsection (a), gross income shall include such payments 
     when received by such Settlement Trust pursuant to the 
     assignment and shall have the same character as if such 
     payments were received by the Native Corporation.
       ``(c) Amount and Scope of Assignment.--The amount and scope 
     of any assignment under subsection (a) shall be described 
     with reasonable particularity and may either be in a 
     percentage of one or more such payments or in a fixed dollar 
     amount.
       ``(d) Duration of Assignment; Revocability.--Any assignment 
     under subsection (a) shall specify--
       ``(1) a duration either in perpetuity or for a period of 
     time, and
       ``(2) whether such assignment is revocable.
       ``(e) Prohibition on Deduction.--Notwithstanding section 
     247, no deduction shall be allowed to a Native Corporation 
     for purposes of any amounts described in subsection (a).
       ``(f) Definitions.--For purposes of this section, the terms 
     `Native Corporation' and `Settlement Trust' have the same 
     meaning given such terms under section 646(h).''.
       (2) Conforming amendment.--The table of sections for part 
     III of subchapter B of chapter 1 is amended by inserting 
     before the item relating to section 140 the following new 
     item:

``Sec. 139G. Assignments to Alaska Native Settlement Trusts.''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to taxable years beginning after December 31, 
     2016.
       (b) Deduction of Contributions to Alaska Native Settlement 
     Trusts.--
       (1) In general.--Part VIII of subchapter B of chapter 1 is 
     amended by inserting before section 248 the following new 
     section:

     ``SEC. 247. CONTRIBUTIONS TO ALASKA NATIVE SETTLEMENT TRUSTS.

       ``(a) In General.--In the case of a Native Corporation, 
     there shall be allowed a deduction for any contributions made 
     by such Native Corporation to a Settlement Trust (regardless 
     of whether an election under section 646 is in effect for 
     such Settlement Trust) for which the Native Corporation has 
     made an annual election under subsection (e).
       ``(b) Amount of Deduction.--The amount of the deduction 
     under subsection (a) shall be equal to--
       ``(1) in the case of a cash contribution (regardless of the 
     method of payment, including currency, coins, money order, or 
     check), the amount of such contribution, or
       ``(2) in the case of a contribution not described in 
     paragraph (1), the lesser of--
       ``(A) the Native Corporation's adjusted basis in the 
     property contributed, or
       ``(B) the fair market value of the property contributed.
       ``(c) Limitation and Carryover.--
       ``(1) In general.--Subject to paragraph (2), the deduction 
     allowed under subsection (a) for any taxable year shall not 
     exceed the taxable income (as determined without regard to 
     such deduction) of the Native Corporation for the taxable 
     year in which the contribution was made.
       ``(2) Carryover.--If the aggregate amount of contributions 
     described in subsection (a) for any taxable year exceeds the 
     limitation under paragraph (1), such excess shall be treated 
     as a contribution described in subsection (a) in each of the 
     15 succeeding years in order of time.
       ``(d) Definitions.--For purposes of this section, the terms 
     `Native Corporation' and `Settlement Trust' have the same 
     meaning given such terms under section 646(h).
       ``(e) Manner of Making Election.--
       ``(1) In general.--For each taxable year, a Native 
     Corporation may elect to have this section apply for such 
     taxable year on the income tax return or an amendment or 
     supplement to the return of the Native Corporation, with such 
     election to have effect solely for such taxable year.
       ``(2) Revocation.--Any election made by a Native 
     Corporation pursuant to this subsection may be revoked 
     pursuant to a timely filed amendment or supplement to the 
     income tax return of such Native Corporation.
       ``(f) Additional Rules.--
       ``(1) Earnings and profits.--Notwithstanding section 
     646(d)(2), in the case of a Native Corporation which claims a 
     deduction under this section for any taxable year, the 
     earnings and profits of such Native Corporation for such 
     taxable year shall be reduced by the amount of such 
     deduction.
       ``(2) Gain or loss.--No gain or loss shall be recognized by 
     the Native Corporation with respect to a contribution of 
     property for which a deduction is allowed under this section.
       ``(3) Income.--Subject to subsection (g), a Settlement 
     Trust shall include in income the amount of any deduction 
     allowed under this section in the taxable year in which the 
     Settlement Trust actually receives such contribution.
       ``(4) Period.--The holding period under section 1223 of the 
     Settlement Trust shall include the period the property was 
     held by the Native Corporation.
       ``(5) Basis.--The basis that a Settlement Trust has for 
     which a deduction is allowed under this section shall be 
     equal to the lesser of--
       ``(A) the adjusted basis of the Native Corporation in such 
     property immediately before such contribution, or
       ``(B) the fair market value of the property immediately 
     before such contribution.
       ``(6) Prohibition.--No deduction shall be allowed under 
     this section with respect to any contributions made to a 
     Settlement Trust which are in violation of subsection (a)(2) 
     or (c)(2) of section 39 of the Alaska Native Claims 
     Settlement Act (43 U.S.C. 1629e).
       ``(g) Election by Settlement Trust to Defer Income 
     Recognition.--

[[Page 19907]]

       ``(1) In general.--In the case of a contribution which 
     consists of property other than cash, a Settlement Trust may 
     elect to defer recognition of any income related to such 
     property until the sale or exchange of such property, in 
     whole or in part, by the Settlement Trust.
       ``(2) Treatment.--In the case of property described in 
     paragraph (1), any income or gain realized on the sale or 
     exchange of such property shall be treated as--
       ``(A) for such amount of the income or gain as is equal to 
     or less than the amount of income which would be included in 
     income at the time of contribution under subsection (f)(3) 
     but for the taxpayer's election under this subsection, 
     ordinary income, and
       ``(B) for any amounts of the income or gain which are in 
     excess of the amount of income which would be included in 
     income at the time of contribution under subsection (f)(3) 
     but for the taxpayer's election under this subsection, having 
     the same character as if this subsection did not apply.
       ``(3) Election.--
       ``(A) In general.--For each taxable year, a Settlement 
     Trust may elect to apply this subsection for any property 
     described in paragraph (1) which was contributed during such 
     year. Any property to which the election applies shall be 
     identified and described with reasonable particularity on the 
     income tax return or an amendment or supplement to the return 
     of the Settlement Trust, with such election to have effect 
     solely for such taxable year.
       ``(B) Revocation.--Any election made by a Settlement Trust 
     pursuant to this subsection may be revoked pursuant to a 
     timely filed amendment or supplement to the income tax return 
     of such Settlement Trust.
       ``(C) Certain dispositions.--
       ``(i) In general.--In the case of any property for which an 
     election is in effect under this subsection and which is 
     disposed of within the first taxable year subsequent to the 
     taxable year in which such property was contributed to the 
     Settlement Trust--

       ``(I) this section shall be applied as if the election 
     under this subsection had not been made,
       ``(II) any income or gain which would have been included in 
     the year of contribution under subsection (f)(3) but for the 
     taxpayer's election under this subsection shall be included 
     in income for the taxable year of such contribution, and
       ``(III) the Settlement Trust shall pay any increase in tax 
     resulting from such inclusion, including any applicable 
     interest, and increased by 10 percent of the amount of such 
     increase with interest.

       ``(ii) Assessment.--Notwithstanding section 6501(a), any 
     amount described in subclause (III) of clause (i) may be 
     assessed, or a proceeding in court with respect to such 
     amount may be initiated without assessment, within 4 years 
     after the date on which the return making the election under 
     this subsection for such property was filed.''.
       (2) Conforming amendment.--The table of sections for part 
     VIII of subchapter B of chapter 1 is amended by inserting 
     before the item relating to section 248 the following new 
     item:

``Sec. 247. Contributions to Alaska Native Settlement Trusts.''.
       (3) Effective date.--
       (A) In general.--The amendments made by this subsection 
     shall apply to taxable years for which the period of 
     limitation on refund or credit under section 6511 of the 
     Internal Revenue Code of 1986 has not expired.
       (B) One-year waiver of statute of limitations.--If the 
     period of limitation on a credit or refund resulting from the 
     amendments made by paragraph (1) expires before the end of 
     the 1-year period beginning on the date of the enactment of 
     this Act, refund or credit of such overpayment (to the extent 
     attributable to such amendments) may, nevertheless, be made 
     or allowed if claim therefor is filed before the close of 
     such 1-year period.
       (c) Information Reporting for Deductible Contributions to 
     Alaska Native Settlement Trusts.--
       (1) In general.--Section 6039H is amended--
       (A) in the heading, by striking ``sponsoring'', and
       (B) by adding at the end the following new subsection:
       ``(e) Deductible Contributions by Native Corporations to 
     Alaska Native Settlement Trusts.--
       ``(1) In general.--Any Native Corporation (as defined in 
     subsection (m) of section 3 of the Alaska Native Claims 
     Settlement Act (43 U.S.C. 1602(m))) which has made a 
     contribution to a Settlement Trust (as defined in subsection 
     (t) of such section) to which an election under subsection 
     (e) of section 247 applies shall provide such Settlement 
     Trust with a statement regarding such election not later than 
     January 31 of the calendar year subsequent to the calendar 
     year in which the contribution was made.
       ``(2) Content of statement.--The statement described in 
     paragraph (1) shall include--
       ``(A) the total amount of contributions to which the 
     election under subsection (e) of section 247 applies,
       ``(B) for each contribution, whether such contribution was 
     in cash,
       ``(C) for each contribution which consists of property 
     other than cash, the date that such property was acquired by 
     the Native Corporation and the adjusted basis and fair market 
     value of such property on the date such property was 
     contributed to the Settlement Trust,
       ``(D) the date on which each contribution was made to the 
     Settlement Trust, and
       ``(E) such information as the Secretary determines to be 
     necessary or appropriate for the identification of each 
     contribution and the accurate inclusion of income relating to 
     such contributions by the Settlement Trust.''.
       (2) Conforming amendment.--The item relating to section 
     6039H in the table of sections for subpart A of part III of 
     subchapter A of chapter 61 is amended to read as follows:

``Sec. 6039H. Information With Respect to Alaska Native Settlement 
              Trusts and Native Corporations.''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to taxable years beginning after December 31, 
     2016.

     SEC. 13822. AMOUNTS PAID FOR AIRCRAFT MANAGEMENT SERVICES.

       (a) In General.--Subsection (e) of section 4261 is amended 
     by adding at the end the following new paragraph:
       ``(5) Amounts paid for aircraft management services.--
       ``(A) In general.--No tax shall be imposed by this section 
     or section 4271 on any amounts paid by an aircraft owner for 
     aircraft management services related to--
       ``(i) maintenance and support of the aircraft owner's 
     aircraft, or
       ``(ii) flights on the aircraft owner's aircraft.
       ``(B) Aircraft management services.--For purposes of 
     subparagraph (A), the term `aircraft management services' 
     includes--
       ``(i) assisting an aircraft owner with administrative and 
     support services, such as scheduling, flight planning, and 
     weather forecasting,
       ``(ii) obtaining insurance,
       ``(iii) maintenance, storage and fueling of aircraft,
       ``(iv) hiring, training, and provision of pilots and crew,
       ``(v) establishing and complying with safety standards, and
       ``(vi) such other services as are necessary to support 
     flights operated by an aircraft owner.
       ``(C) Lessee treated as aircraft owner.--
       ``(i) In general.--For purposes of this paragraph, the term 
     `aircraft owner' includes a person who leases the aircraft 
     other than under a disqualified lease.
       ``(ii) Disqualified lease.--For purposes of clause (i), the 
     term `disqualified lease' means a lease from a person 
     providing aircraft management services with respect to such 
     aircraft (or a related person (within the meaning of section 
     465(b)(3)(C)) to the person providing such services), if such 
     lease is for a term of 31 days or less.
       ``(D) Pro rata allocation.--In the case of amounts paid to 
     any person which (but for this subsection) are subject to the 
     tax imposed by subsection (a), a portion of which consists of 
     amounts described in subparagraph (A), this paragraph shall 
     apply on a pro rata basis only to the portion which consists 
     of amounts described in such subparagraph.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to amounts paid after the date of the enactment 
     of this Act.

     SEC. 13823. OPPORTUNITY ZONES.

       (a) In General.--Chapter 1 is amended by adding at the end 
     the following:

                   ``Subchapter Z--Opportunity Zones

``Sec. 1400Z-1. Designation.
``Sec. 1400Z-2. Special rules for capital gains invested in opportunity 
              zones.

     ``SEC. 1400Z-1. DESIGNATION.

       ``(a) Qualified Opportunity Zone Defined.--For the purposes 
     of this subchapter, the term `qualified opportunity zone' 
     means a population census tract that is a low-income 
     community that is designated as a qualified opportunity zone.
       ``(b) Designation.--
       ``(1) In general.--For purposes of subsection (a), a 
     population census tract that is a low-income community is 
     designated as a qualified opportunity zone if--
       ``(A) not later than the end of the determination period, 
     the chief executive officer of the State in which the tract 
     is located--
       ``(i) nominates the tract for designation as a qualified 
     opportunity zone, and
       ``(ii) notifies the Secretary in writing of such 
     nomination, and
       ``(B) the Secretary certifies such nomination and 
     designates such tract as a qualified opportunity zone before 
     the end of the consideration period.
       ``(2) Extension of periods.--A chief executive officer of a 
     State may request that the Secretary extend either the 
     determination or consideration period, or both (determined 
     without regard to this subparagraph), for an additional 30 
     days.
       ``(c) Other Definitions.--For purposes of this subsection--
       ``(1) Low-income communities.--The term `low-income 
     community' has the same meaning as when used in section 
     45D(e).
       ``(2) Definition of periods.--
       ``(A) Consideration period.--The term `consideration 
     period' means the 30-day period beginning on the date on 
     which the Secretary receives notice under subsection 
     (b)(1)(A)(ii), as extended under subsection (b)(2).
       ``(B) Determination period.--The term `determination 
     period' means the 90-day period beginning on the date of the 
     enactment of the Tax Cuts and Jobs Act, as extended under 
     subsection (b)(2).
       ``(3) State.--For purposes of this section, the term 
     `State' includes any possession of the United States.
       ``(d) Number of Designations.--
       ``(1) In general.--Except as provided by paragraph (2), the 
     number of population census

[[Page 19908]]

     tracts in a State that may be designated as qualified 
     opportunity zones under this section may not exceed 25 
     percent of the number of low-income communities in the State.
       ``(2) Exception.--If the number of low-income communities 
     in a State is less than 100, then a total of 25 of such 
     tracts may be designated as qualified opportunity zones.
       ``(e) Designation of Tracts Contiguous With Low-income 
     Communities.--
       ``(1) In general.--A population census tract that is not a 
     low-income community may be designated as a qualified 
     opportunity zone under this section if--
       ``(A) the tract is contiguous with the low-income community 
     that is designated as a qualified opportunity zone, and
       ``(B) the median family income of the tract does not exceed 
     125 percent of the median family income of the low-income 
     community with which the tract is contiguous.
       ``(2) Limitation.--Not more than 5 percent of the 
     population census tracts designated in a State as a qualified 
     opportunity zone may be designated under paragraph (1).
       ``(f) Period for Which Designation Is in Effect.--A 
     designation as a qualified opportunity zone shall remain in 
     effect for the period beginning on the date of the 
     designation and ending at the close of the 10th calendar year 
     beginning on or after such date of designation.

     ``SEC. 1400Z-2. SPECIAL RULES FOR CAPITAL GAINS INVESTED IN 
                   OPPORTUNITY ZONES.

       ``(a) In General.--
       ``(1) Treatment of gains.--In the case of gain from the 
     sale to, or exchange with, an unrelated person of any 
     property held by the taxpayer, at the election of the 
     taxpayer--
       ``(A) gross income for the taxable year shall not include 
     so much of such gain as does not exceed the aggregate amount 
     invested by the taxpayer in a qualified opportunity fund 
     during the 180-day period beginning on the date of such sale 
     or exchange,
       ``(B) the amount of gain excluded by subparagraph (A) shall 
     be included in gross income as provided by subsection (b), 
     and
       ``(C) subsection (c) shall apply.
       ``(2) Election.--No election may be made under paragraph 
     (1)--
       ``(A) with respect to a sale or exchange if an election 
     previously made with respect to such sale or exchange is in 
     effect, or
       ``(B) with respect to any sale or exchange after December 
     31, 2026.
       ``(b) Deferral of Gain Invested in Opportunity Zone 
     Property.--
       ``(1) Year of inclusion.--Gain to which subsection 
     (a)(1)(B) applies shall be included in income in the taxable 
     year which includes the earlier of--
       ``(A) the date on which such investment is sold or 
     exchanged, or
       ``(B) December 31, 2026.
       ``(2) Amount includible.--
       ``(A) In general.--The amount of gain included in gross 
     income under subsection (a)(1)(A) shall be the excess of--
       ``(i) the lesser of the amount of gain excluded under 
     paragraph (1) or the fair market value of the investment as 
     determined as of the date described in paragraph (1), over
       ``(ii) the taxpayer's basis in the investment.
       ``(B) Determination of basis.--
       ``(i) In general.--Except as otherwise provided in this 
     clause or subsection (c), the taxpayer's basis in the 
     investment shall be zero.
       ``(ii) Increase for gain recognized under subsection 
     (a)(1)(B).--The basis in the investment shall be increased by 
     the amount of gain recognized by reason of subsection 
     (a)(1)(B) with respect to such property.
       ``(iii) Investments held for 5 years.--In the case of any 
     investment held for at least 5 years, the basis of such 
     investment shall be increased by an amount equal to 10 
     percent of the amount of gain deferred by reason of 
     subsection (a)(1)(A).
       ``(iv) Investments held for 7 years.--In the case of any 
     investment held by the taxpayer for at least 7 years, in 
     addition to any adjustment made under clause (iii), the basis 
     of such property shall be increased by an amount equal to 5 
     percent of the amount of gain deferred by reason of 
     subsection (a)(1)(A).
       ``(c) Special Rule for Investments Held for at Least 10 
     Years.--In the case of any investment held by the taxpayer 
     for at least 10 years and with respect to which the taxpayer 
     makes an election under this clause, the basis of such 
     property shall be equal to the fair market value of such 
     investment on the date that the investment is sold or 
     exchanged.
       ``(d) Qualified Opportunity Fund.--For purposes of this 
     section--
       ``(1) In general.--The term `qualified opportunity fund' 
     means any investment vehicle which is organized as a 
     corporation or a partnership for the purpose of investing in 
     qualified opportunity zone property (other than another 
     qualified opportunity fund) that holds at least 90 percent of 
     its assets in qualified opportunity zone property, determined 
     by the average of the percentage of qualified opportunity 
     zone property held in the fund as measured--
       ``(A) on the last day of the first 6-month period of the 
     taxable year of the fund, and
       ``(B) on the last day of the taxable year of the fund.
       ``(2) Qualified opportunity zone property.--
       ``(A) In general.--The term `qualified opportunity zone 
     property' means property which is--
       ``(i) qualified opportunity zone stock,
       ``(ii) qualified opportunity zone partnership interest, or
       ``(iii) qualified opportunity zone business property.
       ``(B) Qualified opportunity zone stock.--
       ``(i) In general.--Except as provided in clause (ii), the 
     term `qualified opportunity zone stock' means any stock in a 
     domestic corporation if--

       ``(I) such stock is acquired by the qualified opportunity 
     fund after December 31, 2017, at its original issue (directly 
     or through an underwriter) from the corporation solely in 
     exchange for cash,
       ``(II) as of the time such stock was issued, such 
     corporation was a qualified opportunity zone business (or, in 
     the case of a new corporation, such corporation was being 
     organized for purposes of being a qualified opportunity zone 
     business), and
       ``(III) during substantially all of the qualified 
     opportunity fund's holding period for such stock, such 
     corporation qualified as a qualified opportunity zone 
     business.

       ``(ii) Redemptions.--A rule similar to the rule of section 
     1202(c)(3) shall apply for purposes of this paragraph.
       ``(C) Qualified opportunity zone partnership interest.--The 
     term `qualified opportunity zone partnership interest' means 
     any capital or profits interest in a domestic partnership 
     if--
       ``(i) such interest is acquired by the qualified 
     opportunity fund after December 31, 2017, from the 
     partnership solely in exchange for cash,
       ``(ii) as of the time such interest was acquired, such 
     partnership was a qualified opportunity zone business (or, in 
     the case of a new partnership, such partnership was being 
     organized for purposes of being a qualified opportunity zone 
     business), and
       ``(iii) during substantially all of the qualified 
     opportunity fund's holding period for such interest, such 
     partnership qualified as a qualified opportunity zone 
     business.
       ``(D) Qualified opportunity zone business property.--
       ``(i) In general.--The term `qualified opportunity zone 
     business property' means tangible property used in a trade or 
     business of the qualified opportunity fund if--

       ``(I) such property was acquired by the qualified 
     opportunity fund by purchase (as defined in section 
     179(d)(2)) after December 31, 2017,
       ``(II) the original use of such property in the qualified 
     opportunity zone commences with the qualified opportunity 
     fund or the qualified opportunity fund substantially improves 
     the property, and
       ``(III) during substantially all of the qualified 
     opportunity fund's holding period for such property, 
     substantially all of the use of such property was in a 
     qualified opportunity zone.

       ``(ii) Substantial improvement.--For purposes of 
     subparagraph (A)(ii), property shall be treated as 
     substantially improved by the qualified opportunity fund only 
     if, during any 30-month period beginning after the date of 
     acquisition of such property, additions to basis with respect 
     to such property in the hands of the qualified opportunity 
     fund exceed an amount equal to the adjusted basis of such 
     property at the beginning of such 30-month period in the 
     hands of the qualified opportunity fund.
       ``(iii) Related party.--For purposes of subparagraph 
     (A)(i), the related person rule of section 179(d)(2) shall be 
     applied pursuant to paragraph (8) of this subsection in lieu 
     of the application of such rule in section 179(d)(2)(A).
       ``(3) Qualified opportunity zone business.--
       ``(A) In general.--The term `qualified opportunity zone 
     business' means a trade or business--
       ``(i) in which substantially all of the tangible property 
     owned or leased by the taxpayer is qualified opportunity zone 
     business property (determined by substituting `qualified 
     opportunity zone business' for `qualified opportunity fund' 
     each place it appears in paragraph (2)(D)),
       ``(ii) which satisfies the requirements of paragraphs (2), 
     (4), and (8) of section 1397C(b), and
       ``(iii) which is not described in section 144(c)(6)(B).
       ``(B) Special rule.--For purposes of subparagraph (A), 
     tangible property that ceases to be a qualified opportunity 
     zone business property shall continue to be treated as a 
     qualified opportunity zone business property for the lesser 
     of--
       ``(i) 5 years after the date on which such tangible 
     property ceases to be so qualified, or
       ``(ii) the date on which such tangible property is no 
     longer held by the qualified opportunity zone business.
       ``(e) Applicable Rules.--
       ``(1) Treatment of investments with mixed funds.--In the 
     case of any investment in a qualified opportunity fund only a 
     portion of which consists of investments of gain to which an 
     election under subsection (a) is in effect--
       ``(A) such investment shall be treated as 2 separate 
     investments, consisting of--
       ``(i) one investment that only includes amounts to which 
     the election under subsection (a) applies, and
       ``(ii) a separate investment consisting of other amounts, 
     and
       ``(B) subsections (a), (b), and (c) shall only apply to the 
     investment described in subparagraph (A)(i).
       ``(2) Related persons.--For purposes of this section, 
     persons are related to each other if such persons are 
     described in section 267(b) or 707(b)(1), determined by 
     substituting `20 percent' for `50 percent' each place it 
     occurs in such sections.
       ``(3) Decedents.--In the case of a decedent, amounts 
     recognized under this section shall, if

[[Page 19909]]

     not properly includible in the gross income of the decedent, 
     be includible in gross income as provided by section 691.
       ``(4) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section, including--
       ``(A) rules for the certification of qualified opportunity 
     funds for the purposes of this section,
       ``(B) rules to ensure a qualified opportunity fund has a 
     reasonable period of time to reinvest the return of capital 
     from investments in qualified opportunity zone stock and 
     qualified opportunity zone partnership interests, and to 
     reinvest proceeds received from the sale or disposition of 
     qualified opportunity zone property, and
       ``(C) rules to prevent abuse.
       ``(f) Failure of Qualified Opportunity Fund to Maintain 
     Investment Standard.--
       ``(1) In general.--If a qualified opportunity fund fails to 
     meet the 90-percent requirement of subsection (c)(1), the 
     qualified opportunity fund shall pay a penalty for each month 
     it fails to meet the requirement in an amount equal to the 
     product of--
       ``(A) the excess of--
       ``(i) the amount equal to 90 percent of its aggregate 
     assets, over
       ``(ii) the aggregate amount of qualified opportunity zone 
     property held by the fund, multiplied by
       ``(B) the underpayment rate established under section 
     6621(a)(2) for such month.
       ``(2) Special rule for partnerships.--In the case that the 
     qualified opportunity fund is a partnership, the penalty 
     imposed by paragraph (1) shall be taken into account 
     proportionately as part of the distributive share of each 
     partner of the partnership.
       ``(3) Reasonable cause exception.--No penalty shall be 
     imposed under this subsection with respect to any failure if 
     it is shown that such failure is due to reasonable cause.''.
       (b) Basis Adjustments.--Section 1016(a) is amended by 
     striking ``and'' at the end of paragraph (36), by striking 
     the period at the end of paragraph (37) and inserting ``, 
     and'', and by inserting after paragraph (37) the following:
       ``(38) to the extent provided in subsections (b)(2) and (c) 
     of section 1400Z-2.''.
       (c) Clerical Amendment.--The table of subchapters for 
     chapter 1 is amended by adding at the end the following new 
     item:

                  ``subchapter z. opportunity zones''.

       (d) Effective Date.--The amendments made by this section 
     shall take effect on the date of the enactment of this Act.

                Subtitle D--International Tax Provisions

                     PART I--OUTBOUND TRANSACTIONS

Subpart A--Establishment of Participation Exemption System for Taxation 
                           of Foreign Income

     SEC. 14101. DEDUCTION FOR FOREIGN-SOURCE PORTION OF DIVIDENDS 
                   RECEIVED BY DOMESTIC CORPORATIONS FROM 
                   SPECIFIED 10-PERCENT OWNED FOREIGN 
                   CORPORATIONS.

       (a) In General.--Part VIII of subchapter B of chapter 1 is 
     amended by inserting after section 245 the following new 
     section:

     ``SEC. 245A. DEDUCTION FOR FOREIGN SOURCE-PORTION OF 
                   DIVIDENDS RECEIVED BY DOMESTIC CORPORATIONS 
                   FROM SPECIFIED 10-PERCENT OWNED FOREIGN 
                   CORPORATIONS.

       ``(a) In General.--In the case of any dividend received 
     from a specified 10-percent owned foreign corporation by a 
     domestic corporation which is a United States shareholder 
     with respect to such foreign corporation, there shall be 
     allowed as a deduction an amount equal to the foreign-source 
     portion of such dividend.
       ``(b) Specified 10-percent Owned Foreign Corporation.--For 
     purposes of this section--
       ``(1) In general.--The term `specified 10-percent owned 
     foreign corporation' means any foreign corporation with 
     respect to which any domestic corporation is a United States 
     shareholder with respect to such corporation.
       ``(2) Exclusion of passive foreign investment companies.--
     Such term shall not include any corporation which is a 
     passive foreign investment company (as defined in section 
     1297) with respect to the shareholder and which is not a 
     controlled foreign corporation.
       ``(c) Foreign-source Portion.--For purposes of this 
     section--
       ``(1) In general.--The foreign-source portion of any 
     dividend from a specified 10-percent owned foreign 
     corporation is an amount which bears the same ratio to such 
     dividend as--
       ``(A) the undistributed foreign earnings of the specified 
     10-percent owned foreign corporation, bears to
       ``(B) the total undistributed earnings of such foreign 
     corporation.
       ``(2) Undistributed earnings.--The term `undistributed 
     earnings' means the amount of the earnings and profits of the 
     specified 10-percent owned foreign corporation (computed in 
     accordance with sections 964(a) and 986)--
       ``(A) as of the close of the taxable year of the specified 
     10-percent owned foreign corporation in which the dividend is 
     distributed, and
       ``(B) without diminution by reason of dividends distributed 
     during such taxable year.
       ``(3) Undistributed foreign earnings.--The term 
     `undistributed foreign earnings' means the portion of the 
     undistributed earnings which is attributable to neither--
       ``(A) income described in subparagraph (A) of section 
     245(a)(5), nor
       ``(B) dividends described in subparagraph (B) of such 
     section (determined without regard to section 245(a)(12)).
       ``(d) Disallowance of Foreign Tax Credit, etc.--
       ``(1) In general.--No credit shall be allowed under section 
     901 for any taxes paid or accrued (or treated as paid or 
     accrued) with respect to any dividend for which a deduction 
     is allowed under this section.
       ``(2) Denial of deduction.--No deduction shall be allowed 
     under this chapter for any tax for which credit is not 
     allowable under section 901 by reason of paragraph (1) 
     (determined by treating the taxpayer as having elected the 
     benefits of subpart A of part III of subchapter N).
       ``(e) Special Rules for Hybrid Dividends.--
       ``(1) In general.--Subsection (a) shall not apply to any 
     dividend received by a United States shareholder from a 
     controlled foreign corporation if the dividend is a hybrid 
     dividend.
       ``(2) Hybrid dividends of tiered corporations.--If a 
     controlled foreign corporation with respect to which a 
     domestic corporation is a United States shareholder receives 
     a hybrid dividend from any other controlled foreign 
     corporation with respect to which such domestic corporation 
     is also a United States shareholder, then, notwithstanding 
     any other provision of this title--
       ``(A) the hybrid dividend shall be treated for purposes of 
     section 951(a)(1)(A) as subpart F income of the receiving 
     controlled foreign corporation for the taxable year of the 
     controlled foreign corporation in which the dividend was 
     received, and
       ``(B) the United States shareholder shall include in gross 
     income an amount equal to the shareholder's pro rata share 
     (determined in the same manner as under section 951(a)(2)) of 
     the subpart F income described in subparagraph (A).
       ``(3) Denial of foreign tax credit, etc.--The rules of 
     subsection (d) shall apply to any hybrid dividend received 
     by, or any amount included under paragraph (2) in the gross 
     income of, a United States shareholder.
       ``(4) Hybrid dividend.--The term `hybrid dividend' means an 
     amount received from a controlled foreign corporation--
       ``(A) for which a deduction would be allowed under 
     subsection (a) but for this subsection, and
       ``(B) for which the controlled foreign corporation received 
     a deduction (or other tax benefit) with respect to any 
     income, war profits, or excess profits taxes imposed by any 
     foreign country or possession of the United States.
       ``(f) Special Rule for Purging Distributions of Passive 
     Foreign Investment Companies.--Any amount which is treated as 
     a dividend under section 1291(d)(2)(B) shall not be treated 
     as a dividend for purposes of this section.
       ``(g) Regulations.--The Secretary shall prescribe such 
     regulations or other guidance as may be necessary or 
     appropriate to carry out the provisions of this section, 
     including regulations for the treatment of United States 
     shareholders owning stock of a specified 10 percent owned 
     foreign corporation through a partnership.''.
       (b) Application of Holding Period Requirement.--Subsection 
     (c) of section 246 is amended--
       (1) by striking ``or 245'' in paragraph (1) and inserting 
     ``245, or 245A'', and
       (2) by adding at the end the following new paragraph:
       ``(5) Special rules for foreign source portion of dividends 
     received from specified 10-percent owned foreign 
     corporations.--
       ``(A) 1-year holding period requirement.--For purposes of 
     section 245A--
       ``(i) paragraph (1)(A) shall be applied--

       ``(I) by substituting `365 days' for `45 days' each place 
     it appears, and
       ``(II) by substituting `731-day period' for `91-day 
     period', and

       ``(ii) paragraph (2) shall not apply.
       ``(B) Status must be maintained during holding period.--For 
     purposes of applying paragraph (1) with respect to section 
     245A, the taxpayer shall be treated as holding the stock 
     referred to in paragraph (1) for any period only if--
       ``(i) the specified 10-percent owned foreign corporation 
     referred to in section 245A(a) is a specified 10-percent 
     owned foreign corporation at all times during such period, 
     and
       ``(ii) the taxpayer is a United States shareholder with 
     respect to such specified 10-percent owned foreign 
     corporation at all times during such period.''.
       (c) Application of Rules Generally Applicable to Deductions 
     for Dividends Received.--
       (1) Treatment of dividends from certain corporations.--
     Paragraph (1) of section 246(a) is amended by striking ``and 
     245'' and inserting ``245, and 245A''.
       (2) Coordination with section 1059.--Subparagraph (B) of 
     section 1059(b)(2) is amended by striking ``or 245'' and 
     inserting ``245, or 245A''.
       (d) Coordination With Foreign Tax Credit Limitation.--
     Subsection (b) of section 904 is amended by adding at the end 
     the following new paragraph:
       ``(5) Treatment of dividends for which deduction is allowed 
     under section 245a.--For purposes of subsection (a), in the 
     case of a domestic corporation which is a United States 
     shareholder with respect to a specified 10-percent owned 
     foreign corporation, such shareholder's taxable income from 
     sources without the United States (and entire taxable income) 
     shall be determined without regard to--
       ``(A) the foreign-source portion of any dividend received 
     from such foreign corporation, and
       ``(B) any deductions properly allocable or apportioned to--

[[Page 19910]]

       ``(i) income (other than amounts includible under section 
     951(a)(1) or 951A(a)) with respect to stock of such specified 
     10-percent owned foreign corporation, or
       ``(ii) such stock to the extent income with respect to such 
     stock is other than amounts includible under section 
     951(a)(1) or 951A(a).
     Any term which is used in section 245A and in this paragraph 
     shall have the same meaning for purposes of this paragraph as 
     when used in such section.''.
       (e) Conforming Amendments.--
       (1) Subsection (b) of section 951 is amended by striking 
     ``subpart'' and inserting ``title''.
       (2) Subsection (a) of section 957 is amended by striking 
     ``subpart'' in the matter preceding paragraph (1) and 
     inserting ``title''.
       (3) The table of sections for part VIII of subchapter B of 
     chapter 1 is amended by inserting after the item relating to 
     section 245 the following new item:

``Sec. 245A. Deduction for foreign source-portion of dividends received 
              by domestic corporations from certain 10-percent owned 
              foreign corporations.''.
       (f) Effective Date.--The amendments made by this section 
     shall apply to distributions made after (and, in the case of 
     the amendments made by subsection (d), deductions with 
     respect to taxable years ending after) December 31, 2017.

     SEC. 14102. SPECIAL RULES RELATING TO SALES OR TRANSFERS 
                   INVOLVING SPECIFIED 10-PERCENT OWNED FOREIGN 
                   CORPORATIONS.

       (a) Sales by United States Persons of Stock.--
       (1) In general.--Section 1248 is amended by redesignating 
     subsection (j) as subsection (k) and by inserting after 
     subsection (i) the following new subsection:
       ``(j) Coordination With Dividends Received Deduction.--In 
     the case of the sale or exchange by a domestic corporation of 
     stock in a foreign corporation held for 1 year or more, any 
     amount received by the domestic corporation which is treated 
     as a dividend by reason of this section shall be treated as a 
     dividend for purposes of applying section 245A.''.
       (2) Effective date.--The amendments made by this subsection 
     shall apply to sales or exchanges after December 31, 2017.
       (b) Basis in Specified 10-percent Owned Foreign Corporation 
     Reduced by Nontaxed Portion of Dividend for Purposes of 
     Determining Loss.--
       (1) In general.--Section 961 is amended by adding at the 
     end the following new subsection:
       ``(d) Basis in Specified 10-percent Owned Foreign 
     Corporation Reduced by Nontaxed Portion of Dividend for 
     Purposes of Determining Loss.--If a domestic corporation 
     received a dividend from a specified 10-percent owned foreign 
     corporation (as defined in section 245A) in any taxable year, 
     solely for purposes of determining loss on any disposition of 
     stock of such foreign corporation in such taxable year or any 
     subsequent taxable year, the basis of such domestic 
     corporation in such stock shall be reduced (but not below 
     zero) by the amount of any deduction allowable to such 
     domestic corporation under section 245A with respect to such 
     stock except to the extent such basis was reduced under 
     section 1059 by reason of a dividend for which such a 
     deduction was allowable.''.
       (2) Effective date.--The amendments made by this subsection 
     shall apply to distributions made after December 31, 2017.
       (c) Sale by a CFC of a Lower Tier CFC.--
       (1) In general.--Section 964(e) is amended by adding at the 
     end the following new paragraph:
       ``(4) Coordination with dividends received deduction.--
       ``(A) In general.--If, for any taxable year of a controlled 
     foreign corporation beginning after December 31, 2017, any 
     amount is treated as a dividend under paragraph (1) by reason 
     of a sale or exchange by the controlled foreign corporation 
     of stock in another foreign corporation held for 1 year or 
     more, then, notwithstanding any other provision of this 
     title--
       ``(i) the foreign-source portion of such dividend shall be 
     treated for purposes of section 951(a)(1)(A) as subpart F 
     income of the selling controlled foreign corporation for such 
     taxable year,
       ``(ii) a United States shareholder with respect to the 
     selling controlled foreign corporation shall include in gross 
     income for the taxable year of the shareholder with or within 
     which such taxable year of the controlled foreign corporation 
     ends an amount equal to the shareholder's pro rata share 
     (determined in the same manner as under section 951(a)(2)) of 
     the amount treated as subpart F income under clause (i), and
       ``(iii) the deduction under section 245A(a) shall be 
     allowable to the United States shareholder with respect to 
     the subpart F income included in gross income under clause 
     (ii) in the same manner as if such subpart F income were a 
     dividend received by the shareholder from the selling 
     controlled foreign corporation.
       ``(B) Application of basis or similar adjustment.--For 
     purposes of this title, in the case of a sale or exchange by 
     a controlled foreign corporation of stock in another foreign 
     corporation in a taxable year of the selling controlled 
     foreign corporation beginning after December 31, 2017, rules 
     similar to the rules of section 961(d) shall apply.
       ``(C) Foreign-source portion.--For purposes of this 
     paragraph, the foreign-source portion of any amount treated 
     as a dividend under paragraph (1) shall be determined in the 
     same manner as under section 245A(c).''.
       (2) Effective date.--The amendments made by this subsection 
     shall apply to sales or exchanges after December 31, 2017.
       (d) Treatment of Foreign Branch Losses Transferred to 
     Specified 10-percent Owned Foreign Corporations.--
       (1) In general.--Part II of subchapter B of chapter 1 is 
     amended by adding at the end the following new section:

     ``SEC. 91. CERTAIN FOREIGN BRANCH LOSSES TRANSFERRED TO 
                   SPECIFIED 10-PERCENT OWNED FOREIGN 
                   CORPORATIONS.

       ``(a) In General.--If a domestic corporation transfers 
     substantially all of the assets of a foreign branch (within 
     the meaning of section 367(a)(3)(C), as in effect before the 
     date of the enactment of the Tax Cuts and Jobs Act) to a 
     specified 10-percent owned foreign corporation (as defined in 
     section 245A) with respect to which it is a United States 
     shareholder after such transfer, such domestic corporation 
     shall include in gross income for the taxable year which 
     includes such transfer an amount equal to the transferred 
     loss amount with respect to such transfer.
       ``(b) Transferred Loss Amount.--For purposes of this 
     section, the term `transferred loss amount' means, with 
     respect to any transfer of substantially all of the assets of 
     a foreign branch, the excess (if any) of--
       ``(1) the sum of losses--
       ``(A) which were incurred by the foreign branch after 
     December 31, 2017, and before the transfer, and
       ``(B) with respect to which a deduction was allowed to the 
     taxpayer, over
       ``(2) the sum of--
       ``(A) any taxable income of such branch for a taxable year 
     after the taxable year in which the loss was incurred and 
     through the close of the taxable year of the transfer, and
       ``(B) any amount which is recognized under section 
     904(f)(3) on account of the transfer.
       ``(c) Reduction for Recognized Gains.--The transferred loss 
     amount shall be reduced (but not below zero) by the amount of 
     gain recognized by the taxpayer on account of the transfer 
     (other than amounts taken into account under subsection 
     (b)(2)(B)).
       ``(d) Source of Income.--Amounts included in gross income 
     under this section shall be treated as derived from sources 
     within the United States.
       ``(e) Basis Adjustments.--Consistent with such regulations 
     or other guidance as the Secretary shall prescribe, proper 
     adjustments shall be made in the adjusted basis of the 
     taxpayer's stock in the specified 10-percent owned foreign 
     corporation to which the transfer is made, and in the 
     transferee's adjusted basis in the property transferred, to 
     reflect amounts included in gross income under this 
     section.''.
       (2) Clerical amendment.--The table of sections for part II 
     of subchapter B of chapter 1 is amended by adding at the end 
     the following new item:

``Sec. 91. Certain foreign branch losses transferred to specified 10-
              percent owned foreign corporations.''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to transfers after December 31, 2017.
       (4) Transition rule.--The amount of gain taken into account 
     under section 91(c) of the Internal Revenue Code of 1986, as 
     added by this subsection, shall be reduced by the amount of 
     gain which would be recognized under section 367(a)(3)(C) 
     (determined without regard to the amendments made by 
     subsection (e)) with respect to losses incurred before 
     January 1, 2018.
       (e) Repeal of Active Trade or Business Exception Under 
     Section 367.--
       (1) In general.--Section 367(a) is amended by striking 
     paragraph (3) and redesignating paragraphs (4), (5), and (6) 
     as paragraphs (3), (4), and (5), respectively.
       (2) Conforming amendments.--Section 367(a)(4), as 
     redesignated by paragraph (1), is amended--
       (A) by striking ``Paragraphs (2) and (3)'' and inserting 
     ``Paragraph (2)'', and
       (B) by striking ``Paragraphs (2) and (3)'' in the heading 
     and inserting ``Paragraph (2)''.
       (3) Effective date.--The amendments made by this subsection 
     shall apply to transfers after December 31, 2017.

     SEC. 14103. TREATMENT OF DEFERRED FOREIGN INCOME UPON 
                   TRANSITION TO PARTICIPATION EXEMPTION SYSTEM OF 
                   TAXATION.

       (a) In General.--Section 965 is amended to read as follows:

     ``SEC. 965. TREATMENT OF DEFERRED FOREIGN INCOME UPON 
                   TRANSITION TO PARTICIPATION EXEMPTION SYSTEM OF 
                   TAXATION.

       ``(a) Treatment of Deferred Foreign Income as Subpart F 
     Income.--In the case of the last taxable year of a deferred 
     foreign income corporation which begins before January 1, 
     2018, the subpart F income of such foreign corporation (as 
     otherwise determined for such taxable year under section 952) 
     shall be increased by the greater of--
       ``(1) the accumulated post-1986 deferred foreign income of 
     such corporation determined as of November 2, 2017, or
       ``(2) the accumulated post-1986 deferred foreign income of 
     such corporation determined as of December 31, 2017.
       ``(b) Reduction in Amounts Included in Gross Income of 
     United States Shareholders of Specified Foreign Corporations 
     With Deficits in Earnings and Profits.--

[[Page 19911]]

       ``(1) In general.--In the case of a taxpayer which is a 
     United States shareholder with respect to at least one 
     deferred foreign income corporation and at least one E&P 
     deficit foreign corporation, the amount which would (but for 
     this subsection) be taken into account under section 
     951(a)(1) by reason of subsection (a) as such United States 
     shareholder's pro rata share of the subpart F income of each 
     deferred foreign income corporation shall be reduced by the 
     amount of such United States shareholder's aggregate foreign 
     E&P deficit which is allocated under paragraph (2) to such 
     deferred foreign income corporation.
       ``(2) Allocation of aggregate foreign e&p deficit.--The 
     aggregate foreign E&P deficit of any United States 
     shareholder shall be allocated among the deferred foreign 
     income corporations of such United States shareholder in an 
     amount which bears the same proportion to such aggregate as--
       ``(A) such United States shareholder's pro rata share of 
     the accumulated post-1986 deferred foreign income of each 
     such deferred foreign income corporation, bears to
       ``(B) the aggregate of such United States shareholder's pro 
     rata share of the accumulated post-1986 deferred foreign 
     income of all deferred foreign income corporations of such 
     United States shareholder.
       ``(3) Definitions related to e&p deficits.--For purposes of 
     this subsection--
       ``(A) Aggregate foreign e&p deficit.--
       ``(i) In general.--The term `aggregate foreign E&P deficit' 
     means, with respect to any United States shareholder, the 
     lesser of--

       ``(I) the aggregate of such shareholder's pro rata shares 
     of the specified E&P deficits of the E&P deficit foreign 
     corporations of such shareholder, or
       ``(II) the amount determined under paragraph (2)(B).

       ``(ii) Allocation of deficit.--If the amount described in 
     clause (i)(II) is less than the amount described in clause 
     (i)(I), then the shareholder shall designate, in such form 
     and manner as the Secretary determines--

       ``(I) the amount of the specified E&P deficit which is to 
     be taken into account for each E&P deficit corporation with 
     respect to the taxpayer, and
       ``(II) in the case of an E&P deficit corporation which has 
     a qualified deficit (as defined in section 952), the portion 
     (if any) of the deficit taken into account under subclause 
     (I) which is attributable to a qualified deficit, including 
     the qualified activities to which such portion is 
     attributable.

       ``(B) E&P deficit foreign corporation.--The term `E&P 
     deficit foreign corporation' means, with respect to any 
     taxpayer, any specified foreign corporation with respect to 
     which such taxpayer is a United States shareholder, if, as of 
     November 2, 2017--
       ``(i) such specified foreign corporation has a deficit in 
     post-1986 earnings and profits,
       ``(ii) such corporation was a specified foreign 
     corporation, and
       ``(iii) such taxpayer was a United States shareholder of 
     such corporation.
       ``(C) Specified e&p deficit.--The term `specified E&P 
     deficit' means, with respect to any E&P deficit foreign 
     corporation, the amount of the deficit referred to in 
     subparagraph (B).
       ``(4) Treatment of earnings and profits in future years.--
       ``(A) Reduced earnings and profits treated as previously 
     taxed income when distributed.--For purposes of applying 
     section 959 in any taxable year beginning with the taxable 
     year described in subsection (a), with respect to any United 
     States shareholder of a deferred foreign income corporation, 
     an amount equal to such shareholder's reduction under 
     paragraph (1) which is allocated to such deferred foreign 
     income corporation under this subsection shall be treated as 
     an amount which was included in the gross income of such 
     United States shareholder under section 951(a).
       ``(B) E&P deficits.--For purposes of this title, with 
     respect to any taxable year beginning with the taxable year 
     described in subsection (a), a United States shareholder's 
     pro rata share of the earnings and profits of any E&P deficit 
     foreign corporation under this subsection shall be increased 
     by the amount of the specified E&P deficit of such 
     corporation taken into account by such shareholder under 
     paragraph (1), and, for purposes of section 952, such 
     increase shall be attributable to the same activity to which 
     the deficit so taken into account was attributable.
       ``(5) Netting among united states shareholders in same 
     affiliated group.--
       ``(A) In general.--In the case of any affiliated group 
     which includes at least one E&P net surplus shareholder and 
     one E&P net deficit shareholder, the amount which would (but 
     for this paragraph) be taken into account under section 
     951(a)(1) by reason of subsection (a) by each such E&P net 
     surplus shareholder shall be reduced (but not below zero) by 
     such shareholder's applicable share of the affiliated group's 
     aggregate unused E&P deficit.
       ``(B) E&P net surplus shareholder.--For purposes of this 
     paragraph, the term `E&P net surplus shareholder' means any 
     United States shareholder which would (determined without 
     regard to this paragraph) take into account an amount greater 
     than zero under section 951(a)(1) by reason of subsection 
     (a).
       ``(C) E&P net deficit shareholder.--For purposes of this 
     paragraph, the term `E&P net deficit shareholder' means any 
     United States shareholder if--
       ``(i) the aggregate foreign E&P deficit with respect to 
     such shareholder (as defined in paragraph (3)(A) without 
     regard to clause (i)(II) thereof), exceeds
       ``(ii) the amount which would (but for this subsection) be 
     taken into account by such shareholder under section 
     951(a)(1) by reason of subsection (a).
       ``(D) Aggregate unused e&p deficit.--For purposes of this 
     paragraph--
       ``(i) In general.--The term `aggregate unused E&P deficit' 
     means, with respect to any affiliated group, the lesser of--

       ``(I) the sum of the excesses described in subparagraph 
     (C), determined with respect to each E&P net deficit 
     shareholder in such group, or
       ``(II) the amount determined under subparagraph (E)(ii).

       ``(ii) Reduction with respect to e&p net deficit 
     shareholders which are not wholly owned by the affiliated 
     group.--If the group ownership percentage of any E&P net 
     deficit shareholder is less than 100 percent, the amount of 
     the excess described in subparagraph (C) which is taken into 
     account under clause (i)(I) with respect to such E&P net 
     deficit shareholder shall be such group ownership percentage 
     of such amount.
       ``(E) Applicable share.--For purposes of this paragraph, 
     the term `applicable share' means, with respect to any E&P 
     net surplus shareholder in any affiliated group, the amount 
     which bears the same proportion to such group's aggregate 
     unused E&P deficit as--
       ``(i) the product of--

       ``(I) such shareholder's group ownership percentage, 
     multiplied by
       ``(II) the amount which would (but for this paragraph) be 
     taken into account under section 951(a)(1) by reason of 
     subsection (a) by such shareholder, bears to

       ``(ii) the aggregate amount determined under clause (i) 
     with respect to all E&P net surplus shareholders in such 
     group.
       ``(F) Group ownership percentage.--For purposes of this 
     paragraph, the term `group ownership percentage' means, with 
     respect to any United States shareholder in any affiliated 
     group, the percentage of the value of the stock of such 
     United States shareholder which is held by other includible 
     corporations in such affiliated group. Notwithstanding the 
     preceding sentence, the group ownership percentage of the 
     common parent of the affiliated group is 100 percent. Any 
     term used in this subparagraph which is also used in section 
     1504 shall have the same meaning as when used in such 
     section.
       ``(c) Application of Participation Exemption to Included 
     Income.--
       ``(1) In general.--In the case of a United States 
     shareholder of a deferred foreign income corporation, there 
     shall be allowed as a deduction for the taxable year in which 
     an amount is included in the gross income of such United 
     States shareholder under section 951(a)(1) by reason of this 
     section an amount equal to the sum of--
       ``(A) the United States shareholder's 8 percent rate 
     equivalent percentage of the excess (if any) of--
       ``(i) the amount so included as gross income, over
       ``(ii) the amount of such United States shareholder's 
     aggregate foreign cash position, plus
       ``(B) the United States shareholder's 15.5 percent rate 
     equivalent percentage of so much of the amount described in 
     subparagraph (A)(ii) as does not exceed the amount described 
     in subparagraph (A)(i).
       ``(2) 8 and 15.5 percent rate equivalent percentages.--For 
     purposes of this subsection--
       ``(A) 8 percent rate equivalent percentage.--The term `8 
     percent rate equivalent percentage' means, with respect to 
     any United States shareholder for any taxable year, the 
     percentage which would result in the amount to which such 
     percentage applies being subject to a 8 percent rate of tax 
     determined by only taking into account a deduction equal to 
     such percentage of such amount and the highest rate of tax 
     specified in section 11 for such taxable year. In the case of 
     any taxable year of a United States shareholder to which 
     section 15 applies, the highest rate of tax under section 11 
     before the effective date of the change in rates and the 
     highest rate of tax under section 11 after the effective date 
     of such change shall each be taken into account under the 
     preceding sentence in the same proportions as the portion of 
     such taxable year which is before and after such effective 
     date, respectively.
       ``(B) 15.5 percent rate equivalent percentage.--The term 
     `15.5 percent rate equivalent percentage' means, with respect 
     to any United States shareholder for any taxable year, the 
     percentage determined under subparagraph (A) applied by 
     substituting `15.5 percent rate of tax' for `8 percent rate 
     of tax'.
       ``(3) Aggregate foreign cash position.--For purposes of 
     this subsection--
       ``(A) In general.--The term `aggregate foreign cash 
     position' means, with respect to any United States 
     shareholder, the greater of--
       ``(i) the aggregate of such United States shareholder's pro 
     rata share of the cash position of each specified foreign 
     corporation of such United States shareholder determined as 
     of the close of the last taxable year of such specified 
     foreign corporation which begins before January 1, 2018, or
       ``(ii) one half of the sum of--

       ``(I) the aggregate described in clause (i) determined as 
     of the close of the last taxable year of each such specified 
     foreign corporation which ends before November 2, 2017, plus
       ``(II) the aggregate described in clause (i) determined as 
     of the close of the taxable year of each such specified 
     foreign corporation which

[[Page 19912]]

     precedes the taxable year referred to in subclause (I).

       ``(B) Cash position.--For purposes of this paragraph, the 
     cash position of any specified foreign corporation is the sum 
     of--
       ``(i) cash held by such foreign corporation,
       ``(ii) the net accounts receivable of such foreign 
     corporation, plus
       ``(iii) the fair market value of the following assets held 
     by such corporation:

       ``(I) Personal property which is of a type that is actively 
     traded and for which there is an established financial 
     market.
       ``(II) Commercial paper, certificates of deposit, the 
     securities of the Federal government and of any State or 
     foreign government.
       ``(III) Any foreign currency.
       ``(IV) Any obligation with a term of less than one year.
       ``(V) Any asset which the Secretary identifies as being 
     economically equivalent to any asset described in this 
     subparagraph.

       ``(C) Net accounts receivable.--For purposes of this 
     paragraph, the term `net accounts receivable' means, with 
     respect to any specified foreign corporation, the excess (if 
     any) of--
       ``(i) such corporation's accounts receivable, over
       ``(ii) such corporation's accounts payable (determined 
     consistent with the rules of section 461).
       ``(D) Prevention of double counting.--Cash positions of a 
     specified foreign corporation described in clause (ii), 
     (iii)(I), or (iii)(IV) of subparagraph (B) shall not be taken 
     into account by a United States shareholder under 
     subparagraph (A) to the extent that such United States 
     shareholder demonstrates to the satisfaction of the Secretary 
     that such amount is so taken into account by such United 
     States shareholder with respect to another specified foreign 
     corporation.
       ``(E) Cash positions of certain non-corporate entities 
     taken into account.--An entity (other than a corporation) 
     shall be treated as a specified foreign corporation of a 
     United States shareholder for purposes of determining such 
     United States shareholder's aggregate foreign cash position 
     if any interest in such entity is held by a specified foreign 
     corporation of such United States shareholder (determined 
     after application of this subparagraph) and such entity would 
     be a specified foreign corporation of such United States 
     shareholder if such entity were a foreign corporation.
       ``(F) Anti-abuse.--If the Secretary determines that a 
     principal purpose of any transaction was to reduce the 
     aggregate foreign cash position taken into account under this 
     subsection, such transaction shall be disregarded for 
     purposes of this subsection.
       ``(d) Deferred Foreign Income Corporation; Accumulated 
     Post-1986 Deferred Foreign Income.--For purposes of this 
     section--
       ``(1) Deferred foreign income corporation.--The term 
     `deferred foreign income corporation' means, with respect to 
     any United States shareholder, any specified foreign 
     corporation of such United States shareholder which has 
     accumulated post-1986 deferred foreign income (as of the date 
     referred to in paragraph (1) or (2) of subsection (a)) 
     greater than zero.
       ``(2) Accumulated post-1986 deferred foreign income.--The 
     term `accumulated post-1986 deferred foreign income' means 
     the post-1986 earnings and profits except to the extent such 
     earnings--
       ``(A) are attributable to income of the specified foreign 
     corporation which is effectively connected with the conduct 
     of a trade or business within the United States and subject 
     to tax under this chapter, or
       ``(B) in the case of a controlled foreign corporation, if 
     distributed, would be excluded from the gross income of a 
     United States shareholder under section 959.
     To the extent provided in regulations or other guidance 
     prescribed by the Secretary, in the case of any controlled 
     foreign corporation which has shareholders which are not 
     United States shareholders, accumulated post-1986 deferred 
     foreign income shall be appropriately reduced by amounts 
     which would be described in subparagraph (B) if such 
     shareholders were United States shareholders.
       ``(3) Post-1986 earnings and profits.--The term `post-1986 
     earnings and profits' means the earnings and profits of the 
     foreign corporation (computed in accordance with sections 
     964(a) and 986, and by only taking into account periods when 
     the foreign corporation was a specified foreign corporation) 
     accumulated in taxable years beginning after December 31, 
     1986, and determined--
       ``(A) as of the date referred to in paragraph (1) or (2) of 
     subsection (a), whichever is applicable with respect to such 
     foreign corporation, and
       ``(B) without diminution by reason of dividends distributed 
     during the taxable year described in subsection (a) other 
     than dividends distributed to another specified foreign 
     corporation.
       ``(e) Specified Foreign Corporation.--
       ``(1) In general.--For purposes of this section, the term 
     `specified foreign corporation' means--
       ``(A) any controlled foreign corporation, and
       ``(B) any foreign corporation with respect to which one or 
     more domestic corporations is a United States shareholder.
       ``(2) Application to certain foreign corporations.--For 
     purposes of sections 951 and 961, a foreign corporation 
     described in paragraph (1)(B) shall be treated as a 
     controlled foreign corporation solely for purposes of taking 
     into account the subpart F income of such corporation under 
     subsection (a) (and for purposes of applying subsection (f)).
       ``(3) Exclusion of passive foreign investment companies.--
     Such term shall not include any corporation which is a 
     passive foreign investment company (as defined in section 
     1297) with respect to the shareholder and which is not a 
     controlled foreign corporation.
       ``(f) Determinations of Pro Rata Share.--
       ``(1) In general.--For purposes of this section, the 
     determination of any United States shareholder's pro rata 
     share of any amount with respect to any specified foreign 
     corporation shall be determined under rules similar to the 
     rules of section 951(a)(2) by treating such amount in the 
     same manner as subpart F income (and by treating such 
     specified foreign corporation as a controlled foreign 
     corporation).
       ``(2) Special rules.--The portion which is included in the 
     income of a United States shareholder under section 951(a)(1) 
     by reason of subsection (a) which is equal to the deduction 
     allowed under subsection (c) by reason of such inclusion--
       ``(A) shall be treated as income exempt from tax for 
     purposes of sections 705(a)(1)(B) and 1367(a)(1)(A), and
       ``(B) shall not be treated as income exempt from tax for 
     purposes of determining whether an adjustment shall be made 
     to an accumulated adjustment account under section 
     1368(e)(1)(A).
       ``(g) Disallowance of Foreign Tax Credit, etc.--
       ``(1) In general.--No credit shall be allowed under section 
     901 for the applicable percentage of any taxes paid or 
     accrued (or treated as paid or accrued) with respect to any 
     amount for which a deduction is allowed under this section.
       ``(2) Applicable percentage.--For purposes of this 
     subsection, the term `applicable percentage' means the amount 
     (expressed as a percentage) equal to the sum of--
       ``(A) 0.771 multiplied by the ratio of--
       ``(i) the excess to which subsection (c)(1)(A) applies, 
     divided by
       ``(ii) the sum of such excess plus the amount to which 
     subsection (c)(1)(B) applies, plus
       ``(B) 0.557 multiplied by the ratio of--
       ``(i) the amount to which subsection (c)(1)(B) applies, 
     divided by
       ``(ii) the sum described in subparagraph (A)(ii).
       ``(3) Denial of deduction.--No deduction shall be allowed 
     under this chapter for any tax for which credit is not 
     allowable under section 901 by reason of paragraph (1) 
     (determined by treating the taxpayer as having elected the 
     benefits of subpart A of part III of subchapter N).
       ``(4) Coordination with section 78.--With respect to the 
     taxes treated as paid or accrued by a domestic corporation 
     with respect to amounts which are includible in gross income 
     of such domestic corporation by reason of this section, 
     section 78 shall apply only to so much of such taxes as bears 
     the same proportion to the amount of such taxes as--
       ``(A) the excess of--
       ``(i) the amounts which are includible in gross income of 
     such domestic corporation by reason of this section, over
       ``(ii) the deduction allowable under subsection (c) with 
     respect to such amounts, bears to
       ``(B) such amounts.
       ``(h) Election to Pay Liability in Installments.--
       ``(1) In general.--In the case of a United States 
     shareholder of a deferred foreign income corporation, such 
     United States shareholder may elect to pay the net tax 
     liability under this section in 8 installments of the 
     following amounts:
       ``(A) 8 percent of the net tax liability in the case of 
     each of the first 5 of such installments,
       ``(B) 15 percent of the net tax liability in the case of 
     the 6th such installment,
       ``(C) 20 percent of the net tax liability in the case of 
     the 7th such installment, and
       ``(D) 25 percent of the net tax liability in the case of 
     the 8th such installment.
       ``(2) Date for payment of installments.--If an election is 
     made under paragraph (1), the first installment shall be paid 
     on the due date (determined without regard to any extension 
     of time for filing the return) for the return of tax for the 
     taxable year described in subsection (a) and each succeeding 
     installment shall be paid on the due date (as so determined) 
     for the return of tax for the taxable year following the 
     taxable year with respect to which the preceding installment 
     was made.
       ``(3) Acceleration of payment.--If there is an addition to 
     tax for failure to timely pay any installment required under 
     this subsection, a liquidation or sale of substantially all 
     the assets of the taxpayer (including in a title 11 or 
     similar case), a cessation of business by the taxpayer, or 
     any similar circumstance, then the unpaid portion of all 
     remaining installments shall be due on the date of such event 
     (or in the case of a title 11 or similar case, the day before 
     the petition is filed). The preceding sentence shall not 
     apply to the sale of substantially all the assets of a 
     taxpayer to a buyer if such buyer enters into an agreement 
     with the Secretary under which such buyer is liable for the 
     remaining installments due under this subsection in the same 
     manner as if such buyer were the taxpayer.
       ``(4) Proration of deficiency to installments.--If an 
     election is made under paragraph (1) to pay the net tax 
     liability under this section in installments and a deficiency 
     has been assessed with respect to such net tax liability, the 
     deficiency shall be prorated to the installments payable 
     under paragraph (1). The part of the deficiency so prorated 
     to any installment the date for payment of which has not 
     arrived shall

[[Page 19913]]

     be collected at the same time as, and as a part of, such 
     installment. The part of the deficiency so prorated to any 
     installment the date for payment of which has arrived shall 
     be paid upon notice and demand from the Secretary. This 
     subsection shall not apply if the deficiency is due to 
     negligence, to intentional disregard of rules and 
     regulations, or to fraud with intent to evade tax.
       ``(5) Election.--Any election under paragraph (1) shall be 
     made not later than the due date for the return of tax for 
     the taxable year described in subsection (a) and shall be 
     made in such manner as the Secretary shall provide.
       ``(6) Net tax liability under this section.--For purposes 
     of this subsection--
       ``(A) In general.--The net tax liability under this section 
     with respect to any United States shareholder is the excess 
     (if any) of--
       ``(i) such taxpayer's net income tax for the taxable year 
     in which an amount is included in the gross income of such 
     United States shareholder under section 951(a)(1) by reason 
     of this section, over
       ``(ii) such taxpayer's net income tax for such taxable year 
     determined--

       ``(I) without regard to this section, and
       ``(II) without regard to any income or deduction properly 
     attributable to a dividend received by such United States 
     shareholder from any deferred foreign income corporation.

       ``(B) Net income tax.--The term `net income tax' means the 
     regular tax liability reduced by the credits allowed under 
     subparts A, B, and D of part IV of subchapter A.
       ``(i) Special Rules for S Corporation Shareholders.--
       ``(1) In general.--In the case of any S corporation which 
     is a United States shareholder of a deferred foreign income 
     corporation, each shareholder of such S corporation may elect 
     to defer payment of such shareholder's net tax liability 
     under this section with respect to such S corporation until 
     the shareholder's taxable year which includes the triggering 
     event with respect to such liability. Any net tax liability 
     payment of which is deferred under the preceding sentence 
     shall be assessed on the return of tax as an addition to tax 
     in the shareholder's taxable year which includes such 
     triggering event.
       ``(2) Triggering event.--
       ``(A) In general.--In the case of any shareholder's net tax 
     liability under this section with respect to any S 
     corporation, the triggering event with respect to such 
     liability is whichever of the following occurs first:
       ``(i) Such corporation ceases to be an S corporation 
     (determined as of the first day of the first taxable year 
     that such corporation is not an S corporation).
       ``(ii) A liquidation or sale of substantially all the 
     assets of such S corporation (including in a title 11 or 
     similar case), a cessation of business by such S corporation, 
     such S corporation ceases to exist, or any similar 
     circumstance.
       ``(iii) A transfer of any share of stock in such S 
     corporation by the taxpayer (including by reason of death, or 
     otherwise).
       ``(B) Partial transfers of stock.--In the case of a 
     transfer of less than all of the taxpayer's shares of stock 
     in the S corporation, such transfer shall only be a 
     triggering event with respect to so much of the taxpayer's 
     net tax liability under this section with respect to such S 
     corporation as is properly allocable to such stock.
       ``(C) Transfer of liability.--A transfer described in 
     clause (iii) of subparagraph (A) shall not be treated as a 
     triggering event if the transferee enters into an agreement 
     with the Secretary under which such transferee is liable for 
     net tax liability with respect to such stock in the same 
     manner as if such transferee were the taxpayer.
       ``(3) Net tax liability.--A shareholder's net tax liability 
     under this section with respect to any S corporation is the 
     net tax liability under this section which would be 
     determined under subsection (h)(6) if the only subpart F 
     income taken into account by such shareholder by reason of 
     this section were allocations from such S corporation.
       ``(4) Election to pay deferred liability in installments.--
     In the case of a taxpayer which elects to defer payment under 
     paragraph (1)--
       ``(A) subsection (h) shall be applied separately with 
     respect to the liability to which such election applies,
       ``(B) an election under subsection (h) with respect to such 
     liability shall be treated as timely made if made not later 
     than the due date for the return of tax for the taxable year 
     in which the triggering event with respect to such liability 
     occurs,
       ``(C) the first installment under subsection (h) with 
     respect to such liability shall be paid not later than such 
     due date (but determined without regard to any extension of 
     time for filing the return), and
       ``(D) if the triggering event with respect to any net tax 
     liability is described in paragraph (2)(A)(ii), an election 
     under subsection (h) with respect to such liability may be 
     made only with the consent of the Secretary.
       ``(5) Joint and several liability of s corporation.--If any 
     shareholder of an S corporation elects to defer payment under 
     paragraph (1), such S corporation shall be jointly and 
     severally liable for such payment and any penalty, addition 
     to tax, or additional amount attributable thereto.
       ``(6) Extension of limitation on collection.--Any 
     limitation on the time period for the collection of a 
     liability deferred under this subsection shall not be treated 
     as beginning before the date of the triggering event with 
     respect to such liability.
       ``(7) Annual reporting of net tax liability.--
       ``(A) In general.--Any shareholder of an S corporation 
     which makes an election under paragraph (1) shall report the 
     amount of such shareholder's deferred net tax liability on 
     such shareholder's return of tax for the taxable year for 
     which such election is made and on the return of tax for each 
     taxable year thereafter until such amount has been fully 
     assessed on such returns.
       ``(B) Deferred net tax liability.--For purposes of this 
     paragraph, the term `deferred net tax liability' means, with 
     respect to any taxable year, the amount of net tax liability 
     payment of which has been deferred under paragraph (1) and 
     which has not been assessed on a return of tax for any prior 
     taxable year.
       ``(C) Failure to report.--In the case of any failure to 
     report any amount required to be reported under subparagraph 
     (A) with respect to any taxable year before the due date for 
     the return of tax for such taxable year, there shall be 
     assessed on such return as an addition to tax 5 percent of 
     such amount.
       ``(8) Election.--Any election under paragraph (1)--
       ``(A) shall be made by the shareholder of the S corporation 
     not later than the due date for such shareholder's return of 
     tax for the taxable year which includes the close of the 
     taxable year of such S corporation in which the amount 
     described in subsection (a) is taken into account, and
       ``(B) shall be made in such manner as the Secretary shall 
     provide.
       ``(j) Reporting by S Corporation.--Each S corporation which 
     is a United States shareholder of a specified foreign 
     corporation shall report in its return of tax under section 
     6037(a) the amount includible in its gross income for such 
     taxable year by reason of this section and the amount of the 
     deduction allowable by subsection (c). Any copy provided to a 
     shareholder under section 6037(b) shall include a statement 
     of such shareholder's pro rata share of such amounts.
       ``(k) Extension of Limitation on Assessment.--
     Notwithstanding section 6501, the limitation on the time 
     period for the assessment of the net tax liability under this 
     section (as defined in subsection (h)(6)) shall not expire 
     before the date that is 6 years after the return for the 
     taxable year described in such subsection was filed.
       ``(l) Recapture for Expatriated Entities.--
       ``(1) In general.--If a deduction is allowed under 
     subsection (c) to a United States shareholder and such 
     shareholder first becomes an expatriated entity at any time 
     during the 10-year period beginning on the date of the 
     enactment of the Tax Cuts and Jobs Act (with respect to a 
     surrogate foreign corporation which first becomes a surrogate 
     foreign corporation during such period), then--
       ``(A) the tax imposed by this chapter shall be increased 
     for the first taxable year in which such taxpayer becomes an 
     expatriated entity by an amount equal to 35 percent of the 
     amount of the deduction allowed under subsection (c), and
       ``(B) no credits shall be allowed against the increase in 
     tax under subparagraph (A).
       ``(2) Expatriated entity.--For purposes of this subsection, 
     the term `expatriated entity' has the same meaning given such 
     term under section 7874(a)(2), except that such term shall 
     not include an entity if the surrogate foreign corporation 
     with respect to the entity is treated as a domestic 
     corporation under section 7874(b).
       ``(3) Surrogate foreign corporation.--For purposes of this 
     subsection, the term `surrogate foreign corporation' has the 
     meaning given such term in section 7874(a)(2)(B).
       ``(m) Special Rules for United States Shareholders Which 
     Are Real Estate Investment Trusts.--
       ``(1) In general.--If a real estate investment trust is a 
     United States shareholder in 1 or more deferred foreign 
     income corporations--
       ``(A) any amount required to be taken into account under 
     section 951(a)(1) by reason of this section shall not be 
     taken into account as gross income of the real estate 
     investment trust for purposes of applying paragraphs (2) and 
     (3) of section 856(c) to any taxable year for which such 
     amount is taken into account under section 951(a)(1), and
       ``(B) if the real estate investment trust elects the 
     application of this subparagraph, notwithstanding subsection 
     (a), any amount required to be taken into account under 
     section 951(a)(1) by reason of this section shall, in lieu of 
     the taxable year in which it would otherwise be included in 
     gross income (for purposes of the computation of real estate 
     investment trust taxable income under section 857(b)), be 
     included in gross income as follows:
       ``(i) 8 percent of such amount in the case of each of the 
     taxable years in the 5-taxable year period beginning with the 
     taxable year in which such amount would otherwise be 
     included.
       ``(ii) 15 percent of such amount in the case of the 1st 
     taxable year following such period.
       ``(iii) 20 percent of such amount in the case of the 2nd 
     taxable year following such period.
       ``(iv) 25 percent of such amount in the case of the 3rd 
     taxable year following such period.
       ``(2) Rules for trusts electing deferred inclusion.--
       ``(A) Election.--Any election under paragraph (1)(B) shall 
     be made not later than the due date for the first taxable 
     year in the 5-taxable year period described in clause (i) of 
     paragraph (1)(B) and shall be made in such manner as the 
     Secretary shall provide.

[[Page 19914]]

       ``(B) Special rules.--If an election under paragraph (1)(B) 
     is in effect with respect to any real estate investment 
     trust, the following rules shall apply:
       ``(i) Application of participation exemption.--For purposes 
     of subsection (c)(1)--

       ``(I) the aggregate amount to which subparagraph (A) or (B) 
     of subsection (c)(1) applies shall be determined without 
     regard to the election,
       ``(II) each such aggregate amount shall be allocated to 
     each taxable year described in paragraph (1)(B) in the same 
     proportion as the amount included in the gross income of such 
     United States shareholder under section 951(a)(1) by reason 
     of this section is allocated to each such taxable year.
       ``(III) No installment payments.--The real estate 
     investment trust may not make an election under subsection 
     (g) for any taxable year described in paragraph (1)(B).

       ``(ii) Acceleration of inclusion.--If there is a 
     liquidation or sale of substantially all the assets of the 
     real estate investment trust (including in a title 11 or 
     similar case), a cessation of business by such trust, or any 
     similar circumstance, then any amount not yet included in 
     gross income under paragraph (1)(B) shall be included in 
     gross income as of the day before the date of the event and 
     the unpaid portion of any tax liability with respect to such 
     inclusion shall be due on the date of such event (or in the 
     case of a title 11 or similar case, the day before the 
     petition is filed).
       ``(n) Election Not to Apply Net Operating Loss Deduction.--
       ``(1) In general.--If a United States shareholder of a 
     deferred foreign income corporation elects the application of 
     this subsection for the taxable year described in subsection 
     (a), then the amount described in paragraph (2) shall not be 
     taken into account--
       ``(A) in determining the amount of the net operating loss 
     deduction under section 172 of such shareholder for such 
     taxable year, or
       ``(B) in determining the amount of taxable income for such 
     taxable year which may be reduced by net operating loss 
     carryovers or carrybacks to such taxable year under section 
     172.
       ``(2) Amount described.--The amount described in this 
     paragraph is the sum of--
       ``(A) the amount required to be taken into account under 
     section 951(a)(1) by reason of this section (determined after 
     the application of subsection (c)), plus
       ``(B) in the case of a domestic corporation which chooses 
     to have the benefits of subpart A of part III of subchapter N 
     for the taxable year, the taxes deemed to be paid by such 
     corporation under subsections (a) and (b) of section 960 for 
     such taxable year with respect to the amount described in 
     subparagraph (A) which are treated as a dividends under 
     section 78.
       ``(3) Election.--Any election under this subsection shall 
     be made not later than the due date (including extensions) 
     for filing the return of tax for the taxable year and shall 
     be made in such manner as the Secretary shall prescribe.
       ``(o) Regulations.--The Secretary shall prescribe such 
     regulations or other guidance as may be necessary or 
     appropriate to carry out the provisions of this section, 
     including--
       ``(1) regulations or other guidance to provide appropriate 
     basis adjustments, and
       ``(2) regulations or other guidance to prevent the 
     avoidance of the purposes of this section, including through 
     a reduction in earnings and profits, through changes in 
     entity classification or accounting methods, or otherwise.''.
       (b) Clerical Amendment.--The table of sections for subpart 
     F of part III of subchapter N of chapter 1 is amended by 
     striking the item relating to section 965 and inserting the 
     following:

``Sec. 965. Treatment of deferred foreign income upon transition to 
              participation exemption system of taxation.''.

         Subpart B--Rules Related to Passive and Mobile Income

  CHAPTER 1--TAXATION OF FOREIGN-DERIVED INTANGIBLE INCOME AND GLOBAL 
                      INTANGIBLE LOW-TAXED INCOME

     SEC. 14201. CURRENT YEAR INCLUSION OF GLOBAL INTANGIBLE LOW-
                   TAXED INCOME BY UNITED STATES SHAREHOLDERS.

       (a) In General.--Subpart F of part III of subchapter N of 
     chapter 1 is amended by inserting after section 951 the 
     following new section:

     ``SEC. 951A. GLOBAL INTANGIBLE LOW-TAXED INCOME INCLUDED IN 
                   GROSS INCOME OF UNITED STATES SHAREHOLDERS.

       ``(a) In General.--Each person who is a United States 
     shareholder of any controlled foreign corporation for any 
     taxable year of such United States shareholder shall include 
     in gross income such shareholder's global intangible low-
     taxed income for such taxable year.
       ``(b) Global Intangible Low-taxed Income.--For purposes of 
     this section--
       ``(1) In general.--The term `global intangible low-taxed 
     income' means, with respect to any United States shareholder 
     for any taxable year of such United States shareholder, the 
     excess (if any) of--
       ``(A) such shareholder's net CFC tested income for such 
     taxable year, over
       ``(B) such shareholder's net deemed tangible income return 
     for such taxable year.
       ``(2) Net deemed tangible income return.--The term `net 
     deemed tangible income return' means, with respect to any 
     United States shareholder for any taxable year, the excess 
     of--
       ``(A) 10 percent of the aggregate of such shareholder's pro 
     rata share of the qualified business asset investment of each 
     controlled foreign corporation with respect to which such 
     shareholder is a United States shareholder for such taxable 
     year (determined for each taxable year of each such 
     controlled foreign corporation which ends in or with such 
     taxable year of such United States shareholder), over
       ``(B) the amount of interest expense taken into account 
     under subsection (c)(2)(A)(ii) in determining the 
     shareholder's net CFC tested income for the taxable year to 
     the extent the interest income attributable to such expense 
     is not taken into account in determining such shareholder's 
     net CFC tested income.
       ``(c) Net CFC Tested Income.--For purposes of this 
     section--
       ``(1) In general.--The term `net CFC tested income' means, 
     with respect to any United States shareholder for any taxable 
     year of such United States shareholder, the excess (if any) 
     of--
       ``(A) the aggregate of such shareholder's pro rata share of 
     the tested income of each controlled foreign corporation with 
     respect to which such shareholder is a United States 
     shareholder for such taxable year of such United States 
     shareholder (determined for each taxable year of such 
     controlled foreign corporation which ends in or with such 
     taxable year of such United States shareholder), over
       ``(B) the aggregate of such shareholder's pro rata share of 
     the tested loss of each controlled foreign corporation with 
     respect to which such shareholder is a United States 
     shareholder for such taxable year of such United States 
     shareholder (determined for each taxable year of such 
     controlled foreign corporation which ends in or with such 
     taxable year of such United States shareholder).
       ``(2) Tested income; tested loss.--For purposes of this 
     section--
       ``(A) Tested income.--The term `tested income' means, with 
     respect to any controlled foreign corporation for any taxable 
     year of such controlled foreign corporation, the excess (if 
     any) of--
       ``(i) the gross income of such corporation determined 
     without regard to--

       ``(I) any item of income described in section 952(b),
       ``(II) any gross income taken into account in determining 
     the subpart F income of such corporation,
       ``(III) any gross income excluded from the foreign base 
     company income (as defined in section 954) and the insurance 
     income (as defined in section 953) of such corporation by 
     reason of section 954(b)(4),
       ``(IV) any dividend received from a related person (as 
     defined in section 954(d)(3)), and
       ``(V) any foreign oil and gas extraction income (as defined 
     in section 907(c)(1)) of such corporation, over

       ``(ii) the deductions (including taxes) properly allocable 
     to such gross income under rules similar to the rules of 
     section 954(b)(5) (or to which such deductions would be 
     allocable if there were such gross income).
       ``(B) Tested loss.--
       ``(i) In general.--The term `tested loss' means, with 
     respect to any controlled foreign corporation for any taxable 
     year of such controlled foreign corporation, the excess (if 
     any) of the amount described in subparagraph (A)(ii) over the 
     amount described in subparagraph (A)(i).
       ``(ii) Coordination with subpart f to deny double benefit 
     of losses.--Section 952(c)(1)(A) shall be applied by 
     increasing the earnings and profits of the controlled foreign 
     corporation by the tested loss of such corporation.
       ``(d) Qualified Business Asset Investment.--For purposes of 
     this section--
       ``(1) In general.--The term `qualified business asset 
     investment' means, with respect to any controlled foreign 
     corporation for any taxable year, the average of such 
     corporation's aggregate adjusted bases as of the close of 
     each quarter of such taxable year in specified tangible 
     property--
       ``(A) used in a trade or business of the corporation, and
       ``(B) of a type with respect to which a deduction is 
     allowable under section 167.
       ``(2) Specified tangible property.--
       ``(A) In general.--The term `specified tangible property' 
     means, except as provided in subparagraph (B), any tangible 
     property used in the production of tested income.
       ``(B) Dual use property.--In the case of property used both 
     in the production of tested income and income which is not 
     tested income, such property shall be treated as specified 
     tangible property in the same proportion that the gross 
     income described in subsection (c)(1)(A) produced with 
     respect to such property bears to the total gross income 
     produced with respect to such property.
       ``(3) Determination of adjusted basis.--For purposes of 
     this subsection, notwithstanding any provision of this title 
     (or any other provision of law) which is enacted after the 
     date of the enactment of this section, the adjusted basis in 
     any property shall be determined--
       ``(A) by using the alternative depreciation system under 
     section 168(g), and
       ``(B) by allocating the depreciation deduction with respect 
     to such property ratably to each day during the period in the 
     taxable year to which such depreciation relates.
       ``(3) Partnership property.--For purposes of this 
     subsection, if a controlled foreign corporation holds an 
     interest in a partnership at the close of such taxable year 
     of the controlled foreign corporation, such controlled 
     foreign corporation shall take into account under paragraph 
     (1) the controlled foreign corporation's

[[Page 19915]]

     distributive share of the aggregate of the partnership's 
     adjusted bases (determined as of such date in the hands of 
     the partnership) in tangible property held by such 
     partnership to the extent such property--
       ``(A) is used in the trade or business of the partnership,
       ``(B) is of a type with respect to which a deduction is 
     allowable under section 167, and
       ``(C) is used in the production of tested income 
     (determined with respect to such controlled foreign 
     corporation's distributive share of income with respect to 
     such property).
     For purposes of this paragraph, the controlled foreign 
     corporation's distributive share of the adjusted basis of any 
     property shall be the controlled foreign corporation's 
     distributive share of income with respect to such property.
       ``(4) Regulations.--The Secretary shall issue such 
     regulations or other guidance as the Secretary determines 
     appropriate to prevent the avoidance of the purposes of this 
     subsection, including regulations or other guidance which 
     provide for the treatment of property if--
       ``(A) such property is transferred, or held, temporarily, 
     or
       ``(B) the avoidance of the purposes of this paragraph is a 
     factor in the transfer or holding of such property.
       ``(e) Determination of Pro Rata Share, etc.--For purposes 
     of this section--
       ``(1) In general.--The pro rata shares referred to in 
     subsections (b), (c)(1)(A), and (c)(1)(B), respectively, 
     shall be determined under the rules of section 951(a)(2) in 
     the same manner as such section applies to subpart F income 
     and shall be taken into account in the taxable year of the 
     United States shareholder in which or with which the taxable 
     year of the controlled foreign corporation ends.
       ``(2) Treatment as united states shareholder.--A person 
     shall be treated as a United States shareholder of a 
     controlled foreign corporation for any taxable year of such 
     person only if such person owns (within the meaning of 
     section 958(a)) stock in such foreign corporation on the last 
     day in the taxable year of such foreign corporation on which 
     such foreign corporation is a controlled foreign corporation.
       ``(3) Treatment as controlled foreign corporation.--A 
     foreign corporation shall be treated as a controlled foreign 
     corporation for any taxable year if such foreign corporation 
     is a controlled foreign corporation at any time during such 
     taxable year.
       ``(f) Treatment as Subpart F Income for Certain Purposes.--
       ``(1) In general.--
       ``(A) Application.--Except as provided in subparagraph (B), 
     any global intangible low-taxed income included in gross 
     income under subsection (a) shall be treated in the same 
     manner as an amount included under section 951(a)(1)(A) for 
     purposes of applying sections 168(h)(2)(B), 535(b)(10), 
     851(b), 904(h)(1), 959, 961, 962, 993(a)(1)(E), 996(f)(1), 
     1248(b)(1), 1248(d)(1), 6501(e)(1)(C), 6654(d)(2)(D), and 
     6655(e)(4).
       ``(B) Exception.--The Secretary shall provide rules for the 
     application of subparagraph (A) to other provisions of this 
     title in any case in which the determination of subpart F 
     income is required to be made at the level of the controlled 
     foreign corporation.
       ``(2) Allocation of global intangible low-taxed income to 
     controlled foreign corporations.--For purposes of the 
     sections referred to in paragraph (1), with respect to any 
     controlled foreign corporation any pro rata amount from which 
     is taken into account in determining the global intangible 
     low-taxed income included in gross income of a United States 
     shareholder under subsection (a), the portion of such global 
     intangible low-taxed income which is treated as being with 
     respect to such controlled foreign corporation is--
       ``(A) in the case of a controlled foreign corporation with 
     no tested income, zero, and
       ``(B) in the case of a controlled foreign corporation with 
     tested income, the portion of such global intangible low-
     taxed income which bears the same ratio to such global 
     intangible low-taxed income as--
       ``(i) such United States shareholder's pro rata amount of 
     the tested income of such controlled foreign corporation, 
     bears to
       ``(ii) the aggregate amount described in subsection 
     (c)(1)(A) with respect to such United States shareholder.''.
       (b) Foreign Tax Credit.--
       (1) Application of deemed paid foreign tax credit.--Section 
     960 is amended adding at the end the following new 
     subsection:
       ``(d) Deemed Paid Credit for Taxes Properly Attributable to 
     Tested Income.--
       ``(1) In general.--For purposes of subpart A of this part, 
     if any amount is includible in the gross income of a domestic 
     corporation under section 951A, such domestic corporation 
     shall be deemed to have paid foreign income taxes equal to 80 
     percent of the product of--
       ``(A) such domestic corporation's inclusion percentage, 
     multiplied by
       ``(B) the aggregate tested foreign income taxes paid or 
     accrued by controlled foreign corporations.
       ``(2) Inclusion percentage.--For purposes of paragraph (1), 
     the term `inclusion percentage' means, with respect to any 
     domestic corporation, the ratio (expressed as a percentage) 
     of--
       ``(A) such corporation's global intangible low-taxed income 
     (as defined in section 951A(b)), divided by
       ``(B) the aggregate amount described in section 
     951A(c)(1)(A) with respect to such corporation.
       ``(3) Tested foreign income taxes.--For purposes of 
     paragraph (1), the term `tested foreign income taxes' means, 
     with respect to any domestic corporation which is a United 
     States shareholder of a controlled foreign corporation, the 
     foreign income taxes paid or accrued by such foreign 
     corporation which are properly attributable to the tested 
     income of such foreign corporation taken into account by such 
     domestic corporation under section 951A.''.
       (2) Application of foreign tax credit limitation.--
       (A) Separate basket for global intangible low-taxed 
     income.--Section 904(d)(1) is amended by redesignating 
     subparagraphs (A) and (B) as subparagraphs (B) and (C), 
     respectively, and by inserting before subparagraph (B) (as so 
     redesignated) the following new subparagraph:
       ``(A) any amount includible in gross income under section 
     951A (other than passive category income),''.
       (B) Exclusion from general category income.--Section 
     904(d)(2)(A)(ii) is amended by inserting ``income described 
     in paragraph (1)(A) and'' before ``passive category income''.
       (C) No carryover or carryback of excess taxes.--Section 
     904(c) is amended by adding at the end the following: ``This 
     subsection shall not apply to taxes paid or accrued with 
     respect to amounts described in subsection (d)(1)(A).''.
       (c) Clerical Amendment.--The table of sections for subpart 
     F of part III of subchapter N of chapter 1 is amended by 
     inserting after the item relating to section 951 the 
     following new item:

``Sec. 951A. Global intangible low-taxed income included in gross 
              income of United States shareholders.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2017, and to taxable years of 
     United States shareholders in which or with which such 
     taxable years of foreign corporations end.

     SEC. 14202. DEDUCTION FOR FOREIGN-DERIVED INTANGIBLE INCOME 
                   AND GLOBAL INTANGIBLE LOW-TAXED INCOME.

       (a) In General.--Part VIII of subchapter B of chapter 1 is 
     amended by adding at the end the following new section:

     ``SEC. 250. FOREIGN-DERIVED INTANGIBLE INCOME AND GLOBAL 
                   INTANGIBLE LOW-TAXED INCOME.

       ``(a) Allowance of Deduction.--
       ``(1) In general.--In the case of a domestic corporation 
     for any taxable year, there shall be allowed as a deduction 
     an amount equal to the sum of--
       ``(A) 37.5 percent of the foreign-derived intangible income 
     of such domestic corporation for such taxable year, plus
       ``(B) 50 percent of--
       ``(i) the global intangible low-taxed income amount (if 
     any) which is included in the gross income of such domestic 
     corporation under section 951A for such taxable year, and
       ``(ii) the amount treated as a dividend received by such 
     corporation under section 78 which is attributable to the 
     amount described in clause (i).
       ``(2) Limitation based on taxable income.--
       ``(A) In general.--If, for any taxable year--
       ``(i) the sum of the foreign-derived intangible income and 
     the global intangible low-taxed income amount otherwise taken 
     into account by the domestic corporation under paragraph (1), 
     exceeds
       ``(ii) the taxable income of the domestic corporation 
     (determined without regard to this section),
     then the amount of the foreign-derived intangible income and 
     the global intangible low-taxed income amount so taken into 
     account shall be reduced as provided in subparagraph (B).
       ``(B) Reduction.--For purposes of subparagraph (A)--
       ``(i) foreign-derived intangible income shall be reduced by 
     an amount which bears the same ratio to the excess described 
     in subparagraph (A) as such foreign-derived intangible income 
     bears to the sum described in subparagraph (A)(i), and
       ``(ii) the global intangible low-taxed income amount shall 
     be reduced by the remainder of such excess.
       ``(3) Reduction in deduction for taxable years after 
     2025.--In the case of any taxable year beginning after 
     December 31, 2025, paragraph (1) shall be applied by 
     substituting--
       ``(A) `21.875 percent' for `37.5 percent' in subparagraph 
     (A), and
       ``(B) `37.5 percent' for `50 percent' in subparagraph (B).
       ``(b) Foreign-derived Intangible Income.--For purposes of 
     this section--
       ``(1) In general.--The foreign-derived intangible income of 
     any domestic corporation is the amount which bears the same 
     ratio to the deemed intangible income of such corporation 
     as--
       ``(A) the foreign-derived deduction eligible income of such 
     corporation, bears to
       ``(B) the deduction eligible income of such corporation.
       ``(2) Deemed intangible income.--For purposes of this 
     subsection--
       ``(A) In general.--The term `deemed intangible income' 
     means the excess (if any) of--
       ``(i) the deduction eligible income of the domestic 
     corporation, over
       ``(ii) the deemed tangible income return of the 
     corporation.
       ``(B) Deemed tangible income return.--The term `deemed 
     tangible income return' means, with respect to any 
     corporation, an amount

[[Page 19916]]

     equal to 10 percent of the corporation's qualified business 
     asset investment (as defined in section 951A(d), determined 
     by substituting `deduction eligible income' for `tested 
     income' in paragraph (2) thereof and without regard to 
     whether the corporation is a controlled foreign corporation).
       ``(3) Deduction eligible income.--
       ``(A) In general.--The term `deduction eligible income' 
     means, with respect to any domestic corporation, the excess 
     (if any) of--
       ``(i) gross income of such corporation determined without 
     regard to--

       ``(I) any amount included in the gross income of such 
     corporation under section 951(a)(1),
       ``(II) the global intangible low-taxed income included in 
     the gross income of such corporation under section 951A,
       ``(III) any financial services income (as defined in 
     section 904(d)(2)(D)) of such corporation,
       ``(IV) any dividend received from a corporation which is a 
     controlled foreign corporation of such domestic corporation,
       ``(V) any domestic oil and gas extraction income of such 
     corporation, and
       ``(VI) any foreign branch income (as defined in section 
     904(d)(2)(J)), over

       ``(ii) the deductions (including taxes) properly allocable 
     to such gross income.
       ``(B) Domestic oil and gas extraction income.--For purposes 
     of subparagraph (A), the term `domestic oil and gas 
     extraction income' means income described in section 
     907(c)(1), determined by substituting `within the United 
     States' for `without the United States'.
       ``(4) Foreign-derived deduction eligible income.--The term 
     `foreign-derived deduction eligible income' means, with 
     respect to any taxpayer for any taxable year, any deduction 
     eligible income of such taxpayer which is derived in 
     connection with--
       ``(A) property--
       ``(i) which is sold by the taxpayer to any person who is 
     not a United States person, and
       ``(ii) which the taxpayer establishes to the satisfaction 
     of the Secretary is for a foreign use, or
       ``(B) services provided by the taxpayer which the taxpayer 
     establishes to the satisfaction of the Secretary are provided 
     to any person, or with respect to property, not located 
     within the United States.
       ``(5) Rules relating to foreign use property or services.--
     For purposes of this subsection--
       ``(A) Foreign use.--The term `foreign use' means any use, 
     consumption, or disposition which is not within the United 
     States.
       ``(B) Property or services provided to domestic 
     intermediaries.--
       ``(i) Property.--If a taxpayer sells property to another 
     person (other than a related party) for further manufacture 
     or other modification within the United States, such property 
     shall not be treated as sold for a foreign use even if such 
     other person subsequently uses such property for a foreign 
     use.
       ``(ii) Services.--If a taxpayer provides services to 
     another person (other than a related party) located within 
     the United States, such services shall not be treated as 
     described in paragraph (4)(B) even if such other person uses 
     such services in providing services which are so described.
       ``(C) Special rules with respect to related party 
     transactions.--
       ``(i) Sales to related parties.--If property is sold to a 
     related party who is not a United States person, such sale 
     shall not be treated as for a foreign use unless--

       ``(I) such property is ultimately sold by a related party, 
     or used by a related party in connection with property which 
     is sold or the provision of services, to another person who 
     is an unrelated party who is not a United States person, and
       ``(II) the taxpayer establishes to the satisfaction of the 
     Secretary that such property is for a foreign use.

     For purposes of this clause, a sale of property shall be 
     treated as a sale of each of the components thereof.
       ``(ii) Service provided to related parties.--If a service 
     is provided to a related party who is not located in the 
     United States, such service shall not be treated described in 
     subparagraph (A)(ii) unless the taxpayer established to the 
     satisfaction of the Secretary that such service is not 
     substantially similar to services provided by such related 
     party to persons located within the United States.
       ``(D) Related party.--For purposes of this paragraph, the 
     term `related party' means any member of an affiliated group 
     as defined in section 1504(a), determined--
       ``(i) by substituting `more than 50 percent' for `at least 
     80 percent' each place it appears, and
       ``(ii) without regard to paragraphs (2) and (3) of section 
     1504(b).
     Any person (other than a corporation) shall be treated as a 
     member of such group if such person is controlled by members 
     of such group (including any entity treated as a member of 
     such group by reason of this sentence) or controls any such 
     member. For purposes of the preceding sentence, control shall 
     be determined under the rules of section 954(d)(3).
       ``(E) Sold.--For purposes of this subsection, the terms 
     `sold', `sells', and `sale' shall include any lease, license, 
     exchange, or other disposition.
       ``(c) Regulations.--The Secretary shall prescribe such 
     regulations or other guidance as may be necessary or 
     appropriate to carry out the provisions of this section.''.
       (b) Conforming Amendments.--
       (1) Section 172(d), as amended by this Act, is amended by 
     adding at the end the following new paragraph:
       ``(9) Deduction for foreign-derived intangible income.--The 
     deduction under section 250 shall not be allowed.''.
       (2) Section 246(b)(1) is amended--
       (A) by striking ``and subsection (a) and (b) of section 
     245'' the first place it appears and inserting ``, subsection 
     (a) and (b) of section 245, and section 250'',
       (B) by striking ``and subsection (a) and (b) of section 
     245'' the second place it appears and inserting ``subsection 
     (a) and (b) of section 245, and 250''.
       (3) Section 469(i)(3)(F)(iii) is amended by striking ``and 
     222'' and inserting ``222, and 250''.
       (4) The table of sections for part VIII of subchapter B of 
     chapter 1 is amended by adding at the end the following new 
     item:

``Sec. 250. Foreign-derived intangible income and global intangible 
              low-taxed income.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

         CHAPTER 2--OTHER MODIFICATIONS OF SUBPART F PROVISIONS

     SEC. 14211. ELIMINATION OF INCLUSION OF FOREIGN BASE COMPANY 
                   OIL RELATED INCOME.

       (a) Repeal.--Subsection (a) of section 954 is amended--
       (1) by inserting ``and'' at the end of paragraph (2),
       (2) by striking the comma at the end of paragraph (3) and 
     inserting a period, and
       (3) by striking paragraph (5).
       (b) Conforming Amendments.--
       (1) Section 952(c)(1)(B)(iii) is amended by striking 
     subclause (I) and redesignating subclauses (II) through (V) 
     as subclauses (I) through (IV), respectively.
       (2) Section 954(b) is amended--
       (A) by striking the second sentence of paragraph (4),
       (B) by striking ``the foreign base company services income, 
     and the foreign base company oil related income'' in 
     paragraph (5) and inserting ``and the foreign base company 
     services income'', and
       (C) by striking paragraph (6).
       (3) Section 954 is amended by striking subsection (g).
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2017, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

     SEC. 14212. REPEAL OF INCLUSION BASED ON WITHDRAWAL OF 
                   PREVIOUSLY EXCLUDED SUBPART F INCOME FROM 
                   QUALIFIED INVESTMENT.

       (a) In General.--Subpart F of part III of subchapter N of 
     chapter 1 is amended by striking section 955.
       (b) Conforming Amendments.--
       (1)(A) Section 951(a)(1)(A) is amended to read as follows:
       ``(A) his pro rata share (determined under paragraph (2)) 
     of the corporation's subpart F income for such year, and''.
       (B) Section 851(b) is amended by striking ``section 
     951(a)(1)(A)(i)'' in the flush language at the end and 
     inserting ``section 951(a)(1)(A)''.
       (C) Section 952(c)(1)(B)(i) is amended by striking 
     ``section 951(a)(1)(A)(i)'' and inserting ``section 
     951(a)(1)(A)''.
       (D) Section 953(c)(1)(C) is amended by striking ``section 
     951(a)(1)(A)(i)'' and inserting ``section 951(a)(1)(A)''.
       (2) Section 951(a) is amended by striking paragraph (3).
       (3) Section 953(d)(4)(B)(iv)(II) is amended by striking 
     ``or amounts referred to in clause (ii) or (iii) of section 
     951(a)(1)(A)''.
       (4) Section 964(b) is amended by striking ``, 955,''.
       (5) Section 970 is amended by striking subsection (b).
       (6) The table of sections for subpart F of part III of 
     subchapter N of chapter 1 is amended by striking the item 
     relating to section 955.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2017, and to taxable years of 
     United States shareholders in which or with which such 
     taxable years of foreign corporations end.

     SEC. 14213. MODIFICATION OF STOCK ATTRIBUTION RULES FOR 
                   DETERMINING STATUS AS A CONTROLLED FOREIGN 
                   CORPORATION.

       (a) In General.--Section 958(b) is amended--
       (1) by striking paragraph (4), and
       (2) by striking ``Paragraphs (1) and (4)'' in the last 
     sentence and inserting ``Paragraph (1)''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to--
       (1) the last taxable year of foreign corporations beginning 
     before January 1, 2018, and each subsequent taxable year of 
     such foreign corporations, and
       (2) taxable years of United States shareholders in which or 
     with which such taxable years of foreign corporations end.

     SEC. 14214. MODIFICATION OF DEFINITION OF UNITED STATES 
                   SHAREHOLDER.

       (a) In General.--Section 951(b) is amended by inserting ``, 
     or 10 percent or more of the total value of shares of all 
     classes of stock of such foreign corporation'' after ``such 
     foreign corporation''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2017, and to taxable years of 
     United States

[[Page 19917]]

     shareholders with or within which such taxable years of 
     foreign corporations end.

     SEC. 14215. ELIMINATION OF REQUIREMENT THAT CORPORATION MUST 
                   BE CONTROLLED FOR 30 DAYS BEFORE SUBPART F 
                   INCLUSIONS APPLY.

       (a) In General.--Section 951(a)(1) is amended by striking 
     ``for an uninterrupted period of 30 days or more'' and 
     inserting ``at any time''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2017, and to taxable years of 
     United States shareholders with or within which such taxable 
     years of foreign corporations end.

                 CHAPTER 3--PREVENTION OF BASE EROSION

     SEC. 14221. LIMITATIONS ON INCOME SHIFTING THROUGH INTANGIBLE 
                   PROPERTY TRANSFERS.

       (a) Definition of Intangible Asset.--Section 936(h)(3)(B) 
     is amended--
       (1) by striking ``or'' at the end of clause (v),
       (2) by striking clause (vi) and inserting the following:
       ``(vi) any goodwill, going concern value, or workforce in 
     place (including its composition and terms and conditions 
     (contractual or otherwise) of its employment); or
       ``(vii) any other item the value or potential value of 
     which is not attributable to tangible property or the 
     services of any individual.'', and
       (3) by striking the flush language after clause (vii), as 
     added by paragraph (2).
       (b) Clarification of Allowable Valuation Methods.--
       (1) Foreign corporations.--Section 367(d)(2) is amended by 
     adding at the end the following new subparagraph:
       ``(D) Regulatory authority.--For purposes of the last 
     sentence of subparagraph (A), the Secretary shall require--
       ``(i) the valuation of transfers of intangible property, 
     including intangible property transferred with other property 
     or services, on an aggregate basis, or
       ``(ii) the valuation of such a transfer on the basis of the 
     realistic alternatives to such a transfer,
     if the Secretary determines that such basis is the most 
     reliable means of valuation of such transfers.''.
       (2) Allocation among taxpayers.--Section 482 is amended by 
     adding at the end the following: ``For purposes of this 
     section, the Secretary shall require the valuation of 
     transfers of intangible property (including intangible 
     property transferred with other property or services) on an 
     aggregate basis or the valuation of such a transfer on the 
     basis of the realistic alternatives to such a transfer, if 
     the Secretary determines that such basis is the most reliable 
     means of valuation of such transfers.''.
       (c) Effective Date.--
       (1) In general.--The amendments made by this section shall 
     apply to transfers in taxable years beginning after December 
     31, 2017.
       (2) No inference.--Nothing in the amendment made by 
     subsection (a) shall be construed to create any inference 
     with respect to the application of section 936(h)(3) of the 
     Internal Revenue Code of 1986, or the authority of the 
     Secretary of the Treasury to provide regulations for such 
     application, with respect to taxable years beginning before 
     January 1, 2018.

     SEC. 14222. CERTAIN RELATED PARTY AMOUNTS PAID OR ACCRUED IN 
                   HYBRID TRANSACTIONS OR WITH HYBRID ENTITIES.

       (a) In General.--Part IX of subchapter B of chapter 1 is 
     amended by inserting after section 267 the following:

     ``SEC. 267A. CERTAIN RELATED PARTY AMOUNTS PAID OR ACCRUED IN 
                   HYBRID TRANSACTIONS OR WITH HYBRID ENTITIES.

       ``(a) In General.--No deduction shall be allowed under this 
     chapter for any disqualified related party amount paid or 
     accrued pursuant to a hybrid transaction or by, or to, a 
     hybrid entity.
       ``(b) Disqualified Related Party Amount.--For purposes of 
     this section--
       ``(1) Disqualified related party amount.--The term 
     `disqualified related party amount' means any interest or 
     royalty paid or accrued to a related party to the extent 
     that--
       ``(A) such amount is not included in the income of such 
     related party under the tax law of the country of which such 
     related party is a resident for tax purposes or is subject to 
     tax, or
       ``(B) such related party is allowed a deduction with 
     respect to such amount under the tax law of such country.
     Such term shall not include any payment to the extent such 
     payment is included in the gross income of a United States 
     shareholder under section 951(a).
       ``(2) Related party.--The term `related party' means a 
     related person as defined in section 954(d)(3), except that 
     such section shall be applied with respect to the person 
     making the payment described in paragraph (1) in lieu of the 
     controlled foreign corporation otherwise referred to in such 
     section.
       ``(c) Hybrid Transaction.--For purposes of this section, 
     the term `hybrid transaction' means any transaction, series 
     of transactions, agreement, or instrument one or more 
     payments with respect to which are treated as interest or 
     royalties for purposes of this chapter and which are not so 
     treated for purposes the tax law of the foreign country of 
     which the recipient of such payment is resident for tax 
     purposes or is subject to tax.
       ``(d) Hybrid Entity.--For purposes of this section, the 
     term `hybrid entity' means any entity which is either--
       ``(1) treated as fiscally transparent for purposes of this 
     chapter but not so treated for purposes of the tax law of the 
     foreign country of which the entity is resident for tax 
     purposes or is subject to tax, or
       ``(2) treated as fiscally transparent for purposes of such 
     tax law but not so treated for purposes of this chapter.
       ``(e) Regulations.--The Secretary shall issue such 
     regulations or other guidance as may be necessary or 
     appropriate to carry out the purposes of this section, 
     including regulations or other guidance providing for--
       ``(1) rules for treating certain conduit arrangements which 
     involve a hybrid transaction or a hybrid entity as subject to 
     subsection (a),
       ``(2) rules for the application of this section to branches 
     or domestic entities,
       ``(3) rules for treating certain structured transactions as 
     subject to subsection (a),
       ``(4) rules for treating a tax preference as an exclusion 
     from income for purposes of applying subsection (b)(1) if 
     such tax preference has the effect of reducing the generally 
     applicable statutory rate by 25 percent or more,
       ``(5) rules for treating the entire amount of interest or 
     royalty paid or accrued to a related party as a disqualified 
     related party amount if such amount is subject to a 
     participation exemption system or other system which provides 
     for the exclusion or deduction of a substantial portion of 
     such amount,
       ``(6) rules for determining the tax residence of a foreign 
     entity if the entity is otherwise considered a resident of 
     more than one country or of no country,
       ``(7) exceptions from subsection (a) with respect to--
       ``(A) cases in which the disqualified related party amount 
     is taxed under the laws of a foreign country other than the 
     country of which the related party is a resident for tax 
     purposes, and
       ``(B) other cases which the Secretary determines do not 
     present a risk of eroding the Federal tax base,
       ``(8) requirements for record keeping and information 
     reporting in addition to any requirements imposed by section 
     6038A.''.
       (b) Conforming Amendment.--The table of sections for part 
     IX of subchapter B of chapter 1 is amended by inserting after 
     the item relating to section 267 the following new item:

``Sec. 267A. Certain related party amounts paid or accrued in hybrid 
              transactions or with hybrid entities.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 14223. SHAREHOLDERS OF SURROGATE FOREIGN CORPORATIONS 
                   NOT ELIGIBLE FOR REDUCED RATE ON DIVIDENDS.

       (a) In General.--Section 1(h)(11)(C)(iii) is amended--
       (1) by striking ``shall not include any foreign 
     corporation'' and inserting ``shall not include--

       ``(I) any foreign corporation'',

       (2) by striking the period at the end and inserting ``, 
     and'', and
       (3) by adding at the end the following new subclause:

       ``(II) any corporation which first becomes a surrogate 
     foreign corporation (as defined in section 7874(a)(2)(B)) 
     after the date of the enactment of this subclause, other than 
     a foreign corporation which is treated as a domestic 
     corporation under section 7874(b).''.

       (b) Effective Date.--The amendments made by this section 
     shall apply to dividends received after the date of the 
     enactment of this Act.

     Subpart C--Modifications Related to Foreign Tax Credit System

     SEC. 14301. REPEAL OF SECTION 902 INDIRECT FOREIGN TAX 
                   CREDITS; DETERMINATION OF SECTION 960 CREDIT ON 
                   CURRENT YEAR BASIS.

       (a) Repeal of Section 902 Indirect Foreign Tax Credits.--
     Subpart A of part III of subchapter N of chapter 1 is amended 
     by striking section 902.
       (b) Determination of Section 960 Credit on Current Year 
     Basis.--Section 960, as amended by section 14201, is 
     amended--
       (1) by striking subsection (c), by redesignating subsection 
     (b) as subsection (c), by striking all that precedes 
     subsection (c) (as so redesignated) and inserting the 
     following:

     ``SEC. 960. DEEMED PAID CREDIT FOR SUBPART F INCLUSIONS.

       ``(a) In General.--For purposes of subpart A of this part, 
     if there is included in the gross income of a domestic 
     corporation any item of income under section 951(a)(1) with 
     respect to any controlled foreign corporation with respect to 
     which such domestic corporation is a United States 
     shareholder, such domestic corporation shall be deemed to 
     have paid so much of such foreign corporation's foreign 
     income taxes as are properly attributable to such item of 
     income.
       ``(b) Special Rules for Distributions From Previously Taxed 
     Earnings and Profits.--For purposes of subpart A of this 
     part--
       ``(1) In general.--If any portion of a distribution from a 
     controlled foreign corporation to a domestic corporation 
     which is a United States shareholder with respect to such 
     controlled foreign corporation is excluded from gross income 
     under section 959(a), such domestic corporation shall be 
     deemed to have paid so much of such foreign corporation's 
     foreign income taxes as--
       ``(A) are properly attributable to such portion, and
       ``(B) have not been deemed to have to been paid by such 
     domestic corporation under this

[[Page 19918]]

     section for the taxable year or any prior taxable year.
       ``(2) Tiered controlled foreign corporations.--If section 
     959(b) applies to any portion of a distribution from a 
     controlled foreign corporation to another controlled foreign 
     corporation, such controlled foreign corporation shall be 
     deemed to have paid so much of such other controlled foreign 
     corporation's foreign income taxes as--
       ``(A) are properly attributable to such portion, and
       ``(B) have not been deemed to have been paid by a domestic 
     corporation under this section for the taxable year or any 
     prior taxable year.'',
       (2) and by adding after subsection (d) (as added by section 
     14201) the following new subsections:
       ``(e) Foreign Income Taxes.--The term `foreign income 
     taxes' means any income, war profits, or excess profits taxes 
     paid or accrued to any foreign country or possession of the 
     United States.
       ``(f) Regulations.--The Secretary shall prescribe such 
     regulations or other guidance as may be necessary or 
     appropriate to carry out the provisions of this section.''.
       (c) Conforming Amendments.--
       (1) Section 78 is amended to read as follows:

     ``SEC. 78. GROSS UP FOR DEEMED PAID FOREIGN TAX CREDIT.

       ``If a domestic corporation chooses to have the benefits of 
     subpart A of part III of subchapter N (relating to foreign 
     tax credit) for any taxable year, an amount equal to the 
     taxes deemed to be paid by such corporation under subsections 
     (a), (b), and (d) of section 960 (determined without regard 
     to the phrase `80 percent of' in subsection (d)(1) thereof) 
     for such taxable year shall be treated for purposes of this 
     title (other than sections 245 and 245A) as a dividend 
     received by such domestic corporation from the foreign 
     corporation.''.
       (2) Paragraph (4) of section 245(a) is amended to read as 
     follows:
       ``(4) Post-1986 undistributed earnings.--The term `post-
     1986 undistributed earnings' means the amount of the earnings 
     and profits of the foreign corporation (computed in 
     accordance with sections 964(a) and 986) accumulated in 
     taxable years beginning after December 31, 1986--
       ``(A) as of the close of the taxable year of the foreign 
     corporation in which the dividend is distributed, and
       ``(B) without diminution by reason of dividends distributed 
     during such taxable year.''.
       (3) Section 245(a)(10)(C) is amended by striking ``902, 
     907, and 960'' and inserting ``907 and 960''.
       (4) Sections 535(b)(1) and 545(b)(1) are each amended by 
     striking ``section 902(a) or 960(a)(1)'' and inserting 
     ``section 960''.
       (5) Section 814(f)(1) is amended--
       (A) by striking subparagraph (B), and
       (B) by striking all that precedes ``No income'' and 
     inserting the following:
       ``(1) Treatment of foreign taxes.--''.
       (6) Section 865(h)(1)(B) is amended by striking ``902, 
     907,'' and inserting ``907''.
       (7) Section 901(a) is amended by striking ``sections 902 
     and 960'' and inserting ``section 960''.
       (8) Section 901(e)(2) is amended by striking ``but is not 
     limited to--'' and all that follows through ``that portion'' 
     and inserting ``but is not limited to that portion''.
       (9) Section 901(f) is amended by striking ``sections 902 
     and 960'' and inserting ``section 960''.
       (10) Section 901(j)(1)(A) is amended by striking ``902 
     or''.
       (11) Section 901(j)(1)(B) is amended by striking ``sections 
     902 and 960'' and inserting ``section 960''.
       (12) Section 901(k)(2) is amended by striking ``, 902,''.
       (13) Section 901(k)(6) is amended by striking ``902 or''.
       (14) Section 901(m)(1)(B) is amended to read as follows:
       ``(B) in the case of a foreign income tax paid by a foreign 
     corporation, shall not be taken into account for purposes of 
     section 960.''.
       (15) Section 904(d)(2)(E) is amended--
       (A) by amending clause (i) to read as follows:
       ``(i) Noncontrolled 10-percent owned foreign corporation.--
     The term `noncontrolled 10-percent owned foreign corporation' 
     means any foreign corporation which is--

       ``(I) a specified 10-percent owned foreign corporation (as 
     defined in section 245A(b)), or
       ``(II) a passive foreign investment company (as defined in 
     section 1297(a)) with respect to which the taxpayer meets the 
     stock ownership requirements of section 902(a) (or, for 
     purposes of applying paragraphs (3) and (4), the requirements 
     of section 902(b)).

     A controlled foreign corporation shall not be treated as a 
     noncontrolled 10-percent owned foreign corporation with 
     respect to any distribution out of its earnings and profits 
     for periods during which it was a controlled foreign 
     corporation. Any reference to section 902 in this clause 
     shall be treated as a reference to such section as in effect 
     before its repeal.'', and
       (B) by striking ``non-controlled section 902 corporation'' 
     in clause (ii) and inserting ``noncontrolled 10-percent owned 
     foreign corporation''.
       (16) Section 904(d)(4) is amended--
       (A) by striking ``noncontrolled section 902 corporation'' 
     each place it appears and inserting ``noncontrolled 10-
     percent owned foreign corporation'',
       (B) by striking ``noncontrolled section 902 corporations'' 
     in the heading thereof and inserting ``noncontrolled 10-
     percent owned foreign corporations''.
       (17) Section 904(d)(6)(A) is amended by striking ``902, 
     907,'' and inserting ``907''.
       (18) Section 904(h)(10)(A) is amended by striking 
     ``sections 902, 907, and 960'' and inserting ``sections 907 
     and 960''.
       (19) Section 904(k) is amended to read as follows:
       ``(k) Cross References.--For increase of limitation under 
     subsection (a) for taxes paid with respect to amounts 
     received which were included in the gross income of the 
     taxpayer for a prior taxable year as a United States 
     shareholder with respect to a controlled foreign corporation, 
     see section 960(c).''.
       (20) Section 905(c)(1) is amended by striking the last 
     sentence.
       (21) Section 905(c)(2)(B)(i) is amended to read as follows:
       ``(i) shall be taken into account for the taxable year to 
     which such taxes relate, and''.
       (22) Section 906(a) is amended by striking ``(or deemed, 
     under section 902, paid or accrued during the taxable 
     year)''.
       (23) Section 906(b) is amended by striking paragraphs (4) 
     and (5).
       (24) Section 907(b)(2)(B) is amended by striking ``902 
     or''.
       (25) Section 907(c)(3)(A) is amended--
       (A) by striking subparagraph (A) and inserting the 
     following:
       ``(A) interest, to the extent the category of income of 
     such interest is determined under section 904(d)(3),'', and
       (B) by striking ``section 960(a)'' in subparagraph (B) and 
     inserting ``section 960''.
       (26) Section 907(c)(5) is amended by striking ``902 or''.
       (27) Section 907(f)(2)(B)(i) is amended by striking ``902 
     or''.
       (28) Section 908(a) is amended by striking ``902 or''.
       (29) Section 909(b) is amended--
       (A) by striking ``section 902 corporation'' in the matter 
     preceding paragraph (1) and inserting ``specified 10-percent 
     owned foreign corporation (as defined in section 245A(b) 
     without regard to paragraph (2) thereof)'',
       (B) by striking ``902 or'' in paragraph (1),
       (C) by striking ``by such section 902 corporation'' and all 
     that follows in the matter following paragraph (2) and 
     inserting ``by such specified 10-percent owned foreign 
     corporation or a domestic corporation which is a United 
     States shareholder with respect to such specified 10-percent 
     owned foreign corporation.'', and
       (D) by striking ``Section 902 Corporations'' in the heading 
     thereof and inserting ``Specified 10-percent Owned Foreign 
     Corporations''.
       (30) Section 909(d) is amended by striking paragraph (5).
       (31) Section 958(a)(1) is amended by striking ``960(a)(1)'' 
     and inserting ``960''.
       (32) Section 959(d) is amended by striking ``Except as 
     provided in section 960(a)(3), any'' and inserting ``Any''.
       (33) Section 959(e) is amended by striking ``section 
     960(b)'' and inserting ``section 960(c)''.
       (34) Section 1291(g)(2)(A) is amended by striking ``any 
     distribution--'' and all that follows through ``but only if'' 
     and inserting ``any distribution, any withholding tax imposed 
     with respect to such distribution, but only if''.
       (35) Section 1293(f) is amended by striking ``and'' at the 
     end of paragraph (1), by striking the period at the end of 
     paragraph (2) and inserting ``, and'', and by adding at the 
     end the following new paragraph:
       ``(3) a domestic corporation which owns (or is treated 
     under section 1298(a) as owning) stock of a qualified 
     electing fund shall be treated in the same manner as a United 
     States shareholder of a controlled foreign corporation (and 
     such qualified electing fund shall be treated in the same 
     manner as such controlled foreign corporation) if such 
     domestic corporation meets the stock ownership requirements 
     of subsection (a) or (b) of section 902 (as in effect before 
     its repeal) with respect to such qualified electing fund.''.
       (36) Section 6038(c)(1)(B) is amended by striking 
     ``sections 902 (relating to foreign tax credit for corporate 
     stockholder in foreign corporation) and 960 (relating to 
     special rules for foreign tax credit)'' and inserting 
     ``section 960''.
       (37) Section 6038(c)(4) is amended by striking subparagraph 
     (C).
       (38) The table of sections for subpart A of part III of 
     subchapter N of chapter 1 is amended by striking the item 
     relating to section 902.
       (39) The table of sections for subpart F of part III of 
     subchapter N of chapter 1 is amended by striking the item 
     relating to section 960 and inserting the following:

``Sec. 960. Deemed paid credit for subpart F inclusions.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to taxable years of foreign corporations 
     beginning after December 31, 2017, and to taxable years of 
     United States shareholders in which or with which such 
     taxable years of foreign corporations end.

     SEC. 14302. SEPARATE FOREIGN TAX CREDIT LIMITATION BASKET FOR 
                   FOREIGN BRANCH INCOME.

       (a) In General.--Section 904(d)(1), as amended by section 
     14201, is amended by redesignating subparagraphs (B) and (C) 
     as subparagraphs (C) and (D), respectively, and by inserting 
     after subparagraph (A) the following new subparagraph:
       ``(B) foreign branch income,''.
       (b) Foreign Branch Income.--
       (1) In general.--Section 904(d)(2) is amended by inserting 
     after subparagraph (I) the following new subparagraph:
       ``(J) Foreign branch income.--

[[Page 19919]]

       ``(i) In general.--The term `foreign branch income' means 
     the business profits of such United States person which are 
     attributable to 1 or more qualified business units (as 
     defined in section 989(a)) in 1 or more foreign countries. 
     For purposes of the preceding sentence, the amount of 
     business profits attributable to a qualified business unit 
     shall be determined under rules established by the Secretary.
       ``(ii) Exception.--Such term shall not include any income 
     which is passive category income.''.
       (2) Conforming amendment.--Section 904(d)(2)(A)(ii), as 
     amended by section 14201, is amended by striking ``income 
     described in paragraph (1)(A) and'' and inserting ``income 
     described in paragraph (1)(A), foreign branch income, and''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 14303. SOURCE OF INCOME FROM SALES OF INVENTORY 
                   DETERMINED SOLELY ON BASIS OF PRODUCTION 
                   ACTIVITIES.

       (a) In General.--Section 863(b) is amended by adding at the 
     end the following: ``Gains, profits, and income from the sale 
     or exchange of inventory property described in paragraph (2) 
     shall be allocated and apportioned between sources within and 
     without the United States solely on the basis of the 
     production activities with respect to the property.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 14304. ELECTION TO INCREASE PERCENTAGE OF DOMESTIC 
                   TAXABLE INCOME OFFSET BY OVERALL DOMESTIC LOSS 
                   TREATED AS FOREIGN SOURCE.

       (a) In General.--Section 904(g) is amended by adding at the 
     end the following new paragraph:
       ``(5) Election to increase percentage of taxable income 
     treated as foreign source.--
       ``(A) In general.--If any pre-2018 unused overall domestic 
     loss is taken into account under paragraph (1) for any 
     applicable taxable year, the taxpayer may elect to have such 
     paragraph applied to such loss by substituting a percentage 
     greater than 50 percent (but not greater than 100 percent) 
     for 50 percent in subparagraph (B) thereof.
       ``(B) Pre-2018 unused overall domestic loss.--For purposes 
     of this paragraph, the term `pre-2018 unused overall domestic 
     loss' means any overall domestic loss which--
       ``(i) arises in a qualified taxable year beginning before 
     January 1, 2018, and
       ``(ii) has not been used under paragraph (1) for any 
     taxable year beginning before such date.
       ``(C) Applicable taxable year.--For purposes of this 
     paragraph, the term `applicable taxable year' means any 
     taxable year of the taxpayer beginning after December 31, 
     2017, and before January 1, 2028.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

                     PART II--INBOUND TRANSACTIONS

     SEC. 14401. BASE EROSION AND ANTI-ABUSE TAX.

       (a) Imposition of Tax.--Subchapter A of chapter 1 is 
     amended by adding at the end the following new part:

              ``PART VII--BASE EROSION AND ANTI-ABUSE TAX

``Sec. 59A. Tax on base erosion payments of taxpayers with substantial 
              gross receipts.

     ``SEC. 59A. TAX ON BASE EROSION PAYMENTS OF TAXPAYERS WITH 
                   SUBSTANTIAL GROSS RECEIPTS.

       ``(a) Imposition of Tax.--There is hereby imposed on each 
     applicable taxpayer for any taxable year a tax equal to the 
     base erosion minimum tax amount for the taxable year. Such 
     tax shall be in addition to any other tax imposed by this 
     subtitle.
       ``(b) Base Erosion Minimum Tax Amount.--For purposes of 
     this section--
       ``(1) In general.--Except as provided in paragraphs (2) and 
     (3), the term `base erosion minimum tax amount' means, with 
     respect to any applicable taxpayer for any taxable year, the 
     excess (if any) of--
       ``(A) an amount equal to 10 percent (5 percent in the case 
     of taxable years beginning in calendar year 2018) of the 
     modified taxable income of such taxpayer for the taxable 
     year, over
       ``(B) an amount equal to the regular tax liability (as 
     defined in section 26(b)) of the taxpayer for the taxable 
     year, reduced (but not below zero) by the excess (if any) 
     of--
       ``(i) the credits allowed under this chapter against such 
     regular tax liability, over
       ``(ii) the sum of--

       ``(I) the credit allowed under section 38 for the taxable 
     year which is properly allocable to the research credit 
     determined under section 41(a), plus
       ``(II) the portion of the applicable section 38 credits not 
     in excess of 80 percent of the lesser of the amount of such 
     credits or the base erosion minimum tax amount (determined 
     without regard to this subclause).

       ``(2) Modifications for taxable years beginning after 
     2025.--In the case of any taxable year beginning after 
     December 31, 2025, paragraph (1) shall be applied--
       ``(A) by substituting `12.5 percent' for `10 percent' in 
     subparagraph (A) thereof, and
       ``(B) by reducing (but not below zero) the regular tax 
     liability (as defined in section 26(b)) for purposes of 
     subparagraph (B) thereof by the aggregate amount of the 
     credits allowed under this chapter against such regular tax 
     liability rather than the excess described in such 
     subparagraph.
       ``(3) Increased rate for certain banks and securities 
     dealers.--
       ``(A) In general.--In the case of a taxpayer described in 
     subparagraph (B) who is an applicable taxpayer for any 
     taxable year, the percentage otherwise in effect under 
     paragraphs (1)(A) and (2)(A) shall each be increased by one 
     percentage point.
       ``(B) Taxpayer described.--A taxpayer is described in this 
     subparagraph if such taxpayer is a member of an affiliated 
     group (as defined in section 1504(a)(1)) which includes--
       ``(i) a bank (as defined in section 581), or
       ``(ii) a registered securities dealer under section 15(a) 
     of the Securities Exchange Act of 1934.
       ``(4) Applicable section 38 credits.--For purposes of 
     paragraph (1)(B)(ii)(II), the term `applicable section 38 
     credits' means the credit allowed under section 38 for the 
     taxable year which is properly allocable to--
       ``(A) the low-income housing credit determined under 
     section 42(a),
       ``(B) the renewable electricity production credit 
     determined under section 45(a), and
       ``(C) the investment credit determined under section 46, 
     but only to the extent properly allocable to the energy 
     credit determined under section 48.
       ``(c) Modified Taxable Income.--For purposes of this 
     section--
       ``(1) In general.--The term `modified taxable income' means 
     the taxable income of the taxpayer computed under this 
     chapter for the taxable year, determined without regard to--
       ``(A) any base erosion tax benefit with respect to any base 
     erosion payment, or
       ``(B) the base erosion percentage of any net operating loss 
     deduction allowed under section 172 for the taxable year.
       ``(2) Base erosion tax benefit.--
       ``(A) In general.--The term `base erosion tax benefit' 
     means--
       ``(i) any deduction described in subsection (d)(1) which is 
     allowed under this chapter for the taxable year with respect 
     to any base erosion payment,
       ``(ii) in the case of a base erosion payment described in 
     subsection (d)(2), any deduction allowed under this chapter 
     for the taxable year for depreciation (or amortization in 
     lieu of depreciation) with respect to the property acquired 
     with such payment,
       ``(iii) in the case of a base erosion payment described in 
     subsection (d)(3)--

       ``(I) any reduction under section 803(a)(1)(B) in the gross 
     amount of premiums and other consideration on insurance and 
     annuity contracts for premiums and other consideration 
     arising out of indemnity insurance, and
       ``(II) any deduction under section 832(b)(4)(A) from the 
     amount of gross premiums written on insurance contracts 
     during the taxable year for premiums paid for reinsurance, 
     and

       ``(iv) in the case of a base erosion payment described in 
     subsection (d)(4), any reduction in gross receipts with 
     respect to such payment in computing gross income of the 
     taxpayer for the taxable year for purposes of this chapter.
       ``(B) Tax benefits disregarded if tax withheld on base 
     erosion payment.--
       ``(i) In general.--Except as provided in clause (ii), any 
     base erosion tax benefit attributable to any base erosion 
     payment--

       ``(I) on which tax is imposed by section 871 or 881, and
       ``(II) with respect to which tax has been deducted and 
     withheld under section 1441 or 1442,

     shall not be taken into account in computing modified taxable 
     income under paragraph (1)(A) or the base erosion percentage 
     under paragraph (4).
       ``(ii) Exception.--The amount not taken into account in 
     computing modified taxable income by reason of clause (i) 
     shall be reduced under rules similar to the rules under 
     section 163(j)(5)(B) (as in effect before the date of the 
     enactment of the Tax Cuts and Jobs Act).
       ``(3) Special rules for determining interest for which 
     deduction allowed.--For purposes of applying paragraph (1), 
     in the case of a taxpayer to which section 163(j) applies for 
     the taxable year, the reduction in the amount of interest for 
     which a deduction is allowed by reason of such subsection 
     shall be treated as allocable first to interest paid or 
     accrued to persons who are not related parties with respect 
     to the taxpayer and then to such related parties.
       ``(4) Base erosion percentage.--For purposes of paragraph 
     (1)(B)--
       ``(A) In general.--The term `base erosion percentage' 
     means, for any taxable year, the percentage determined by 
     dividing--
       ``(i) the aggregate amount of base erosion tax benefits of 
     the taxpayer for the taxable year, by
       ``(ii) the sum of--

       ``(I) the aggregate amount of the deductions (including 
     deductions described in clauses (i) and (ii) of paragraph 
     (2)(A)) allowable to the taxpayer under this chapter for the 
     taxable year, plus
       ``(II) the base erosion tax benefits described in clauses 
     (iii) and (iv) of paragraph (2)(A) allowable to the taxpayer 
     for the taxable year.

       ``(B) Certain items not taken into account.--The amount 
     under subparagraph (A)(ii) shall be determined by not taking 
     into account--
       ``(i) any deduction allowed under section 172, 245A, or 250 
     for the taxable year,
       ``(ii) any deduction for amounts paid or accrued for 
     services to which the exception under subsection (d)(5) 
     applies, and
       ``(iii) any deduction for qualified derivative payments 
     which are not treated as a base erosion payment by reason of 
     subsection (h).
       ``(d) Base Erosion Payment.--For purposes of this section--

[[Page 19920]]

       ``(1) In general.--The term `base erosion payment' means 
     any amount paid or accrued by the taxpayer to a foreign 
     person which is a related party of the taxpayer and with 
     respect to which a deduction is allowable under this chapter.
       ``(2) Purchase of depreciable property.--Such term shall 
     also include any amount paid or accrued by the taxpayer to a 
     foreign person which is a related party of the taxpayer in 
     connection with the acquisition by the taxpayer from such 
     person of property of a character subject to the allowance 
     for depreciation (or amortization in lieu of depreciation).
       ``(3) Reinsurance payments.--Such term shall also include 
     any premium or other consideration paid or accrued by the 
     taxpayer to a foreign person which is a related party of the 
     taxpayer for any reinsurance payments which are taken into 
     account under sections 803(a)(1)(B) or 832(b)(4)(A).
       ``(4) Certain payments to expatriated entities.--
       ``(A) In general.--Such term shall also include any amount 
     paid or accrued by the taxpayer with respect to a person 
     described in subparagraph (B) which results in a reduction of 
     the gross receipts of the taxpayer.
       ``(B) Person described.--A person is described in this 
     subparagraph if such person is a--
       ``(i) surrogate foreign corporation which is a related 
     party of the taxpayer, but only if such person first became a 
     surrogate foreign corporation after November 9, 2017, or
       ``(ii) foreign person which is a member of the same 
     expanded affiliated group as the surrogate foreign 
     corporation.
       ``(C) Definitions.--For purposes of this paragraph--
       ``(i) Surrogate foreign corporation.--The term `surrogate 
     foreign corporation' has the meaning given such term by 
     section 7874(a)(2)(B) but does not include a foreign 
     corporation treated as a domestic corporation under section 
     7874(b).
       ``(ii) Expanded affiliated group.--The term `expanded 
     affiliated group' has the meaning given such term by section 
     7874(c)(1).
       ``(5) Exception for certain amounts with respect to 
     services.--Paragraph (1) shall not apply to any amount paid 
     or accrued by a taxpayer for services if--
       ``(A) such services are services which meet the 
     requirements for eligibility for use of the services cost 
     method under section 482 (determined without regard to the 
     requirement that the services not contribute significantly to 
     fundamental risks of business success or failure), and
       ``(B) such amount constitutes the total services cost with 
     no markup component.
       ``(e) Applicable Taxpayer.--For purposes of this section--
       ``(1) In general.--The term `applicable taxpayer' means, 
     with respect to any taxable year, a taxpayer--
       ``(A) which is a corporation other than a regulated 
     investment company, a real estate investment trust, or an S 
     corporation,
       ``(B) the average annual gross receipts of which for the 3-
     taxable-year period ending with the preceding taxable year 
     are at least $500,000,000, and
       ``(C) the base erosion percentage (as determined under 
     subsection (c)(4)) of which for the taxable year is 3 percent 
     (2 percent in the case of a taxpayer described in subsection 
     (b)(3)(B)) or higher.
       ``(2) Gross receipts.--
       ``(A) Special rule for foreign persons.--In the case of a 
     foreign person the gross receipts of which are taken into 
     account for purposes of paragraph (1)(B), only gross receipts 
     which are taken into account in determining income which is 
     effectively connected with the conduct of a trade or business 
     within the United States shall be taken into account. In the 
     case of a taxpayer which is a foreign person, the preceding 
     sentence shall not apply to the gross receipts of any United 
     States person which are aggregated with the taxpayer's gross 
     receipts by reason of paragraph (3).
       ``(B) Other rules made applicable.--Rules similar to the 
     rules of subparagraphs (B), (C), and (D) of section 448(c)(3) 
     shall apply in determining gross receipts for purposes of 
     this section.
       ``(3) Aggregation rules.--All persons treated as a single 
     employer under subsection (a) of section 52 shall be treated 
     as 1 person for purposes of this subsection and subsection 
     (c)(4), except that in applying section 1563 for purposes of 
     section 52, the exception for foreign corporations under 
     section 1563(b)(2)(C) shall be disregarded.
       ``(f) Foreign Person.--For purposes of this section, the 
     term `foreign person' has the meaning given such term by 
     section 6038A(c)(3).
       ``(g) Related Party.--For purposes of this section--
       ``(1) In general.--The term `related party' means, with 
     respect to any applicable taxpayer--
       ``(A) any 25-percent owner of the taxpayer,
       ``(B) any person who is related (within the meaning of 
     section 267(b) or 707(b)(1)) to the taxpayer or any 25-
     percent owner of the taxpayer, and
       ``(C) any other person who is related (within the meaning 
     of section 482) to the taxpayer.
       ``(2) 25-percent owner.--The term `25-percent owner' means, 
     with respect to any corporation, any person who owns at least 
     25 percent of--
       ``(A) the total voting power of all classes of stock of a 
     corporation entitled to vote, or
       ``(B) the total value of all classes of stock of such 
     corporation.
       ``(3) Section 318 to apply.--Section 318 shall apply for 
     purposes of paragraphs (1) and (2), except that--
       ``(A) `10 percent' shall be substituted for `50 percent' in 
     section 318(a)(2)(C), and
       ``(B) subparagraphs (A), (B), and (C) of section 318(a)(3) 
     shall not be applied so as to consider a United States person 
     as owning stock which is owned by a person who is not a 
     United States person.
       ``(h) Exception for Certain Payments Made in the Ordinary 
     Course of Trade or Business.--For purposes of this section--
       ``(1) In general.--Except as provided in paragraph (3), any 
     qualified derivative payment shall not be treated as a base 
     erosion payment.
       ``(2) Qualified derivative payment.--
       ``(A) In general.--The term `qualified derivative payment' 
     means any payment made by a taxpayer pursuant to a derivative 
     with respect to which the taxpayer--
       ``(i) recognizes gain or loss as if such derivative were 
     sold for its fair market value on the last business day of 
     the taxable year (and such additional times as required by 
     this title or the taxpayer's method of accounting),
       ``(ii) treats any gain or loss so recognized as ordinary, 
     and
       ``(iii) treats the character of all items of income, 
     deduction, gain, or loss with respect to a payment pursuant 
     to the derivative as ordinary.
       ``(B) Reporting requirement.--No payments shall be treated 
     as qualified derivative payments under subparagraph (A) for 
     any taxable year unless the taxpayer includes in the 
     information required to be reported under section 6038B(b)(2) 
     with respect to such taxable year such information as is 
     necessary to identify the payments to be so treated and such 
     other information as the Secretary determines necessary to 
     carry out the provisions of this subsection.
       ``(3) Exceptions for payments otherwise treated as base 
     erosion payments.--This subsection shall not apply to any 
     qualified derivative payment if--
       ``(A) the payment would be treated as a base erosion 
     payment if it were not made pursuant to a derivative, 
     including any interest, royalty, or service payment, or
       ``(B) in the case of a contract which has derivative and 
     nonderivative components, the payment is properly allocable 
     to the nonderivative component.
       ``(4) Derivative defined.--For purposes of this 
     subsection--
       ``(A) In general.--The term `derivative' means any contract 
     (including any option, forward contract, futures contract, 
     short position, swap, or similar contract) the value of 
     which, or any payment or other transfer with respect to 
     which, is (directly or indirectly) determined by reference to 
     one or more of the following:
       ``(i) Any share of stock in a corporation.
       ``(ii) Any evidence of indebtedness.
       ``(iii) Any commodity which is actively traded.
       ``(iv) Any currency.
       ``(v) Any rate, price, amount, index, formula, or 
     algorithm.
     Such term shall not include any item described in clauses (i) 
     through (v).
       ``(B) Treatment of american depository receipts and similar 
     instruments.--Except as otherwise provided by the Secretary, 
     for purposes of this part, American depository receipts (and 
     similar instruments) with respect to shares of stock in 
     foreign corporations shall be treated as shares of stock in 
     such foreign corporations.
       ``(C) Exception for certain contracts.--Such term shall not 
     include any insurance, annuity, or endowment contract issued 
     by an insurance company to which subchapter L applies (or 
     issued by any foreign corporation to which such subchapter 
     would apply if such foreign corporation were a domestic 
     corporation).
       ``(i) Regulations.--The Secretary shall prescribe such 
     regulations or other guidance as may be necessary or 
     appropriate to carry out the provisions of this section, 
     including regulations--
       ``(1) providing for such adjustments to the application of 
     this section as are necessary to prevent the avoidance of the 
     purposes of this section, including through--
       ``(A) the use of unrelated persons, conduit transactions, 
     or other intermediaries, or
       ``(B) transactions or arrangements designed, in whole or in 
     part--
       ``(i) to characterize payments otherwise subject to this 
     section as payments not subject to this section, or
       ``(ii) to substitute payments not subject to this section 
     for payments otherwise subject to this section and
       ``(2) for the application of subsection (g), including 
     rules to prevent the avoidance of the exceptions under 
     subsection (g)(3).''.
       (b) Reporting Requirements and Penalties.--
       (1) In general.--Subsection (b) of section 6038A is amended 
     to read as follows:
       ``(b) Required Information.--
       ``(1) In general.--For purposes of subsection (a), the 
     information described in this subsection is such information 
     as the Secretary prescribes by regulations relating to--
       ``(A) the name, principal place of business, nature of 
     business, and country or countries in which organized or 
     resident, of each person which--
       ``(i) is a related party to the reporting corporation, and
       ``(ii) had any transaction with the reporting corporation 
     during its taxable year,
       ``(B) the manner in which the reporting corporation is 
     related to each person referred to in subparagraph (A), and
       ``(C) transactions between the reporting corporation and 
     each foreign person which is a related party to the reporting 
     corporation.

[[Page 19921]]

       ``(2) Additional information regarding base erosion 
     payments.--For purposes of subsection (a) and section 6038C, 
     if the reporting corporation or the foreign corporation to 
     whom section 6038C applies is an applicable taxpayer, the 
     information described in this subsection shall include--
       ``(A) such information as the Secretary determines 
     necessary to determine the base erosion minimum tax amount, 
     base erosion payments, and base erosion tax benefits of the 
     taxpayer for purposes of section 59A for the taxable year, 
     and
       ``(B) such other information as the Secretary determines 
     necessary to carry out such section.
     For purposes of this paragraph, any term used in this 
     paragraph which is also used in section 59A shall have the 
     same meaning as when used in such section.''.
       (2) Increase in penalty.--Paragraphs (1) and (2) of section 
     6038A(d) are each amended by striking ``$10,000'' and 
     inserting ``$25,000''.
       (c) Disallowance of Credits Against Base Erosion Tax.--
     Paragraph (2) of section 26(b) is amended by inserting after 
     subparagraph (A) the following new subparagraph:
       ``(B) section 59A (relating to base erosion and anti-abuse 
     tax),''.
       (d) Conforming Amendments.--
       (1) The table of parts for subchapter A of chapter 1 is 
     amended by adding after the item relating to part VI the 
     following new item:

             ``Part VII. Base Erosion and Anti-abuse Tax''.

       (2) Paragraph (1) of section 882(a), as amended by this 
     Act, is amended by inserting `` or 59A,'' after ``section 
     11,''.
       (3) Subparagraph (A) of section 6425(c)(1), as amended by 
     section 13001, is amended to read as follows:
       ``(A) the sum of--
       ``(i) the tax imposed by section 11, or subchapter L of 
     chapter 1, whichever is applicable, plus
       ``(ii) the tax imposed by section 59A, over''.
       (4)(A) Subparagraph (A) of section 6655(g)(1), as amended 
     by sections 12001 and 13001, is amended by striking ``plus'' 
     at the end of clause (i), by redesignating clause (ii) as 
     clause (iii), and by inserting after clause (i) the following 
     new clause:
       ``(ii) the tax imposed by section 59A, plus''.
       (B) Subparagraphs (A)(i) and (B)(i) of section 6655(e)(2), 
     as amended by sections 12001 and 13001, are each amended by 
     inserting ``and modified taxable income'' after ``taxable 
     income''.
       (C) Subparagraph (B) of section 6655(e)(2) is amended by 
     adding at the end the following new clause:
       ``(iii) Modified taxable income.--The term `modified 
     taxable income' has the meaning given such term by section 
     59A(c)(1).''.
       (e) Effective Date.--The amendments made by this section 
     shall apply to base erosion payments (as defined in section 
     59A(d) of the Internal Revenue Code of 1986, as added by this 
     section) paid or accrued in taxable years beginning after 
     December 31, 2017.

                       PART III--OTHER PROVISIONS

     SEC. 14501. RESTRICTION ON INSURANCE BUSINESS EXCEPTION TO 
                   PASSIVE FOREIGN INVESTMENT COMPANY RULES.

       (a) In General.--Section 1297(b)(2)(B) is amended to read 
     as follows:
       ``(B) derived in the active conduct of an insurance 
     business by a qualifying insurance corporation (as defined in 
     subsection (f)),''.
       (b) Qualifying Insurance Corporation Defined.--Section 1297 
     is amended by adding at the end the following new subsection:
       ``(f) Qualifying Insurance Corporation.--For purposes of 
     subsection (b)(2)(B)--
       ``(1) In general.--The term `qualifying insurance 
     corporation' means, with respect to any taxable year, a 
     foreign corporation--
       ``(A) which would be subject to tax under subchapter L if 
     such corporation were a domestic corporation, and
       ``(B) the applicable insurance liabilities of which 
     constitute more than 25 percent of its total assets, 
     determined on the basis of such liabilities and assets as 
     reported on the corporation's applicable financial statement 
     for the last year ending with or within the taxable year.
       ``(2) Alternative facts and circumstances test for certain 
     corporations.--If a corporation fails to qualify as a 
     qualified insurance corporation under paragraph (1) solely 
     because the percentage determined under paragraph (1)(B) is 
     25 percent or less, a United States person that owns stock in 
     such corporation may elect to treat such stock as stock of a 
     qualifying insurance corporation if--
       ``(A) the percentage so determined for the corporation is 
     at least 10 percent, and
       ``(B) under regulations provided by the Secretary, based on 
     the applicable facts and circumstances--
       ``(i) the corporation is predominantly engaged in an 
     insurance business, and
       ``(ii) such failure is due solely to runoff-related or 
     rating-related circumstances involving such insurance 
     business.
       ``(3) Applicable insurance liabilities.--For purposes of 
     this subsection--
       ``(A) In general.--The term `applicable insurance 
     liabilities' means, with respect to any life or property and 
     casualty insurance business--
       ``(i) loss and loss adjustment expenses, and
       ``(ii) reserves (other than deficiency, contingency, or 
     unearned premium reserves) for life and health insurance 
     risks and life and health insurance claims with respect to 
     contracts providing coverage for mortality or morbidity 
     risks.
       ``(B) Limitations on amount of liabilities.--Any amount 
     determined under clause (i) or (ii) of subparagraph (A) shall 
     not exceed the lesser of such amount--
       ``(i) as reported to the applicable insurance regulatory 
     body in the applicable financial statement described in 
     paragraph (4)(A) (or, if less, the amount required by 
     applicable law or regulation), or
       ``(ii) as determined under regulations prescribed by the 
     Secretary.
       ``(4) Other definitions and rules.--For purposes of this 
     subsection--
       ``(A) Applicable financial statement.--The term `applicable 
     financial statement' means a statement for financial 
     reporting purposes which--
       ``(i) is made on the basis of generally accepted accounting 
     principles,
       ``(ii) is made on the basis of international financial 
     reporting standards, but only if there is no statement that 
     meets the requirement of clause (i), or
       ``(iii) except as otherwise provided by the Secretary in 
     regulations, is the annual statement which is required to be 
     filed with the applicable insurance regulatory body, but only 
     if there is no statement which meets the requirements of 
     clause (i) or (ii).
       ``(B) Applicable insurance regulatory body.--The term 
     `applicable insurance regulatory body' means, with respect to 
     any insurance business, the entity established by law to 
     license, authorize, or regulate such business and to which 
     the statement described in subparagraph (A) is provided.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

     SEC. 14502. REPEAL OF FAIR MARKET VALUE METHOD OF INTEREST 
                   EXPENSE APPORTIONMENT.

       (a) In General.--Paragraph (2) of section 864(e) is amended 
     to read as follows:
       ``(2) Gross income and fair market value methods may not be 
     used for interest.--All allocations and apportionments of 
     interest expense shall be determined using the adjusted bases 
     of assets rather than on the basis of the fair market value 
     of the assets or gross income.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to taxable years beginning after December 31, 
     2017.

                                TITLE II

     SEC. 20001. OIL AND GAS PROGRAM.

       (a) Definitions.--In this section:
       (1) Coastal plain.--The term ``Coastal Plain'' means the 
     area identified as the 1002 Area on the plates prepared by 
     the United States Geological Survey entitled ``ANWR Map - 
     Plate 1'' and ``ANWR Map - Plate 2'', dated October 24, 2017, 
     and on file with the United States Geological Survey and the 
     Office of the Solicitor of the Department of the Interior.
       (2) Secretary.--The term ``Secretary'' means the Secretary 
     of the Interior, acting through the Bureau of Land 
     Management.
       (b) Oil and Gas Program.--
       (1) In general.--Section 1003 of the Alaska National 
     Interest Lands Conservation Act (16 U.S.C. 3143) shall not 
     apply to the Coastal Plain.
       (2) Establishment.--
       (A) In general.--The Secretary shall establish and 
     administer a competitive oil and gas program for the leasing, 
     development, production, and transportation of oil and gas in 
     and from the Coastal Plain.
       (B) Purposes.--Section 303(2)(B) of the Alaska National 
     Interest Lands Conservation Act (Public Law 96-487; 94 Stat. 
     2390) is amended--
       (i) in clause (iii), by striking ``and'' at the end;
       (ii) in clause (iv), by striking the period at the end and 
     inserting ``; and''; and
       (iii) by adding at the end the following:
       ``(v) to provide for an oil and gas program on the Coastal 
     Plain.''.
       (3) Management.--Except as otherwise provided in this 
     section, the Secretary shall manage the oil and gas program 
     on the Coastal Plain in a manner similar to the 
     administration of lease sales under the Naval Petroleum 
     Reserves Production Act of 1976 (42 U.S.C. 6501 et seq.) 
     (including regulations).
       (4) Royalties.--Notwithstanding the Mineral Leasing Act (30 
     U.S.C. 181 et seq.), the royalty rate for leases issued 
     pursuant to this section shall be 16.67 percent.
       (5) Receipts.--Notwithstanding the Mineral Leasing Act (30 
     U.S.C. 181 et seq.), of the amount of adjusted bonus, rental, 
     and royalty receipts derived from the oil and gas program and 
     operations on Federal land authorized under this section--
       (A) 50 percent shall be paid to the State of Alaska; and
       (B) the balance shall be deposited into the Treasury as 
     miscellaneous receipts.
       (c) 2 Lease Sales Within 10 Years.--
       (1) Requirement.--
       (A) In general.--Subject to subparagraph (B), the Secretary 
     shall conduct not fewer than 2 lease sales area-wide under 
     the oil and gas program under this section by not later than 
     10 years after the date of enactment of this Act.
       (B) Sale acreages; schedule.--
       (i) Acreages.--The Secretary shall offer for lease under 
     the oil and gas program under this section--

       (I) not fewer than 400,000 acres area-wide in each lease 
     sale; and
       (II) those areas that have the highest potential for the 
     discovery of hydrocarbons.

       (ii) Schedule.--The Secretary shall offer--

       (I) the initial lease sale under the oil and gas program 
     under this section not later than 4 years after the date of 
     enactment of this Act; and

[[Page 19922]]

       (II) a second lease sale under the oil and gas program 
     under this section not later than 7 years after the date of 
     enactment of this Act.

       (2) Rights-of-way.--The Secretary shall issue any rights-
     of-way or easements across the Coastal Plain for the 
     exploration, development, production, or transportation 
     necessary to carry out this section.
       (3) Surface development.--In administering this section, 
     the Secretary shall authorize up to 2,000 surface acres of 
     Federal land on the Coastal Plain to be covered by production 
     and support facilities (including airstrips and any area 
     covered by gravel berms or piers for support of pipelines) 
     during the term of the leases under the oil and gas program 
     under this section.

     SEC. 20002. LIMITATIONS ON AMOUNT OF DISTRIBUTED QUALIFIED 
                   OUTER CONTINENTAL SHELF REVENUES.

       Section 105(f)(1) of the Gulf of Mexico Energy Security Act 
     of 2006 (43 U.S.C. 1331 note; Public Law 109-432) is amended 
     by striking ``exceed $500,000,000 for each of fiscal years 
     2016 through 2055.'' and inserting the following: ``exceed--
       ``(A) $500,000,000 for each of fiscal years 2016 through 
     2019;
       ``(B) $650,000,000 for each of fiscal years 2020 and 2021; 
     and
       ``(C) $500,000,000 for each of fiscal years 2022 through 
     2055.''.

     SEC. 20003. STRATEGIC PETROLEUM RESERVE DRAWDOWN AND SALE.

       (a) Drawdown and Sale.--
       (1) In general.--Notwithstanding section 161 of the Energy 
     Policy and Conservation Act (42 U.S.C. 6241), except as 
     provided in subsections (b) and (c), the Secretary of Energy 
     shall draw down and sell from the Strategic Petroleum Reserve 
     7,000,000 barrels of crude oil during the period of fiscal 
     years 2026 through 2027.
       (2) Deposit of amounts received from sale.--Amounts 
     received from a sale under paragraph (1) shall be deposited 
     in the general fund of the Treasury during the fiscal year in 
     which the sale occurs.
       (b) Emergency Protection.--The Secretary of Energy shall 
     not draw down and sell crude oil under subsection (a) in a 
     quantity that would limit the authority to sell petroleum 
     products under subsection (h) of section 161 of the Energy 
     Policy and Conservation Act (42 U.S.C. 6241) in the full 
     quantity authorized by that subsection.
       (c) Limitation.--The Secretary of Energy shall not drawdown 
     or conduct sales of crude oil under subsection (a) after the 
     date on which a total of $600,000,000 has been deposited in 
     the general fund of the Treasury from sales authorized under 
     that subsection.

       And the Senate agree to the same.
     From the Committee on Ways and Means, for consideration of 
     the House bill and the Senate amendment, and modifications 
     committed to conference:
     Kevin Brady,
     Devin Nunes,
     Peter J. Roskam,
     Diane Black,
     Kristi L. Noem,
     From the Committee on Energy and Commerce, for consideration 
     of sec. 20003 of the Senate amendment, and modifications 
     committed to conference:
     Fred Upton,
     John Shimkus,
     From the Committee on Natural Resources, for consideration of 
     secs. 20001 and 20002 of the Senate amendment, and 
     modifications committed to conference:
     Rob Bishop,
     Don Young,
                                Managers on the Part of the House.

     Orrin G. Hatch,
     Michael B. Enzi,
     Lisa Murkowski,
     John Cornyn,
     John Thune,
     Rob Portman,
     Tim Scott,
     Patrick J. Toomey,
                               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. 1), the Tax Cuts 
     and Jobs Act, 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

                       INDIVIDUAL TAX PROVISIONS

 A. Reduction and Simplification of Individual Income Tax Rates (sec. 
1001 of the House bill, sec. 11001 of the Senate amendment, and sec. 1 
                              of the Code)


                              present law

     In general
       To determine regular tax liability, an individual taxpayer 
     generally must apply the tax rate schedules (or the tax 
     tables) to his or her regular taxable income. The rate 
     schedules are broken into several ranges of income, known as 
     income brackets, and the marginal tax rate increases as a 
     taxpayer's income increases.
     Tax rate schedules
       Separate rate schedules apply based on an individual's 
     filing status. For 2017, the regular individual income tax 
     rate schedules are as follows:

       TABLE 1.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2017 \1\
------------------------------------------------------------------------
           If taxable income is:               Then income tax equals:
------------------------------------------------------------------------
                           Single Individuals
 
Not over $9,325...........................  10% of the taxable income
Over $9,325 but not over $37,950..........  $932.50 plus 15% of the
                                             excess over $9,325
Over $37,950 but not over $91,900.........  $5,226.25 plus 25% of the
                                             excess over $37,950
Over $91,900 but not over $191,650........  $18,713.75 plus 28% of the
                                             excess over $91,900
Over $191,650 but not over $416,700.......  $46,643.75 plus 33% of the
                                             excess over $191,650
Over $416,700 but not over $418,400.......  $120,910.25 plus 35% of the
                                             excess over $416,700
Over $418,400.............................  $121,505.25 plus 39.6% of
                                             the excess over $418,400
------------------------------------------------------------------------
                           Heads of Households
 
Not over $13,350..........................  10% of the taxable income
Over $13,350 but not over $50,800.........  $1,335 plus 15% of the
                                             excess over $13,350
Over $50,800 but not over $131,200........  $6,952.50 plus 25% of the
                                             excess over $50,800
Over $131,200 but not over $212,500.......  $27,052.50 plus 28% of the
                                             excess over $131,200
Over $212,500 but not over $416,700.......  $49,816.50 plus 33% of the
                                             excess over $212,500
Over $416,700 but not over $444,550.......  $117,202.50 plus 35% of the
                                             excess over $416,700
Over $444,550.............................  $126,950 plus 39.6% of the
                                             excess over $444,550
------------------------------------------------------------------------
     Married Individuals Filing Joint Returns and Surviving Spouses
 
Not over $18,650..........................  10% of the taxable income
Over $18,650 but not over $75,900.........  $1,865 plus 15% of the
                                             excess over $18,650
Over $75,900 but not over $153,100........  $10,452.50 plus 25% of the
                                             excess over $75,900
Over $153,100 but not over $233,350.......  $29,752.50 plus 28% of the
                                             excess over $153,100
Over $233,350 but not over $416,700.......  $52,222.50 plus 33% of the
                                             excess over $233,350
Over $416,700 but not over $470,700.......  $112,728 plus 35% of the
                                             excess over $416,700
Over $470,700.............................  $131,628 plus 39.6% of the
                                             excess over $470,700
------------------------------------------------------------------------
               Married Individuals Filing Separate Returns
 
Not over $9,325...........................  10% of the taxable income
Over $9,325 but not over $37,950..........  $932.50 plus 15% of the
                                             excess over $9,325
Over $37,950 but not over $76,550.........  $5,226.25 plus 25% of the
                                             excess over $37,950
Over $76,550 but not over $116,675........  $14,876.25 plus 28% of the
                                             excess over $76,550
Over $116,675 but not over $208,350.......  $26,111.25 plus 33% of the
                                             excess over $116,675
Over $208,350 but not over $235,350.......  $56,364 plus 35% of the
                                             excess over $208,350
Over $235,350.............................  $65,814 plus 39.6% of the
                                             excess over $235,350
------------------------------------------------------------------------
                           Estates and Trusts
 
Not over $2,550...........................  15% of the taxable income
Over $2,550 but not over $6,000...........  $382.50 plus 25% of the
                                             excess over $2,550
Over $6,000 but not over $9,150...........  $1,245 plus 28% of the
                                             excess over $6,000
Over $9,150 but not over $12,500..........  $2,127 plus 33% of the
                                             excess over $9,150
Over $12,500..............................  $3,232.50 plus 39.6% of the
                                             excess over $12,500
------------------------------------------------------------------------
\1\  Rev. Proc. 2016-55, 2016-45 I.R.B. 707, sec. 3.01.

     Unearned income of children
       Special rules (generally referred to as the ``kiddie tax'') 
     apply to the net unearned income of certain children.\1\ 
     Generally, the kiddie tax applies to a child if: (1) the 
     child has not reached the age of 19 by the close of the 
     taxable year, or the child is a full-time student under the 
     age of 24, and either of the child's parents is alive at such 
     time; (2) the child's unearned income exceeds $2,100 (for 
     2017); and (3) the child does not file a joint return.\2\ The 
     kiddie tax applies regardless of whether the child may be 
     claimed as a dependent by either or both parents. For 
     children above age 17, the kiddie tax applies only to 
     children whose earned income does not exceed one-half of the 
     amount of their support.
---------------------------------------------------------------------------
     \1\ Sec. 1(g). Unless otherwise stated, all section 
     references are to the Internal Revenue Code of 1986, as 
     amended (the ``Code'').
     \2\ Sec. 1(g)(2).
---------------------------------------------------------------------------
       Under these rules, the net unearned income of a child (for 
     2017, unearned income over $2,100) is taxed at the parents' 
     tax rates if the parents' tax rates are higher than the tax 
     rates of the child.\3\ The remainder of a child's taxable 
     income (i.e., earned income, plus unearned income up to 
     $2,100 (for 2017), less the child's standard deduction) is 
     taxed at the child's rates, regardless of whether the kiddie 
     tax applies to the child. For these purposes, unearned income 
     is income other than wages, salaries, professional fees, 
     other amounts received as compensation for personal services 
     actually rendered, and distributions from qualified 
     disability trusts.\4\ In general, a child is eligible to use 
     the preferential tax rates for qualified dividends and 
     capital gains.\5\
---------------------------------------------------------------------------
     \3\ Special rules apply for determining which parent's rate 
     applies where a joint return is not filed.
     \4\ Sec. 1(g)(4) and sec. 911(e)(2).
     \5\ Sec. 1(h).
---------------------------------------------------------------------------
       The kiddie tax is calculated by computing the ``allocable 
     parental tax.'' This involves adding the net unearned income 
     of the child

[[Page 19923]]

     to the parent's income and then applying the parent's tax 
     rate. A child's ``net unearned income'' is the child's 
     unearned income less the sum of (1) the minimum standard 
     deduction allowed to dependents ($1,050 for 2017 \6\), 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.\7\
---------------------------------------------------------------------------
     \6\ Sec. 3.02 of Rev. Proc. 2016-55, supra.
     \7\ 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.\8\ 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.
---------------------------------------------------------------------------
     \8\ Sec. 1(g)(3).
---------------------------------------------------------------------------
       Generally, a child must file a separate return to report 
     his or her income.\9\ In such case, items on the parents' 
     return are not affected by the child's income, and the total 
     tax due from the child is the greater of:
---------------------------------------------------------------------------
     \9\ Sec. 1(g)(6). See Form 8615, Tax for Certain Children Who 
     Have Unearned Income.
---------------------------------------------------------------------------
       1. The sum of (a) the tax payable by the child on the 
     child's earned income and unearned income up to $2,100 (for 
     2017), 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.\10\
---------------------------------------------------------------------------
     \10\ Sec. 1(g)(1).
---------------------------------------------------------------------------
       Under certain circumstances, a parent may elect to report a 
     child's unearned income on the parent's return.\11\
---------------------------------------------------------------------------
     \11\ Sec. 1(g)(7).
---------------------------------------------------------------------------
     Capital gains rates

     In general
       In the case of an individual, estate, or trust, any 
     adjusted net capital gain which otherwise would be taxed at 
     the 10- or 15-percent rate is not taxed. Any adjusted net 
     capital gain which otherwise would be taxed at rates over 15-
     percent and below 39.6 percent is taxed at a 15-percent rate. 
     Any adjusted net capital gain which otherwise would be taxed 
     at a 39.6-percent rate is taxed at a 20-percent rate.
       The unrecaptured section 1250 gain is taxed at a maximum 
     rate of 25 percent, and 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.
       In addition, a tax is imposed on net investment income in 
     the case of an individual, estate, or trust. In the case of 
     an individual, the tax is 3.8 percent of the lesser of net 
     investment income, which includes gains and dividends, or the 
     excess of modified adjusted gross income over the threshold 
     amount. The threshold amount is $250,000 in the case of a 
     joint return or surviving spouse, $125,000 in the case of a 
     married individual filing a separate return, and $200,000 in 
     the case of any other individual.
     Definitions

       Net capital gain
       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. 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.
       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 available under the straight-line method of 
     depreciation.
       Adjusted net capital gain
       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).
       Qualified dividend income
       Adjusted net capital gain is increased by the amount of 
     qualified dividend income.
       A dividend is the distribution of property made by a 
     corporation to its shareholders out of its after-tax earnings 
     and profits. Qualified dividends generally includes dividends 
     received from domestic corporations and 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 for any dividend paid by the 
     corporation with respect to stock that is readily tradable on 
     an established securities market in the United States.
       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.
       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.
       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 (1) 
     the qualified dividend income of the RIC for the taxable year 
     and (2) 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 qualified dividend income that may be paid by 
     a real estate investment trust (``REIT'') for any taxable 
     year may not exceed the sum of (1) the qualified dividend 
     income of the REIT for the taxable year, (2) 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 (3) the 
     amount of earnings and profits accumulated in a non-REIT 
     taxable year that were distributed by the REIT during the 
     taxable year.
       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 are not 
     qualified dividend income.
       28-percent rate gain
       The term ``28-percent rate gain'' means the excess of the 
     sum of 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) and the amount of gain equal to the 
     additional amount of gain that would be excluded from gross 
     income under section 1202 (relating to certain small business 
     stock) if the percentage limitations of section 1202(a) did 
     not apply, over the sum of 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
       ``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.


                               House Bill

     Modification of rates
       The House bill replaces the individual income tax rate 
     structure with a new rate structure.

[[Page 19924]]



 TABLE 2.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2018 UNDER THE HOUSE
                                  BILL
------------------------------------------------------------------------
           If taxable income is:               Then income tax equals:
------------------------------------------------------------------------
                           Single Individuals
 
Not over $45,000..........................  12% of the taxable income
Over $45,000 but not over $200,000........  $5,400 plus 25% of the
                                             excess over $45,000
Over $200,000 but not over $500,000.......  $44,150 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $149,150 plus 39.6% of the
                                             excess over $500,000
------------------------------------------------------------------------
                           Heads of Households
 
Not over $67,500..........................  12% of the taxable income
Over $67,500 but not over $200,000........  $8,100 plus 25% of the
                                             excess over $67,500
Over $200,000 but not over $500,000.......  $41,225 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $146,225 plus 39.6% of the
                                             excess over $500,000
------------------------------------------------------------------------
     Married Individuals Filing Joint Returns and Surviving Spouses
 
Not over $90,000..........................  12% of the taxable income
Over $90,000 but not over $260,000........  $10,800 plus 25% of the
                                             excess over $90,000
Over $260,000 but not over $1,000,000.....  $53,300 plus 35% of the
                                             excess over $260,000
Over $1,000,000...........................  $312,300 plus 39.6% of the
                                             excess over $1,000,000
------------------------------------------------------------------------
               Married Individuals Filing Separate Returns
 
Not over $45,000..........................  12% of the taxable income
Over $45,000 but not over $130,000........  $5,400 plus 25% of the
                                             excess over $45,000
Over $130,000 but not over $500,000.......  $26,650 plus 35% of the
                                             excess over $130,000
Over $500,000.............................  $156,150 plus 39.6% of the
                                             excess over $500,000
------------------------------------------------------------------------
                           Estates and Trusts
 
Not over $2,550...........................  12% of the taxable income
Over $2,550 but not over $9,150...........  $306 plus 25% of the excess
                                             over $2,550
Over $9,150 but not over $12,500..........  $1,956 plus 35% of the
                                             excess over $9,150
Over $12,500..............................  $3,128.50 plus 39.6% of the
                                             excess over $12,500
------------------------------------------------------------------------

       The dollar amounts for bracket thresholds are all adjusted 
     for inflation and then rounded to the next lowest multiple of 
     $100 in future years.\12\ Unlike present law, which uses a 
     measure of the Consumer Price Index for All Urban Consumers 
     (``CPI-U''), the new inflation adjustment uses the Chained 
     Consumer Price Index for All Urban Consumers (``C-CPI-U'').
---------------------------------------------------------------------------
     \12\ Some thresholds are defined as 1/2 of dollar amounts and 
     thus may be multiples of $50.
---------------------------------------------------------------------------
     Phaseout of benefit of the 12-percent bracket
       For taxpayers with adjusted gross income in excess of 
     $1,000,000 ($1,200,000 in the case of married taxpayers 
     filing jointly), the benefit of the 12-percent bracket, as 
     measured against the 39.6-percent bracket, is phased out at a 
     rate of 6-percent for taxpayers whose AGI is in excess of 
     these amounts. Thus, in the case of a married taxpayer filing 
     a joint return, if AGI is in excess of $1,200,000, the 
     benefit of $24,840 (27.6-percent of $90,000) phases out over 
     an income range of $414,000. The phaseout thresholds are 
     indexed for inflation.
     Simplification of tax on unearned income of children
       The provision simplifies the ``kiddie tax'' by effectively 
     applying ordinary and capital gains rates applicable to 
     trusts and estates to the net unearned income of a child. 
     Thus, as under present law, taxable income attributable to 
     earned income is taxed according to an unmarried taxpayers' 
     brackets and rates. Taxable income attributable to net 
     unearned income is taxed according to the brackets applicable 
     to trusts and estates, with respect to both ordinary income 
     and income taxed at preferential rates. Thus, under the 
     provision, the child's tax is unaffected by the tax situation 
     of the child's parent or the unearned income of any siblings.
     Maximum rates on capital gains and qualified dividends
       The provision generally retains the present-law maximum 
     rates on net capital gain and qualified dividends. The 
     breakpoints between the zero- and 15-percent rates (``15-
     percent breakpoint'') and the 15- and 20-percent rates (``20-
     percent breakpoint'') are based on the same amounts as the 
     breakpoints under present law, except the breakpoints are 
     indexed using the C-CPI-U in taxable years beginning after 
     2017. Thus, for 2018, the 15-percent breakpoint is $77,200 
     for joint returns and surviving spouses (one-half of this 
     amount for married taxpayers filing separately), $51,700 for 
     heads of household, $2,600 for estates and trusts, and 
     $38,600 for other unmarried individuals. The 20-percent 
     breakpoint is $479,000 for joint returns and surviving 
     spouses (one-half of this amount for married taxpayers filing 
     separately), $452,400 for heads of household, $12,700 for 
     estates and trusts, and $425,800 for other unmarried 
     individuals.
       Therefore, in the case of an individual (including an 
     estate or trust) with adjusted net capital gain, to the 
     extent the gain would not result in taxable income exceeding 
     the 15-percent breakpoint, such gain is not taxed. Any 
     adjusted net capital gain which would result in taxable 
     income exceeding the 15-percent breakpoint but not exceeding 
     the 20-percent breakpoint is taxed at 15 percent. The 
     remaining adjusted net capital gain is taxed at 20 percent.
       As under present law, unrecaptured section 1250 gain 
     generally is taxed at a maximum rate of 25 percent, and 28-
     percent rate gain is taxed at a maximum rate of 28 percent.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

     Temporary modification of rates
       The Senate amendment temporarily replaces the individual 
     income tax rate structure with a new rate structure.

 TABLE 3.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2018 UNDER THE SENATE
                                AMENDMENT
------------------------------------------------------------------------
           If taxable income is:               Then income tax equals:
------------------------------------------------------------------------
                           Single Individuals
 
Not over $9,525...........................  10% of the taxable income
Over $9,525 but not over $38,700..........  $952.50 plus 12% of the
                                             excess over $9,525
Over $38,700 but not over $70,000.........  $4,453.50 plus 22% of the
                                             excess over $38,700
Over $70,000 but not over $160,000........  $11,339.50 plus 24% of the
                                             excess over $70,000
Over $160,000 but not over $200,000.......  $32,939.50 plus 32% of the
                                             excess over $160,000
Over $200,000 but not over $500,000.......  $45,739.50 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $150,739.50 plus 38.5% of
                                             the excess over $500,000
------------------------------------------------------------------------
                           Heads of Households
 
Not over $13,600..........................  10% of the taxable income
Over $13,600 but not over $51,800.........  $1,360 plus 12% of the
                                             excess over $13,600
Over $51,800 but not over $70,000.........  $5,944 plus 22% of the
                                             excess over $51,800
Over $70,000 but not over $160,000........  $9,948 plus 24% of the
                                             excess over $70,000
Over $160,000 but not over $200,000.......  $31,548 plus 32% of the
                                             excess over $160,000
Over $200,000 but not over $500,000.......  $44,348 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $149,348 plus 38.5% of the
                                             excess over $500,000
------------------------------------------------------------------------
     Married Individuals Filing Joint Returns and Surviving Spouses
 
Not over $19,050..........................  10% of the taxable income
Over $19,050 but not over $77,400.........  $1,905 plus 12% of the
                                             excess over $19,050
Over $77,400 but not over $140,000........  $8,907 plus 22% of the
                                             excess over $77,400
Over $140,000 but not over $320,000.......  $22,679 plus 24% of the
                                             excess over $140,000
Over $320,000 but not over $400,000.......  $65,879 plus 32% of the
                                             excess over $320,000
Over $400,000 but not over $1,000,000.....  $91,479 plus 35% of the
                                             excess over $400,000
Over $1,000,000...........................  $301,479 plus 38.5% of the
                                             excess over $1,000,000
------------------------------------------------------------------------
               Married Individuals Filing Separate Returns
 
Not over $9,525...........................  10% of the taxable income
Over $9,525 but not over $38,700..........  $952.50 plus 12% of the
                                             excess over $9,525
Over $38,700 but not over $70,000.........  $4,453.50 plus 22% of the
                                             excess over $38,700
Over $70,000 but not over $160,000........  $11,339.50 plus 24% of the
                                             excess over $70,000
Over $160,000 but not over $200,000.......  $32,939.50 plus 32% of the
                                             excess over $160,000
Over $200,000 but not over $500,000.......  $45,739.50 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $150,739.50 plus 38.5% of
                                             the excess over $500,000
------------------------------------------------------------------------
                           Estates and Trusts
 
Not over $2,550...........................  10% of the taxable income
Over $2,550 but not over $9,150...........  $255 plus 24% of the excess
                                             over $2,550
Over $9,150 but not over $12,500..........  $1,839 plus 35% of the
                                             excess over $9,150
Over $12,500..............................  $3,011.50 plus 38.5% of the
                                             excess over $12,500
------------------------------------------------------------------------

       Unlike present law, which uses a measure of the CPI-U, the 
     new inflation adjustment uses the C-CPI-U.
       The provision's rate structure does not apply to taxable 
     years beginning after December 31, 2025.
     Temporary simplification of tax on unearned income of 
         children
       The Senate amendment follows the House bill in applying 
     ordinary and capital gains rates applicable to trusts and 
     estates to the net unearned income of a child, but does not 
     apply these changes to taxable years beginning after December 
     31, 2025.
     Maximum rates on capital gains and qualified dividends
       The Senate amendment follows the House bill and generally 
     retains the present-law maximum rates on net capital gain and 
     qualified dividends.
     Paid preparer due diligence requirement for head of household 
         status
       The Senate amendment directs the Secretary of the Treasury 
     to promulgate due diligence requirements for paid preparers 
     in determining eligibility for a taxpayer to file as head of 
     household. A penalty of $500 is imposed for each failure to 
     meet these requirements.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement temporarily replaces the existing 
     rate structure with a new rate structure.

    TABLE 4.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2018 UNDER THE
                          CONFERENCE AGREEMENT
------------------------------------------------------------------------
           If taxable income is:               Then income tax equals:
------------------------------------------------------------------------
                           Single Individuals
 
Not over $9,525...........................  10% of the taxable income
Over $9,525 but not over $38,700..........  $952.50 plus 12% of the
                                             excess over $9,525
Over $38,700 but not over $82,500.........  $4,453.50 plus 22% of the
                                             excess over $38,700
Over $82,500 but not over $157,500........  $14,089.50 plus 24% of the
                                             excess over $82,500
Over $157,500 but not over $200,000.......  $32,089.50 plus 32% of the
                                             excess over $157,500
Over $200,000 but not over $500,000.......  $45,689.50 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $150,689.50 plus 37% of the
                                             excess over $500,000
------------------------------------------------------------------------
                           Heads of Households
 
Not over $13,600..........................  10% of the taxable income

[[Page 19925]]

 
Over $13,600 but not over $51,800.........  $1,360 plus 12% of the
                                             excess over $13,600
Over $51,800 but not over $82,500.........  $5,944 plus 22% of the
                                             excess over $51,800
Over $82,500 but not over $157,500........  $12,698 plus 24% of the
                                             excess over $82,500
Over $157,500 but not over $200,000.......  $30,698 plus 32% of the
                                             excess over $157,500
Over $200,000 but not over $500,000.......  $44,298 plus 35% of the
                                             excess over $200,000
Over $500,000.............................  $149,298 plus 37% of the
                                             excess over $500,000
------------------------------------------------------------------------
     Married Individuals Filing Joint Returns and Surviving Spouses
 
Not over $19,050..........................  10% of the taxable income
Over $19,050 but not over $77,400.........  $1,905 plus 12% of the
                                             excess over $19,050
Over $77,400 but not over $165,000........  $8,907 plus 22% of the
                                             excess over $77,400
Over $165,000 but not over $315,000.......  $28,179 plus 24% of the
                                             excess over $165,000
Over $315,000 but not over $400,000.......  $64,179 plus 32% of the
                                             excess over $315,000
Over $400,000 but not over $600,000.......  $91,379 plus 35% of the
                                             excess over $400,000
Over $600,000.............................  $161,379 plus 37% of the
                                             excess over $600,000
------------------------------------------------------------------------
               Married Individuals Filing Separate Returns
 
Not over $9,525...........................  10% of the taxable income
Over $9,525 but not over $38,700..........  $952.50 plus 12% of the
                                             excess over $9,525
Over $38,700 but not over $82,500.........  $4,453.50 plus 22% of the
                                             excess over $38,700
Over $82,500 but not over $157,500........  $14,089.50 plus 24% of the
                                             excess over $82,500
Over $157,500 but not over $200,000.......  $32,089.50 plus 32% of the
                                             excess over $157,500
Over $200,000 but not over $300,000.......  $45,689.50 plus 35% of the
                                             excess over $200,000
Over $300,000.............................  $80,689.50 plus 37% of the
                                             excess over $300,000
------------------------------------------------------------------------
                           Estates and Trusts
 
Not over $2,550...........................  10% of the taxable income
Over $2,550 but not over $9,150...........  $255 plus 24% of the excess
                                             over $2,550
Over $9,150 but not over $12,500..........  $1,839 plus 35% of the
                                             excess over $9,150
Over $12,500..............................  $3,011.50 plus 37% of the
                                             excess over $12,500
------------------------------------------------------------------------

       The provision's rate structure does not apply to taxable 
     years beginning after December 31, 2025.
       The conference agreement does not follow the House bill in 
     phasing out the benefit of the 12-percent bracket for 
     taxpayers with adjusted gross income in excess of $1,000,000 
     ($1,200,000 in the case of married taxpayers filing jointly).
       The conference agreement follows the House bill and 
     generally retains present-law maximum rates on net capital 
     gains and qualified dividends.
       The conference agreement follows the House bill in 
     simplifying the tax on the unearned income of children. This 
     provision does not apply to taxable years beginning after 
     December 31, 2025.
       The conference agreement follows the Senate amendment and 
     directs the Secretary of the Treasury to promulgate due 
     diligence requirements for paid preparers in determining 
     eligibility for a taxpayer to file as head of household.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.
     1. Increase in standard deduction (sec. 1002 of the House 
         bill, sec. 11021 of the Senate amendment, and sec. 63 of 
         the Code)


                              Present Law

       Under present law, an individual who does not elect to 
     itemize deductions may reduce his or her adjusted gross 
     income (``AGI'') by the amount of the applicable standard 
     deduction in arriving at his or her taxable income. The 
     standard deduction is the sum of the basic standard deduction 
     and, if applicable, the additional standard deduction. The 
     basic standard deduction varies depending upon a taxpayer's 
     filing status. For 2017, the amount of the basic standard 
     deduction is $6,350 for single individuals and married 
     individuals filing separate returns, $9,350 for heads of 
     households, and $12,700 for married individuals filing a 
     joint return and surviving spouses. An additional standard 
     deduction is allowed with respect to any individual who is 
     elderly or blind.\13\ The amount of the standard deduction is 
     indexed annually for inflation.
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     \13\ For 2017, the additional amount is $1,250 for married 
     taxpayers (for each spouse meeting the applicable criterion) 
     and surviving spouses. The additional amount for single 
     individuals and heads of households is $1,550. An individual 
     who qualifies as both blind and elderly is entitled to two 
     additional standard deductions, for a total additional amount 
     (for 2017) of $2,500 or $3,100, as applicable.
---------------------------------------------------------------------------
       In the case of a dependent for whom a deduction for a 
     personal exemption is allowed to another taxpayer, the 
     standard deduction may not exceed the greater of (i) $1,050 
     (in 2017) or (ii) the sum of $350 (in 2017) plus the 
     individual's earned income.


                               House Bill

       The House bill increases the standard deduction for 
     individuals across all filing statuses. Under the provision, 
     the amount of the standard deduction is $24,400 for married 
     individuals filing a joint return, $18,300 for head-of-
     household filers, and $12,200 for all other taxpayers. The 
     amount of the standard deduction is indexed for inflation 
     using the C-CPI-U for taxable years beginning after December 
     31, 2019.\14\
---------------------------------------------------------------------------
     \14\ Thus, the standard deduction is the same for 2018 and 
     2019.
---------------------------------------------------------------------------
       The provision eliminates the additional standard deduction 
     for the aged and the blind.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment temporarily increases the basic 
     standard deduction for individuals across all filing 
     statuses. Under the provision, the amount of the standard 
     deduction is temporarily increased to $24,000 for married 
     individuals filing a joint return, $18,000 for head-of-
     household filers, and $12,000 for all other individuals. The 
     amount of the standard deduction is indexed for inflation 
     using the C-CPI-U for taxable years beginning after December 
     31, 2018.
       The additional standard deduction for the elderly and the 
     blind is not changed by the provision.
       The increase of the basic standard deduction does not apply 
     to taxable years beginning after December 31, 2025.\15\
---------------------------------------------------------------------------
     \15\ The standard deduction continues to be indexed with the 
     C-CPI-U after this sunset.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     2. Repeal of the deduction for personal exemptions (sec. 1003 
         of the House bill, sec. 11041 of the Senate amendment, 
         and sec. 151 of the Code)


                              Present Law

       Under present law, in determining taxable income, an 
     individual reduces AGI by any personal exemption deductions 
     and either the applicable standard deduction or his or her 
     itemized deductions. Personal exemptions generally are 
     allowed for the taxpayer, his or her spouse, and any 
     dependents. For 2017, the amount deductible for each personal 
     exemption is $4,050. This amount is indexed annually for 
     inflation. The personal exemption amount is phased out in the 
     case of an individual with AGI in excess of $313,800 for 
     married taxpayers filing jointly, $287,650 for heads of 
     household, $156,900 for married taxpayers filing separately, 
     and $261,500 for all other filers. In addition, no personal 
     exemption is allowed in the case of a dependent if a 
     deduction is allowed to another taxpayer.
       Withholding rules
       Under present law, the amount of tax required to be 
     withheld by employers from a taxpayer's wages is based in 
     part on the number of withholding exemptions a taxpayer 
     claims on his Form W-4. An employee is entitled to the 
     following exemptions: (1) an exemption for himself, unless he 
     allowed to be claimed as a dependent of another person; (2) 
     an exemption to which the employee's spouse would be 
     entitled, if that spouse does not file a Form W-4 for that 
     taxable year claiming an exemption described in (1); (3) an 
     exemption for each individual who is a dependent (but only if 
     the employee's spouse has not also claimed such a withholding 
     exemption on a Form W-4); (4) additional withholding 
     allowances (taking into account estimated itemized 
     deductions, estimated tax credits, and additional deductions 
     as provided by the Secretary of the Treasury); and (5) a 
     standard deduction allowance.
       Filing requirements
       Under present law, an unmarried individual is required to 
     file a tax return for the taxable year if in that year the 
     individual had income which equals or exceeds the exemption 
     amount plus the standard deduction applicable to such 
     individual (i.e., single, head of household, or surviving 
     spouse). An individual entitled to file a joint return is 
     required to do so unless that individual's gross income, when 
     combined with the individual's spouse's gross income for the 
     taxable year, is less than the sum of twice the exemption 
     amount plus the basic standard deduction applicable to a 
     joint return, provided that such individual and his spouse, 
     at the close of the taxable year, had the same household as 
     their home.
       Trusts and estates
       In lieu of the deduction for personal exemptions, an estate 
     is allowed a deduction of $600. A trust is allowed a 
     deduction of $100; $300 if required to distribute all its 
     income currently; and an amount equal to the personal 
     exemption of an individual in the case of a qualified 
     disability trust.


                               House Bill

       The House bill repeals the deduction for personal 
     exemptions.
       The provision modifies the requirements for those who are 
     required to file a tax return. In the case of an individual 
     who is not married, such individual is required to file a tax 
     return if the taxpayer's gross income for the taxable year 
     exceeds the applicable standard deduction. Married 
     individuals are required to file a return if that 
     individual's gross income, when combined with the 
     individual's spouse's gross income, for the taxable year is 
     more than the standard deduction applicable to a joint 
     return, provided that: (i) such individual and his spouse, at 
     the close of the taxable year, had the same household as 
     their home; (ii) the individual's spouse does not make a 
     separate return; and (iii) neither the individual nor his 
     spouse is a dependent of another taxpayer who has income 
     (other than earned income) in excess of $500 (indexed for 
     inflation).

[[Page 19926]]

       The provision repeals the enhanced deduction for qualified 
     disability trusts.
       Under the provision, the Secretary of the Treasury is to 
     develop rules to determine the amount of tax required to be 
     withheld by employers from a taxpayer's wages.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment suspends the deduction for personal 
     exemptions.\16\
---------------------------------------------------------------------------
     \16\ The provision also clarifies that, for purposes of 
     taxable years in which the personal exemption is reduced to 
     zero, this should not alter the operation of those provisions 
     of the Code which refer to a taxpayer allowed a deduction (or 
     an individual with respect to whom a taxpayer is allowed a 
     deduction) under section 151. Thus, for instance, sec. 24(a) 
     allows a credit against tax with respect to each qualifying 
     child of the taxpayer for which the taxpayer is allowed a 
     deduction under section 151. A qualifying child, as defined 
     under section 152(c), remains eligible for the credit, 
     notwithstanding that the deduction under section 151 has been 
     reduced to zero.
---------------------------------------------------------------------------
       The Senate amendment follows the House bill in modifying 
     the requirements for those who are required to file a tax 
     return.
       The provision does not apply to taxable years beginning 
     after December 31, 2025.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment and 
     suspends the deduction for personal exemptions. The 
     suspension does not apply to taxable years beginning after 
     December 31, 2025.
       The conference agreement generally follows the House bill 
     in modifying the withholding rules to reflect that taxpayers 
     no longer claim personal exemptions under the conference 
     agreement.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017. The conference 
     agreement provides that the Secretary may administer the 
     withholding rules under section 3402 for taxable years 
     beginning before January 1, 2019, without regard to the 
     amendments made under this provision. Thus, at the 
     Secretary's discretion, wage withholding rules may remain the 
     same as under present law for 2018.
     3. Alternative inflation adjustment (secs. 1001 and 1005 of 
         the House bill, sec. 11002 of the Senate amendment, and 
         sec. 1 of the Code)


                              Present Law

       Under present law, many parameters of the tax system are 
     adjusted for inflation to protect taxpayers from the effects 
     of rising prices. Most of the adjustments are based on annual 
     changes in the level of the Consumer Price Index for All 
     Urban Consumers (``CPI-U'').\17\ The CPI-U is an index that 
     measures prices paid by typical urban consumers on a broad 
     range of products, and is developed and published by the 
     Department of Labor.
---------------------------------------------------------------------------
     \17\ Generally, the Code adjusts calendar year values for 
     cost of living by using the percentage by which the price 
     index for the preceding calendar year exceeds the price index 
     for a base calendar year. Sec. 1(f).
---------------------------------------------------------------------------
       Among the inflation-indexed tax parameters are the 
     following individual income tax amounts: (1) the regular 
     income tax brackets; (2) the basic standard deduction; (3) 
     the additional standard deduction for aged and blind; (4) the 
     personal exemption amount; (5) the thresholds for the overall 
     limitation on itemized deductions and the personal exemption 
     phase-out; (6) the phase-in and phase-out thresholds of the 
     earned income credit; (7) IRA contribution limits and 
     deductible amounts; and (8) the saver's credit.


                               House Bill

       The House bill requires the use of the Chained Consumer 
     Price Index for All Urban Consumers (``C-CPI-U'') to adjust 
     tax parameters currently indexed by the CPI-U. The C-CPI-U, 
     like the CPI-U, is a measure of the average change over time 
     in prices paid by urban consumers. It is developed and 
     published by the Department of Labor, but differs from the 
     CPI-U in accounting for the ability of individuals to alter 
     their consumption patterns in response to relative price 
     changes. The C-CPI-U accomplishes this by allowing for 
     consumer substitution between item categories in the market 
     basket of consumer goods and services that make up the index, 
     while the CPI-U only allows for modest substitution within 
     item categories.
       Under the provision, indexed parameters in the Code switch 
     from CPI-U indexing to C-CPI-U indexing going forward in 
     taxable years beginning after December 31, 2017. Therefore, 
     in the case of any existing tax parameters that are not reset 
     for 2018, the provision indexes parameters as if CPI-U 
     applies through 2017 and C-CPI-U applies for years 
     thereafter; the provision does not index all existing tax 
     parameters from their base years using the C-CPI-U. Tax 
     parameters with cost-of-living adjustment base years of 2016 
     and later are indexed solely with C-CPI-U. Therefore, tax 
     values that are reset for 2018 are indexed by the C-CPI-U in 
     taxable years beginning after December 31, 2018.\18\
---------------------------------------------------------------------------
     \18\ One exception is the increased standard deduction which 
     is indexed by C-CPI-U in taxable years beginning after 
     December 31, 2019 and therefore is the same in 2018 and 2019.
---------------------------------------------------------------------------
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment generally follows the House bill.\19\
---------------------------------------------------------------------------
     \19\ The Senate Amendment indexes all tax values that are 
     temporarily reset for 2018, including the basic standard 
     deduction, with the C-CPI-U in taxable years beginning after 
     December 31, 2018.
---------------------------------------------------------------------------
       The provision requiring C-CPI-U indexing after 2017 is 
     permanent. Thus, after certain temporary tax parameters 
     sunset, such as bracket thresholds and the increased basic 
     standard deduction, corresponding present law values in the 
     Code are indexed appropriately with the C-CPI-U.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

  B. Treatment of Business Income of Individuals, Trusts, and Estates

     1. Deduction for qualified business income (sec. 1004 of the 
         House bill, sec. 11011 of the Senate amendment, and sec. 
         199A of the Code)


                              present law

     Individual income tax rates
       To determine regular tax liability, an individual taxpayer 
     generally must apply the tax rate schedules (or the tax 
     tables) to his or her regular taxable income. The rate 
     schedules are broken into several ranges of income, known as 
     income brackets, and the marginal tax rate increases as a 
     taxpayer's income increases. Separate rate schedules apply 
     based on an individual's filing status (i.e., single, head of 
     household, married filing jointly, or married filing 
     separately). For 2017, the regular individual income tax rate 
     schedule provides rates of 10, 15, 25, 28, 33, 35, and 39.6 
     percent.
     Partnerships
       Partnerships generally are treated for Federal income tax 
     purposes as pass-through entities not subject to tax at the 
     entity level.\20\ Items of income (including tax-exempt 
     income), gain, loss, deduction, and credit of the partnership 
     are taken into account by the partners in computing their 
     income tax liability (based on the partnership's method of 
     accounting and regardless of whether the income is 
     distributed to the partners).\21\ A partner's deduction for 
     partnership losses is limited to the partner's adjusted basis 
     in its partnership interest.\22\ Losses not allowed as a 
     result of that limitation generally are carried forward to 
     the next year. A partner's adjusted basis in the partnership 
     interest generally equals the sum of (1) the partner's 
     capital contributions to the partnership, (2) the partner's 
     distributive share of partnership income, and (3) the 
     partner's share of partnership liabilities, less (1) the 
     partner's distributive share of losses allowed as a deduction 
     and certain nondeductible expenditures, and (2) any 
     partnership distributions to the partner.\23\ Partners 
     generally may receive distributions of partnership property 
     without recognition of gain or loss, subject to some 
     exceptions.\24\
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     \20\ Sec. 701.
     \21\ Sec. 702(a).
     \22\ Sec. 704(d). In addition, passive loss and at-risk 
     limitations limit the extent to which certain types of income 
     can be offset by partnership deductions (sections 469 and 
     465). These limitations do not apply to corporate partners 
     (except certain closely-held corporations) and may not be 
     important to individual partners who have partner-level 
     passive income from other investments.
     \23\ Sec. 705.
     \24\ Sec. 731. Gain or loss may nevertheless be recognized, 
     for example, on the distribution of money or marketable 
     securities, distributions with respect to contributed 
     property, or in the case of disproportionate distributions 
     (which can result in ordinary income).
---------------------------------------------------------------------------
       Partnerships may allocate items of income, gain, loss, 
     deduction, and credit among the partners, provided the 
     allocations have substantial economic effect.\25\ In general, 
     an allocation has substantial economic effect to the extent 
     the partner to which the allocation is made receives the 
     economic benefit or bears the economic burden of such 
     allocation and the allocation substantially affects the 
     dollar amounts to be received by the partners from the 
     partnership independent of tax consequences.\26\
---------------------------------------------------------------------------
     \25\ Sec. 704(b)(2).
     \26\ Treas. Reg. sec. 1.704-1(b)(2).
---------------------------------------------------------------------------
       State laws of every State provide for limited liability 
     companies \27\ (``LLCs''), which are neither partnerships nor 
     corporations under applicable State law, but which are 
     generally treated as partnerships for Federal tax 
     purposes.\28\
---------------------------------------------------------------------------
     \27\ The first LLC statute was enacted in Wyoming in 1977. 
     All States (and the District of Columbia) now have an LLC 
     statute, though the tax treatment of LLCs for State tax 
     purposes may differ.
     \28\ Under Treasury regulations promulgated in 1996, any 
     domestic nonpublicly traded unincorporated entity with two or 
     more members generally is treated as a partnership for 
     federal income tax purposes, while any single-member domestic 
     unincorporated entity generally is treated as disregarded for 
     Federal income tax purposes (i.e., treated as not separate 
     from its owner). Instead of the applicable default treatment, 
     however, an LLC may elect to be treated as a corporation for 
     Federal income tax purposes. Treas. Reg. sec. 301.7701-3. 
     These are known as the ``check-the-box'' regulations.
---------------------------------------------------------------------------
       Under present law, a publicly traded partnership generally 
     is treated as a corporation

[[Page 19927]]

     for Federal tax purposes.\29\ For this purpose, a publicly 
     traded partnership means any partnership if interests in the 
     partnership are traded on an established securities market or 
     interests in the partnership are readily tradable on a 
     secondary market (or the substantial equivalent thereof).\30\
---------------------------------------------------------------------------
     \29\ Sec. 7704(a).
     \30\ Sec. 7704(b).
---------------------------------------------------------------------------
       An exception from corporate treatment is provided for 
     certain publicly traded partnerships, 90 percent or more of 
     whose gross income is qualifying income.\31\
---------------------------------------------------------------------------
     \31\ Sec. 7704(c)(2). Qualifying income is defined to include 
     interest, dividends, and gains from the disposition of a 
     capital asset (or of property described in section 1231(b)) 
     that is held for the production of income that is qualifying 
     income. Sec. 7704(d). Qualifying income also includes rents 
     from real property, gains from the sale or other disposition 
     of real property, and income and gains from the exploration, 
     development, mining or production, processing, refining, 
     transportation (including pipelines transporting gas, oil, or 
     products thereof), or the marketing of any mineral or natural 
     resource (including fertilizer, geothermal energy, and 
     timber), industrial source carbon dioxide, or the 
     transportation or storage of certain fuel mixtures, 
     alternative fuel, alcohol fuel, or biodiesel fuel. It also 
     includes income and gains from commodities (not described in 
     section 1221(a)(1)) or futures, options, or forward contracts 
     with respect to such commodities (including foreign currency 
     transactions of a commodity pool) where a principal activity 
     of the partnership is the buying and selling of such 
     commodities, futures, options, or forward contracts. However, 
     the exception for partnerships with qualifying income does 
     not apply to any partnership resembling a mutual fund (i.e., 
     that would be described in section 851(a) if it were a 
     domestic corporation), which includes a corporation 
     registered under the Investment Company Act of 1940 (Pub. L. 
     No. 76-768 (1940)) as a management company or unit investment 
     trust (sec. 7704(c)(3)).
---------------------------------------------------------------------------
     S corporations
       For Federal income tax purposes, an S corporation \32\ 
     generally is not subject to tax at the corporate level.\33\ 
     Items of income (including tax-exempt income), gain, loss, 
     deduction, and credit of the S corporation are taken into 
     account by the S corporation shareholders in computing their 
     income tax liabilities (based on the S corporation's method 
     of accounting and regardless of whether the income is 
     distributed to the shareholders). A shareholder's deduction 
     for corporate losses is limited to the sum of the 
     shareholder's adjusted basis in its S corporation stock and 
     the indebtedness of the S corporation to such shareholder. 
     Losses not allowed as a result of that limitation generally 
     are carried forward to the next year. A shareholder's 
     adjusted basis in the S corporation stock generally equals 
     the sum of (1) the shareholder's capital contributions to the 
     S corporation and (2) the shareholder's pro rata share of S 
     corporation income, less (1) the shareholder's pro rata share 
     of losses allowed as a deduction and certain nondeductible 
     expenditures, and (2) any S corporation distributions to the 
     shareholder.\34\
---------------------------------------------------------------------------
     \32\ An S corporation is so named because its Federal tax 
     treatment is governed by subchapter S of the Code.
     \33\ Secs. 1363 and 1366.
     \34\ Sec. 1367. If any amount that would reduce the adjusted 
     basis of a shareholder's S corporation stock exceeds the 
     amount that would reduce that basis to zero, the excess is 
     applied to reduce (but not below zero) the shareholder's 
     basis in any indebtedness of the S corporation to the 
     shareholder. If, after a reduction in the basis of such 
     indebtedness, there is an event that would increase the 
     adjusted basis of the shareholder's S corporation stock, such 
     increase is instead first applied to restore the reduction in 
     the basis of the shareholder's indebtedness. Sec. 1367(b)(2).
---------------------------------------------------------------------------
       In general, an S corporation shareholder is not subject to 
     tax on corporate distributions unless the distributions 
     exceed the shareholder's basis in the stock of the 
     corporation.
       Electing S corporation status
       To be eligible to elect S corporation status, a corporation 
     may not have more than 100 shareholders and may not have more 
     than one class of stock.\35\ Only individuals (other than 
     nonresident aliens), certain tax-exempt organizations, and 
     certain trusts and estates are permitted shareholders of an S 
     corporation.
---------------------------------------------------------------------------
     \35\ Sec. 1361. For this purpose, a husband and wife and all 
     members of a family are treated as one shareholder. Sec. 
     1361(c)(1).
---------------------------------------------------------------------------
     Sole proprietorships
       Unlike a C corporation, partnership, or S corporation, a 
     business conducted as a sole proprietorship is not treated as 
     an entity distinct from its owner for Federal income tax 
     purposes.\36\ Rather, the business owner is taxed directly on 
     business income, and files Schedule C (sole proprietorships 
     generally), Schedule E (rental real estate and royalties), or 
     Schedule F (farms) with his or her individual tax return. 
     Furthermore, transfer of a sole proprietorship is treated as 
     a transfer of each individual asset of the business. 
     Nonetheless, a sole proprietorship is treated as an entity 
     separate from its owner for employment tax purposes,\37\ for 
     certain excise taxes,\38\ and certain information reporting 
     requirements.\39\
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     \36\ A single-member unincorporated entity is disregarded for 
     Federal income tax purposes, unless its owner elects to be 
     treated as a C corporation. Treas. Reg. sec. 301.7701-
     3(b)(1)(ii). Sole proprietorships often are conducted through 
     legal entities for nontax reasons. While sole proprietorships 
     generally may have no more than one owner, a married couple 
     that files a joint return and jointly owns and operates a 
     business may elect to have that business treated as a sole 
     proprietorship under section 761(f).
     \37\ Treas. Reg. sec. 301.7701-2(c)(2)(iv).
     \38\ Treas. Reg. sec. 301.7701-2(c)(2)(v).
     \39\ Treas. Reg. sec. 301.7701-2(c)(2)(vi).
---------------------------------------------------------------------------


                               House Bill

       Qualified business income of an individual from a 
     partnership, S corporation, or sole proprietorship is subject 
     to Federal income tax at a rate no higher than 25 percent. 
     Qualified business income means, generally, all net business 
     income from a passive business activity plus the capital 
     percentage of net business income from an active business 
     activity, reduced by carryover business losses and by certain 
     net business losses from the current year, as determined 
     under the provision.
     Determination of rate
       25-percent rate
       The provision provides that an individual's tax is reduced 
     to reflect a maximum rate of 25 percent on qualified business 
     income. Qualified business income includes the capital 
     percentage, generally 30 percent, of net business income. The 
     percentage differs in the case of specified service 
     activities or in the case of a taxpayer election to prove out 
     a different percentage.
       Taxable income (reduced by net capital gain) that exceeds 
     the maximum dollar amount for the 25-percent rate bracket 
     applicable to the taxpayer, and that exceeds qualified 
     business income, is subject to tax in the next higher 
     brackets.
       The provision provides that a 25-percent tax rate applies 
     generally to dividends received from a real estate investment 
     trust (other than any portion that is a capital gain dividend 
     or a qualified dividend), and applies generally to dividends 
     that are includable in gross income from certain 
     cooperatives.
       Nine-percent rate
       A special rule provides a reduced tax rate of 11, 10, or 
     nine percent in the case of an individual's qualified active 
     business income below an indexed threshold of $75,000 (in the 
     case of a joint return or a surviving spouse) (the ``nine-
     percent bracket threshold amount''). The indexed $75,000 
     threshold is three quarters of that amount for individuals 
     filing as head of household and half that amount for other 
     individuals. The reduced rate is not available to estates and 
     trusts.
       The reduced rate is phased in. The reduced rate is 11 
     percent (that is, one percentage point below the 12 percent 
     rate) for taxable years beginning in 2018 and 2019, and is 10 
     percent (that is, two percentage points below the 12 percent 
     rate) for taxable years beginning in 2020 and 2021. For 
     taxable years beginning in 2022 and thereafter the reduced 
     rate is nine percent (that is, three percentage points below 
     the 12 percent rate).
       The reduced tax rate applies to the least of three amounts, 
     the taxpayer's: (1) qualified active business income, (2) 
     taxable income reduced by net capital gain, or (3) nine-
     percent bracket threshold amount (described above). Qualified 
     active business income for a taxable year means the excess of 
     the taxpayer's net business income from any active business 
     activity over his or her net business loss from any active 
     business activity. An active business activity is an activity 
     that involves the conduct of any trade or business and that 
     is not a passive activity for purposes of the passive loss 
     rules of section 469 determined without regard to paragraphs 
     (2) and (6)(B) of section 469(c) (that is, generally, the 
     taxpayer materially participates in the trade or business 
     activity). Qualified active business income includes income 
     from any trade or business activity, including service 
     businesses. No capital percentage limitation applies in 
     determining qualified active business income.
       A phaseout applies to the amount subject to the 11-, 10-, 
     or nine-percent rate. The amount taxed at one of these rates 
     is reduced by the excess of taxable income over an indexed 
     applicable threshold amount, $150,000 in the case of married 
     individuals filing jointly. The applicable threshold amount 
     is three quarters of that amount for individuals filing as 
     head of household and half that amount for other individuals.
       For example, assume that in 2022, an individual (married 
     filing jointly) has $70,000 of qualified active business 
     income and $40,000 of other income, resulting in taxable 
     income of $110,000. The $70,000 of qualified active business 
     income is subject to tax at nine percent. Alternatively, 
     assume that in 2022, another individual has $160,000 of 
     qualified active business income and $10,000 of other income 
     resulting in taxable income of $170,000. The excess of the 
     taxpayer's $170,000 taxable income over the $150,000 
     applicable threshold amount is $20,000. Taking into account 
     the phaseout, this $20,000 amount reduces the $75,000 amount 
     that, absent the phaseout, would be subject to the nine-
     percent rate, reversing the benefit of the nine-percent rate 
     for $20,000 of the taxpayer's qualified active business 
     income. The effect is that $55,000 is subject to the nine 
     percent rate.
     Qualified business income
       Qualified business income is defined as the sum of 100 
     percent of any net business income derived from any passive 
     business activity plus the capital percentage of net business 
     income derived from any active business activity, reduced by 
     the sum of 100 percent of any net business loss derived from 
     any passive business activity, 30 percent (except as 
     otherwise provided under rules for

[[Page 19928]]

     determining the capital percentage, below) of any net 
     business loss derived from any active business activity, and 
     any carryover business loss determined for the preceding 
     taxable year. Qualified business income does not include 
     income from a business activity that exceeds these 
     percentages.
       Net business income or loss
       To determine qualified business income requires a 
     calculation of net business income or loss from each of an 
     individual's passive business activities and active business 
     activities. Net business income or loss is determined at the 
     activity level, that is, separately for each business 
     activity.
       Net business income is determined by appropriately netting 
     items of income, gain, deduction and loss with respect to the 
     business activity. The determination takes into account these 
     amounts only to the extent the amount affects the 
     determination of taxable income for the year. For example, if 
     in a taxable year, a business activity has 100 of ordinary 
     income from inventory sales, and makes an expenditure of 25 
     that is required to be capitalized and amortized over 5 years 
     under applicable tax rules, the net business income is 100 
     minus 5 (current-year ordinary amortization deduction), or 
     95. The net business income is not reduced by the entire 
     amount of the capital expenditure, only by the amount 
     deductible in determining taxable income for the year.
       Net business income or loss includes the amounts received 
     by the individual taxpayer as wages, director's fees, 
     guaranteed payments and amounts received from a partnership 
     other than in the individual's capacity as a partner, that 
     are properly attributable to a business activity. These 
     amounts are taken into account as an item of income with 
     respect to the business activity. For example, if an 
     individual shareholder of an S corporation engaged in a 
     business activity is paid wages or director's fees by the S 
     corporation, the amount of wages or director's fees is added 
     in determining net business or loss with respect to the 
     business activity. This rule is intended to ensure that the 
     amount eligible for the 25-percent tax rate is not 
     erroneously reduced because of compensation for services or 
     other specified amounts that are paid separately (or treated 
     as separate) from the individual's distributive share of 
     passthrough income.
       Net business income or loss does not include specified 
     investment-related income, deductions, or loss. Specifically, 
     net business income does not include (1) any item taken into 
     account in determining net long-term capital gain or net 
     long-term capital loss, (2) dividends, income equivalent to a 
     dividend, or payments in lieu of dividends, (3) interest 
     income and income equivalent to interest, other than that 
     which is properly allocable to a trade or business, (4) the 
     excess of gain over loss from commodities transactions, other 
     than those entered into in the normal course of the trade or 
     business or with respect to stock in trade or property held 
     primarily for sale to customers in the ordinary course of the 
     trade or business, property used in the trade or business, or 
     supplies regularly used or consumed in the trade or business, 
     (5) the excess of foreign currency gains over foreign 
     currency losses from section 988 transactions, other than 
     transactions directly related to the business needs of the 
     business activity, (6) net income from notional principal 
     contracts, other than clearly identified hedging transactions 
     that are treated as ordinary (i.e., not treated as capital 
     assets), and (7) any amount received from an annuity that is 
     not used in the trade or business of the business activity. 
     Net business income does not include any item of deduction or 
     loss properly allocable to such income.
       Carryover business loss
       The carryover business loss from the preceding taxable year 
     reduces qualified business income in the taxable year. The 
     carryover business loss is the excess of (1) the sum of 100 
     percent of any net business loss derived from any passive 
     business activity, 30 percent (except as otherwise provided 
     under rules for determining the capital percentage, below) of 
     any net business loss derived from any active business 
     activity, and any carryover business loss determined for the 
     preceding taxable year, over (2) the sum of 100 percent of 
     any net business income derived from any passive business 
     activity plus the capital percentage of net business income 
     derived from any active business activity. There is no time 
     limit on carryover business losses. For example, an 
     individual has two business activities that give rise to a 
     net business loss of 3 and 4, respectively, in year one, 
     giving rise to a carryover business loss of 7 in year two. If 
     in year two the two business activities each give rise to net 
     business income of 2, a carryover business loss of 3 is 
     carried to year three (that is, <7>-(2 + 2) = <3>).
       Passive business activity and active business activity
       A business activity means an activity that involves the 
     conduct of any trade or business. A taxpayer's activities 
     include those conducted through partnerships, S corporations, 
     and sole proprietorships. An activity has the same meaning as 
     under the present-law passive loss rules (section 469). As 
     provided in regulations under those rules, a taxpayer may use 
     any reasonable method of applying the relevant facts and 
     circumstances in grouping activities together or as separate 
     activities (through rental activities generally may not be 
     grouped with other activities unless together they constitute 
     an appropriate economic unit, and grouping real property 
     rentals with personal property rentals is not permitted). It 
     is intended that the activity grouping the taxpayer has 
     selected under the passive loss rules is required to be used 
     for purposes of the passthrough rate rules. For example, an 
     individual taxpayer has an interest in a bakery and a movie 
     theater in Baltimore, and a bakery and a movie theatre in 
     Philadelphia. For purposes of the passive loss rules, the 
     taxpayer has grouped them as two activities, a bakery 
     activity and a movie theatre activity. The taxpayer must 
     group them the same way that is as two activities, a bakery 
     activity and a movie theatre activity, for purposes of rules 
     of this provision.
       Regulatory authority is provided to require or permit 
     grouping as one or as multiple activities in particular 
     circumstances, in the case of specified services activities 
     that would be treated as a single employer under broad 
     related party rules of present law.
       A passive business activity generally has the same meaning 
     as a passive activity under the present-law passive loss 
     rules. However, for this purpose, a passive business activity 
     is not defined to exclude a working interest in any oil or 
     gas property that the taxpayer holds directly or through an 
     entity that does not limit the taxpayer's liability. Rather, 
     whether the taxpayer materially participates in the activity 
     is relevant. Further, for this purpose, a passive business 
     activity does not include an activity in connection with a 
     trade or business or in connection with the production of 
     income.
       An active business activity is an activity that involves 
     the conduct of any trade or business and that is not a 
     passive activity. For example, if an individual has a 
     partnership interest in a manufacturing business and 
     materially participates in the manufacturing business, it is 
     considered an active business activity of the individual.
       Capital percentage
       The capital percentage is the percentage of net business 
     income from an active business activity that is included in 
     qualified business income subject to Federal income tax at a 
     rate no higher than 25 percent.
       In general, the capital percentage is 30 percent, except as 
     provided in the case of application of an increased 
     percentage for capital-intensive business activities, in the 
     case of specified service activities, and in the case of 
     application of the rule for capital-intensive specified 
     service activities.
       The capital percentage is reduced if the portion of net 
     business income represented by the sum of wages, director's 
     fees, guaranteed payments and amounts received from a 
     partnership other than in the individual's capacity as a 
     partner, that are properly attributable to a business 
     activity exceeds the difference between 100 percent and the 
     capital percentage. For example, if net business income from 
     an individual's active business activity conducted through an 
     S corporation is 100, including 75 of wages that the S 
     corporation pays the individual, the otherwise applicable 
     capital percentage is reduced from 30 percent to 25 percent.
       Increased percentage for capital-intensive business 
     activities.--A taxpayer may elect the application of an 
     increased percentage with respect to any active business 
     activity other than a specified service activity (described 
     below). The election applies for the taxable year it is made 
     and each of the next four taxable years. The election is to 
     be made no later than the due date (including extensions) of 
     the return for the taxable year made, and is irrevocable. The 
     percentage under the election is the applicable percentage 
     (described below) for the five taxable years of the election.
       Specified service activities.--In the case of an active 
     business activity that is a specified service activity, 
     generally the capital percentage is 0 and the percentage of 
     any net business loss from the specified service activity 
     that is taken into account as qualified business income is 0 
     percent.
       A specified service activity means any trade or business 
     activity involving the performance of services in the fields 
     of health, law, engineering, architecture, accounting, 
     actuarial science, performing arts, consulting, athletics, 
     financial services, brokerage services, any trade or business 
     where the principal asset of such trade or business is the 
     reputation or skill of one or more of its employees, or 
     investing, trading, or dealing in securities, partnership 
     interests, or commodities. For this purpose a security and a 
     commodity have the meanings provided in the rules for the 
     mark-to-market accounting method for dealers in securities 
     (sections 475(c)(2) and 475(e)(2), respectively).
       Capital-intensive specified service activities.--A taxpayer 
     may elect the application of an exception with respect to any 
     active business activity that is specified service activity, 
     provided the applicable percentage (described below) for the 
     taxable year is at least 10 percent. If the election is 
     validly made, the capital percentage and the percentage of 
     net business loss with respect to the activity

[[Page 19929]]

     are not 0 percent, but rather, the applicable percentage for 
     the taxable year.
       Calculation of applicable percentage.--The applicable 
     percentage is the percentage applied in lieu of the capital 
     percentage in the case of either of the foregoing elections. 
     The applicable percentage (not the capital percentage) then 
     determines the portion of the net business income or loss 
     from the activity for the taxable year that is taken into 
     account in determining qualified business income subject to 
     Federal income tax at a rate no higher than 25 percent.
       The applicable percentage is determined by dividing (1) the 
     specified return on capital for the activity for the taxable 
     year, by (2) the taxpayer's net business income derived from 
     that activity for that taxable year. The specified return on 
     capital for any active business activity is determined by 
     multiplying a deemed rate of return, the short-term AFR plus 
     7 percentage points, times the asset balance for the activity 
     for the taxable year, and reducing the product by interest 
     expense deducted with respect to the activity for the taxable 
     year. The asset balance for this purpose is the adjusted 
     basis of property used in connection with the activity as of 
     the end of the taxable year, but without taking account of 
     basis adjustments for bonus depreciation under section 168(k) 
     or expensing under section 179. In the case of an active 
     business activity conducted through a partnership or S 
     corporation, the taxpayer takes into account his distributive 
     share of the asset balance of the partnership's or S 
     corporation's property used in connection with the activity. 
     Regulatory authority is provided to ensure that in 
     determining asset balance, no amount is taken into account 
     for more than one activity.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017. A transition rule 
     provides that for fiscal year taxpayers whose taxable year 
     includes December 31, 2017, a proportional benefit of the 
     reduced rate under the provision is allowed for the period 
     beginning January 1, 2018, and ending on the day before the 
     beginning of the taxable year beginning after December 31, 
     2017.


                            Senate Amendment

     In general
       For taxable years beginning after December 31, 2017 and 
     before January 1, 2026, an individual taxpayer generally may 
     deduct 23 percent of qualified business income from a 
     partnership, S corporation, or sole proprietorship, as well 
     as 23 percent of aggregate qualified REIT dividends, 
     qualified cooperative dividends, and qualified publicly 
     traded partnership income. Special rules apply to specified 
     agricultural or horticultural cooperatives. A limitation 
     based on W-2 wages paid is phased in above a threshold amount 
     of taxable income. A disallowance of the deduction with 
     respect to specified service trades or businesses is also 
     phased in above the threshold amount of taxable income.\40\
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     \40\ For purposes of this provision, taxable income is 
     computed without regard to the 23 percent deduction.
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     Qualified business income
       Qualified business income is determined for each qualified 
     trade or business of the taxpayer. For any taxable year, 
     qualified business income means the net amount of qualified 
     items of income, gain, deduction, and loss with respect to 
     the qualified trade or business of the taxpayer. The 
     determination of qualified items of income, gain, deduction, 
     and loss takes into account these items only to the extent 
     included or allowed in the determination of taxable income 
     for the year. For example, if in a taxable year, a qualified 
     business has $100,000 of ordinary income from inventory 
     sales, and makes an expenditure of $25,000 that is required 
     to be capitalized and amortized over 5 years under applicable 
     tax rules, the qualified business income is $100,000 minus 
     $5,000 (current-year ordinary amortization deduction), or 
     $95,000. The qualified business income is not reduced by the 
     entire amount of the capital expenditure, only by the amount 
     deductible in determining taxable income for the year.
       If the net amount of qualified business income from all 
     qualified trades or businesses during the taxable year is a 
     loss, it is carried forward as a loss from a qualified trade 
     or business in the next taxable year. Similar to a qualified 
     trade or business that has a qualified business loss for the 
     current taxable year, any deduction allowed in a subsequent 
     year is reduced (but not below zero) by 23 percent of any 
     carryover qualified business loss. For example, Taxpayer has 
     qualified business income of $20,000 from qualified business 
     A and a qualified business loss of $50,000 from qualified 
     business B in Year 1. Taxpayer is not permitted a deduction 
     for Year 1 and has a carryover qualified business loss of 
     $30,000 to Year 2. In Year 2, Taxpayer has qualified business 
     income of $20,000 from qualified business A and qualified 
     business income of $50,000 from qualified business B. To 
     determine the deduction for Year 2, Taxpayer reduces the 23 
     percent deductible amount determined for the qualified 
     business income of $70,000 from qualified businesses A and B 
     by 23 percent of the $30,000 carryover qualified business 
     loss.
       Domestic business
       Items are treated as qualified items of income, gain, 
     deduction, and loss only to the extent they are effectively 
     connected with the conduct of a trade or business within the 
     United States.\41\ In the case of a taxpayer who is an 
     individual with otherwise qualified business income from 
     sources within the commonwealth of Puerto Rico, if all the 
     income is taxable under section 1 (income tax rates for 
     individuals) for the taxable year, the ``United States'' is 
     considered to include Puerto Rico for purposes of determining 
     the individual's qualified business income.
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     \41\ For this purpose, section 864(c) is applied substituting 
     ``qualified trade or business (within the meaning of section 
     199A)'' for ``nonresident alien individual or a foreign 
     corporation'' or ``a foreign corporation.''
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       Treatment of investment income
       Qualified items do not include specified investment-related 
     income, deductions, or loss. Specifically, qualified items of 
     income, gain, deduction and loss do not include (1) any item 
     taken into account in determining net long-term capital gain 
     or net long-term capital loss, (2) dividends, income 
     equivalent to a dividend, or payments in lieu of dividends, 
     (3) interest income other than that which is properly 
     allocable to a trade or business, (4) the excess of gain over 
     loss from commodities transactions, other than those entered 
     into in the normal course of the trade or business or with 
     respect to stock in trade or property held primarily for sale 
     to customers in the ordinary course of the trade or business, 
     property used in the trade or business, or supplies regularly 
     used or consumed in the trade or business, (5) the excess of 
     foreign currency gains over foreign currency losses from 
     section 988 transactions, other than transactions directly 
     related to the business needs of the business activity, (6) 
     net income from notional principal contracts, other than 
     clearly identified hedging transactions that are treated as 
     ordinary (i.e., not treated as capital assets), and (7) any 
     amount received from an annuity that is not used in the trade 
     or business of the business activity. Qualified items under 
     this provision do not include any item of deduction or loss 
     properly allocable to such income.
       Reasonable compensation and guaranteed payments
       Qualified business income does not include any amount paid 
     by an S corporation that is treated as reasonable 
     compensation of the taxpayer. Similarly, qualified business 
     income does not include any guaranteed payment for services 
     rendered with respect to the trade or business,\42\ and to 
     the extent provided in regulations, does not include any 
     amount paid or incurred by a partnership to a partner who is 
     acting other than in his or her capacity as a partner for 
     services.\43\
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     \42\ Described in sec. 707(c).
     \43\ Described in sec. 707(a).
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       Qualified trade or business
       A qualified trade or business means any trade or business 
     other than a specified service trade or business and other 
     than the trade or business of being an employee.
       Specified service business
       A specified service trade or business means any trade or 
     business involving the performance of services in the fields 
     of health,\44\ law, engineering, architecture, accounting, 
     actuarial science, performing arts,\45\ consulting,\46\

[[Page 19930]]

     athletics, financial services, brokerage services, including 
     investing and investment management, trading, or dealing in 
     securities, partnership interests, or commodities, and any 
     trade or business where the principal asset of such trade or 
     business is the reputation or skill of one or more of its 
     employees. For this purpose a security and a commodity have 
     the meanings provided in the rules for the mark-to-market 
     accounting method for dealers in securities (sections 
     475(c)(2) and 475(e)(2), respectively).
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     \44\ A similar list of service trades or business is provided 
     in section 448(d)(2)(A) and Treas. Reg. sec. 1.448-
     1T(e)(4)(i). For purposes of section 448, Treasury 
     regulations provide that the performance of services in the 
     field of health means the provision of medical services by 
     physicians, nurses, dentists, and other similar healthcare 
     professionals. The performance of services in the field of 
     health does not include the provision of services not 
     directly related to a medical field, even though the services 
     may purportedly relate to the health of the service 
     recipient. For example, the performance of services in the 
     field of health does not include the operation of health 
     clubs or health spas that provide physical exercise or 
     conditioning to their customers. See Treas. Reg. sec. 1.448-
     1T(e)(4)(ii).
     \45\ For purposes of the similar list of services in section 
     448, Treasury regulations provide that the performance of 
     services in the field of the performing arts means the 
     provision of services by actors, actresses, singers, 
     musicians, entertainers, and similar artists in their 
     capacity as such. The performance of services in the field of 
     the performing arts does not include the provision of 
     services by persons who themselves are not performing artists 
     (e.g., persons who may manage or promote such artists, and 
     other persons in a trade or business that relates to the 
     performing arts). Similarly, the performance of services in 
     the field of the performing arts does not include the 
     provision of services by persons who broadcast or otherwise 
     disseminate the performance of such artists to members of the 
     public (e.g., employees of a radio station that broadcasts 
     the performances of musicians and singers). See Treas. Reg. 
     sec. 1.448-1T(e)(4)(iii).
     \46\ For purposes of the similar list of services in section 
     448, Treasury regulations provide that the performance of 
     services in the field of consulting means the provision of 
     advice and counsel. The performance of services in the field 
     of consulting does not include the performance of services 
     other than advice and counsel, such as sales or brokerage 
     services, or economically similar services. For purposes of 
     the preceding sentence, the determination of whether a 
     person's services are sales or brokerage services, or 
     economically similar services, shall be based on all the 
     facts and circumstances of that person's business. Such facts 
     and circumstances include, for example, the manner in which 
     the taxpayer is compensated for the services provided (e.g., 
     whether the compensation for the services is contingent upon 
     the consummation of the transaction that the services were 
     intended to effect). See Treas. Reg. sec. 1.448-1T(e)(4)(iv).
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       Phase-in of specified service business limitation
       The exclusion from the definition of a qualified business 
     for specified service trades or businesses phases in for a 
     taxpayer with taxable income in excess of a threshold amount. 
     The threshold amount is $250,000 (200 percent of that amount, 
     or $500,000, in the case of a joint return) (the ``threshold 
     amount''). The threshold amount is indexed for inflation. The 
     exclusion from the definition of a qualified business for 
     specified service trades or businesses is fully phased in for 
     a taxpayer with taxable income in excess of the threshold 
     amount plus $50,000 ($100,000 in the case of a joint return). 
     For a taxpayer with taxable income within the phase-in range, 
     the exclusion applies as follows.
       In computing the qualified business income with respect to 
     a specified service trade or business, the taxpayer takes 
     into account only the applicable percentage of qualified 
     items of income, gain, deduction, or loss, and of allocable 
     W-2 wages. The applicable percentage with respect to any 
     taxable year is 100 percent reduced by the percentage equal 
     to the ratio of the excess of the taxable income of the 
     taxpayer over the threshold amount bears to $50,000 ($100,000 
     in the case of a joint return).
       For example, Taxpayer has taxable income of $280,000, of 
     which $200,000 is attributable to an accounting sole 
     proprietorship after paying wages of $100,000 to employees. 
     Taxpayer has an applicable percentage of 40 percent.\47\ In 
     determining includible qualified business income, Taxpayer 
     takes into account 40 percent of $200,000, or $80,000. In 
     determining the includible W-2 wages, Taxpayer takes into 
     account 40 percent of $100,000, or $40,000. Taxpayer 
     calculates the deduction by taking the lesser of 23 percent 
     of $80,000 ($18,400) or 50 percent of $40,000 ($20,000). 
     Taxpayer takes a deduction for $18,400.
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     \47\ 1-$280,000-$250,000)/$50,000 = 1-30,000/50,000 = 1-.6 = 
     40 percent.
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     Tentative deductible amount for a qualified trade or business

       In general
       For each qualified trade or business, the taxpayer is 
     allowed a deductible amount equal to the lesser of 23 percent 
     of the qualified business income with respect to such trade 
     or business or 50 percent of the W-2 wages with respect to 
     such business (the ``wage limit''). However, if the 
     taxpayer's taxable income is below the threshold amount, the 
     deductible amount for each qualified trade or business is 
     equal to 23 percent of the qualified business income with 
     respect to each respective trade or business.
       W-2 wages
       W-2 wages are the total wages \48\ subject to wage 
     withholding, elective deferrals,\49\ and deferred 
     compensation \50\ paid by the qualified trade or business 
     with respect to employment of its employees during the 
     calendar year ending during the taxable year of the 
     taxpayer.\51\ W-2 wages do not include any amount which is 
     not properly allocable to the qualified business income as a 
     qualified item of deduction. In addition, W-2 wages do not 
     include any amount which was 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.
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     \48\ Defined in sec. 3401(a).
     \49\ Within the meaning of sec. 402(g)(3).
     \50\ Deferred compensation includes compensation deferred 
     under section 457, as well as the amount of any designated 
     Roth contributions (as defined in section 402A).
     \51\ In the case of a taxpayer with a short taxable year that 
     does not contain a calendar year ending during such short 
     taxable year, the Committee intends that the following 
     amounts shall be treated as the W-2 wages of the taxpayer for 
     the short taxable year: (1) only those wages paid during the 
     short taxable year to employees of the qualified trade or 
     business, (2) only those elective deferrals (within the 
     meaning of section 402(g)(3)) made during the short taxable 
     year by employees of the qualified trade or business, and (3) 
     only compensation actually deferred under section 457 during 
     the short taxable year with respect to employees of the 
     qualified trade or business. The Committee intends that 
     amounts that are treated as W-2 wages for a taxable year 
     shall not be treated as W-2 wages of any other taxable year.
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       In the case of a taxpayer who is an individual with 
     otherwise qualified business income from sources within the 
     commonwealth of Puerto Rico, if all the income is taxable 
     under section 1 (income tax rates for individuals) for the 
     taxable year, the determination of W-2 wages with respect to 
     the taxpayer's trade or business conducted in Puerto Rico is 
     made without regard to any exclusion under the wage 
     withholding rules \52\ for remuneration paid for services in 
     Puerto Rico.
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     \52\ As provided in sec. 3401(a)(8).
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       Phase-in of wage limit
       The application of the wage limit phases in for a taxpayer 
     with taxable income in excess of the threshold amount. The 
     wage limit applies fully for a taxpayer with taxable income 
     in excess of the threshold amount plus $50,000 ($100,000 in 
     the case of a joint return). For a taxpayer with taxable 
     income within the phase-in range, the wage limit applies as 
     follows.
       With respect to any qualified trade or business, the 
     taxpayer compares (1) 23 percent of the taxpayer's qualified 
     business income with respect to the qualified trade or 
     business with (2) 50 percent of the W-2 wages with respect to 
     the qualified trade or business. If the amount determined 
     under (2) is less than the amount determined (1), (that is, 
     if the wage limit is binding), the taxpayer's deductible 
     amount is the amount determined under (1) reduced by the same 
     proportion of the difference between the two amounts as the 
     excess of the taxable income of the taxpayer over the 
     threshold amount bears to $50,000 ($100,000 in the case of a 
     joint return).
       For example, H and W file a joint return on which they 
     report taxable income of $520,000. W has a qualified trade or 
     business that is not a specified service business, such that 
     23 percent of the qualified business income with respect to 
     the business is $15,000. W's share of wages paid by the 
     business is $20,000, such that 50 percent of the W-2 wages 
     with respect to the business is $10,000. The $15,000 amount 
     is reduced by 20 percent \53\ of the difference between 
     $15,000 and $10,000, or $1,000. H and W take a deduction for 
     $14,000.
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     \53\ ($520,000-$500,000)/$100,000 = 20 percent.
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     Qualified REIT dividends, cooperative dividends, and publicly 
         traded partnership income
       A deduction is allowed under the provision for 23 percent 
     of the taxpayer's aggregate amount of qualified REIT 
     dividends, qualified cooperative dividends, and qualified 
     publicly traded partnership income for the taxable year. 
     Qualified REIT dividends do not include any portion of a 
     dividend received from a REIT that is a capital gain dividend 
     \54\ or a qualified dividend.\55\ A qualified cooperative 
     dividend means a patronage dividend,\56\ per-unit retain 
     allocation,\57\ qualified written notice of allocation,\58\ 
     or any similar amount, provided it is includible in gross 
     income and is received from either (1) a tax-exempt 
     benevolent life insurance association, mutual ditch or 
     irrigation company, cooperative telephone company, like 
     cooperative organization,\59\ or a taxable or tax-exempt 
     cooperative that is described in section 1381(a), or (2) a 
     taxable cooperative governed by tax rules applicable to 
     cooperatives before the enactment of subchapter T of the Code 
     in 1962. Qualified publicly traded partnership income means 
     (with respect to any qualified trade or business of the 
     taxpayer), the sum of the (a) the net amount of the 
     taxpayer's allocable share of each qualified item of income, 
     gain, deduction, and loss (that are effectively connected 
     with a U.S. trade or business and are included or allowed in 
     determining taxable income for the taxable year and do not 
     constitute excepted enumerated investment-type income, and 
     not including the taxpayer's reasonable compensation, 
     guaranteed payments for services, or (to the extent provided 
     in regulations) section 707(a) payments for services) from a 
     publicly traded partnership not treated as a corporation, and 
     (b) gain recognized by the taxpayer on disposition of its 
     interest in the partnership that is treated as ordinary 
     income (for example, by reason of section 751).
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     \54\ Defined in sec. 857(b)(3).
     \55\ Defined in sec. 1(h)(11).
     \56\ Defined in sec. 1388(a).
     \57\ Defined in sec. 1388(f).
     \58\ Defined in sec. 1388(c).
     \59\ Described in sec. 501(c)(12).
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     Determination of the taxpayer's deduction
       The taxpayer's deduction for qualified business income is 
     equal to the lesser of the combined qualified business income 
     amount for the taxable year or an amount equal to 23 percent 
     of the taxpayer's taxable income (reduced by any net capital 
     gain \60\) for the taxable year. The combined qualified 
     business income amount is the sum of the deductible amounts 
     determined for each qualified trade or business for the 
     taxable year and 23 percent of the qualified REIT dividends 
     and qualified cooperative dividends received by the taxpayer 
     for the taxable year.
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     \60\ Defined in sec. 1(h).
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     Specified agricultural or horticultural cooperatives
       For taxable years beginning after December 31, 2018 but not 
     after December 31, 2025, a deduction is allowed to any 
     specified agricultural or horticultural cooperative equal to 
     the lesser of 23 percent of the cooperative's taxable income 
     for the taxable year or 50 percent of the W-2 wages paid by 
     the cooperative with respect to its trade or business. A 
     specified agricultural or horticultural cooperative is a 
     organization to which subchapter T applies that is engaged in 
     (a) the manufacturing, production, growth, or extraction in 
     whole or significant part of any agricultural or 
     horticultural product, (b) the marketing of agricultural or 
     horticultural products

[[Page 19931]]

     that its patrons have so manufactured, produced, grown, or 
     extracted, or (c) the provision of supplies, equipment, or 
     services to farmers or organizations described in the 
     foregoing.
     Special rules and definitions
       For purposes of the provision, taxable income is determined 
     without regard to the deduction allowable under the 
     provision.
       In the case of a partnership or S corporation, the 
     provision applies at the partner or shareholder level. Each 
     partner takes into account the partner's allocable share of 
     each qualified item of income, gain, deduction, and loss, and 
     is treated as having W-2 wages for the taxable year equal to 
     the partner's allocable share of W-2 wages of the 
     partnership. The partner's allocable share of W-2 wages is 
     required to be determined in the same manner as the partner's 
     share of wage expenses. For example, if a partner is 
     allocated a deductible amount of 10 percent of wages paid by 
     the partnership to employees for the taxable year, the 
     partner is required to be allocated 10 percent of the W-2 
     wages of the partnership for purposes of calculating the wage 
     limit under this deduction. Similarly, each shareholder of an 
     S corporation takes into account the shareholder's pro rata 
     share of each qualified item of income, gain, deduction, and 
     loss, and is treated as having W-2 wages for the taxable year 
     equal to the shareholder's pro rata share of W-2 wages of the 
     S corporation.
       Qualified business income is determined without regard to 
     any adjustments prescribed under the rules of the alternative 
     minimum tax.
       The provision does not apply to a trust or estate.
       The deduction under the provision is allowed only for 
     Federal income tax purposes.
       For purposes of determining a substantial underpayment of 
     income tax under the accuracy related penalty,\61\ a 
     substantial underpayment exists if the amount of the 
     understatement exceeds the greater of five percent (not 10 
     percent) of the tax required to be shown on the return or 
     $5,000.
---------------------------------------------------------------------------
     \61\ Sec. 6662(d)(1)(A).
---------------------------------------------------------------------------
       Authority is provided to promulgate regulations needed to 
     carry out the purposes of the provision, including 
     regulations requiring, or restricting, the allocation of 
     items of income, gain, loss, or deduction, or of wages under 
     the provision. In addition, regulatory authority is provided 
     to address reporting requirements appropriate under the 
     provision, and the application of the provision in the case 
     of tiered entities.
       The provision does not apply to taxable years beginning 
     after December 31, 2025.
     Additional examples
       The following examples provide a comprehensive illustration 
     of the provision.
       Example 1
       H and W file a joint return on which they report taxable 
     income of $520,000 (determined without regard to this 
     provision). H is a partner in a qualified trade or business 
     that is not a specified service business (``qualified 
     business A''). W has a sole proprietorship qualified trade or 
     business that is a specified service business (``qualified 
     business B''). H and W also received $10,000 in qualified 
     REIT dividends during the tax year.
       H's allocable share of qualified business income from 
     qualified business A is $300,000, such that 23 percent of the 
     qualified business income with respect to the business is 
     $69,000.\62\ H's allocable share of wages paid by qualified 
     business A is $100,000, such that 50 percent of the W-2 wages 
     with respect to the business is $50,000.\63\ As H and W's 
     taxable income is above the threshold amount for a joint 
     return, the application of the wage limit for qualified 
     business A is phased in. Accordingly, the $69,000 amount is 
     reduced by 20 percent \64\ of the difference between $69,000 
     and $50,000, or $3,800.\65\ H's deductible amount for 
     qualified business A is $65,200.\66\
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     \62\ $300,000*.23 = $69,000.
     \63\ $100,000*.5 = $50,000.
     \64\ ($520,000-$500,000)/$100,000 = 20 percent.
     \65\ ($69,000-$50,000)*.2 = $3,800.
     \66\ $69,000-$3,800 = $65,200.
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       W's qualified business income and W-2 wages from qualified 
     business B, which is a specified service business, are 
     $325,000 and $150,000, respectively. H and W's taxable income 
     is above the threshold amount for a joint return. Thus, the 
     exclusion of qualified business income and W-2 wages from the 
     specified service business are phased in. W has an applicable 
     percentage of 80 percent.\67\ In determining includible 
     qualified business income, W takes into account 80 percent of 
     $325,000, or $260,000. In determining includible W-2 wages, W 
     takes into account 80 percent of $150,000, or $120,000. W 
     calculates the deductible amount for qualified business B by 
     taking the lesser of 23 percent of $260,000 ($59,800) or 50 
     percent of includible W-2 wages of $120,000 ($60,000).\68\ 
     W's deductible amount for qualified business B is $59,800.
---------------------------------------------------------------------------
     \67\ 1-($520,000-$500,000)/$100,000 = 1-$20,000/$100,000 = 
     1-.2 = 80 percent.
     \68\ Although H and W's taxable income is above the threshold 
     amount for a joint return, the wage limit is not binding as 
     the 23 percent of includible qualified business income of 
     qualified business B ($59,800) is less than 50 percent of 
     includible W-2 wages of qualified business B ($60,000).
---------------------------------------------------------------------------
       H and W's combined qualified business income amount of 
     $127,300 is comprised of the deductible amount for qualified 
     business A of $65,200, the deductible amount for qualified 
     business B of $59,800, and 23 percent of the $10,000 
     qualified REIT dividends ($2,300). H and W's deduction is 
     limited to 23 percent of their taxable income for the year 
     ($520,000), or $119,600. Accordingly, H and W's deduction for 
     the taxable year is $119,600.
       Example 2
       H and W file a joint return on which they report taxable 
     income of $200,000 (determined without regard to this 
     provision). H has a sole proprietorship qualified trade or 
     business that is not a specified service business 
     (``qualified business A''). W is a partner in a qualified 
     trade or business that is not a specified service business 
     (``qualified business B''). H and W have a carryover 
     qualified business loss of $50,000.
       H's qualified business income from qualified business A is 
     $150,000, such that 23 percent of the qualified business 
     income with respect to the business is $34,500. As H and W's 
     taxable income is below the threshold amount for a joint 
     return, the wage limit does not apply to qualified business 
     A. H's deductible amount for qualified business A is $34,500.
       W's allocable share of qualified business loss is $40,000, 
     such that 23 percent of the qualified business loss with 
     respect to the business is $9,200. As H and W's taxable 
     income is below the threshold amount for a joint return, the 
     wage limit does not apply to qualified business B. W's 
     deductible amount for qualified business B is a reduction to 
     the deduction of $9,200.
       H and W's combined qualified business income amount of 
     $13,800 is comprised of the deductible amount for qualified 
     business A of $34,500, the reduction to the deduction for 
     qualified business B of $9,200, and the reduction to the 
     deduction of $11,500 attributable to the carryover qualified 
     business loss. H and W's deduction is limited to 23 percent 
     of their taxable income for the year ($200,000), or $46,000. 
     Accordingly, H and W's deduction for the taxable year is 
     $13,800.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          conference agreement

       The conference agreement follows the Senate amendment with 
     modifications.
     Deduction percentage
       Under the conference agreement, the percentage of the 
     deduction allowable under the provision is 20 percent (not 23 
     percent).
     Threshold amount
       The conference agreement reduces the threshold amount above 
     which both the limitation on specified service businesses and 
     the wage limit are phased in. Under the conference agreement, 
     the threshold amount is $157,500 (twice that amount or 
     $315,000 in the case of a joint return), indexed. The 
     conferees expect that the reduced threshold amount will serve 
     to deter high-income taxpayers from attempting to convert 
     wages or other compensation for personal services to income 
     eligible for the 20-percent deduction under the provision.
       The conference agreement provides that the range over which 
     the phase-in of these limitations applies is $50,000 
     ($100,000 in the case of a joint return).
     Limitation based on W-2 wages and capital
       The conference agreement modifies the wage limit applicable 
     to taxpayers with taxable income above the threshold amount 
     to provide a limit based either on wages paid or on wages 
     paid plus a capital element. Under the conference agreement, 
     the limitation is the greater of (a) 50 percent of the W-2 
     wages paid with respect to the qualified trade or business, 
     or (b) the sum of 25 of percent of the W-2 wages with respect 
     to the qualified trade or business plus 2.5 percent of the 
     unadjusted basis, immediately after acquisition, of all 
     qualified property.
       For purposes of the provision, qualified property means 
     tangible property of a character subject to depreciation that 
     is held by, and available for use in, the qualified trade or 
     business at the close of the taxable year, and which is used 
     in the production of qualified business income, and for which 
     the depreciable period has not ended before the close of the 
     taxable year. The depreciable period with respect to 
     qualified property of a taxpayer means the period beginning 
     on the date the property is first placed in service by the 
     taxpayer and ending on the later of (a) the date 10 years 
     after that date, or (b) the last day of the last full year in 
     the applicable recovery period that would apply to the 
     property under section 168 (without regard to section 
     168(g)).
       For example, a taxpayer (who is subject to the limit) does 
     business as a sole proprietorship conducting a widget-making 
     business. The business buys a widget-making machine for 
     $100,000 and places it in service in 2020. The business has 
     no employees in 2020. The limitation in 2020 is the greater 
     of (a) 50 percent of W-2 wages, or $0, or (b) the sum of 25 
     percent of W-2 wages ($0) plus 2.5 percent of the unadjusted 
     basis of the machine immediately after its acquisition: 
     $100,000  x  .025 = $2,500. The amount of the limitation on 
     the taxpayer's deduction is $2,500.
       In the case of property that is sold, for example, the 
     property is no longer available for

[[Page 19932]]

     use in the trade or business and is not taken into account in 
     determining the limitation. The Secretary is required to 
     provide rules for applying the limitation in cases of a short 
     taxable year of where the taxpayer acquires, or disposes of, 
     the major portion of a trade or business or the major portion 
     of a separate unit of a trade or business during the year. 
     The Secretary is required to provide guidance applying rules 
     similar to the rules of section 179(d)(2) to address 
     acquisitions of property from a related party, as well as in 
     a sale-leaseback or other transaction as needed to carry out 
     the purposes of the provision and to provide anti-abuse 
     rules, including under the limitation based on W-2 wages and 
     capital. Similarly, the Secretary shall provide guidance 
     prescribing rules for determining the unadjusted basis 
     immediately after acquisition of qualified property acquired 
     in like-kind exchanges or involuntary conversions as needed 
     to carry out the purposes of the provision and to provide 
     anti-abuse rules, including under the limitation based on W-2 
     wages and capital.
     Specified service trade or business
       The conference agreement modifies the definition of a 
     specified service trade or business in several respects. The 
     definition is modified to exclude engineering and 
     architecture services, and to take into account the 
     reputation or skill of owners.
       A specified service trade or business means any trade or 
     business involving the performance of services in the fields 
     of health, law, consulting, athletics, financial services, 
     brokerage services, or any trade or business where the 
     principal asset of such trade or business is the reputation 
     or skill of one or more of its employees or owners, or which 
     involves the performance of services that consist of 
     investing and investment management trading, or dealing in 
     securities, partnership interests, or commodities. For this 
     purpose a security and a commodity have the meanings provided 
     in the rules for the mark-to-market accounting method for 
     dealers in securities (sections 475(c)(2) and 475(e)(2), 
     respectively).
     Determination of the taxpayer's deduction
       The taxpayer's deduction for qualified business income for 
     the taxable year is equal to the sum of (a) the lesser of the 
     combined qualified business income amount for the taxable 
     year or an amount equal to 20 percent of the excess of 
     taxpayer's taxable income over any net capital gain \69\ and 
     qualified cooperative dividends, plus (b) the lesser of 20 
     percent of qualified cooperative dividends and taxable income 
     (reduced by net capital gain). This sum may not exceed the 
     taxpayer's taxable income for the taxable year (reduced by 
     net capital gain). Under the provision, the 20-percent 
     deduction with respect to qualified cooperative dividends is 
     limited to taxable income (reduced by net capital gain) for 
     the year. The combined qualified business income amount for 
     the taxable year is the sum of the deductible amounts 
     determined for each qualified trade or business carried on by 
     the taxpayer and 20 percent of the taxpayer's qualified REIT 
     dividends and qualified publicly traded partnership income. 
     The deductible amount for each qualified trade or business is 
     the lesser of (a) 20 percent of the taxpayer's qualified 
     business income with respect to the trade or business, or (b) 
     the greater of 50 percent of the W-2 wages with respect to 
     the trade or business or the sum of 25 percent of the W-2 
     wages with respect to the trade or business and 2.5 percent 
     of the unadjusted basis, immediately after acquisition, of 
     all qualified property.
---------------------------------------------------------------------------
     \69\ Defined in sec. 1(h).
---------------------------------------------------------------------------
     Deduction against taxable income
       The conference agreement clarifies that the 20-percent 
     deduction is not allowed in computing adjusted gross income, 
     and instead is allowed as a deduction reducing taxable 
     income. Thus, for example, the provision does not affect 
     limitations based on adjusted gross income. Similarly the 
     conference agreement clarifies that the deduction is 
     available to both non-itemizers and itemizers.
     Treatment of agricultural and horticultural cooperatives
       For taxable years beginning after December 31, 2017 but not 
     after December 31, 2025, a deduction is allowed to any 
     specified agricultural or horticultural cooperative equal to 
     the lesser of (a) 20 percent of the cooperative's taxable 
     income for the taxable year or (b) the greater of 50 percent 
     of the W-2 wages paid by the cooperative with respect to its 
     trade or business or the sum of 25 percent of the W-2 wages 
     of the cooperative with respect to its trade or business plus 
     2.5 percent of the unadjusted basis immediately after 
     acquisition of qualified property of the cooperative. A 
     specified agricultural or horticultural cooperative is a 
     organization to which subchapter T applies that is engaged in 
     (a) the manufacturing, production, growth, or extraction in 
     whole or significant part of any agricultural or 
     horticultural product, (b) the marketing of agricultural or 
     horticultural products that its patrons have so manufactured, 
     produced, grown, or extracted, or (c) the provision of 
     supplies, equipment, or services to farmers or organizations 
     described in the foregoing.
     Treatment of trusts and estates
       The conference agreement provides that trusts and estates 
     are eligible for the 20-percent deduction under the 
     provision. Rules similar to the rules under present-law 
     section 199 (as in effect on December 1, 2017) apply for 
     apportioning between fiduciaries and beneficiaries any W-2 
     wages and unadjusted basis of qualified property under the 
     limitation based on W-2 wages and capital.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.

   C. Simplification and Reform of Family and Individual Tax Credits

     1. Enhancement of child tax credit and new family credit 
         (sec. 1101 of the House bill, sec. 11022 of the Senate 
         amendment, and sec. 24 of the Code)


                              present law

       An individual may claim a tax credit for each qualifying 
     child under the age of 17. The amount of the credit per child 
     is $1,000. A child who is not a citizen, national, or 
     resident of the United States cannot be a qualifying child.
       The aggregate amount of child credits that may be claimed 
     is phased out for individuals with income over certain 
     threshold amounts. Specifically, the otherwise allowable 
     child tax credit is reduced by $50 for each $1,000 (or 
     fraction thereof) of modified adjusted gross income (``AGI'') 
     over $75,000 for single individuals or heads of households, 
     $110,000 for married individuals filing joint returns, and 
     $55,000 for married individuals filing separate returns. For 
     purposes of this limitation, modified AGI includes certain 
     otherwise excludable income earned by U.S. citizens or 
     residents living abroad or in certain U.S. territories.
       The credit is allowable against both the regular tax and 
     the alternative minimum tax (``AMT''). To the extent the 
     child credit exceeds the taxpayer's tax liability, the 
     taxpayer is eligible for a refundable credit \70\ (the 
     ``additional child tax credit'') equal to 15 percent of 
     earned income in excess of $3,000 (the ``earned income'' 
     formula).
---------------------------------------------------------------------------
     \70\ The refundable credit may not exceed the maximum credit 
     per child of $1,000.
---------------------------------------------------------------------------
       Families with three or more children may determine the 
     additional child tax credit using the ``alternative 
     formula,'' if this results in a larger credit than determined 
     under the earned income formula. Under the alternative 
     formula, the additional child tax credit equals the amount by 
     which the taxpayer's Social Security taxes exceed the 
     taxpayer's earned income credit (``EIC'').
       Earned income is defined as the sum of wages, salaries, 
     tips, and other taxable employee compensation plus net self-
     employment earnings. At the taxpayer's election, combat pay 
     may be treated as earned income for these purposes. Unlike 
     the EIC, which also includes the preceding items in its 
     definition of earned income, the additional child tax credit 
     is based only on earned income to the extent it is included 
     in computing taxable income. For example, some ministers' 
     parsonage allowances are considered self-employment income, 
     and thus are considered earned income for purposes of 
     computing the EIC, but the allowances are excluded from gross 
     income for individual income tax purposes, and thus are not 
     considered earned income for purposes of the additional child 
     tax credit since the income is not included in taxable 
     income.
       Any credit or refund allowed or made to an individual under 
     this provision (including to any resident of a U.S. 
     possession) is not taken into account as income and is not be 
     taken into account as resources for the month of receipt and 
     the following two months for purposes of determining 
     eligibility of such individual or any other individual for 
     benefits or assistance, or the amount or extent of benefits 
     or assistance, under any Federal program or under any State 
     or local program financed in whole or in part with Federal 
     funds.


                               house bill

       The provision expands the child tax credit into a new 
     family tax credit. The family credit consists of a $1,600 
     credit per qualifying child under the age of 17, and a $300 
     credit for each of the taxpayer (both spouses in the case of 
     married taxpayers filing a joint return) and each dependent 
     of the taxpayer who is not a qualifying child under age 17.
       The provision generally retains the present-law definition 
     of dependent. However, under the provision, a qualifying 
     child is eligible for the $1,600 credit only if such child is 
     a citizen or national of the United States.
       The family credit phases out at AGI of $230,000 for married 
     taxpayers filing joint returns and $115,000 for other 
     individuals. The credit is refundable under rules similar to 
     the present law additional child tax credit. That is, to the 
     extent the credit exceeds the taxpayer's tax liability, the 
     taxpayer is eligible for a refundable credit equal to 15 
     percent of earned income in excess of $3,000.\71\ The 
     refundable credit is limited to $1,000 times the number of 
     qualifying children under the age of 17 claimed on the 
     return.

[[Page 19933]]

     This $1,000 per child dollar limitation is indexed for 
     inflation, with a base year of 2017, rounding up to the 
     nearest $100. Accordingly, in 2018 the limitation will be 
     $1,100.
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     \71\ The alternate formula described in the present law 
     section applies to the refundable portion of the family 
     credit as well.
---------------------------------------------------------------------------
       The provision requires that the taxpayer include the name 
     and taxpayer identification number of each qualifying child 
     and dependent on the tax return for each taxable year.\72\
---------------------------------------------------------------------------
     \72\ See a description of sec. 1103 of the House bill for 
     modifications to the taxpayer identification number 
     requirement.
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       The $300 credit for the taxpayer, spouse, and non-child 
     dependents of the taxpayer expires for taxable years 
     beginning after December 31, 2022.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            senate amendment

       The provision temporarily increases the child tax credit to 
     $2,000 per qualifying child. Additionally, the age limit for 
     a qualifying child is temporarily increased by one year, such 
     that a taxpayer may claim the credit with respect to any 
     qualifying child under the age of 18. This increase in the 
     age limit expires for taxable years after December 31, 2024.
       The credit is further modified to temporarily provide for a 
     $500 nonrefundable credit for qualifying dependents other 
     than qualifying children. The provision generally retains the 
     present-law definition of dependent.
       Under the temporary provision, beginning in 2018, the 
     threshold at which the credit begins to phase out is 
     increased to $500,000 for all taxpayers. These amounts are 
     not indexed for inflation.
       The provision temporarily lowers the earned income 
     threshold for the refundable child tax credit to $2,500. As 
     under present law, the maximum amount refundable may not 
     exceed $1,000 per qualifying child. Under the provision, this 
     $1,000 threshold is indexed for inflation with a base year of 
     2017, rounding up to the nearest $100 (such that the 
     threshold is $1,100 in 2018). A temporary rule provides that, 
     for the taxable years for which the above-described changes 
     are in effect, in order to receive the refundable portion of 
     the child tax credit, a taxpayer must include a Social 
     Security number for each qualifying child for whom the credit 
     is claimed on the tax return.
       The temporary provision (other than the increase in the age 
     limit, which expires one year earlier) expires for taxable 
     years beginning after December 31, 2025.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement temporarily increases the child 
     tax credit to $2,000 per qualifying child. The credit is 
     further modified to temporarily provide for a $500 
     nonrefundable credit for qualifying dependents other than 
     qualifying children. The provision generally retains the 
     present-law definition of dependent.
       Under the conference agreement, the maximum amount 
     refundable may not exceed $1,400 per qualifying child.\73\ 
     Additionally, the conference agreement provides that, in 
     order to receive the child tax credit (i.e., both the 
     refundable and non-refundable portion), a taxpayer must 
     include a Social Security number for each qualifying child 
     for whom the credit is claimed on the tax return. For these 
     purposes, a Social Security number must be issued before the 
     due date for the filing of the return for the taxable year. 
     This requirement does not apply to a non-child dependent for 
     whom the $500 non-refundable credit is claimed.\74\
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     \73\ Unlike both the House bill and the Senate amendment, the 
     conference agreement uses an indexing convention that rounds 
     the $1,400 amount to the next lowest multiple of $100.
     \74\ Additionally, a qualifying child who is ineligible to 
     receive the child tax credit because that child did not have 
     a Social Security number as the child's taxpayer 
     identification number may nonetheless qualify for the non-
     refundable $500 credit.
---------------------------------------------------------------------------
       Further, the conference agreement retains the present-law 
     age limit for a qualifying child. Thus, a qualifying child is 
     an individual who has not attained age 17 during the taxable 
     year.
       Finally, the conference agreement modifies the adjusted 
     gross income phaseout thresholds. Under the conference 
     agreement, the credit begins to phase out for taxpayers with 
     adjusted gross income in excess of $400,000 (in the case of 
     married taxpayers filing a joint return) and $200,000 (for 
     all other taxpayers). These phaseout thresholds are not 
     indexed for inflation.
       As was the case with the Senate amendment, the provision 
     expires for taxable years beginning after December 31, 2025.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.
     2. Credit for the elderly and permanently disabled (sec. 
         1102(a) of the House bill and sec. 22 of the Code)


                              Present Law

       Certain taxpayers who are over the age of 65 or retired on 
     account of permanent and total disability may claim a 
     nonrefundable credit. The maximum credit is 15 percent of 
     $5,000 for a return where one individual qualifies and $7,500 
     on a joint return where both spouses qualify.\75\ Thus, the 
     maximum credit amounts are $750 and $1,125, respectively.
---------------------------------------------------------------------------
     \75\ Sec. 22(a).
---------------------------------------------------------------------------
       The credit base is reduced by one half of the amount by 
     which the taxpayer's adjusted gross income exceeds $7,500 if 
     the taxpayer is unmarried, $10,000 if the taxpayer is married 
     and files a joint return, or $5,000 if the taxpayer is 
     married and files a separate return.\76\ Thus, the credit 
     base is phased down to zero when adjusted gross income 
     exceeds $17,500 for an unmarried person, $20,000 for a 
     married couple filing a joint return where only one spouse 
     qualifies for the credit, $25,000 for a joint return where 
     both spouses qualify, and $12,500 for a married person filing 
     a separate return.
---------------------------------------------------------------------------
     \76\ Sec. 22(d).
---------------------------------------------------------------------------
       Additionally, the credit base is reduced by certain items 
     of income otherwise exempt from tax: (1) benefits under Title 
     II of the Social Security Act; (2) retirement benefits under 
     the Railroad Retirement Act of 1974; (3) disability benefits 
     paid by the Veterans Administration, except for benefits 
     payable on account of personal injuries or sickness resulting 
     from active service in the Armed Forces; and (4) pensions, 
     annuities, and disability benefits exempted from tax by any 
     provision not in the Code.\77\
---------------------------------------------------------------------------
     \77\ Sec. 22(c)(3).
---------------------------------------------------------------------------
       To qualify for the credit, a taxpayer must, at the end of 
     the taxable year, be at least 65 years old or retired on 
     account of permanent and total disability.\78\ Permanent and 
     total disability exists if, at the time of retirement, the 
     taxpayer was ``unable to engage in any substantial gainful 
     activity by reason of any medically determinable physical or 
     mental impairment which can be expected to result in death or 
     which has lasted or can be expected to last for a continuous 
     period of not less than 12 months.\79\
---------------------------------------------------------------------------
     \78\ Sec. 22(b).
     \79\ Sec. 22(e)(3).
---------------------------------------------------------------------------


                               House Bill

       The House bill repeals the credit for the elderly and 
     permanently disabled.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     3. Repeal of credit for plug-in electric drive motor vehicles 
         (sec. 1102(c) of the House bill and sec. 30D of the Code)


                              Present Law

       A credit is available for new four-wheeled vehicles 
     (excluding low speed vehicles and vehicles weighing 14,000 
     pounds or more) propelled by a battery with at least 4 
     kilowatt-hours of electricity that can be charged from an 
     external source.\80\ The base credit is $2,500 plus $417 for 
     each kilowatt-hour of additional battery capacity in excess 
     of 4 kilowatt-hours (for a maximum credit of $7,500). 
     Qualified vehicles are subject to a 200,000 vehicle-per-
     manufacturer limitation. Once the limitation has been reached 
     the credit is phased down over four calendar quarters.
---------------------------------------------------------------------------
     \80\ Sec. 30D.
---------------------------------------------------------------------------


                               House Bill

       The provision repeals the credit for plug-in electric drive 
     motor vehicles.
       Effective date.--The provision is effective for vehicles 
     placed in service in taxable years beginning after December 
     31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     4. Termination of credit for interest on certain home 
         mortgages (sec. 1102(b) of the House bill and sec. 25 of 
         the Code)


                              Present Law

       Qualified governmental units can elect to exchange all or a 
     portion of their qualified mortgage bond authority for 
     authority to issue mortgage credit certificates 
     (``MCCs'').\81\ MCCs entitle homebuyers to a nonrefundable 
     income tax credit for a specified percentage of interest paid 
     on mortgage loans on their principal residences. The tax 
     credit provided by the MCC may be carried forward three 
     years. Once issued, an MCC generally remains in effect as 
     long as the residence being financed is the certificate-
     recipient's principal residence. MCCs generally are subject 
     to the same eligibility and targeted area requirements as 
     qualified mortgage bonds.\82\
---------------------------------------------------------------------------
     \81\ Sec. 25.
     \82\ Sec. 143.
---------------------------------------------------------------------------


                               House Bill

       No credit is allowed with respect to any MCC issued after 
     December 31, 2017.
       Effective date.--The provision applies to taxable years 
     ending after December 31, 2017. Credits continue for interest 
     paid on mortgage loans on principal residences for which MCCs 
     have been issued on or before December 31, 2017.


                            Senate Amendment

       No Provision.

[[Page 19934]]




                          Conference Agreement

       The conference agreement does not contain the House bill 
     provision.
     5. Modification of taxpayer identification number 
         requirements for the child tax credit, earned income 
         credit, and American Opportunity credit (sec. 1103 of the 
         House bill, sec. 11022 of the Senate amendment and secs. 
         24, 25A and 32 of the Code)


                              Present Law

     Earned income credit
       Low and moderate-income taxpayers may be eligible for the 
     refundable earned income credit (``EIC''). Eligibility for 
     the EIC is based on the taxpayer's earned income, adjusted 
     gross income, investment income, filing status, and work 
     status in the United States. The amount of the EIC is based 
     on the presence and number of qualifying children in the 
     worker's family, as well as on adjusted gross income and 
     earned income.
       The earned income credit generally equals a specified 
     percentage of earned income \83\ up to a maximum dollar 
     amount. The maximum amount applies over a certain income 
     range and then diminishes to zero over a specified phase-out 
     range. For taxpayers with earned income (or adjusted gross 
     income (``AGI''), if greater) in excess of the beginning of 
     the phase-out range, the maximum EIC amount is reduced by the 
     phase-out rate multiplied by the amount of earned income (or 
     AGI, if greater) in excess of the beginning of the phase-out 
     range. For taxpayers with earned income (or AGI, if greater) 
     in excess of the end of the phase-out range, no credit is 
     allowed.
---------------------------------------------------------------------------
     \83\ Earned income is defined as (1) wages, salaries, tips, 
     and other employee compensation, but only if such amounts are 
     includible in gross income, plus (2) the amount of the 
     individual's net self-employment earnings.
---------------------------------------------------------------------------
       An individual is not eligible for the EIC if the aggregate 
     amount of disqualified income of the taxpayer for the taxable 
     year exceeds $3,450 (for 2017). This threshold is indexed for 
     inflation. Disqualified income is the sum of: (1) interest 
     (taxable and tax-exempt); (2) dividends; (3) net rent and 
     royalty income (if greater than zero); (4) capital gains net 
     income; and (5) net passive income (if greater than zero) 
     that is not self-employment income.
       The EIC is a refundable credit, meaning that if the amount 
     of the credit exceeds the taxpayer's Federal income tax 
     liability, the excess is payable to the taxpayer as a direct 
     transfer payment.
     Child tax credit \84\
       An individual may claim a tax credit of $1,000 for each 
     qualifying child under the age of 17. A child who is not a 
     citizen, national, or resident of the United States cannot be 
     a qualifying child.
---------------------------------------------------------------------------
     \84\ See description of sec. 1101 of the House bill for the 
     House bill and Senate amendment modifications to the child 
     tax credit.
---------------------------------------------------------------------------
       The aggregate amount of allowable child credits is phased 
     out for individuals with income over certain threshold 
     amounts. Specifically, the otherwise allowable aggregate 
     child tax credit (``CTC'') amount is reduced by $50 for each 
     $1,000 (or fraction thereof) of modified adjusted gross 
     income (``modified AGI'') over $75,000 for single individuals 
     or heads of households, $110,000 for married individuals 
     filing joint returns, and $55,000 for married individuals 
     filing separate returns. For purposes of this limitation, 
     modified AGI includes certain otherwise excludable income 
     \85\ earned by U.S. citizens or residents living abroad or in 
     certain U.S. territories.
---------------------------------------------------------------------------
     \85\ Sec. 911.
---------------------------------------------------------------------------
       The child tax credit is allowable against both the regular 
     tax and the alternative minimum tax (``AMT''). To the extent 
     the credit exceeds the taxpayer's tax liability, the taxpayer 
     is eligible for a refundable credit (the ``additional child 
     tax credit'') equal to 15 percent of earned income in excess 
     of a threshold dollar amount of $3,000 (the ``earned income'' 
     formula).
       Families with three or more qualifying children may 
     determine the additional child tax credit using the 
     ``alternative formula'' if this results in a larger credit 
     than determined under the earned income formula. Under the 
     alternative formula, the additional child tax credit equals 
     the amount by which the taxpayer's Social Security taxes 
     exceed the taxpayer's EIC.
       As with the EIC, earned income is defined as the sum of 
     wages, salaries, tips, and other taxable employee 
     compensation plus net self-employment earnings. Unlike the 
     EIC, the additional child tax credit is based on earned 
     income only to the extent it is included in computing taxable 
     income. For example, some ministers' parsonage allowances are 
     considered self-employment income and thus are considered 
     earned income for purposes of computing the EIC, but the 
     allowances are excluded from gross income for individual 
     income tax purposes and thus are not considered earned income 
     for purposes of the additional child tax credit.
     American Opportunity credit \86\
       The American Opportunity credit provides individuals with a 
     tax credit of up to $2,500 per eligible student per year for 
     qualified tuition and related expenses (including course 
     materials) paid for each of the first four years of the 
     student's post-secondary education in a degree or certificate 
     program. The credit rate is 100 percent on the first $2,000 
     of qualified tuition and related expenses, and 25 percent on 
     the next $2,000 of qualified tuition and related expenses.
---------------------------------------------------------------------------
     \86\ See description of sec. 1201 of the House bill for the 
     bill's modifications to the American Opportunity credit.
---------------------------------------------------------------------------
       The American Opportunity credit is phased out ratably for 
     taxpayers with modified AGI between $80,000 and $90,000 
     ($160,000 and $180,000 for married taxpayers filing a joint 
     return). The credit may be claimed against a taxpayer's AMT 
     liability.
       Forty percent of a taxpayer's otherwise allowable modified 
     credit is refundable. A refundable credit is a credit which, 
     if the amount of the credit exceeds the taxpayer's Federal 
     income tax liability, the excess is payable to the taxpayer 
     as a direct transfer payment.
       No credit is allowed to a taxpayer who fails to include the 
     taxpayer identification number of the student to whom the 
     qualified tuition and related expenses relate.
     Taxpayer identification number requirements
       Any individual filing a U.S. tax return is required to 
     state his or her taxpayer identification number on such 
     return. Generally, a taxpayer identification number is the 
     individual's Social Security number (``SSN'').\87\ However, 
     in the case of an individual who is not eligible to be issued 
     an SSN, but who has a tax filing obligation, the Internal 
     Revenue Service (``IRS'') issues an individual taxpayer 
     identification number (``ITIN'') for use in connection with 
     the individual's tax filing requirements.\88\ An individual 
     who is eligible to receive an SSN may not obtain an ITIN for 
     purposes of his or her tax filing obligations.\89\ An ITIN 
     does not provide eligibility to work in the United States or 
     claim Social Security benefits.
---------------------------------------------------------------------------
     \87\ Sec. 6109(a).
     \88\ Treas. Reg. Sec. 301.6109-1(d)(3)(i).
     \89\ Treas. Reg. Sec. 301.6109-1(d)(3)(ii).
---------------------------------------------------------------------------
       Examples of individuals who are not eligible for SSNs, but 
     potentially need ITINs in order to file U.S. returns include 
     a nonresident alien filing a claim for a reduced withholding 
     rate under a U.S. income tax treaty, a nonresident alien 
     required to file a U.S. tax return,\90\ an individual who is 
     a U.S. resident alien under the substantial presence test and 
     who therefore must file a U.S. tax return,\91\ a dependent or 
     spouse of the prior two categories of individuals, or a 
     dependent or spouse of a nonresident alien visa holder.
---------------------------------------------------------------------------
     \90\ For instance, in the case of an individual that has 
     income which is effectively connected with a United States 
     trade or business, such as the performance of personal 
     services in the United States.
     \91\ Such an individual would have a filing requirement 
     without regard to whether the individual is lawfully present 
     or has work authorization.
---------------------------------------------------------------------------
       An individual is ineligible for the EIC (but not the child 
     tax credit) if he or she does not include a valid SSN and the 
     qualifying child's valid SSN (and, if married, the spouse's 
     SSN) on his or her tax return. For these purposes, the Code 
     defines an SSN as a Social Security number issued to an 
     individual, other than an SSN issued to an individual solely 
     for the purpose of applying for or receiving federally funded 
     benefits.\92\ If an individual fails to provide a correct 
     taxpayer identification number, such omission will be treated 
     as a mathematical or clerical error by the IRS.
---------------------------------------------------------------------------
     \92\ Sec. 205(c)(2)(B)(i)(II) (and that portion of sec. 
     205(c)(2)(B)(i)(III) relating to it) of the Social Security 
     Act.
---------------------------------------------------------------------------
       A taxpayer who resides with a qualifying child may not 
     claim the EIC with respect to the qualifying child if such 
     child does not have a valid SSN. The taxpayer also is 
     ineligible for the EIC for workers without children because 
     he or she resides with a qualifying child. However, if a 
     taxpayer has two or more qualifying children, some of whom do 
     not have a valid SSN, the taxpayer may claim the EIC based on 
     the number of qualifying children for whom there are valid 
     SSNs.


                               House Bill

       Under the provision, any qualifying child claimed by the 
     taxpayer on the tax return must use, as that child's 
     identifying number, a Social Security number that is valid 
     for employment in the United States in order to be eligible 
     for the CTC. Under the provision, if a child's identifying 
     number was other than a Social Security number (such as an 
     ITIN), the taxpayer would be eligible to receive the $300 
     credit for dependents other than qualifying children, 
     assuming such child otherwise qualified as a dependent of the 
     taxpayer.\93\
---------------------------------------------------------------------------
     \93\ See description of sec. 1101 of the House bill.
---------------------------------------------------------------------------
       Additionally, under the provision, taxpayers who use as 
     their taxpayer identification number a Social Security number 
     issued for non-work reasons, such as for purposes of 
     receiving Federal benefits or for any other reason, are not 
     eligible for the EIC.
       Lastly, under the provision, in order to claim the American 
     Opportunity credit, the identification number provided with 
     respect to the student to whom the tuition and related 
     expenses relate must be a Social Security number.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       Under the Senate amendment, as a part of the temporary 
     modifications to the child tax

[[Page 19935]]

     credit, for the taxable years 2018 through 2025, in order to 
     receive the refundable portion of the child tax credit, a 
     taxpayer must include a Social Security number for each 
     qualifying child for whom the credit is claimed on the tax 
     return.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement does not contain the House bill 
     provision.\94\
---------------------------------------------------------------------------
     \94\ But see description of sec. 11022 of the conference 
     agreement for a description of modifications with respect to 
     the taxpayer identification number requirements pertaining to 
     the child tax credit.
---------------------------------------------------------------------------
     6. Procedures to reduce improper claims of earned income 
         credit (sec. 1104 of the House bill and new secs. 
         32(c)(2)(B)(vii) and 6011(i) of the Code)


                              Present Law

     Earned income credit
       Low- and moderate-income workers may be eligible for the 
     refundable earned income credit (``EIC''). Eligibility for 
     the EIC is based on earned income, adjusted gross income 
     (``AGI''), investment income, filing status, number of 
     children, and immigration and work status in the United 
     States. The maximum amount of the EIC applies over a certain 
     income range and then diminishes to zero over a specified 
     phaseout range. The EIC is a refundable credit, meaning that 
     if the amount of the credit exceeds the taxpayer's Federal 
     income tax liability, the excess is payable to the taxpayer 
     as a direct transfer payment.
       The EIC generally equals a specified percentage of earned 
     income up to a maximum dollar amount. Earned income is the 
     sum of employee compensation includible in gross income 
     (generally the amount reported in Box 1 of Form W-2, Wage and 
     Tax Statement, discussed below) plus net earnings from self-
     employment determined with regard to the deduction for one-
     half of self-employment taxes.\95\ Special rules apply in 
     computing earned income for purposes of the EIC.\96\ Net 
     earnings from self-employment generally includes the gross 
     income derived by an individual from any trade or business 
     carried on by the individual, less the deductions 
     attributable to the trade or business that are allowed under 
     the self-employment tax rules, plus the individual's 
     distributive share of income or loss from any trade or 
     business of a partnership in which the individual is a 
     partner.\97\
---------------------------------------------------------------------------
     \95\ Sec. 32(c)(2)(A).
     \96\ Sec. 32(c)(2)(B).
     \97\ Sec. 1402(a); Chief Counsel Advice 200022051.
---------------------------------------------------------------------------
     Employment taxes and quarterly reporting by employers
       Employment taxes include employer and employee taxes on 
     employee wages under the Federal Insurance Contributions Act 
     (``FICA'') and income taxes required to be withheld by 
     employers from employee wages (``income tax 
     withholding'').\98\ Income tax 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. Employers are required also to 
     withhold the employee share of FICA tax from employee wages. 
     For these purposes, wages is defined broadly to include all 
     remuneration, subject to exceptions specifically provided in 
     the relevant statutory provisions.
---------------------------------------------------------------------------
     \98\ Secs. 3101-3128 (FICA) and 3401-3404 (income tax 
     withholding). Employment taxes also include taxes under the 
     Railroad Retirement Act (``RRTA''), sections 3201-3241, and 
     tax under the Federal Unemployment Taxes Act (``FUTA''), 
     sections 3301-3311. Sections 3501-3510 provide additional 
     employment tax rules.
---------------------------------------------------------------------------
       Employers generally submit quarterly reports to IRS on Form 
     941, Employer's Quarterly Federal Tax Return, showing the 
     number of employees to whom wages were paid during the 
     quarter, the total wages paid to employees, total FICA taxes 
     (employer and employee) on the wages, and total income tax 
     withheld from the wages.\99\ In addition, by January 31 after 
     the end of a calendar year, an employer must provide each 
     employee with Form W-2, Wage and Tax Statement, showing the 
     total wages paid to the employee during the calendar year and 
     certain other information.\100\ The information contained on 
     each employee's W-2 is also provided to the IRS, accompanied 
     by Form W-3, Transmittal of Wage and Tax Statements, showing 
     the total number of Forms W-2 and aggregate information for 
     all employees, such as aggregate wages reported on Forms W-2. 
     IRS then compares the W-3 wage totals to the Form 941 (or 
     Form 944) wage totals.
---------------------------------------------------------------------------
     \99\ Treas. Secs. 31.6011(a)-1(a)(1), 31.6011(a)-4(a)(1), 
     31.6011(a)-1(a)(5). If the total amount of FICA taxes and 
     withheld income tax for a year is $1,000 or less, instead of 
     filing Form 941 for each quarter, the employer is permitted 
     file annually on Form 944, Employer's Annual Federal Tax 
     Return. Separate forms and filing requirement apply with 
     respect to RRTA and FUTA taxes.
     \100\ Sec. 6051(a). Employees are required to include a copy 
     of Form W-2 when filing their income tax returns.
---------------------------------------------------------------------------


                               House Bill

     Modification of the definition of ``earned income''
       The provision clarifies that a taxpayer is required to 
     claim all allowable deductions in computing net earnings from 
     self-employment for EIC purposes.
     Quarterly reporting of wages by employers
       The provision modifies employer reporting requirements 
     associated with the deduction and withholding of certain 
     employment taxes on wages. Under the provision, employers 
     must report, along with the aggregate wages paid and 
     employment taxes collected on Form 941 or Form 944, the name 
     and address of each employee and the amount of reportable 
     wages received by each of those employees.
       Effective date.--Modification of the definition of ``earned 
     income''
       The provision applies to taxable years ending after the 
     date of enactment.
       Effective date.--Quarterly reporting of wages by employers
       The provision applies to taxable years ending after the 
     date of enactment, subject to the authority of the Secretary 
     to delay for such period as the Secretary determines to be 
     reasonable to allow adequate time to modify systems to permit 
     compliance with the additional reporting requirements.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     7. Certain income disallowed for purposes of the earned 
         income tax credit (sec. 1105 of the House bill, new secs. 
         32(n) and 32(c)(2)(C) of the Code, and secs. 6051, 6052, 
         6041(a), and 6050(w) of the Code)


                              Present Law

       Earned income credit
       Low- and moderate-income workers may be eligible for the 
     refundable earned income credit (``EIC''). Eligibility for 
     the EIC is based on earned income, adjusted gross income 
     (``AGI''), investment income, filing status, number of 
     children, and immigration and work status in the United 
     States. The maximum amount of the EIC applies over a certain 
     income range and then diminishes to zero over a specified 
     phaseout range. The EIC is a refundable credit, meaning that 
     if the amount of the credit exceeds the taxpayer's Federal 
     income tax liability, the excess is payable to the taxpayer 
     as a direct transfer payment.
       The EIC generally equals a specified percentage of earned 
     income up to a maximum dollar amount. Earned income is the 
     sum of employee compensation includible in gross income plus 
     net earnings from self-employment determined with regard to 
     the deduction for one-half of self-employment taxes.\101\ 
     Special rules apply in computing earned income for purposes 
     of the EIC.\102\
---------------------------------------------------------------------------
     \101\ Sec. 32(c)(2)(A).
     \102\ Sec. 32(c)(2)(B).
---------------------------------------------------------------------------
       Information reporting
       Present law imposes a variety of information reporting 
     requirements on participants in certain transactions.\103\ 
     These requirements are intended to assist taxpayers in 
     preparing their income tax returns and to help the Internal 
     Revenue Service (``IRS'') determine whether such returns are 
     correct and complete.
---------------------------------------------------------------------------
     \103\ Sec. 6031 through 6060.
---------------------------------------------------------------------------
       The primary provision governing information reporting by 
     payors requires an information return by every person engaged 
     in a trade or business who makes payments aggregating $600 or 
     more in any taxable year to a single payee in the course of 
     the payor's trade or business.\104\ Payments to corporations 
     generally are excepted from this requirement. Payments 
     subject to reporting include fixed or determinable income or 
     compensation, but do not include payments for goods or 
     certain enumerated types of payments that are subject to 
     other specific reporting requirements.\105\ Detailed rules 
     are provided for the reporting of various types of investment 
     income, including interest, dividends, and gross proceeds 
     from brokered transactions (such as a sale of stock) paid to 
     U.S. persons.\106\
---------------------------------------------------------------------------
     \104\ The information return generally is submitted 
     electronically as a Form-1099 or Form-1096, although certain 
     payments to beneficiaries or employees may require use of 
     Forms W-3 or W-2, respectively. Treas. Reg. sec. 1.6041-
     1(a)(2).
     \105\ Sec. 6041(a) requires reporting as to fixed or 
     determinable gains, profits, and income (other than payments 
     to which section 6042(a)(1), 6044(a)(1), 6047(c), 6049(a), or 
     6050N(a) applies and other than payments with respect to 
     which a statement is required under authority of section 
     6042(a), 6044(a)(2) or 6045). These payments excepted from 
     section 6041(a) include most interest, royalties, and 
     dividends.
     \106\ Secs. 6042 (dividends), 6045 (broker reporting) and 
     6049 (interest) and the Treasury regulations thereunder.
---------------------------------------------------------------------------
       Special information reporting requirements exist for 
     employers required to deduct and withhold tax from employees' 
     income.\107\ 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.\108\
---------------------------------------------------------------------------
     \107\ Sec. 6051(a).
     \108\ Sec. 6041A.
---------------------------------------------------------------------------
       There are also information reporting requirements for 
     merchant acquiring entities and third party settlement 
     organizations with respect to payments made in settlement of 
     payment card transactions and third

[[Page 19936]]

     party payment network transactions occurring in that calendar 
     year.\109\
---------------------------------------------------------------------------
     \109\ Sec. 6050W.
---------------------------------------------------------------------------
       The payor of amounts described above is required to provide 
     the recipient of the payment with an annual statement showing 
     the aggregate payments made and contact information for the 
     payor.\110\ The statement must be supplied to taxpayers by 
     the payors by January 31 of the following calendar year.\7\ 
     Payors generally must file the information return with the 
     IRS on or before January 31 of the year following the 
     calendar year to which such returns relate.\111\
---------------------------------------------------------------------------
     \110\ Sec. 6041(d).
     \111\ Sec. 6071(d).
---------------------------------------------------------------------------
       Failure to comply with the information reporting 
     requirements results in penalties, which may include a 
     penalty for failure to file the information return,\112\ to 
     furnish payee statements,\113\ or to comply with other 
     various reporting requirements.\114\ No penalty is imposed if 
     the failure is due to reasonable cause.\115\ Any person who 
     is required to file an information return, but who fails to 
     do so on or before the prescribed filing date is subject to a 
     penalty that varies based on when, if at all, the correct 
     information return is filed and the correct payee statement 
     is furnished.
---------------------------------------------------------------------------
     \112\ Sec. 6721.
     \113\ Sec. 6722.
     \114\ Sec. 6723.
     \115\ Sec. 6724.
---------------------------------------------------------------------------
       Books or records
       Every person liable for any tax imposed by the Code, or for 
     the collection thereof, must keep such records, render such 
     statements, make such returns, and comply with such rules and 
     regulations as the Secretary may from time to time 
     prescribe.\116\ Whenever necessary, the Secretary may require 
     any person, by notice served upon that person or by 
     regulations, to make such returns, render such statements, or 
     keep such records, as the Secretary deems sufficient to show 
     whether or not that person is liable for tax. Persons subject 
     to income tax are required to keep books or records 
     sufficient to establish the amount of gross income, 
     deductions, credits, or other matters required to be shown by 
     that person in any return of such tax or information.\117\ 
     The books or records are required to be kept available at all 
     times for inspection by the IRS, and must be retained so long 
     as the contents thereof may become material in the 
     administration of any internal revenue law.\118\
---------------------------------------------------------------------------
     \116\ Sec. 6001.
     \117\ Treas. sec. 1.6001-1(a).
     \118\ Treas. sec. 1.6001-1(e).
---------------------------------------------------------------------------


                               House Bill

       The provision limits earned income for purposes of the 
     earned income credit to amounts substantiated by the taxpayer 
     on statements furnished or returns filed under third party 
     information reporting requirements, or amounts substantiated 
     by the taxpayer's books and records. The authority of the IRS 
     to make returns, render statements, or keep records and, 
     pursuant to the Code, to make corresponding adjustments to 
     income to reflect substantiated amounts for purposes other 
     than the EIC remains unaffected by this provision.
       Effective date.--The provision is effective for taxable 
     years ending after the date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     8. Limitation on losses for taxpayers other than corporations 
         (sec. 11012 of the Senate amendment and sec. 461(l) of 
         the Code)


                              Present Law

     Loss limitation rules applicable to individuals

       Passive loss rules
       The passive loss rules limit deductions and credits from 
     passive trade or business activities.\119\ The passive loss 
     rules apply to individuals, estates and trusts, and closely 
     held corporations. A passive activity for this purpose is a 
     trade or business activity in which the taxpayer owns an 
     interest, but in which the taxpayer does not materially 
     participate. A taxpayer is treated as materially 
     participating in an activity only if the taxpayer is involved 
     in the operation of the activity on a basis that is regular, 
     continuous, and substantial.\120\ Deductions attributable to 
     passive activities, to the extent they exceed income from 
     passive activities, generally may not be deducted against 
     other income. Deductions and credits that are suspended under 
     these rules are carried forward and treated as deductions and 
     credits from passive activities in the next year. The 
     suspended losses from a passive activity are allowed in full 
     when a taxpayer makes a taxable disposition of his entire 
     interest in the passive activity to an unrelated person.
---------------------------------------------------------------------------
     \119\ Sec. 469.
     \120\ Regulations provide more detailed standards for 
     material participation. See Treas. Reg. sec. 1.469-5 and -5T.
---------------------------------------------------------------------------
       Excess farm loss rules
       A limitation on excess farm losses applies to taxpayers 
     other than C corporations.\121\ If a taxpayer other than a C 
     corporation receives an applicable subsidy for the taxable 
     year, the amount of the excess farm loss is not allowed for 
     the taxable year, and is carried forward and treated as a 
     deduction attributable to farming businesses in the next 
     taxable year. An excess farm loss for a taxable year means 
     the excess of aggregate deductions that are attributable to 
     farming businesses over the sum of aggregate gross income or 
     gain attributable to farming businesses plus the threshold 
     amount. The threshold amount is the greater of (1) $300,000 
     ($150,000 for married individuals filing separately), or (2) 
     for the five-consecutive-year period preceding the taxable 
     year, the excess of the aggregate gross income or gain 
     attributable to the taxpayer's farming businesses over the 
     aggregate deductions attributable to the taxpayer's farming 
     businesses.
---------------------------------------------------------------------------
     \121\ Sec. 461(j).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       For taxable years beginning after December 31, 2017 and 
     before January 1, 2026, excess business losses of a taxpayer 
     other than a corporation are not allowed for the taxable 
     year. Such losses are carried forward and treated as part of 
     the taxpayer's net operating loss (``NOL'') carryforward in 
     subsequent taxable years. Under the bill, NOL carryovers 
     generally are allowed for a taxable year up to the lesser of 
     the carryover amount or 90 percent (80 percent for taxable 
     years beginning after December 31, 2022) of taxable income 
     determined without regard to the deduction for NOLs.
       An excess business loss for the taxable year is the excess 
     of aggregate deductions of the taxpayer attributable to 
     trades or businesses of the taxpayer (determined without 
     regard to the limitation of the provision), over the sum of 
     aggregate gross income or gain of the taxpayer plus a 
     threshold amount. The threshold amount for a taxable year is 
     $250,000 (or twice the otherwise applicable threshold amount 
     in the case of a joint return). The threshold amount is 
     indexed for inflation.
       In the case of a partnership or S corporation, the 
     provision applies at the partner or shareholder level. Each 
     partner's distributive share and each S corporation 
     shareholder's pro rata share of items of income, gain, 
     deduction, or loss of the partnership or S corporation are 
     taken into account in applying the limitation under the 
     provision for the taxable year of the partner or S 
     corporation shareholder. Regulatory authority is provided to 
     apply the provision to any other passthrough entity to the 
     extent necessary to carry out the provision. Regulatory 
     authority is also provided to require any additional 
     reporting as the Secretary determines is appropriate to carry 
     out the purposes of the provision.
       The provision applies after the application of the passive 
     loss rules.\122\
---------------------------------------------------------------------------
     \122\ Sec. 469.
---------------------------------------------------------------------------
       For taxable years beginning after December 31, 2017 and 
     before January 1, 2026, the present-law limitation relating 
     to excess farm losses does not apply.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment. 
     Thus, excess business losses not allowed are carried forward 
     and treated as part of the taxpayer's net operating loss 
     (``NOL'') carryforward in subsequent taxable years as 
     determined under the NOL rules provided under the conference 
     agreement.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.
     9. Reform of American opportunity tax credit and repeal of 
         lifetime learning credit (sec. 1201 of the House bill and 
         sec. 25A of the Code)


                              Present Law

     American Opportunity credit
       The American Opportunity credit provides individuals with a 
     tax credit of up to $2,500 per eligible student per year for 
     qualified tuition and related expenses (including course 
     materials) paid for each of the first four years of the 
     student's post-secondary education in a degree or certificate 
     program. The credit rate is 100 percent on the first $2,000 
     of qualified tuition and related expenses, and 25 percent on 
     the next $2,000 of qualified tuition and related expenses. 
     The credit may not be claimed for more than four taxable 
     years with respect to any student.
       The American Opportunity credit is phased out ratably for 
     taxpayers with modified AGI between $80,000 and $90,000 
     ($160,000 and $180,000 for married taxpayers filing a joint 
     return). The credit may be claimed against a taxpayer's AMT 
     liability.
       Forty percent of a taxpayer's otherwise allowable modified 
     credit is refundable. A refundable credit is a credit which, 
     if the amount of the credit exceeds the taxpayer's Federal 
     income tax liability, the excess is payable to the taxpayer 
     as a direct transfer payment.
       A taxpayer may not claim the American Opportunity credit if 
     the qualified tuition and related expenses for the enrollment 
     or

[[Page 19937]]

     attendance of a student, if such student has been convicted 
     of a Federal or State felony offense consisting of the 
     possession or distribution of a controlled substance before 
     the end of the taxable year.\123\
---------------------------------------------------------------------------
     \123\ Sec. 25A(b)(2)(D).
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     Lifetime learning credit
       Individual taxpayers may be eligible to claim a 
     nonrefundable credit, the Lifetime Learning credit, against 
     Federal income taxes equal to 20 percent of qualified tuition 
     and related expenses incurred during the taxable year on 
     behalf of the taxpayer, the taxpayer's spouse, or any 
     dependents. Up to $10,000 of qualified tuition and related 
     expenses per taxpayer return are eligible for the Lifetime 
     Learning credit (i.e., the maximum credit per taxpayer return 
     is $2,000).
       In contrast to the American Opportunity credit, a taxpayer 
     may claim the Lifetime Learning credit for an unlimited 
     number of taxable years.\124\ Also in contrast to the 
     American Opportunity credit, the maximum amount of the 
     Lifetime Learning credit that may be claimed on a taxpayer's 
     return does not vary based on the number of students in the 
     taxpayer's family--that is, the American Opportunity credit 
     is computed on a per-student basis while the Lifetime 
     Learning credit is computed on a family-wide basis. The 
     Lifetime Learning credit amount that a taxpayer may otherwise 
     claim is phased out ratably for taxpayers with modified AGI 
     between $56,000 and $66,000 ($112,000 and $132,000 for 
     married taxpayers filing a joint return) in 2017.
---------------------------------------------------------------------------
     \124\ Sec. 25A(a)(2).
---------------------------------------------------------------------------


                               House Bill

       The House bill modifies the American Opportunity credit 
     \125\ by providing that a credit may be claimed with respect 
     to a student for five taxable years (rather than four taxable 
     years under present law). For a credit claimed with respect 
     to the student's fifth taxable year, the credit is half the 
     value of the American Opportunity credit that is applicable 
     to the first four taxable years (the refundable portion of 
     the credit is 40-percent of the half-value credit). 
     Additionally, the provision allows a student to claim the 
     American Opportunity credit for any of the first five years 
     of postsecondary education.
---------------------------------------------------------------------------
     \125\ The provision also repeals the Hope credit, a precursor 
     to the American Opportunity credit which since 2009 has been 
     largely superseded in the Code by the American Opportunity 
     credit.
---------------------------------------------------------------------------
       The operation of this provision is as follows. Assume that 
     a student enters college in the Fall of 2018, attending for 
     eight consecutive semesters, such that the student graduates 
     in the Spring of 2022. Assume that qualifying tuition and 
     fees for each semester is in excess of $5,000. For each of 
     taxable years 2018, 2019, 2020 and 2021, an individual 
     claiming the credit on behalf of the student would be 
     eligible for the maximum credit of $2,500 (of which $1,000 is 
     refundable). For taxable year 2022, a taxpayer claiming the 
     credit on behalf of the student may be eligible for a $1,250 
     credit (of which $500 is refundable). Alternatively, if no 
     credit were claimed with respect to the student in 2022, and 
     the student were to decide to attend graduate school in the 
     Fall of 2024, the student may claim the half-value fifth year 
     credit ($1,250 ($500 refundable)) for the 2024 taxable year.
       The provision repeals the lifetime learning credit.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     10. Consolidation and modification of education savings rules 
         (sec. 1202 of the House bill, sec. 11033 of the Senate 
         amendment, and secs. 529 and 530 of the Code)


                              Present Law

     Coverdell education savings accounts
       A Coverdell education savings account is a trust or 
     custodial account created exclusively for the purpose of 
     paying qualified education expenses of a named 
     beneficiary.\126\ Annual contributions to Coverdell education 
     savings accounts may not exceed $2,000 per designated 
     beneficiary and may not be made after the designated 
     beneficiary reaches age 18 (except in the case of a special 
     needs beneficiary). The contribution limit is phased out for 
     taxpayers with modified AGI between $95,000 and $110,000 
     ($190,000 and $220,000 for married taxpayers filing a joint 
     return); the AGI of the contributor, and not that of the 
     beneficiary, controls whether a contribution is permitted by 
     the taxpayer.
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     \126\ Sec. 530.
---------------------------------------------------------------------------
       Earnings on contributions to a Coverdell education savings 
     account generally are subject to tax when withdrawn.\127\ 
     However, distributions from a Coverdell education savings 
     account are excludable from the gross income of the 
     distributee (i.e., the student) to the extent that the 
     distribution does not exceed the qualified education expenses 
     incurred by the beneficiary during the year the distribution 
     is made. The earnings portion of a Coverdell education 
     savings account distribution not used to pay qualified 
     education expenses is includible in the gross income of the 
     distributee and generally is subject to an additional 10-
     percent tax.\128\
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     \127\ In addition, Coverdell education savings accounts are 
     subject to the unrelated business income tax imposed by 
     section 511.
     \128\ This 10-percent additional tax does not apply if a 
     distribution from an education savings account is made on 
     account of the death or disability of the designated 
     beneficiary, or if made on account of a scholarship received 
     by the designated beneficiary.
---------------------------------------------------------------------------
       Tax-free (and free of additional 10-percent tax) transfers 
     or rollovers of account balances from one Coverdell education 
     savings account benefiting one beneficiary to another 
     Coverdell education savings account benefiting another 
     beneficiary (as well as redesignations of the named 
     beneficiary) are permitted, provided that the new beneficiary 
     is a member of the family of the prior beneficiary and is 
     under age 30 (except in the case of a special needs 
     beneficiary). In general, any balance remaining in a 
     Coverdell education savings account is deemed to be 
     distributed within 30 days after the date that the 
     beneficiary reaches age 30 (or, if the beneficiary dies 
     before attaining age 30, within 30 days of the date that the 
     beneficiary dies).
       Qualified education expenses include qualified elementary 
     and secondary expenses and qualified higher education 
     expenses. Such qualified education expenses generally include 
     only out-of-pocket expenses. They do not include expenses 
     covered by employer-provided educational assistance or 
     scholarships for the benefit of the beneficiary that are 
     excludable from gross income.
       The term qualified elementary and secondary school 
     expenses, means expenses for: (1) tuition, fees, academic 
     tutoring, special needs services, books, supplies, and other 
     equipment incurred in connection with the enrollment or 
     attendance of the beneficiary at a public, private, or 
     religious school providing elementary or secondary education 
     (kindergarten through grade 12) as determined under State 
     law; (2) room and board, uniforms, transportation, and 
     supplementary items or services (including extended day 
     programs) required or provided by such a school in connection 
     with such enrollment or attendance of the beneficiary; and 
     (3) the purchase of any computer technology or equipment (as 
     defined in section 170(e)(6)(F)(i)) or internet access and 
     related services, if such technology, equipment, or services 
     are to be used by the beneficiary and the beneficiary's 
     family during any of the years the beneficiary is in 
     elementary or secondary school. Computer software primarily 
     involving sports, games, or hobbies is not considered a 
     qualified elementary and secondary school expense unless the 
     software is predominantly educational in nature.
       The term qualified higher education expenses includes 
     tuition, fees, books, supplies, and equipment required for 
     the enrollment or attendance of the designated beneficiary at 
     an eligible education institution, regardless of whether the 
     beneficiary is enrolled at an eligible educational 
     institution on a full-time, half-time, or less than half-time 
     basis.\129\ Moreover, qualified higher education expenses 
     include certain room and board expenses for any period during 
     which the beneficiary is at least a half-time student. 
     Qualified higher education expenses include expenses with 
     respect to undergraduate or graduate-level courses. In 
     addition, qualified higher education expenses include amounts 
     paid or incurred to purchase tuition credits (or to make 
     contributions to an account) under a qualified tuition 
     program for the benefit of the beneficiary of the Coverdell 
     education savings account.\130\
---------------------------------------------------------------------------
     \129\ Qualified higher education expenses are defined in the 
     same manner as for qualified tuition programs.
     \130\ Sec. 530(b)(2)(B).
---------------------------------------------------------------------------
     Section 529 qualified tuition programs

       In general
       A qualified tuition program is a program established and 
     maintained by a State or agency or instrumentality thereof, 
     or by one or more eligible educational institutions, which 
     satisfies certain requirements and under which a person may 
     purchase tuition credits or certificates on behalf of a 
     designated beneficiary that entitle the beneficiary to the 
     waiver or payment of qualified higher education expenses of 
     the beneficiary (a ``prepaid tuition program''). Section 529 
     provides specified income tax and transfer tax rules for the 
     treatment of accounts and contracts established under 
     qualified tuition programs.\131\ In the case of a program 
     established and maintained by a State or agency or 
     instrumentality thereof, a qualified tuition program also 
     includes a program under which a person may make 
     contributions to an account that is established for the 
     purpose of satisfying the qualified higher education expenses 
     of the designated beneficiary of the account, provided it 
     satisfies certain specified requirements (a ``savings account 
     program''). Under both types of qualified tuition programs, a 
     contributor establishes an account for the benefit of a 
     particular designated beneficiary to provide for that 
     beneficiary's higher education expenses.
---------------------------------------------------------------------------
     \131\ For purposes of this description, the term ``account'' 
     is used interchangeably to refer to a prepaid tuition benefit 
     contract or a tuition savings account established pursuant to 
     a qualified tuition program.
---------------------------------------------------------------------------
       In general, prepaid tuition contracts and tuition savings 
     accounts established under a qualified tuition program 
     involve prepayments or contributions made by one or more

[[Page 19938]]

     individuals for the benefit of a designated beneficiary. 
     Decisions with respect to the contract or account are 
     typically made by an individual who is not the designated 
     beneficiary. Qualified tuition accounts or contracts 
     generally require the designation of a person (generally 
     referred to as an ``account owner'') \132\ whom the program 
     administrator (oftentimes a third party administrator 
     retained by the State or by the educational institution that 
     established the program) may look to for decisions, 
     recordkeeping, and reporting with respect to the account 
     established for a designated beneficiary. The person or 
     persons who make the contributions to the account need not be 
     the same person who is regarded as the account owner for 
     purposes of administering the account. Under many qualified 
     tuition programs, the account owner generally has control 
     over the account or contract, including the ability to change 
     designated beneficiaries and to withdraw funds at any time 
     and for any purpose. Thus, in practice, qualified tuition 
     accounts or contracts generally involve a contributor, a 
     designated beneficiary, an account owner (who oftentimes is 
     not the contributor or the designated beneficiary), and an 
     administrator of the account or contract.
---------------------------------------------------------------------------
     \132\ Section 529 refers to contributors and designated 
     beneficiaries, but does not define or otherwise refer to the 
     term ``account owner,'' which is a commonly used term among 
     qualified tuition programs.
---------------------------------------------------------------------------
       Qualified higher education expenses
       For purposes of receiving a distribution from a qualified 
     tuition program that qualifies for favorable tax treatment 
     under the Code, qualified higher education expenses means 
     tuition, fees, books, supplies, and equipment required for 
     the enrollment or attendance of a designated beneficiary at 
     an eligible educational institution, and expenses for special 
     needs services in the case of a special needs beneficiary 
     that are incurred in connection with such enrollment or 
     attendance. Qualified higher education expenses generally 
     also include room and board for students who are enrolled at 
     least half-time. Qualified higher education expenses include 
     the purchase of any computer technology or equipment, or 
     Internet access or related services, if such technology or 
     services were to be used primarily by the beneficiary during 
     any of the years a beneficiary is enrolled at an eligible 
     institution.
       Contributions to qualified tuition programs
       Contributions to a qualified tuition program must be made 
     in cash. Section 529 does not impose a specific dollar limit 
     on the amount of contributions, account balances, or prepaid 
     tuition benefits relating to a qualified tuition account; 
     however, the program is required to have adequate safeguards 
     to prevent contributions in excess of amounts necessary to 
     provide for the beneficiary's qualified higher education 
     expenses. Contributions generally are treated as a completed 
     gift eligible for the gift tax annual exclusion. 
     Contributions are not tax deductible for Federal income tax 
     purposes, although they may be deductible for State income 
     tax purposes. Amounts in the account accumulate on a tax-free 
     basis (i.e., income on accounts in the plan is not subject to 
     current income tax).
       A qualified tuition program may not permit any contributor 
     to, or designated beneficiary under, the program to direct 
     (directly or indirectly) the investment of any contributions 
     (or earnings thereon) more than two times in any calendar 
     year, and must provide separate accounting for each 
     designated beneficiary. A qualified tuition program may not 
     allow any interest in an account or contract (or any portion 
     thereof) to be used as security for a loan.


                               House Bill

       Under the House bill, no new contributions are permitted 
     into Coverdell savings accounts after December 31, 2017. 
     However, rollovers of account balances from one Coverdell 
     education savings account to another pre-existing Coverdell 
     education savings account benefiting another beneficiary 
     remain permitted after this date. Additionally, the provision 
     allows section 529 plans to receive rollover contributions 
     from Coverdell education savings accounts.
       The provision modifies section 529 plans to allow such 
     plans to distribute not more than $10,000 in expenses for 
     tuition incurred during the taxable year in connection with 
     the enrollment or attendance of the designated beneficiary at 
     a public, private or religious elementary or secondary 
     school. This limitation applies on a per-student basis, 
     rather than a per-account basis. Thus, under the provision, 
     although an individual may be the designated beneficiary of 
     multiple accounts, that individual may receive a maximum of 
     $10,000 in distributions free of tax, regardless of whether 
     the funds are distributed from multiple accounts. Any excess 
     distributions received by the individual would be treated as 
     a distribution subject to tax under the general rules of 
     section 529.
       The provision also modifies section 529 plans to allow such 
     plan distributions to be used for certain expenses, including 
     books, supplies, and equipment, required for attendance in a 
     registered apprenticeship program. Registered apprenticeship 
     programs are apprenticeship programs registered and certified 
     with the Secretary of Labor.
       Finally, the provision specifies that nothing in this 
     section shall prevent an unborn child from qualifying as a 
     designated beneficiary. For these purposes, an unborn child 
     means a child in utero, and the term child in utero means a 
     member of the species homo sapiens, at any stage of 
     development, who is carried in the womb.
       Effective date.--The provision applies to contributions and 
     distributions made after December 31, 2017.


                            Senate Amendment

       The Senate amendment modifies section 529 plans to allow 
     such plans to distribute not more than $10,000 in expenses 
     for tuition incurred during the taxable year in connection 
     with the enrollment or attendance of the designated 
     beneficiary at a public, private or religious elementary or 
     secondary school. This limitation applies on a per-student 
     basis, rather than a per-account basis. Thus, under the 
     provision, although an individual may be the designated 
     beneficiary of multiple accounts, that individual may receive 
     a maximum of $10,000 in distributions free of tax, regardless 
     of whether the funds are distributed from multiple accounts. 
     Any excess distributions received by the individual would be 
     treated as a distribution subject to tax under the general 
     rules of section 529.
       The provision also modifies the definition of higher 
     education expenses to include certain expenses incurred in 
     connection with a homeschool. Those expenses are (1) 
     curriculum and curricular materials; (2) books or other 
     instructional materials; (3) online educational materials; 
     (4) tuition for tutoring or educational classes outside of 
     the home (but only if the tutor or instructor is not related 
     to the student); (5) dual enrollment in an institution of 
     higher education; and (6) educational therapies for students 
     with disabilities.
       Effective date.--The provision applies to distributions 
     made after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     11. Reforms to discharge of certain student loan indebtedness 
         (sec. 1203 of the House bill, sec. 11031 of the Senate 
         amendment, and sec. 108 of the Code)


                              Present Law

       Gross income generally includes the discharge of 
     indebtedness of the taxpayer. Under an exception to this 
     general rule, gross income does not include any amount from 
     the forgiveness (in whole or in part) of certain student 
     loans, provided that the forgiveness is contingent on the 
     student's working for a certain period of time in certain 
     professions for any of a broad class of employers.\133\
---------------------------------------------------------------------------
     \133\ Sec. 108(f).
---------------------------------------------------------------------------
       Student loans eligible for this special rule must be made 
     to an individual to assist the individual in attending an 
     educational institution that normally maintains a regular 
     faculty and curriculum and normally has a regularly enrolled 
     body of students in attendance at the place where its 
     education activities are regularly carried on. Loan proceeds 
     may be used not only for tuition and required fees, but also 
     to cover room and board expenses. The loan must be made by 
     (1) the United States (or an instrumentality or agency 
     thereof), (2) a State (or any political subdivision thereof), 
     (3) certain tax-exempt public benefit corporations that 
     control a State, county, or municipal hospital and whose 
     employees have been deemed to be public employees under State 
     law, or (4) an educational organization that originally 
     received the funds from which the loan was made from the 
     United States, a State, or a tax-exempt public benefit 
     corporation.
       In addition, an individual's gross income does not include 
     amounts from the forgiveness of loans made by educational 
     organizations (and certain tax-exempt organizations in the 
     case of refinancing loans) out of private, nongovernmental 
     funds if the proceeds of such loans are used to pay costs of 
     attendance at an educational institution or to refinance any 
     outstanding student loans (not just loans made by educational 
     organizations) and the student is not employed by the lender 
     organization. In the case of such loans made or refinanced by 
     educational organizations (or refinancing loans made by 
     certain tax-exempt organizations), cancellation of the 
     student loan must be contingent on the student working in an 
     occupation or area with unmet needs and such work must be 
     performed for, or under the direction of, a tax-exempt 
     charitable organization or a governmental entity.
       Finally, an individual's gross income does not include any 
     loan repayment amount received under the National Health 
     Service Corps loan repayment program, certain State loan 
     repayment programs, or any amount received by an individual 
     under any State loan repayment or loan forgiveness program 
     that is intended to provide for the increased availability of 
     health care services in underserved or health professional 
     shortage areas (as determined by the State).


                               House Bill

       The House bill modifies the exclusion of student loan 
     discharges from gross income,

[[Page 19939]]

     by including within the exclusion certain discharges on 
     account of death or disability. Loans eligible for the 
     exclusion under the provision are loans made by (1) the 
     United States (or an instrumentality or agency thereof), (2) 
     a State (or any political subdivision thereof), (3) certain 
     tax-exempt public benefit corporations that control a State, 
     county, or municipal hospital and whose employees have been 
     deemed to be public employees under State law, (4) an 
     educational organization that originally received the funds 
     from which the loan was made from the United States, a State, 
     or a tax-exempt public benefit corporation, or (5) private 
     education loans (for this purpose, private education loan is 
     defined in section 140(7) of the Consumer Protection 
     Act).\134\
---------------------------------------------------------------------------
     \134\ 15 U.S.C. 1650(7).
---------------------------------------------------------------------------
       Under the provision, the discharge of a loan as described 
     above is excluded from gross income if the discharge was 
     pursuant to the death or total and permanent disability of 
     the student.\135\
---------------------------------------------------------------------------
     \135\ Although the provision makes specific reference to 
     those provisions of the Higher Education Act of 1965 that 
     discharge William D. Ford Federal Direct Loan Program loans, 
     Federal Family Education Loan Program loans, and Federal 
     Perkins Loan Program loans in the case of death and total and 
     permanent disability, the provision also contains a catch-all 
     exclusion in the case of a student loan discharged on account 
     of the death or total and permanent disability of the 
     student, in addition to those specific statutory references.
---------------------------------------------------------------------------
       Additionally, the provision modifies the gross income 
     exclusion for amounts received under the National Health 
     Service Corps loan repayment program or certain State loan 
     repayment programs to include any amount received by an 
     individual under the Indian Health Service loan repayment 
     program.\136\
---------------------------------------------------------------------------
     \136\ Section 108 of the Indian Health Care Improvement Act 
     established the Indian Health Service loan repayment program 
     to assure a sufficient supply of trained health professionals 
     needed to provide health care services to Indians. Pub. L. 
     No. 94-437, as amended by Pub. L. No. 100-713, sec. 108, and 
     Pub. L. No. 102-573, sec. 106, and as amended, and 
     permanently reauthorized by Pub. L. No. 111-148, sec. 10221.
---------------------------------------------------------------------------
       Effective date.--The provision applies to discharges of 
     loans after, and amounts received after, December 31, 2017.


                            Senate Amendment

       The Senate amendment generally follows the House bill. 
     However, the Senate amendment does not contain the provision 
     in the House bill excluding amounts received under the Indian 
     Health Service loan repayment program from income.
       Additionally, the Senate amendment does not apply to 
     discharges of indebtedness occurring after December 31, 2025.
       Effective date.--The provision is effective for discharges 
     of indebtedness after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     12. Repeal of deduction for student loan interest (sec. 1204 
         of the House bill and sec. 221 of the Code)


                              Present Law

       Certain individuals who have paid interest on qualified 
     education loans may claim an above-the-line deduction for 
     such interest expenses, subject to a maximum annual deduction 
     limit.\137\ Required payments of interest generally do not 
     include voluntary payments, such as interest payments made 
     during a period of loan forbearance. No deduction is allowed 
     to an individual if that individual is claimed as a dependent 
     on another taxpayer's return for the taxable year.\138\
---------------------------------------------------------------------------
     \137\ Sec. 221.
     \138\ Sec. 221(c).
---------------------------------------------------------------------------
       A qualified education loan generally is defined as any 
     indebtedness incurred solely to pay for the costs of 
     attendance (including room and board) of the taxpayer, the 
     taxpayer's spouse, or any dependent of the taxpayer as of the 
     time the indebtedness was incurred in attending on at least a 
     half-time basis (1) eligible educational institutions, or (2) 
     institutions conducting internship or residency programs 
     leading to a degree or certificate from an institution of 
     higher education, a hospital, or a health care facility 
     conducting postgraduate training. The cost of attendance is 
     reduced by any amount excluded from gross income under the 
     exclusions for qualified scholarships and tuition reductions, 
     employer-provided educational assistance, interest earned on 
     education savings bonds, qualified tuition programs, and 
     Coverdell education savings accounts, as well as the amount 
     of certain other scholarships and similar payments.
       The maximum allowable deduction per year is $2,500.\139\ 
     For 2017, the deduction is phased out ratably for taxpayers 
     with AGI between $65,000 and $80,000 ($135,000 and $165,000 
     for married taxpayers filing a joint return). The income 
     phase-out ranges are indexed for inflation and rounded to the 
     next lowest multiple of $5,000.
---------------------------------------------------------------------------
     \139\ Sec. 221(b)(1).
---------------------------------------------------------------------------


                               House Bill

       The provision repeals the deduction for student loan 
     interest.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     13. Repeal of deduction for qualified tuition and related 
         expenses (sec. 1204 of the House bill and sec. 222 of the 
         Code)


                              Present Law

       For taxable years beginning before January 1, 2017, 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.\140\ 
     Qualified tuition includes tuition and fees required for the 
     enrollment or attendance by 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. 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.
---------------------------------------------------------------------------
     \140\ Sec. 222(a).
---------------------------------------------------------------------------
       The maximum deduction is $4,000 for an individual whose AGI 
     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 AGI does not exceed $80,000 ($160,000 in the case of a 
     joint return).\141\ No deduction is allowed for an individual 
     whose AGI exceeds the relevant AGI 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, 2016.
---------------------------------------------------------------------------
     \141\ Sec. 222(b)(2)(B).
---------------------------------------------------------------------------


                               House Bill

       The provision repeals the deduction for qualified tuition 
     and related expenses.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     14. Repeal of exclusion for qualified tuition reductions 
         (sec. 1204 of the House bill and sec. 117(d) of the Code)


                              Present Law

       Qualified tuition reductions for certain education provided 
     to employees (and their spouses and dependents \142\) of 
     certain educational organizations are excludible from gross 
     income.\143\ The tuition reduction is subject to 
     nondiscrimination rules.\144\ The exclusion generally applies 
     below the graduate level, and to teaching and research 
     assistants who are students at the graduate level, but does 
     not apply to any amount received by a student that represents 
     payment for teaching, research or other services by the 
     student required as a condition for receiving the tuition 
     reduction. Amounts that are excludible from gross income for 
     income tax purposes are also excluded from wages for 
     employment tax purposes.
---------------------------------------------------------------------------
     \142\ Individuals described under the rules of Sec. 132(h).
     \143\ Educational organization described in section 
     170(b)(1)(A)(ii). Sec. 117(d)(2).
     \144\ The exclusion applies with respect to highly 
     compensated employees, within the meaning of Sec. 414(q), 
     only if such tuition reductions are available on 
     substantially the same terms to each member of a group of 
     employees which is defined under a reasonable classification 
     established by the employer, such that the benefit does not 
     discriminate in favor of highly compensated employees.
---------------------------------------------------------------------------


                               House Bill

       The provision repeals the exclusions from gross income and 
     wages for qualified tuition reductions.
       Effective date.--The provision applies to amounts paid or 
     incurred after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     15. Repeal of exclusion for interest on United States savings 
         bonds used for higher education expenses (sec. 1204 of 
         the House bill and sec. 135 of the Code)


                              Present Law

       Interest earned on a qualified United States Series EE 
     savings bond issued after 1989 is excludable from gross 
     income if the proceeds of the bond upon redemption do not 
     exceed qualified higher education expenses paid by the 
     taxpayer during the taxable year.\145\ Qualified higher 
     education expenses include tuition and fees (but not room and 
     board expenses) required for the enrollment or attendance of 
     the taxpayer, the taxpayer's spouse, or a dependent of the 
     taxpayer at certain eligible higher educational institutions. 
     The amount of qualified higher education expenses taken into 
     account for purposes of the exclusion is reduced by the

[[Page 19940]]

     amount of such expenses taken into account in determining the 
     Hope, American Opportunity, or Lifetime Learning credits 
     claimed by any taxpayer, or taken into account in determining 
     an exclusion from gross income for a distribution from a 
     qualified tuition program or a Coverdell education savings 
     account, with respect to a particular student for the taxable 
     year.
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     \145\ Sec. 135.
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       The exclusion is phased out for certain higher-income 
     taxpayers, determined by the taxpayer's modified AGI during 
     the year the bond is redeemed. For 2017, the exclusion is 
     phased out for taxpayers with modified AGI between $78,150 
     and $93,150 ($117,250 and $147,250 for married taxpayers 
     filing a joint return). To prevent taxpayers from effectively 
     avoiding the income phaseout limitation through the purchase 
     of bonds directly in the child's name, the interest exclusion 
     is available only with respect to U.S. Series EE savings 
     bonds issued to taxpayers who are at least 24 years old.


                               House Bill

       The House bill repeals exclusion for interest on Series EE 
     savings bond used for qualified higher education expenses.
       Effective date.--The provision generally applies to taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     16. Repeal of exclusion for educational assistance programs 
         (sec. 1204 of the House bill and sec. 127 of the Code)


                              Present Law

       Up to $5,250 annually of educational assistance provided by 
     an employer to an employee is excludible from the employee's 
     gross income, provided that certain requirements are 
     satisfied.\146\ Nondiscrimination rules \147\ apply and the 
     educational assistance must be provided pursuant to a 
     separate written plan of the employer. The exclusion applies 
     to both graduate and undergraduate courses, and applies only 
     with respect to education provided to the employee (i.e., it 
     does not apply to education provided to the spouse or a child 
     of the employee). Amounts that are excludible from gross 
     income for income tax purposes are also excluded from wages 
     for employment tax purposes.
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     \146\ Sec. 127(a).
     \147\ The employer's educational assistance program must not 
     discriminate in favor of highly compensated employees, within 
     the meaning of Sec. 414(q). In addition, no more than five 
     percent of the amounts paid or incurred by the employer 
     during the year for educational assistance under a qualified 
     educational assistance program can be provided for the class 
     of individuals consisting of more-than-five-percent owners of 
     the employer and the spouses or dependents of such more-than-
     five-percent owners.
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       For purposes of the exclusion, educational assistance means 
     the payment by an employer of expenses incurred by or on 
     behalf of the employee for education of the employee 
     including, but not limited to, tuition, fees and similar 
     payments, books, supplies, and equipment. Educational 
     assistance also includes the provision by the employer of 
     courses of instruction for the employee (including books, 
     supplies, and equipment). Educational assistance does not 
     include (1) tools or supplies that may be retained by the 
     employee after completion of a course, (2) meals, lodging, or 
     transportation, and (3) any education involving sports, 
     games, or hobbies.


                               House Bill

       The provision repeals the exclusions from gross income and 
     wages for educational assistance programs.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     17. Rollovers between qualified tuition programs and 
         qualified ABLE programs (sec. 1205 of the House bill, 
         sec. 11025 of the Senate amendment and secs. 529 and 529A 
         of the Code)


                              Present Law

     Qualified ABLE programs
       The Code provides for a tax-favored savings program 
     intended to benefit disabled individuals, known as qualified 
     ABLE programs.\148\ A qualified ABLE program is a program 
     established and maintained by a State or agency or 
     instrumentality thereof. A qualified ABLE program must meet 
     the following conditions: (1) under the provisions of the 
     program, contributions may be made to an account (an ``ABLE 
     account''), established for the purpose of meeting the 
     qualified disability expenses of the designated beneficiary 
     of the account; (2) the program must limit a designated 
     beneficiary to one ABLE account; and (3) the program must 
     meet certain other requirements discussed below. A qualified 
     ABLE program is generally exempt from income tax, but is 
     otherwise subject to the taxes imposed on the unrelated 
     business income of tax-exempt organizations.
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     \148\ Sec. 529A.
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       A designated beneficiary of an ABLE account is the owner of 
     the ABLE account. A designated beneficiary must be an 
     eligible individual (defined below) who established the ABLE 
     account and who is designated at the commencement of 
     participation in the qualified ABLE program as the 
     beneficiary of amounts paid (or to be paid) into and from the 
     program.
       Contributions to an ABLE account must be made in cash and 
     are not deductible for Federal income tax purposes. Except in 
     the case of a rollover contribution from another ABLE 
     account, an ABLE account must provide that it may not receive 
     aggregate contributions during a taxable year in excess of 
     the amount under section 2503(b) of the Code (the annual gift 
     tax exemption). For 2017, this is $14,000.\149\ Additionally, 
     a qualified ABLE program must provide adequate safeguards to 
     ensure that ABLE account contributions do not exceed the 
     limit imposed on accounts under the qualified tuition program 
     of the State maintaining the qualified ABLE program. Amounts 
     in the account accumulate on a tax-deferred basis (i.e., 
     income on accounts under the program is not subject to 
     current income tax).
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     \149\ This amount is indexed for inflation. In the case that 
     contributions to an ABLE account exceed the annual limit, an 
     excise tax in the amount of six percent of the excess 
     contribution to such account is imposed on the designated 
     beneficiary. Such tax does not apply in the event that the 
     trustee of such account makes a corrective distribution of 
     such excess amounts by the due date (including extensions) of 
     the individual's tax return for the year within the taxable 
     year.
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       A qualified ABLE program may permit a designated 
     beneficiary to direct (directly or indirectly) the investment 
     of any contributions (or earnings thereon) no more than two 
     times in any calendar year and must provide separate 
     accounting for each designated beneficiary. A qualified ABLE 
     program may not allow any interest in the program (or any 
     portion thereof) to be used as security for a loan.
       Distributions from an ABLE account are generally includible 
     in the distributee's income to the extent consisting of 
     earnings on the account.\150\ Distributions from an ABLE 
     account are excludable from income to the extent that the 
     total distribution does not exceed the qualified disability 
     expenses of the designated beneficiary during the taxable 
     year. If a distribution from an ABLE account exceeds the 
     qualified disability expenses of the designated beneficiary, 
     a pro rata portion of the distribution is excludable from 
     income. The portion of any distribution that is includible in 
     income is subject to an additional 10-percent tax unless the 
     distribution is made after the death of the beneficiary. 
     Amounts in an ABLE account may be rolled over without income 
     tax liability to another ABLE account for the same 
     beneficiary \151\ or another ABLE account for the designated 
     beneficiary's brother, sister, stepbrother or stepsister who 
     is also an eligible individual.
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     \150\ The rules of section 72 apply in determining the 
     portion of a distribution that consists of earnings.
     \151\ For instance, if a designated beneficiary were to 
     relocate to a different State.
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       Except in the case of an ABLE account established in a 
     different ABLE program for purposes of transferring ABLE 
     accounts,\152\ no more than one ABLE account may be 
     established by a designated beneficiary. Thus, once an ABLE 
     account has been established by a designated beneficiary, no 
     account subsequently established by such beneficiary shall be 
     treated as an ABLE account.
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     \152\ In which case the contributor ABLE account must be 
     closed 60 days after the transfer to the new ABLE account is 
     made.
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       A contribution to an ABLE account is treated as a completed 
     gift of a present interest to the designated beneficiary of 
     the account. Such contributions qualify for the per-donee 
     annual gift tax exclusion ($14,000 for 2017) and, to the 
     extent of such exclusion, are exempt from the generation 
     skipping transfer (``GST'') tax. A distribution from an ABLE 
     account generally is not subject to gift tax or GST tax.
       Eligible individuals
       As described above, a qualified ABLE program may provide 
     for the establishment of ABLE accounts only if those accounts 
     are established and owned by an eligible individual, such 
     owner referred to as a designated beneficiary. For these 
     purposes, an eligible individual is an individual either (1) 
     for whom a disability certification has been filed with the 
     Secretary for the taxable year, or (2) who is entitled to 
     Social Security Disability Insurance benefits or SSI benefits 
     \153\ based on blindness or disability, and such blindness or 
     disability occurred before the individual attained age 26.
---------------------------------------------------------------------------
     \153\ These are benefits, respectively, under Title II or 
     Title XVI of the Social Security Act.
---------------------------------------------------------------------------
       A disability certification means a certification to the 
     satisfaction of the Secretary, made by the eligible 
     individual or the parent or guardian of the eligible 
     individual, that the individual has a medically determinable 
     physical or mental impairment, which results in marked and 
     severe functional limitations, and which can be expected to 
     result in death or which has lasted or can be expected to 
     last for a continuous period of not less than 12 months, or 
     is blind (within the meaning of section 1614(a)(2) of the 
     Social

[[Page 19941]]

     Security Act). Such blindness or disability must have 
     occurred before the date the individual attained age 26. Such 
     certification must include a copy of the diagnosis of the 
     individual's impairment and be signed by a licensed 
     physician.\154\
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     \154\ No inference may be drawn from a disability 
     certification for purposes of eligibility for Social 
     Security, SSI or Medicaid benefits.
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       Qualified disability expenses
       As described above, the earnings on distributions from an 
     ABLE account are excluded from income only to the extent 
     total distributions do not exceed the qualified disability 
     expenses of the designated beneficiary. For this purpose, 
     qualified disability expenses are any expenses related to the 
     eligible individual's blindness or disability which are made 
     for the benefit of the designated beneficiary. Such expenses 
     include the following expenses: education, housing, 
     transportation, employment training and support, assistive 
     technology and personal support services, health, prevention 
     and wellness, financial management and administrative 
     services, legal fees, expenses for oversight and monitoring, 
     funeral and burial expenses, and other expenses, which are 
     approved by the Secretary under regulations and consistent 
     with the purposes of section 529A.
       Transfer to State
       In the event that the designated beneficiary dies, subject 
     to any outstanding payments due for qualified disability 
     expenses incurred by the designated beneficiary, all amounts 
     remaining in the deceased designated beneficiary's ABLE 
     account not in excess of the amount equal to the total 
     medical assistance paid such individual under any State 
     Medicaid plan established under title XIX of the Social 
     Security Act shall be distributed to such State upon filing 
     of a claim for payment by such State. Such repaid amounts 
     shall be net of any premiums paid from the account or by or 
     on behalf of the beneficiary to the State's Medicaid Buy-In 
     program.
       Treatment of ABLE accounts under Federal programs
       Any amounts in an ABLE account, and any distribution for 
     qualified disability expenses, shall be disregarded for 
     purposes of determining eligibility to receive, or the amount 
     of, any assistance or benefit authorized by any Federal 
     means-tested program. However, in the case of the SSI 
     program, a distribution for housing expenses is not 
     disregarded, nor are amounts in an ABLE account in excess of 
     $100,000. In the case that an individual's ABLE account 
     balance exceeds $100,000, such individual's SSI benefits 
     shall not be terminated, but instead shall be suspended until 
     such time as the individual's resources fall below $100,000. 
     However, such suspension shall not apply for purposes of 
     Medicaid eligibility.


                               House Bill

       The House bill allows for amounts from qualified tuition 
     programs (also known as 529 accounts) to be rolled over to an 
     ABLE account without penalty, provided that the ABLE account 
     is owned by the designated beneficiary of that 529 account, 
     or a member of such designated beneficiary's family.\155\ 
     Such rolled-over amounts count towards the overall limitation 
     on amounts that can be contributed to an ABLE account within 
     a taxable year.\156\ Any amount rolled over that is in excess 
     of this limitation shall be includible in the gross income of 
     the distributee in a manner provided by section 72.\157\
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     \155\ For these purposes, a member of the family means, with 
     respect to any designated beneficiary, the taxpayer's: (1) 
     spouse; (2) child or descendant of a child; (3) brother, 
     sister, stepbrother or stepsister; (4) father, mother or 
     ancestor of either; (5) stepfather or stepmother; (6) niece 
     or nephew; (7) aunt or uncle; (8) in-law; (9) the spouse of 
     any individual described in (2)-(8); and (10) any first 
     cousin of the designated beneficiary.
     \156\ 529A(b)(2)(B).
     \157\ 529(c)(3)(A).
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       Effective date.--The provision applies to distributions 
     after December 31, 2017.


                            Senate Amendment

       The Senate amendment generally follows the House Bill. 
     Under the Senate amendment, the provision is not effective 
     for distributions after December 31, 2025.
       Effective date.--The provision applies to distributions 
     after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     18. Repeal of overall limitation on itemized deductions (sec. 
         1301 of the House bill, sec. 11046 of the Senate 
         amendment, and sec. 68 of the Code)


                              Present Law

       The total amount of most otherwise allowable itemized 
     deductions (other than the deductions for medical expenses, 
     investment interest and casualty, theft or gambling losses) 
     is limited for certain upper-income taxpayers.\158\ All other 
     limitations applicable to such deductions (such as the 
     separate floors) are first applied and, then, the otherwise 
     allowable total amount of itemized deductions is reduced by 
     three percent of the amount by which the taxpayer's adjusted 
     gross income exceeds a threshold amount.
---------------------------------------------------------------------------
     \158\ Sec. 68.
---------------------------------------------------------------------------
       For 2017, the threshold amounts are $261,500 for single 
     taxpayers, $287,650 for heads of household, $313,800 for 
     married couples filing jointly, and $156,900 for married 
     taxpayers filing separately. These threshold amounts are 
     indexed for inflation. The otherwise allowable itemized 
     deductions may not be reduced by more than 80 percent by 
     reason of the overall limit on itemized deductions.


                               House Bill

       The House bill repeals the overall limitation on itemized 
     deductions.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment follows the House bill. Under the 
     Senate amendment, the suspension of the overall limitation on 
     itemized deductions does not apply to taxable years beginning 
     after December 31, 2025.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

       D. Simplification and Reform of Deductions and Exclusions

     1. Modification of deduction for home mortgage interest (sec. 
         1302 of the House bill, sec. 11043 of the Senate 
         amendment, and sec. 163(h) of the Code)


                              Present Law

       As a general matter, personal interest is not 
     deductible.\159\ Qualified residence interest is not treated 
     as personal interest and is allowed as an itemized deduction, 
     subject to limitations.\160\ Qualified residence interest 
     means interest paid or accrued during the taxable year on 
     either acquisition indebtedness or home equity indebtedness. 
     A qualified residence means the taxpayer's principal 
     residence and one other residence of the taxpayer selected to 
     be a qualified residence. A qualified residence can be a 
     house, condominium, cooperative, mobile home, house trailer, 
     or boat.
---------------------------------------------------------------------------
     \159\ Sec. 163(h)(1).
     \160\ Sec. 163(h)(2)(D) and (h)(3).
---------------------------------------------------------------------------
     Acquisition indebtedness
       Acquisition indebtedness is indebtedness that is incurred 
     in acquiring, constructing, or substantially improving a 
     qualified residence of the taxpayer and which secures the 
     residence. The maximum amount treated as acquisition 
     indebtedness is $1 million ($500,000 in the case of a married 
     person filing a separate return).
       Acquisition indebtedness also includes indebtedness from 
     the refinancing of other acquisition indebtedness but only to 
     the extent of the amount (and term) of the refinanced 
     indebtedness. Thus, for example, if the taxpayer incurs 
     $200,000 of acquisition indebtedness to acquire a principal 
     residence and pays down the debt to $150,000, the taxpayer's 
     acquisition indebtedness with respect to the residence cannot 
     thereafter be increased above $150,000 (except by 
     indebtedness incurred to substantially improve the 
     residence).
       Interest on acquisition indebtedness is allowable in 
     computing alternative minimum taxable income. However, in the 
     case of a second residence, the acquisition indebtedness may 
     only be incurred with respect to a house, apartment, 
     condominium, or a mobile home that is not used on a transient 
     basis.
     Home equity indebtedness
       Home equity indebtedness is indebtedness (other than 
     acquisition indebtedness) secured by a qualified residence.
       The amount of home equity indebtedness may not exceed 
     $100,000 ($50,000 in the case of a married individual filing 
     a separate return) and may not exceed the fair market value 
     of the residence reduced by the acquisition indebtedness.
       Interest on home equity indebtedness is not deductible in 
     computing alternative minimum taxable income.
       Interest on qualifying home equity indebtedness is 
     deductible, regardless of how the proceeds of the 
     indebtedness are used. For example, personal expenditures may 
     include health costs and education expenses for the 
     taxpayer's family members or any other personal expenses such 
     as vacations, furniture, or automobiles. A taxpayer and a 
     mortgage company can contract for the home equity 
     indebtedness loan proceeds to be transferred to the taxpayer 
     in a lump sum payment (e.g., a traditional mortgage), a 
     series of payments (e.g., a reverse mortgage), or the lender 
     may extend the borrower a line of credit up to a fixed limit 
     over the term of the loan (e.g., a home equity line of 
     credit).
       Thus, the aggregate limitation on the total amount of a 
     taxpayer's acquisition indebtedness and home equity 
     indebtedness with respect to a taxpayer's principal residence 
     and a second residence that may give rise to deductible 
     interest is $1,100,000 ($550,000, for married persons filing 
     a separate return).


                               House Bill

       The House bill modifies the home mortgage interest 
     deduction in the following ways.
       First, under the provision, only interest paid on 
     indebtedness used to acquire, construct or substantially 
     improve the taxpayer's principal residence may be included in 
     the calculation of the deduction. Thus,

[[Page 19942]]

     under the provision, a taxpayer receives no deduction for 
     interest paid on indebtedness used to acquire a second home.
       Second, under the provision, a taxpayer may treat no more 
     than $500,000 as principal residence acquisition indebtedness 
     ($250,000 in the case of married taxpayers filing 
     separately). In the case of principal residence acquisition 
     indebtedness incurred before the date of introduction 
     (November 2, 2017), this limitation is $1,000,000 ($500,000 
     in the case of married taxpayers filing separately).\161\ 
     Although the term principal residence acquisition 
     indebtedness is not defined in the statute, it is intended 
     that this ``grandfathering'' provision apply only with 
     respect to indebtedness incurred with respect to a taxpayer's 
     principal residence.
---------------------------------------------------------------------------
     \161\ Special rules apply in the case of indebtedness from 
     refinancing existing principal residence acquisition 
     indebtedness. Specifically, the $1,000,000 ($500,000 in the 
     case of married taxpayers filing separately) limitation 
     continues to apply to any indebtedness incurred on or after 
     November 2, 2017, to refinance qualified residence 
     indebtedness incurred before that date to the extent the 
     amount of the indebtedness resulting from the refinancing 
     does not exceed the amount of the refinanced indebtedness. 
     Thus, the maximum dollar amount that may be treated as 
     principal residence acquisition indebtedness will not 
     decrease by reason of a refinancing.
---------------------------------------------------------------------------
       Last, under the provision, interest paid on home equity 
     indebtedness is not treated as qualified residence interest, 
     and thus is not deductible. This is the case regardless of 
     when the home equity indebtedness was incurred.
       Effective date.--The provision is effective for interest 
     paid or accrued in taxable years beginning after December 31, 
     2017.


                            Senate Amendment

       The Senate amendment suspends the deduction for interest on 
     home equity indebtedness. Thus, for taxable years beginning 
     after December 31, 2017, a taxpayer may not claim a deduction 
     for interest on home equity indebtedness. The suspension ends 
     for taxable years beginning after December 31, 2025.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement provides that, in the case of 
     taxable years beginning after December 31, 2017, and 
     beginning before January 1, 2026, a taxpayer may treat no 
     more than $750,000 as acquisition indebtedness ($375,000 in 
     the case of married taxpayers filing separately). In the case 
     of acquisition indebtedness incurred before December 15, 2017 
     \162\ this limitation is $1,000,000 ($500,000 in the case of 
     married taxpayers filing separately).\163\ For taxable years 
     beginning after December 31, 2025, a taxpayer may treat up to 
     $1,000,000 ($500,000 in the case of married taxpayers filing 
     separately) of indebtedness as acquisition indebtedness, 
     regardless of when the indebtedness was incurred.
---------------------------------------------------------------------------
     \162\ The conference agreement provides that a taxpayer who 
     has entered into a binding written contract before December 
     15, 2017 to close on the purchase of a principal residence 
     before January 1, 2018, and who purchases such residence 
     before April 1, 2018, shall be considered to incurred 
     acquisition indebtedness prior to December 15, 2017 under 
     this provision.
     \163\ Special rules apply in the case of indebtedness from 
     refinancing existing acquisition indebtedness. Specifically, 
     the $1,000,000 ($500,000 in the case of married taxpayers 
     filing separately) limitation continues to apply to any 
     indebtedness incurred on or after December 15, 2017, to 
     refinance qualified residence indebtedness incurred before 
     that date to the extent the amount of the indebtedness 
     resulting from the refinancing does not exceed the amount of 
     the refinanced indebtedness. Thus, the maximum dollar amount 
     that may be treated as principal residence acquisition 
     indebtedness will not decrease by reason of a refinancing.
---------------------------------------------------------------------------
       Additionally, the conference agreement suspends the 
     deduction for interest on home equity indebtedness. Thus, for 
     taxable years beginning after December 31, 2017, a taxpayer 
     may not claim a deduction for interest on home equity 
     indebtedness. The suspension ends for taxable years beginning 
     after December 31, 2025.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.
     2. Modification of deduction for taxes not paid or accrued in 
         a trade or business (sec. 1303 of the House bill, sec. 
         11042 of the Senate amendment, and sec. 164 of the Code)


                              Present Law

       Individuals are permitted a deduction for certain taxes 
     paid or accrued, whether or not incurred in a taxpayer's 
     trade or business. These taxes are: (i) State and local real 
     and foreign property taxes; \164\ (ii) State and local 
     personal property taxes; \165\ (iii) State, local, and 
     foreign income, war profits, and excess profits taxes.\166\ 
     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 for State and local income taxes.\167\
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     \164\ Sec. 164(a)(1).
     \165\ Sec. 164(a)(2).
     \166\  Sec. 164(a)(3). A foreign tax credit, in lieu of a 
     deduction, is allowable for foreign taxes if the taxpayer so 
     elects.
     \167\ Sec. 164(b)(5).
---------------------------------------------------------------------------
       Property taxes may be allowed as a deduction in computing 
     adjusted gross income if incurred in connection with property 
     used in a trade or business; otherwise they are an itemized 
     deduction. In the case of State and local income taxes, the 
     deduction is an itemized deduction notwithstanding that the 
     tax may be imposed on profits from a trade or business.\168\
---------------------------------------------------------------------------
     \168\ See H. Rep. No. 1365 to accompany Individual Income Tax 
     Bill of 1944 (78th Cong., 2d. Sess.), reprinted at 19 C.B. 
     839 (1944).
---------------------------------------------------------------------------
       Individuals also are permitted a deduction for Federal and 
     State generation skipping transfer tax (``GST tax'') imposed 
     on certain income distributions that are included in the 
     gross income of the distributee.\169\
---------------------------------------------------------------------------
     \169\ Sec. 164(a)(4).
---------------------------------------------------------------------------
       In determining a taxpayer's alternative minimum taxable 
     income, no itemized deduction for property, income, or sales 
     tax is allowed.


                               House Bill

       Under the provision, in the case of an individual, as a 
     general matter, State, local, and foreign property taxes and 
     State and local sales taxes are allowed as a deduction only 
     when paid or accrued in carrying on a trade or business, or 
     an activity described in section 212 (relating to expenses 
     for the production of income).\170\ Thus, the provision 
     allows only those deductions for State, local, and foreign 
     property taxes, and sales taxes, that are presently 
     deductible in computing income on an individual's Schedule C, 
     Schedule E, or Schedule F on such individual's tax return. 
     Thus, for instance, in the case of property taxes, an 
     individual may deduct such items only if these taxes were 
     imposed on business assets (such as residential rental 
     property).
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     \170\ The proposal does not modify the deductibility of GST 
     tax imposed on certain income distributions. Additionally, 
     taxes imposed at the entity level, such as a business tax 
     imposed on pass-through entities, that are reflected in a 
     partner's or S corporation shareholder's distributive or pro-
     rata share of income or loss on a Schedule K-1 (or similar 
     form), will continue to reduce such partner's or 
     shareholder's distributive or pro-rata share of income as 
     under present law.
---------------------------------------------------------------------------
       The provision contains an exception to the above-stated 
     rule in the case of real property taxes. Under this 
     exception, an individual may claim an itemized deduction of 
     up to $10,000 ($5,000 for married taxpayer filing a separate 
     return) for property taxes paid or accrued in the taxable 
     year, in addition to any property taxes deducted in carrying 
     on a trade or business or an activity described in section 
     212. Foreign real property taxes may not be deducted under 
     this exception.
       Under the provision, in the case of an individual, State 
     and local income, war profits, and excess profits taxes are 
     not allowable as a deduction.
       It is intended that persons required to report refunds of 
     State and local income taxes under section 6050E should no 
     longer be required to report such refunds of tax relating to 
     taxable years beginning after December 31, 2017. A technical 
     amendment may be needed to reflect this intent.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment follows the House bill. However, under 
     the Senate amendment, the suspension of the deduction for 
     State and local taxes expires for taxable years beginning 
     after December 31, 2025.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement provides that in the case of an 
     individual,\171\ as a general matter, State, local, and 
     foreign property taxes and State and local sales taxes are 
     allowed as a deduction only when paid or accrued in carrying 
     on a trade or business, or an activity described in section 
     212 (relating to expenses for the production of income).\172\ 
     Thus, the provision allows only those deductions for State, 
     local, and foreign property taxes, and sales taxes, that are 
     presently deductible in computing income on an individual's 
     Schedule C, Schedule E, or Schedule F on such individual's 
     tax return. Thus, for instance, in the case of property 
     taxes, an individual may deduct such items only if these 
     taxes were imposed on business assets (such as residential 
     rental property).
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     \171\ See sec. 641(b) regarding the computation of taxable 
     income of an estate or trust in the same manner as an 
     individual.
     \172\ The proposal does not modify the deductibility of GST 
     tax imposed on certain income distributions. Additionally, 
     taxes imposed at the entity level, such as a business tax 
     imposed on pass-through entities, that are reflected in a 
     partner's or S corporation shareholder's distributive or pro-
     rata share of income or loss on a Schedule K-1 (or similar 
     form), will continue to reduce such partner's or 
     shareholder's distributive or pro-rata share of income as 
     under present law.
---------------------------------------------------------------------------
       Under the provision, in the case of an individual, State 
     and local income, war profits, and excess profits taxes are 
     not allowable as a deduction.
       The provision contains an exception to the above-stated 
     rule. Under the provision a taxpayer may claim an itemized 
     deduction of up to $10,000 ($5,000 for married taxpayer 
     filing a separate return) for the aggregate of (i) State and 
     local property taxes not paid or accrued in carrying on a 
     trade or business, or an activity described in section 212, 
     and (ii)

[[Page 19943]]

     State and local income, war profits, and excess profits taxes 
     (or sales taxes in lieu of income, etc. taxes) paid or 
     accrued in the taxable year. Foreign real property taxes may 
     not be deducted under this exception.
       The above rules apply to taxable years beginning after 
     December 31, 2017, and beginning before January 1, 2026.
       The conference agreement also provides that, in the case of 
     an amount paid in a taxable year beginning before January 1, 
     2018, with respect to a State or local income tax imposed for 
     a taxable year beginning after December 31, 2017, the payment 
     shall be treated as paid on the last day of the taxable year 
     for which such tax is so imposed for purposes of applying the 
     provision limiting the dollar amount of the deduction. Thus, 
     under the provision, an individual may not claim an itemized 
     deduction in 2017 on a pre-payment of income tax for a future 
     taxable year in order to avoid the dollar limitation 
     applicable for taxable years beginning after 2017.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2016.
     3. Repeal of deduction for personal casualty and theft losses 
         (sec. 1304 of the House bill, sec. 11044 of the Senate 
         amendment, and sec. 165 of the Code)


                              Present Law

       A taxpayer may generally claim a deduction for any loss 
     sustained during the taxable year, not compensated by 
     insurance or otherwise. For individual taxpayers, deductible 
     losses must be incurred in a trade or business or other 
     profit-seeking activity or consist of property losses arising 
     from fire, storm, shipwreck, or other casualty, or from 
     theft.\173\ Personal casualty or theft losses are deductible 
     only if they exceed $100 per casualty or theft. In addition, 
     aggregate net casualty and theft losses are deductible only 
     to the extent they exceed 10 percent of an individual 
     taxpayer's adjusted gross income.
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     \173\ Sec. 165(c).
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                               House Bill

       The House bill repeals the deduction for personal casualty 
     and theft losses. However, notwithstanding the repeal of the 
     deduction, the provision retains the benefit of the 
     deduction, as modified by the Disaster Tax Relief and Airport 
     and Airway Extension Act of 2017,\174\ for those individuals 
     who sustained a personal casualty loss arising from 
     hurricanes Harvey, Irma, or Maria.
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     \174\ Pub. L. No. 115-63.
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       Effective date.--The provision is effective for losses 
     incurred in taxable years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment temporarily modifies the deduction for 
     personal casualty and theft losses. Under the provision, a 
     taxpayer may claim a personal casualty loss (subject to the 
     limitations described above) only if such loss was 
     attributable to a disaster declared by the President under 
     section 401 of the Robert T. Stafford Disaster Relief and 
     Emergency Assistance Act.
       The above-described limitation does not apply with respect 
     to losses incurred after December 31, 2025.
       Effective date.--The provision is effective for losses 
     incurred in taxable years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     4. Limitation on wagering losses (sec. 1305 of the House 
         bill, sec. 11051 of the Senate amendment, and sec. 165 of 
         the Code)


                              Present Law

       Losses sustained during the taxable year on wagering 
     transactions are allowed as a deduction only to the extent of 
     the gains during the taxable year from such 
     transactions.\175\
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     \175\ Sec. 165(d).
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                               House Bill

       The House bill clarifies the scope of ``losses from 
     wagering transactions'' as that term is used in section 
     165(d). Under the provision, this term includes any deduction 
     otherwise allowable under chapter 1 of the Code incurred in 
     carrying on any wagering transaction.
       The provision is intended to clarify that the limitation on 
     losses from wagering transactions applies not only to the 
     actual costs of wagers incurred by an individual, but to 
     other expenses incurred by the individual in connection with 
     the conduct of that individual's gambling activity.\176\ The 
     provision clarifies, for instance, an individual's otherwise 
     deductible expenses in traveling to or from a casino are 
     subject to the limitation under section 165(d).
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     \176\ The provision thus reverses the result reached by the 
     Tax Court in Ronald A. Mayo v. Commissioner, 136 T.C. 81 
     (2011). In that case, the Court held that a taxpayer's 
     expenses incurred in the conduct of the trade or business of 
     gambling, other than the cost of wagers, were not limited by 
     sec. 165(d), and were thus deductible under sec. 162(a).
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       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment follows the House bill. However, the 
     Senate amendment does not apply to taxable years beginning 
     after December 31, 2025.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     5. Modifications to the deduction for charitable 
         contributions (sec. 1306 of the House bill, secs. 11023, 
         13703, and 13704 of the Senate amendment, and sec. 170 of 
         the Code)


                              Present Law

     In general
       The Internal Revenue Code allows taxpayers to reduce their 
     income tax liability by taking deductions for contributions 
     to certain organizations, including charities, Federal, 
     State, local, and Indian tribal governments, and certain 
     other organizations.
       To be deductible, a charitable contribution generally must 
     meet several threshold requirements. First, the recipient of 
     the transfer must be eligible to receive charitable 
     contributions (i.e., an organization or entity described in 
     section 170(c)). Second, the transfer must be made with 
     gratuitous intent and without the expectation of a benefit of 
     substantial economic value in return. Third, the transfer 
     must be complete and generally must be a transfer of a 
     donor's entire interest in the contributed property (i.e., 
     not a contingent or partial interest contribution). To 
     qualify for a current year charitable deduction, payment of 
     the contribution must be made within the taxable year.\177\ 
     Fourth, the transfer must be of money or property--
     contributions of services are not deductible.\178\ Finally, 
     the transfer must be substantiated and in the proper form.
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     \177\ Sec. 170(a)(1).
     \178\ For example, as discussed in greater detail below, the 
     value of time spent volunteering for a charitable 
     organization is not deductible. Incidental expenses such as 
     mileage, supplies, or other expenses incurred while 
     volunteering for a charitable organization, however, may be 
     deductible.
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       As discussed below, special rules limit the deductibility 
     of a taxpayer's charitable contributions in a given year to a 
     percentage of income, and those rules, in part, turn on 
     whether the organization receiving the contributions is a 
     public charity or a private foundation. Other special rules 
     determine the deductible value of contributed property for 
     each type of property.
     Contributions of partial interests in property

       In general
       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 retaining an 
     interest in that property or transferring an interest in that 
     property to a noncharity for less than full and adequate 
     consideration.\179\ This rule of nondeductibility, often 
     referred to as the partial interest rule, generally prohibits 
     a charitable deduction for contributions of income interests, 
     remainder interests, or rights to use property.
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     \179\ Secs. 170(f)(3)(A) (income tax), 2055(e)(2) (estate 
     tax), and 2522(c)(2) (gift tax).
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       A charitable contribution deduction generally is not 
     allowable for a contribution of a future interest in tangible 
     personal property.\180\ 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 that has the effect 
     of reserving to, or retaining in, such donor a right to the 
     use, possession, or enjoyment of the property.'' \181\
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     \180\ Sec. 170(a)(3).
     \181\ Treas. Reg. sec. 1.170A-5(a)(4). 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.'' Treas. Reg. sec. 1.170A-5(a)(2).
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       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.\182\ 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.\183\ 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.\184\
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     \182\ Sec. 170(f)(3)(B)(ii).
     \183\ Treas. Reg. sec. 1.170A-7(b)(1).
     \184\ Treas. Reg. sec. 1.170A-7(b)(1).
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       Other exceptions to the partial interest rule are provided 
     for, among other interests: (1) remainder interests in 
     charitable remainder annuity trusts, charitable remainder 
     unitrusts, and pooled income funds; (2) present interests in 
     the form of a guaranteed annuity or a fixed percentage of the 
     annual value of the property; (3) a remainder interest in a 
     personal residence or farm; and (4) qualified conservation 
     contributions.

[[Page 19944]]


       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.\185\ 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 (generally, a conservation easement). Qualified 
     organizations include certain governmental units, public 
     charities that meet certain public support tests, and certain 
     supporting organizations. Conservation purposes include: (1) 
     the preservation of land areas for outdoor recreation by, or 
     for the education of, the general public; (2) the protection 
     of a relatively natural habitat of fish, wildlife, or plants, 
     or similar ecosystem; (3) the preservation of open space 
     (including farmland and forest land) where such preservation 
     will yield a significant public benefit and is either for the 
     scenic enjoyment of the general public or pursuant to a 
     clearly delineated Federal, State, or local governmental 
     conservation policy; and (4) the preservation of an 
     historically important land area or a certified historic 
     structure.
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     \185\ Secs. 170(f)(3)(B)(iii) and 170(h).
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     Percentage limits on charitable contributions

       Individual taxpayers
       Charitable contributions by individual taxpayers are 
     limited to a specified percentage of the individual's 
     contribution base. The contribution base is the taxpayer's 
     adjusted gross income (``AGI'') for a taxable year, 
     disregarding any net operating loss carryback to the year 
     under section 172.\186\ In general, more favorable (higher) 
     percentage limits apply to contributions of cash and ordinary 
     income property than to contributions of capital gain 
     property. More favorable limits also generally apply to 
     contributions to public charities (and certain operating 
     foundations) than to contributions to nonoperating private 
     foundations.
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     \186\ Sec. 170(b)(1)(G).
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       More specifically, the deduction for charitable 
     contributions by an individual taxpayer of cash and property 
     that is not appreciated to a charitable organization 
     described in section 170(b)(1)(A) (public charities, private 
     foundations other than nonoperating private foundations, and 
     certain governmental units) may not exceed 50 percent of the 
     taxpayer's contribution base. Contributions of this type of 
     property to nonoperating private foundations generally may be 
     deducted up to the lesser of 30 percent of the taxpayer's 
     contribution base or the excess of (i) 50 percent of the 
     contribution base over (ii) the amount of contributions 
     subject to the 50 percent limitation.
       Contributions of appreciated capital gain property to 
     public charities and other organizations described in section 
     170(b)(1)(A) generally are deductible up to 30 percent of the 
     taxpayer's contribution base (after taking into account 
     contributions other than contributions of capital gain 
     property). An individual may elect, however, to bring all 
     these contributions of appreciated capital gain property for 
     a taxable year within the 50-percent limitation category by 
     reducing the amount of the contribution deduction by the 
     amount of the appreciation in the capital gain property. 
     Contributions of appreciated capital gain property to 
     nonoperating private foundations are deductible up to the 
     lesser of 20 percent of the taxpayer's contribution base or 
     the excess of (i) 30 percent of the contribution base over 
     (ii) the amount of contributions subject to the 30 percent 
     limitation.
       Finally, contributions that are for the use of (not to) the 
     donee charity get less favorable percentage limits. 
     Contributions of capital gain property for the use of public 
     charities and other organizations described in section 
     170(b)(1)(A) also are limited to 20 percent of the taxpayer's 
     contribution base. Property contributed for the use of an 
     organization generally has been interpreted to mean property 
     contributed in trust for the organization.\187\ Charitable 
     contributions of income interests (where deductible) also 
     generally are treated as contributions for the use of the 
     donee organization.
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     \187\ Rockefeller v. Commissioner, 676 F.2d 35, 39 (2d Cir. 
     1982).

               TABLE 3.--CHARITABLE CONTRIBUTION PERCENTAGE LIMITS FOR INDIVIDUAL TAXPAYERS \188\
----------------------------------------------------------------------------------------------------------------
                                                                                                  Capital Gain
                                                          Ordinary Income      Capital Gain    Property for  the
                                                         Property and Cash   Property to the       use of the
                                                                             Recipient \189\       Recipient
----------------------------------------------------------------------------------------------------------------
Public Charities, Private Operating Foundations, and                   50%         \190\ 30%                 20%
 Private Distributing Foundations......................
Nonoperating Private Foundations.......................                30%                20%                20%
----------------------------------------------------------------------------------------------------------------

       Corporate taxpayers
       A corporation generally may deduct charitable contributions 
     up to 10 percent of the corporation's taxable income for the 
     year.\191\ For this purpose, taxable income is determined 
     without regard to: (1) the charitable contributions 
     deduction; (2) any net operating loss carryback to the 
     taxable year; (3) deductions for dividends received; (4) 
     deductions for dividends paid on certain preferred stock of 
     public utilities; and (5) any capital loss carryback to the 
     taxable year.\192\
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     \188\ Percentages shown are the percentage of an individual's 
     contribution base.
     \189\ Capital gain property contributed to public charities, 
     private operating foundations, or private distributing 
     foundations will be subject to the 50-percent limitation if 
     the donor elects to reduce the fair market value of the 
     property by the amount that would have been long-term capital 
     gain if the property had been sold.
     \190\ Certain qualified conservation contributions to public 
     charities (generally, conservation easements), qualify for 
     more generous contribution limits. In general, the 30-percent 
     limit applicable to contributions of capital gain property is 
     increased to 100 percent if the individual making the 
     qualified conservation contribution is a qualified farmer or 
     rancher or to 50 percent if the individual is not a qualified 
     farmer or rancher.
     \191\  Sec. 170(b)(2)(A).
     \192\  Sec. 170(b)(2)(C).
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       Carryforwards of excess contributions
       Charitable contributions that exceed the applicable 
     percentage limit generally may be carried forward for up to 
     five years.\193\ In general, contributions carried over from 
     a prior year are taken into account after contributions for 
     the current year that are subject to the same percentage 
     limit. Excess contributions made for the use of (rather than 
     to) an organization generally may not be carried forward.
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     \193\ Sec. 170(d).
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       Qualified conservation contributions
       Preferential percentage limits and carryforward rules apply 
     for qualified conservation contributions.\194\ In general, 
     the 30-percent contribution base limitation on contributions 
     of capital gain property by individuals does not apply to 
     qualified conservation contributions. Instead, individuals 
     may deduct the fair market value of any qualified 
     conservation contribution to an organization described in 
     section 170(b)(1)(A) (generally, public charities) 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 carry forward any 
     qualified conservation contributions that exceed the 50-
     percent limitation for up to 15 years. 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.
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     \194\  Sec. 170(b)(1)(E).
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       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.\195\
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     \195\  Sec. 170(b)(2)(B).
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       A qualified farmer or rancher means a taxpayer whose gross 
     income from the trade or business of farming (within the 
     meaning of section 2032A(e)(5)) is greater than 50 percent of 
     the taxpayer's gross income for the taxable year.
     Valuation of charitable contributions

       In general
       For purposes of the income tax charitable deduction, the 
     value of property contributed to charity may be limited to 
     the fair market value of the property, the donor's tax basis 
     in the property, or in some cases a different amount.
       Charitable contributions of cash are deductible in the 
     amount contributed, subject to the percentage limits 
     discussed above. In addition, a taxpayer generally may deduct 
     the full fair market value of long-term capital gain property 
     contributed to charity.\196\

[[Page 19945]]

     Contributions of tangible personal property also generally 
     are deductible at fair market value if the use by the 
     recipient charitable organization is related to its tax-
     exempt purpose.
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     \196\ 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. Sec. 170(e)(1)(A).
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       In certain other cases, however, section 170(e) limits the 
     deductible value of the contribution of appreciated property 
     to the donor's tax basis in the property. This limitation of 
     the property's deductible value to basis generally applies, 
     for example, for: (1) contributions of inventory or other 
     ordinary income or short-term capital gain property; \197\ 
     (2) contributions of tangible personal property if the use by 
     the recipient charitable organization is unrelated to the 
     organization's tax-exempt purpose; \198\ and (3) 
     contributions to or for the use of a private foundation 
     (other than certain private operating foundations).\199\
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     \197\ Sec. 170(e). Special rules, discussed below, apply for 
     certain contributions of inventory and other property.
     \198\ Sec. 170(e)(1)(B)(i)(I).
     \199\ Sec. 170(e)(1)(B)(ii). Certain contributions of patents 
     or other intellectual property also generally are limited to 
     the donor's basis in the property. Sec. 170(e)(1)(B)(iii). 
     However, a special rule permits additional charitable 
     deductions beyond the donor's tax basis in certain 
     situations.
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       For contributions of qualified appreciated stock, the 
     above-described rule that limits the value of property 
     contributed to or for the use of a private nonoperating 
     foundation to the taxpayer's basis in the property does not 
     apply; therefore, subject to certain limits, contributions of 
     qualified appreciated stock to a nonoperating private 
     foundation may be deducted at fair market value.\200\ 
     Qualified appreciated stock is stock that is capital gain 
     property and for which (as of the date of the contribution) 
     market quotations are readily available on an established 
     securities market.\201\ A contribution of qualified 
     appreciated stock (when increased by the aggregate amount of 
     all prior such contributions by the donor of stock in the 
     corporation) generally does not include a contribution of 
     stock to the extent the amount of the stock contributed 
     exceeds 10 percent (in value) of all of the outstanding stock 
     of the corporation.\202\
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     \200\ Sec. 170(e)(5).
     \201\ Sec. 170(e)(5)(B).
     \202\ Sec. 170(e)(5)(C).
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       Contributions of property with a fair market value that is 
     less than the donor's tax basis generally are deductible at 
     the fair market value of the property.
       Enhanced deduction rules for certain contributions of 
           inventory and other property
       Although most charitable contributions of property are 
     valued at fair market value or the donor's tax basis in the 
     property, certain statutorily described contributions of 
     appreciated inventory and other property qualify for an 
     enhanced deduction valuation that exceeds the donor's tax 
     basis in the property, but which is less than the fair market 
     value of the property.
       As discussed above, a taxpayer's deduction for charitable 
     contributions of inventory property generally is limited to 
     the taxpayer's basis (typically, cost) in the inventory, or 
     if less, the fair market value of the property. For certain 
     contributions of inventory, however, C corporations (but not 
     other taxpayers) 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.\203\ To be eligible for the 
     enhanced deduction value, 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.\204\ Contributions to 
     organizations that are not described in section 501(c)(3), 
     such as governmental entities, do not qualify for this 
     enhanced deduction.
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     \203\ Sec. 170(e)(3).
     \204\ Sec. 170(e)(3)(A)(i)-(iii).
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       To use the enhanced deduction provision, the taxpayer must 
     establish that the fair market value of the donated item 
     exceeds basis.
       A taxpayer engaged in a trade or business, whether or not a 
     C corporation, is eligible to claim the enhanced deduction 
     for certain donations of food inventory.\205\
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     \205\ Sec. 170(e)(3)(C).
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       Selected statutory rules for specific types of 
           contributions
       Special statutory rules limit the deductible value (and 
     impose enhanced reporting obligations on donors) of 
     charitable contributions of certain types of property, 
     including vehicles, intellectual property, and clothing and 
     household items. Each of these rules was enacted in response 
     to concerns that some taxpayers did not accurately report--
     and in many instances overstated--the value of the property 
     for purposes of claiming a charitable deduction.
       Vehicle donations.--Under present law, the amount of 
     deduction for charitable contributions of vehicles (generally 
     including automobiles, boats, and airplanes for which the 
     claimed value exceeds $500 and excluding inventory property) 
     depends upon the use of the vehicle by the donee 
     organization. If the donee organization sells the vehicle 
     without any significant intervening use or material 
     improvement of such vehicle by the organization, the amount 
     of the deduction may not exceed the gross proceeds received 
     from the sale. In other situations, a fair market value 
     deduction may be allowed.
       Patents and other intellectual property.--If a taxpayer 
     contributes a patent or other intellectual property (other 
     than certain copyrights or inventory) \206\ to a charitable 
     organization, the taxpayer's initial charitable deduction is 
     limited to the lesser of the taxpayer's basis in the 
     contributed property or the fair market value of the 
     property.\207\ In addition, the taxpayer generally is 
     permitted to deduct, as a charitable contribution, certain 
     additional amounts in the year of contribution or in 
     subsequent taxable years based on a specified percentage of 
     the qualified donee income received or accrued by the 
     charitable donee with respect to the contributed intellectual 
     property. For this purpose, qualified donee income includes 
     net income received or accrued by the donee that properly is 
     allocable to the intellectual property itself (as opposed to 
     the activity in which the intellectual property is 
     used).\208\
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     \206\ Under present and prior law, certain copyrights are not 
     considered capital assets, such that the charitable deduction 
     for such copyrights generally is limited to the taxpayer's 
     basis. See sec. 1221(a)(3), 1231(b)(1)(C).
     \207\ Sec. 170(e)(1)(B)(iii).
     \208\ The present-law rules allowing additional charitable 
     deductions for qualified donee income were enacted as part of 
     the American Jobs Creation Act of 2004, and are effective for 
     contributions made after June 3, 2004. For a more detailed 
     description of these rules, see Joint Committee on Taxation, 
     General Explanation of Tax Legislation Enacted in the 108th 
     Congress (JCS-5-05), May 2005, pp. 457-461.
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       Clothing and household items.--Charitable contributions of 
     clothing and household items generally are subject to the 
     charitable deduction rules applicable to tangible personal 
     property. 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 limited 
     to basis. In most situations, however, clothing and household 
     items have a fair market value that is less than the 
     taxpayer's basis in the property. Because property with a 
     fair market value less than basis generally is deductible at 
     the property's fair market value, taxpayers generally may 
     deduct only the fair market value of most contributions of 
     clothing or household items, regardless of whether the 
     property is used for exempt or unrelated purposes by the 
     donee organization. Furthermore, a special rule generally 
     provides that no deduction is allowed for a charitable 
     contribution of clothing or a household item unless the item 
     is in good used or better condition. The Secretary is 
     authorized to deny by regulation a deduction for any 
     contribution of clothing or a household item that has minimal 
     monetary value, such as used socks and used undergarments. 
     Notwithstanding the general rule, a charitable contribution 
     of clothing or household items not in good used or better 
     condition with a claimed value of more than $500 may be 
     deducted if the taxpayer includes with the taxpayer's return 
     a qualified appraisal with respect to the property.\209\ 
     Household items include furniture, furnishings, electronics, 
     appliances, linens, and other similar items. Food, paintings, 
     antiques, and other objects of art, jewelry and gems, and 
     certain collections are excluded from the special rules 
     described in the preceding paragraph.\210\
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     \209\ As is discussed above, the charitable contribution 
     substantiation rules generally require a qualified appraisal 
     where the claimed value of a contribution is more than 
     $5,000.
     \210\ The special rules concerning the deductibility of 
     clothing and household items were enacted as part of the 
     Pension Protection Act of 2006, P.L. 109-280 (August 17, 
     2006), and are effective for contributions made after August 
     17, 2006. For a more detailed description of these rules, see 
     Joint Committee on Taxation, General Explanation of Tax 
     Legislation Enacted in the 109th Congress (JCS-1-07), January 
     17, 2007, pp. 597-600.
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       College athletic seating rights.--In general, where a 
     taxpayer receives or expects to receive a substantial return 
     benefit for a payment to charity, the payment is not 
     deductible as a charitable contribution. However, special 
     rules apply to certain payments to institutions of higher 
     education in exchange for which the payor receives the right 
     to purchase tickets or seating at an athletic event. 
     Specifically, the payor may treat 80 percent of a payment as 
     a charitable contribution where: (1) the amount is paid to or 
     for the benefit of an institution of higher education (as 
     defined in section 3304(f)) described in section 
     (b)(1)(A)(ii) (generally, a school with a regular faculty and 
     curriculum and meeting certain other requirements), and (2) 
     such amount would be allowable as a charitable deduction but 
     for the fact that the taxpayer receives (directly or 
     indirectly) as a result of the payment the right to purchase 
     tickets for seating at an athletic event in an athletic 
     stadium of such institution.\211\
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     \211\ Sec. 170(l).

[[Page 19946]]


     Use of a vehicle when volunteering for a 
         charity
       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.\212\ 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.\213\
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     \212\ Treas. Reg. sec. 1.170A-1(g).
     \213\ Sec. 170(j).
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       In determining the amount treated as a charitable 
     contribution where a taxpayer operates a vehicle in providing 
     donated services to a charity, the taxpayer either may track 
     and 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.\214\ 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.\215\
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     \214\ Sec. 170(i).
     \215\ In lieu of actual operating expenses, an optional 
     standard mileage rate may be used in computing deductible 
     transportation expenses for medical purposes (section 213) or 
     for work-related moving (section 217). The standard mileage 
     rates for medical and moving purposes generally cover only 
     out-of-pocket operating expenses (including gasoline and oil) 
     directly related to the use of the automobile. Such rates do 
     not include costs that are not deductible for medical or 
     moving purposes, such as general maintenance expenses, 
     depreciation, insurance, and registration fees. The medical 
     and moving standard mileage rates are determined by the IRS 
     and updated periodically. For expenses paid or incurred on or 
     after January 1, 2017, the rate for both such purposes is 17 
     cents per mile. IRS Notice 2016-79.
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     Substantiation and other formal requirements

       In general
       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.\216\ In the case of a charitable contribution 
     of money, regardless of the amount, applicable recordkeeping 
     requirements are satisfied only if the donor maintains as a 
     record of the contribution a bank record or a written 
     communication from the donee showing the name of the donee 
     organization, the date of the contribution, and the amount of 
     the contribution. In such cases, the recordkeeping 
     requirements may not be satisfied by maintaining other 
     written records.
---------------------------------------------------------------------------
     \216\ Sec. 170(f)(17).
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       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.\217\
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     \217\ 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. 
     Sec. 170(f)(8).
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       In addition, any charity receiving 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.\218\
---------------------------------------------------------------------------
     \218\ Sec. 6115.
---------------------------------------------------------------------------
       If the total charitable deduction claimed for noncash 
     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.\219\ 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.
---------------------------------------------------------------------------
     \219\ Sec. 170(f)(11).
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       Exception for certain contributions reported by the donee 
           organization
       Subsection 170(f)(8)(D) provides an exception to the 
     contemporaneous written acknowledgment requirement described 
     above. Under the exception, a contemporaneous written 
     acknowledgment is not required if the donee organization 
     files a return, on such form and in accordance with such 
     regulations as the Secretary may prescribe, that includes the 
     same content. ``[T]he section 170(f)(8)(D) exception is not 
     available unless and until the Treasury Department and the 
     IRS issue final regulations prescribing the method by which 
     donee reporting may be accomplished.'' \220\ No such final 
     regulations have been issued.\221\
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     \220\ See IRS, Notice of Proposed Rulemaking, Substantiation 
     Requirement for Certain Contributions, REG-138344-13 (October 
     13, 2015), I.R.B. 2015-41 (preamble).
     \221\ In October 2015, the IRS issued proposed regulations 
     that, if finalized, would have implemented the section 
     170(f)(8)(D) exception to the contemporaneous written 
     acknowledgment requirement. The proposed regulations provided 
     that a return filed by a donee organization under section 
     170(f)(8)(D) must include, in addition to the information 
     generally required on a contemporaneous written 
     acknowledgment: (1) the name and address of the donee 
     organization; (2) the name and address of the donor; and (3) 
     the taxpayer identification number of the donor. In addition, 
     the return must be filed with the IRS (with a copy provided 
     to the donor) on or before February 28 of the year following 
     the calendar year in which the contribution was made. Under 
     the proposed regulations, donee reporting would have been 
     optional and would have been available solely at the 
     discretion of the donee organization. The proposed 
     regulations were withdrawn in January 2016. See Prop. Treas. 
     Reg. sec 1.170A-13(f)(18).
---------------------------------------------------------------------------


                               House Bill

       The provision makes the following modifications to the 
     present law charitable deduction rules.
     Increased percentage limit for contributions of cash to 
         public charities
       The provision increases the income-based percentage limit 
     described in section 170(b)(1)(A) for certain charitable 
     contributions by an individual taxpayer of cash to public 
     charities and certain other organizations from 50 percent to 
     60 percent.
     Charitable mileage rate adjusted for inflation
       The provision repeals the statutory charitable mileage rate 
     and provides instead that the standard mileage rate used for 
     determining the charitable contribution deduction shall be a 
     rate which takes into account the variable costs of operating 
     an automobile. The intent of the provision is to allow the 
     IRS to determine, and make periodic adjustments to, the 
     charitable standard mileage rate, taking into account the 
     types of costs that are deductible under section 170 of the 
     Code when operating a vehicle in connection with providing 
     volunteer services (i.e., generally, the out-of-pocket 
     operating expenses (including gasoline and oil) directly 
     related to the use of the automobile for such purposes).
     Denial of charitable deduction for college athletic event 
         seating rights
       The provision amends section 170(l) to provide that no 
     charitable deduction shall be allowed for any amount 
     described in paragraph 170(l)(2), generally, a payment to an 
     institution of higher education in exchange for which the 
     payor receives the right to purchase tickets or seating at an 
     athletic event, as described in greater detail above.
     Repeal of substantiation exception for certain contributions 
         reported by the donee organization
       The provision repeals the section 170(f)(8)(D) exception to 
     the contemporaneous written acknowledgment requirement.
       Effective date.--The provision is effective for 
     contributions made in taxable years beginning after December 
     31, 2017


                            Senate Amendment

       The Senate amendment includes three of the House bill's 
     four modifications to the present-law charitable contribution 
     rules: (1) the increase in the percentage limit for 
     charitable contributions of cash to public charities; (2) the 
     denial of a charitable deduction for payments made in 
     exchange for college athletic event seating rights; and (3) 
     the repeal of the substantiation exception for certain 
     contributions reported by the donee organization.
       The Senate amendment does not include the provision from 
     the House bill that allows the charitable standard mileage 
     rate to be adjusted for inflation.
       Effective date.--The provisions that increase the 
     charitable contribution percentage limit and deny a deduction 
     for stadium seating payments are effective for contributions 
     made in taxable years beginning after December 31, 2017. The 
     provision that repeals the substantiation exception for 
     certain contributions reported by the donee organization is 
     effective for contributions made in taxable years beginning 
     after December 31, 2016.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     6. Repeal of Certain Miscellaneous Itemized Deductions 
         Subject to the Two-Percent Floor (secs. 1307 and 1312 of 
         the House bill, sec. 11045 of the Senate amendment, and 
         secs. 62, 67 and 212 of the Code)


                              Present Law

       Individuals may claim itemized deductions for certain 
     miscellaneous expenses. Certain of these expenses are not 
     deductible unless, in aggregate, they exceed two percent of 
     the taxpayer's adjusted gross income (``AGI'').\222\

[[Page 19947]]

     The deductions described below are subject to the aggregate 
     two-percent floor.\223\
---------------------------------------------------------------------------
     \222\ Sec. 67(a).
     \223\ The miscellaneous itemized deduction for tax 
     preparation expenses is described in a separate section of 
     this document.
---------------------------------------------------------------------------
     Expenses for the production or collection of income
       Individuals may deduct all ordinary and necessary expenses 
     paid or incurred during the taxable year for the production 
     or collection of income.\224\
---------------------------------------------------------------------------
     \224\ Sec. 212(1).
---------------------------------------------------------------------------
       Present law and IRS guidance provide examples of items that 
     may be deducted under this provision. This non-exhaustive 
     list includes: \225\
---------------------------------------------------------------------------
     \225\ See IRS Publication 529, ``Miscellaneous Deductions'' 
     (2016), p. 9.
---------------------------------------------------------------------------
        Appraisal fees for a casualty loss or charitable 
     contribution;
        Casualty and theft losses from property used in 
     performing services as an employee;
        Clerical help and office rent in caring for 
     investments;
        Depreciation on home computers used for 
     investments;
        Excess deductions (including administrative 
     expenses) allowed a beneficiary on termination of an estate 
     or trust;
        Fees to collect interest and dividends;
        Hobby expenses, but generally not more than hobby 
     income;
        Indirect miscellaneous deductions from pass-
     through entities;
        Investment fees and expenses;
        Loss on deposits in an insolvent or bankrupt 
     financial institution;
        Loss on traditional IRAs or Roth IRAs, when all 
     amounts have been distributed;
        Repayments of income;
        Safe deposit box rental fees, except for storing 
     jewelry and other personal effects;
        Service charges on dividend reinvestment plans; 
     and
        Trustee's fees for an IRA, if separately billed 
     and paid.
     Tax preparation expenses
       For regular income tax purposes, individuals are allowed an 
     itemized deduction for expenses for the production of income. 
     These expenses are defined as ordinary and necessary expenses 
     paid or incurred in a taxable year: (1) for the production or 
     collection of income; (2) for the management, conservation, 
     or maintenance of property held for the production of income; 
     or (3) in connection with the determination, collection, or 
     refund of any tax.\226\
---------------------------------------------------------------------------
     \226\ Sec. 212.
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     Unreimbursed expenses attributable to the trade or business 
         of being an employee
       In general, unreimbursed business expenses incurred by an 
     employee are deductible, but only as an itemized deduction 
     and only to the extent the expenses exceed two percent of 
     adjusted gross income.\227\
---------------------------------------------------------------------------
     \227\ Secs. 62(a)(1) and 67.
---------------------------------------------------------------------------
       Present law and IRS guidance provide examples of items that 
     may be deducted under this provision. This non-exhaustive 
     list includes: \228\
---------------------------------------------------------------------------
     \228\ See IRS Publication 529, ``Miscellaneous Deductions'' 
     (2016), p. 3.
---------------------------------------------------------------------------
        Business bad debt of an employee;
        Business liability insurance premiums;
        Damages paid to a former employer for breach of an 
     employment contract;
        Depreciation on a computer a taxpayer's employer 
     requires him to use in his work;
        Dues to a chamber of commerce if membership helps 
     the taxpayer perform his job;
        Dues to professional societies;
        Educator expenses; \229\
---------------------------------------------------------------------------
     \229\ Under a special provision, these expenses are 
     deductible ``above the line'' up to $250.
---------------------------------------------------------------------------
        Home office or part of a taxpayer's home used 
     regularly and exclusively in the taxpayer's work;
        Job search expenses in the taxpayer's present 
     occupation;
        Laboratory breakage fees;
        Legal fees related to the taxpayer's job;
        Licenses and regulatory fees;
        Malpractice insurance premiums;
        Medical examinations required by an employer;
        Occupational taxes;
        Passport fees for a business trip;
        Repayment of an income aid payment received under 
     an employer's plan;
        Research expenses of a college professor;
        Rural mail carriers' vehicle expenses;
        Subscriptions to professional journals and trade 
     magazines related to the taxpayer's work;
        Tools and supplies used in the taxpayer's work;
        Purchase of travel, transportation, meals, 
     entertainment, gifts, and local lodging related to the 
     taxpayer's work;
        Union dues and expenses;
        Work clothes and uniforms if required and not 
     suitable for everyday use; and
        Work-related education.
     Other miscellaneous itemized deductions subject to the two-
         percent floor
       Other miscellaneous itemized deductions subject to the two-
     percent floor include:
        Repayments of income received under a claim of 
     right (only subject to the two-percent floor if less than 
     $3,000);
        Repayments of Social Security benefits; and
        The share of deductible investment expenses from 
     pass-through entities.


                               House Bill

       The House bill repeals the deduction for expenses in 
     connection with the determination, collection, or refund of 
     any tax.
       Under the provision, business expenses incurred by an 
     employee are not deductible, other than expenses that are 
     deductible in determining adjusted gross income (that is, 
     above-the-line deductions).
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment suspends all miscellaneous itemized 
     deductions that are subject to the two-percent floor under 
     present law. Thus, under the provision, taxpayers may not 
     claim the above-listed items as itemized deductions for the 
     taxable years to which the suspension applies. The provision 
     does not apply for taxable years beginning after December 31, 
     2025.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     7. Repeal of deduction for medical expenses (sec. 1308 of the 
         House bill, sec. 11028 of the Senate amendment and sec. 
         213 of the Code)


                              Present Law

       Individuals may claim an itemized deduction for 
     unreimbursed medical expenses, but only to the extent that 
     such expenses exceed 10 percent of adjusted gross 
     income.\230\ For taxable years beginning before January 1, 
     2017, the 10-percent threshold is reduced to 7.5 percent in 
     the case of taxpayers who have attained the age of 65 before 
     the close of the taxable year. In the case of married 
     taxpayers, the 7.5 percent threshold applies if either spouse 
     has obtained the age of 65 before the close of the taxable 
     year. For these taxpayers, during these years, the threshold 
     is 10 percent for AMT purposes.
---------------------------------------------------------------------------
     \230\ Sec. 213. The threshold was amended by the Patient 
     Protection and Affordable Care Act (Pub. L. No. 111-118). For 
     taxable years beginning before January 1, 2013, the threshold 
     was 7.5 percent and 10 percent for alternative minimum tax 
     (``AMT'') purposes.
---------------------------------------------------------------------------


                               House Bill

       The House bill repeals the deduction for unreimbursed 
     medical expenses.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment provides that, for taxable years 
     beginning after December 31, 2016 and ending before January 
     1, 2019, the threshold for deducting medical expenses shall 
     be 7.5-percent for all taxpayers. For these years, this 
     threshold applies for purposes of the AMT in addition to the 
     regular tax.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2016.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     8. Repeal of deduction for alimony payments and corresponding 
         inclusion in gross income (sec. 1309 of the House bill 
         and secs. 61, 71, and 215 of the Code)


                              Present Law

       Alimony and separate maintenance payments are deductible by 
     the payor spouse and includible in income by the recipient 
     spouse.\231\ Child support payments are not treated as 
     alimony.\232\
---------------------------------------------------------------------------
     \231\ Secs. 215(a), 61(a)(8) and 71(a).
     \232\ Sec. 71(c).
---------------------------------------------------------------------------


                               House Bill

       Under the House bill, alimony and separate maintenance 
     payments are not deductible by the payor spouse. The House 
     bill repeals the Code provisions that specify that alimony 
     and separate maintenance payments are included in income. 
     Thus, the intent of the provision is to follow the rule of 
     the United States Supreme Court's holding in Gould v. 
     Gould,\233\ in which the Court held that such payments are 
     not income to the recipient. Income used for alimony payments 
     is taxed at the rates applicable to the payor spouse rather 
     than the recipient spouse. The treatment of child support is 
     not changed.
---------------------------------------------------------------------------
     \233\ 245 U.S. 151 (1917).
---------------------------------------------------------------------------
       Effective date.--The provision is effective for any divorce 
     or separation instrument executed after December 31, 2017, or 
     for any divorce or separation instrument executed on or 
     before December 31, 2017, and modified after that date, if 
     the modification expressly provides that the amendments made 
     by this section apply to such modification.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement generally follows the House bill. 
     However, the conference agreement delays the effective date 
     of the provision by one year. Thus, the conference agreement 
     is effective for any divorce or separation instrument 
     executed after December

[[Page 19948]]

     31, 2018, or for any divorce or separation instrument 
     executed on or before December 31, 2018, and modified after 
     that date, if the modification expressly provides that the 
     amendments made by this section apply to such modification.
     9. Repeal of deduction for moving expenses (sec. 1310 of the 
         House bill, sec. 11050 of the Senate amendment, and sec. 
         217 of the Code)


                              Present Law

       Individuals are permitted an above-the-line deduction for 
     moving expenses paid or incurred during the taxable year in 
     connection with the commencement of work by the taxpayer as 
     an employee or as a self-employed individual at a new 
     principal place of work.\234\ Such expenses are deductible 
     only if the move meets certain conditions related to distance 
     from the taxpayer's previous residence and the taxpayer's 
     status as a full-time employee in the new location.
---------------------------------------------------------------------------
     \234\ Sec. 217(a).
---------------------------------------------------------------------------
       Special rules apply in the case of a member of the Armed 
     Forces of the United States. In the case of any such 
     individual who is on active duty, who moves pursuant to a 
     military order and incident to a permanent change of station, 
     the limitations related to distance from the taxpayer's 
     previous residence and status as a full-time employee in the 
     new location do not apply.\235\ Additionally, any moving and 
     storage expenses which are furnished in kind to such an 
     individual, spouse, or dependents, or if such expenses are 
     reimbursed or an allowance for such expenses is provided, 
     such amounts are excluded from gross income.\236\ Rules also 
     apply to exclude amounts furnished to the spouse and 
     dependents of such an individual in the event that such 
     individuals move to a location other than to where the member 
     of the Armed Forces is moving.
---------------------------------------------------------------------------
     \235\ Sec. 217(g).
     \236\ Sec. 217(g)(2).
---------------------------------------------------------------------------
       Present law provides income exclusions for various benefits 
     provided to members of the Armed Forces.\237\
---------------------------------------------------------------------------
     \237\ Sec. 134.
---------------------------------------------------------------------------


                               House Bill

       The House bill generally repeals the deduction for moving 
     expenses. The provision intends to retain tax benefits for 
     the moving expenses of members of the Armed Forces of the 
     United States.\238\ Thus, the provision retains the special 
     rules under present law that provide an exclusion for amounts 
     attributable to in-kind moving and storage expenses (and 
     reimbursements or allowances for these expenses) for members 
     of the Armed Forces (or their spouse or dependents) on active 
     duty that move pursuant to a military order and incident to a 
     permanent change of station.\239\
---------------------------------------------------------------------------
     \238\ A technical amendment may be needed to reflect this 
     intent for the deduction for moving expenses for members of 
     the Armed Forces.
     \239\ Under the provision, these exclusions are added to 
     section 134.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment generally suspends the deduction for 
     moving expenses for taxable years 2018 through 2025. However, 
     during that suspension period, the provision retains the 
     deduction for moving expenses and the rules providing for 
     exclusions of amounts attributable to in-kind moving and 
     storage expenses (and reimbursements or allowances for these 
     expenses) for members of the Armed Forces (or their spouse or 
     dependents) on active duty that move pursuant to a military 
     order and incident to a permanent change of station.
       The suspension of the deduction for moving expenses does 
     not apply to taxable years beginning after December 31, 2025.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     10. Termination of deduction and exclusions for contributions 
         to medical savings accounts (sec. 1311 of the House bill, 
         secs. 106(b) and 220 of the Code)


                              Present Law

     Archer MSAs
       As of 1997, certain individuals are permitted to contribute 
     to an Archer MSA, which is a tax-exempt trust or custodial 
     account.\240\ Within limits, contributions to an Archer MSA 
     are deductible in determining adjusted gross income if made 
     by an individual and are excludible from gross income for 
     income tax purposes and wages for employment tax \241\ 
     purposes if made by the employer of an individual.\242\
---------------------------------------------------------------------------
     \240\ Archer MSAs were originally called medical savings 
     accounts or MSAs.
     \241\ The FICA exclusion is provided under IRS Notice 96-53.
     \242\ Sections 106(b) and 220.
---------------------------------------------------------------------------
       An individual is generally eligible for an Archer MSA if 
     the individual is covered by a high deductible health plan 
     and no other health plan other than a plan that provides 
     certain permitted insurance or permitted coverage. In 
     addition, the individual either must be an employee of a 
     small employer (generally an employer with 50 or fewer 
     employees on average) that provides the high deductible 
     health plan or must be self-employed or the spouse of a self-
     employed individual and the high deductible health plan is 
     not provided by the employer of the individual or spouse.
       For 2017, a high deductible health plan for purposes of 
     Archer MSA eligibility is a health plan with an annual 
     deductible of at least $2,250 and not more than $3,350 in the 
     case of self-only coverage and at least $4,500 and not more 
     than $6,750 in the case of family coverage. In addition, for 
     2017, the maximum out-of-pocket expenses with respect to 
     allowed costs must be no more than $4,500 in the case of 
     self-only coverage and no more than $8,250 in the case of 
     family coverage. Out-of-pocket expenses include deductibles, 
     co-payments, and other amounts (other than premiums) that the 
     individual must pay for covered benefits under the plan. A 
     plan does not fail to qualify as a high deductible health 
     plan if substantially all of the coverage under the plan is 
     certain permitted insurance or is coverage (whether provided 
     through insurance or otherwise) for accidents, disability, 
     dental care, vision care, or long-term care.
       The maximum annual contribution that can be made to an 
     Archer MSA for a year is 65 percent of the annual deductible 
     under the individual's high deductible health plan in the 
     case of self-only coverage (65 percent of $3,350 for 2017) 
     and 75 percent of the annual deductible in the case of family 
     coverage (75 percent of $6,750 for 2017), but in no case more 
     than the individual's compensation income. In addition, the 
     maximum contribution can be made only if the individual is 
     covered by the high deductible health plan for the full year.
       Distributions from an Archer MSA for qualified medical 
     expenses are not includible in gross income. Distributions 
     not used for qualified medical expenses are includible in 
     gross income and subject to an additional 20-percent tax 
     unless an exception applies. A distribution from an Archer 
     MSA may be rolled over on a nontaxable basis to another 
     Archer MSA or to a health savings account and does not count 
     against the contribution limits.
       After 2007, no new contributions can be made to Archer MSAs 
     except by or on behalf of individuals who previously had made 
     Archer MSA contributions and employees of small employers 
     that previously contributed to Archer MSAs (or at least 20 
     percent of whose employees who were previously eligible to 
     contribute to Archer MSAs did so).
     Health savings accounts
       As of 2004, an individual with a high deductible health 
     plan (and no other health plan other than a plan that 
     provides certain permitted insurance or permitted coverage) 
     generally may contribute to a health savings account 
     (``HSA''), which is a tax-exempt trust or custodial account. 
     HSAs provide similar tax-favored savings treatment as Archer 
     MSAs. That is, within limits, contributions to an HSA are 
     deductible in determining adjusted gross income if made by an 
     individual and are excludable from gross income for income 
     tax purposes and wages for employment tax \243\ purposes if 
     made by the employer of an individual, and distributions for 
     qualified medical expenses are not includible in gross 
     income.\244\ However, the rules for HSAs are in various 
     aspects more favorable than the rules for Archer MSAs. For 
     example, the availability of HSAs is not limited to employees 
     of small employers or self-employed individuals and their 
     spouses.
---------------------------------------------------------------------------
     \243\ The FICA exclusion is provided under IRS Notice 2004-2.
     \244\ Secs. 106(d) and 223.
---------------------------------------------------------------------------
       For 2017, a high deductible health plan for purposes of HSA 
     eligibility is a health plan with an annual deductible of at 
     least $1,300 in the case of self-only coverage and at least 
     $2,600 in the case of family coverage. In addition, for 2017, 
     the sum of the deductible and the maximum out-of-pocket 
     expenses with respect to allowed costs must be no more than 
     $6,550 in the case of self-only coverage and no more than 
     $13,100 in the case of family coverage. A plan does not fail 
     to qualify as a high deductible health plan for HSA purposes 
     merely because it does not have a deductible for preventive 
     care.
       For 2017, the maximum aggregate annual contribution that 
     can be made to an HSA is $3,400 in the case of self-only 
     coverage and $6,750 in the case of family coverage. The 
     annual contribution limits are increased by $1,000 for 
     individuals who have attained age 55 by the end of the 
     taxable year (referred to as ``catch-up contributions''). The 
     maximum amount that an individual make contribute is reduced 
     by the amount of any contributions to the individual's Archer 
     MSA and any excludable HSA contributions made by the 
     individual's employer. In some cases, an individual may make 
     the maximum HSA contribution, even if the individual is 
     covered by the high deductible health plan for only part of 
     the year. A distribution from an HSA may be rolled over on a 
     nontaxable basis to another HSA and does not count against 
     the contribution limits.


                               House Bill

       Under the provision, contributions to Archer MSAs for 
     taxable years beginning after

[[Page 19949]]

     December 31, 2017, are not deductible or excludible from 
     gross income and wages.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not contain the House bill 
     provision.
     11. Denial of deduction for performing artists and certain 
         officials; Modification of deduction for educator 
         expenses (sec. 1312 of the House bill, sec. 11032 of the 
         Senate amendment and sec. 62 of the Code)


                              Present Law

       In general, unreimbursed business expenses incurred by an 
     employee are deductible, but only as an itemized deduction 
     and only to the extent the expenses exceed two percent of 
     adjusted gross income.\245\ However, in the case of certain 
     employees and certain expenses, a deduction may be taken in 
     determining adjusted gross income (referred to as an ``above-
     the-line'' deduction), including expenses of qualified 
     performing artists, expenses of State or local government 
     officials performing services on a fee basis, and expenses of 
     eligible educators.\246\
---------------------------------------------------------------------------
     \245\ Secs. 62(a)(1) and 67.
     \246\ Sec. 62(a)(2)(B), (C), and (D). Under section 
     62(a)(2)(A) and (C), certain reimbursements of employee 
     business expenses are excluded from income. Under section 
     62(a)(2)(E), an above-the-line deduction applies to expenses 
     of members of a reserve component of the Armed Forces.
---------------------------------------------------------------------------
       Eligible educators are elementary or secondary school 
     teachers, instructors, counselors, principals, or aides in a 
     school for at least 900 hours during a school year.\247\ An 
     eligible educator may take an ``above-the-line'' deduction 
     for ordinary and necessary expenses incurred (1) by reason of 
     participation in professional development courses related to 
     the curriculum or students the educator teaches, or (2) in 
     connection with books, supplies, computer and other 
     equipment, and supplementary materials to be used in the 
     classroom. The deduction may not exceed $250 (for 2017) in 
     expenses, and is indexed for inflation.
---------------------------------------------------------------------------
     \247\ Sec. 62(d)(1).
---------------------------------------------------------------------------


                               House Bill

       The House bill repeals the present-law provisions allowing 
     for above-the-line deductions for expenses of qualified 
     performing artists, expenses of State or local government 
     officials performing services on a fee basis, and expenses of 
     eligible educators.\248\
---------------------------------------------------------------------------
     \248\ The provision retains the present-law provisions under 
     which certain reimbursements of employee business expenses 
     are excluded from income and under which an above-the-line 
     deduction applies to expenses of members of a reserve 
     component of the Armed Forces.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment temporarily increases the limit for 
     the deduction of certain expenses of eligible educators, in 
     determining adjusted gross income, to $500. Any deduction for 
     expenses in excess of this amount (under present law 
     generally a miscellaneous itemized deduction subject to the 
     two-percent floor) is suspended.\249\
---------------------------------------------------------------------------
     \249\ Sec. 11045 of the Senate amendment.
---------------------------------------------------------------------------
       The provision does not apply to taxable years beginning 
     after December 31, 2025.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision or the Senate amendment provision and retains the 
     present-law above-the-line deduction and limit for certain 
     expenses of eligible educators.
     12. Suspension of exclusion for qualified bicycle commuting 
         reimbursement (sec. 11048 of the Senate amendment and 
         secs. 132(f) of the Code)


                              Present Law

       Qualified bicycle commuting reimbursements of up to $20 per 
     qualifying bicycle commuting month are excludible from an 
     employee's gross income \250\. A qualifying bicycle commuting 
     month is any month during which the employee regularly uses 
     the bicycle for a substantial portion of travel to a place of 
     employment and during which the employee does not receive 
     transportation in a commuter highway vehicle, a transit pass, 
     or qualified parking from an employer.
---------------------------------------------------------------------------
     \250\ Section 132(a)(5) and 132(f)(1)(D).
---------------------------------------------------------------------------
       Qualified reimbursements are any amount received from an 
     employer during a 15-month period beginning with the first 
     day of the calendar year as payment for reasonable expenses 
     during a calendar year. Reasonable expenses are those 
     incurred in a calendar year for the purchase of a bicycle and 
     bicycle improvements, repair, and storage, if the bicycle is 
     regularly used for travel between the employee's residence 
     and place of employment.
       Amounts that are excludible from gross income for income 
     tax purposes are also excluded from wages for employment tax 
     purposes.


                               House Bill

       No provision.


                            Senate Amendment

       The provision suspends the exclusion from gross income and 
     wages for qualified bicycle commuting reimbursements. The 
     exclusion does not apply to taxable years beginning after 
     December 31, 2017 and before January 1, 2026.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     13. Limitation on exclusion for employer-provided housing 
         (sec. 1401 of the House bill and sec. 119 of the Code)


                              Present Law

       The value of lodging furnished to an employee, spouse, or 
     dependents by or on behalf of an employer for the convenience 
     of the employer (referred to as ``employer-provided 
     lodging'') is excludible from the employee's gross income, 
     but only if the employee is required to accept the lodging on 
     the business premises of the employer as a condition of 
     employment.\251\ Special rules apply with respect to 
     employees living in foreign camps \252\ and lodging furnished 
     by certain educational institutions to employees.\253\ 
     Amounts attributable to employer-provided lodging that are 
     excludible from gross income for income tax purposes are also 
     excluded from wages for employment tax purposes.
---------------------------------------------------------------------------
     \251\ Sec. 119(a).
     \252\ Sec. 119(c).
     \253\ Sec. 119(d).
---------------------------------------------------------------------------


                               House Bill

       The provision limits the amount that may be excluded from 
     gross income for employer-provided lodging to $50,000 
     ($25,000 in the case of a married individual filing a 
     separate return), subject to a phase-out based on the 
     employee's level of compensation. The exclusion is phased out 
     by $1 for every $2 earned above the indexed compensation 
     threshold. For 2017, this compensation threshold is 
     $120,000.\254\ The provision also denies any exclusion for 
     employer-provided housing provided to 5% owners,\255\ 
     regardless of their compensation level.
---------------------------------------------------------------------------
     \254\ The compensation threshold is that amount in effect 
     under section 414(q)(1)(B)(i).
     \255\ As defined in section 416(i)(1)(B)(i).
---------------------------------------------------------------------------
       In addition, the exclusion does not apply to more than one 
     residence at any given time. In the case of spouses filing a 
     joint return, the one residence limit may be applied 
     separately to each spouse for a period during which the 
     spouses reside in separate residences provided in connection 
     with their respective employments.
       Those amounts that are not excludible from gross income for 
     income tax purposes will also not be excluded from wages for 
     employment tax purposes.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement does not include the House bill 
     provision.
     14. Modification of exclusion of gain on sale of a principal 
         residence (sec. 1402 of the House bill, sec. 11047 of the 
         Senate amendment, and sec. 121 of the Code)


                              present law

       A taxpayer who is an individual 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 date of 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.
       The exclusion under this provision may not be claimed for 
     more than one sale or exchange during any two-year period.


                               house bill

       The provision extends the length of time a taxpayer must 
     own and use a residence to qualify for this exclusion. 
     Specifically, the exclusion is available only if the taxpayer 
     has owned and used the residence as a principal residence for 
     at least five of the eight years ending on the date of 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 five years 
     that the ownership and use requirements are met.
       The provision limits the exclusion so that the exclusion 
     may not apply to more than one sale or exchange during any 
     five-year period.
       The provision phases-out the exclusion by one dollar for 
     every dollar a taxpayer's AGI

[[Page 19950]]

     exceeds $250,000 ($500,000 if married filing a joint return). 
     For purposes of this provision, AGI is measured using the 
     average of the taxpayer's AGI in the year of sale (excluding 
     any income from the sale of the home) and the prior two 
     taxable years before the sale.
       Effective date.--The provision is effective for sales and 
     exchanges after December 31, 2017.


                            senate amendment

       The Senate amendment generally follows the House bill, but 
     does not include the provision that phases out the exclusion 
     for AGI in excess of $250,000 ($500,000 if married filing a 
     joint return). The Senate amendment does not apply to taxable 
     years beginning after December 31, 2025.
       Effective date.--The provision is effective for sales and 
     exchanges after December 31, 2017.


                          conference agreement

       No provision.
     15. Sunset of exclusion for dependent care assistance 
         programs (sec. 1404 of the House bill and sec. 129 of the 
         Code)


                              present law

       An exclusion from the gross income of an employee of up to 
     $5,000 annually for employer-provided dependent care 
     assistance \256\ is allowed if the assistance is provided 
     pursuant to a separate written plan of an employer that does 
     not discriminate in favor of highly compensated employees 
     \257\ and meets certain other requirements. The amount 
     excludible cannot exceed the earned income of the employee 
     or, if the employee is married, the lesser of the earned 
     income of the employee or the earned income of the employee's 
     spouse. Amounts attributable to dependent care assistance 
     that are excludible from gross income for income tax purposes 
     are also excludible from wages for employment tax purposes.
---------------------------------------------------------------------------
     \256\ Sec. 129(a).
     \257\ Section 129(d). The exclusion applies if the 
     contributions or benefits under the program do not 
     discriminate in favor of highly compensated employees, within 
     the meaning of Sec. 414(q), or their dependents, and the 
     program benefits employees under a classification established 
     by the employer found not to be discriminatory in favor or 
     such highly compensated employees or their dependents.
---------------------------------------------------------------------------


                               house bill

       The provision repeals the deduction for qualified tuition 
     and related expenses.
       Effective date.--The provision terminates the exclusions 
     from gross income and wages for dependent care assistance 
     programs for taxable years beginning after December 31, 2022.


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement does not include the House bill 
     provision.
     16. Repeal of exclusion for qualified moving expense 
         reimbursement (sec. 1405 of the House bill, sec. 11049 of 
         the Senate amendment, and sec. 132(g) of the Code)


                              present law

       Qualified moving expense reimbursements are excluded from 
     an employee's gross income,\258\ and are defined as any 
     amount received (directly or indirectly) from an employer as 
     payment for (or reimbursement of) expenses which would be 
     deductible as moving expenses under section 217 \259\ if 
     directly paid or incurred by the employee. However, any such 
     amount actually deducted by the individual is not eligible 
     for this exclusion. Amounts that are excludible from gross 
     income for income tax purposes are also excluded from wages 
     for employment tax purposes.
---------------------------------------------------------------------------
     \258\ Secs. 132(a)(6) and 132(g).
     \259\ Individuals are allowed an itemized deduction for 
     moving expenses paid or incurred during the taxable year in 
     connection with the commencement of work by the taxpayer as 
     an employee or as a self-employed individual at a new 
     principal place of work.\259\ Such expenses are deductible 
     only if the move meets certain conditions related to distance 
     from the taxpayer's previous residence and the taxpayer's 
     status as a full-time employee in the new location.
---------------------------------------------------------------------------


                               house bill

       The provision repeals the exclusion from gross income and 
     wages for qualified moving expense reimbursements except in 
     the case of a member of the Armed Forces of the United States 
     on active duty who moves pursuant to a military order.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            senate amendment

       The Senate amendment is the same as the House bill except 
     that the exclusion does not apply to taxable years beginning 
     after December 31, 2017 and before January 1, 2026.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          conference agreement

       The conference agreement follows the Senate amendment.
     17. Repeal of exclusion for adoption assistance programs 
         (sec. 1406 of the House bill and sec. 137 of the Code)


                              present law

       An exclusion from an employee's gross income is allowed for 
     qualified adoption expenses paid or reimbursed by an 
     employer, if such amounts are furnished pursuant to an 
     adoption assistance program.\260\ For 2017, the maximum 
     exclusion amount is $13,570, and is phased out ratably for 
     taxpayers with modified adjusted gross income (``AGI'') above 
     a certain amount. In 2017, the phase out range begins at 
     modified AGI of $203,540, with no exclusion when modified AGI 
     equals or exceeds $243,540. Modified AGI is the sum of the 
     taxpayer's AGI plus amounts excluded from income under 
     sections 911, 931, and 933 (relating to the exclusion of 
     income of U.S. citizens or residents living abroad; residents 
     of Guam, American Samoa, and the Northern Mariana Islands and 
     residents of Puerto Rico, respectively).
---------------------------------------------------------------------------
     \260\ Sec. 137(a).
---------------------------------------------------------------------------
       In the case of adoption of a child with special needs that 
     is finalized during a taxable year, the taxpayer may claim as 
     an exclusion the amount of the maximum exclusion minus the 
     aggregate qualified adoption expenses with respect to that 
     adoption for all prior taxable years.
       Qualified adoption expenses are reasonable and necessary 
     adoption fees, court costs, attorney fees, and other expenses 
     that are: (1) directly related to, and the principal purpose 
     of which is for, the legal adoption of an eligible child by 
     the taxpayer; (2) not incurred in violation of State or 
     Federal law, or in carrying out any surrogate parenting 
     arrangement; (3) not for the adoption of the child of the 
     taxpayer's spouse; and (4) not reimbursed (e.g., by an 
     employer).\261\
---------------------------------------------------------------------------
     \261\ Sec. 23(d)(1).
---------------------------------------------------------------------------
       For the exclusion to apply, certain requirements must be 
     satisfied, including satisfaction of nondiscrimination rules 
     and providing employees with reasonable notification of the 
     availability and terms of the program.\262\
---------------------------------------------------------------------------
     \262\ The employer's adoption assistance program must not 
     discriminate in favor of highly compensated employees, within 
     the meaning of Sec. 414(q). In addition, no more than five 
     percent of the amounts paid or incurred by the employer 
     during the year for qualified adoption expenses under an 
     adoption assistance program can be provided for the class of 
     individuals consisting of more-than-five-percent owners of 
     the employer and the spouses or dependents of such more-than-
     five-percent owners.
---------------------------------------------------------------------------
       Adoption expenses paid or reimbursed by the employer under 
     an adoption assistance program are not eligible for the 
     adoption credit under section 23. A taxpayer may be eligible 
     for the adoption credit (with respect to qualified adoption 
     expenses he or she incurs) and also for the exclusion (with 
     respect to different qualified adoption expenses paid or 
     reimbursed by his or her employer).


                               house bill

       The provision repeals the exclusion from gross income for 
     adoption assistance programs.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement does not include the House bill 
     provision.

     E. Simplification and Reform of Savings, Pensions, Retirement

     1. Repeal of special rule permitting recharacterization of 
         IRA contributions (sec. 1501 of the House bill, sec. 
         13611 of the Senate amendment, and sec. 408A of the Code)


                              present law

     Individual retirement arrangements
       There are two basic types of individual retirement 
     arrangements (``IRAs'') under present law: traditional 
     IRAs,\263\ to which both deductible and nondeductible 
     contributions may be made,\264\ and Roth IRAs, to which only 
     nondeductible contributions may be made.\265\ The principal 
     difference between these two types of IRAs is the timing of 
     income tax inclusion.
---------------------------------------------------------------------------
     \263\ Sec. 408.
     \264\ Secs. 219(a) and 408(o).
     \265\ Sec. 408A.
---------------------------------------------------------------------------
       An annual limit applies to contributions to IRAs. The 
     contribution limit is coordinated so that the aggregate 
     maximum amount that can be contributed to all of an 
     individual's IRAs (both traditional and Roth) for a taxable 
     year is the lesser of a certain dollar amount ($5,500 for 
     2017) or the individual's compensation. 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 is at least equal to the contributed amount. The 
     dollar limit is increased annually (``indexed'') as needed to 
     reflect increases in the cost-of living. An individual who 
     has attained age 50 before the end of the taxable year may 
     also make catch-up contributions up to $1,000 to an IRA. The 
     IRA catch-up contribution limit is not indexed.
     Traditional IRAs
       An individual may make deductible contributions to a 
     traditional IRA up to the IRA contribution limit (reduced by 
     any contributions to Roth IRAs) 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

[[Page 19951]]

     employer-sponsored retirement plan, the deduction is phased 
     out for taxpayers with adjusted gross income (``AGI'') for 
     the taxable year over certain indexed levels.\266\ To the 
     extent an individual cannot or does not make deductible 
     contributions to a traditional IRA or contributions to a Roth 
     IRA for the taxable year, the individual may make 
     nondeductible after-tax contributions to a traditional IRA 
     (that is, no AGI limits apply), subject to the same 
     contribution limits as the limits on deductible 
     contributions, including catch-up contributions. An 
     individual who has attained age 70\1/2\ before to the close 
     of a year is not permitted to make contributions to a 
     traditional IRA for that year.
---------------------------------------------------------------------------
     \266\ Sec. 219(g).
---------------------------------------------------------------------------
       Amounts held in a traditional IRA are includible in income 
     when withdrawn, except to the extent the withdrawal is a 
     return of the individual's basis.\267\ All traditional IRAs 
     of an individual are treated as a single contract for 
     purposes of recovering basis in the IRAs.
---------------------------------------------------------------------------
     \267\ Basis results from after-tax contributions to 
     traditional IRAs or a rollovers to traditional IRAs of after-
     tax amounts from another eligible retirement plan.
---------------------------------------------------------------------------
     Roth IRAs
       Individuals with AGI below certain levels may make 
     nondeductible contributions to a Roth IRA. The maximum annual 
     contribution that can be made to a Roth IRA is phased out for 
     taxpayers with AGI for the taxable year over certain indexed 
     levels.\268\
---------------------------------------------------------------------------
     \268\ Although an individual with AGI exceeding certain 
     limits is not permitted to make a contribution directly to a 
     Roth IRA, the individual can make a contribution to a 
     traditional IRA and convert the traditional IRA to a Roth 
     IRA, as discussed below.
---------------------------------------------------------------------------
       Amounts held in a Roth IRA that are withdrawn as a 
     qualified distribution are not includible in income. A 
     qualified distribution is a distribution that (1) is made 
     after the five-taxable-year period beginning with the first 
     taxable year for which the individual first made a 
     contribution to a Roth IRA, and (2) is made after attainment 
     of age 59\1/2\, on account of death or disability, or is made 
     for first-time homebuyer expenses of up to $10,000.
       Distributions from a Roth IRA that are not qualified 
     distributions are includible in income to the extent 
     attributable to earnings; amounts that are attributable to a 
     return of contributions to the Roth IRA are not includible in 
     income. All Roth IRAs are treated as a single contract for 
     purposes of determining the amount that is a return of 
     contributions.
     Separation of traditional and Roth IRA accounts
       Contributions to traditional IRAs and to Roth IRAs must be 
     segregated into separate IRAs, meaning arrangements with 
     separate trusts, accounts, or contracts, and separate IRA 
     documents. Except in the case of a conversion or 
     recharacterization, amounts cannot be transferred or rolled 
     over between the two types of IRAs.
       Taxpayers generally may convert an amount in a traditional 
     IRA to a Roth IRA.\269\ The amount converted is includible in 
     the taxpayer's income as if a withdrawal had been made.\270\ 
     The conversion is accomplished by a trustee-to-trustee 
     transfer of the amount from the traditional IRA to the Roth 
     IRA, or by a distribution from the traditional IRA and 
     contribution to the Roth IRA within 60 days.
---------------------------------------------------------------------------
     \269\ Although an individual with AGI exceeding certain 
     limits is not permitted to make a contribution directly to a 
     Roth IRA, the individual can make a contribution to a 
     traditional IRA and convert the traditional IRA to a Roth 
     IRA.
     \270\ Subject to various exceptions, distributions from an 
     IRA before age 59\1/2\ that are includible in income are 
     subject to a 10-percent early distribution tax under section 
     72(t). An exception applies to an amount includible in income 
     as a result of the conversion from a traditional IRA into a 
     Roth IRA. However, the early distribution tax applies if the 
     taxpayer withdraws the amount within five years of the 
     conversion.
---------------------------------------------------------------------------
       Rollovers to IRAs of distributions from tax-favored 
     employer-sponsored retirement plans (that is, qualified 
     retirement plans, tax-deferred annuity plans, and 
     governmental eligible deferred compensation plans \271\) are 
     also permitted. For tax-free rollovers, distributions from 
     pretax accounts under an employer-sponsored plan generally 
     must are contributed to a traditional IRA, and distributions 
     from a designated Roth account under an employer-sponsored 
     plan must be contributed only to a Roth IRA. However, a 
     distribution from an employer-sponsored plan that is not from 
     a designated Roth account is also permitted to be rolled over 
     into a Roth IRA, subject to the rules that apply to 
     conversions from a traditional IRA into a Roth IRA. Thus, a 
     rollover from a tax-favored employer-sponsored plan to a Roth 
     IRA is includible in gross income (except to the extent it 
     represents a return of after-tax contributions).\272\
---------------------------------------------------------------------------
     \271\  Secs. 401(a), 403(a), 403(b) and 457(b).
     \272\  As in the case of a conversion of an amount from a 
     traditional IRA to a Roth IRA, the special recapture rule 
     relating to the 10-percent additional tax on early 
     distributions applies for distributions made from the Roth 
     IRA within a specified five-year period after the rollover.
---------------------------------------------------------------------------
     Recharacterization of IRA contributions
       If an individual makes a contribution to an IRA 
     (traditional or Roth) for a taxable year, the individual is 
     permitted to recharacterize the contribution as a 
     contribution to the other type of IRA (traditional or Roth) 
     by making a trustee-to-trustee transfer to the other type of 
     IRA before the due date for the individual's income tax 
     return for that year.\273\ In the case of a 
     recharacterization, the contribution will be treated as 
     having been made to the transferee IRA (and not the original, 
     transferor IRA) as of the date of the original contribution. 
     Both regular contributions and conversion contributions to a 
     Roth IRA can be recharacterized as having been made to a 
     traditional IRA.
---------------------------------------------------------------------------
     \273\ Sec. 408A(d)(6).
---------------------------------------------------------------------------
       The amount transferred in a recharacterization must be 
     accompanied by any net income allocable to the contribution. 
     In general, even if a recharacterization is accomplished by 
     transferring a specific asset, net income is calculated as a 
     pro rata portion of income on the entire account rather than 
     income allocable to the specific asset transferred. However, 
     when doing a Roth conversion of an amount for a year, an 
     individual may establish multiple Roth IRAs, for example, 
     Roth IRAs with different investment strategies, and divide 
     the amount being converted among the IRAs. The individual can 
     then choose whether to recharacterize any of the Roth IRAs as 
     a traditional IRA by transferring the entire amount in the 
     particular Roth IRA to a traditional IRA.\274\ For example, 
     if the value of the assets in a particular Roth IRA declines 
     after the conversion, the conversion can be reversed by 
     recharacterizing that IRA as a traditional IRA. The 
     individual may then later convert that traditional IRA to a 
     Roth IRA (referred to as a reconversion), including only the 
     lower value in income. Treasury regulations prevent the 
     reconversion from taking place immediately after the 
     recharcterization, by requiring a minimum period to elapse 
     before the reconversion. Generally the reconversion cannot 
     occur sooner than the later of 30 days after the 
     recharacterization or a date during the taxable year 
     following the taxable year of the original conversion.\275\
---------------------------------------------------------------------------
     \274\ Treas. Reg. sec. 1.408A-5, Q&A-2(b).
     \275\ Treas. Reg. sec. 1.408A-5, Q&A-9.
---------------------------------------------------------------------------


                               House Bill

       The House bill repeals the special rule that allows IRA 
     contributions to one type of IRA (either traditional or Roth) 
     to be recharacterized as a contribution to the other type of 
     IRA. Thus, for example, under the provision, a conversion 
     contribution establishing a Roth IRA during a taxable year 
     can no longer be recharacterized as a contribution to a 
     traditional IRA (thereby unwinding the conversion).\276\
---------------------------------------------------------------------------
     \276\ The provision does not preclude an individual from 
     making a contribution to a traditional IRA and converting the 
     traditional IRA to a Roth IRA. Rather, the provision would 
     preclude the individual from later unwinding the conversion 
     through a recharacterization.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment with a modification. Under the provision, 
     the special rule that allows a contribution to one type of 
     IRA to be recharacterized as a contribution to the other type 
     of IRA does not apply to a conversion contribution to a Roth 
     IRA. Thus, recharacterization cannot be used to unwind a Roth 
     conversion. However, recharacterization is still permitted 
     with respect to other contributions. For example, an 
     individual may make a contribution for a year to a Roth IRA 
     and, before the due date for the individual's income tax 
     return for that year, recharacterize it as a contribution to 
     a traditional IRA.\277\
---------------------------------------------------------------------------
     \277\ In addition, an individual may still make a 
     contribution to a traditional IRA and convert the traditional 
     IRA to a Roth IRA, but the provision precludes the individual 
     from later unwinding the conversion through a 
     recharacterization.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.
     2. Reduction in minimum age for allowable in-service 
         distributions (sec. 1502 of the House bill and secs. 401 
         and 457 of the Code)


                              Present Law

       Tax-favored employer-sponsored retirement plans consist of 
     qualified retirement plans, including certain defined 
     contribution plans that allow employees to make elective 
     deferrals (a ``section 401(k) plan''), tax-deferred annuity 
     plans (a ``section 403(b) plan''), which may also allow 
     employees to make elective deferrals, and eligible deferred 
     compensation plans of State and local government employers (a 
     ``governmental section 457(b) plan'').\278\ The terms of an 
     employer-sponsored retirement plan generally determine when 
     distributions are permitted. However, in some cases, 
     restrictions may apply to distribution before an employee's 
     severance from employment, referred to as ``in-service'' 
     distributions.
---------------------------------------------------------------------------
     \278\ Secs. 401(a), 401(k), 403(a), 403(b), and 457(b).
---------------------------------------------------------------------------
       In-service distributions of elective deferrals (and related 
     earnings) under a section

[[Page 19952]]

     401(k) plan generally are permitted only after attainment of 
     age 59\1/2\ or termination of the plan.\279\ In-service 
     distributions of elective deferrals (but not related 
     earnings) are also permitted in the case of hardship. 
     Elective deferrals under a section 403(b) plan are subject to 
     in-service distribution restrictions similar to those 
     applicable to elective deferrals under a section 401(k) plan, 
     and, in some cases, other contributions to a section 403(b) 
     plan are subject to similar restrictions.\280\
---------------------------------------------------------------------------
     \279\  Sec. 401(k)(2)(B). Similar restrictions apply to 
     certain other contributions, such as employer matching or 
     nonelective contributions required under the 
     nondiscrimination safe harbors under section 401(k).
     \280\ Secs. 403(b)(7)(A)(ii) and 403(b)(11).
---------------------------------------------------------------------------
       Pension plans, that is, qualified defined benefit plans and 
     money purchase pension plans, a type of qualified defined 
     contribution plan, generally may not permit in-service 
     distributions before attainment of age 62 (or attainment of 
     normal retirement age under the plan if earlier) or 
     termination of the plan.\281\
---------------------------------------------------------------------------
     \281\ Sec. 401(a)(36) and Treas. Reg. secs. 1.401-1(b)(1)(i) 
     and 1.401(a)-1(b).
---------------------------------------------------------------------------
       Deferrals under a governmental section 457(b) plan are 
     subject to in-service distribution restrictions similar to 
     those applicable to elective deferrals under a section 401(k) 
     plan, except that in-service distributions under a 
     governmental section 457(b) plan are permitted only after 
     attainment of age 70\1/2\ (rather than age 59\1/2\).\282\
---------------------------------------------------------------------------
     \282\ Sec. 457(d)(1)(A).
---------------------------------------------------------------------------


                               House Bill

       Under the House bill, in-service distributions are 
     permitted under a pension plan or a governmental section 
     457(b) plan at age 59\1/2\, thus making the rules for those 
     plans consistent with the rules for section 401(k) plans and 
     section 403(b) plans.
       Effective date.--The provision is effective for plan years 
     beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     3. Modification of rules governing hardship distributions 
         (sec. 1503 of the House bill and secs. 401 and 403 of the 
         Code)


                              Present Law

       Elective deferrals under a section 401(k) plan or a section 
     403(b) plan may not be distributed before the occurrence of 
     one or more specified events, including financial hardship of 
     the employee.\283\
---------------------------------------------------------------------------
     \283\ Secs. 401(k)(2)(B)(i)(IV) and 403(b)(7)(A)(ii) and 
     (b)(11)(B). Other types of contributions may also be subject 
     to this restriction.
---------------------------------------------------------------------------
       Applicable Treasury regulations provide that a distribution 
     is made on account of hardship only if the distribution is 
     made on account of an immediate and heavy financial need of 
     the employee and is necessary to satisfy the heavy need.\284\ 
     The Treasury regulations provide a safe harbor under which a 
     distribution may be deemed necessary to satisfy an immediate 
     and heavy financial need. One requirement of this safe harbor 
     is that the employee be prohibited from making elective 
     deferrals and employee contributions to the plan and all 
     other plans maintained by the employer for at least six 
     months after receipt of the hardship distribution.
---------------------------------------------------------------------------
     \284\ Treas. Reg. sec. 1.401(k)-1(d)(3).
---------------------------------------------------------------------------


                               House Bill

       Under the House bill, the Secretary of the Treasury is 
     directed to modify the applicable regulations within one year 
     of the date of enactment to (1) delete the requirement that 
     an employee be prohibited from making elective deferrals and 
     employee contributions for six months after the receipt of a 
     hardship distribution in order for the distribution to be 
     deemed necessary to satisfy an immediate and heavy financial 
     need, and (2) make any other modifications necessary to carry 
     out the purposes of the rule allowing elective deferrals to 
     be distributed in the case of hardship. Thus, under the 
     modified regulations, an employee would not be prevented for 
     any period after the receipt of a hardship distribution from 
     continuing to make elective deferrals and employee 
     contributions.
       Effective date.--The regulations as revised by the 
     provision shall apply to plan years beginning after December 
     31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     4. Modification of rules relating to hardship withdrawals 
         from cash or deferred arrangements (sec. 1504 of the 
         bill, sec. 11033(c) of the Senate amendment, and sec. 401 
         of the Code)


                              Present Law

       Amounts attributable to elective deferrals (including 
     earnings thereon) under a section 401(k) plan generally may 
     not be distributed before the earliest of the employee's 
     severance from employment, death, disability or attainment of 
     age 59\1/2\, or termination of the plan, or as a qualified 
     reservist distribution.\285\ Elective deferrals, but not 
     associated earnings, may be distributed on account of 
     hardship.
---------------------------------------------------------------------------
     \285\ Sec. 401(k)(2)(B)(i).
---------------------------------------------------------------------------
       An employer may make nonelective and matching contributions 
     for employees under a section 401(k) plan. Elective 
     deferrals, and matching contributions and after-tax employee 
     contributions, are subject to special tests 
     (``nondiscrimination tests'') to prevent discrimination in 
     favor of highly compensated employees. Nonelective 
     contributions and matching contributions that satisfy certain 
     requirements (``qualified nonelective contributions and 
     qualified matching contributions'') may be used to enable the 
     plan to satisfy these nondiscrimination tests. One of the 
     requirements is that these contributions be subject to the 
     same distribution restrictions as elective deferrals, except 
     that these contributions (and associated earnings) are not 
     permitted to be distributed on account of hardship.
       Applicable Treasury regulations provide that a distribution 
     is made on account of hardship only if the distribution is 
     made on account of an immediate and heavy financial need of 
     the employee and is necessary to satisfy the heavy need.\286\ 
     The Treasury regulations provide a safe harbor under which a 
     distribution may be deemed necessary to satisfy an immediate 
     and heavy financial need. One requirement of the safe harbor 
     is that the employee represent that the need cannot be 
     satisfied through currently available plan loans. This in 
     effect requires an employee to take any available plan loan 
     before receiving a hardship distribution.
---------------------------------------------------------------------------
     \286\ Treas. Reg. sec. 1.401(k)-1(d)(3).
---------------------------------------------------------------------------


                               House Bill

       The House bill allows earnings on elective deferrals under 
     a section 401(k) plan, as well as qualified nonelective 
     contributions and qualified matching contributions (and 
     associated earnings), to be distributed on account of 
     hardship. Further, a distribution is not treated as failing 
     to be on account of hardship solely because the employee does 
     not take any available plan loan.
       Effective date.--The provision is effective for plan years 
     beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision or Senate amendment.
     5. Extended rollover period for the rollover of plan loan 
         offset amounts in certain cases (sec. 1505 of the bill, 
         sec. 13613 of the Senate amendment, and sec. 402 of the 
         Code)


                              Present Law

     Taxation of retirement plan distributions
       A distribution from a tax-favored employer-sponsored 
     retirement plan (that is, a qualified retirement plan, 
     section 403(b) plan, or a governmental section 457(b) plan) 
     is generally includible in gross income, except in the case 
     of a qualified distribution from a designated Roth account or 
     to the extent the distribution is a recovery of basis under 
     the plan or the distribution is contributed to another such 
     plan or an IRA (referred to as eligible retirement plans) in 
     a tax-free rollover.\287\ In the case of a distribution from 
     a retirement plan to an employee under age 59\1/2\, the 
     distribution (other than a distribution from a governmental 
     section 457(b) plan) is also subject to a 10-percent early 
     distribution tax unless an exception applies.\288\
---------------------------------------------------------------------------
     \287\ Secs. 402(a) and (c), 402A(d), 403(a) and (b), 457(a) 
     and (e)(16).
     \288\ Sec. 72(t).
---------------------------------------------------------------------------
       A distribution from a tax-favored employer-sponsored 
     retirement plan that is an eligible rollover distribution may 
     be rolled over to an eligible retirement plan.\289\ The 
     rollover generally can be achieved by direct rollover (direct 
     payment from the distributing plan to the recipient plan) or 
     by contributing the distribution to the eligible retirement 
     plan within 60 days of receiving the distribution (``60-day 
     rollover'').
---------------------------------------------------------------------------
     \289\ Certain distributions are not eligible rollover 
     distributions, such as annuity payments, required minimum 
     distributions, hardship distributions, and loans that are 
     treated as deemed distributions under section 72(p).
---------------------------------------------------------------------------
       Employer-sponsored retirement plans are required to offer 
     an employee a direct rollover with respect to any eligible 
     rollover distribution before paying the amount to the 
     employee. If an eligible rollover distribution is not 
     directly rolled over to an eligible retirement plan, the 
     taxable portion of the distribution generally is subject to 
     mandatory 20-percent income tax withholding.\290\ Employees 
     who do not elect a direct rollover but who roll over eligible 
     distributions within 60 days of receipt also defer tax on the 
     rollover amounts; however, the 20 percent withheld will 
     remain taxable unless the employee substitutes funds within 
     the 60-day period.
---------------------------------------------------------------------------
     \290\ Treas. Reg. sec. 1.402(c)-2, Q&A-1(b)(3).
---------------------------------------------------------------------------
     Plan loans
       Employer-sponsored retirement plans may provide loans to 
     employees. Unless the loan satisfies certain requirements in 
     both form and operation, the amount of a retirement plan loan 
     is a deemed distribution from the retirement plan, including 
     that the terms of the loan provide for a repayment period of 
     not more than five years (except for a loan

[[Page 19953]]

     specifically to purchase a home) and for level amortization 
     of loan payments with payments not less frequently than 
     quarterly.\291\ Thus, if an employee stops making payments on 
     a loan before the loan is repaid, a deemed distribution of 
     the outstanding loan balance generally occurs. A deemed 
     distribution of an unpaid loan balance is generally taxed as 
     though an actual distribution occurred, including being 
     subject to a 10-percent early distribution tax, if 
     applicable. A deemed distribution is not eligible for 
     rollover to another eligible retirement plan.
---------------------------------------------------------------------------
     \291\ Sec. 72(p).
---------------------------------------------------------------------------
       A plan may also provide that, in certain circumstances (for 
     example, if an employee terminates employment), an employee's 
     obligation to repay a loan is accelerated and, if the loan is 
     not repaid, the loan is cancelled and the amount in 
     employee's account balance is offset by the amount of the 
     unpaid loan balance, referred to as a loan offset. A loan 
     offset is treated as an actual distribution from the plan 
     equal to the unpaid loan balance (rather than a deemed 
     distribution), and (unlike a deemed distribution) the amount 
     of the distribution is eligible for tax-free rollover to 
     another eligible retirement plan within 60 days. However, the 
     plan is not required to offer a direct rollover with respect 
     to a plan loan offset amount that is an eligible rollover 
     distribution, and the plan loan offset amount is generally 
     not subject to 20-percent income tax withholding.


                               House Bill

       Under the House bill, the period during which a qualified 
     plan loan offset amount may be contributed to an eligible 
     retirement plan as a rollover contribution is extended from 
     60 days after the date of the offset to the due date 
     (including extensions) for filing the Federal income tax 
     return for the taxable year in which the plan loan offset 
     occurs, that is, the taxable year in which the amount is 
     treated as distributed from the plan. Under the provision, a 
     qualified plan loan offset amount is a plan loan offset 
     amount that is treated as distributed from a qualified 
     retirement plan, a section 403(b) plan or a governmental 
     section 457(b) plan solely by reason of the termination of 
     the plan or the failure to meet the repayment terms of the 
     loan because of the employee's separation from service, 
     whether due to layoff, cessation of business, termination of 
     employment, or otherwise. As under present law, a loan offset 
     amount under the provision is the amount by which an 
     employee's account balance under the plan is reduced to repay 
     a loan from the plan.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that a qualified plan loan offset amount is a plan loan 
     offset amount that is treated as distributed from a qualified 
     retirement plan, a section 403(b) plan or a governmental 
     section 457(b) plan solely by reason of the termination of 
     the plan or the failure to meet the repayment terms of the 
     loan because of the employee's severance from employment.
       Effective date.--The provision is effective for plan loan 
     offset amounts treated as distributed in taxable years 
     beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     6. Modification of nondiscrimination rules for certain plans 
         providing benefits or contributions to older, longer 
         service participants (sec. 1506 of the House bill and 
         sec. 401 of the Code)


                              Present Law

     In general
       Qualified retirement plans are subject to nondiscrimination 
     requirements, under which the group of employees covered by a 
     plan (``plan coverage'') and the contributions or benefits 
     provided to employees, including benefits, rights, and 
     features under the plan, must not discriminate in favor of 
     highly compensated employees.\292\ The timing of plan 
     amendments must also not have the effect of discriminating 
     significantly in favor of highly compensated employees. In 
     addition, in the case of a defined benefit plan, the plan 
     must benefit at least the lesser of (1) 50 employees and (2) 
     the greater of 40 percent of all employees and two employees 
     (or one employee if the employer has only one employee), 
     referred to as the ``minimum participation'' 
     requirements.\293\ These nondiscrimination requirements are 
     designed to help ensure that qualified retirement plans 
     achieve the goal of retirement security for both lower and 
     higher paid employees.
---------------------------------------------------------------------------
     \292\ Secs. 401(a)(3)-(5) and 410(b). Detailed rules are 
     provided in Treas. Reg. secs. 1.401(a)(4)-1 through -13 and 
     secs. 1.410(b)-2 through -10. In applying the 
     nondiscrimination requirements, certain employees, such as 
     those under age 21 or with less than a year of service, 
     generally may be disregarded. In addition, employees of 
     controlled groups and affiliated service groups under the 
     aggregation rules of section 414(b), (c), (m) and (o) are 
     treated as employed by a single employer.
     \293\ Sec. 401(a)(26).
---------------------------------------------------------------------------
       For nondiscrimination purposes, an employee generally is 
     treated as highly compensated if the employee (1) was a five-
     percent owner of the employer at any time during the year or 
     the preceding year, or (2) had compensation for the preceding 
     year in excess of $120,000 (for 2017).\294\ Employees who are 
     not highly compensated are referred to as nonhighly 
     compensated employees.
---------------------------------------------------------------------------
     \294\ Sec. 414(q). At the election of the employer, employees 
     who are highly compensated based on the amount of their 
     compensation may be limited to employees who were among the 
     top 20 percent of employees based on compensation.
---------------------------------------------------------------------------
     Nondiscriminatory plan coverage
       Whether plan coverage of employees is nondiscriminatory is 
     determined by calculating a plan's ratio percentage, that is, 
     the ratio of the percentage of nonhighly compensated 
     employees covered under the plan to the percentage of highly 
     compensated employees covered. For this purpose, certain 
     portions of a defined contribution plan are treated as 
     separate plans to which the plan coverage requirements are 
     applied separately, referred to as mandatory disaggregation. 
     Specifically, the following, if provided under a plan, are 
     treated as separate plans: the portion of a plan consisting 
     of employee elective deferrals, the portion consisting of 
     employer matching contributions, the portion consisting of 
     employer nonelective contributions, and the portion 
     consisting of an employee stock ownership plan 
     (``ESOP'').\295\ Subject to mandatory disaggregation, 
     different qualified retirement plans may otherwise be 
     aggregated and tested together as a single plan, provided 
     that they use the same plan year. The plan determined under 
     these rules for plan coverage purposes generally is also 
     treated as the plan for purposes of applying the other 
     nondiscrimination requirements.
---------------------------------------------------------------------------
     \295\ Elective deferrals are contributions that an employee 
     elects to have made to a defined contribution plan that 
     includes a qualified cash or deferred arrangement (referred 
     to as ``section 401(k) plan'') rather than receive the same 
     amount as current compensation. Employer matching 
     contributions are contributions made by an employer only if 
     an employee makes elective deferrals or after-tax employee 
     contributions. Employer nonelective contributions are 
     contributions made by an employer regardless of whether an 
     employee makes elective deferrals or after-tax employee 
     contributions. Under section 4975(e)(7), an ESOP is a defined 
     contribution plan, or portion of a defined contribution plan, 
     that is designated as an ESOP and is designed to invest 
     primarily in employer stock.
---------------------------------------------------------------------------
       A plan's coverage is nondiscriminatory if the ratio 
     percentage, as determined above, is 70 percent or greater. If 
     a plan's ratio percentage is less than 70 percent, a multi-
     part test applies, referred to as the average benefit test. 
     First, the plan must meet a ``nondiscriminatory 
     classification requirement,'' that is, it must cover a group 
     of employees that is reasonable and established under 
     objective business criteria and the plan's ratio percentage 
     must be at or above a level specified in the regulations, 
     which varies depending on the percentage of nonhighly 
     compensated employees in the employer's workforce. In 
     addition, the average benefit percentage test must be 
     satisfied.
       Under the average benefit percentage test, in general, the 
     average rate of employer-provided contributions or benefit 
     accruals for all nonhighly compensated employees under all 
     plans of the employer must be at least 70 percent of the 
     average contribution or accrual rate of all highly 
     compensated employees.\296\ In applying the average benefit 
     percentage test, elective deferrals made by employees, as 
     well as employer matching and nonelective contributions, are 
     taken into account. Generally, all plans maintained by the 
     employer are taken into account, including ESOPs, regardless 
     of whether plans use the same plan year.
---------------------------------------------------------------------------
     \296\ Contribution and benefit rates are generally determined 
     under the rules for nondiscriminatory contributions or 
     benefit accruals, described below. These rules are generally 
     based on benefit accruals under a defined benefit plan, other 
     than accruals attributable to after-tax employee 
     contributions, and contributions allocated to participants' 
     accounts under a defined contribution plan, other than 
     allocations attributable to after-tax employee contributions. 
     (Under these rules, contributions allocated to a participants 
     accounts are referred to as ``allocations,'' with the related 
     rates referred to as ``allocation rates,'' but ``contribution 
     rates'' is used herein for convenience.) However, as 
     discussed below, benefit accruals can be converted to 
     actuarially equivalent contributions, and contributions can 
     be converted to actuarially equivalent benefit accruals.
---------------------------------------------------------------------------
       Under a transition rule applicable in the case of the 
     acquisition or disposition of a business, or portion of a 
     business, or a similar transaction, a plan that satisfied the 
     plan coverage requirements before the transaction is deemed 
     to continue to satisfy them for a period after the 
     transaction, provided coverage under the plan is not 
     significantly changed during that period.\297\
---------------------------------------------------------------------------
     \297\ Sec. 410(b)(6)(C).
---------------------------------------------------------------------------
     Nondiscriminatory contributions or benefit accruals
       In general
       There are three general approaches to testing the amount of 
     benefits under qualified retirement plans: (1) design-based 
     safe harbors under which the plan's contribution or benefit 
     accrual formula satisfies certain uniformity standards, (2) a 
     general test, described below, and (3) cross-testing of 
     equivalent contributions or benefit accruals. Employee 
     elective deferrals and employer matching contributions under 
     defined contribution plans are subject to special testing

[[Page 19954]]

     rules and generally are not permitted to be taken into 
     account in determining whether other contributions or 
     benefits are nondiscriminatory.\298\
---------------------------------------------------------------------------
     \298\ Secs. 401(k) and (m), the latter of which applies also 
     to after-tax employee contributions under a defined 
     contribution plan.
---------------------------------------------------------------------------
       The nondiscrimination rules allow contributions and benefit 
     accruals to be provided to highly compensated and nonhighly 
     compensated employees at the same percentage of 
     compensation.\299\ Thus, the various testing approaches 
     described below are generally applied to the amount of 
     contributions or accruals provided as a percentage of 
     compensation, referred to as a contribution rate or accrual 
     rate. In addition, under the ``permitted disparity'' rules, 
     in calculating an employee's contribution or accrual rate, 
     credit may be given for the employer paid portion of Social 
     Security taxes or benefits.\300\ The permitted disparity 
     rules do not apply in testing whether elective deferrals, 
     matching contributions, or ESOP contributions are 
     nondiscriminatory.
---------------------------------------------------------------------------
     \299\ For this purpose, under section 401(a)(17), 
     compensation generally is limited to $265,000 per year (for 
     2016).
     \300\ See sections 401(a)(5)(C) and (D) and 401(l) and Treas. 
     Reg. section 1. 401(a)(4)-7 and 1.401(l)-1 through -6 for 
     rules for determining the amount of contributions or benefits 
     that can be attributed to the employer-paid portion of Social 
     Security taxes or benefits.
---------------------------------------------------------------------------
       The general test is generally satisfied by measuring the 
     rate of contribution or benefit accrual for each highly 
     compensated employee to determine if the group of employees 
     with the same or higher rate (a ``rate'' group) is a 
     nondiscriminatory group, using the nondiscriminatory plan 
     coverage standards described above. For this purpose, if the 
     ratio percentage of a rate group is less than 70 percent, a 
     simplified standard applies, which includes disregarding the 
     reasonable classification requirement, but requires 
     satisfaction of the average benefit percentage test.
       Cross-testing
       Cross-testing involves the conversion of contributions 
     under a defined contribution plan or benefit accruals under a 
     defined benefit plan to actuarially equivalent accruals or 
     contributions, with the resulting equivalencies tested under 
     the general test. However, employee elective deferrals and 
     employer matching contributions under defined contribution 
     plans are not permitted to be taken into account for this 
     purpose, and cross-testing of contributions under a defined 
     contribution plan, or cross-testing of a defined contribution 
     plan aggregated with a defined benefit plan, is permitted 
     only if certain threshold requirements are satisfied.
       In order for a defined contribution plan to be tested on an 
     equivalent benefit accrual basis, one of the following three 
     threshold conditions must be met:
        The plan has broadly available allocation rates, 
     that is, each allocation rate under the plan is available to 
     a nondiscriminatory group of employees (disregarding certain 
     permitted additional contributions provided to employees as a 
     replacement for benefits under a frozen defined benefit plan, 
     as discussed below);
        The plan provides allocations that meet prescribed 
     designs under which allocations gradually increase with age 
     or service or are expected to provide a target level of 
     annuity benefit; or
        The plan satisfies a minimum allocation gateway, 
     under which each nonhighly compensated employee has an 
     allocation rate of (a) at least one-third of the highest rate 
     for any highly compensated employee, or (b) if less, at least 
     five percent.
       In order for an aggregated defined contribution and defined 
     benefit plan to be tested on an aggregate equivalent benefit 
     accrual basis, one of the following three threshold 
     conditions must be met:
        The plan must be primarily defined benefit in 
     character, that is, for more than fifty percent of the 
     nonhighly compensated employees under the plan, their accrual 
     rate under the defined benefit plan exceeds their equivalent 
     accrual rate under the defined contribution plan;
        The plan consists of broadly available separate 
     defined benefit and defined contribution plans, that is, the 
     defined benefit plan and the defined contribution plan would 
     separately satisfy simplified versions of the minimum 
     coverage and nondiscriminatory amount requirements; or
        The plan satisfies a minimum aggregate allocation 
     gateway, under which each nonhighly compensated employee has 
     an aggregate allocation rate (consisting of allocations under 
     the defined contribution plan and equivalent allocations 
     under the defined benefit plan) of (a) at least one-third of 
     the highest aggregate allocation rate for any nonhighly 
     compensated employee, or (b) if less, at least five percent 
     in the case of a highest nonhighly compensated employee's 
     rate up to 25 percent, increased by one percentage point for 
     each five-percentage-point increment (or portion thereof) 
     above 25 percent, subject to a maximum of 7.5 percent.
       Benefits, rights, and features
       Each benefit, right, or feature offered under the plan 
     generally must be available to a group of employees that has 
     a ratio percentage that satisfies the minimum coverage 
     requirements, including the reasonable classification 
     requirement if applicable, except that the average benefit 
     percentage test does not have to be met, even if the ratio 
     percentage is less than 70 percent.
     Multiple-employer and section 403(b) plans
       A multiple-employer plan generally is a single plan 
     maintained by two or more unrelated employers, that is, 
     employers that are not treated as a single employer under the 
     aggregation rules for related entities.\301\ The plan 
     coverage and other nondiscrimination requirements are applied 
     separately to the portions of a multiple-employer plan 
     covering employees of different employers.\302\
---------------------------------------------------------------------------
     \301\ Sec. 413(c). Multiple-employer status does not apply if 
     the plan is a multiemployer plan, defined under sec. 414(f) 
     as a plan maintained pursuant to one or more collective 
     bargaining agreements with two or more unrelated employers 
     and to which the employers are required to contribute under 
     the collective bargaining agreement(s). Multiemployer plans 
     are also known as Taft-Hartley plans.
     \302\ Treas. Reg. sec. 1.413-2(a)(3)(ii)-(iii).
---------------------------------------------------------------------------
       Certain tax-exempt charitable organizations may offer their 
     employees a tax-deferred annuity plan (``section 403(b) 
     plan'').\303\ The nondiscrimination requirements, other than 
     the requirements applicable to elective deferrals, generally 
     apply to section 403(b) plans of private tax-exempt 
     organizations. For purposes of applying the nondiscrimination 
     requirements to a section 403(b) plan, subject to mandatory 
     disaggregation, a qualified retirement plan may be combined 
     with the section 403(b) plan and treated as a single 
     plan.\304\ However, a section 403(b) plan and qualified 
     retirement plan may not be treated as a single plan for 
     purposes of applying the nondiscrimination requirements to 
     the qualified retirement plan.
---------------------------------------------------------------------------
     \303\ Sec. 403(b). These plans are available to employers 
     that are tax-exempt under section 501(c)(3), as well as to 
     educational institutions of State or local governments.
     \304\ Treas. Reg. sec. 1.410(b)-7(f).
---------------------------------------------------------------------------
     Closed and frozen defined benefit plans
       A defined benefit plan may be amended to limit 
     participation in the plan to individuals who are employees as 
     of a certain date. That is, employees hired after that date 
     are not eligible to participate in the plan. Such a plan is 
     sometimes referred to as a ``closed'' defined benefit plan 
     (that is, closed to new entrants). In such a case, it is 
     common for the employer also to maintain a defined 
     contribution plan and to provide employer matching or 
     nonelective contributions only to employees not covered by 
     the defined benefit plan or at a higher rate to such 
     employees.
       Over time, the group of employees continuing to accrue 
     benefits under the defined benefit plan may come to consist 
     more heavily of highly compensated employees, for example, 
     because of greater turnover among nonhighly compensated 
     employees or because increasing compensation causes nonhighly 
     compensated employees to become highly compensated. In that 
     case, the defined benefit plan may have to be combined with 
     the defined contribution plan and tested on a benefit accrual 
     basis. However, under the regulations, if none of the 
     threshold conditions is met, testing on a benefits basis may 
     not be available. Notwithstanding the regulations, recent IRS 
     guidance provides relief for a limited period, allowing 
     certain closed defined benefit plans to be aggregated with a 
     defined contribution plan and tested on an aggregate 
     equivalent benefits basis without meeting any of the 
     threshold conditions.\305\ When the group of employees 
     continuing to accrue benefits under a closed defined benefit 
     plan consists more heavily of highly compensated employees, 
     the benefits, rights, and features provided under the plan 
     may also fail the tests under the existing nondiscrimination 
     rules.
---------------------------------------------------------------------------
     \305\ Notice 2014-5, 2014-2 I.R.B. 276, extended by Notice 
     2015-28, 2015-14 14 I.R.B. 848, Notice 2016-57, 2016-40 
     I.R.B. 432, and Notice 2017-45, 2017-38 I.R.B. 232. Proposed 
     regulations revising the nondiscrimination requirements for 
     closed plans were also issued earlier this year, subject to 
     various conditions. 81 Fed. Reg. 4976 (January 29, 2016).
---------------------------------------------------------------------------
       In some cases, if a defined benefit plan is amended to 
     cease future accruals for all participants, referred to as a 
     ``frozen'' defined benefit plan, additional contributions to 
     a defined contribution plan may be provided for participants, 
     in particular for older participants, in order to make up in 
     part for the loss of the benefits they expected to earn under 
     the defined benefit plan (``make-whole'' contributions). As a 
     practical matter, testing on a benefit accrual basis may be 
     required in that case, but may not be available because the 
     defined contribution plan does not meet any of the threshold 
     conditions.


                               House Bill

     Closed or frozen defined benefit plans
       In general
       Under the House bill, nondiscrimination relief applies with 
     respect to benefits, rights, and features for a closed class 
     of participants (``closed class''),\306\ and with respect to 
     benefit accruals for a closed class, under a defined benefit 
     plan that meets the requirements described below (referred to 
     herein as

[[Page 19955]]

     an ``applicable'' defined benefit plan). In addition, the 
     provision treats a closed or frozen applicable defined 
     benefit plan as meeting the minimum participation 
     requirements if the plan met the requirements as of the 
     effective date of the plan amendment by which the plan was 
     closed or frozen.
---------------------------------------------------------------------------
     \306\ References under the provision to a closed class of 
     participants and similar references to a closed class include 
     arrangements under which one or more classes of participants 
     are closed, except that one or more classes of participants 
     closed on different dates are not aggregated for purposes of 
     determining the date any such class was closed.
---------------------------------------------------------------------------
       If a portion of an applicable defined benefit plan eligible 
     for relief under the provision is spun off to another 
     employer, and if the spun-off plan continues to satisfy any 
     ongoing requirements applicable for the relevant relief as 
     described below, the relevant relief for the spun-off plan 
     will continue with respect to the other employer.
       Benefits, rights, or features for a closed class
       Under the provision, an applicable defined benefit plan 
     that provides benefits, rights, or features to a closed class 
     does not fail the nondiscrimination requirements by reason of 
     the composition of the closed class, or the benefits, rights, 
     or features provided to the closed class, if (1) for the plan 
     year as of which the class closes and the two succeeding plan 
     years, the benefits, rights, and features satisfy the 
     nondiscrimination requirements without regard to the relief 
     under the provision, but taking into account the special 
     testing rules described below,\307\ and (2) after the date as 
     of which the class was closed, any plan amendment modifying 
     the closed class or the benefits, rights, and features 
     provided to the closed class does not discriminate 
     significantly in favor of highly compensated employees.
---------------------------------------------------------------------------
     \307\ Other testing options available under present law are 
     also available for this purpose.
---------------------------------------------------------------------------
       For purposes of requirement (1) above, the following 
     special testing rules apply:
        In applying the plan coverage transition rule for 
     business acquisitions, dispositions, and similar 
     transactions, the closing of the class of participants is not 
     treated as a significant change in coverage;
        Two or more plans do not fail to be eligible to be 
     a treated as a single plan solely by reason of having 
     different plan years; \308\ and
---------------------------------------------------------------------------
     \308\ This rule applies also for purposes applying the plan 
     coverage and other nondiscrimination requirements to an 
     applicable defined benefit plan and one or more defined 
     contributions that, under the provision, may be treated as a 
     single plan as described below.
---------------------------------------------------------------------------
        Changes in employee population are disregarded to 
     the extent attributable to individuals who become employees 
     or cease to be employees, after the date the class is closed, 
     by reason of a merger, acquisition, divestiture, or similar 
     event.
       Benefit accruals for a closed class
       Under the provision, an applicable defined benefit plan 
     that provides benefits to a closed class may be aggregated, 
     that is, treated as a single plan, and tested on a benefit 
     accrual basis with one or more defined contribution plans 
     (without having to satisfy the threshold conditions under 
     present law) if (1) for the plan year as of which the class 
     closes and the two succeeding plan years, the plan satisfies 
     the plan coverage and nondiscrimination requirements without 
     regard to the relief under the provision, but taking into 
     account the special testing rules described above,\309\ and 
     (2) after the date as of which the class was closed, any plan 
     amendment modifying the closed class or the benefits provided 
     to the closed class does not discriminate significantly in 
     favor of highly compensated employees.
---------------------------------------------------------------------------
     \309\ Other testing options available under present law are 
     also available for this purpose.
---------------------------------------------------------------------------
       Under the provision, defined contribution plans that may be 
     aggregated with an applicable defined benefit plan and 
     treated as a single plan include the portion of one or more 
     defined contribution plans consisting of matching 
     contributions, an ESOP, or matching or nonelective 
     contributions under a section 403(b) plan. If an applicable 
     defined benefit plan is aggregated with the portion of a 
     defined contribution plan consisting of matching 
     contributions, any portion of the defined contribution plan 
     consisting of elective deferrals must also be aggregated. In 
     addition, the matching contributions are treated in the same 
     manner as nonelective contributions, including for purposes 
     of permitted disparity.
       Applicable defined benefit plan
       An applicable defined benefit plan to which relief under 
     the provision applies is a defined benefit plan under which 
     the class was closed (or the plan frozen) before April 5, 
     2017, or that meets the following alternative conditions: (1) 
     taking into account any predecessor plan, the plan has been 
     in effect for at least five years as of the date the class is 
     closed (or the plan is frozen) and (2) under the plan, during 
     the five-year period preceding that date, (a) for purposes of 
     the relief provided with respect to benefits, rights, and 
     features for a closed class, there has not been a substantial 
     increase in the coverage or value of the benefits, rights, or 
     features, or (b) for purposes of the relief provided with 
     respect to benefit accruals for a closed class or the minimum 
     participation requirements, there has not been a substantial 
     increase in the coverage or benefits under the plan.
       For purposes of (2)(a) above, a plan is treated as having a 
     substantial increase in coverage or value of benefits, 
     rights, or features only if, during the applicable five-year 
     period, either the number of participants covered by the 
     benefits, rights, or features on the date the period ends is 
     more than 50 percent greater than the number on the first day 
     of the plan year in which the period began, or the benefits, 
     rights, and features have been modified by one or more plan 
     amendments in such a way that, as of the date the class is 
     closed, the value of the benefits, rights, and features to 
     the closed class as a whole is substantially greater than the 
     value as of the first day of the five-year period, solely as 
     a result of the amendments.
       For purposes of (2)(b) above, a plan is treated as having 
     had a substantial increase in coverage or benefits only if, 
     during the applicable five-year period, either the number of 
     participants benefiting under the plan on the date the period 
     ends is more than 50 percent greater than the number of 
     participants on the first day of the plan year in which the 
     period began, or the average benefit provided to participants 
     on the date the period ends is more than 50 percent greater 
     than the average benefit provided on the first day of the 
     plan year in which the period began. In applying this 
     requirement, the average benefit provided to participants 
     under the plan is treated as having remained the same between 
     the two relevant dates if the benefit formula applicable to 
     the participants has not changed between the dates and, if 
     the benefit formula has changed, the average benefit under 
     the plan is considered to have increased by more than 50 
     percent only if the target normal cost for all participants 
     benefiting under the plan for the plan year in which the 
     five-year period ends exceeds the target normal cost for all 
     such participants for that plan year if determined using the 
     benefit formula in effect for the participants for the first 
     plan year in the five-year period by more than 50 
     percent.\310\ In applying these rules, a multiple-employer 
     plan is treated as a single plan, rather than as separate 
     plans separately covering the employees of each participating 
     employer.
---------------------------------------------------------------------------
     \310\ Under the funding requirements applicable to defined 
     benefit plans, target normal cost for a plan year (defined in 
     section 430(b)(1)(A)(i)) is generally the sum of the present 
     value of the benefits expected to be earned under the plan 
     during the plan year plus the amount of plan-related expenses 
     to be paid from plan assets during the plan year. Under the 
     provision, in applying this average benefit rule to certain 
     defined benefit plans maintained by cooperative organizations 
     and charities, referred to as CSEC plans (defined in section 
     414(y)), which are subject to different funding requirements, 
     the CSEC plan's normal cost under section 433(j)(1)(B) is 
     used instead of target normal cost.
---------------------------------------------------------------------------
       In applying these standards, any increase in coverage or 
     value, or in coverage or benefits, whichever is applicable, 
     is generally disregarded if it is attributable to coverage 
     and value, or coverage and benefits, provided to employees 
     who (1) became participants as a result of a merger, 
     acquisition, or similar event that occurred during the 7-year 
     period preceding the date the class was closed, or (2) became 
     participants by reason of a merger of the plan with another 
     plan that had been in effect for at least five years as of 
     the date of the merger and, in the case of benefits, rights, 
     or features for a closed class, under the merger, the 
     benefits, rights, or features under one plan were conformed 
     to the benefits, rights, or features under the other plan 
     prospectively.
     Make-whole contributions under a defined contribution plan
       Under the provision, a defined contribution plan is 
     permitted to be tested on an equivalent benefit accrual basis 
     (without having to satisfy the threshold conditions under 
     present law) if the following requirements are met:
        The plan provides make-whole contributions to a 
     closed class of participants whose accruals under a defined 
     benefit plan have been reduced or ended (``make-whole 
     class'');
        For the plan year of the defined contribution plan 
     as of which the make-whole class closes and the two 
     succeeding plan years, the make-whole class satisfies the 
     nondiscriminatory classification requirement under the plan 
     coverage rules, taking into account the special testing rules 
     described above;
        After the date as of which the class was closed, 
     any amendment to the defined contribution plan modifying the 
     make-whole class or the allocations, benefits, rights, and 
     features provided to the make-whole class does not 
     discriminate significantly in favor of highly compensated 
     employees; and
        Either the class was closed before April 5, 2017, 
     or the defined benefit plan is an applicable defined benefit 
     plan under the alternative conditions applicable for purposes 
     of the relief provided with respect to benefit accruals for a 
     closed class.
       With respect to one or more defined contribution plans 
     meeting the requirements above, in applying the plan coverage 
     and nondiscrimination requirements, the portion of the plan 
     providing make-whole or other nonelective contributions may 
     also be aggregated and tested on an equivalent benefit 
     accrual basis with the portion of one or more other defined 
     contribution plans consisting of matching contributions, an 
     ESOP, or matching or nonelective contributions under

[[Page 19956]]

     a section 403(b) plan. If the plan is aggregated with the 
     portion of a defined contribution plan consisting of matching 
     contributions, any portion of the defined contribution plan 
     consisting of elective deferrals must also be aggregated. In 
     addition, the matching contributions are treated in the same 
     manner as nonelective contributions, including for purposes 
     of permitted disparity.
       Under the provision, ``make-whole contributions'' generally 
     means nonelective contributions for each employee in the 
     make-whole class that are reasonably calculated, in a 
     consistent manner, to replace some or all of the retirement 
     benefits that the employee would have received under the 
     defined benefit plan and any other plan or qualified cash or 
     deferred arrangement under a section 401(k) plan if no change 
     had been made to the defined benefit plan and other plan or 
     arrangement.\311\ However, under a special rule, in the case 
     of a defined contribution plan that provides benefits, 
     rights, or features to a closed class of participants whose 
     accruals under a defined benefit plan have been reduced or 
     eliminated, the plan will not fail to satisfy the 
     nondiscrimination requirements solely by reason of the 
     composition of the closed class, or the benefits, rights, or 
     features provided to the closed class, if the defined 
     contribution plan and defined benefit plan otherwise meet the 
     requirements described above but for the fact that the make-
     whole contributions under the defined contribution plan are 
     made in whole or in part through matching contributions.
---------------------------------------------------------------------------
     \311\ For this purpose, consistency is not required with 
     respect to employees who were subject to different benefit 
     formulas under the defined benefit plan.
---------------------------------------------------------------------------
       If a portion of a defined contribution plan eligible for 
     relief under the provision is spun off to another employer, 
     and if the spun-off plan continues to satisfy any ongoing 
     requirements applicable for the relevant relief as described 
     above, the relevant relief for the spun-off plan will 
     continue with respect to the other employer.
       Effective date.--The provision is generally effective on 
     the date of enactment without regard to whether any plan 
     modifications referred to in the provision are adopted or 
     effective before, on, or after the date of enactment. 
     However, at the election of a plan sponsor, the provision 
     will apply to plan years beginning after December 31, 2013. 
     For purposes of the provision, a closed class of participants 
     under a defined benefit plan is treated as being closed 
     before April 5, 2017, if the plan sponsor's intention to 
     create the closed class is reflected in formal written 
     documents and communicated to participants before that date. 
     In addition, a plan does not fail to be eligible for the 
     relief under the provision solely because (1) in the case of 
     benefits, rights, or features for a closed class under a 
     defined benefit plan, the plan was amended before the date of 
     enactment to eliminate one or more benefits, rights, or 
     features and is further amended after the date of enactment 
     to provide the previously eliminated benefits, rights, or 
     features to a closed class of participants, or (2) in the 
     case of benefit accruals for a closed class under a defined 
     benefit plan or application of the minimum benefit 
     requirements to a closed or frozen defined benefit plan, the 
     plan was amended before the date of the enactment to cease 
     all benefit accruals and is further amended after the date of 
     enactment to provide benefit accruals to a closed class of 
     participants. In either case, the relevant relief applies 
     only if the plan otherwise meets the requirements for the 
     relief, and, in applying the relevant relief, the date the 
     class of participants is closed is the effective date of the 
     later amendment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     7. Modification of rules applicable to length of service 
         award programs for bona fide public safety volunteers 
         (sec. 13612 of the Senate amendment and sec. 457(e) of 
         the Code)


                              Present Law

       Special rules apply to deferred compensation plans of State 
     and local government and private, tax-exempt employers.\312\ 
     However, an exception to these rules applies in the case of a 
     plan paying solely length of service awards to bona fide 
     volunteers (or their beneficiaries) on account of qualified 
     services performed by the volunteers. For this purpose, 
     qualified services consist of firefighting and fire 
     prevention services, emergency medical services, and 
     ambulance services. An individual is treated as a bona fide 
     volunteer for this purpose if the only compensation received 
     by the individual for performing qualified services is in the 
     form of (1) reimbursement or a reasonable allowance for 
     reasonable expenses incurred in the performance of such 
     services, or (2) reasonable benefits (including length of 
     service awards) and nominal fees for the services, 
     customarily paid in connection with the performance of such 
     services by volunteers. The exception applies only if the 
     aggregate amount of length of service awards accruing for a 
     bona fide volunteer with respect to any year of service does 
     not exceed $3,000.
---------------------------------------------------------------------------
     \312\ Sec. 457.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment increases the aggregate amount of 
     length of service awards that may accrue for a bona fide 
     volunteer with respect to any year of service to $6,000 and 
     adjusts that amount in $500 increments to reflect changes in 
     cost-of-living for years after the first year the provision 
     is effective. In addition, under the provision, if the plan 
     is a defined benefit plan, the limit applies to the actuarial 
     present value of the aggregate amount of length of service 
     awards accruing with respect to any year of service. 
     Actuarial present value is to be calculated using reasonable 
     actuarial assumptions and methods, assuming payment will be 
     made under the most valuable form of payment under the plan 
     with payment commencing at the later of the earliest age at 
     which unreduced benefits are payable under the plan or the 
     participant's age at the time of the calculation.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

  F. Modifications to Estate, Gift, and Generation-Skipping Transfers 
Taxes (secs. 1601 and 1602 of the House bill, sec. 11061 of the Senate 
            amendment, and secs. 2001 and 2010 of the Code)


                              Present Law

     In general
       A gift tax is imposed on certain lifetime transfers, and an 
     estate tax is imposed on certain transfers at death. A 
     generation-skipping transfer tax generally is imposed on 
     transfers, either directly or in trust or similar 
     arrangement, to a ``skip person'' (i.e., a beneficiary in a 
     generation more than one generation younger than that of the 
     transferor). Transfers subject to the generation-skipping 
     transfer tax include direct skips, taxable terminations, and 
     taxable distributions.
       Income tax rules determine the recipient's tax basis in 
     property acquired from a decedent or by gift. Gifts and 
     bequests generally are excluded from the recipient's gross 
     income.\313\
---------------------------------------------------------------------------
     \313\ Sec. 102.
---------------------------------------------------------------------------
     Common features of the estate, gift and 
         generation-skipping transfer taxes
       Unified credit (exemption) and tax rates
       Unified credit.--A unified credit is available with respect 
     to taxable transfers by gift and at death.\314\ The unified 
     credit offsets tax, computed using the applicable estate and 
     gift tax rates, on a specified amount of transfers, referred 
     to as the applicable exclusion amount, or exemption amount. 
     The exemption amount was set at $5 million for 2011 and is 
     indexed for inflation for later years.\315\ For 2017, the 
     inflation-indexed exemption amount is $5.49 million.\316\ 
     Exemption used during life to offset taxable gifts reduces 
     the amount of exemption that remains at death to offset the 
     value of a decedent's estate. An election is available under 
     which exemption that is not used by a decedent may be used by 
     the decedent's surviving spouse (exemption portability).
---------------------------------------------------------------------------
     \314\ Sec. 2010.
     \315\ For 2011 and later years, the gift and estate taxes 
     were reunified, meaning that the gift tax exemption amount 
     was increased to equal the estate tax exemption amount.
     \316\ For 2017, the $5.49 million exemption amount results in 
     a unified credit of $2,141,800, after applying the applicable 
     rates set forth in section 2001(c).
---------------------------------------------------------------------------
       Common tax rate table.--A common tax-rate table with a top 
     marginal tax rate of 40 percent is used to compute gift tax 
     and estate tax. The 40-percent rate applies to transfers in 
     excess of $1 million (to the extent not exempt). Because the 
     exemption amount currently shields the first $5.49 million in 
     gifts and bequests from tax, transfers in excess of the 
     exemption amount generally are subject to tax at the highest 
     marginal rate (40 percent).
       Generation-skipping transfer tax exemption and rate.--The 
     generation-skipping transfer tax is a separate tax that can 
     apply in addition to either the gift tax or the estate tax. 
     The tax rate and exemption amount for generation-skipping 
     transfer tax purposes, however, are set by reference to the 
     estate tax rules. Generation-skipping transfer tax is imposed 
     using a flat rate equal to the highest estate tax rate (40 
     percent). Tax is imposed on cumulative generation-skipping 
     transfers in excess of the generation-skipping transfer tax 
     exemption amount in effect for the year of the transfer. The 
     generation-skipping transfer tax exemption for a given year 
     is equal to the estate tax exemption amount in effect for 
     that year (currently $5.49 million).
       Transfers between spouses.--A 100-percent marital deduction 
     generally is permitted for the value of property transferred 
     between spouses.\317\ In addition, transfers of ``qualified 
     terminable interest property'' also are eligible for the 
     marital deduction. Qualified terminable interest property is 
     property: (1) that passes from the decedent, (2) in which the 
     surviving spouse has a ``qualifying income interest for 
     life,'' and (3) to which an

[[Page 19957]]

     election under these rules applies. A qualifying income 
     interest for life exists if: (1) the surviving spouse is 
     entitled to all the income from the property (payable 
     annually or at more frequent intervals) or has the right to 
     use the property during the spouse's life, and (2) no person 
     has the power to appoint any part of the property to any 
     person other than the surviving spouse.
---------------------------------------------------------------------------
     \317\ Secs. 2056 and 2523.
---------------------------------------------------------------------------
       A marital deduction generally is denied for property 
     passing to a surviving spouse who is not a citizen of the 
     United States. A marital deduction is permitted, however, for 
     property passing to a qualified domestic trust of which the 
     noncitizen surviving spouse is a beneficiary. A qualified 
     domestic trust is a trust that has as its trustee at least 
     one U.S. citizen or U.S. corporation. No corpus may be 
     distributed from a qualified domestic trust unless the U.S. 
     trustee has the right to withhold any estate tax imposed on 
     the distribution.
       Tax is imposed on (1) any distribution from a qualified 
     domestic trust before the date of the death of the noncitizen 
     surviving spouse and (2) the value of the property remaining 
     in a qualified domestic trust on the date of death of the 
     noncitizen surviving spouse. The tax is computed as an 
     additional estate tax on the estate of the first spouse to 
     die.
       Transfers to charity.--Contributions to section 501(c)(3) 
     charitable organizations and certain other organizations may 
     be deducted from the value of a gift or from the value of the 
     assets in an estate for Federal gift or estate tax 
     purposes.\318\ The effect of the deduction generally is to 
     remove the full fair market value of assets transferred to 
     charity from the gift or estate tax base; unlike the income 
     tax charitable deduction, there are no percentage limits on 
     the deductible amount. For estate tax purposes, the 
     charitable deduction is limited to the value of the 
     transferred property that is required to be included in the 
     gross estate.\319\ A charitable contribution of a partial 
     interest in property, such as a remainder or future interest, 
     generally is not deductible for gift or estate tax 
     purposes.\320\
---------------------------------------------------------------------------
     \318\ Secs. 2055 and 2522.
     \319\ Sec. 2055(d).
     \320\ Secs. 2055(e)(2) and 2522(c)(2).
---------------------------------------------------------------------------
     The estate tax
       Overview
       The Code imposes a tax on the transfer of the taxable 
     estate of a decedent who is a citizen or resident of the 
     United States.\321\ The taxable estate is determined by 
     deducting from the value of the decedent's gross estate any 
     deductions provided for in the Code. After applying tax rates 
     to determine a tentative amount of estate tax, certain 
     credits are subtracted to determine estate tax 
     liability.\322\
---------------------------------------------------------------------------
     \321\ Sec. 2001(a).
     \322\ More mechanically, the taxable estate is combined with 
     the value of adjusted taxable gifts made during the 
     decedent's life (generally, post-1976 gifts), before applying 
     tax rates to determine a tentative total amount of tax. The 
     portion of the tentative tax attributable to lifetime gifts 
     is then subtracted from the total tentative tax to determine 
     the gross estate tax, i.e., the amount of estate tax before 
     considering available credits. Credits are then subtracted to 
     determine the estate tax liability.
     This method of computation was designed to ensure that a 
     taxpayer only gets one run up through the rate brackets for 
     all lifetime gifts and transfers at death, at a time when the 
     thresholds for applying the higher marginal rates exceeded 
     the exemption amount. However, the higher ($5.49 million) 
     present-law exemption amount effectively renders the lower 
     rate brackets irrelevant, because the top marginal rate 
     bracket applies to all transfers in excess of $1 million. In 
     other words, all transfers that are not exempt by reason of 
     the $5.49 million exemption amount are taxed at the highest 
     marginal rate of 40 percent.
---------------------------------------------------------------------------
       Because the estate tax shares a common unified credit 
     (exemption) and tax rate table with the gift tax, the 
     exemption amounts and tax rates are described together above, 
     along with certain other common features of these taxes.
       Gross estate
       A decedent's gross estate includes, to the extent provided 
     for in other sections of the Code, the date-of-death value of 
     all of a decedent's property, real or personal, tangible or 
     intangible, wherever situated.\323\ In general, the value of 
     property for this purpose is the fair market value of the 
     property as of the date of the decedent's death, although an 
     executor may elect to value certain property as of the date 
     that is six months after the decedent's death (the alternate 
     valuation date).\324\
---------------------------------------------------------------------------
     \323\ Sec. 2031(a).
     \324\ Sec. 2032.
---------------------------------------------------------------------------
       The gross estate includes not only property directly owned 
     by the decedent, but also other property in which the 
     decedent had a beneficial interest at the time of his or her 
     death.\325\ The gross estate also includes certain transfers 
     made by the decedent prior to his or her death, including: 
     (1) certain gifts made within three years prior to the 
     decedent's death; \326\ (2) certain transfers of property in 
     which the decedent retained a life estate; \327\ (3) certain 
     transfers taking effect at death; \328\ and (4) revocable 
     transfers.\329\ In addition, the gross estate also includes 
     property with respect to which the decedent had, at the time 
     of death, a general power of appointment (generally, the 
     right to determine who will have beneficial ownership).\330\ 
     The value of a life insurance policy on the decedent's life 
     is included in the gross estate if the proceeds are payable 
     to the decedent's estate or the decedent had incidents of 
     ownership with respect to the policy at the time of his or 
     her death.\331\
---------------------------------------------------------------------------
     \325\ Sec. 2033.
     \326\ Sec. 2035.
     \327\ Sec. 2036.
     \328\ Sec. 2037.
     \329\ Sec. 2038.
     \330\ Sec. 2041.
     \331\ Sec. 2042.
---------------------------------------------------------------------------
       Deductions from the gross estate
       A decedent's taxable estate is determined by subtracting 
     from the value of the gross estate any deductions provided 
     for in the Code.
       Marital and charitable transfers.--As described above, 
     transfers to a surviving spouse or to charity generally are 
     deductible for estate tax purposes. The effect of the marital 
     and charitable deductions generally is to remove assets 
     transferred to a surviving spouse or to charity from the 
     estate tax base.
       State death taxes.--An estate tax deduction is permitted 
     for death taxes (e.g., any estate, inheritance, legacy, or 
     succession taxes) actually paid to any State or the District 
     of Columbia, in respect of property included in the gross 
     estate of the decedent.\332\ Such State taxes must have been 
     paid and claimed before the later of: (1) four years after 
     the filing of the estate tax return; or (2) (a) 60 days after 
     a decision of the U.S. Tax Court determining the estate tax 
     liability becomes final, (b) the expiration of the period of 
     extension to pay estate taxes over time under section 6166, 
     or (c) the expiration of the period of limitations in which 
     to file a claim for refund or 60 days after a decision of a 
     court in which such refund suit has become final.
---------------------------------------------------------------------------
     \332\ Sec. 2058.
---------------------------------------------------------------------------
       Other deductions.--A deduction is available for funeral 
     expenses, estate administration expenses, and claims against 
     the estate, including certain taxes.\333\ A deduction also is 
     available for uninsured casualty and theft losses incurred 
     during the settlement of the estate.\334\
---------------------------------------------------------------------------
     \333\ Sec. 2053.
     \334\ Sec. 2054.
---------------------------------------------------------------------------
       Credits against tax
       After accounting for allowable deductions, a gross amount 
     of estate tax is computed. Estate tax liability is then 
     determined by subtracting allowable credits from the gross 
     estate tax.
       Unified credit.--The most significant credit allowed for 
     estate tax purposes is the unified credit, which is discussed 
     in greater detail above.\335\ For 2017, the value of the 
     unified credit is $2,141,800, which has the effect of 
     exempting $5.49 million in transfers from tax. The unified 
     credit available at death is reduced by the amount of unified 
     credit used to offset gift tax on gifts made during the 
     decedent's life.
---------------------------------------------------------------------------
     \335\ Sec. 2010.
---------------------------------------------------------------------------
       Other credits.--Estate tax credits also are allowed for: 
     (1) gift tax paid on certain pre-1977 gifts (before the 
     estate and gift tax computations were integrated); \336\ (2) 
     estate tax paid on certain prior transfers (to limit the 
     estate tax burden when estate tax is imposed on transfers of 
     the same property in two estates by reason of deaths in rapid 
     succession); \337\ and (3) certain foreign death taxes paid 
     (generally, where the property is situated in a foreign 
     country but included in the decedent's U.S. gross 
     estate).\338\
---------------------------------------------------------------------------
     \336\ Sec. 2012.
     \337\ Sec. 2013.
     \338\ Sec. 2014. In certain cases, an election may be made to 
     deduct foreign death taxes. See section 2053(d).
---------------------------------------------------------------------------
       Provisions affecting small and family-owned businesses and 
           farms
       Special-use valuation.--An executor can elect to value for 
     estate tax purposes certain ``qualified real property'' used 
     in farming or another qualifying closely-held trade or 
     business at its current-use value, rather than its fair 
     market value.\339\ The maximum reduction in value for such 
     real property is $750,000 (adjusted for inflation occurring 
     after 1997; the inflation-adjusted amount for 2017 is 
     $1,120,000). In general, real property qualifies for special-
     use valuation only if (1) at least 50 percent of the adjusted 
     value of the decedent's gross estate (including both real and 
     personal property) consists of a farm or closely-held 
     business property in the decedent's estate and (2) at least 
     25 percent of the adjusted value of the gross estate consists 
     of farm or closely held business real property. In addition, 
     the property must be used in a qualified use (e.g., farming) 
     by the decedent or a member of the decedent's family for five 
     of the eight years before the decedent's death.
---------------------------------------------------------------------------
     \339\ Sec. 2032A.
---------------------------------------------------------------------------
       If, after a special-use valuation election is made, the 
     heir who acquired the real property ceases to use it in its 
     qualified use within 10 years of the decedent's death, an 
     additional estate tax is imposed to recapture the entire 
     estate-tax benefit of the special-use valuation.
       Installment payment of estate tax for closely held 
     businesses.--Under present law, the estate tax generally is 
     due within nine months of a decedent's death. However, an 
     executor generally may elect to pay estate

[[Page 19958]]

     tax attributable to an interest in a closely held business in 
     two or more installments (but no more than 10).\340\ An 
     estate is eligible for payment of estate tax in installments 
     if the value of the decedent's interest in a closely held 
     business exceeds 35 percent of the decedent's adjusted gross 
     estate (i.e., the gross estate less certain deductions). If 
     the election is made, the estate may defer payment of 
     principal and pay only interest for the first five years, 
     followed by up to 10 annual installments of principal and 
     interest. This provision effectively extends the time for 
     paying estate tax by 14 years from the original due date of 
     the estate tax. A special two-percent interest rate applies 
     to the amount of deferred estate tax attributable to the 
     first $1 million (adjusted annually for inflation occurring 
     after 1998; the inflation-adjusted amount for 2017 is 
     $1,490,000) in taxable value of a closely held business. The 
     interest rate applicable to the amount of estate tax 
     attributable to the taxable value of the closely held 
     business in excess of $1 million (adjusted for inflation) is 
     equal to 45 percent of the rate applicable to underpayments 
     of tax under section 6621 of the Code (i.e., 45 percent of 
     the Federal short-term rate plus three percentage 
     points).\341\ Interest paid on deferred estate taxes is not 
     deductible for estate or income tax purposes.
---------------------------------------------------------------------------
     \340\ Sec. 6166.
     \341\ The interest rate on this portion adjusts with the 
     Federal short-term rate.
---------------------------------------------------------------------------
     The gift tax
       Overview
       The Code imposes a tax for each calendar year on the 
     transfer of property by gift during such year by any 
     individual, whether a resident or nonresident of the United 
     States.\342\ The amount of taxable gifts for a calendar year 
     is determined by subtracting from the total amount of gifts 
     made during the year: (1) the gift tax annual exclusion 
     (described below); and (2) allowable deductions.
---------------------------------------------------------------------------
     \342\ Sec. 2501(a).
---------------------------------------------------------------------------
       Gift tax for the current taxable year is determined by: (1) 
     computing a tentative tax on the combined amount of all 
     taxable gifts for the current and all prior calendar years 
     using the common gift tax and estate tax rate table; (2) 
     computing a tentative tax only on all prior-year gifts; (3) 
     subtracting the tentative tax on prior-year gifts from the 
     tentative tax computed for all years to arrive at the portion 
     of the total tentative tax attributable to current-year 
     gifts; and, finally, (4) subtracting the amount of unified 
     credit not consumed by prior-year gifts.
       Because the gift tax shares a common unified credit 
     (exemption) and tax rate table with the estate tax, the 
     exemption amounts and tax rates are described together above, 
     along with certain other common features of these taxes.
       Transfers by gift
       The gift tax applies to a transfer by gift regardless of 
     whether: (1) the transfer is made outright or in trust; (2) 
     the gift is direct or indirect; or (3) the property is real 
     or personal, tangible or intangible.\343\ For gift tax 
     purposes, the value of a gift of property is the fair market 
     value of the property at the time of the gift.\344\ Where 
     property is transferred for less than full consideration, the 
     amount by which the value of the property exceeds the value 
     of the consideration is considered a gift and is included in 
     computing the total amount of a taxpayer's gifts for a 
     calendar year.\345\
---------------------------------------------------------------------------
     \343\ Sec. 2511(a).
     \344\ Sec. 2512(a).
     \345\ Sec. 2512(b).
---------------------------------------------------------------------------
       For a gift to occur, a donor generally must relinquish 
     dominion and control over donated property. For example, if a 
     taxpayer transfers assets to a trust established for the 
     benefit of his or her children, but retains the right to 
     revoke the trust, the taxpayer may not have made a completed 
     gift, because the taxpayer has retained dominion and control 
     over the transferred assets. A completed gift made in trust, 
     on the other hand, often is treated as a gift to the trust 
     beneficiaries.
       By reason of statute, certain transfers are not treated as 
     transfers by gift for gift tax purposes. These include, for 
     example, certain transfers for educational and medical 
     purposes,\346\ transfers to section 527 political 
     organizations,\347\ and transfers to tax-exempt organizations 
     described in sections 501(c)(4), (5), or (6).\348\
---------------------------------------------------------------------------
     \346\ Sec. 2503(e).
     \347\ Sec. 2501(a)(4).
     \348\ Sec. 2501(a)(6).
---------------------------------------------------------------------------
       Taxable gifts
       As stated above, the amount of a taxpayer's taxable gifts 
     for the year is determined by subtracting from the total 
     amount of the taxpayer's gifts for the year the gift tax 
     annual exclusion and any available deductions.
       Gift tax annual exclusion.--Under present law, donors of 
     lifetime gifts are provided an annual exclusion of $14,000 
     per donee in 2017 (indexed for inflation from the 1997 annual 
     exclusion amount of $10,000) for gifts of present interests 
     in property during the taxable year.\349\ If the non-donor 
     spouse consents to split the gift with the donor spouse, then 
     the annual exclusion is $28,000 per donee in 2017. In 
     general, unlimited transfers between spouses are permitted 
     without imposition of a gift tax. Special rules apply to the 
     contributions to a qualified tuition program (``529 Plan'') 
     including an election to treat a contribution that exceeds 
     the annual exclusion as a contribution made ratably over a 
     five-year period beginning with the year of the 
     contribution.\350\
---------------------------------------------------------------------------
     \349\ Sec. 2503(b).
     \350\ Sec. 529(c)(2).
---------------------------------------------------------------------------
       Marital and charitable deductions.--As described above, 
     transfers to a surviving spouse or to charity generally are 
     deductible for gift tax purposes. The effect of the marital 
     and charitable deductions generally is to remove assets 
     transferred to a surviving spouse or to charity from the gift 
     tax base.
     The generation-skipping transfer tax
       A generation-skipping transfer tax generally is imposed (in 
     addition to the gift tax or the estate tax) on transfers, 
     either directly or in trust or similar arrangement, to a 
     ``skip person'' (i.e., a beneficiary in a generation more 
     than one generation below that of the transferor). Transfers 
     subject to the generation-skipping transfer tax include 
     direct skips, taxable terminations, and taxable 
     distributions.
       Exemption and tax rate
       An exemption generally equal to the estate tax exemption 
     amount ($5.49 million for 2017) is provided for each person 
     making generation-skipping transfers. The exemption may be 
     allocated by a transferor (or his or her executor) to 
     transferred property, and in some cases is automatically 
     allocated. The allocation of generation-skipping transfer tax 
     exemption effectively reduces the tax rate on a generation-
     skipping transfer.
       The tax rate on generation-skipping transfers is a flat 
     rate of tax equal to the maximum estate and gift tax rate (40 
     percent) multiplied by the ``inclusion ratio.'' The inclusion 
     ratio with respect to any property transferred indicates the 
     amount of ``generation-skipping transfer tax exemption'' 
     allocated to a trust (or to property transferred in a direct 
     skip) relative to the total value of property 
     transferred.\351\ If, for example, a taxpayer transfers $5 
     million in property to a trust and allocates $5 million of 
     exemption to the transfer, the inclusion ratio is zero, and 
     the applicable tax rate on any subsequent generation-skipping 
     transfers from the trust is zero percent (40 percent 
     multiplied by the inclusion ratio of zero). If, however, the 
     taxpayer allocated only $2.5 million of exemption to the 
     transfer, the inclusion ratio is 0.5, and the applicable tax 
     rate on any subsequent generation-skipping transfers from the 
     trust is 20 percent (40 percent multiplied by the inclusion 
     ratio of 0.5). If the taxpayer allocates no exemption to the 
     transfer, the inclusion ratio is one, and the applicable tax 
     rate on any subsequent generation-skipping transfers from the 
     trust is 40 percent (40 percent multiplied by the inclusion 
     ratio of one).
---------------------------------------------------------------------------
     \351\ The inclusion ratio is one minus the applicable 
     fraction. The applicable fraction is the amount of exemption 
     allocated to a trust (or to a direct skip) divided by the 
     value of assets transferred.
---------------------------------------------------------------------------
       Generation-skipping transfers
       Generation-skipping transfer tax generally is imposed at 
     the time of a generation-skipping transfer--a direct skip, a 
     taxable termination, or a taxable distribution.
       A direct skip is any transfer subject to estate or gift tax 
     of an interest in property to a skip person. A skip person 
     may be a natural person or certain trusts. All persons 
     assigned to the second or more remote generation below the 
     transferor are skip persons (e.g., grandchildren and great-
     grandchildren). Trusts are skip persons if (1) all interests 
     in the trust are held by skip persons, or (2) no person holds 
     an interest in the trust and at no time after the transfer 
     may a distribution (including distributions and terminations) 
     be made to a non-skip person.
       A taxable termination is a termination (by death, lapse of 
     time, release of power, or otherwise) of an interest in 
     property held in trust unless, immediately after such 
     termination, a non-skip person has an interest in the 
     property, or unless at no time after the termination may a 
     distribution (including a distribution upon termination) be 
     made from the trust to a skip person.
       A taxable distribution is a distribution from a trust to a 
     skip person (other than a taxable termination or direct 
     skip). If a transferor allocates generation-skipping transfer 
     tax exemption to a trust prior to the taxable distribution, 
     generation-skipping transfer tax may be avoided.
     Income tax basis in property received
       In general
       Gain or loss, if any, on the disposition of property is 
     measured by the taxpayer's amount realized (i.e., gross 
     proceeds received) on the disposition, less the taxpayer's 
     basis in such property. Basis generally represents a 
     taxpayer's investment in property with certain adjustments 
     required after acquisition. For example, basis is increased 
     by the cost of capital improvements made to the property and 
     decreased by depreciation deductions taken with respect to 
     the property.
       A gift or bequest of appreciated (or loss) property is not 
     an income tax realization event for the transferor. The Code 
     provides special rules for determining a recipient's basis in 
     assets received by lifetime gift or from a decedent.

[[Page 19959]]


       Basis in property received by lifetime gift
       Under present law, property received from a donor of a 
     lifetime gift generally takes a carryover basis. ``Carryover 
     basis'' means that the basis in the hands of the donee is the 
     same as it was in the hands of the donor. The basis of 
     property transferred by lifetime gift also is increased, but 
     not above fair market value, by any gift tax paid by the 
     donor. The basis of a lifetime gift, however, generally 
     cannot exceed the property's fair market value on the date of 
     the gift. If a donor's basis in property is greater than the 
     fair market value of the property on the date of the gift, 
     then, for purposes of determining loss on a subsequent sale 
     of the property, the donee's basis is the property's fair 
     market value on the date of the gift.
       Basis in property acquired from a decedent
       Property acquired from a decedent's estate generally takes 
     a stepped-up basis. ``Stepped-up basis'' means that the basis 
     of property acquired from a decedent's estate generally is 
     the fair market value on the date of the decedent's death 
     (or, if the alternate valuation date is elected, the earlier 
     of six months after the decedent's death or the date the 
     property is sold or distributed by the estate). Providing a 
     fair market value basis eliminates the recognition of income 
     on any appreciation of the property that occurred prior to 
     the decedent's death and eliminates the tax benefit from any 
     unrealized loss.
       In community property states, a surviving spouse's one-half 
     share of community property held by the decedent and the 
     surviving spouse (under the community property laws of any 
     State, U.S. possession, or foreign country) generally is 
     treated as having passed from the decedent and, thus, is 
     eligible for stepped-up basis. Thus, both the decedent's one-
     half share and the surviving spouse's one-half share are 
     stepped up to fair market value. This rule applies if at 
     least one-half of the whole of the community interest is 
     includible in the decedent's gross estate.
       Stepped-up basis treatment generally is denied to certain 
     interests in foreign entities. Stock in a passive foreign 
     investment company (including those for which a mark-to-
     market election has been made) generally takes a carryover 
     basis, except that stock of a passive foreign investment 
     company for which a decedent shareholder had made a qualified 
     electing fund election is allowed a stepped-up basis. Stock 
     owned by a decedent in a domestic international sales 
     corporation (or former domestic international sales 
     corporation) takes a stepped-up basis reduced by the amount 
     (if any) which would have been included in gross income under 
     section 995(c) as a dividend if the decedent had lived and 
     sold the stock at its fair market value on the estate tax 
     valuation date (i.e., generally the date of the decedent's 
     death unless an alternate valuation date is elected).


                               House Bill

       The provision doubles the estate and gift tax exemption for 
     decedents dying and gifts made after December 31, 2017. This 
     is accomplished by increasing the basic exclusion amount 
     provided in section 2010(c)(3) of the Code from $5 million to 
     $10 million. The $10 million amount is indexed for inflation 
     occurring after 2011.
       For estates of decedents dying and generation-skipping 
     transfers made after December 31, 2024, the provision repeals 
     the estate tax and the generation-skipping transfer tax. The 
     provision includes a transition rule for assets placed in a 
     qualified domestic trust by a decedent who died before the 
     effective date of the provision. Specifically, estate tax 
     will not be imposed on: (1) distributions before the death of 
     a surviving spouse from the trust more than 10 years after 
     the date of enactment; or (2) assets remaining in the 
     qualified domestic trust upon the death of the surviving 
     spouse. The top marginal gift tax rate is reduced to 35 
     percent for gifts made after December 31, 2024.
       The provision generally retains the present law rules for 
     determining the income tax basis of assets acquired by gift 
     and assets acquired from a decedent. As a result, property 
     received from a donor of a lifetime gift generally will 
     continue to take a carryover basis, and property acquired 
     from a decedent's estate generally will continue to take a 
     stepped-up basis.
       Effective date.--The doubling of the estate and gift tax 
     exemption is effective for estates of decedents dying, 
     generation-skipping transfers, and gifts made after December 
     31, 2017. The repeal of the estate and generation-skipping 
     transfer taxes, and the reduction in the gift tax rate to 35 
     percent, are effective for estates of decedents dying, 
     generation-skipping transfers, and gifts made after December 
     31, 2024.


                            Senate Amendment

       The provision doubles the estate and gift tax exemption for 
     estates of decedents dying and gifts made after December 31, 
     2017, and before January 1, 2026. This is accomplished by 
     increasing the basic exclusion amount provided in section 
     2010(c)(3) of the Code from $5 million to $10 million. The 
     $10 million amount is indexed for inflation occurring after 
     2011.
       As a conforming amendment to section 2010(g) (regarding 
     computation of estate tax), the provision provides that the 
     Secretary shall prescribe regulations as may be necessary or 
     appropriate to carry out the purposes of the section with 
     respect to differences between the basic exclusion amount in 
     effect: (1) at the time of the decedent's death; and (2) at 
     the time of any gifts made by the decedent.
       Effective date.--The provision is effective for estates of 
     decedents dying and gifts made after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

G. Alternative Minimum Tax (sec. 2001 of the House bill, sec. 12001 of 
       the Senate amendment, and secs. 53 and 55-59 of the Code)


                              Present Law

     Individual alternative minimum tax
       In general
       An alternative minimum tax (``AMT'') is imposed on an 
     individual, estate, or trust in an amount by which the 
     tentative minimum tax exceeds the regular income tax for the 
     taxable year. For taxable years beginning in 2017, the 
     tentative minimum tax is the sum of (1) 26 percent of so much 
     of the taxable excess as does not exceed $187,800 ($93,900 in 
     the case of a married individual filing a separate return) 
     and (2) 28 percent of the remaining taxable excess. The 
     breakpoints are indexed for inflation. 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 
     taxable income adjusted to take account of specified tax 
     preferences and adjustments.
       The exemption amounts for taxable years beginning in 2017 
     are: (1) $84,500 in the case of married individuals filing a 
     joint return and surviving spouses; (2) $54,300 in the case 
     of other unmarried individuals; (3) $42,250 in the case of 
     married individuals filing separate returns; and (4) $24,100 
     in the case of an estate or trust. For taxable years 
     beginning in 2017, the exemption amounts are phased out by an 
     amount equal to 25 percent of the amount by which the 
     individual's AMTI exceeds (1) $160,900 in the case of married 
     individuals filing a joint return and surviving spouses, (2) 
     $120,700 in the case of other unmarried individuals, and (3) 
     $80,450 in the case of married individuals filing separate 
     returns or an estate or a trust. The amounts are indexed for 
     inflation.
       AMTI is the taxpayer's taxable income increased by certain 
     preference items and adjusted by determining the tax 
     treatment of certain items in a manner that negates the 
     deferral of income resulting from the regular tax treatment 
     of those items.
       Preference items in computing AMTI
       The minimum tax preference items are:
       1. The excess of the deduction for percentage depletion 
     over the adjusted basis of each mineral property (other than 
     oil and gas properties) at the end of the taxable year.
       2. The amount by which excess intangible drilling costs 
     (i.e., expenses in excess the amount that would have been 
     allowable if amortized over a 10-year period) exceed 65 
     percent of the net income from oil, gas, and geothermal 
     properties. This preference applies to independent producers 
     only to the extent it reduces the producer's AMTI (determined 
     without regard to this preference and the net operating loss 
     deduction) by more than 40 percent.
       3. Tax-exempt interest income on private activity bonds 
     (other than qualified 501(c)(3) bonds, certain housing bonds, 
     and bonds issued in 2009 and 2010) issued after August 7, 
     1986.
       4. Accelerated depreciation or amortization on certain 
     property placed in service before January 1, 1987.
       5. Seven percent of the amount excluded from income under 
     section 1202 (relating to gains on the sale of certain small 
     business stock).
       In addition, losses from any tax shelter farm activity or 
     passive activities are not taken into account in computing 
     AMTI.
       Adjustments in computing AMTI
       The adjustments that individuals must make to compute AMTI 
     are:
       1. Depreciation on property placed in service after 1986 
     and before January 1, 1999, is computed by using the 
     generally longer class lives prescribed by the alternative 
     depreciation system of section 168(g) and either (a) the 
     straight-line method in the case of property subject to the 
     straight-line method under the regular tax or (b) the 150-
     percent declining balance method in the case of other 
     property. Depreciation on property placed in service after 
     December 31, 1998, is computed by using the regular tax 
     recovery periods and the AMT methods described in the 
     previous sentence. Depreciation on property acquired after 
     September 10, 2001, which is allowed an additional allowance 
     under section 168(k) for the regular tax is computed without 
     regard to any AMT adjustments.
       2. Mining exploration and development costs are capitalized 
     and amortized over a 10-year period.
       3. Taxable income from a long-term contract (other than a 
     home construction contract) is computed using the percentage 
     of completion method of accounting.
       4. Depreciation on property placed in service after 1986 
     and before January 1, 1999, is

[[Page 19960]]

     computed by using the generally longer class lives prescribed 
     by the alternative depreciation system of section 168(g) and 
     either (a) the straight-line method in the case of property 
     subject to the straight-line method under the regular tax or 
     (b) the 150-percent declining balance method in the case of 
     other property. Depreciation on property placed in service 
     after December 31, 1998, is computed by using the regular tax 
     recovery periods and the AMT methods described in the 
     previous sentence. Depreciation on property acquired after 
     September 10, 2001, which is allowed an additional allowance 
     under section 168(k) for the regular tax is computed without 
     regard to any AMT adjustments.
       5. Mining exploration and development costs are capitalized 
     and amortized over a 10-year period.
       6. Taxable income from a long-term contract (other than a 
     home construction contract) is computed using the percentage 
     of completion method of accounting.
       7. The amortization deduction allowed for pollution control 
     facilities placed in service before January 1, 1999 
     (generally determined using 60-month amortization for a 
     portion of the cost of the facility under the regular tax), 
     is calculated under the alternative depreciation system 
     (generally, using longer class lives and the straight-line 
     method). The amortization deduction allowed for pollution 
     control facilities placed in service after December 31, 1998, 
     is calculated using the regular tax recovery periods and the 
     straight-line method.
       8. Miscellaneous itemized deductions are not allowed.
       9. Itemized deductions for State, local, and foreign real 
     property taxes; State and local personal property taxes; 
     State, local, and foreign income, war profits, and excess 
     profits taxes; and State and local sales taxes are not 
     allowed.
       10. Medical expenses are allowed only to the extent they 
     exceed ten percent of the taxpayer's adjusted gross income.
       11. Deductions for interest on home equity loans are not 
     allowed.
       12. The standard deduction and the deduction for personal 
     exemptions are not allowed.
       13. The amount allowable as a deduction for circulation 
     expenditures is capitalized and amortized over a three-year 
     period.
       14. The amount allowable as a deduction for research and 
     experimentation expenditures from passive activities is 
     capitalized and amortized over a 10-year period.
       15. The regular tax rules relating to incentive stock 
     options do not apply.
       Other rules
       The taxpayer's net operating loss deduction generally 
     cannot reduce the taxpayer's AMTI by more than 90 percent of 
     the AMTI (determined without the net operating loss 
     deduction).
       The alternative minimum tax foreign tax credit reduces the 
     tentative minimum tax.
       The various nonrefundable business credits allowed under 
     the regular tax generally are not allowed against the AMT. 
     Certain exceptions apply.
       If an individual is subject to AMT in any year, the amount 
     of tax exceeding the taxpayer's regular tax liability is 
     allowed as a credit (the ``AMT credit'') in any subsequent 
     taxable year to the extent the taxpayer's regular tax 
     liability exceeds his or her tentative minimum tax liability 
     in such subsequent year. The AMT credit is allowed only to 
     the extent that the taxpayer's AMT liability is the result of 
     adjustments that are timing in nature. The individual AMT 
     adjustments relating to itemized deductions and personal 
     exemptions are not timing in nature, and no minimum tax 
     credit is allowed with respect to these items.
       An individual may elect to write off certain expenditures 
     paid or incurred with respect of circulation expenses, 
     research and experimental expenses, intangible drilling and 
     development expenditures, development expenditures, and 
     mining exploration expenditures over a specified period 
     (three years in the case of circulation expenses, 60 months 
     in the case of intangible drilling and development 
     expenditures, and 10 years in case of other expenditures). 
     The election applies for purposes of both the regular tax and 
     the alternative minimum tax.
     Corporate alternative minimum tax
       In general
       An AMT is also imposed on a corporation to the extent the 
     corporation's tentative minimum tax exceeds its regular tax. 
     This tentative minimum tax is computed at the rate of 20 
     percent on the AMTI in excess of a $40,000 exemption amount 
     that phases out. The exemption amount is phased out by an 
     amount equal to 25 percent of the amount that the 
     corporation's AMTI exceeds $150,000.
       AMTI is the taxpayer's taxable income increased by certain 
     preference items and adjusted by determining the tax 
     treatment of certain items in a manner that negates the 
     deferral of income resulting from the regular tax treatment 
     of those items.
       A corporation with average gross receipts of less than $7.5 
     million for the prior three taxable years is exempt from the 
     corporate minimum tax. The $7.5 million threshold is reduced 
     to $5 million for the corporation's first three-taxable year 
     period.
       Preference items in computing AMTI
       The corporate minimum tax preference items are:
       1. The excess of the deduction for percentage depletion 
     over the adjusted basis of the property at the end of the 
     taxable year. This preference does not apply to percentage 
     depletion allowed with respect to oil and gas properties.
       2. The amount by which excess intangible drilling costs 
     arising in the taxable year exceed 65 percent of the net 
     income from oil, gas, and geothermal properties. This 
     preference does not apply to an independent producer to the 
     extent the preference would not reduce the producer's AMTI by 
     more than 40 percent.
       3. Tax-exempt interest income on private activity bonds 
     (other than qualified 501(c)(3) bonds, certain housing bonds, 
     and bonds issued in 2009 and 2010) issued after August 7, 
     1986.
       4. Accelerated depreciation or amortization on certain 
     property placed in service before January 1, 1987.
       Adjustments in computing AMTI
       The adjustments that corporations must make in computing 
     AMTI are:
       1. Depreciation on property placed in service after 1986 
     and before January 1, 1999, must be computed by using the 
     generally longer class lives prescribed by the alternative 
     depreciation system of section 168(g) and either (a) the 
     straight-line method in the case of property subject to the 
     straight-line method under the regular tax or (b) the 150-
     percent declining balance method in the case of other 
     property. Depreciation on property placed in service after 
     December 31, 1998, is computed by using the regular tax 
     recovery periods and the AMT methods described in the 
     previous sentence. Depreciation on property which is allowed 
     ``bonus depreciation'' for the regular tax is computed 
     without regard to any AMT adjustments.
       2. Mining exploration and development costs must be 
     capitalized and amortized over a 10-year period.
       3. Taxable income from a long-term contract (other than a 
     home construction contract) must be computed using the 
     percentage of completion method of accounting.
       4. The amortization deduction allowed for pollution control 
     facilities placed in service before January 1, 1999 
     (generally determined using 60-month amortization for a 
     portion of the cost of the facility under the regular tax), 
     must be calculated under the alternative depreciation system 
     (generally, using longer class lives and the straight-line 
     method). The amortization deduction allowed for pollution 
     control facilities placed in service after December 31, 1998, 
     is calculated using the regular tax recovery periods and the 
     straight-line method.
       5. The special rules applicable to Merchant Marine 
     construction funds are not applicable.
       6. The special deduction allowable under section 833(b) for 
     Blue Cross and Blue Shield organizations is not allowed.
       7. The adjusted current earnings adjustment applies, as 
     described below.
       Adjusted current earning (``ACE'') adjustment
       The adjusted current earnings adjustment is the amount 
     equal to 75 percent of the amount by which the adjusted 
     current earnings of a corporation exceed its AMTI (determined 
     without the ACE adjustment and the alternative tax net 
     operating loss deduction). In determining ACE the following 
     rules apply:
       1. For property placed in service before 1994, depreciation 
     generally is determined using the straight-line method and 
     the class life determined under the alternative depreciation 
     system.
       2. Amounts excluded from gross income under the regular tax 
     but included for purposes of determining earnings and profits 
     are generally included in determining ACE.
       3. The inside build-up of a life insurance contract is 
     included in ACE (and the related premiums are deductible).
       4. Intangible drilling costs of integrated oil companies 
     must be capitalized and amortized over a 60-month period.
       5. The regular tax rules of section 173 (allowing 
     circulation expenses to be amortized) and section 248 
     (allowing organizational expenses to be amortized) do not 
     apply.
       6. Inventory must be calculated using the FIFO, rather than 
     LIFO, method.
       7. The installment sales method generally may not be used.
       8. No loss may be recognized on the exchange of any pool of 
     debt obligations for another pool of debt obligations having 
     substantially the same effective interest rates and 
     maturities.
       9. Depletion (other than for oil and gas properties) must 
     be calculated using the cost, rather than the percentage, 
     method.
       10. In certain cases, the assets of a corporation that has 
     undergone an ownership change must be stepped down to their 
     fair market values.
       Other rules
       The taxpayer's net operating loss carryover generally 
     cannot reduce the taxpayer's AMT liability by more than 90 
     percent of AMTI determined without this deduction.
       The various nonrefundable business credits allowed under 
     the regular tax generally are not allowed against the AMT. 
     Certain exceptions apply.
       If a corporation is subject to AMT in any year, the amount 
     of AMT is allowed as an

[[Page 19961]]

     AMT credit in any subsequent taxable year to the extent the 
     taxpayer's regular tax liability exceeds its tentative 
     minimum tax in the subsequent year. Corporations are allowed 
     to claim a limited amount of AMT credits in lieu of bonus 
     depreciation.
       A corporation may elect to write off certain expenditures 
     paid or incurred with respect of circulation expenses, 
     research and experimental expenses, intangible drilling and 
     development expenditures, development expenditures, and 
     mining exploration expenditures over a specified period 
     (three years in the case of circulation expenses, 60 months 
     in the case of intangible drilling and development 
     expenditures, and 10 years in case of other expenditures). 
     The election applies for purposes of both the regular tax and 
     the alternative minimum tax


                               House Bill

       The House bill repeals the individual and corporate 
     alternative minimum tax.
       The provision allows the AMT credit to offset the 
     taxpayer's regular tax liability for any taxable year. In 
     addition, the AMT credit is refundable for any taxable year 
     beginning after 2018 and before 2023 in an amount equal to 50 
     percent (100 percent in the case of taxable years beginning 
     in 2022) of the excess of the minimum tax credit for the 
     taxable year over the amount of the credit allowable for the 
     year against regular tax liability. Thus, the full amount of 
     the minimum tax credit will be allowed in taxable years 
     beginning before 2023.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.
       In determining the alternative minimum taxable income for 
     taxable years beginning before January 1, 2018, the net 
     operating loss deduction carryback from taxable years 
     beginning after December 31, 2017, are determined without 
     regard to any AMT adjustments or preferences.
       The repeal of the election to write off certain 
     expenditures over a specified period applies to amounts paid 
     or incurred after December 31, 2017.


                            Senate Amendment

       The Senate amendment temporarily increases both the 
     exemption amount and the exemption amount phaseout thresholds 
     for the individual AMT. Under the provision, for taxable 
     years beginning after December 31, 2017, and beginning before 
     January 1, 2026, the AMT exemption amount is increased to 
     $109,400 for married taxpayers filing a joint return (half 
     this amount for married taxpayers filing a separate return), 
     and $70,300 for all other taxpayers (other than estates and 
     trusts). The phaseout thresholds are increased to $208,400 
     (half this amount for married taxpayers filing a separate 
     return), and $156,300 for all other taxpayers (other than 
     estates and trusts). These amounts are indexed for inflation.
       The provision does not change the corporate alternative 
     minimum tax.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement temporarily increases both the 
     exemption amount and the exemption amount phaseout thresholds 
     for the individual AMT. Under the provision, for taxable 
     years beginning after December 31, 2017, and beginning before 
     January 1, 2026, the AMT exemption amount is increased to 
     $109,400 for married taxpayers filing a joint return (half 
     this amount for married taxpayers filing a separate return), 
     and $70,300 for all other taxpayers (other than estates and 
     trusts). The phaseout thresholds are increased to $1,000,000 
     for married taxpayers filing a joint return, and $500,000 for 
     all other taxpayers (other than estates and trusts). These 
     amounts are indexed for inflation.
       The conference agreement follows the House bill in 
     repealing the corporate alternative minimum tax.
       In the case of a corporation, the conference agreement 
     allows the AMT credit to offset the regular tax liability for 
     any taxable year. In addition, the AMT credit is refundable 
     for any taxable year beginning after 2017 and before 2022 in 
     an amount equal to 50 percent (100 percent in the case of 
     taxable years beginning in 2021) of the excess of the minimum 
     tax credit for the taxable year over the amount of the credit 
     allowable for the year against regular tax liability. Thus, 
     the full amount of the minimum tax credit will be allowed in 
     taxable years beginning before 2022.
       Effective date.--The provisions are effective for taxable 
     years beginning after December 31, 2017.

H. Elimination of Shared Responsibility Payment for Individuals Failing 
   to Maintain Minimal Essential Coverage (sec. 11081 of the Senate 
                 amendment and sec. 5000A of the Code)


                              Present Law

       Under the Patient Protection and Affordable Care Act \352\ 
     (also called the Affordable Care Act, or ``ACA''), 
     individuals must be covered by a health plan that provides at 
     least minimum essential coverage or be subject to a tax (also 
     referred to as a penalty) for failure to maintain the 
     coverage (commonly referred to as the ``individual 
     mandate'').\353\ Minimum essential coverage includes 
     government-sponsored programs (including Medicare, Medicaid, 
     and CHIP, among others), eligible employer-sponsored plans, 
     plans in the individual market, grandfathered group health 
     plans and grandfathered health insurance coverage, and other 
     coverage as recognized by the Secretary of Health and Human 
     Services (``HHS'') in coordination with the Secretary of the 
     Treasury.\354\ The tax is imposed for any month that an 
     individual does not have minimum essential coverage unless 
     the individual qualifies for an exemption for the month as 
     described below.
---------------------------------------------------------------------------
     \352\  Pub. L. No. 111-148.
     \353\ Section 5000A. If an individual is a dependent, as 
     defined in section 152, of another taxpayer, the other 
     taxpayer is liable for any tax for failure to maintain the 
     required coverage with respect to the individual.
     \354\  Sec. 5000A(f). Minimum essential coverage does not 
     include coverage that consists of only certain excepted 
     benefits, such as limited scope dental and vision benefits or 
     long-term care insurance offered under a separate policy, 
     certificate or contract.
---------------------------------------------------------------------------
       The tax for any calendar month is one-twelfth of the tax 
     calculated as an annual amount. The annual amount is equal to 
     the greater of a flat dollar amount or an excess income 
     amount. The flat dollar amount is the lesser of (1) the sum 
     of the individual annual dollar amounts for the members of 
     the taxpayer's family and (2) 300 percent of the adult 
     individual dollar amount. The individual adult annual dollar 
     amount is $695 for 2017 and 2018.\355\ For an individual who 
     has not attained age 18, the individual annual dollar amount 
     is one half of the adult amount. The excess income amount is 
     2.5 percent of the excess of the taxpayer's household income 
     for the taxable year over the threshold amount of income for 
     requiring the taxpayer to file an income tax return.\356\ The 
     total annual household payment may not exceed the national 
     average annual premium for bronze level health plans for the 
     applicable family size offered through Exchanges that year.
---------------------------------------------------------------------------
     \355\ For years after 2016, the $695 amount is indexed to 
     CPI-U, rounded to the next lowest multiple of $50.
     \356\  Sec. 6012(a).
---------------------------------------------------------------------------
       Exemptions from the requirement to maintain minimum 
     essential coverage are provided for the following: (1) an 
     individual for whom coverage is unaffordable because the 
     required contribution exceeds 8.16 \357\ percent of household 
     income, (2) an individual with household income below the 
     income tax return filing threshold, (3) a member of an Indian 
     tribe, (4) a member of certain recognized religious sects or 
     a health sharing ministry, (5) an individual with a coverage 
     gap for a continuous period of less than three months, and 
     (6) an individual who is determined by the Secretary of HHS 
     to have suffered a hardship with respect to the capability to 
     obtain coverage.\358\
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     \357\  For 2017. The rate applicable for 2018 is 8.06 percent 
     of household income.
     \358\ In addition, certain individuals present or residing 
     outside of the United States and bona fide residents of 
     United States territories are deemed to maintain minimum 
     essential coverage.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment reduces the amount of the individual 
     responsibility payment, enacted as part of the Affordable 
     Care Act, to zero.
       Effective date.--The provision is effective with respect to 
     health coverage status for months beginning after December 
     31, 2018.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

                          I. Other Provisions

     1. Temporarily allow increased contributions to ABLE 
         accounts, and allow contributions to be eligible for 
         saver's credit (sec. 11024 of the Senate amendment and 
         sec. 529A of the Code)


                              Present Law

     Qualified ABLE programs
       The Code provides for a tax-favored savings program 
     intended to benefit disabled individuals, known as qualified 
     ABLE programs.\359\ A qualified ABLE program is a program 
     established and maintained by a State or agency or 
     instrumentality thereof. A qualified ABLE program must meet 
     the following conditions: (1) under the provisions of the 
     program, contributions may be made to an account (an ``ABLE 
     account''), established for the purpose of meeting the 
     qualified disability expenses of the designated beneficiary 
     of the account; (2) the program must limit a designated 
     beneficiary to one ABLE account; and (3) the program must 
     meet certain other requirements discussed below. A qualified 
     ABLE program is generally exempt from income tax, but is 
     otherwise subject to the taxes imposed on the unrelated 
     business income of tax-exempt organizations.
---------------------------------------------------------------------------
     \359\ Sec. 529A.
---------------------------------------------------------------------------
       A designated beneficiary of an ABLE account is the owner of 
     the ABLE account. A designated beneficiary must be an 
     eligible individual (defined below) who established the ABLE 
     account and who is designated at the commencement of 
     participation in the qualified ABLE program as the 
     beneficiary of amounts paid (or to be paid) into and from the 
     program.
       Contributions to an ABLE account must be made in cash and 
     are not deductible for Federal income tax purposes. Except in 
     the case

[[Page 19962]]

     of a rollover contribution from another ABLE account, an ABLE 
     account must provide that it may not receive aggregate 
     contributions during a taxable year in excess of the amount 
     under section 2503(b) of the Code (the annual gift tax 
     exemption). For 2017, this is $14,000.\360\ Additionally, a 
     qualified ABLE program must provide adequate safeguards to 
     ensure that ABLE account contributions do not exceed the 
     limit imposed on accounts under the qualified tuition program 
     of the State maintaining the qualified ABLE program. Amounts 
     in the account accumulate on a tax-deferred basis (i.e., 
     income on accounts under the program is not subject to 
     current income tax).
---------------------------------------------------------------------------
     \360\ This amount is indexed for inflation. In the case that 
     contributions to an ABLE account exceed the annual limit, an 
     excise tax in the amount of six percent of the excess 
     contribution to such account is imposed on the designated 
     beneficiary. Such tax does not apply in the event that the 
     trustee of such account makes a corrective distribution of 
     such excess amounts by the due date (including extensions) of 
     the individual's tax return for the year within the taxable 
     year.
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       A qualified ABLE program may permit a designated 
     beneficiary to direct (directly or indirectly) the investment 
     of any contributions (or earnings thereon) no more than two 
     times in any calendar year and must provide separate 
     accounting for each designated beneficiary. A qualified ABLE 
     program may not allow any interest in the program (or any 
     portion thereof) to be used as security for a loan.
       Distributions from an ABLE account are generally includible 
     in the distributee's income to the extent consisting of 
     earnings on the account.\361\ Distributions from an ABLE 
     account are excludable from income to the extent that the 
     total distribution does not exceed the qualified disability 
     expenses of the designated beneficiary during the taxable 
     year. If a distribution from an ABLE account exceeds the 
     qualified disability expenses of the designated beneficiary, 
     a pro rata portion of the distribution is excludable from 
     income. The portion of any distribution that is includible in 
     income is subject to an additional 10-percent tax unless the 
     distribution is made after the death of the beneficiary. 
     Amounts in an ABLE account may be rolled over without income 
     tax liability to another ABLE account for the same 
     beneficiary \362\ or another ABLE account for the designated 
     beneficiary's brother, sister, stepbrother or stepsister who 
     is also an eligible individual.
---------------------------------------------------------------------------
     \361\  The rules of section 72 apply in determining the 
     portion of a distribution that consists of earnings.
     \362\ For instance, if a designated beneficiary were to 
     relocate to a different State.
---------------------------------------------------------------------------
       Except in the case of an ABLE account established in a 
     different ABLE program for purposes of transferring ABLE 
     accounts,\363\ no more than one ABLE account may be 
     established by a designated beneficiary. Thus, once an ABLE 
     account has been established by a designated beneficiary, no 
     account subsequently established by such beneficiary shall be 
     treated as an ABLE account.
---------------------------------------------------------------------------
     \363\ In which case the contributor ABLE account must be 
     closed 60 days after the transfer to the new ABLE account is 
     made.
---------------------------------------------------------------------------
       A contribution to an ABLE account is treated as a completed 
     gift of a present interest to the designated beneficiary of 
     the account. Such contributions qualify for the per-donee 
     annual gift tax exclusion ($14,000 for 2017) and, to the 
     extent of such exclusion, are exempt from the generation 
     skipping transfer (``GST'') tax. A distribution from an ABLE 
     account generally is not subject to gift tax or GST tax.
       Eligible individuals
       As described above, a qualified ABLE program may provide 
     for the establishment of ABLE accounts only if those accounts 
     are established and owned by an eligible individual, such 
     owner referred to as a designated beneficiary. For these 
     purposes, an eligible individual is an individual either (1) 
     for whom a disability certification has been filed with the 
     Secretary for the taxable year, or (2) who is entitled to 
     Social Security Disability Insurance benefits or SSI benefits 
     \364\ based on blindness or disability, and such blindness or 
     disability occurred before the individual attained age 26.
---------------------------------------------------------------------------
     \364\ These are benefits, respectively, under Title II or 
     Title XVI of the Social Security Act.
---------------------------------------------------------------------------
       A disability certification means a certification to the 
     satisfaction of the Secretary, made by the eligible 
     individual or the parent or guardian of the eligible 
     individual, that the individual has a medically determinable 
     physical or mental impairment, which results in marked and 
     severe functional limitations, and which can be expected to 
     result in death or which has lasted or can be expected to 
     last for a continuous period of not less than 12 months, or 
     is blind (within the meaning of section 1614(a)(2) of the 
     Social Security Act). Such blindness or disability must have 
     occurred before the date the individual attained age 26. Such 
     certification must include a copy of the diagnosis of the 
     individual's impairment and be signed by a licensed 
     physician.\365\
---------------------------------------------------------------------------
     \365\ No inference may be drawn from a disability 
     certification for purposes of eligibility for Social 
     Security, SSI or Medicaid benefits.
---------------------------------------------------------------------------
       Qualified disability expenses
       As described above, the earnings on distributions from an 
     ABLE account are excluded from income only to the extent 
     total distributions do not exceed the qualified disability 
     expenses of the designated beneficiary. For this purpose, 
     qualified disability expenses are any expenses related to the 
     eligible individual's blindness or disability which are made 
     for the benefit of the designated beneficiary. Such expenses 
     include the following expenses: education, housing, 
     transportation, employment training and support, assistive 
     technology and personal support services, health, prevention 
     and wellness, financial management and administrative 
     services, legal fees, expenses for oversight and monitoring, 
     funeral and burial expenses, and other expenses, which are 
     approved by the Secretary under regulations and consistent 
     with the purposes of section 529A.
       Transfer to State
       In the event that the designated beneficiary dies, subject 
     to any outstanding payments due for qualified disability 
     expenses incurred by the designated beneficiary, all amounts 
     remaining in the deceased designated beneficiary's ABLE 
     account not in excess of the amount equal to the total 
     medical assistance paid such individual under any State 
     Medicaid plan established under title XIX of the Social 
     Security Act shall be distributed to such State upon filing 
     of a claim for payment by such State. Such repaid amounts 
     shall be net of any premiums paid from the account or by or 
     on behalf of the beneficiary to the State's Medicaid Buy-In 
     program.
       Treatment of ABLE accounts under Federal programs
       Any amounts in an ABLE account, and any distribution for 
     qualified disability expenses, shall be disregarded for 
     purposes of determining eligibility to receive, or the amount 
     of, any assistance or benefit authorized by any Federal 
     means-tested program. However, in the case of the SSI 
     program, a distribution for housing expenses is not 
     disregarded, nor are amounts in an ABLE account in excess of 
     $100,000. In the case that an individual's ABLE account 
     balance exceeds $100,000, such individual's SSI benefits 
     shall not be terminated, but instead shall be suspended until 
     such time as the individual's resources fall below $100,000. 
     However, such suspension shall not apply for purposes of 
     Medicaid eligibility.
     Saver's credit
       Present law provides a nonrefundable tax credit for 
     eligible taxpayers for qualified retirement savings 
     contributions.\366\ The maximum annual contribution eligible 
     for the credit is $2,000 per individual. The credit rate 
     depends on the adjusted gross income (``AGI'') of the 
     taxpayer. For this purpose, AGI is determined without regard 
     to certain excludable foreign-source earned income and 
     certain U.S. possession income.
---------------------------------------------------------------------------
     \366\ Sec. 25B.
---------------------------------------------------------------------------
       For taxable years beginning in 2017, married taxpayers 
     filing joint returns with AGI of $61,500 or less, taxpayers 
     filing head of household returns with AGI of $46,125 or less, 
     and all other taxpayers filing returns with AGI of $30,750 or 
     less are eligible for the credit. As the taxpayer's AGI 
     increases, the credit rate available to the taxpayer is 
     reduced, until, at certain AGI levels, the credit is 
     unavailable. The credit rates based on AGI for taxable years 
     beginning in 2016 are provided in the table below. The AGI 
     levels used for the determination of the available credit 
     rate are indexed for inflation.

                                    TABLE 3.--CREDIT RATES FOR SAVER'S CREDIT
----------------------------------------------------------------------------------------------------------------
             Joint Filers                Heads of Households        All Other Filers           Credit Rate
----------------------------------------------------------------------------------------------------------------
$0-$37,000...........................  $0-$27,750.............  $0-$18,500.............  50 percent
$37,001-$40,000......................  $27,751-$30,000........  $18,501-$20,000........  20 percent
$40,001-$62,000......................  $30,001-$46,500........  $20,001-$31,000........  10 percent
Over $62,000.........................  Over $46,500...........  Over $31,000...........  0 percent
----------------------------------------------------------------------------------------------------------------

       The saver's credit is in addition to any deduction or 
     exclusion that would otherwise apply with respect to the 
     contribution. The credit offsets alternative minimum tax 
     liability as well as regular tax liability. The credit is 
     available to individuals who are 18 years old or older, other 
     than individuals who are full-time students or claimed as a 
     dependent on another taxpayer's return.

[[Page 19963]]

       Qualified retirement savings contributions consist of (1) 
     elective deferrals to a section 401(k) plan, a section 403(b) 
     plan, a governmental section 457 plan, a SIMPLE plan, or a 
     SARSEP; (2) contributions to a traditional or Roth IRA; and 
     (3) voluntary after-tax employee contributions to a qualified 
     retirement plan or section 403(b) plan. Under the rules 
     governing these arrangements, an individual's contribution to 
     the arrangement generally cannot exceed the lesser of an 
     annual dollar amount (for example, in 2017, $5,500 in the 
     case of an IRA of an individual under age 50) or the 
     individual's compensation that is includible in income. In 
     the case of IRA contributions of a married couple, the 
     combined includible compensation of both spouses may be taken 
     into account.
       The amount of any contribution eligible for the credit is 
     reduced by distributions received by the taxpayer (or by the 
     taxpayer's spouse if the taxpayer files a joint return with 
     the spouse) from any retirement plan to which eligible 
     contributions can be made during the taxable year for which 
     the credit is claimed, during the two taxable years prior to 
     the year for which 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 (including extensions) 
     for filing the taxpayer's return for the year. Distributions 
     that are rolled over to another retirement plan do not affect 
     the credit.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment temporarily increases the contribution 
     limitation to ABLE accounts under certain circumstances. 
     While the general overall limitation on contributions (the 
     per-donee annual gift tax exclusion ($14,000 for 2017)) 
     remains the same, the limitation is temporarily increased 
     with respect to contributions made by the designated 
     beneficiary of the ABLE account. Under the temporary 
     provision, after the overall limitation on contributions is 
     reached, an ABLE account's designated beneficiary may 
     contribute an additional amount, up to the lesser of (a) the 
     Federal poverty line for a one-person household; or (b) the 
     individual's compensation for the taxable year.
       Additionally, the provision temporarily allows a designated 
     beneficiary of an ABLE account to claim the saver's credit 
     for contributions made to his or her ABLE account.
       The provision does not apply to taxable years after 
     December 31, 2025.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment.


                          conference agreement

       The conference agreement follows the Senate amendment.
       Effective date.--The provision is effective for taxable 
     years beginning after the date of enactment of this Act.
     2. Extension of time limit for contesting IRS levy (sec. 
         11071 of the Senate amendment and secs. 6343 and 6532 of 
         the Code)


                              present law

       The IRS is authorized to return property that has been 
     wrongfully levied upon.\367\ In general, monetary proceeds 
     from the sale of levied property may be returned within nine 
     months of the date of the levy.
---------------------------------------------------------------------------
     \367\ Sec. 6343.
---------------------------------------------------------------------------
       Generally, any person (other than the person against whom 
     is assessed the tax out of which such levy arose) who claims 
     an interest in levied property and that such property was 
     wrongfully levied upon may bring a civil action for wrongful 
     levy in a district court of the United States.\368\ 
     Generally, an action for wrongful levy must be brought within 
     nine months from the date of levy.\369\
---------------------------------------------------------------------------
     \368\ Sec. 7426.
     \369\ Sec. 6532.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The provision extends from nine months to two years the 
     period for returning the monetary proceeds from the sale of 
     property that has been wrongfully levied upon.
       The provision also extends from nine months to two years 
     the period for bringing a civil action for wrongful levy.
       Effective date.--The provision is effective with respect 
     to: (1) levies made after the date of enactment; and (2) 
     levies made on or before the date of enactment provided that 
     the nine-month period has not expired as of the date of 
     enactment.


                          conference agreement

       The conference agreement follows the Senate amendment.
     3. Treatment of certain individuals performing services in 
         the Sinai Peninsula of Egypt (sec. 11026 of the Senate 
         amendment and secs. 2, 112, 692, 2201, 3401, 4253, 6013, 
         and 7508 of the Code)


                              present law

       Members of the Armed Forces serving in a combat zone are 
     afforded a number of tax benefits. These include:
       1.  An exclusion from gross income of certain military pay 
     received for any month during which the member served in a 
     combat zone or was hospitalized as a result of serving in a 
     combat zone; \370\
---------------------------------------------------------------------------
     \370\ Sec. 112; see also, sec. 3401(a)(1), exempting such 
     income from wage withholding.
---------------------------------------------------------------------------
       2.  An exemption from taxes on death while serving in 
     combat zone or dying as a result of wounds, disease, or 
     injury incurred while so serving; \371\
---------------------------------------------------------------------------
     \371\ Sec. 692.
---------------------------------------------------------------------------
       3.  Special estate tax rules where death occurs in a combat 
     zone; \372\
---------------------------------------------------------------------------
     \372\ Sec. 2201.
---------------------------------------------------------------------------
       4.  Special benefits to surviving spouses in the event of a 
     service member's death or missing status; \373\
---------------------------------------------------------------------------
     \373\ Secs. 2(a)(3) and 6013(f)(1).
---------------------------------------------------------------------------
       5.  An extension of time limits governing the filing of 
     returns and other rules regarding timely compliance with 
     Federal income tax rules; \374\ and
---------------------------------------------------------------------------
     \374\ Sec. 7508.
---------------------------------------------------------------------------
       6.  An exclusion from telephone excise taxes.\375\
---------------------------------------------------------------------------
     \375\ Sec. 4253(d).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The provision grants combat zone tax benefits to the Sinai 
     Peninsula of Egypt, if as of the date of enactment of the 
     provision any member of the Armed Forces of the United States 
     is entitled to special pay under section 310 of title 37, 
     United States Code (relating to special pay; duty subject to 
     hostile fire or imminent danger), for services performed in 
     such location. This benefit lasts only during the period such 
     entitlement is in effect but not later than taxable years 
     beginning before January 1, 2026.
       Effective date.--The provision is generally effective 
     beginning June 9, 2015. The portion of the provision related 
     to wage withholding applies to remuneration paid after the 
     date of enactment.


                          conference agreement

       The conference agreement follows the Senate amendment.
     4. Modifications of user fees requirements for installment 
         agreements (sec. 11073 of the Senate amendment and new 
         sec. 6159(f) of the Code)


                              present law

       The Code authorizes the IRS to enter into written 
     agreements with any taxpayer under which the taxpayer agrees 
     to pay taxes owed, as well as interest and penalties, in 
     installments over an agreed schedule, if the IRS determines 
     that doing so will facilitate collection of the amounts owed. 
     This agreement provides for a period during which payments 
     may be made and while other IRS enforcement actions are held 
     in abeyance.\376\ An installment agreement generally does not 
     reduce the amount of taxes, interest, or penalties owed. 
     However, the IRS is authorized to enter into installment 
     agreements with taxpayers which do not provide for full 
     payment of the taxpayer's liability over the life of the 
     agreement. The IRS is required to review such partial payment 
     installment agreements at least every two years to determine 
     whether the financial condition of the taxpayer has 
     significantly changed so as to warrant an increase in the 
     value of the payments being made.
---------------------------------------------------------------------------
     \376\ Sec. 6331(k).
---------------------------------------------------------------------------
       Taxpayers can request an installment agreement by filing 
     Form 9465, Installment Agreement Request.\377\ If the request 
     for an installment agreement is approved by the IRS, the IRS 
     charges a user fee.\378\ The IRS currently charges $225 for 
     entering into an installment agreement.\379\ If the 
     application is for a direct debit installment agreement, 
     whereby the taxpayer authorizes the IRS to request the 
     monthly electronic transfer of funds from the taxpayer's bank 
     account to the IRS, the fee is reduced to $107.\380\ In 
     addition, regardless of the method of payment, the fee is $43 
     for low-income taxpayers.\381\ For this purpose, low-income 
     is defined as a person who falls below 250 percent of the 
     Federal poverty guidelines published annually. Finally, there 
     is no user fee if the agreement qualifies for a short term 
     agreement (120 days or less).
---------------------------------------------------------------------------
     \377\ The IRS accepts applications for installment agreements 
     online, from individuals and businesses, if the total tax, 
     penalties and interest is below $50,000 for the former, and 
     $25,000 for the latter.
     \378\ 31 U.S.C. sec. 9701; Treas. reg. sec. 300.1; The 
     Independent Offices Appropriations Act of 1952 (IOAA) 65 
     Stat. B70 (June 27, 1951). A discussion of the IRS practice 
     regarding user fees and a list of actions for which fees are 
     charged is included in the Internal Revenue Manual. See 
     ``User Fees,'' paragraph 1.32.19 IRM, available at https://
www.irs.gov/irm/part1/irm_01-035-019.
     \379\ Treas. reg. sec. 300.1.
     \380\ Ibid.
     \381\ Ibid.
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                               house bill

       No provision.


                            senate amendment

       The provision generally prohibits increases in the amount 
     of user fees charged by the IRS for installment agreements. 
     For low-income taxpayers (those whose income falls below 250 
     percent of the Federal poverty guidelines), it alleviates the 
     user fee requirement in two ways. First, it waives the user 
     fee if the low-income taxpayer enters into an installment 
     agreement under which the taxpayer agrees to make automated 
     installment

[[Page 19964]]

     payments through a debit account. Second, it provides that 
     low-income taxpayers who are unable to agree to make payments 
     electronically remain subject to the required user fee, but 
     the fee is reimbursed upon completion of the installment 
     agreement.
       Effective date.--The provision is effective for agreements 
     entered into on or after the date that is 60 days after the 
     date of enactment.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Relief for 2016 disaster areas (sec. 11029 of the Senate 
         amendment and secs. 72(t), 165, 401-403, 408, 457, and 
         3405 of the Code)


                              present law

     Distributions from tax-favored retirement plans
       A distribution from a qualified retirement plan, a tax-
     sheltered annuity plan (a ``section 403(b) plan''), an 
     eligible deferred compensation plan of a State or local 
     government employer (a ``governmental section 457(b) plan''), 
     or an individual retirement arrangement (an ``IRA'') 
     generally is included in income for the year 
     distributed.\382\ These plans are referred to collectively as 
     ``eligible retirement plans.'' In addition, unless an 
     exception applies, a distribution from a qualified retirement 
     plan, a section 403(b) plan, or an IRA received before age 
     59\1/2\ is subject to a 10-percent additional tax (referred 
     to as the ``early withdrawal tax'') on the amount includible 
     in income.\383\
---------------------------------------------------------------------------
     \382\ Secs. 401(a), 403(a), 403(b), 457(b) and 408. Under 
     section 3405, distributions from these plans are generally 
     subject to income tax withholding unless the recipient elects 
     otherwise. In addition, certain distributions from a 
     qualified retirement plan, a section 403(b) plan, or a 
     governmental section 457(b) plan are subject to mandatory 
     income tax withholding at a 20-percent rate unless the 
     distribution is rolled over.
     \383\ Sec. 72(t). Under present law, the 10-percent early 
     withdrawal tax does not apply to distributions from a 
     governmental section 457(b) plan.
---------------------------------------------------------------------------
       In general, a distribution from an eligible retirement plan 
     may be rolled over to another eligible retirement plan within 
     60 days, in which case the amount rolled over generally is 
     not includible in income. The IRS has the authority to waive 
     the 60-day requirement if failure to waive the requirement 
     would be against equity or good conscience, including cases 
     of casualty, disaster or other events beyond the reasonable 
     control of the individual.
       The terms of a qualified retirement plan, section 403(b) 
     plan, or governmental section 457(b) plan generally determine 
     when distributions are permitted. However, in some cases, 
     restrictions may apply to distribution before an employee's 
     termination of employment, referred to as ``in-service'' 
     distributions. Despite such restrictions, an in-service 
     distribution may be permitted in the case of financial 
     hardship or an unforeseeable emergency.
       Tax-favored retirement plans are generally required to be 
     operated in accordance with the terms of the plan document, 
     and amendments to reflect changes to the plan generally must 
     be adopted within a limited period.
     Itemized deduction for casualty losses
       A taxpayer may generally claim a deduction for any loss 
     sustained during the taxable year and not compensated by 
     insurance or otherwise.\384\ For individual taxpayers, 
     deductible losses must be incurred in a trade or business or 
     other profit-seeking activity or consist of property losses 
     arising from fire, storm, shipwreck, or other casualty, or 
     from theft. Personal casualty or theft losses are deductible 
     only if they exceed $100 per casualty or theft. In addition, 
     aggregate net casualty and theft losses are deductible only 
     to the extent they exceed 10 percent of an individual 
     taxpayer's adjusted gross income.
---------------------------------------------------------------------------
     \384\ Sec. 165.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     In general
       The provision provides tax relief, as described below, 
     relating to a ``2016 disaster area,'' defined as any area 
     with respect to which a major disaster was declared by the 
     President under section 401 of the Robert T. Stafford 
     Disaster Relief and Emergency Assistance Act during calendar 
     year 2016.
     Distributions from eligible retirement plans
       Under the provision, an exception to the 10-percent early 
     withdrawal tax applies in the case of a qualified 2016 
     disaster distribution from a qualified retirement plan, a 
     section 403(b) plan or an IRA. In addition, as discussed 
     further, income attributable to a qualified 2016 disaster 
     distribution may be included in income ratably over three 
     years, and the amount of a qualified 2016 disaster 
     distribution may be recontributed to an eligible retirement 
     plan within three years.
       A qualified 2016 disaster distribution is a distribution 
     from an eligible retirement plan made on or after January 1, 
     2016, and before January 1, 2018, to an individual whose 
     principal place of abode at any time during calendar year 
     2016 was located in a 2016 disaster area and who has 
     sustained an economic loss by reason of the events giving 
     rise to the Presidential disaster declaration.
       The total amount of distributions to an individual from all 
     eligible retirement plans that may be treated as qualified 
     2016 disaster distributions is $100,000. Thus, any 
     distributions in excess of $100,000 during the applicable 
     period are not qualified 2016 disaster distributions.
       Any amount required to be included in income as a result of 
     a qualified 2016 disaster is included in income ratably over 
     the three-year period beginning with the year of distribution 
     unless the individual elects not to have ratable inclusion 
     apply.
       Any portion of a qualified 2016 disaster distribution may, 
     at any time during the three-year period beginning the day 
     after the date on which the distribution was received, be 
     recontributed to an eligible retirement plan to which a 
     rollover can be made. Any amount recontributed within the 
     three-year period is treated as a rollover and thus is not 
     includible in income. For example, if an individual receives 
     a qualified 2016 disaster distribution in 2016, that amount 
     is included in income, generally ratably over the year of the 
     distribution and the following two years, but is not subject 
     to the 10-percent early withdrawal tax. If, in 2018, the 
     amount of the qualified 2016 disaster distribution is 
     recontributed to an eligible retirement plan, the individual 
     may file an amended return to claim a refund of the tax 
     attributable to the amount previously included in income. In 
     addition, if, under the ratable inclusion provision, a 
     portion of the distribution has not yet been included in 
     income at the time of the contribution, the remaining amount 
     is not includible in income.
       A qualified 2016 disaster distribution is a permissible 
     distribution from a qualified retirement plan, section 403(b) 
     plan, or governmental section 457(b) plan, regardless of 
     whether a distribution otherwise would be permissible.\385\ A 
     plan is not treated as violating any Code requirement merely 
     because it treats a distribution as a qualified 2016 disaster 
     distribution, provided that the aggregate amount of such 
     distributions from plans maintained by the employer and 
     members of the employer's controlled group or affiliated 
     service group does not exceed $100,000. Thus, a plan is not 
     treated as violating any Code requirement merely because an 
     individual might receive total distributions in excess of 
     $100,000, taking into account distributions from plans of 
     other employers or IRAs.
---------------------------------------------------------------------------
     \385\ A qualified 2016 disaster distributions is subject to 
     income tax withholding unless the recipient elects otherwise. 
     Mandatory 20-percent withholding does not apply.
---------------------------------------------------------------------------
       A plan amendment made pursuant to the provision (or a 
     regulation issued thereunder) may be retroactively effective 
     if, in addition to the requirements described below, the 
     amendment is made on or before the last day of the first plan 
     year beginning after December 31, 2018 (or in the case of a 
     governmental plan, December 31, 2020), or a later date 
     prescribed by the Secretary. In addition, the plan will be 
     treated as operated in accordance with plan terms during the 
     period beginning with the date the provision or regulation 
     takes effect (or the date specified by the plan if the 
     amendment is not required by the provision or regulation) and 
     ending on the last permissible date for the amendment (or, if 
     earlier, the date the amendment is adopted). In order for an 
     amendment to be retroactively effective, it must apply 
     retroactively for that period, and the plan must be operated 
     in accordance with the amendment during that period.
     Modification of rules related to casualty losses
       Under the provision, in the case of a personal casualty 
     loss which arose on or after January 1, 2016, in a 2016 
     disaster area and was attributable to the events giving rise 
     to the Presidential disaster declaration, such losses are 
     deductible without regard to whether aggregate net losses 
     exceed ten percent of a taxpayer's adjusted gross income. 
     Under the provision, in order to be deductible, the losses 
     must exceed $500 per casualty. Additionally, such losses may 
     be claimed in addition to the standard deduction.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     a clarification that casualty loss relief applies to losses 
     arising in taxable years beginning after December 31, 2015, 
     and before January 1, 2018.
     6. Attorneys' fees relating to awards to whistleblowers (sec. 
         11078 of the Senate amendment and sec. 62(a)(21) of the 
         Code)


                              Present Law

       The Code provides an above-the-line deduction for 
     attorneys' fees and costs paid by, or on behalf of, the 
     taxpayer in connection with any action involving a claim of 
     unlawful discrimination, certain claims against the Federal 
     Government, or a private cause of action under the Medicare 
     Secondary Payer statute.\386\ The amount that may be deducted

[[Page 19965]]

     above-the-line may not exceed the amount includible in the 
     taxpayer's gross income for the taxable year on account of a 
     judgment or settlement (whether by suit or agreement and 
     whether as lump sum or periodic payments) resulting from such 
     claim. Additionally, the Code provides an above-the-line 
     deduction for attorneys' fees and costs paid by, or on behalf 
     of, the individual in connection with any award for providing 
     information regarding violations of the tax laws.\387\ The 
     amount that may be deducted above-the-line may not exceed the 
     amount includible in the taxpayer's gross income for the 
     taxable year on account of such award.\388\
---------------------------------------------------------------------------
     \386\ Secs. 62(a)(20) and (e). Section 62(e) defines 
     ``unlawful discrimination'' to include a number of specific 
     statutes, any federal whistle-blower statute, and any 
     federal, state, or local law ``providing for the enforcement 
     of civil rights'' or ``regulating any aspect of the 
     employment relationship . . . or prohibiting the discharge of 
     an employee, the discrimination against an employee, or any 
     other form of retaliation or reprisal against an employee for 
     asserting rights or taking other actions permitted by law.''
     \387\ Secs. 7623 and 62(a)(21).
     \388\ Secs. 7623 and 62(a)(21).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides an above-the-line deduction for 
     attorney fees and court costs paid by, or on behalf of, the 
     taxpayer in connection with any action involving a claim 
     under State False Claim Acts, the SEC whistleblower 
     program,\389\ and the Commodity Future Trading Commission 
     whistleblower program.\390\
---------------------------------------------------------------------------
     \389\ 15 U.S.C. secs. 78u-6 and 78u-7.
     \390\ 7 U.S.C. sec. 26.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     7. Clarification of whistleblower awards (sec. 11079 of the 
         Senate amendment and new sec. 7623(c) of the Code)


                              Present Law

     Awards to whistleblowers
       The Code authorizes the IRS to pay such sums as deemed 
     necessary for: ``(1) detecting underpayments of tax; or (2) 
     detecting and bringing to trial and punishment persons guilty 
     of violating the internal revenue laws or conniving at the 
     same.'' \391\ Generally, amounts are paid based on a 
     percentage of proceeds collected based on the information 
     provided.
---------------------------------------------------------------------------
     \391\ Sec. 7623.
---------------------------------------------------------------------------
       The Tax Relief and Health Care Act of 2006 (the ``Act'') 
     \392\ established an enhanced reward program for actions in 
     which the tax, penalties, interest, additions to tax, and 
     additional amounts in dispute exceed $2,000,000 and, if the 
     taxpayer is an individual, the individual's gross income 
     exceeds $200,000 for any taxable year in issue. In such 
     cases, the award is calculated to be at least 15 percent but 
     not more than 30 percent of collected proceeds (including 
     penalties, interest, additions to tax, and additional 
     amounts).
---------------------------------------------------------------------------
     \392\ Pub. L. No. 109-432.
---------------------------------------------------------------------------
       The Act permits an individual to appeal the amount or a 
     denial of an award determination to the United States Tax 
     Court (the ``Tax Court'') within 30 days of such 
     determination. Tax Court review of an award determination may 
     be assigned to a special trial judge.
     Rules relating to taxpayers with foreign 
         assets
       U.S. persons who transfer assets to, and hold interests in, 
     foreign bank accounts or foreign entities may be subject to 
     self-reporting requirements under both the Foreign Account 
     Tax Compliance Act provisions in the Code and the provisions 
     in the Bank Secrecy Act and its underlying regulations (which 
     provide for FinCEN Form 114, Report of Foreign Bank and 
     Financial Accounts, the ``FBAR''), as discussed below. 
     Amounts recovered for violations of FATCA provisions in the 
     Code may be considered for purposes of computing a 
     whistleblower award under the Code. However, the IRS has 
     found that amounts recovered for violations of non-tax laws, 
     including the provisions of the Bank Secrecy Act (and FBAR) 
     for which the IRS has delegated authority, may not be 
     considered for purposes of computing an award under the 
     Code.\393\
---------------------------------------------------------------------------
     \393\ Chief Counsel Memorandum, ``Scope of Awards Payable 
     Under I.R.C. section 7623,'' April 23, 2012, available at 
     http://www.tax-whistleblower.com/
resources/PMTA-2012-10.pdf. Under Title 31, ``[t]he Secretary 
     may pay a reward to an individual who provides original 
     information which leads to a recovery of a criminal fine, 
     civil penalty, or forfeiture, which exceeds $50,000, for a 
     violation of [chapter 53 of Title 31]. The Secretary shall 
     determine the amount of a reward . . . [and] may not award 
     more than 25 per centum of the net amount of the fine, 
     penalty, or forfeiture collected or $150,000, whichever is 
     less.'' 31 U.S.C. Sec. 5323.
---------------------------------------------------------------------------
       Foreign Account Tax Compliance Act (``FATCA'')
       The Code imposes a withholding and reporting regime for 
     U.S. persons engaged in foreign activities, directly or 
     indirectly, through a foreign business entity.\394\ This 
     regime for outbound payments,\395\ commonly referred to as 
     the Foreign Account Tax Compliance Act (``FATCA''),\396\ 
     imposes a withholding tax of 30 percent of the gross amount 
     of certain payments to foreign financial institutions 
     (``FFIs'') unless the FFI establishes that it is compliant 
     with the information reporting requirements of FATCA which 
     include identifying certain U.S. accounts held in the FFI. An 
     FFI must report with respect to a U.S. account (1) the name, 
     address, and taxpayer identification number of each U.S. 
     person holding an account or a foreign entity with one or 
     more substantial U.S. owners holding an account; (2) the 
     account number; (3) the account balance or value; and (4) 
     except as provided by the Secretary, the gross receipts, 
     including from dividends and interest, and gross withdrawals 
     or payments from the account.\397\
---------------------------------------------------------------------------
     \394\ See, e.g., secs. 6038, 6038B, and 6046.
     \395\ Hiring Incentives to Restore Employment Act of 2010, 
     Pub. L. No. 111-147.
     \396\ Foreign Account Tax Compliance Act of 2009 is the name 
     of the House and Senate bills in which the provisions first 
     appeared. See H.R. 3933 and S. 1934 (October 27, 2009).
     \397\ Sec. 1471(c).
---------------------------------------------------------------------------
       Individuals are required to disclose with their annual 
     Federal income tax return any interest in foreign accounts 
     and certain foreign securities if the aggregate value of such 
     assets is in excess of the greater of $50,000 or an amount 
     determined by the Secretary in regulations. Failure to do so 
     is punishable by a penalty of $10,000, which may increase for 
     each 30-day period during which the failure continues after 
     notification by the IRS, up to a maximum penalty of 
     $50,000.\398\
---------------------------------------------------------------------------
     \398\ Sec. 6038D. Guidance on the scope of reporting 
     required, the threshold values triggering reporting 
     requirements for various fact patterns and how the value of 
     assets is to be determined is found in Treas. Reg. secs. 
     1.6038D-1 to 1.6038D-8.
---------------------------------------------------------------------------
       Report of Foreign Bank and Financial Accounts (the 
           ``FBAR'')
       In addition to the reporting requirements under the Code, 
     U.S. persons who transfer assets to, and hold interests in, 
     foreign bank accounts or foreign entities may be subject to 
     self-reporting requirements under the Bank Secrecy Act.\399\
---------------------------------------------------------------------------
     \399\ Bank Secrecy Act, 31 U.S.C. secs. 5311-5332.
---------------------------------------------------------------------------
       The Bank Secrecy Act imposes reporting obligations on both 
     financial institutions and account holders. With respect to 
     account holders, a U.S. citizen, resident, or person doing 
     business in the United States is required to keep records and 
     file reports, as specified by the Secretary, when that person 
     enters into a transaction or maintains an account with a 
     foreign financial agency.\400\ Regulations promulgated 
     pursuant to broad regulatory authority granted to the 
     Secretary in the Bank Secrecy Act \401\ provide additional 
     guidance regarding the disclosure obligation with respect to 
     foreign accounts.
---------------------------------------------------------------------------
     \400\ 31 U.S.C. sec. 5314. The term ``agency'' in the Bank 
     Secrecy Act includes financial institutions.
     \401\ 31 U.S.C. sec. 5314(a) provides: ``Considering the need 
     to avoid impeding or controlling the export or import of 
     monetary instruments and the need to avoid burdening 
     unreasonably a person making a transaction with a foreign 
     financial agency, the Secretary of the Treasury shall require 
     a resident or citizen of the United States or a person in, 
     and doing business in, the United States, to keep records, 
     file reports, or keep records and file reports, when the 
     resident, citizen, or person makes a transaction or maintains 
     a relation for any person with a foreign financial agency.''
---------------------------------------------------------------------------
       The FBAR must be filed by June 30 \402\ of the year 
     following the year in which the $10,000 filing threshold is 
     met.\403\ Failure to file the FBAR is subject to both 
     criminal \404\ and civil penalties.\405\ Willful failure to 
     file an FBAR may be subject to penalties in amounts not to 
     exceed the greater of $100,000 or 50 percent of the amount in 
     the account at the time of the violation.\406\ A non-willful, 
     but negligent, failure to file is subject to a penalty of 
     $10,000 for each negligent violation.\407\ The penalty may be 
     waived if (1) there is reasonable cause for the failure to 
     report and (2) the amount of the transaction or balance in 
     the account was properly reported. In addition, serious 
     violations are subject to criminal prosecution, potentially 
     resulting in both monetary penalties and imprisonment. Civil 
     and criminal sanctions are not mutually exclusive.
---------------------------------------------------------------------------
     \402\ The Surface Transportation and Veterans Health Care 
     Choice Improvement Act of 2015, Pub. L. No. 114-41, changed 
     the filing date for FinCEN Form 114 from June 30 to April 15 
     (with a maximum extension for a 6-month period ending on 
     October 15 and with provision for an extension under rules 
     similar to the rules in Treas. Reg. section 1.6081--5) for 
     tax returns for taxable years beginning after December 31, 
     2015.
     \403\ 31 C.F.R. sec. 103.27(c). The $10,000 threshold is the 
     aggregate value of all foreign financial accounts in which a 
     U.S. person has a financial interest or over which the U.S. 
     person has signature or other authority.
     \404\ 31 U.S.C. sec. 5322 (failure to file is punishable by a 
     fine up to $250,000 and imprisonment for five years, which 
     may double if the violation occurs in conjunction with 
     certain other violations).
     \405\ 31 U.S.C. sec. 5321(a)(5).
     \406\ 31 U.S.C. sec. 5321(a)(5)(C).
     \407\ 31 U.S.C. sec. 5321(a)(5)(B)(i), (ii).
---------------------------------------------------------------------------
     FBAR enforcement responsibility
       Until 2003, the Financial Crimes Enforcement Network 
     (``FinCEN''), an agency of the Department of the Treasury, 
     had exclusive responsibility for civil penalty enforcement of 
     FBAR, although administration of the FBAR reporting regime 
     was delegated to the IRS.\408\ As a result, persons who were 
     more

[[Page 19966]]

     than 180 days delinquent in paying any FBAR penalties were 
     referred for collection action to the Financial Management 
     Service of the Treasury Department, which is responsible for 
     such non-tax collections.\409\ Continued nonpayment resulted 
     in a referral to the Department of Justice for institution of 
     court proceedings against the delinquent person. In 2003, the 
     Secretary delegated FBAR civil enforcement authority to the 
     IRS.\410\ The authority delegated to the IRS in 2003 included 
     the authority to determine and enforce civil penalties,\411\ 
     as well as to revise the form and instructions. However, the 
     Bank Secrecy Act does not include collection powers similar 
     to those available for enforcement of the tax laws under the 
     Code. As a consequence, FBAR civil penalties remain 
     collectible only in accord with the procedures for non-tax 
     collection described above.
---------------------------------------------------------------------------
     \408\ Treas. Directive 15-14 (December 1, 1992), in which the 
     Secretary delegated to the IRS authority to investigate 
     violations of the Bank Secrecy Act. If the IRS Criminal 
     Investigation Division declines to pursue a possible criminal 
     case, it is to refer the matter to FinCEN for civil 
     enforcement.
     \409\ 31 U.S.C. sec. 3711(g).
     \410\ 31 C.F.R. sec. 103.56(g). Memorandum of Agreement and 
     Delegation of Authority for Enforcement of FBAR Requirements 
     (April 2, 2003); News Release, Internal Revenue Service, IR-
     2003-48 (April 10, 2003). Secretary of the Treasury, ``A 
     Report to Congress in Accordance with sec. 361(b) of the 
     Uniting and Strengthening America by Providing Appropriate 
     Tools Required to Intercept and Obstruct Terrorism Act of 
     2001 (USA Patriot Act)'' (April 24, 2003).
     \411\ A penalty may be assessed before the end of the six-
     year period beginning on the date of the transaction with 
     respect to which the penalty is assessed. 31 U.S.C. sec. 
     5321(b)(1). A civil action for collection may be commenced 
     within two years of the later of the date of assessment and 
     the date a judgment becomes final in any a related criminal 
     action. 31 U.S.C. sec. 5321(b)(2).
---------------------------------------------------------------------------
     FBAR and awards to whistleblowers
       Recent cases have considered FBAR penalties in connection 
     with IRS whistleblower awards.\412\ One case analyzed the 
     provision dealing with ``additional amounts in dispute'' and 
     linked that concept to amounts assessed and collected under 
     the Code which FBAR is not.\413\ The issue was whether FBAR 
     penalties constituted ``additional amounts'' for purposes of 
     determining whether ``additional amounts in dispute exceed 
     $2,000,000.'' The case was disposed on summary judgment on 
     the grounds that FBAR penalties are not assessed, collected 
     or paid in the same manner as taxes. As such, they are not 
     additional amounts in dispute and therefore the threshold was 
     not exceeded. Notably, the court suggested that the 
     petitioner present its policy arguments to Congress based on 
     the fact that the connection between FBAR and tax enforcement 
     justified the Secretary to redelegate FBAR administrative 
     authority to the IRS.\414\
---------------------------------------------------------------------------
     \412\ Whistleblower 22716-13W v. Commissioner, 146 T.C. No. 6 
     (March 14, 2016); and Whistleblower 21276-13W v. 
     Commissioner, 147 T.C. No. 4 (August 3, 2016).
     \413\ Whistleblower 22716-13W v. Commissioner, 146 T.C. No. 6 
     (March 14, 2016).
     \414\ Whistleblower 22716-13W v. Commissioner, 146 T.C. No. 6 
     at 26-27.
---------------------------------------------------------------------------
       Another case dealt with the provision ``collected 
     proceeds'' and held that the term is not limited to amounts 
     assessed and collected under Title 26.\415\ The issue in the 
     case was whether payments of a criminal fine and civil 
     forfeitures constitute collected proceeds.
---------------------------------------------------------------------------
     \415\ Whistleblower 21276-13W v. Commissioner, 147 T.C. No. 4 
     (August 3, 2016).
---------------------------------------------------------------------------
       The criminal fine was imposed under Title 18 as a result of 
     guilty plea to conspiring to defraud the IRS, file false 
     Federal income tax returns, and evade Federal income taxes. 
     The money was forfeited pursuant to Title 18. The IRS argued 
     that criminal fines and forfeitures are not collected 
     proceeds because only amounts assessed and collected under 
     Title 26 can be used to pay a whistleblower award. The IRS 
     also argued that a criminal fine collected by the Government 
     cannot be considered collected proceeds because (1) pursuant 
     to 42 U.S.C. sec. 10601 all criminal fines collected from 
     persons convicted of offenses against the United States are 
     to be deposited in the Crime Victims Fund; (2) criminal fines 
     are paid by the taxpayer directly to the imposing court, 
     which in turn deposits them into the Crime Victims Fund; and 
     (3) at no time are criminal fines available to the Secretary. 
     The court said that the Code did not refer to, or require, 
     the availability of funds to be used in making an award.\416\
---------------------------------------------------------------------------
     \416\ Whistleblower 21276-13W v. Commissioner, 147 T.C. No. 4 
     at 28-29.
---------------------------------------------------------------------------
       Petitioners said the payment resulted from action taken by 
     Secretary and relates to acts committed by taxpayer in 
     violation of Title 26 provisions. The court agreed and held 
     that collected proceeds are not limited to amounts assessed 
     and collected under Title 26. In reaching its holding it 
     referenced Whistleblower 22716-13W v. Commissioner, discussed 
     above and noted there is no inconsistency because the issue 
     there was about whether the threshold of $2,000,000 was 
     exceeded. It is not clear whether FBAR penalties would be 
     included under their holding because in the case, the 
     taxpayer did violate Title 26 (even if the penalties were 
     imposed under Title 18).


                               House Bill

       No provision.


                            Senate Amendment

       Under the provision, collected proceeds eligible for awards 
     under the Code are defined to include: (1) penalties, 
     interest, additions to tax, and additional amounts and (2) 
     any proceeds under enforcement programs that the Treasury has 
     delegated to the IRS the authority to administer, enforce, or 
     investigate, including criminal fines and civil forfeitures, 
     and violations of reporting requirements. This definition is 
     also used to determine eligibility for the enhanced reward 
     program under which proceeds and additional amounts in 
     dispute exceed $2,000,000.
       The collected proceeds amounts are determined without 
     regard to whether such proceeds are available to the 
     Secretary.
       Effective date.--The provision is effective for information 
     provided before, on, or after date of enactment with respect 
     to which a final determination has not been made before such 
     date.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.
     8. Exclusion from gross income of certain amounts received by 
         wrongly incarcerated individuals (sec. 11027 of the 
         Senate amendment and sec. 139F of the Code)


                              Present Law

       Under a provision added in the PATH Act,\417\ with respect 
     to any wrongfully incarcerated individual, gross income does 
     not include any civil damages, restitution, or other monetary 
     award (including compensatory or statutory damages and 
     restitution imposed in a criminal matter) relating to the 
     incarceration of such individual for the covered offense for 
     which such individual was convicted.\418\
---------------------------------------------------------------------------
     \417\ Pub. L. No. 114-113 (2015), Division Q (Protecting 
     Americans from Tax Hikes Act of 2015), sec. 304.
     \418\ Sec. 139F.
---------------------------------------------------------------------------
       A wrongfully incarcerated individual means an individual:
       (1)  who was convicted of a covered offense;
       (2)  who served all or part of a sentence of imprisonment 
     relating to that covered offense; and
       (3)  (i) was pardoned, granted clemency, or granted amnesty 
     for such offense because the individual was innocent, or
       (ii)  for whom the judgment of conviction for the offense 
     was reversed or vacated, and whom the indictment, 
     information, or other accusatory instrument for that covered 
     offense was dismissed or who was found not guilty at a new 
     trial after the judgment of conviction for that covered 
     offense was reversed or vacated.
       For these purposes, a covered offense is any criminal 
     offense under Federal or State law, and includes any criminal 
     offense arising from the same course of conduct as that 
     criminal offense.
       The Code contains a special rule allowing individuals to 
     make a claim for credit or refund of any overpayment of tax 
     resulting from the exclusion, even if such claim would be 
     disallowed under the Code or by operation of any law or rule 
     of law (including res judicata), if the claim for credit or 
     refund is filed before the close of the one-year period 
     beginning on the date of enactment of the PATH Act (December 
     18, 2015).\419\
---------------------------------------------------------------------------
     \419\ Sec. 139F.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment would extend the waiver on the statute 
     of limitations with respect to filing a claim for a credit or 
     refund of an overpayment of tax resulting from the exclusion 
     described above for an additional year. Thus, under the 
     provision, such claim for credit or refund must be filed 
     before December 18, 2017.
       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                          BUSINESS TAX REFORM

                              A. Tax Rates

     1. Reduction in corporate tax rate (sec. 3001 of the House 
         bill, secs. 13001 and 13002 of the Senate amendment, and 
         secs. 11 and 243 of the Code)


                              Present Law

     In general
       Corporate taxable income is subject to tax under a four-
     step graduated rate structure.\420\ The top corporate tax 
     rate is 35 percent on taxable income in excess of $10 
     million. The corporate taxable income brackets and tax rates 
     are as set forth in the table below.
---------------------------------------------------------------------------
     \420\ Sec. 11(a) and (b)(1).

 
------------------------------------------------------------------------
                Taxable Income                     Tax rate  (percent)
------------------------------------------------------------------------
Not over $50,000..............................                       15
Over $50,000 but not over $75,000.............                       25
Over $75,000 but not over $10,000,000.........                       34
Over $10,000,000..............................                       35
------------------------------------------------------------------------

       An additional five-percent tax is imposed on a 
     corporation's taxable income in excess of $100,000. The 
     maximum additional tax is $11,750. Also, a second additional 
     three-percent tax is imposed on a corporation's taxable 
     income in excess of $15 million. The maximum second 
     additional tax is $100,000.
       Certain personal service corporations pay tax on their 
     entire taxable income at the rate of 35 percent.\421\
---------------------------------------------------------------------------
     \421\ Sec. 11(b)(2).

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[[Page 19967]]

       Present law provides that, if the maximum corporate tax 
     rate exceeds 35 percent, the maximum rate on a corporation's 
     net capital gain will be 35 percent.\422\
---------------------------------------------------------------------------
     \422\ Sec. 1201(a).
---------------------------------------------------------------------------
     Dividends received deduction
       Corporations are allowed a deduction with respect to 
     dividends received from other taxable domestic 
     corporations.\423\ The amount of the deduction is generally 
     equal to 70 percent of the dividend received.
---------------------------------------------------------------------------
     \423\ Sec. 243(a). Such dividends are taxed at a maximum rate 
     of 10.5 percent (30 percent of the top corporate tax rate of 
     35 percent).
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       In the case of any dividend received from a 20-percent 
     owned corporation, the amount of the deduction is equal to 80 
     percent of the dividend received.\424\ The term ``20-percent 
     owned corporation'' means any corporation if 20 percent or 
     more of the stock of such corporation (by vote and value) is 
     owned by the taxpayer. For this purpose, certain preferred 
     stock is not taken into account.
---------------------------------------------------------------------------
     \424\ Sec. 243(c). Such dividends are taxed at a maximum rate 
     of 7 percent (20 percent of the top corporate tax rate of 35 
     percent).
---------------------------------------------------------------------------
       In the case of a dividend received from a corporation that 
     is a member of the same affiliated group, a corporation is 
     generally allowed a deduction equal to 100 percent of the 
     dividend received.\425\
---------------------------------------------------------------------------
     \425\ Sec. 243(a)(3) and (b)(1). For this purpose, the term 
     ``affiliated group'' generally has the meaning given such 
     term by section 1504(a). Sec. 243(b)(2).
---------------------------------------------------------------------------


                               House Bill

       The provision eliminates the graduated corporate rate 
     structure and instead taxes corporate taxable income at 20 
     percent.
       Personal service corporations are taxed at 25 percent.
       The provision repeals the maximum corporate tax rate on net 
     capital gain as obsolete.
       The provision reduces the 70 percent dividends received 
     deduction to 50 percent and the 80 percent dividends received 
     deduction to 65 percent.\426\
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     \426\ Such dividends would be taxed at a maximum rate of 10 
     percent (50 percent of the top corporate tax rate of 20 
     percent) and 7 percent (35 percent of the top corporate tax 
     rate of 20 percent), respectively.
---------------------------------------------------------------------------
       For taxpayers subject to the normalization method of 
     accounting (e.g., regulated public utilities), the provision 
     provides for the normalization of excess deferred tax 
     reserves resulting from the reduction of corporate income tax 
     rates (with respect to prior depreciation or recovery 
     allowances taken on assets placed in service before the date 
     of enactment).
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment follows the House bill, but does not 
     provide a special rate for personal service corporations.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2018.


                          Conference Agreement

       The conference agreement follows the Senate amendment, but 
     provides for a 21-percent corporate rate effective for 
     taxable years beginning after December 31, 2017.
       In addition, for taxpayers subject to the normalization 
     method of accounting (e.g., regulated public utilities), the 
     conference agreement clarifies the normalization of excess 
     tax reserves resulting from the reduction of corporate income 
     tax rates (with respect to prior depreciation or recovery 
     allowances taken on assets placed in service before the 
     corporate rate reduction takes effect).
       The excess tax reserve is the reserve for deferred taxes as 
     of the day before the corporate rate reduction takes effect 
     over what the reserve for deferred taxes would be if the 
     corporate rate reduction had been in effect for all prior 
     periods. If an excess tax reserve is reduced more rapidly or 
     to a greater extent than such reserve would be reduced under 
     the average rate assumption method, the taxpayer will not be 
     treated as using a normalization method with respect to the 
     corporate rate reduction. If the taxpayer does not use a 
     normalization method of accounting for the corporate rate 
     reduction, the taxpayer's tax for the taxable year shall be 
     increased by the amount by which it reduces its excess tax 
     reserve more rapidly than permitted under a normalization 
     method of accounting and the taxpayer will not be treated as 
     using a normalization method of accounting for purposes of 
     section 168(f)(2) and (i)(9)(C).\427\
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     \427\ Section 168(f)(2) and (i)(9)(C) provide that if a 
     taxpayer is required to use a normalization method of 
     accounting with respect to public utility property and does 
     not do so, such taxpayer must compute its depreciation 
     allowances for Federal income tax purposes using the 
     depreciation method, useful life determination, averaging 
     convention, and salvage value limitation used for purposes of 
     setting rates and reflecting operating results in its 
     regulated books of account.
---------------------------------------------------------------------------
       The average rate assumption method \428\ reduces the excess 
     tax reserve over the remaining regulatory lives of the 
     property that gave rise to the reserve for deferred taxes 
     during the years in which the deferred tax reserve related to 
     such property is reversing. Under this method, the excess tax 
     reserve is reduced as the timing differences (i.e., 
     differences between tax depreciation and regulatory 
     depreciation with respect to the property) reverse over the 
     remaining life of the asset. The reversal of timing 
     differences generally occurs when the amount of the tax 
     depreciation taken with respect to an asset is less than the 
     amount of the regulatory depreciation taken with respect to 
     the asset. To ensure that the deferred tax reserve, including 
     the excess tax reserve, is reduced to zero at the end of the 
     regulatory life of the asset that generated the reserve, the 
     amount of the timing difference which reverses during a 
     taxable year is multiplied by the ratio of (1) the aggregate 
     deferred taxes as of the beginning of the period in question 
     to (2) the aggregate timing differences for the property as 
     of the beginning of the period in question.
---------------------------------------------------------------------------
     \428\ See section 2.04 of Rev. Proc. 88-12, 1988-1 C.B. 637.
---------------------------------------------------------------------------
       The following example illustrates the application of the 
     average rate assumption method. A calendar year regulated 
     utility placed property costing $100 million in service in 
     2016. For regulatory (book) purposes, the property is 
     depreciated over 10 years on a straight line basis with a 
     full year's allowance in the first year. For tax purposes, 
     the property is depreciated over 5 years using the 200 
     percent declining balance method and a half-year placed in 
     service convention.\429\
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     \429\ The 5-year tax and 10-year book lives are used for 
     illustration purposes only. In general, public utility 
     property may be depreciated over various periods ranging from 
     5 to 20 years under MACRS. For regulatory purposes, public 
     utility property may, in certain cases, have a useful life of 
     30 years or more.

                                                 NORMALIZATION CALCULATION FOR CORPORATE RATE REDUCTION
                                                              (Millions of dollars--Years)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                       2016     2017     2018     2019     2020      2021        2022        2023        2024        2025        Total
--------------------------------------------------------------------------------------------------------------------------------------------------------
Tax expense........................       20       32     19.2    11.52    11.52        5.76           0           0           0           0         100
Book depreciation..................       10       10       10       10       10          10          10          10          10          10         100
Timing difference..................       10       22      9.2     1.52     1.52      (4.24)        (10)        (10)        (10)        (10)           0
Tax rate...........................      35%      35%      21%      21%      21%       31.1%       31.1%       31.1%       31.1%       31.1%
Annual adjustment to reserve.......      3.5      7.7      1.9      0.3      0.3       (1.3)       (3.1)       (3.1)       (3.1)       (3.1)           0
Cumulative deferred tax reserve....      3.5     11.2     13.1     13.5     13.8        12.5         9.3         6.2         3.1       (0.0)           0
Annual adjustment at 21%...........                                                    (0.9)       (2.1)       (2.1)       (2.1)       (2.1)       (9.3)
Annual adjustment at average rate..                                                    (1.3)       (3.1)       (3.1)       (3.1)       (3.1)      (13.8)
Excess tax reserve.................                                                      0.4         1.0         1.0         1.0         1.0         4.5
--------------------------------------------------------------------------------------------------------------------------------------------------------

       The excess tax reserve as of December 31, 2017, the day 
     before the corporate rate reduction takes effect, is $4.5 
     million.\430\ The taxpayer will begin taking the excess tax 
     reserve into account in the 2021 taxable year, which is the 
     first year in which the tax depreciation taken with respect 
     to the property is less than the depreciation reflected in 
     the regulated books of account. The annual adjustment to the 
     deferred tax reserve for the 2021 through 2025 taxable years 
     is multiplied by 31.1 percent which is the ratio of the 
     aggregate deferred taxes as of the beginning of 2021 ($13.8 
     million) to the aggregate timing differences for the property 
     as of the beginning of 2021 ($44.2 million).
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     \430\ The excess tax reserve of $4.5 million is equal to the 
     cumulative deferred tax reserve as of December 31, 2017 
     ($11.2 million) minus the cumulative timing difference as of 
     December 31, 2017 ($32 million) multiplied by 21 percent.
---------------------------------------------------------------------------
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.

                            B. Cost Recovery

     1. Increased expensing (sec. 3101 of the House bill, secs. 
         13201 and 13311 of the Senate amendment, and sec. 168(k) 
         of the Code)


                              Present Law

       A taxpayer generally must capitalize the cost of property 
     used in a trade or business or held for the production of 
     income and recover such cost over time through annual 
     deductions for depreciation or amortization.\431\
---------------------------------------------------------------------------
     \431\ See secs. 263(a) and 167. However, where property is 
     not used exclusively in a taxpayer's business, the amount 
     eligible for a deduction must be reduced by the amount 
     related to personal use. See, e.g., section 280A.

[[Page 19968]]


     Tangible property
       Tangible property generally is depreciated under the 
     modified accelerated cost recovery system (``MACRS''), which 
     determines depreciation for different types of property based 
     on an assigned applicable depreciation method, recovery 
     period,\432\ and convention.\433\
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     \432\ The applicable recovery period for an asset is 
     determined in part by statute and in part by historic 
     Treasury guidance. Exercising authority granted by Congress, 
     the Secretary issued Rev. Proc. 87-56, 1987-2 C.B. 674, 
     laying out the framework of recovery periods for enumerated 
     classes of assets. The Secretary clarified and modified the 
     list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. 
     In November 1988, Congress revoked the Secretary's authority 
     to modify the class lives of depreciable property. Rev. Proc. 
     87-56, as modified, remains in effect except to the extent 
     that the Congress has, since 1988, statutorily modified the 
     recovery period for certain depreciable assets, effectively 
     superseding any administrative guidance with regard to such 
     property.
     \433\ Sec. 168.
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       Bonus depreciation
       An additional first-year depreciation deduction is allowed 
     equal to 50 percent of the adjusted basis of qualified 
     property acquired and placed in service before January 1, 
     2020 (January 1, 2021, for longer production period property 
     \434\ and certain aircraft \435\).\436\ The 50-percent 
     allowance is phased down for property placed in service after 
     December 31, 2017 (after December 31, 2018 for longer 
     production period property and certain aircraft). The bonus 
     depreciation percentage rates are as follows.
---------------------------------------------------------------------------
     \434\ As defined in section 168(k)(2)(B).
     \435\ As defined in section 168(k)(2)(C).
     \436\ Sec. 168(k). The additional first-year depreciation 
     deduction is generally subject to the rules regarding whether 
     a cost must be capitalized under section 263A.

------------------------------------------------------------------------
                                       Bonus Depreciation Percentage
                                 ---------------------------------------
                                                       Longer Production
     Placed in Service Year       Qualified Property   Period  Property
                                       in General        and  Certain
                                                           Aircraft
------------------------------------------------------------------------
2017............................  50 percent........  50 percent
2018............................  40 percent........  50 percent \437\
2019............................  30 percent........  40 percent
2020............................  None..............  30 percent \438\
------------------------------------------------------------------------

       The additional first-year depreciation deduction is allowed 
     for both the regular tax and the alternative minimum tax 
     (``AMT''),\439\ but is not allowed in computing earnings and 
     profits.\440\ The basis of the property and the depreciation 
     allowances in the year of purchase and later years are 
     appropriately adjusted to reflect the additional first-year 
     depreciation deduction.\441\ The amount of the additional 
     first-year depreciation deduction is not affected by a short 
     taxable year.\442\ The taxpayer may elect out of the 
     additional first-year depreciation for any class of property 
     for any taxable year.\443\
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     \437\ It is intended that for longer production period 
     property placed in service in 2018, 50 percent applies to the 
     entire adjusted basis. Similarly, for longer production 
     period property placed in service in 2019, 40 percent applies 
     to the entire adjusted basis. A technical correction may be 
     necessary with respect to longer production period property 
     placed in service in 2018 and 2019 so that the statute 
     reflects this intent.
     \438\ In the case of longer production period property 
     described in section 168(k)(2)(B) and placed in service in 
     2020, 30 percent applies to the adjusted basis attributable 
     to manufacture, construction, or production before January 1, 
     2020, and the remaining adjusted basis does not qualify for 
     bonus depreciation. Thirty percent applies to the entire 
     adjusted basis of certain aircraft described in section 
     168(k)(2)(C) and placed in service in 2020.
     \439\ Sec. 168(k)(2)(G). See also Treas. Reg. sec. 1.168(k)-
     1(d).
     \440\ Sec. 312(k)(3) and Treas. Reg. sec. 1.168(k)-1(f)(7).
     \441\ Sec. 168(k)(1)(B).
     \442\ Ibid.
     \443\ Sec. 168(k)(7). For the definition of a class of 
     property, see Treas. Reg. sec. 1.168(k)-1(e)(2).
---------------------------------------------------------------------------
       The interaction of the additional first-year depreciation 
     allowance with the otherwise applicable depreciation 
     allowance may be illustrated as follows. Assume that in 2017 
     a taxpayer purchases new depreciable property and places it 
     in service.\444\ The property's cost is $10,000, and it is 
     five-year property subject to the 200 percent declining 
     balance method and half-year convention. The amount of 
     additional first-year depreciation allowed is $5,000. The 
     remaining $5,000 of the cost of the property is depreciable 
     under the rules applicable to five-year property. Thus, 
     $1,000 also is allowed as a depreciation deduction in 
     2017.\445\ The total depreciation deduction with respect to 
     the property for 2017 is $6,000. The remaining $4,000 
     adjusted basis of the property generally is recovered through 
     otherwise applicable depreciation rules.
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     \444\ Assume that the cost of the property is not eligible 
     for expensing under section 179 or Treas. Reg. sec. 1.263(a)-
     1(f).
     \445\ $1,000 results from the application of the half-year 
     convention and the 200 percent declining balance method to 
     the remaining $5,000.
---------------------------------------------------------------------------
       Qualified property
       Property qualifying for the additional first-year 
     depreciation deduction must meet all of the following 
     requirements.\446\ First, the property must be: (1) property 
     to which MACRS applies with an applicable recovery period of 
     20 years or less; (2) water utility property; \447\ (3) 
     computer software other than computer software covered by 
     section 197; or (4) qualified improvement property.\448\ 
     Second, the original use \449\ of the property must commence 
     with the taxpayer.\450\ Third, the taxpayer must acquire the 
     property within the applicable time period (as described 
     below). Finally, the property must be placed in service 
     before January 1, 2020. As noted above, an extension of the 
     placed-in-service date of one year (i.e., before January 1, 
     2021) is provided for certain property with a recovery period 
     of 10 years or longer, certain transportation property, and 
     certain aircraft.\451\
---------------------------------------------------------------------------
     \446\ Requirements relating to actions taken before 2008 are 
     not described herein since they have little (if any) 
     remaining effect.
     \447\ As defined in section 168(e)(5).
     \448\ The additional first-year depreciation deduction is not 
     available for any property that is required to be depreciated 
     under the alternative depreciation system of MACRS. Sec. 
     168(k)(2)(D)(i).
     \449\ The term ``original use'' means the first use to which 
     the property is put, whether or not such use corresponds to 
     the use of such property by the taxpayer. If in the normal 
     course of its business a taxpayer sells fractional interests 
     in property to unrelated third parties, then the original use 
     of such property begins with the first user of each 
     fractional interest (i.e., each fractional owner is 
     considered the original user of its proportionate share of 
     the property). Treas. Reg. sec. 1.168(k)-1(b)(3).
     \450\ A special rule applies in the case of certain leased 
     property. In the case of any property that is originally 
     placed in service by a person and that is sold to the 
     taxpayer and leased back to such person by the taxpayer 
     within three months after the date that the property was 
     placed in service, the property would be treated as 
     originally placed in service by the taxpayer not earlier than 
     the date that the property is used under the leaseback. If 
     property is originally placed in service by a lessor, such 
     property is sold within three months after the date that the 
     property was placed in service, and the user of such property 
     does not change, then the property is treated as originally 
     placed in service by the taxpayer not earlier than the date 
     of such sale. Sec. 168(k)(2)(E)(ii) and (iii).
     \451\ Property qualifying for the extended placed-in-service 
     date must have an estimated production period exceeding one 
     year and a cost exceeding $1 million. Transportation property 
     generally is defined as tangible personal property used in 
     the trade or business of transporting persons or property. 
     Certain aircraft which is not transportation property, other 
     than for agricultural or firefighting uses, also qualifies 
     for the extended placed-in-service date, if at the time of 
     the contract for purchase, the purchaser made a nonrefundable 
     deposit of the lesser of 10 percent of the cost or $100,000, 
     and which has an estimated production period exceeding four 
     months and a cost exceeding $200,000.
---------------------------------------------------------------------------
       To qualify, property must be acquired (1) before January 1, 
     2020, or (2) pursuant to a binding written contract which was 
     entered into before January 1, 2020. With respect to property 
     that is manufactured, constructed, or produced by the 
     taxpayer for use by the taxpayer, the taxpayer must begin the 
     manufacture, construction, or production of the property 
     before January 1, 2020.\452\ 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.\453\ For property eligible for the extended 
     placed-in-service date, a special rule limits the amount of 
     costs eligible for the additional first-year depreciation. 
     With respect to such property, only the portion of the basis 
     that is properly attributable to the costs incurred before 
     January 1, 2020 (``progress expenditures'') is eligible for 
     the additional first-year depreciation deduction.\454\
---------------------------------------------------------------------------
     \452\ Sec. 168(k)(2)(E)(i).
     \453\ Treas. Reg. sec. 1.168(k)-1(b)(4)(iii).
     \454\ Sec. 168(k)(2)(B)(ii). For purposes of determining the 
     amount of eligible progress expenditures, rules similar to 
     section 46(d)(3) as in effect prior to the Tax Reform Act of 
     1986 apply.
---------------------------------------------------------------------------
     Qualified improvement property
       Qualified improvement property is any improvement to an 
     interior portion of a building that is nonresidential real 
     property if such improvement is placed in service after the 
     date such building was first placed in service.\455\ 
     Qualified improvement property does not include any 
     improvement for which the expenditure is attributable to the 
     enlargement of the building, any elevator or escalator, or 
     the internal structural framework of the building.
---------------------------------------------------------------------------
     \455\ Sec. 168(k)(3).
---------------------------------------------------------------------------
       Election to accelerate AMT credits in lieu of bonus 
           depreciation
       A corporation otherwise eligible for additional first-year 
     depreciation may elect to claim additional AMT credits in 
     lieu of claiming additional depreciation with respect to 
     qualified property.\456\ In the case of a corporation making 
     this election, the straight line method is used for the 
     regular tax and the AMT with respect to qualified 
     property.\457\
---------------------------------------------------------------------------
     \456\ Sec. 168(k)(4).
     \457\ Sec. 168(k)(4)(A)(ii).
---------------------------------------------------------------------------
       A corporation making an election increases the tax 
     liability limitation under section 53(c) on the use of 
     minimum tax credits by the bonus depreciation amount. The 
     aggregate increase in credits allowable by reason of the 
     increased limitation is treated as refundable.
       The bonus depreciation amount generally is equal to 20 
     percent of bonus depreciation for qualified property that 
     could be claimed as a deduction absent an election under this 
     provision.\458\ As originally enacted, the bonus

[[Page 19969]]

     depreciation amount for all taxable years was limited to the 
     lesser of (1) $30 million or (2) six percent of the minimum 
     tax credits allocable to the adjusted net minimum tax imposed 
     for taxable years beginning before January 1, 2006. However, 
     extensions of this provision have provided that this 
     limitation applies separately to property subject to each 
     extension.
---------------------------------------------------------------------------
     \458\ For this purpose, bonus depreciation is the difference 
     between (i) the aggregate amount of depreciation determined 
     if section 168(k)(1) applied to all qualified property placed 
     in service during the taxable year and (ii) the amount of 
     depreciation that would be so determined if section 168(k)(1) 
     did not so apply. This determination is made using the most 
     accelerated depreciation method and the shortest life 
     otherwise allowable for each property.
---------------------------------------------------------------------------
       For taxable years ending after December 31, 2015, the bonus 
     depreciation amount for a taxable year (as defined under 
     present law with respect to all qualified property) is 
     limited to the lesser of (1) 50 percent of the minimum tax 
     credit for the first taxable year ending after December 31, 
     2015 (determined before the application of any tax liability 
     limitation) or (2) the minimum tax credit for the taxable 
     year allocable to the adjusted net minimum tax imposed for 
     taxable years ending before January 1, 2016 (determined 
     before the application of any tax liability limitation and 
     determined on a first-in, first-out basis).
       All corporations treated as a single employer under section 
     52(a) are treated as one taxpayer for purposes of the 
     limitation, as well as for electing the application of this 
     provision.\459\
---------------------------------------------------------------------------
     \459\ Sec. 168(k)(4)(B)(iii).
---------------------------------------------------------------------------
       In the case of a corporation making an election which is a 
     partner in a partnership, for purposes of determining the 
     electing partner's distributive share of partnership items, 
     bonus depreciation does not apply to any qualified property 
     and the straight line method is used with respect to that 
     property.\460\
---------------------------------------------------------------------------
     \460\ Sec. 168(k)(4)(D)(ii).
---------------------------------------------------------------------------
       In the case of a partnership having a single corporate 
     partner owning (directly or indirectly) more than 50 percent 
     of the capital and profits interests in the partnership, each 
     partner takes into account its distributive share of 
     partnership depreciation in determining its bonus 
     depreciation amount.\461\
---------------------------------------------------------------------------
     \461\ Sec. 168(k)(4)(D)(iii).
---------------------------------------------------------------------------
       Special rules
     Passenger automobiles
       The limitation under section 280F on the amount of 
     depreciation deductions allowed with respect to certain 
     passenger automobiles is increased in the first year by 
     $8,000 for automobiles that qualify (and for which the 
     taxpayer does not elect out of the additional first-year 
     deduction).\462\ The $8,000 amount is phased down from $8,000 
     by $1,600 per calendar year beginning in 2018. Thus, the 
     section 280F increase amount for property placed in service 
     during 2018 is $6,400, and during 2019 is $4,800. While the 
     underlying section 280F limitation is indexed for 
     inflation,\463\ the section 280F increase amount is not 
     indexed for inflation. The increase does not apply to a 
     taxpayer who elects to accelerate AMT credits in lieu of 
     bonus depreciation for a taxable year.
---------------------------------------------------------------------------
     \462\ Sec. 168(k)(2)(F).
     \463\ Sec. 280F(d)(7).
---------------------------------------------------------------------------
     Certain plants bearing fruits and nuts
       A special election is provided for certain plants bearing 
     fruits and nuts.\464\ Under the election, the applicable 
     percentage of the adjusted basis of a specified plant which 
     is planted or grafted after December 31, 2015, and before 
     January 1, 2020, is deductible for regular tax and AMT 
     purposes in the year planted or grafted by the taxpayer, and 
     the adjusted basis is reduced by the amount of the 
     deduction.\465\ The percentage is 50 percent for 2017, 40 
     percent for 2018, and 30 percent for 2019. A specified plant 
     is any tree or vine that bears fruits or nuts, and any other 
     plant that will have more than one yield of fruits or nuts 
     and generally has a preproductive period of more than two 
     years from planting or grafting to the time it begins bearing 
     fruits or nuts.\466\ The election is revocable only with the 
     consent of the Secretary, and if the election is made with 
     respect to any specified plant, such plant is not treated as 
     qualified property eligible for bonus depreciation in the 
     subsequent taxable year in which it is placed in service.
---------------------------------------------------------------------------
     \464\ See sec. 168(k)(5).
     \465\ Any amount deducted under this election is not subject 
     to capitalization under section 263A.
     \466\ A specified plant does not include any property that is 
     planted or grafted outside the United States.
---------------------------------------------------------------------------
     Long-term contracts
       In general, in the case of a long-term contract, the 
     taxable income from the contract is determined under the 
     percentage-of-completion method.\467\ Solely for purposes of 
     determining the percentage of completion under section 
     460(b)(1)(A), the cost of qualified property with a MACRS 
     recovery period of seven years or less is taken into account 
     as a cost allocated to the contract as if bonus depreciation 
     had not been enacted for property placed in service before 
     January 1, 2020 (January 1, 2021, in the case of longer 
     production period property).\468\
---------------------------------------------------------------------------
     \467\ Sec. 460.
     \468\ Sec. 460(c)(6). Other dates involving prior years are 
     not described herein.
---------------------------------------------------------------------------
     Intangible property
       MACRS does not apply to certain property, including any 
     motion picture film, video tape, or sound recording, or to 
     any other property if the taxpayer elects to exclude such 
     property from MACRS and the taxpayer properly applies a unit-
     of-production method or other method of depreciation not 
     expressed in a term of years.\469\ Section 197 (amortization 
     of goodwill and certain other intangibles) does not apply to 
     certain intangible property, including certain property 
     produced by the taxpayer or any interest in a film, sound 
     recording, video tape, book or similar property not acquired 
     in a transaction (or a series of related transactions) 
     involving the acquisition of assets constituting a trade or 
     business or substantial portion thereof.\470\ Thus, the 
     recovery of the cost of a film, video tape, or similar 
     property that is produced by the taxpayer or is acquired on a 
     ``stand-alone'' basis by the taxpayer may not be determined 
     under either the MACRS depreciation provisions or under the 
     section 197 amortization provisions. The cost recovery of 
     such property may be determined under section 167, which 
     allows a depreciation deduction for the reasonable allowance 
     for the exhaustion, wear and tear, or obsolescence of the 
     property if it is used in a trade or business or held for the 
     production of income. In addition, the costs of motion 
     picture films, video tapes, sound recordings, copyrights, 
     books, and patents are eligible to be recovered using the 
     income forecast method of depreciation.\471\
---------------------------------------------------------------------------
     \469\ Sec. 168(f)(1), (3) and (4).
     \470\ Sec. 197(c)(2) and (e)(4)(A). If section 197 applies to 
     the acquisition of intangible assets held in connection with 
     a trade or business, any value properly attributable to a 
     ``section 197 intangible'' is amortizable on a straight-line 
     basis over 15 years. Sec. 197(a) and (c).
     \471\ Sec. 167(g)(6). Under the income forecast method, a 
     property's depreciation deduction for a taxable year is 
     determined by multiplying the adjusted basis of the property 
     by a fraction, the numerator of which is the gross income 
     generated by the property during the year, and the 
     denominator of which is the total forecasted or estimated 
     gross income expected to be generated prior to the close of 
     the tenth taxable year after the year the property is placed 
     in service. Any costs that are not recovered by the end of 
     the tenth taxable year after the property is placed in 
     service may be taken into account as depreciation in that 
     year. Sec. 167(g)(1).
---------------------------------------------------------------------------
       Expensing of certain qualified film, television and live 
           theatrical productions
       Under section 181, a taxpayer may elect \472\ to deduct the 
     cost of any qualifying film, television and live theatrical 
     production, commencing prior to January 1, 2017, in the year 
     the expenditure is incurred in lieu of capitalizing the cost 
     and recovering it through depreciation allowances.\473\ A 
     taxpayer may elect to deduct up to $15 million of the 
     aggregate cost of the film or television production under 
     this section.\474\ The threshold is increased to $20 million 
     if a significant amount of the production expenditures are 
     incurred in areas eligible for designation as a low-income 
     community or eligible for designation by the Delta Regional 
     Authority as a distressed county or isolated area of 
     distress.\475\
---------------------------------------------------------------------------
     \472\ See Treas. Reg. sec. 1.181-2 for rules on making an 
     election under this section.
     \473\ For this purpose, a qualified film or television 
     production is treated as commencing on the first date of 
     principal photography. The date on which a qualified live 
     theatrical production commences is the date of the first 
     public performance of such production for a paying audience.
     \474\ Sec. 181(a)(2)(A). See Treas. Reg. sec. 1.181-1 for 
     rules on determining eligible production costs.
     \475\ Sec. 181(a)(2)(B).
---------------------------------------------------------------------------
       A qualified film, television or live theatrical production 
     means any production of a motion picture (whether released 
     theatrically or directly to video cassette or any other 
     format), television program or live staged play if at least 
     75 percent of the total compensation expended on the 
     production is for services performed in the United States by 
     actors, directors, producers, and other relevant production 
     personnel.\476\ The term ``compensation'' does not include 
     participations and residuals (as defined in section 
     167(g)(7)(B)).\477\
---------------------------------------------------------------------------
     \476\ Sec. 181(d)(3)(A).
     \477\ Sec. 181(d)(3)(B).
---------------------------------------------------------------------------
       Each episode of a television series is treated as a 
     separate production, and only the first 44 episodes of a 
     particular series qualify under the provision.\478\ Qualified 
     productions do not include sexually explicit productions as 
     referenced by section 2257 of title 18 of the U.S. Code.\479\
---------------------------------------------------------------------------
     \478\ Sec. 181(d)(2)(B).
     \479\ Sec. 181(d)(2)(C).
---------------------------------------------------------------------------
       A qualified live theatrical production is defined as a live 
     staged production of a play (with or without music) which is 
     derived from a written book or script and is produced or 
     presented by a commercial entity in any venue which has an 
     audience capacity of not more than 3,000, or a series of 
     venues the majority of which have an audience capacity of not 
     more than 3,000.\480\ In addition, qualified live theatrical 
     productions include any live staged production which is 
     produced or presented by a taxable entity no more than 10 
     weeks annually in any venue which has an audience capacity of 
     not more than 6,500.\481\ In general, in the case of multiple 
     live-staged productions, each such live-staged production is 
     treated as a separate production. Similar to the exclusion 
     for sexually explicit productions from the definition of 
     qualified film or television productions, qualified live 
     theatrical productions do not include stage performances that 
     would be excluded by section 2257(h)(1) of title 18 of the

[[Page 19970]]

     U.S. Code, if such provision were extended to live stage 
     performances.\482\
---------------------------------------------------------------------------
     \480\ Sec. 181(e)(2)(A).
     \481\ Sec. 181(e)(2)(D).
     \482\ Sec. 181(e)(2)(E).
---------------------------------------------------------------------------
       For purposes of recapture under section 1245, any deduction 
     allowed under section 181 is treated as if it were a 
     deduction allowable for amortization.\483\
---------------------------------------------------------------------------
     \483\ Sec. 1245(a)(2)(C).
---------------------------------------------------------------------------


                               House Bill

     Full expensing for certain business assets
       The provision extends and modifies the additional first-
     year depreciation deduction through 2022 (through 2023 for 
     longer production period property and certain aircraft). The 
     50-percent allowance is increased to 100 percent for property 
     acquired and placed in service after September 27, 2017, and 
     before January 1, 2023 (January 1, 2024, for longer 
     production period property and certain aircraft), as well as 
     for specified plants planted or grafted after September 27, 
     2017, and before January 1, 2023.
       Special rules
       The $8,000 increase amount in the limitation on the 
     depreciation deductions allowed with respect to certain 
     passenger automobiles is increased to $16,000 for passenger 
     automobiles acquired and placed in service after September 
     27, 2017, and before January 1, 2023.
       The provision extends the special rule under the 
     percentage-of-completion method for the allocation of bonus 
     depreciation to a long-term contract for property placed in 
     service before January 1, 2023 (January 1, 2024, in the case 
     of longer production period property).
     Application to used property
       The provision removes the requirement that the original use 
     of qualified property must commence with the taxpayer. Thus, 
     the provision applies to purchases of used as well as new 
     items. To prevent abuses, the additional first-year 
     depreciation deduction applies only to property purchased in 
     an arm's-length transaction. It does not apply to property 
     received as a gift or from a decedent.\484\ In the case of 
     trade-ins, like-kind exchanges, or involuntary conversions, 
     it applies only to any money paid in addition to the traded-
     in property or in excess of the adjusted basis of the 
     replaced property.\485\ It does not apply to property 
     acquired in a nontaxable exchange such as a reorganization, 
     to property acquired from a member of the taxpayer's family, 
     including a spouse, ancestors, and lineal descendants, or 
     from another related entity as defined in section 267, nor to 
     property acquired from a person who controls, is controlled 
     by, or is under common control with, the taxpayer.\486\ Thus 
     it does not apply, for example, if one member of an 
     affiliated group of corporations purchases property from 
     another member, or if an individual who controls a 
     corporation purchases property from that corporation.
---------------------------------------------------------------------------
     \484\ By reference to section 179(d)(2)(C). See also Treas. 
     Reg. sec. 1.179-4(c)(1)(iv).
     \485\ By reference to section 179(d)(3). See also Treas. Reg. 
     sec. 1.179-4(d).
     \486\ By reference to section 179(d)(2)(A) and (B). See also 
     Treas. Reg. sec. 1.179-4(c).
---------------------------------------------------------------------------
     Exception for certain businesses not subject to limitation on 
         interest expense
       The provision excludes from the definition of qualified 
     property any property used in a real property trade or 
     business, i.e., any real property development, redevelopment, 
     construction, reconstruction, acquisition, conversion, 
     rental, operation, management, leasing, or brokerage trade or 
     business.\487\
---------------------------------------------------------------------------
     \487\ As defined in section 3301 of the House bill 
     (Interest), by cross reference to section 469(c)(7)(C). Note 
     that a mortgage broker who is a broker of financial 
     instruments is not in a real property trade or business for 
     this purpose. See, e.g., CCA 201504010 (December 17, 2014).
---------------------------------------------------------------------------
       The provision also excludes from the definition of 
     qualified property any property used in the trade or business 
     of certain regulated public utilities, i.e., the trade or 
     business of the furnishing or sale of (1) electrical energy, 
     water, or sewage disposal services, (2) gas or steam through 
     a local distribution system, or (3) transportation of gas or 
     steam by pipeline, if the rates for such furnishing or sale, 
     as the case may be, have been established or approved by a 
     State or political subdivision thereof, by any agency or 
     instrumentality of the United States, or by a public service 
     or public utility commission or other similar body of any 
     State or political subdivision thereof.\488\
---------------------------------------------------------------------------
     \488\ As defined in section 3301 of the House bill 
     (Interest).
---------------------------------------------------------------------------
       In addition, the provision excludes from the definition of 
     qualified property any property used in a trade or business 
     that has had floor plan financing indebtedness,\489\ unless 
     the taxpayer with such trade or business is not a tax shelter 
     prohibited from using the cash method and is exempt from the 
     interest limitation rules in section 3301 of the bill by 
     meeting the $25 million gross receipts test of section 
     448(c).
---------------------------------------------------------------------------
     \489\ As defined in section 3301 of the House bill 
     (Interest).
---------------------------------------------------------------------------
     Election to accelerate AMT credits in lieu of bonus 
         depreciation
       As a conforming amendment to the repeal of AMT,\490\ the 
     provision repeals the election to accelerate AMT credits in 
     lieu of bonus depreciation.
---------------------------------------------------------------------------
     \490\ See section 2001 of the House bill (Repeal of 
     alternative minimum tax).
---------------------------------------------------------------------------
     Transition rule
       The present-law phase-down of bonus depreciation is 
     maintained for property acquired before September 28, 2017, 
     and placed in service after September 27, 2017. Under the 
     provision, in the case of property acquired and adjusted 
     basis incurred before September 28, 2017, the bonus 
     depreciation rates are as follows.

  Phase-Down for Portion of Basis of Qualified Property Acquired before
                           September 28, 2017
------------------------------------------------------------------------
                                       Bonus Depreciation Percentage
                                 ---------------------------------------
                                                       Longer Production
     Placed in Service Year       Qualified Property    Period Property
                                      in General         and  Certain
                                                           Aircraft
------------------------------------------------------------------------
2017............................  50 percent........  50 percent
2018............................  40 percent........  50 percent
2019............................  30 percent........  40 percent
2020............................  None..............  30 percent
------------------------------------------------------------------------

       Similarly, the section 280F increase amount in the 
     limitation on the depreciation deductions allowed with 
     respect to certain passenger automobiles acquired before 
     September 28, 2017, and placed in service after September 27, 
     2017, is $8,000 for 2017, $6,400 for 2018, and $4,800 for 
     2019.
       Effective date.--The provision generally applies to 
     property acquired \491\ and placed in service after September 
     27, 2017, and to specified plants planted or grafted after 
     such date.
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     \491\ Property is not treated as acquired after the date on 
     which a written binding contract is entered into for such 
     acquisition.
---------------------------------------------------------------------------
       A transition rule provides that, for a taxpayer's first 
     taxable year ending after September 27, 2017, the taxpayer 
     may elect to apply section 168 without regard to the 
     amendments made by this provision.
       In the case of any taxable year that includes any portion 
     of the period beginning on September 28, 2017, and ending on 
     December 31, 2017, the amount of any net operating loss for 
     such taxable year which may be treated as a net operating 
     loss carryback is determined without regard to the amendments 
     made by this provision.\492\
---------------------------------------------------------------------------
     \492\ See section 3302 of the House bill (Modification of net 
     operating loss deduction).
---------------------------------------------------------------------------


                            Senate Amendment

     In general
       The provision extends and modifies the additional first-
     year depreciation deduction through 2026 (through 2027 for 
     longer production period property and certain aircraft). The 
     50-percent allowance is increased to 100 percent for property 
     placed in service after September 27, 2017, and before 
     January 1, 2023 (January 1, 2024, for longer production 
     period property and certain aircraft), as well as for 
     specified plants planted or grafted after September 27, 2017, 
     and before January 1, 2023. Thus, the provision repeals the 
     phase-down of the 50-percent allowance for property placed in 
     service after December 31, 2017, and for specified plants 
     planted or grafted after such date. The 100-percent allowance 
     is phased down by 20 percent per calendar year for property 
     placed in service, and specified plants planted or grafted, 
     in taxable years beginning after 2022 (after 2023 for longer 
     production period property and certain aircraft). Under the 
     provision, the bonus depreciation percentage rates are as 
     follows.

------------------------------------------------------------------------
                                       Bonus Depreciation Percentage
                                 ---------------------------------------
                                                       Longer Production
  Placed in Service Year \493\    Qualified Property    Period Property
                                      in General         and  Certain
                                                           Aircraft
------------------------------------------------------------------------
2023............................  80 percent........  100 percent
2024............................  60 percent........  80 percent
2025............................  40 percent........  60 percent
2026............................  20 percent........  40 percent
2027............................  None..............  20 percent \494\
------------------------------------------------------------------------

       Special rules
       The provision maintains the section 280F increase amount of 
     $8,000 for passenger automobiles placed in service after 
     December 31, 2017.
---------------------------------------------------------------------------
     \493\ In the case of specified plants, this is the year of 
     planting or grafting.
     \494\ Twenty percent applies to the adjusted basis 
     attributable to manufacture, construction, or production 
     before January 1, 2027, and the remaining adjusted basis does 
     not qualify for bonus depreciation. Twenty percent applies to 
     the entire adjusted basis of certain aircraft described in 
     section 168(k)(2)(C) and placed in service in 2027.
---------------------------------------------------------------------------
       The provision extends the special rule under the 
     percentage-of-completion method for the allocation of bonus 
     depreciation to a long-term contract for property placed in 
     service before January 1, 2027 (January 1, 2028, in the case 
     of longer production period property).
     Application to qualified film, television and live theatrical 
         productions
       The provision expands the definition of qualified property 
     eligible for the additional first-year depreciation allowance 
     to include qualified film, television and live theatrical 
     productions \495\ placed in service after September 27, 2017, 
     and before January 1, 2027, for which a deduction otherwise 
     would have been allowable under section 181 without regard to 
     the dollar limitation or termination of such section. For 
     purposes of this provision, a production is considered placed 
     in service at the time of initial release, broadcast, or live 
     staged performance (i.e., at the time of the first commercial 
     exhibition,

[[Page 19971]]

     broadcast, or live staged performance of a production to an 
     audience).
---------------------------------------------------------------------------
     \495\ As defined in section 181(d) and (e).
---------------------------------------------------------------------------
     Exception for certain businesses not subject to limitation on 
         interest expense
       The provision excludes from the definition of qualified 
     property any property which is primarily used in the trade or 
     business of the furnishing \496\ or sale of (1) electrical 
     energy, water, or sewage disposal services, (2) gas or steam 
     through a local distribution system, or (3) transportation of 
     gas or steam by pipeline, if the rates for such furnishing or 
     sale, as the case may be, have been established or approved 
     by a State or political subdivision thereof, by any agency or 
     instrumentality of the United States, by a public service or 
     public utility commission or other similar body of any State 
     or political subdivision thereof, or by the governing or 
     ratemaking body of an electric cooperative.\497\
---------------------------------------------------------------------------
     \496\ The term ``furnishing'' includes generation, 
     transmission, and distribution activities.
     \497\ See sec. 13301 of the Senate amendment (Limitation on 
     deduction for interest).
---------------------------------------------------------------------------
       In addition, the provision excludes from the definition of 
     qualified property any property used in a trade or business 
     that has had floor plan financing indebtedness,\498\ unless 
     the taxpayer with such trade or business is not a tax shelter 
     prohibited from using the cash method and is exempt from the 
     interest limitation rules in section 13301 of the Senate 
     amendment by meeting the small business gross receipts test 
     of section 448(c).
---------------------------------------------------------------------------
     \498\ As defined in section 13311 of the Senate amendment 
     (Floor plan financing).
---------------------------------------------------------------------------
       Effective date.--The provision generally applies to 
     property placed in service after September 27, 2017, in 
     taxable years ending after such date, and to specified plants 
     planted or grafted after such date.
       A transition rule provides that, for a taxpayer's first 
     taxable year ending after September 27, 2017, the taxpayer 
     may elect to apply a 50-percent allowance instead of the 100-
     percent allowance.\499\
---------------------------------------------------------------------------
     \499\ Such election shall be made at such time and in such 
     form and manner as prescribed by the Secretary.
---------------------------------------------------------------------------


                          Conference Agreement

       The conference agreement follows the Senate amendment but 
     also includes the House bill's removal of the requirement 
     that the original use of qualified property must commence 
     with the taxpayer (i.e., it allows the additional first-year 
     depreciation deduction for new and used property).
       In addition, the conference agreement also follows the 
     House bill's application of the present-law phase-down of 
     bonus depreciation to property acquired before September 28, 
     2017, and placed in service after September 27, 2017, as well 
     as the present-law phase-down of the section 280F increase 
     amount in the limitation on the depreciation deductions 
     allowed with respect to certain passenger automobiles 
     acquired before September 28, 2017, and placed in service 
     after September 27, 2017. Under the conference agreement, the 
     bonus depreciation rates are as follows.

------------------------------------------------------------------------
                                       Bonus Depreciation Percentage
                                 ---------------------------------------
                                                       Longer Production
  Placed in Service Year \500\    Qualified Property    Period Property
                                      in General/         and Certain
                                   Specified Plants        Aircraft
------------------------------------------------------------------------
  Portion of Basis of Qualified Property Acquired before Sept. 28, 2017
 
Sept. 28, 2017-Dec. 31, 2017....  50 percent........  50 percent
2018............................  40 percent........  50 percent
2019............................  30 percent........  40 percent
2020............................  None..............  30 percent \501\
2021 and thereafter.............  None..............  None
------------------------------------------------------------------------
  Portion of Basis of Qualified Property Acquired after Sept. 27, 2017
 
Sept. 28, 2017-Dec. 31, 2022....  100 percent.......  100 percent
2023............................  80 percent........  100 percent
2024............................  60 percent........  80 percent
2025............................  40 percent........  60 percent
2026............................  20 percent........  40 percent
2027............................  None..............  20 percent \502\
2028 and thereafter.............  None..............  None
------------------------------------------------------------------------

       As a conforming amendment to the repeal of corporate AMT, 
     the conference agreement repeals the election to accelerate 
     AMT credits in lieu of bonus depreciation.
---------------------------------------------------------------------------
     \500\ In the case of specified plants, this is the year of 
     planting or grafting.
     \501\ Thirty percent applies to the adjusted basis 
     attributable to manufacture, construction, or production 
     before January 1, 2020, and the remaining adjusted basis does 
     not qualify for bonus depreciation. Thirty percent applies to 
     the entire adjusted basis of certain aircraft described in 
     section 168(k)(2)(C) and placed in service in 2020.
     \502\ Twenty percent applies to the adjusted basis 
     attributable to manufacture, construction, or production 
     before January 1, 2027, and the remaining adjusted basis does 
     not qualify for bonus depreciation. Twenty percent applies to 
     the entire adjusted basis of certain aircraft described in 
     section 168(k)(2)(C) and placed in service in 2027.
---------------------------------------------------------------------------
       Effective date.--The provision generally applies to 
     property acquired and placed in service after September 27, 
     2017, and to specified plants planted or grafted after such 
     date.
       A transition rule provides that, for a taxpayer's first 
     taxable year ending after September 27, 2017, the taxpayer 
     may elect to apply a 50-percent allowance instead of the 100-
     percent allowance.
     2. Modifications to depreciation limitations on luxury 
         automobiles and personal use property (sec. 13202 of the 
         Senate amendment and sec. 280F of the Code)


                              Present Law

       Section 280F(a) limits the annual cost recovery deduction 
     with respect to certain passenger automobiles. This 
     limitation is commonly referred to as the ``luxury automobile 
     depreciation limitation.'' For passenger automobiles placed 
     in service in 2017, and for which the additional first-year 
     depreciation deduction under section 168(k) is not claimed, 
     the maximum amount of allowable depreciation is $3,160 for 
     the year in which the vehicle is placed in service, $5,100 
     for the second year, $3,050 for the third year, and $1,875 
     for the fourth and later years in the recovery period.\503\ 
     This limitation is indexed for inflation and applies to the 
     aggregate deduction provided under present law for 
     depreciation and section 179 expensing. Hence, passenger 
     automobiles subject to section 280F are eligible for section 
     179 expensing only to the extent of the applicable limits 
     contained in section 280F. For passenger automobiles eligible 
     for the additional first-year depreciation allowance in 2017, 
     the first-year limitation is increased by an additional 
     $8,000.\504\
---------------------------------------------------------------------------
     \503\ Rev. Proc. 2017-29, Table 3, 2017-14 I.R.B. 1065.
     \504\ Sec. 168(k)(2)(F). For proposed changes to section 
     168(k), see section II.B.1. of this document (Increased 
     expensing).
---------------------------------------------------------------------------
       For purposes of the depreciation limitation, passenger 
     automobiles are defined broadly to include any four-wheeled 
     vehicles that are manufactured primarily for use on public 
     streets, roads, and highways and which are rated at 6,000 
     pounds unloaded gross vehicle weight or less.\505\ In the 
     case of a truck or a van, the depreciation limitation applies 
     to vehicles that are rated at 6,000 pounds gross vehicle 
     weight or less. Sport utility vehicles are treated as a truck 
     for the purpose of applying the section 280F limitation.
---------------------------------------------------------------------------
     \505\ Sec. 280F(d)(5). Exceptions are provided for any 
     ambulance, hearse, or combination ambulance-hearse used by 
     the taxpayer directly in a trade or business, or any vehicle 
     used by the taxpayer directly in the trade or business of 
     transporting persons or property for compensation or hire.
---------------------------------------------------------------------------
       Basis not recovered in the recovery period of a passenger 
     automobile is allowable as an expense in subsequent taxable 
     years.\506\ The expensed amount is limited in each such 
     subsequent taxable year to the amount of the limitation in 
     the fourth year in the recovery period.
---------------------------------------------------------------------------
     \506\ Sec. 280F(a)(1)(B).
---------------------------------------------------------------------------
     Listed property
       In the case of certain listed property, special rules 
     apply. Listed property generally is defined as (1) any 
     passenger automobile; (2) any other property used as a means 
     of transportation; \507\ (3) any property of a type generally 
     used for purposes of entertainment, recreation, or amusement; 
     (4) any computer or peripheral equipment; \508\ and (5) any 
     other property of a type specified in Treasury 
     regulations.\509\
---------------------------------------------------------------------------
     \507\ Property substantially all of the use of which is in a 
     trade or business of providing transportation to unrelated 
     persons for hire is not considered other property used as a 
     means of transportation. Sec. 280F(d)(4)(C).
     \508\ Computer or peripheral equipment used exclusively at a 
     regular business establishment and owned or leased by the 
     person operating such establishment, however, is not listed 
     property. Sec. 280F(d)(4)(B).
     \509\ Sec. 280F(d)(4)(A).
---------------------------------------------------------------------------
       First, if for the taxable year in which the property is 
     placed in service, the use of the property for trade or 
     business purposes does not exceed 50 percent of the total use 
     of the property, then the depreciation deduction with respect 
     to such property is determined under the alternative 
     depreciation system.\510\ The alternative depreciation system 
     generally requires the use of the straight-line method and a 
     recovery period equal to the class life of the property.\511\ 
     Second, if an individual owns or leases listed property that 
     is used by the individual in connection with the performance 
     of services as an employee, no depreciation deduction, 
     expensing allowance, or deduction for lease payments is 
     available with respect to such use unless the use of the 
     property is for the convenience of the employer and required 
     as a condition of employment.\512\ Both limitations apply for 
     purposes of section 179 expensing.
---------------------------------------------------------------------------
     \510\ Sec. 280F(b)(1). If for any taxable year after the year 
     in which the property is placed in service the use of the 
     property for trade or business purposes decreases to 50 
     percent or less of the total use of the property, then the 
     amount of depreciation allowed in prior years in excess of 
     the amount of depreciation that would have been allowed for 
     such prior years under the alternative depreciation system is 
     recaptured (i.e., included in gross income) for such taxable 
     year.
     \511\ Sec. 168(g).
     \512\ Sec. 280F(d)(3).
---------------------------------------------------------------------------
       For listed property, no deduction is allowed unless the 
     taxpayer adequately substantiates the expense and business 
     usage of the property.\513\ A taxpayer must substantiate the 
     elements of each expenditure or use of listed property, 
     including (1) the amount (e.g., cost) of each separate 
     expenditure and the amount of business or investment use, 
     based on the appropriate measure (e.g., mileage for 
     automobiles), and the total use of the property for the 
     taxable period, (2) the date

[[Page 19972]]

     of the expenditure or use, and (3) the business purposes for 
     the expenditure or use.\514\ The level of substantiation for 
     business or investment use of listed property varies 
     depending on the facts and circumstances. In general, the 
     substantiation must contain sufficient information as to each 
     element of every business or investment use.\515\
---------------------------------------------------------------------------
     \513\ Sec. 274(d)(4).
     \514\ Temp. Reg. sec. 1.274-5T(b)(6).
     \515\ Temp. Reg. sec. 1.274-5T(c)(2)(ii)(C).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision increases the depreciation limitations under 
     section 280F that apply to listed property. For passenger 
     automobiles placed in service after December 31, 2017, and 
     for which the additional first-year depreciation deduction 
     under section 168(k) is not claimed, the maximum amount of 
     allowable depreciation is $10,000 for the year in which the 
     vehicle is placed in service, $16,000 for the second year, 
     $9,600 for the third year, and $5,760 for the fourth and 
     later years in the recovery period.\516\ The limitations are 
     indexed for inflation for passenger automobiles placed in 
     service after 2018.
---------------------------------------------------------------------------
     \516\ Rev. Proc. 2017-29, Table 3, 2017-14 I.R.B. 1065.
---------------------------------------------------------------------------
       The provision removes computer or peripheral equipment from 
     the definition of listed property. Such property is therefore 
     not subject to the heightened substantiation requirements 
     that apply to listed property.
       Effective date.--The provision is effective for property 
     placed in service after December 31, 2017, in taxable years 
     ending after such date.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     3. Modifications of treatment of certain farm property (sec. 
         13203 of the Senate amendment and sec. 168 of the Code)


                              Present Law

       A taxpayer generally must capitalize the cost of property 
     used in a trade or business or held for the production of 
     income and recover such cost over time through annual 
     deductions for depreciation or amortization.\517\ Tangible 
     property generally is depreciated under the modified 
     accelerated cost recovery system (``MACRS''), which 
     determines depreciation for different types of property based 
     on an assigned applicable depreciation method, recovery 
     period, and convention.\518\
---------------------------------------------------------------------------
     \517\ See secs. 263(a) and 167. However, where property is 
     not used exclusively in a taxpayer's business, the amount 
     eligible for a deduction must be reduced by the amount 
     related to personal use. See, e.g., section 280A.
     \518\ Sec. 168.
---------------------------------------------------------------------------
       The applicable recovery period for an asset is determined 
     in part by statute and in part by historic Treasury 
     guidance.\519\ The ``type of property'' of an asset is used 
     to determine the ``class life'' of the asset, which in turn 
     dictates the applicable recovery period for the asset.
---------------------------------------------------------------------------
     \519\ Exercising authority granted by Congress, the Secretary 
     issued Rev. Proc. 87-56, 1987-2 C.B. 674, laying out the 
     framework of recovery periods for enumerated classes of 
     assets. The Secretary clarified and modified the list of 
     asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In 
     November 1988, Congress revoked the Secretary's authority to 
     modify the class lives of depreciable property. Rev. Proc. 
     87-56, as modified, remains in effect except to the extent 
     that the Congress has, since 1988, statutorily modified the 
     recovery period for certain depreciable assets, effectively 
     superseding any administrative guidance with regard to such 
     property.
---------------------------------------------------------------------------
       The MACRS recovery periods applicable to most tangible 
     personal property range from three to 20 years. The 
     depreciation methods generally applicable to tangible 
     personal property are the 200-percent and 150-percent 
     declining balance methods,\520\ switching to the straight 
     line method for the first taxable year where using the 
     straight line method with respect to the adjusted basis as of 
     the beginning of that year yields a larger depreciation 
     allowance. The recovery periods for most real property are 39 
     years for nonresidential real property and 27.5 years for 
     residential rental property. The straight line depreciation 
     method is required for the aforementioned real property.
---------------------------------------------------------------------------
     \520\ Under the declining balance method the depreciation 
     rate is determined by dividing the appropriate percentage 
     (here 150 or 200) by the appropriate recovery period. This 
     leads to accelerated depreciation when the declining balance 
     percentage is greater than 100. The table below illustrates 
     depreciation for an asset with a cost of $1,000 and a seven-
     year recovery period under the 200-percent declining balance 
     method, the 150-percent declining balance method, and the 
     straight line method. (see endnote at end of table)
---------------------------------------------------------------------------
       Property used in a farming business is assigned various 
     recovery periods in the same manner as other business 
     property. For example, depreciable assets used in agriculture 
     activities that are assigned a recovery period of 7 years 
     include machinery and equipment, grain bins, and fences (but 
     no other land improvements), that are used in the production 
     of crops or plants, vines, and trees; livestock; the 
     operation of farm dairies, nurseries, greenhouses, sod farms, 
     mushrooms cellars, cranberry bogs, apiaries, and fur farms; 
     and the performance of agriculture, animal husbandry, and 
     horticultural services.\521\ Cotton ginning assets are also 
     assigned a recovery period of 7 years.\522\ Any single 
     purpose agricultural or horticultural structure,\523\ and any 
     tree or vine bearing fruit or nuts are assigned a recovery 
     period of 10 years.\524\ Land improvements such as drainage 
     facilities, paved lots, and water wells are assigned a 
     recovery period of 15 years.\525\
---------------------------------------------------------------------------
     \521\ Rev. Proc. 87-56, Asset class 01.1, Agriculture.
     \522\ Rev. Proc. 87-56, Asset class 01.11, Cotton ginning 
     assets.
     \523\ Within the meaning of section 168(i)(13). See also Rev. 
     Proc. 87-56, Asset class 01.4, Single purpose agricultural or 
     horticultural structures. Farm buildings that do not meet the 
     definition of a single purpose agricultural or horticultural 
     structure are assigned a recovery period of 20 years. Rev. 
     Proc. 87-56, Asset class 01.3, Farm buildings except 
     structures included in asset class 01.4.
     \524\ Sec. 168(e)(3)(D)(i) and (ii).
     \525\ Rev. Proc. 87-56, Asset class 00.3, Land improvements. 
     See also, IRS Publication 225, Farmer's Tax Guide (2017).
---------------------------------------------------------------------------
       A 5-year recovery period was assigned to new farm machinery 
     or equipment (other than any grain bin, cotton ginning asset, 
     fence, or other land improvement) which was used in a farming 
     business,\526\ the original use of which commenced with the 
     taxpayer after December 31, 2008, and which was placed in 
     service before January 1, 2010.\527\
---------------------------------------------------------------------------
     \526\ As defined in section 263A(e)(4). See also Treas. Reg. 
     sec. 1.263A-4(a)(4).
     \527\ Sec. 168(e)(3)(B)(vii).
---------------------------------------------------------------------------
       Any property (other than nonresidential real property,\528\ 
     residential rental property,\529\ and trees or vines bearing 
     fruits or nuts \530\) used in a farming business \531\ is 
     subject to the 150-percent declining balance method.\532\
---------------------------------------------------------------------------
     \528\ Sec. 168(b)(3)(A).
     \529\ Sec. 168(b)(3)(B).
     \530\ Sec. 168(b)(3)(E).
     \531\ Within the meaning of section 263A(e)(4). See also 
     Treas. Reg. sec. 1.263A-4(a)(4).
     \532\ Sec. 168(b)(2)(B).
---------------------------------------------------------------------------
       Under a special accounting rule, certain taxpayers engaged 
     in the business of farming who elect to deduct preproductive 
     period expenditures are required to depreciate all farming 
     assets using the alternative depreciation system (i.e., using 
     longer recovery periods and the straight line method).\533\
---------------------------------------------------------------------------
     \533\ Sec. 263A(d)(3) and (e)(2).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision shortens the recovery period from 7 to 5 
     years for any machinery or equipment (other than any grain 
     bin, cotton ginning asset, fence, or other land improvement) 
     used in a farming business, the original use of which 
     commences with the taxpayer and is placed in service after 
     December 31, 2017.
       The provision also repeals the required use of the 150-
     percent declining balance method for property used in a 
     farming business (i.e., for 3-, 5-, 7-, and 10-year 
     property). The 150-percent declining balance method will 
     continue to apply to any 15-year or 20-year property used in 
     the farming business to which the straight line method does 
     not apply, or to property for which the taxpayer elects the 
     use of the 150-percent declining balance method.
       For these purposes, the term ``farming business'' means a 
     farming business as defined in section 263A(e)(4). Thus, the 
     term ``farming business'' means a trade or business involving 
     the cultivation of land or the raising or harvesting of any 
     agricultural or horticultural commodity (e.g., the trade or 
     business of operating a nursery or sod farm; the raising or 
     harvesting of trees bearing fruit, nuts, or other crops; the 
     raising of ornamental trees (other than evergreen trees that 
     are more than six years old at the time they are severed from 
     their roots); and the raising, shearing, feeding, caring for, 
     training, and management of animals).\534\ A farming business 
     includes processing activities that are normally incident to 
     the growing, raising, or harvesting of agricultural or 
     horticultural products.\535\ A farming business does not 
     include contract harvesting of an agricultural or 
     horticultural commodity grown or raised by another taxpayer, 
     or merely buying and reselling plants or animals grown or 
     raised by another taxpayer.\536\
---------------------------------------------------------------------------
     \534\ Treas. Reg. sec. 1.263A-4(a)(4)(i).
     \535\ Treas. Reg. sec. 1.263A-4(a)(4)(ii).
     \536\ Treas. Reg. sec. 1.263A-4(a)(4)(i).
---------------------------------------------------------------------------
       Effective date.--The provision is effective for property 
     placed in service after December 31, 2017, in taxable years 
     ending after such date.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     4. Applicable recovery period for real property (sec. 13204 
         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 or held for the production of 
     income and recover such cost over time through annual 
     deductions for depreciation or amortization.\537\ Tangible 
     property generally is depreciated under the modified 
     accelerated cost recovery system (``MACRS''), which 
     determines depreciation for different types of property based 
     on an assigned applicable depreciation method, recovery 
     period, and convention.\538\
---------------------------------------------------------------------------
     \537\ See secs. 263(a) and 167. However, where property is 
     not used exclusively in a taxpayer's business, the amount 
     eligible for a deduction must be reduced by the amount 
     related to personal use. See, e.g., section 280A.
     \538\ Sec. 168.

[[Page 19973]]


       Recovery periods and depreciation methods
       The applicable recovery period for an asset is determined 
     in part by statute and in part by historic Treasury 
     guidance.\539\ The ``type of property'' of an asset is used 
     to determine the ``class life'' of the asset, which in turn 
     dictates the applicable recovery period for the asset.
---------------------------------------------------------------------------
     \539\ Exercising authority granted by Congress, the Secretary 
     issued Rev. Proc. 87-56, 1987-2 C.B. 674, laying out the 
     framework of recovery periods for enumerated classes of 
     assets. The Secretary clarified and modified the list of 
     asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In 
     November 1988, Congress revoked the Secretary's authority to 
     modify the class lives of depreciable property. Rev. Proc. 
     87-56, as modified, remains in effect except to the extent 
     that the Congress has, since 1988, statutorily modified the 
     recovery period for certain depreciable assets, effectively 
     superseding any administrative guidance with regard to such 
     property.
---------------------------------------------------------------------------
       The MACRS recovery periods applicable to most tangible 
     personal property range from three to 20 years. The 
     depreciation methods generally applicable to tangible 
     personal property are the 200-percent and 150-percent 
     declining balance methods,\540\ switching to the straight 
     line method for the first taxable year where using the 
     straight line method with respect to the adjusted basis as of 
     the beginning of that year yields a larger depreciation 
     allowance. The recovery periods for most real property are 39 
     years for nonresidential real property and 27.5 years for 
     residential rental property. The straight line depreciation 
     method is required for the aforementioned real property.
---------------------------------------------------------------------------
     \540\ Under the declining balance method the depreciation 
     rate is determined by dividing the appropriate percentage 
     (here 150 or 200) by the appropriate recovery period. This 
     leads to accelerated depreciation when the declining balance 
     percentage is greater than 100. The table below illustrates 
     depreciation for an asset with a cost of $1,000 and a seven-
     year recovery period under the 200-percent declining balance 
     method, the 150-percent declining balance method, and the 
     straight line method. (see endnote for table)
---------------------------------------------------------------------------
       Placed-in-service conventions
       Depreciation of an asset begins when the asset is deemed to 
     be placed in service under the applicable convention.\541\ 
     Under MACRS, nonresidential real property, residential rental 
     property, and any railroad grading or tunnel bore generally 
     are subject to the mid-month convention, which treats all 
     property placed in service during any month (or disposed of 
     during any month) as placed in service (or disposed of) on 
     the mid-point of such month.\542\ All other property 
     generally is subject to the half-year convention, which 
     treats all property placed in service during any taxable year 
     (or disposed of during any taxable year) as placed in service 
     (or disposed of) on the mid-point of such taxable year to 
     reflect the assumption that assets are placed in service 
     ratably throughout the year.\543\ However, if substantial 
     property is placed in service during the last three months of 
     a taxable year, a special rule requires use of the mid-
     quarter convention,\544\ designed to prevent the recognition 
     of disproportionately large amounts of first-year 
     depreciation under the half-year convention.
---------------------------------------------------------------------------
     \541\ Treas. Reg. sec. 1.167(a)-10(b).
     \542\ Sec. 168(d)(2) and (d)(4)(B).
     \543\ Sec. 168(d)(1) and (d)(4)(A).
     \544\ The mid-quarter convention treats all property placed 
     in service (or disposed of) during any quarter as placed in 
     service (or disposed of) on the mid-point of such quarter. 
     Sec. 168(d)(3) and (d)(4)(C).
---------------------------------------------------------------------------
       Depreciation of additions or improvements to property
       The recovery period for any addition or improvement to real 
     or personal property begins on the later of (1) the date on 
     which the addition or improvement is placed in service, or 
     (2) the date on which the property with respect to which such 
     addition or improvement is made is placed in service.\545\ 
     Any MACRS deduction for an addition or improvement to any 
     property is to be computed in the same manner as the 
     deduction for the underlying property would be if such 
     property were placed in service at the same time as such 
     addition or improvement. Thus, for example, the cost of an 
     improvement to a building that constitutes nonresidential 
     real property is recovered over 39 years using the straight 
     line method and mid-month convention. Certain improvements to 
     nonresidential real property are eligible for the additional 
     first-year depreciation deduction if the other requirements 
     of section 168(k) are met (i.e., improvements that constitute 
     ``qualified improvement property'').\546\
---------------------------------------------------------------------------
     \545\ Sec. 168(i)(6).
     \546\ Sec. 168(k)(2)(A)(i)(IV) and (k)(3). See also section 
     13201 of the bill (Temporary 100-percent expensing for 
     certain business assets).
---------------------------------------------------------------------------
       Qualified improvement property
       Qualified improvement property is any improvement to an 
     interior portion of a building that is nonresidential real 
     property if such improvement is placed in service after the 
     date such building was first placed in service.\547\ 
     Qualified improvement property does not include any 
     improvement for which the expenditure is attributable to the 
     enlargement of the building, any elevator or escalator, or 
     the internal structural framework of the building.
---------------------------------------------------------------------------
     \547\ Sec. 168(k)(3).
---------------------------------------------------------------------------
       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.\548\ 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 to the 
     39-year recovery period exist for certain qualified leasehold 
     improvements, qualified restaurant property, and qualified 
     retail improvement property.
---------------------------------------------------------------------------
     \548\ Sec. 168(i)(8).
---------------------------------------------------------------------------
       Qualified leasehold improvement property
       Section 168(e)(3)(E)(iv) provides a statutory 15-year 
     recovery period for qualified leasehold improvement property. 
     Qualified leasehold improvement property is any improvement 
     to an interior portion of a building that is nonresidential 
     real property, provided certain requirements are met.\549\ 
     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. 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.
---------------------------------------------------------------------------
     \549\ Sec. 168(e)(6).
---------------------------------------------------------------------------
       Qualified leasehold improvement property is generally 
     recovered using the straight-line method and a half-year 
     convention,\550\ and is eligible for the additional first-
     year depreciation deduction if the other requirements of 
     section 168(k) are met.\551\
---------------------------------------------------------------------------
     \550\ Sec. 168(b)(3)(G) and (d).
     \551\ Sec. 168(k)(2)(A)(i)(IV) and (k)(3). See section 13201 
     of the bill (Temporary 100-percent expensing for certain 
     business assets).
---------------------------------------------------------------------------
       Qualified restaurant property
       Section 168(e)(3)(E)(v) provides a statutory 15-year 
     recovery period for qualified restaurant property. Qualified 
     restaurant property is any section 1250 property that is a 
     building or an improvement to a building, if more than 50 
     percent of the building's square footage is devoted to the 
     preparation of, and seating for on-premises consumption of, 
     prepared meals.\552\ Qualified restaurant property is 
     recovered using the straight-line method and a half-year 
     convention.\553\ Additionally, qualified restaurant property 
     is not eligible for the additional first-year depreciation 
     deduction unless it also satisfies the definition of 
     qualified improvement property.\554\
---------------------------------------------------------------------------
     \552\ Sec. 168(e)(7).
     \553\ Sec. 168(b)(3)(H) and (d).
     \554\ Sec. 168(e)(7)(B).
---------------------------------------------------------------------------
       Qualified retail improvement property
       Section 168(e)(3)(E)(ix) provides a statutory 15-year 
     recovery period for qualified retail improvement property. 
     Qualified retail improvement property is any improvement to 
     an interior portion of a building which is nonresidential 
     real property if such portion is open to the general public 
     \555\ and is used in the retail trade or business of selling 
     tangible personal property to the general public, and such 
     improvement is placed in service more than three years after 
     the date the building was first placed in service.\556\ 
     Qualified retail improvement property does not include any 
     improvement for which the expenditure is attributable to the 
     enlargement of the building, any elevator or escalator, any 
     structural component benefiting a common area, or the 
     internal structural framework of the building.\557\ In the 
     case of an improvement made by the owner of such improvement, 
     the improvement is a qualified retail improvement only so 
     long as the improvement is held by such owner.\558\
---------------------------------------------------------------------------
     \555\ Improvements to portions of a building not open to the 
     general public (e.g., stock room in back of retail space) do 
     not qualify under the provision.
     \556\ Sec. 168(e)(8).
     \557\ Sec. 168(e)(8)(C).
     \558\ Sec. 168(e)(8)(B). Rules similar to section 
     168(e)(6)(B) apply in the case of death and certain transfers 
     of property that qualify for non-recognition treatment.
---------------------------------------------------------------------------
       Retail establishments that qualify for the 15-year recovery 
     period include those primarily engaged in the sale of goods. 
     Examples of these retail establishments include, but are not 
     limited to, grocery stores, clothing stores, hardware stores, 
     and convenience stores. Establishments primarily engaged in 
     providing services, such as professional services, financial 
     services, personal services, health services, and 
     entertainment, do not qualify. Generally, it is intended that 
     businesses defined as a store retailer under the current 
     North American Industry Classification System (industry sub-
     sectors 441

[[Page 19974]]

     through 453) qualify while those in other industry classes do 
     not qualify.\559\
---------------------------------------------------------------------------
     \559\ Joint Committee on Taxation, General Explanation of Tax 
     Legislation Enacted in the 110th Congress (JCS-1-09), March 
     2009, p. 402.
---------------------------------------------------------------------------
       Qualified retail improvement property is recovered using 
     the straight-line method and a half-year convention,\560\ and 
     is eligible for the additional first-year depreciation 
     deduction if the other requirements of section 168(k) are 
     met.\561\
---------------------------------------------------------------------------
     \560\ Sec. 168(b)(3)(I) and (d).
     \561\ Sec. 168(k)(2)(A)(i)(IV) and (k)(3). See section 13301 
     of the bill (Temporary 100-percent expensing for certain 
     business assets).
---------------------------------------------------------------------------
       Alternative depreciation system
       The alternative depreciation system (``ADS'') is required 
     to be used for tangible property used predominantly outside 
     the United States, certain tax-exempt use property, tax-
     exempt bond financed property, and certain imported property 
     covered by an Executive order.\562\ An election to use ADS is 
     available to taxpayers for any class of property for any 
     taxable year.\563\ Under ADS, all property is depreciated 
     using the straight line method over recovery periods which 
     generally are equal to the class life of the property, with 
     certain exceptions.\564\ For example nonresidential real and 
     residential rental property have a 40-year ADS recovery 
     period, while qualified leasehold improvement property, 
     qualified restaurant property, and qualified retail 
     improvement property have a 39-year ADS recovery period.\565\
---------------------------------------------------------------------------
     \562\ Sec. 168(g).
     \563\ Sec. 168(g)(7).
     \564\ Sec. 168(g)(2) and (3).
     \565\ Sec. 168(g)(3).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision shortens the recovery period for determining 
     the depreciation deduction with respect to nonresidential 
     real and residential rental property to 25 years. As a 
     conforming amendment, the provision changes the statutory 
     recovery period for nonresidential real and residential 
     rental property to 25 years for purposes of determining 
     whether a rental agreement is a long-term agreement under the 
     section 467 rules applicable to certain payments for the use 
     of property or services.\566\ The provision also shortens the 
     ADS recovery period for residential rental property from 40 
     years to 30 years.
---------------------------------------------------------------------------
     \566\ A long-term section 467 rental agreement is a lease of 
     property for a term in excess of 75 percent of the property's 
     statutory recovery period. Sec. 467(b)(4)(A) and (e)(3)(A). A 
     disqualified long-term agreement is one that has as one of 
     its principal purposes the avoidance of taxes. Sec. 
     467(b)(4)(B).
---------------------------------------------------------------------------
       The provision eliminates the separate definitions of 
     qualified leasehold improvement, qualified restaurant, and 
     qualified retail improvement property, and provides a general 
     10-year recovery period for qualified improvement 
     property,\567\ and a 20-year ADS recovery period for such 
     property. Thus, for example, qualified improvement property 
     placed in service after December 31, 2017, is generally 
     depreciable over 10 years using the straight line method and 
     half-year convention, without regard to whether the 
     improvements are property subject to a lease, placed in 
     service more than three years after the date the building was 
     first placed in service, or made to a restaurant building. 
     Restaurant building property placed in service after December 
     31, 2017, that does not meet the definition of qualified 
     improvement property is depreciable over 25 years as 
     nonresidential real property, using the straight line method 
     and the mid-month convention.
---------------------------------------------------------------------------
     \567\ Described in present law section 168(k)(3).
---------------------------------------------------------------------------
       As a conforming amendment, the provision replaces the 
     references in section 179(f) to qualified leasehold 
     improvement property, qualified restaurant property, and 
     qualified retail improvement property with a reference to 
     qualified improvement property.\568\ Thus, for example, the 
     provision allows section 179 expensing for improvement 
     property without regard to whether the improvements are 
     property subject to a lease, placed in service more than 
     three years after the date the building was first placed in 
     service, or made to a restaurant building. Restaurant 
     building property placed in service after December 31, 2017, 
     that does not meet the definition of qualified improvement 
     property is not eligible for section 179 expensing.
---------------------------------------------------------------------------
     \568\ For additional changes to section 179, see section 
     13101 of the Senate amendment (Modifications of rules for 
     expensing depreciable business assets).
---------------------------------------------------------------------------
       The provision also requires a real property trade or 
     business \569\ electing out of the limitation on the 
     deduction for interest to use ADS to depreciate any of its 
     nonresidential real property, residential rental property, 
     and qualified improvement property.
---------------------------------------------------------------------------
     \569\ As defined in section 13301 of the Senate amendment 
     (Limitation on deduction for interest), by cross reference to 
     section 469(c)(7)(C) (i.e., any real property development, 
     redevelopment, construction, reconstruction, acquisition, 
     conversion, rental, operation, management, leasing, or 
     brokerage trade or business). Note that a mortgage broker who 
     is a broker of financial instruments is not in a real 
     property trade or business for this purpose. See, e.g., CCA 
     201504010 (December 17, 2014).
---------------------------------------------------------------------------
       Effective date.--The provision is effective for property 
     placed in service after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment 
     except that it maintains the present law general MACRS 
     recovery periods of 39 and 27.5 years for nonresidential real 
     and residential rental property, respectively. In addition, 
     the conference agreement provides a general 15-year MACRS 
     recovery period for qualified improvement property.
     5. Use of alternative depreciation system for electing 
         farming businesses (sec. 13205 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 or held for the production of 
     income and recover such cost over time through annual 
     deductions for depreciation or amortization.\570\ Tangible 
     property generally is depreciated under the modified 
     accelerated cost recovery system (``MACRS''), which 
     determines depreciation for different types of property based 
     on an assigned applicable depreciation method, recovery 
     period, and convention.\571\
---------------------------------------------------------------------------
     \570\ See secs. 263(a) and 167. However, where property is 
     not used exclusively in a taxpayer's business, the amount 
     eligible for a deduction must be reduced by the amount 
     related to personal use. See, e.g., section 280A.
     \571\ Sec. 168.
---------------------------------------------------------------------------
       The applicable recovery period for an asset is determined 
     in part by statute and in part by historic Treasury 
     guidance.\572\ The ``type of property'' of an asset is used 
     to determine the ``class life'' of the asset, which in turn 
     dictates the applicable recovery period for the asset.
---------------------------------------------------------------------------
     \572\ Exercising authority granted by Congress, the Secretary 
     issued Rev. Proc. 87-56, 1987-2 C.B. 674, laying out the 
     framework of recovery periods for enumerated classes of 
     assets. The Secretary clarified and modified the list of 
     asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In 
     November 1988, Congress revoked the Secretary's authority to 
     modify the class lives of depreciable property. Rev. Proc. 
     87-56, as modified, remains in effect except to the extent 
     that the Congress has, since 1988, statutorily modified the 
     recovery period for certain depreciable assets, effectively 
     superseding any administrative guidance with regard to such 
     property.
---------------------------------------------------------------------------
       The MACRS recovery periods applicable to most tangible 
     personal property range from three to 20 years. The 
     depreciation methods generally applicable to tangible 
     personal property are the 200-percent and 150-percent 
     declining balance methods,\573\ switching to the straight 
     line method for the first taxable year where using the 
     straight line method with respect to the adjusted basis as of 
     the beginning of that year yields a larger depreciation 
     allowance. The recovery periods for most real property are 39 
     years for nonresidential real property and 27.5 years for 
     residential rental property.\574\ The straight line 
     depreciation method is required for the aforementioned real 
     property.
---------------------------------------------------------------------------
     \573\ Under the declining balance method the depreciation 
     rate is determined by dividing the appropriate percentage 
     (here 150 or 200) by the appropriate recovery period. This 
     leads to accelerated depreciation when the declining balance 
     percentage is greater than 100. The table below illustrates 
     depreciation for an asset with a cost of $1,000 and a seven-
     year recovery period under the 200-percent declining balance 
     method, the 150-percent declining balance method, and the 
     straight line method.
     \574\ However, section 13204 of the bill (Applicable recovery 
     period for real property) reduces the recovery period to 25 
     years for both nonresidential real property and residential 
     rental property. (see endnote for table)
---------------------------------------------------------------------------
       Property used in a farming business is assigned various 
     recovery periods in the same manner as other business 
     property. For example, depreciable assets used in agriculture 
     activities that are assigned a recovery period of 7 years 
     include machinery and equipment, grain bins, and fences (but 
     no other land improvements), that are used in the production 
     of crops or plants, vines, and trees; livestock; the 
     operation of farm dairies, nurseries, greenhouses, sod farms, 
     mushrooms cellars, cranberry bogs, apiaries, and fur farms; 
     and the performance of agriculture, animal husbandry, and 
     horticultural services.\575\ Cotton ginning assets are also 
     assigned a recovery period of 7 years.\576\ Any single 
     purpose agricultural or horticultural structure,\577\ and any 
     tree or vine bearing fruit or nuts are assigned a recovery 
     period of 10 years.\578\ Land improvements such as drainage 
     facilities, paved lots, and water wells are assigned a 
     recovery period of 15 years.\579\
---------------------------------------------------------------------------
     \575\ Rev. Proc. 87-56, Asset class 01.1, Agriculture.
     \576\ Rev. Proc. 87-56, Asset class 01.11, Cotton ginning 
     assets.
     \577\ Within the meaning of section 168(i)(13). See also Rev. 
     Proc. 87-56, Asset class 01.4, Single purpose agricultural or 
     horticultural structures. Farm buildings that do not meet the 
     definition of a single purpose agricultural or horticultural 
     structure are assigned a recovery period of 20 years. Rev. 
     Proc. 87-56, Asset class 01.3, Farm buildings except 
     structures included in asset class 01.4.
     \578\ Sec. 168(e)(3)(D)(i) and (ii).
     \579\ Rev. Proc. 87-56, Asset class 00.3, Land improvements. 
     See also, IRS Publication 225, Farmer's Tax Guide (2017).
---------------------------------------------------------------------------
       A 5-year recovery period was assigned to new farm machinery 
     or equipment (other than any grain bin, cotton ginning asset, 
     fence, or other land improvement) which was used in a farming 
     business,\580\ the original use of which commenced with the 
     taxpayer after December 31, 2008, and which was placed in 
     service before January 1, 2010.\581\
---------------------------------------------------------------------------
     \580\ As defined in section 263A(e)(4).
     \581\ Sec. 168(e)(3)(B)(vii). However, section 13203 of the 
     bill (Modifications of treatment of certain farm property) 
     also shortens the recovery period from 7 to 5 years for any 
     machinery or equipment (other than any grain bin, cotton 
     ginning asset, fence, or other land improvement) which is 
     used in a farming business, the original use of which 
     commences with the taxpayer and is placed in service after 
     December 31, 2017.

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

[[Page 19975]]

       Any property (other than nonresidential real property,\582\ 
     residential rental property,\583\ and trees or vines bearing 
     fruits or nuts \584\) used in a farming business \585\ is 
     subject to the 150-percent declining balance method.\586\
---------------------------------------------------------------------------
     \582\ Sec. 168(b)(3)(A).
     \583\ Sec. 168(b)(3)(B).
     \584\ Sec. 168(b)(3)(E).
     \585\ Within the meaning of section 263A(e)(4).
     \586\ Sec. 168(b)(2)(B). However, section 13203 of the bill 
     (Modifications of treatment of certain farm property) repeals 
     the required use of the 150-percent declining balance method 
     for property used in a farming business (i.e., for 3-, 5-, 7-
     , and 10-year property). The 150-percent declining balance 
     method will continue to apply to any 15-year or 20-year 
     property used in the farming business to which the straight 
     line method does not apply, or to property for which the 
     taxpayer elects the use of the 150-percent declining balance 
     method.
---------------------------------------------------------------------------
     Alternative depreciation system
       The alternative depreciation system (``ADS'') is required 
     to be used for tangible property used predominantly outside 
     the United States, certain tax-exempt use property, tax-
     exempt bond financed property, and certain imported property 
     covered by an Executive order.\587\ An election to use ADS is 
     available to taxpayers for any class of property for any 
     taxable year.\588\ Under ADS, all property is depreciated 
     using the straight line method over recovery periods which 
     generally are equal to the class life of the property, with 
     certain exceptions.\589\ For example, any single purpose 
     agricultural or horticultural structure has a 15-year ADS 
     recovery period,\590\ while any tree or vine bearing fruit or 
     nuts has a 20-year ADS recovery period.\591\ Similarly, land 
     improvements such as drainage facilities, paved lots, and 
     water wells have an ADS recovery period of 20 years.\592\
---------------------------------------------------------------------------
     \587\ Sec. 168(g).
     \588\ Sec. 168(g)(7).
     \589\ Sec. 168(g)(2) and (3).
     \590\ Sec. 168(g)(3)(B). Farm buildings that do not meet the 
     definition of a single purpose agricultural or horticultural 
     structure have an ADS recovery period of 25 years. Rev. Proc. 
     87-56, Asset class 01.3, Farm buildings except structures 
     included in asset class 01.4.
     \591\ Sec. 168(g)(3)(B).
     \592\ Rev. Proc. 87-56, Asset class 00.3, Land improvements.
---------------------------------------------------------------------------
       Under a special accounting rule, certain taxpayers engaged 
     in the business of farming who elect to deduct preproductive 
     period expenditures under the uniform capitalization rules 
     are required to depreciate all farming assets using ADS.\593\
---------------------------------------------------------------------------
     \593\ Sec. 263A(d)(3) and (e)(2).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision requires an electing farming business,\594\ 
     i.e., a farming business electing out of the limitation on 
     the deduction for interest,\595\ to use ADS to depreciate any 
     property with a recovery period of 10 years or more (e.g., 
     property such as single purpose agricultural or horticultural 
     structures, trees or vines bearing fruit or nuts, farm 
     buildings, and certain land improvements).
---------------------------------------------------------------------------
     \594\ As defined in section 13301 of the Senate amendment 
     (Limitation on deduction for interest), by cross reference to 
     section 263A(e)(4) (i.e., farming business means the trade or 
     business of farming and includes the trade or business of 
     operating a nursery or sod farm, or the raising or harvesting 
     of trees bearing fruit, nuts, or other crops, or ornamental 
     trees (other than evergreen trees that are more than six 
     years old at the time they are severed from their roots)). 
     Treas. Reg. sec. 1.263A-4(a)(4) further defines a farming 
     business as a trade or business involving the cultivation of 
     land or the raising or harvesting of any agricultural or 
     horticultural commodity. Examples of a farming business 
     include the trade or business of operating a nursery or sod 
     farm; the raising or harvesting of trees bearing fruit, nuts, 
     or other crops; the raising of ornamental trees (other than 
     evergreen trees that are more than six years old at the time 
     they are severed from their roots); and the raising, 
     shearing, feeding, caring for, training, and management of 
     animals. A farming business also includes processing 
     activities that are normally incident to the growing, 
     raising, or harvesting of agricultural or horticultural 
     products. See Treas. Reg. sec. 1.263A-4(a)(4)(i) and (ii). A 
     farming business does not include contract harvesting of an 
     agricultural or horticultural commodity grown or raised by 
     another taxpayer, or merely buying and reselling plants or 
     animals grown or raised by another taxpayer. See Treas. Reg. 
     sec. 1.263A-4(a)(4)(i).
     \595\ See section 13301 of the Senate amendment (Limitation 
     on deduction for interest). Section 13301 of the Senate 
     amendment also includes an exception from the limitation on 
     the deduction for interest for taxpayers meeting the $15 
     million gross receipts test.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     6. Expensing of certain costs of replanting citrus plants 
         lost by reason of casualty (sec. 13207 of the Senate 
         amendment and sec. 263A of the Code)


                              Present Law

     In general
       The uniform capitalization (``UNICAP'') rules, which were 
     enacted as part of the Tax Reform Act of 1986,\596\ require 
     certain direct and indirect costs allocable to real or 
     tangible personal property produced by the taxpayer to be 
     either capitalized into the basis of such property or 
     included in inventory, as applicable.\597\ For real or 
     personal property acquired by the taxpayer for resale, 
     section 263A generally requires certain direct and indirect 
     costs allocable to such property to be either capitalized 
     into the basis of such property or included in inventory, as 
     applicable.
---------------------------------------------------------------------------
     \596\ Sec. 803(a) of Pub. L. No. 99-514 (1986).
     \597\ Sec. 263A.
---------------------------------------------------------------------------
       Section 263A generally requires the capitalization of the 
     direct and indirect costs allocable to the production of any 
     property in a farming business, including animals and plants 
     without regard to the length of their preproductive 
     period.\598\ The costs of a plant generally required to be 
     capitalized under section 263(a) include preparatory costs 
     incurred so that the plant's growing process may begin, such 
     as the acquisition costs of the seed, seedling, or plant. 
     Under section 263A, the costs of producing a plant generally 
     required to be capitalized also include the preproductive 
     period costs of planting, cultivating, maintaining, and 
     developing the plant during the preproductive period.\599\ 
     Preproductive period costs may include management, 
     irrigation, pruning, soil and water conservation, 
     fertilizing, frost protection, spraying, harvesting, storage 
     and handling, upkeep, electricity, tax depreciation and 
     repairs on buildings and equipment used in raising the 
     plants, farm overhead, taxes, and interest, as 
     applicable.\600\
---------------------------------------------------------------------------
     \598\ Treas. Reg. sec. 1.263A-4(b)(1).
     \599\ Treas. Reg. sec. 1.263A-4(b)(1)(i).
     \600\ Ibid.
---------------------------------------------------------------------------
     Special rules for plant farmers
       Section 263A provides an exception to the general 
     capitalization requirements for taxpayers who raise, harvest, 
     or grow trees.\601\ Under this exception, section 263A does 
     not apply to trees raised, harvested, or grown by the 
     taxpayer (other than trees bearing fruit, nuts, or other 
     crops, or ornamental trees) and any real property underlying 
     such trees. Similarly, the UNICAP rules do not apply to any 
     plant having a preproductive period of two years or less, 
     which is produced by a taxpayer in a farming business (unless 
     the taxpayer is required to use an accrual method of 
     accounting under section 447 or 448(a)(3)).\602\ Hence, in 
     general, the UNICAP rules apply to the production of plants 
     that have a preproductive period of more than two years, and 
     to taxpayers required to use an accrual method of accounting.
---------------------------------------------------------------------------
     \601\ Sec. 263A(c)(5).
     \602\ Sec. 263A(d).
---------------------------------------------------------------------------
       Plant farmers otherwise required to capitalize 
     preproductive period costs may elect to deduct such costs 
     currently, provided the alternative depreciation system 
     described in section 168(g)(2) is used on all farm assets and 
     the preproductive period costs are recaptured upon 
     disposition of the product.\603\ The election is not 
     available to taxpayers required to use the accrual method of 
     accounting. Moreover, the election is not available with 
     respect to certain costs attributable to planting, 
     cultivating, maintaining, or developing citrus or almond 
     groves.
---------------------------------------------------------------------------
     \603\ Sec. 263A(d)(3), (e)(1), and (e)(2).
---------------------------------------------------------------------------
       Section 263A does not apply to costs incurred in replanting 
     edible crops for human consumption following loss or damage 
     due to freezing temperatures, disease, drought, pests, or 
     casualty.\604\ The same type of crop as the lost or damaged 
     crop must be replanted. However, the exception to 
     capitalization still applies if the replanting occurs on a 
     parcel of land other than the land on which the damage 
     occurred provided the acreage of the new land does not exceed 
     that of the land to which the damage occurred and the new 
     land is located in the United States. This exception may also 
     apply to costs incurred by persons other than the taxpayer 
     who incurred the loss or damage, provided (1) the taxpayer 
     who incurred the loss or damage retains an equity interest of 
     more than 50 percent in the property on which the loss or 
     damage occurred at all times during the taxable year in which 
     the replanting costs are paid or incurred, and (2) the person 
     holding a minority equity interest and claiming the deduction 
     materially participates in the planting, maintenance, 
     cultivation, or development of the property during the 
     taxable year in which the replanting costs are paid or 
     incurred.\605\
---------------------------------------------------------------------------
     \604\ Sec. 263A(d)(2). Such replanting costs generally 
     include costs attributable to the replanting, cultivating, 
     maintaining, and developing of the plants that were lost or 
     damaged that are incurred during the preproductive period. 
     Treas. Reg. sec. 1.263A-4(e)(1). The acquisition costs of the 
     replacement trees or seedlings must still be capitalized 
     under section 263(a) (see, e.g., T.D. 8897, 65 FR 50638, 
     Treas. Reg. sec. 1.263A-4(e)(3), Examples 1-3, and TAM 
     9547002 (July 18, 1995)), potentially subject to the special 
     bonus depreciation deduction in the year of planting under 
     section 168(k)(5).
     \605\ Sec. 263A(d)(2)(B). Material participation for this 
     purpose is determined in a similar manner as under section 
     2032A(e)(6) (relating to qualified use valuation of farm 
     property upon death of the taxpayer).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision modifies the special rule for costs incurred 
     by persons other than the taxpayer in connection with 
     replanting an edible crop for human consumption following

[[Page 19976]]

     loss or damage due to casualty. Under the provision, with 
     respect to replanting costs paid or incurred after the date 
     of enactment, but no later than a date which is ten years 
     after such date of enactment, for citrus plants lost or 
     damaged due to casualty, such replanting costs may also be 
     deducted by a person other than the taxpayer if (1) the 
     taxpayer has an equity interest of not less than 50 percent 
     in the replanted citrus plants at all times during the 
     taxable year in which the replanting costs are paid or 
     incurred and such other person holds any part of the 
     remaining equity interest, or (2) such other person acquires 
     all of the taxpayer's equity interest in the land on which 
     the lost or damaged citrus plants were located at the time of 
     such loss or damage, and the replanting is on such land.
       Effective date.--The provision is effective for costs paid 
     or incurred after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

                       C. Small Business Reforms

  1. Expansion of section 179 expensing (sec. 3201 of the House bill, 
     sec. 13101 of the Senate amendment, and sec. 179 of the Code)


                              Present Law

       A taxpayer generally must capitalize the cost of property 
     used in a trade or business or held for the production of 
     income and recover such cost over time through annual 
     deductions for depreciation or amortization.\606\ Tangible 
     property generally is depreciated under the modified 
     accelerated cost recovery system (``MACRS''), which 
     determines depreciation for different types of property based 
     on an assigned applicable depreciation method, recovery 
     period,\607\ and convention.\608\
---------------------------------------------------------------------------
     \606\ See secs. 263(a) and 167. However, where property is 
     not used exclusively in a taxpayer's business, the amount 
     eligible for a deduction must be reduced by the amount 
     related to personal use. See, e.g., section 280A.
     \607\ The applicable recovery period for an asset is 
     determined in part by statute and in part by historic 
     Treasury guidance. Exercising authority granted by Congress, 
     the Secretary issued Rev. Proc. 87-56, 1987-2 C.B. 674, 
     laying out the framework of recovery periods for enumerated 
     classes of assets. The Secretary clarified and modified the 
     list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. 
     In November 1988, Congress revoked the Secretary's authority 
     to modify the class lives of depreciable property. Rev. Proc. 
     87-56, as modified, remains in effect except to the extent 
     that the Congress has, since 1988, statutorily modified the 
     recovery period for certain depreciable assets, effectively 
     superseding any administrative guidance with regard to such 
     property.
     \608\ Sec. 168.
---------------------------------------------------------------------------
     Election to expense certain depreciable business assets
       A taxpayer may elect under section 179 to deduct (or 
     ``expense'') the cost of qualifying property, rather than to 
     recover such costs through depreciation deductions, subject 
     to limitation. The maximum amount a taxpayer may expense is 
     $500,000 of the cost of qualifying property placed in service 
     for the taxable year.\609\ The $500,000 amount is reduced 
     (but not below zero) by the amount by which the cost of 
     qualifying property placed in service during the taxable year 
     exceeds $2,000,000.\610\ The $500,000 and $2,000,000 amounts 
     are indexed for inflation for taxable years beginning after 
     2015.\611\
---------------------------------------------------------------------------
     \609\ Sec. 179(b)(1).
     \610\ Sec. 179(b)(2).
     \611\ Sec. 179(b)(6).
---------------------------------------------------------------------------
       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. Qualifying property 
     also includes off-the-shelf computer software and qualified 
     real property (i.e., qualified leasehold improvement 
     property, qualified restaurant property, and qualified retail 
     improvement property).\612\ Qualifying property excludes any 
     property described in section 50(b) (i.e., certain property 
     not eligible for the investment tax credit).\613\
---------------------------------------------------------------------------
     \612\ Sec. 179(d)(1)(A)(ii) and (f).
     \613\ Sec. 179(d)(1) flush language. Property described in 
     section 50(b) is generally property used outside the United 
     States, certain property used for lodging, property used by 
     certain tax exempt organizations, and property used by 
     governmental units and foreign persons or entities.
---------------------------------------------------------------------------
       Passenger automobiles subject to the section 280F 
     limitation are eligible for section 179 expensing only to the 
     extent of the dollar limitations in section 280F. For sport 
     utility vehicles above the 6,000 pound weight rating and not 
     more than the 14,000 pound weight rating, which are not 
     subject to the limitation under section 280F, the maximum 
     cost that may be expensed for any taxable year under section 
     179 is $25,000 (the ``sport utility vehicle 
     limitation'').\614\
---------------------------------------------------------------------------
     \614\ Sec. 179(b)(5). For this purpose, a sport utility 
     vehicle is defined to exclude any vehicle that: (1) is 
     designed for more than nine individuals in seating rearward 
     of the driver's seat; (2) is equipped with an open cargo 
     area, or a covered box not readily accessible from the 
     passenger compartment, of at least six feet in interior 
     length; or (3) has an integral enclosure, fully enclosing the 
     driver compartment and load carrying device, does not have 
     seating rearward of the driver's seat, and has no body 
     section protruding more than 30 inches ahead of the leading 
     edge of the windshield.
---------------------------------------------------------------------------
       The amount eligible to be expensed for a taxable year may 
     not exceed the taxable income for such taxable year that is 
     derived from the active conduct of a trade or business 
     (determined without regard to this provision).\615\ Any 
     amount that is not allowed as a deduction because of the 
     taxable income limitation may be carried forward to 
     succeeding taxable years (subject to limitations).
---------------------------------------------------------------------------
     \615\ Sec. 179(b)(3).
---------------------------------------------------------------------------
       No general business credit under section 38 is allowed with 
     respect to any amount for which a deduction is allowed under 
     section 179.\616\ If a corporation makes an election under 
     section 179 to deduct expenditures, the full amount of the 
     deduction does not reduce earnings and profits. Rather, the 
     expenditures that are deducted reduce corporate earnings and 
     profits ratably over a five-year period.\617\
---------------------------------------------------------------------------
     \616\ Sec. 179(d)(9).
     \617\ Sec. 312(k)(3)(B).
---------------------------------------------------------------------------
       An expensing election is made under rules prescribed by the 
     Secretary.\618\ In general, any election or specification 
     made with respect to any property may not be revoked except 
     with the consent of the Commissioner. However, an election or 
     specification under section 179 may be revoked by the 
     taxpayer without consent of the Commissioner.
---------------------------------------------------------------------------
     \618\ Sec. 179(c)(1).
---------------------------------------------------------------------------


                               House Bill

       The provision increases the maximum amount a taxpayer may 
     expense under section 179 to $5,000,000, and increases the 
     phase-out threshold amount to $20,000,000 for five taxable 
     years, i.e., for taxable years beginning in 2018, 2019, 2020, 
     2021 and 2022. Thus, the provision provides that the maximum 
     amount a taxpayer may expense, for taxable years beginning 
     after 2017 and before 2023, is $5,000,000 of the cost of 
     qualifying property placed in service for the taxable year. 
     The $5,000,000 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 $20,000,000. The 
     $5,000,000 and $20,000,000 amounts are indexed for inflation 
     for taxable years beginning after 2018.
       The provision also expands the definition of qualified real 
     property under section 179 to include qualified energy 
     efficient heating and air-conditioning property acquired and 
     placed in service by the taxpayer after November 2, 2017. For 
     purposes of the provision, qualified energy efficient heating 
     and air-conditioning property means any depreciable section 
     1250 property that is (i) installed as part of a building's 
     heating, cooling, ventilation, or hot water system, and (ii) 
     within the scope of Standard 90.1-2007 of the American 
     Society of Heating, Refrigerating, and Air-Conditioning 
     Engineers and the Illuminating Engineering Society of North 
     America (as in effect on the day before the date of the 
     adoption of Standard 90.1-2010 of such Societies) or any 
     successor standard.
       Effective date.--The increased dollar limitations under 
     section 179 apply to taxable years beginning after December 
     31, 2017.
       The expansion of qualified real property to include 
     qualified energy efficient heating and air-conditioning 
     property applies to property acquired \619\ and placed in 
     service after November 2, 2017.
---------------------------------------------------------------------------
     \619\ Property is not treated as acquired after the date on 
     which a written binding contract is entered into for such 
     acquisition.
---------------------------------------------------------------------------


                            Senate Amendment

       The provision increases the maximum amount a taxpayer may 
     expense under section 179 to $1,000,000, and increases the 
     phase-out threshold amount to $2,500,000. Thus, the provision 
     provides that the maximum amount a taxpayer may expense, for 
     taxable years beginning after 2017, is $1,000,000 of the cost 
     of qualifying property placed in service for the taxable 
     year. The $1,000,000 amount is reduced (but not below zero) 
     by the amount by which the cost of qualifying property placed 
     in service during the taxable year exceeds $2,500,000. The 
     $1,000,000 and $2,500,000 amounts, as well as the $25,000 
     sport utility vehicle limitation, are indexed for inflation 
     for taxable years beginning after 2018.
       The provision expands the definition of section 179 
     property to include certain depreciable tangible personal 
     property used predominantly to furnish lodging or in 
     connection with furnishing lodging.\620\
---------------------------------------------------------------------------
     \620\ As defined in section 50(b)(2). Property used 
     predominantly to furnish lodging or in connection with 
     furnishing lodging generally includes, e.g., beds and other 
     furniture, refrigerators, ranges, and other equipment used in 
     the living quarters of a lodging facility such as an 
     apartment house, dormitory, or any other facility (or part of 
     a facility) where sleeping accommodations are provided and 
     let. See Treas. Reg. sec. 1.48-1(h).
---------------------------------------------------------------------------
       The provision also expands the definition of qualified real 
     property eligible for section 179 expensing to include any of 
     the following improvements to nonresidential real property 
     placed in service after the date such property was first 
     placed in service: roofs; heating, ventilation, and air-
     conditioning property; fire protection and alarm systems; and 
     security systems.
       Effective date.--The provision applies to property placed 
     in service in taxable years beginning after December 31, 
     2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

[[Page 19977]]



  2. Small business accounting method reform and simplification (sec. 
    3202 of the House bill, secs. 13102 through 13105 of the Senate 
       amendment, and secs. 263A, 448, 460, and 471 of the Code)


                              Present Law

     General rule for methods of accounting
       Section 446 generally allows a taxpayer to select the 
     method of accounting to be used to compute taxable income, 
     provided that such method clearly reflects the income of the 
     taxpayer. The term ``method of accounting'' includes not only 
     the overall method of accounting used by the taxpayer, but 
     also the accounting treatment of any one item.\621\ 
     Permissible overall methods of accounting include the cash 
     receipts and disbursements method (``cash method''), an 
     accrual method, or any other method (including a hybrid 
     method) permitted under regulations prescribed by the 
     Secretary.\622\ Examples of any one item for which an 
     accounting method may be adopted include cost recovery,\623\ 
     revenue recognition,\624\ and timing of deductions.\625\ For 
     each separate trade or business, a taxpayer is entitled to 
     adopt any permissible method, subject to certain 
     restrictions.\626\
---------------------------------------------------------------------------
     \621\ Treas. Reg. sec. 1.446-1(a)(1).
     \622\ Sec. 446(c).
     \623\ See, e.g., secs. 167 and 168.
     \624\ See, e.g., secs. 451 and 460.
     \625\ See, e.g., secs. 461 and 467.
     \626\ Sec. 446(d); Treas. Reg. sec. 1.446-1(d).
---------------------------------------------------------------------------
       A taxpayer filing its first return may adopt any 
     permissible method of accounting in computing taxable income 
     for such year.\627\ Except as otherwise provided, section 
     446(e) requires taxpayers to secure consent of the Secretary 
     before changing a method of accounting. The regulations under 
     this section provide rules for determining: (1) what a method 
     of accounting is, (2) how an adoption of a method of 
     accounting occurs, and (3) how a change in method of 
     accounting is effectuated.\628\
---------------------------------------------------------------------------
     \627\ Treas. Reg. sec. 1.446-1(e)(1).
     \628\ Treas. Reg. sec. 1.446-1(e).
---------------------------------------------------------------------------
     Cash and accrual methods
       Taxpayers using the cash method generally recognize items 
     of income when actually or constructively received and items 
     of expense when paid. The cash method is administratively 
     easy and provides the taxpayer flexibility in the timing of 
     income recognition. It is the method generally used by most 
     individual taxpayers, including farm and nonfarm sole 
     proprietorships.
       Taxpayers using an accrual method generally accrue items of 
     income when all the events have occurred that fix the right 
     to receive the income and the amount of the income can be 
     determined with reasonable accuracy.\629\ Taxpayers using an 
     accrual method of accounting generally may not deduct items 
     of expense prior to when all events have occurred that fix 
     the obligation to pay the liability, the amount of the 
     liability can be determined with reasonable accuracy, and 
     economic performance has occurred.\630\ Accrual methods of 
     accounting generally result in a more accurate measure of 
     economic income than does the cash method. The accrual method 
     is often used by businesses for financial accounting 
     purposes.
---------------------------------------------------------------------------
     \629\ See, e.g., sec. 451.
     \630\ See, e.g., sec. 461.
---------------------------------------------------------------------------
       A C corporation, a partnership that has a C corporation as 
     a partner, or a tax-exempt trust or corporation with 
     unrelated business income generally may not use the cash 
     method. Exceptions are made for farming businesses, qualified 
     personal service corporations, and the aforementioned 
     entities to the extent their average annual gross receipts do 
     not exceed $5 million for all prior years (including the 
     prior taxable years of any predecessor of the entity) (the 
     ``gross receipts test''). The cash method may not be used by 
     any tax shelter.\631\ In addition, the cash method generally 
     may not be used if the purchase, production, or sale of 
     merchandise is an income producing factor.\632\ Such 
     taxpayers generally are required to keep inventories and use 
     an accrual method with respect to inventory items.\633\
---------------------------------------------------------------------------
     \631\ Secs. 448(a)(3) and (d)(3) and 461(i)(3) and (4). For 
     this purpose, a tax shelter includes: (1) any enterprise 
     (other than a C corporation) if at any time interests in such 
     enterprise have been offered for sale in any offering 
     required to be registered with any Federal or State agency 
     having the authority to regulate the offering of securities 
     for sale; (2) any syndicate (within the meaning of section 
     1256(e)(3)(B)); or (3) any tax shelter as defined in section 
     6662(d)(2)(C)(ii). In the case of a farming trade or 
     business, a tax shelter includes any tax shelter as defined 
     in section 6662(d)(2)(C)(ii) or any partnership or any other 
     enterprise other than a corporation which is not an S 
     corporation engaged in the trade or business of farming, (1) 
     if at any time interests in such partnership or enterprise 
     have been offered for sale in any offering required to be 
     registered with any Federal or State agency having authority 
     to regulate the offering of securities for sale or (2) if 
     more than 35 percent of the losses during any period are 
     allocable to limited partners or limited entrepreneurs.
     \632\ Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
     \633\ Sec. 471 and Treas. Reg. secs. 1.446-1(c)(2) and 1.471-
     1.
---------------------------------------------------------------------------
       A farming business is defined as a trade or business of 
     farming, including operating a nursery or sod farm, or the 
     raising or harvesting of trees bearing fruit, nuts, or other 
     crops, timber, or ornamental trees.\634\ Such farming 
     businesses are not precluded from using the cash method 
     regardless of whether they meet the gross receipts test. 
     However, section 447 generally requires a farming C 
     corporation (and any farming partnership if a corporation is 
     a partner in such partnership) to use an accrual method of 
     accounting. Section 447 does not apply to nursery or sod 
     farms, to the raising or harvesting of trees (other than 
     fruit and nut trees), nor to farming C corporations meeting a 
     gross receipts test with a $1 million threshold. For family 
     farm C corporations, the threshold under the gross receipts 
     test is $25 million.
---------------------------------------------------------------------------
     \634\ Sec. 448(d)(1).
---------------------------------------------------------------------------
       A qualified personal service corporation is a corporation: 
     (1) substantially all of whose activities involve the 
     performance of services in the fields of health, law, 
     engineering, architecture, accounting, actuarial science, 
     performing arts, or consulting, and (2) substantially all of 
     the stock of which is owned by current or former employees 
     performing such services, their estates, or heirs.\635\ 
     Qualified personal service corporations are allowed to use 
     the cash method without regard to whether they meet the gross 
     receipts test.
---------------------------------------------------------------------------
     \635\ Sec. 448(d)(2).
---------------------------------------------------------------------------
     Accounting for inventories
       In general, for Federal income tax purposes, taxpayers must 
     account for inventories if the production, purchase, or sale 
     of merchandise is an income-producing factor to the 
     taxpayer.\636\ Treasury regulations also provide that in any 
     case in which the use of inventories is necessary to clearly 
     reflect income, the accrual method must be used with regard 
     to purchases and sales.\637\ However, an exception is 
     provided for taxpayers whose average annual gross receipts do 
     not exceed $1 million.\638\ A second exception is provided 
     for taxpayers in certain industries whose average annual 
     gross receipts do not exceed $10 million and that are not 
     otherwise prohibited from using the cash method under section 
     448.\639\ Such taxpayers may account for inventory as 
     materials and supplies that are not incidental (i.e., ``non-
     incidental materials and supplies'').\640\
---------------------------------------------------------------------------
     \636\ Sec. 471(a) and Treas. Reg. sec. 1.471-1.
     \637\ Treas. Reg. sec. 1.446-1(c)(2).
     \638\ Rev. Proc. 2001-10, 2001-1 C.B. 272.
     \639\ Rev. Proc. 2002-28, 2002-1 C.B. 815.
     \640\ Treas. Reg. sec. 1.162-3(a)(1). A deduction is 
     generally permitted for the cost of non-incidental materials 
     and supplies in the taxable year in which they are first used 
     or are consumed in the taxpayer's operations.
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       In those circumstances in which a taxpayer is required to 
     account for inventory, the taxpayer must maintain inventory 
     records to determine the cost of goods sold during the 
     taxable period. Cost of goods sold generally is determined by 
     adding the taxpayer's inventory at the beginning of the 
     period to the purchases made during the period and 
     subtracting from that sum the taxpayer's inventory at the end 
     of the period.
       Because of the difficulty of accounting for inventory on an 
     item-by-item basis, taxpayers often use conventions that 
     assume certain item or cost flows. Among these conventions 
     are the first-in, first-out (``FIFO'') method, which assumes 
     that the items in ending inventory are those most recently 
     acquired by the taxpayer, and the last-in, first-out 
     (``LIFO'') method, which assumes that the items in ending 
     inventory are those earliest acquired by the taxpayer.
     Uniform capitalization
       The uniform capitalization rules require certain direct and 
     indirect costs allocable to real or tangible personal 
     property produced by the taxpayer to be included in either 
     inventory or capitalized into the basis of such property, as 
     applicable.\641\ For real or personal property acquired by 
     the taxpayer for resale, section 263A generally requires 
     certain direct and indirect costs allocable to such property 
     to be included in inventory.
---------------------------------------------------------------------------
     \641\ Sec. 263A.
---------------------------------------------------------------------------
       Section 263A provides a number of exceptions to the general 
     uniform capitalization requirements. One such exception 
     exists for certain small taxpayers who acquire property for 
     resale and have $10 million or less of average annual gross 
     receipts; \642\ such taxpayers are not required to include 
     additional section 263A costs in inventory. Another exception 
     exists for taxpayers who raise, harvest, or grow trees.\643\ 
     Under this exception, section 263A does not apply to trees 
     raised, harvested, or grown by the taxpayer (other than trees 
     bearing fruit, nuts, or other crops, or ornamental trees) and 
     any real property underlying such trees. Similarly, the 
     uniform capitalization rules do not apply to any plant having 
     a preproductive period of two years or less or to any animal, 
     which is produced by a taxpayer in a farming business (unless 
     the taxpayer is required to use an accrual method of 
     accounting under section 447 or 448(a)(3)).\644\ Freelance 
     authors, photographers, and artists also are exempt from 
     section 263A for any qualified creative expenses.\645\
---------------------------------------------------------------------------
     \642\ Sec. 263A(b)(2)(B). No exception is available for small 
     taxpayers who produce property subject to section 263A. 
     However, a de minimis rule under Treasury regulations treats 
     producers with total indirect costs of $200,000 or less as 
     having no additional indirect costs beyond those normally 
     capitalized for financial accounting purposes. Treas. Reg. 
     sec. 1.263A-2(b)(3)(iv).
     \643\ Sec. 263A(c)(5).
     \644\ Sec. 263A(d).
     \645\ Sec. 263A(h). Qualified creative expenses are defined 
     as amounts paid or incurred by an individual in the trade or 
     business of being a writer, photographer, or artist. However, 
     such term does not include any expense related to printing, 
     photographic plates, motion picture files, video tapes, or 
     similar items.

[[Page 19978]]


     Accounting for long-term contracts
       In general, in the case of a long-term contract, the 
     taxable income from the contract is determined under the 
     percentage-of-completion method.\646\ Under this method, the 
     taxpayer must include in gross income for the taxable year an 
     amount equal to the product of (1) the gross contract price 
     and (2) the percentage of the contract completed during the 
     taxable year.\647\ The percentage of the contract completed 
     during the taxable year is determined by comparing costs 
     allocated to the contract and incurred before the end of the 
     taxable year with the estimated total contract costs.\648\ 
     Costs allocated to the contract typically include all costs 
     (including depreciation) that directly benefit or are 
     incurred by reason of the taxpayer's long-term contract 
     activities.\649\ The allocation of costs to a contract is 
     made in accordance with regulations.\650\ Costs incurred with 
     respect to the long-term contract are deductible in the year 
     incurred, subject to general accrual method of accounting 
     principles and limitations.\651\
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     \646\ Sec. 460(a).
     \647\ See Treas. Reg. sec. 1.460-4. This calculation is done 
     on a cumulative basis. Thus, the amount included in gross 
     income in a particular year is that proportion of the 
     expected contract price that the amount of costs incurred 
     through the end of the taxable year bears to the total 
     expected costs, reduced by the amounts of gross contract 
     price included in gross income in previous taxable years.
     \648\ Sec. 460(b)(1).
     \649\ Sec. 460(c).
     \650\ Treas. Reg. sec. 1.460-5.
     \651\ Treas. Reg. secs. 1.460-4(b)(2)(iv) and 1.460-1(b)(8).
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       An exception from the requirement to use the percentage-of-
     completion method is provided for certain construction 
     contracts (``small construction contracts''). Contracts 
     within this exception are those contracts for the 
     construction or improvement of real property if the contract: 
     (1) is expected (at the time such contract is entered into) 
     to be completed within two years of commencement of the 
     contract and (2) is performed by a taxpayer whose average 
     annual gross receipts for the prior three taxable years do 
     not exceed $10 million.\652\ Thus, long-term contract income 
     from small construction contracts must be reported 
     consistently using the taxpayer's exempt contract 
     method.\653\ Permissible exempt contract methods include the 
     completed contract method, the exempt-contract percentage-of-
     completion method, the percentage-of-completion method, or 
     any other permissible method.\654\
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     \652\ Secs. 460(e)(1)(B) and (4).
     \653\ Since such contracts involve the construction of real 
     property, they are subject to the interest capitalization 
     rules without regard to their duration. See Treas. Reg. sec. 
     1.263A-8.
     \654\ Treas. Reg. sec. 1.460-4(c)(1).
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                               House Bill

       The provision expands the universe of taxpayers that may 
     use the cash method of accounting. Under the provision, the 
     cash method of accounting may be used by taxpayers, other 
     than tax shelters, that satisfy the gross receipts test, 
     regardless of whether the purchase, production, or sale of 
     merchandise is an income-producing factor. The gross receipts 
     test allows taxpayers with annual average gross receipts that 
     do not exceed $25 million for the three prior taxable-year 
     period (the ``$25 million gross receipts test'') to use the 
     cash method. The $25 million amount is indexed for inflation 
     for taxable years beginning after 2018.
       The provision expands the universe of farming C 
     corporations (and farming partnerships with a C corporation 
     partner) that may use the cash method to include any farming 
     C corporation (or farming partnership with a C corporation 
     partner) that meets the $25 million gross receipts test.
       The provision retains the exceptions from the required use 
     of the accrual method for qualified personal service 
     corporations and taxpayers other than C corporations. Thus, 
     qualified personal service corporations, partnerships without 
     C corporation partners, S corporations, and other passthrough 
     entities are allowed to use the cash method without regard to 
     whether they meet the $25 million gross receipts test, so 
     long as the use of such method clearly reflects income.\655\
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     \655\ Consistent with present law, the cash method generally 
     may not be used by taxpayers, other than those that meet the 
     $25 million gross receipts test, if the purchase, production, 
     or sale of merchandise is an income-producing factor. In 
     addition, the cash method may not be used by a tax shelter.
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       In addition, the provision also exempts certain taxpayers 
     from the requirement to keep inventories. Specifically, 
     taxpayers that meet the $25 million gross receipts test are 
     not required to account for inventories under section 471 
     \656\, but rather may use a method of accounting for 
     inventories that either (1) treats inventories as non-
     incidental materials and supplies \657\, or (2) conforms to 
     the taxpayer's financial accounting treatment of 
     inventories.\658\
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     \656\ In the case of a sole proprietorship, the $25 million 
     gross receipts test is applied as if the sole proprietorship 
     is a corporation or partnership.
     \657\ Consistent with present law, a deduction is generally 
     permitted for the cost of non-incidental materials and 
     supplies in the taxable year in which they are first used or 
     are consumed in the taxpayer's operations. See Treas. Reg. 
     sec. 1.162-3(a)(1).
     \658\ The taxpayer's financial accounting treatment of 
     inventories is determined by reference to the method of 
     accounting used in the taxpayer's applicable financial 
     statement (as defined in section 3202 of the House bill 
     (Small business accounting method reform and simplification)) 
     or, if the taxpayer does not have an applicable financial 
     statement, the method of accounting used in the taxpayer's 
     book and records prepared in accordance with the taxpayer's 
     accounting procedures.
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       The provision expands the exception for small taxpayers 
     from the uniform capitalization rules. Under the provision, 
     any producer or reseller that meets the $25 million gross 
     receipts test is exempted from the application of section 
     263A.\659\ The provision retains the exemptions from the 
     uniform capitalization rules that are not based on a 
     taxpayer's gross receipts.
---------------------------------------------------------------------------
     \659\ In the case of a sole proprietorship, the $25 million 
     gross receipts test is applied as if the sole proprietorship 
     is a corporation or partnership.
---------------------------------------------------------------------------
       Finally, the provision expands the exception for small 
     construction contracts from the requirement to use the 
     percentage-of-completion method. Under the provision, 
     contracts within this exception are those contracts for the 
     construction or improvement of real property if the contract: 
     (1) is expected (at the time such contract is entered into) 
     to be completed within two years of commencement of the 
     contract and (2) is performed by a taxpayer that (for the 
     taxable year in which the contract was entered into) meets 
     the $25 million gross receipts test.\660\
---------------------------------------------------------------------------
     \660\ In the case of a sole proprietorship, the $25 million 
     gross receipts test is applied as if the sole proprietorship 
     is a corporation or partnership.
---------------------------------------------------------------------------
       Under the provision, a taxpayer who fails the $25 million 
     gross receipts test would not be eligible for any of the 
     aforementioned exceptions (i.e., from the accrual method, 
     from keeping inventories, from applying the uniform 
     capitalization rules, or from using the percentage-of 
     completion method) for such taxable year.
       Application of the provisions to expand the universe of 
     taxpayers eligible to use the cash method, exempt certain 
     taxpayers from the requirement to keep inventories, and 
     expand the exception from the uniform capitalization rules is 
     a change in the taxpayer's method of accounting for purposes 
     of section 481. Application of the exception for small 
     construction contracts from the requirement to use the 
     percentage-of-completion method is applied on a cutoff basis 
     for all similarly classified contracts (hence there is no 
     adjustment under section 481(a) for contracts entered into 
     before January 1, 2018).
       Effective date.--The provisions to expand the universe of 
     taxpayers eligible to use the cash method, exempt certain 
     taxpayers from the requirement to keep inventories, and 
     expand the exception from the uniform capitalization rules 
     apply to taxable years beginning after December 31, 2017. The 
     provision to expand the exception for small construction 
     contracts from the requirement to use the percentage-of-
     completion method applies to contracts entered into after 
     December 31, 2017, in taxable years ending after such date.


                            senate amendment

       The Senate amendment is the same as the House bill with the 
     following modifications. The Senate amendment modifies the 
     $25 million gross receipts test to be a $15 million gross 
     receipts test which is met if a taxpayer's annual average 
     gross receipts do not exceed $15 million for the three prior 
     taxable-year period. The Senate amendment retains the present 
     law $25 million gross receipts limit for family farming 
     corporations and applies such limit consistent with present 
     law.
       Effective date.--The provisions to expand the universe of 
     taxpayers eligible to use the cash method, exempt certain 
     taxpayers from the requirement to keep inventories, and 
     expand the exception from the uniform capitalization rules 
     apply to taxable years beginning after December 31, 2017. The 
     provision to expand the exception for small construction 
     contracts from the requirement to use the percentage-of-
     completion method applies to contracts entered into after 
     December 31, 2017, in taxable years ending after such date.


                          conference agreement

       The conference agreement follows the House bill.

    3. Modification of treatment of S corporation conversions to C 
  corporations (sec. 3204 of the House bill, sec. 13543 of the Senate 
             amendment, and secs. 481 and 1371 of the Code)


                              present law

     Changes in accounting method
       Cash and accrual methods in general
       Taxpayers using the cash method generally recognize items 
     of income when actually or constructively received and items 
     of expense when paid. The cash method is administratively 
     easy and provides the taxpayer flexibility in the timing of 
     income recognition. It is the method generally used by most 
     individual taxpayers, including farm and nonfarm sole 
     proprietorships.
       Taxpayers using an accrual method generally accrue items of 
     income when all the

[[Page 19979]]

     events have occurred that fix the right to receive the income 
     and the amount of the income can be determined with 
     reasonable accuracy.\661\ Taxpayers using an accrual method 
     of accounting generally may not deduct items of expense prior 
     to when all events have occurred that fix the obligation to 
     pay the liability, the amount of the liability can be 
     determined with reasonable accuracy, and economic performance 
     has occurred.\662\ Accrual methods of accounting generally 
     result in a more accurate measure of economic income than 
     does the cash method. The accrual method is often used by 
     businesses for financial accounting purposes.
---------------------------------------------------------------------------
     \661\ See, e.g., sec. 451.
     \662\ See, e.g., sec. 461.
---------------------------------------------------------------------------
       A C corporation, a partnership that has a C corporation as 
     a partner, or a tax-exempt trust or corporation with 
     unrelated business income generally may not use the cash 
     method. Exceptions are made for farming businesses,\663\ 
     qualified personal service corporations,\664\ and the 
     aforementioned entities to the extent their average annual 
     gross receipts do not exceed $5 million for all prior years 
     (including the prior taxable years of any predecessor of the 
     entity) (the ``gross receipts test'').\665\ The cash method 
     may not be used by any tax shelter.\666\ In addition, the 
     cash method generally may not be used if the purchase, 
     production, or sale of merchandise is an income producing 
     factor.\667\ Such taxpayers generally are required to keep 
     inventories and use an accrual method with respect to 
     inventory items.\668\
---------------------------------------------------------------------------
     \663\ A farming business is defined as a trade or business of 
     farming, including operating a nursery or sod farm, or the 
     raising or harvesting of trees bearing fruit, nuts, or other 
     crops, timber, or ornamental trees. Sec. 448(d)(1).
     \664\ A qualified personal service corporation is a 
     corporation (1) substantially all of whose activities involve 
     the performance of services in the fields of health, law, 
     engineering, architecture, accounting, actuarial science, 
     performing arts, or consulting, and (2) substantially all of 
     the stock of which is owned by current or former employees 
     performing such services, their estates, or heirs. Sec. 
     448(d)(2).
     \665\ The gross receipts test is modified to apply to 
     taxpayers with annual average gross receipts that do not 
     exceed $25 million for the three prior taxable-year period as 
     part of this bill. See section 3202 of the bill (Small 
     business accounting method reform and simplification).
     \666\ Secs. 448(a)(3) and (d)(3) and 461(i)(3) and (4). For 
     this purpose, a tax shelter includes: (1) any enterprise 
     (other than a C corporation) if at any time interests in such 
     enterprise have been offered for sale in any offering 
     required to be registered with any Federal or State agency 
     having the authority to regulate the offering of securities 
     for sale; (2) any syndicate (within the meaning of section 
     1256(e)(3)(B)); or (3) any tax shelter as defined in section 
     6662(d)(2)(C)(ii). In the case of a farming trade or 
     business, a tax shelter includes any tax shelter as defined 
     in section 6662(d)(2)(C)(ii) or any partnership or any other 
     enterprise other than a corporation which is not an S 
     corporation engaged in the trade or business of farming, (1) 
     if at any time interests in such partnership or enterprise 
     have been offered for sale in any offering required to be 
     registered with any Federal or State agency having authority 
     to regulate the offering of securities for sale or (2) if 
     more than 35 percent of the losses during any period are 
     allocable to limited partners or limited entrepreneurs.
     \667\ Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
     \668\ Sec. 471 and Treas. Reg. secs. 1.446-1(c)(2) and 1.471-
     1. However, section 3202 of the House bill (Small business 
     accounting method reform and simplification) provides an 
     exemption from the requirement to use inventories for 
     taxpayers that meet the $25 million gross receipts test 
     provided in such section. Accordingly, under the bill, such 
     taxpayers are thus also eligible to use the cash method.
---------------------------------------------------------------------------
       Procedures for changing a method of accounting
       A taxpayer filing its first return may adopt any 
     permissible method of accounting in computing taxable income 
     for such year.\669\ Except as otherwise provided, section 
     446(e) requires taxpayers to secure consent of the Secretary 
     before changing a method of accounting. The regulations under 
     this section provide rules for determining: (1) what a method 
     of accounting is, (2) how an adoption of a method of 
     accounting occurs, and (3) how a change in method of 
     accounting is effectuated.\670\
---------------------------------------------------------------------------
     \669\ Treas. Reg. sec. 1.446-1(e)(1).
     \670\ Treas. Reg. sec. 1.446-1(e).
---------------------------------------------------------------------------
       Section 481 prescribes the rules to be followed in 
     computing taxable income in cases where the taxable income of 
     the taxpayer is computed under a different method than the 
     prior year (e.g., when changing from the cash method to an 
     accrual method). In computing taxable income for the year of 
     change, the taxpayer must take into account those adjustments 
     which are determined to be necessary solely by reason of such 
     change in order to prevent items of income or expense from 
     being duplicated or omitted.\671\ The year of change is the 
     taxable year for which the taxable income of the taxpayer is 
     computed under a different method than the prior year.\672\ 
     Congress has provided the Secretary with the authority to 
     prescribe the timing and manner in which such adjustments are 
     taken into account in computing taxable income.\673\ Net 
     adjustments that decrease taxable income generally are taken 
     into account entirely in the year of change, and net 
     adjustments that increase taxable income generally are taken 
     into account ratably during the four-taxable-year period 
     beginning with the year of change.\674\
---------------------------------------------------------------------------
     \671\ Sec. 481(a)(2) and Treas. Reg. sec. 1.481-1(a)(1).
     \672\ Treas. Reg. sec. 1.481-1(a)(1).
     \673\ Sec. 481(c). While Treasury regulations generally 
     provide that the entire adjustments required by section 
     481(a) are taken into account entirely in the year of change, 
     the Secretary has provided the Commissioner with the 
     authority to provide additional guidance regarding the 
     taxable year or years in which the adjustments are taken into 
     account. See Treas. Reg. sec. 1.481-1(c)(2).
     \674\ See Section 7.03 of Rev. Proc. 2015-13, 2015-5 I.R.B 
     419.
---------------------------------------------------------------------------
     Post-termination distributions
       Under present law, in the case of an S corporation that 
     converts to a C corporation, distributions of cash by the C 
     corporation to its shareholders during the post-termination 
     transition period (to the extent of the amount in the 
     accumulated adjustment account) are tax-free to the 
     shareholders and reduce the adjusted basis of the stock.\675\ 
     The post-termination transition period is generally the one-
     year period after the S corporation election terminates.\676\
---------------------------------------------------------------------------
     \675\ Sec. 1371(e)(1).
     \676\ Sec. 1377(b).
---------------------------------------------------------------------------


                               house bill

       Under the provision, any section 481(a) adjustment of an 
     eligible terminated S corporation attributable to the 
     revocation of its S corporation election (i.e., a change from 
     the cash method to an accrual method) is taken into account 
     ratably during the six-taxable-year period beginning with the 
     year of change.\677\ An eligible terminated S corporation is 
     any C corporation which (1) is an S corporation the day 
     before the enactment of this bill, (2) during the two-year 
     period beginning on the date of such enactment revokes its S 
     corporation election under section 1362(a), and (3) all of 
     the owners of which on the date the S corporation election is 
     revoked are the same owners (and in identical proportions) as 
     the owners on the date of such enactment.
---------------------------------------------------------------------------
     \677\ Section 3202 of the House bill (Small business 
     accounting method reform and simplification) expand the 
     universe of partnerships and C corporations eligible to use 
     the cash method to include partnerships or C corporations 
     with annual average gross receipts that do not exceed $25 
     million for the three prior taxable-year period. Accordingly, 
     an eligible terminated S corporation with annual average 
     gross receipts that do not exceed $25 million that used the 
     cash method prior to revoking its S corporation election may 
     be eligible to remain on the cash method as a C corporation.
---------------------------------------------------------------------------
       Under the provision, in the case of a distribution of money 
     by an eligible terminated S corporation, the accumulated 
     adjustments account shall be allocated to such distribution, 
     and the distribution shall be chargeable to accumulated 
     earnings and profits, in the same ratio as the amount of the 
     accumulated adjustments account bears to the amount the 
     accumulated earnings and profits.
       Effective date.--The provision is effective upon enactment.


                            senate amendment

       The Senate amendment generally is the same as the House 
     bill, except that any increase in tax due to the section 
     481(a) adjustment, rather than the section 481(a) adjustment 
     itself, is taken into account ratably during the six-taxable-
     year period beginning with the year of change.
       Effective date.--The provision is effective for 
     distributions after the date of enactment.


                          conference agreement

       The conference agreement follows the House bill.

       D. Reform of Business Related Exclusions, Deductions, etc.

  1. Interest (secs. 3203 and 3301 of the House bill, secs. 13301 and 
      13311 of the Senate amendment, and sec. 163(j) of the Code)


                              present law

     Interest deduction
       Interest paid or accrued by a business generally is 
     deductible in the computation of taxable income subject to a 
     number of limitations.\678\
---------------------------------------------------------------------------
     \678\ Sec. 163(a). In addition to the limitations discussed 
     herein, other limitations include: denial of the deduction 
     for the disqualified portion of the original issue discount 
     on an applicable high yield discount obligation (sec. 
     163(e)(5)), denial of deduction for interest on certain 
     obligations not in registered form (sec. 163(f)), reduction 
     of the deduction for interest on indebtedness with respect to 
     which a mortgage credit certificate has been issued under 
     section 25 (sec. 163(g)), disallowance of deduction for 
     personal interest (sec. 163(h)), disallowance of deduction 
     for interest on debt with respect to certain life insurance 
     contracts (sec. 264), and disallowance of deduction for 
     interest relating to tax-exempt income (sec. 265). Interest 
     may also be subject to capitalization. See, e.g., sections 
     263A(f) and 461(g).
---------------------------------------------------------------------------
       Interest is generally deducted by a taxpayer as it is paid 
     or accrued, depending on the taxpayer's method of accounting. 
     For all taxpayers, if an obligation is issued with original 
     issue discount (``OID''), a deduction for interest is 
     allowable over the life of the obligation on a yield to 
     maturity basis.\679\ Generally, OID arises where interest on 
     a debt instrument is not calculated based on a qualified rate 
     and required to be paid at least annually.
---------------------------------------------------------------------------
     \679\ Sec. 163(e). But see section 267 (dealing in part with 
     interest paid to a related or foreign party).
---------------------------------------------------------------------------
     Investment interest expense
       In the case of a taxpayer other than a corporation, the 
     deduction for interest on indebtedness that is allocable to 
     property held for investment (``investment interest'') is 
     limited to the taxpayer's net investment income for the 
     taxable year.\680\ Disallowed investment interest is carried 
     forward to the next taxable year.
---------------------------------------------------------------------------
     \680\ Sec. 163(d).

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

[[Page 19980]]

       Net investment income is investment income net of 
     investment expenses. Investment income generally consists of 
     gross income from property held for investment, and 
     investment expense includes all deductions directly connected 
     with the production of investment income (e.g., deductions 
     for investment management fees) other than deductions for 
     interest.
       The two-percent floor on miscellaneous itemized deductions 
     allows taxpayers to deduct investment expenses connected with 
     investment income only to the extent such deductions exceed 
     two percent of the taxpayer's adjusted gross income 
     (``AGI'').\681\ Miscellaneous itemized deductions \682\ that 
     are not investment expenses are disallowed first before any 
     investment expenses are disallowed.\683\
---------------------------------------------------------------------------
     \681\ Sec. 67(a).
     \682\ Miscellaneous itemized deductions include itemized 
     deductions of individuals other than certain specific 
     itemized deductions. Sec. 67(b). Miscellaneous itemized 
     deductions generally include, for example, investment 
     management fees and certain employee business expenses, but 
     specifically do not include, for example, interest, taxes, 
     casualty and theft losses, charitable contributions, medical 
     expenses, or other listed itemized deductions.
     \683\ H.R. Rep. No. 841, 99th Cong., 2d Sess., p. II-154, 
     Sept. 18, 1986 (Conf. Rep.) (``In computing the amount of 
     expenses that exceed the 2-percent floor, expenses that are 
     not investment expenses are intended to be disallowed before 
     any investment expenses are disallowed.'').
---------------------------------------------------------------------------
     Earnings stripping
       Section 163(j) may disallow a deduction for disqualified 
     interest paid or accrued by a corporation in a taxable year 
     if two threshold tests are satisfied: the payor's debt-to-
     equity ratio exceeds 1.5 to 1.0 (the safe harbor ratio) 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, domestic production activities under 
     section 199, depreciation, amortization, and depletion). 
     Disqualified interest includes interest paid or accrued to: 
     (1) related parties when no Federal income tax is imposed 
     with respect to such interest; \684\ (2) unrelated parties in 
     certain instances in which a related party guarantees the 
     debt; or (3) to a real estate investment trust (``REIT'') by 
     a taxable REIT subsidiary of that trust.\685\ Interest 
     amounts disallowed under these rules can be carried forward 
     indefinitely.\686\ In addition, any excess limitation (i.e., 
     the excess, if any, of 50 percent of the adjusted taxable 
     income of the payor over the payor's net interest expense) 
     can be carried forward three years.\687\
---------------------------------------------------------------------------
     \684\ If a tax treaty reduces the rate of tax on interest 
     paid or accrued by the taxpayer, the interest is treated as 
     interest on which no Federal income tax is imposed to the 
     extent of the same proportion of such interest as the rate of 
     tax imposed without regard to the treaty, reduced by the rate 
     of tax imposed by the treaty, bears to the rate of tax 
     imposed without regard to the treaty. Sec. 163(j)(5)(B).
     \685\ Sec. 163(j)(3).
     \686\ Sec. 163(j)(1)(B).
     \687\ Sec. 163(j)(2)(B)(ii).
---------------------------------------------------------------------------


                               house bill

     In general
       In the case of any taxpayer for any taxable year, the 
     deduction for business interest is limited to the sum of (1) 
     business interest income; (2) 30 percent of the adjusted 
     taxable income of the taxpayer for the taxable year; and (3) 
     the floor plan financing interest of the taxpayer for the 
     taxable year. The amount of any business interest not allowed 
     as a deduction for any taxable year may be carried forward 
     for up to five years beyond the year in which the business 
     interest was paid or accrued, treating business interest as 
     allowed as a deduction on a first-in, first-out basis. The 
     limitation applies at the taxpayer level. In the case of a 
     group of affiliated corporations that file a consolidated 
     return, the limitation applies at the consolidated tax return 
     filing level.
       Business interest means any interest paid or accrued on 
     indebtedness properly allocable to a trade or business. Any 
     amount treated as interest for purposes of the Internal 
     Revenue Code is interest for purposes of the provision. 
     Business interest income means the amount of interest 
     includible in the gross income of the taxpayer for the 
     taxable year which is properly allocable to a trade or 
     business. Business interest does not include investment 
     interest, and business interest income does not include 
     investment income, within the meaning of section 163(d).\688\
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     \688\ Section 163(d) applies in the case of a taxpayer other 
     than a corporation. Thus, a corporation has neither 
     investment interest nor investment income within the meaning 
     of section 163(d). Thus, interest income and interest expense 
     of a corporation is properly allocable to a trade or 
     business, unless such trade or business is otherwise 
     explicitly excluded from the application of the provision.
---------------------------------------------------------------------------
       Adjusted taxable income means the taxable income of the 
     taxpayer computed without regard to (1) any item of income, 
     gain, deduction, or loss which is not properly allocable to a 
     trade or business; (2) any business interest or business 
     interest income; (3) the amount of any net operating loss 
     deduction; and (4) any deduction allowable for depreciation, 
     amortization, or depletion.\689\ The Secretary may provide 
     other adjustments to the computation of adjusted taxable 
     income.
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     \689\ Any deduction allowable for depreciation, amortization, 
     or depletion includes any deduction allowable for any amount 
     treated as depreciation, amortization, or depletion under 
     present law.
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       Floor plan financing interest means interest paid or 
     accrued on floor plan financing indebtedness. Floor plan 
     financing indebtedness means indebtedness used to finance the 
     acquisition of motor vehicles held for sale to retail 
     customers and secured by the inventory so acquired. A motor 
     vehicle means a motor vehicle that is an automobile, a truck, 
     a recreational vehicle, a motorcycle, a boat, farm machinery 
     or equipment, or construction machinery or equipment.
       By including business interest income and floor plan 
     financing interest in the limitation, the rule operates to 
     allow floor plan financing interest to be fully deductible 
     and to limit the deduction for net interest expense (less 
     floor plan financing interest) to 30 percent of adjusted 
     taxable income. That is, a deduction for business interest is 
     permitted to the full extent of business interest income and 
     any floor plan financing interest. To the extent that 
     business interest exceeds business interest income and floor 
     plan financing interest, the deduction for the net interest 
     expense is limited to 30 percent of adjusted taxable income.
       It is generally intended that, similar to present law, 
     section 163(j) apply after the application of provisions that 
     subject interest to deferral, capitalization, or other 
     limitation. Thus, section 163(j) applies to interest 
     deductions that are deferred, for example under section 
     163(e) or section 267(a)(3)(B), in the taxable year to which 
     such deductions are deferred. Section 163(j) applies after 
     section 263A is applied to capitalize interest and after, for 
     example, section 265 or section 279 is applied to disallow 
     interest.
     Application to passthrough entities
       In general
       In the case of any partnership, the limitation is applied 
     at the partnership level. Any deduction for business interest 
     is taken into account in determining the nonseparately stated 
     taxable income or loss of the partnership.\690\ To prevent 
     double counting, special rules are provided for the 
     determination of the adjusted taxable income of each partner 
     of the partnership. Similarly, to allow for additional 
     interest deduction by a partner in the case of an excess 
     amount of unused adjusted taxable income limitation of the 
     partnership, special rules apply. Similar rules apply with 
     respect to any S corporation and its shareholders.
---------------------------------------------------------------------------
     \690\ This amount is the ``Ordinary business income or loss'' 
     reflected on Form 1065 (U.S. Return of Partnership Income). 
     The partner's distributive share is reflected in Box 1 of 
     Schedule K-1 (Form 1065).
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       Double counting rule
       The adjusted taxable income of each partner (or 
     shareholder, as the case may be) is determined without regard 
     to such partner's distributive share of the nonseparately 
     stated income or loss of such partnership. In the absence of 
     such a rule, the same dollars of adjusted taxable income of a 
     partnership could generate additional interest deductions as 
     the income is passed through to the partners.
       Example 1.--ABC is a partnership owned 50-50 by XYZ 
     Corporation and an individual. ABC generates $200 of 
     noninterest income. Its only expense is $60 of business 
     interest. Under the provision the deduction for business 
     interest is limited to 30 percent of adjusted taxable income, 
     that is, 30 percent * $200 = $60. ABC deducts $60 of business 
     interest and reports ordinary business income of $140. XYZ's 
     distributive share of the ordinary business income of ABC is 
     $70. XYZ has net taxable income of zero from its other 
     operations, none of which is attributable to interest income 
     and without regard to its business interest expense. XYZ has 
     business interest expense of $25. In the absence of any 
     special rule, the $70 of taxable income from its interest in 
     ABC would permit the deduction of up to an additional $21 of 
     interest (30 percent * $70 = $21), resulting in a deduction 
     disallowance of only $4. XYZ's $100 share of ABC's adjusted 
     taxable income would generate $51 of interest deductions. If 
     XYZ were instead a passthrough entity, additional deductions 
     could be available at each tier.
       The double counting rule provides that XYZ has adjusted 
     taxable income computed without regard to the $70 
     distributive share of the nonseparately stated income of ABC. 
     As a result, XYZ has adjusted taxable income of $0. XYZ's 
     deduction for business interest is limited to 30 percent * $0 
     = $0, resulting in a deduction disallowance of $25.
       Additional deduction limit
       The limit on the amount allowed as a deduction for business 
     interest is increased by a partner's distributive share of 
     the partnership's excess amount of unused adjusted taxable 
     income limitation. The excess amount with respect to any 
     partnership is the excess (if any) of 30 percent of the 
     adjusted taxable income of the partnership over the amount 
     (if any) by which the business interest of the partnership 
     (reduced by floor plan financing interest) exceeds the 
     business interest income of the partnership. This allows a 
     partner of a partnership to deduct more interest expense the 
     partner may have paid or incurred to the extent the 
     partnership could have deducted more business interest.

[[Page 19981]]

       Example 2.--The facts are the same as in Example 1 except 
     ABC has only $40 of business interest. As in Example 1, ABC 
     has a limit on its interest deduction of $60. The excess 
     amount for ABC is $60-$40 = $20. XYZ's distributive share of 
     the excess amount from ABC partnership is $10. XYZ's 
     deduction for business interest is limited to 30 percent of 
     its adjusted taxable income plus its distributive share of 
     the excess amount from ABC partnership (30 percent * $0 + $10 
     = $10). As a result of the rule, XYZ may deduct $10 of 
     business interest and has an interest deduction disallowance 
     of $15.
     Carryforward of disallowed business interest
       The amount of any business interest not allowed as a 
     deduction for any taxable year is treated as business 
     interest paid or accrued in the succeeding taxable year. 
     Business interest may be carried forward for up to five 
     years. Carryforwards are determined on a first-in, first-out 
     basis. It is intended that the provision be administered in a 
     way to prevent trafficking in carryforwards.
       A coordination rule is provided with the limitation on 
     deduction of interest by domestic corporations in 
     international financial reporting groups.\691\ Whichever rule 
     imposes the lower limitation on deduction of business 
     interest with respect to the taxable year (and therefore the 
     greatest amount of interest to be carried forward) governs.
---------------------------------------------------------------------------
     \691\ See section 4302 of the bill (Limitation on deduction 
     of interest by domestic corporations which are members of an 
     international financial reporting group).
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       Any carryforward of disallowed business interest is an item 
     taken into account in the case of certain corporate 
     acquisitions described in section 381 and is subject to 
     limitation under section 382.
     Exceptions
       The limitation does not apply to any taxpayer that meets 
     the $25 million gross receipts test of section 448(c), that 
     is, if the average annual gross receipts for the three-
     taxable-year period ending with the prior taxable year does 
     not exceed $25 million.\692\ Aggregation rules apply to 
     determine the amount of a taxpayer's gross receipts under the 
     gross receipts test of section 448(c).
---------------------------------------------------------------------------
     \692\ In the case of a sole proprietorship, the $25 million 
     gross receipts test is applied as if the sole proprietorship 
     were a corporation or partnership.
---------------------------------------------------------------------------
       The trade or business of performing services as an employee 
     is not treated as a trade or business for purposes of the 
     limitation. As a result, for example, the wages of an 
     employee are not counted in the adjusted taxable income of 
     the taxpayer for purposes of determining the limitation.
       The limitation does not apply to a real property trade or 
     business as defined in section 469(c)(7)(C). Any real 
     property development, redevelopment, construction, 
     reconstruction, acquisition, conversion, rental, operation, 
     management, leasing, or brokerage trade or business is not 
     treated as a trade or business for purposes of the 
     limitation.
       The limitation does not apply to certain regulated public 
     utilities. Specifically, the trade or business of the 
     furnishing or sale of (1) electrical energy, water, or sewage 
     disposal services, (2) gas or steam through a local 
     distribution system, or (3) transportation of gas or steam by 
     pipeline, if the rates for such furnishing or sale, as the 
     case may be, have been established or approved by a State 
     \693\ or political subdivision thereof, by any agency or 
     instrumentality of the United States, or by a public service 
     or public utility commission or other similar body of any 
     State or political subdivision thereof is not treated as a 
     trade or business for purposes of the limitation. As a 
     result, for example, interest expense paid or incurred in a 
     real property trade or business is not business interest 
     subject to limitation and is generally deductible in the 
     computation of taxable income.
---------------------------------------------------------------------------
     \693\ The term ``State'' includes the District of Columbia. 
     See sec. 7701(a)(10) (``The term `State' shall be construed 
     to include the District of Columbia where such construction 
     is necessary to carry out provisions of this title'').
---------------------------------------------------------------------------
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            senate amendment

       The Senate amendment is the same as the House bill, with 
     the following modifications.
     In general
       The Senate amendment makes several changes to the 
     definition of adjusted taxable income. Specifically, the 
     Senate amendment does not add back deductions allowable for 
     depreciation, amortization, or depletion, but does add back 
     any deduction under section 199,\694\ and any deduction under 
     section 199A with respect to qualified business income of a 
     passthrough entity.\695\
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     \694\ The deduction for income attributable to domestic 
     production activities is repealed effective for taxable years 
     beginning after December 31, 2018. See section 13305 of the 
     Senate amendment (Repeal of deduction for income attributable 
     to domestic production activities).
     \695\ See section 11011 of the Senate amendment (Deduction 
     for qualified business income).
---------------------------------------------------------------------------
       The Senate amendment also modifies the definition of floor 
     plan financing. Specifically, the Senate amendment permits 
     interest on indebtedness used to finance acquisition of motor 
     vehicles for sale or lease (i.e., not just for sale, as in 
     the House bill) to qualify as floor plan financing interest. 
     The Senate amendment also includes self-propelled vehicles in 
     the definition of motor vehicle, but removes construction 
     machinery and equipment from the definition.
     Carryforward of disallowed business interest
       The Senate amendment permits interest deductions to be 
     carried forward indefinitely, subject to certain restrictions 
     applicable to partnerships, described below.
     Application to passthrough entities
       The Senate amendment requires a partner in a partnership to 
     ignore the partner's distributive share of all items of 
     income, gain, deduction, or loss of the partnership when 
     calculating adjusted taxable income (rather than merely 
     ignoring the nonseparately stated income or loss, as in the 
     House bill).
       The Senate amendment takes a different mathematical 
     approach from the House bill to calculating a partner's 
     interest limitation, though both provisions have the same 
     practical effect. In the Senate amendment, the limit on the 
     amount allowed as a deduction for business interest is 
     increased by a partner's distributive share of the 
     partnership's excess taxable income. The excess taxable 
     income with respect to any partnership is the amount which 
     bears the same ratio to the partnership's adjusted taxable 
     income as the excess (if any) of 30 percent of the adjusted 
     taxable income of the partnership over the amount (if any) by 
     which the business interest of the partnership, reduced by 
     floor plan financing interest, exceeds the business interest 
     income of the partnership bears to 30 percent of the adjusted 
     taxable income of the partnership. This allows a partner of a 
     partnership to deduct additional interest expense the partner 
     may have paid or incurred to the extent the partnership could 
     have deducted more business interest. The Senate amendment 
     requires that excess taxable income be allocated in the same 
     manner as nonseparately stated income and loss. As in the 
     House bill, rules similar to these rules also apply to S 
     corporations.
       The Senate amendment provides a special rule for 
     carryforward of disallowed partnership interest. In the case 
     of a partnership, the general carryforward rule described in 
     the discussion of the House bill does not apply. Instead, any 
     business interest that is not allowed as a deduction to the 
     partnership for the taxable year is allocated to each partner 
     in the same manner as nonseparately stated taxable income or 
     loss of the partnership. The partner may deduct its share of 
     the partnership's excess business interest in any future 
     year, but only against excess taxable income attributed to 
     the partner by the partnership the activities of which gave 
     rise to the excess business interest carryforward. Any such 
     deduction requires a corresponding reduction in excess 
     taxable income. Additionally, when excess business interest 
     is allocated to a partner, the partner's basis in its 
     partnership interest is reduced (but not below zero) by the 
     amount of such allocation, even though the carryforward does 
     not give rise to a partner deduction in the year of the basis 
     reduction. However, the partner's deduction in a future year 
     for interest carried forward does not reduce the partner's 
     basis in the partnership interest. In the event the partner 
     disposes of a partnership interest the basis of which has 
     been so reduced, the partner's basis in such interest shall 
     be increased, immediately before such disposition, by the 
     amount that any such basis reductions exceed any amount of 
     excess interest expense that has been treated as paid by the 
     partner (i.e., excess interest expense that has been deducted 
     by the partner against excess taxable income of the same 
     partnership). This special rule does not apply to S 
     corporations and their shareholders.
     Exceptions
       The Senate amendment exempts certain categories of 
     taxpayers or trades or businesses from the interest 
     limitation. First, any taxpayer that meets the $15 million 
     gross receipts test of section 448(c) is exempt from the 
     interest limitation.\696\ Second, the Senate amendment 
     expands the regulated public utilities exception in the House 
     bill to include utilities where the rates for such furnishing 
     or sale, as the case may be, have been established by the 
     governing or ratemaking body of an electric cooperative.
---------------------------------------------------------------------------
     \696\ See section 13102 of the Senate amendment 
     (Modifications of gross receipts test for use of cash method 
     of accounting by corporations and partnerships). In the case 
     of a sole proprietorship, the $15 million gross receipts test 
     is applied as if the sole proprietorship were a corporation 
     or partnership.
---------------------------------------------------------------------------
       In the Senate amendment, at the taxpayer's election, any 
     real property development, redevelopment, construction, 
     reconstruction, acquisition, conversion, rental, operation, 
     management, leasing, or brokerage trade or business is not 
     treated as a trade or business for purposes of the 
     limitation, and therefore the limitation does not apply to 
     such trades or businesses.\697\ Similarly, at the taxpayer's 
     election, any farming

[[Page 19982]]

     business,\698\ as well as any business engaged in the trade 
     or business of a specified agricultural or horticultural 
     cooperative,\699\ are not treated as trades or businesses for 
     purposes of the limitation, and therefore the limitation does 
     not apply to such trades or businesses.
---------------------------------------------------------------------------
     \697\ It is intended that any such real property trade or 
     business, including such a trade or business conducted by a 
     corporation or real estate investment trust, be included. 
     Because this description of a real property trade or business 
     refers only to the section 469(c)(7)(C) description, and not 
     to other rules of section 469 (such as the rule of section 
     469(c)(2) that passive activities include rental activities 
     or the rule of section 469(a) that a passive activity loss is 
     limited under section 469), the other rules of section 469 
     are not made applicable by this reference. It is further 
     intended that a real property operation or a real property 
     management trade or business includes the operation or 
     management of a lodging facility.
     \698\ As defined in section 263A(e)(4) (i.e., farming 
     business means the trade or business of farming and includes 
     the trade or business of operating a nursery or sod farm, or 
     the raising or harvesting of trees bearing fruit, nuts, or 
     other crops, or ornamental trees (other than evergreen trees 
     that are more than six years old at the time they are severed 
     from their roots)). Treas. Reg. sec. 1.263A-4(a)(4) further 
     defines a farming business as a trade or business involving 
     the cultivation of land or the raising or harvesting of any 
     agricultural or horticultural commodity. Examples of a 
     farming business include the trade or business of operating a 
     nursery or sod farm; the raising or harvesting of trees 
     bearing fruit, nuts, or other crops; the raising of 
     ornamental trees (other than evergreen trees that are more 
     than six years old at the time they are severed from their 
     roots); and the raising, shearing, feeding, caring for, 
     training, and management of animals. A farming business also 
     includes processing activities that are normally incident to 
     the growing, raising, or harvesting of agricultural or 
     horticultural products. See Treas. Reg. sec. 1.263A-
     4(a)(4)(i) and (ii). A farming business does not include 
     contract harvesting of an agricultural or horticultural 
     commodity grown or raised by another taxpayer, or merely 
     buying and reselling plants or animals grown or raised by 
     another taxpayer. See Treas. Reg. sec. 1.263A-4(a)(4)(i).
     \699\ As defined in new section 199A(g)(2) under the Senate 
     amendment. See section 11011 of the Senate amendment 
     (Deduction for qualified business income).
---------------------------------------------------------------------------


                          Conference Agreement

       The conference agreement generally follows the Senate 
     amendment, with the following modifications. Under the 
     conference agreement, for taxable years beginning after 
     December 31, 2017 and before January 1, 2022, adjusted 
     taxable income is computed without regard to deductions 
     allowable for depreciation, amortization, or depletion. 
     Additionally, because the conference agreement repeals 
     section 199 effective December 31, 2017, adjusted taxable 
     income is computed without regard to such deduction. The 
     conference agreement follows the House in exempting from the 
     limitation taxpayers with average annual gross receipts for 
     the three-taxable-year period ending with the prior taxable 
     year that do not exceed $25 million. In addition, for 
     purposes of defining floor plan financing, the conference 
     agreement modifies the definition of motor vehicle by 
     deleting the specific references to an automobile, a truck, a 
     recreational vehicle, and a motorcycle because those terms 
     are encompassed in the phrase, ``any self-propelled vehicle 
     designed for transporting persons or property on a public 
     street, highway, or road,'' which was also part of the 
     definition in the Senate amendment.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.
     2. Modification of net operating loss deduction (sec. 3302 of 
         the House bill, sec. 13302 of the Senate amendment, and 
         sec. 172 of the Code)


                              Present Law

       A net operating loss (``NOL'') generally means the amount 
     by which a taxpayer's business deductions exceed its gross 
     income.\700\ In general, an NOL may be carried back two years 
     and carried over 20 years to offset taxable income in such 
     years.\701\ NOLs offset taxable income in the order of the 
     taxable years to which the NOL may be carried.\702\
---------------------------------------------------------------------------
     \700\ Sec. 172(c).
     \701\ Sec. 172(b)(1)(A).
     \702\ Sec. 172(b)(2).
---------------------------------------------------------------------------
       Different carryback periods apply with respect to NOLs 
     arising in different circumstances. Extended carryback 
     periods are allowed for NOLs attributable to specified 
     liability losses and certain casualty and disaster 
     losses.\703\ Limitations are placed on the carryback of 
     excess interest losses attributable to corporate equity 
     reduction transactions.\704\
---------------------------------------------------------------------------
     \703\ Sec. 172(b)(1)(C) and (E).
     \704\ Sec. 172(b)(1)(D).
---------------------------------------------------------------------------


                               House Bill

       The provision limits the NOL deduction to 90 percent of 
     taxable income (determined without regard to the deduction). 
     Carryovers to other years are adjusted to take account of 
     this limitation, and may be carried forward indefinitely. In 
     addition, NOL carryovers attributable to losses arising in 
     taxable years beginning after December 31, 2017, are 
     increased annually to take into account the time value of 
     money.
       The provision repeals the two-year carryback and the 
     special carryback provisions, but provides a one-year 
     carryback in the case of certain disaster losses incurred in 
     the trade or business of farming, or by certain small 
     businesses.\705\ For this purpose, small business means a 
     corporation, partnership, or sole proprietorship whose 
     average annual gross receipts for the three-taxable-year 
     period ending with such taxable year does not exceed 
     $5,000,000. Aggregation rules apply to determine gross 
     receipts.
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     \705\ Notwithstanding the amendments made by the provision 
     and section 1304 of the House bill (Repeal of deduction for 
     personal casualty losses), the provision retains the present-
     law three-year carryback for the portion of the NOL for any 
     taxable year which is a net disaster loss to which section 
     504(b) of the Disaster Tax Relief and Airport and Airway 
     Extension Act of 2017 (Pub. L. No. 115-63) applies (i.e., a 
     net disaster loss arising from hurricane Harvey, Irma, or 
     Maria).
---------------------------------------------------------------------------
       Effective date.--The provision allowing indefinite 
     carryovers and modifying carrybacks generally applies to 
     losses arising in taxable years beginning after December 31, 
     2017.\706\
---------------------------------------------------------------------------
     \706\ See section 3101 of the House bill (Increased 
     expensing) for a limitation on the amount of any NOL which 
     may be treated as an NOL carryback in the case of any year 
     which includes any portion of the period beginning September 
     28, 2017 and ending December 31, 2017.
---------------------------------------------------------------------------
       The provision limiting the NOL deduction applies to taxable 
     years beginning after December 31, 2017.
       The annual increase in carryover amounts applies to taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment follows the House bill, with the 
     following modifications. First, provision limits the NOL 
     deduction to 80 percent of taxable income (determined without 
     regard to the deduction), for losses arising in taxable years 
     beginning after December 31, 2022. The limitation does not 
     apply to a property and casualty insurance company.
       The provision repeals the two-year carryback and the 
     special carryback provisions, but provides a two-year 
     carryback in the case of certain losses incurred in the trade 
     or business of farming. In addition, the Senate amendment 
     provides a two-year carryback and 20-year carryforward for 
     NOLs of a property and casualty insurance company (defined in 
     section 816(a)) as an insurance company other than a life 
     insurance company).
       The provision does not increase NOL carryovers.
       Effective date.--The provision allowing indefinite 
     carryovers and modifying carrybacks applies to losses arising 
     in taxable years beginning after December 31, 2017.
       The provision limiting the NOL deduction applies to losses 
     arising in taxable years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment, 
     except that the provision limits the NOL deduction to 80 
     percent of taxable income (determined without regard to the 
     deduction) for losses arising in taxable years beginning 
     after December 31, 2017.
     3. Like-kind exchanges of real property (sec. 3303 of the 
         House bill, and sec. 13303 of the Senate amendment, and 
         sec. 1031 of the Code)


                              Present Law

       An exchange of property, like a sale, generally is a 
     taxable event. However, no gain or loss is recognized if 
     property held for productive use in a trade or business or 
     for investment is exchanged for property of a ``like kind'' 
     which is to be held for productive use in a trade or business 
     or for investment.\707\ In general, section 1031 does not 
     apply to any exchange of stock in trade (i.e., inventory) or 
     other property held primarily for sale; stocks, bonds, or 
     notes; other securities or evidences of indebtedness or 
     interest; interests in a partnership; certificates of trust 
     or beneficial interests; or choses in action.\708\ Section 
     1031 also does not apply to certain exchanges involving 
     livestock \709\ or foreign property.\710\
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     \707\ Sec. 1031(a)(1).
     \708\ Sec. 1031(a)(2). A chose in action is a right that can 
     be enforced by legal action.
     \709\ Sec. 1031(e).
     \710\ Sec. 1031(h).
---------------------------------------------------------------------------
       For purposes of section 1031, the determination of whether 
     property is of a ``like kind'' relates to the nature or 
     character of the property and not its grade or quality, i.e., 
     the nonrecognition rules do not apply to an exchange of one 
     class or kind of property for property of a different class 
     or kind (e.g., section 1031 does not apply to an exchange of 
     real property for personal property).\711\ 
     The different classes of property are: (1) depreciable 
     tangible personal property; \712\ (2) intangible or 
     nondepreciable personal property; \713\ 


[[Page 19983]]

     and (3) real property.\714\ However, the rules with respect 
     to whether real estate is ``like kind'' are applied more 
     liberally than the rules governing like-kind exchanges of 
     depreciable, intangible, or nondepreciable personal property. 
     For example, improved real estate and unimproved real estate 
     generally are considered to be property of a ``like kind'' as 
     this distinction relates to the grade or quality of the real 
     estate,\715\ while depreciable tangible personal properties 
     must be either within the same General Asset Class \716\ or 
     within the same Product Class.\717\
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     \711\ Treas. Reg. sec. 1.1031(a)-1(b).
     \712\ For example, an exchange of a personal computer 
     classified under asset class 00.12 of Rev. Proc. 87-56, 1987-
     2 C.B. 674, for a printer classified under the same asset 
     class of Rev. Proc. 87-56 would be treated as property of a 
     like kind. However, an exchange of an airplane classified 
     under asset class 00.21 of Rev. Proc. 87-56 for a heavy 
     general purpose truck classified under asset class 00.242 of 
     Rev. Proc. 87-56 would not be treated as property of a like 
     kind. See Treas. Reg. sec. 1.1031(a)-2(b)(7).
     \713\ For example, an exchange of a copyright on a novel for 
     a copyright on a different novel would be treated as property 
     of a like kind. See Treas. Reg. sec. 1.1031(a)-2(c)(3). 
     However, the goodwill or going concern value of one business 
     is not of a like kind to the goodwill or going concern value 
     of a different business. See Treas. Reg. sec. 1.1031(a)-
     2(c)(2). The Internal Revenue Service (``IRS'') has ruled 
     that intangible assets such as trademarks, trade names, 
     mastheads, and customer-based intangibles that can be 
     separately described and valued apart from goodwill qualify 
     as property of a like kind under section 1031. See Chief 
     Counsel Advice 200911006, February 12, 2009.
     \714\ Treas. Reg. sec. 1.1031(a)-1(b) and (c).
     \715\ Treas. Reg. sec. 1.1031(a)-1(b).
     \716\ Treasury Regulation section 1.1031(a)-2(b)(2) provides 
     the following list of General Asset Classes, based on asset 
     classes 00.11 through 00.28 and 00.4 of Rev. Proc. 87-56, 
     1987-2 C.B. 674: (i) Office furniture, fixtures, and 
     equipment (asset class 00.11), (ii) Information systems 
     (computers and peripheral equipment) (asset class 00.12), 
     (iii) Data handling equipment, except computers (asset class 
     00.13), (iv) Airplanes (airframes and engines), except those 
     used in commercial or contract carrying of passengers or 
     freight, and all helicopters (airframes and engines) (asset 
     class 00.21), (v) Automobiles, taxis (asset class 00.22), 
     (vi) Buses (asset class 00.23), (vii) Light general purpose 
     trucks (asset class 00.241), (viii) Heavy general purpose 
     trucks (asset class 00.242), (ix) Railroad cars and 
     locomotives, except those owned by railroad transportation 
     companies (asset class 00.25), (x) Tractor units for use 
     over-the-road (asset class 00.26), (xi) Trailers and trailer-
     mounted containers (asset class 00.27), (xii) Vessels, 
     barges, tugs, and similar water-transportation equipment, 
     except those used in marine construction (asset class 00.28), 
     and (xiii) Industrial steam and electric generation and/or 
     distribution systems (asset class 00.4).
     \717\ Property within a product class consists of depreciable 
     tangible personal property that is described in a 6-digit 
     product class within Sectors 31, 32, and 33 (pertaining to 
     manufacturing industries) of the North American Industry 
     Classification System (``NAICS''), set forth in Executive 
     Office of the President, Office of Management and Budget, 
     North American Industry Classification System, United States, 
     2002 (NAICS Manual), as periodically updated. Treas. Reg. 
     sec. 1.1031(a)-2(b)(3).
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       The nonrecognition of gain in a like-kind exchange applies 
     only to the extent that like-kind property is received in the 
     exchange. Thus, if an exchange of property would meet the 
     requirements of section 1031, but for the fact that the 
     property received in the transaction consists not only of the 
     property that would be permitted to be exchanged on a tax-
     free basis, but also other non-qualifying property or money 
     (``additional consideration''), then the gain to the 
     recipient of the other property or money is required to be 
     recognized, but not in an amount exceeding the fair market 
     value of such other property or money.\718\ Additionally, any 
     such gain realized on a section 1031 exchange as a result of 
     additional consideration being involved constitutes ordinary 
     income to the extent that the gain is subject to the 
     recapture provisions of sections 1245 and 1250.\719\ No 
     losses may be recognized from a like-kind exchange.\720\
---------------------------------------------------------------------------
     \718\ Sec. 1031(b). For example, if a taxpayer holding land A 
     having a basis of $40,000 and a fair market value of $100,000 
     exchanges the property for land B worth $90,000 plus $10,000 
     in cash, the taxpayer would recognize $10,000 of gain on the 
     transaction, which would be includable in income. The 
     remaining $50,000 of gain would be deferred until the 
     taxpayer disposes of land B in a taxable sale or exchange.
     \719\ Secs. 1245(b)(4) and 1250(d)(4). For example, if a 
     taxpayer holding section 1245 property A with an original 
     cost basis of $11,000, an adjusted basis of $10,000, and a 
     fair market value of $15,000 exchanges the property for 
     section 1245 property B with a fair market value of $14,000 
     plus $1,000 in cash, the taxpayer would recognize $1,000 of 
     ordinary income on the transaction. The remaining $4,000 of 
     gain would be deferred until the taxpayer disposes of section 
     1245 property B in a taxable sale or exchange.
     \720\ Sec. 1031(c).
---------------------------------------------------------------------------
       If section 1031 applies to an exchange of properties, the 
     basis of the property received in the exchange is equal to 
     the basis of the property transferred. This basis is 
     increased to the extent of any gain recognized as a result of 
     the receipt of other property or money in the like-kind 
     exchange, and decreased to the extent of any money received 
     by the taxpayer.\721\ The holding period of qualifying 
     property received includes the holding period of the 
     qualifying property transferred, but the nonqualifying 
     property received is required to begin a new holding 
     period.\722\
---------------------------------------------------------------------------
     \721\ Sec. 1031(d). Thus, in the example noted above, the 
     taxpayer's basis in B would be $40,000 (the taxpayer's 
     transferred basis of $40,000, increased by $10,000 in gain 
     recognized, and decreased by $10,000 in money received).
     \722\ Sec. 1223(1).
---------------------------------------------------------------------------
       A like-kind exchange also does not require that the 
     properties be exchanged simultaneously. Rather, the property 
     to be received in the exchange must be received not more than 
     180 days after the date on which the taxpayer relinquishes 
     the original property (but in no event later than the due 
     date (including extensions) of the taxpayer's income tax 
     return for the taxable year in which the transfer of the 
     relinquished property occurs). In addition, the taxpayer must 
     identify the property to be received within 45 days after the 
     date on which the taxpayer transfers the property 
     relinquished in the exchange.\723\
---------------------------------------------------------------------------
     \723\ Sec. 1031(a)(3).
---------------------------------------------------------------------------
       The Treasury Department has issued regulations \724\ and 
     revenue procedures \725\ providing guidance and safe harbors 
     for taxpayers engaging in deferred like-kind exchanges.
---------------------------------------------------------------------------
     \724\ Treas. Reg. sec. 1.1031(k)-1(a) through (o).
     \725\ See Rev. Proc. 2000-37, 2000-40 I.R.B. 308, as modified 
     by Rev. Proc. 2004-51, 2004-33 I.R.B. 294.
---------------------------------------------------------------------------


                               House Bill

       The provision modifies the provision providing for 
     nonrecognition of gain in the case of like-kind exchanges by 
     limiting its application to real property that is not held 
     primarily for sale.\726\
---------------------------------------------------------------------------
     \726\ It is intended that real property eligible for like-
     kind exchange treatment under present law will continue to be 
     eligible for like-kind exchange treatment under the 
     provision. For example, a like-kind exchange of real property 
     includes an exchange of shares in a mutual ditch, reservoir, 
     or irrigation company described in section 501(c)(12)(A) if 
     at the time of the exchange such shares have been recognized 
     by the highest court or statute of the State in which the 
     company is organized as constituting or representing real 
     property or an interest in real property. Similarly, improved 
     real estate and unimproved real estate are generally 
     considered to be property of a like kind. See Treas. Reg. 
     sec. 1.1031(a)-1(b).
---------------------------------------------------------------------------
       Effective date.--The provision generally applies to 
     exchanges completed after December 31, 2017. However, an 
     exception is provided for any exchange if the property 
     disposed of by the taxpayer in the exchange is disposed of on 
     or before December 31, 2017, or the property received by the 
     taxpayer in the exchange is received on or before such date.


                            Senate Amendment

       The Senate amendment follows the House bill.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     4. Revision of treatment of contributions to capital (sec. 
         3304 of the House bill and sec. 118 of the Code)


                              Present Law

       The gross income of a corporation does not include any 
     contribution to its capital.\727\ For purposes of this rule, 
     a contribution to the capital of a corporation does not 
     include any contribution in aid of construction or any other 
     contribution from a customer or potential customer.\728\ A 
     special rule allows certain contributions in aid of 
     construction received by a regulated public utility that 
     provides water or sewerage disposal services to be treated as 
     a tax-free contribution to the capital of the utility.\729\ 
     No deduction or credit is allowed for, or by reason of, any 
     expenditure that constitutes a contribution that is treated 
     as a tax-free contribution to the capital of the 
     utility.\730\
---------------------------------------------------------------------------
     \727\ Sec. 118(a).
     \728\ Sec. 118(b).
     \729\ Sec. 118(c)(1).
     \730\ Sec. 118(c)(4).
---------------------------------------------------------------------------
       If property is acquired by a corporation as a contribution 
     to capital and is not contributed by a shareholder as such, 
     the adjusted basis of the property is zero.\731\ If the 
     contribution consists of money, the corporation must first 
     reduce the basis of any property acquired with the 
     contributed money within the following 12-month period, and 
     then reduce the basis of other property held by the 
     corporation.\732\ Similarly, the adjusted basis of any 
     property acquired by a utility with a contribution in aid of 
     construction is zero.\733\
---------------------------------------------------------------------------
     \731\ Sec. 362(c)(1).
     \732\ Sec. 362(c)(2). See also Treas. Reg. sec. 1.362-2.
     \733\ Sec. 118(c)(4).
---------------------------------------------------------------------------


                               House Bill

       The provision repeals the provision of the Internal Revenue 
     Code under which, generally, a corporation's gross income 
     does not include contributions of capital to the corporation.
       The provision provides that a contribution to capital, 
     other than a contribution of money or property made in 
     exchange for stock of a corporation or any interest in an 
     entity, is included in gross income of the corporation. For 
     example, a contribution of municipal land by a municipality 
     that is not in exchange for stock (or for a partnership 
     interest or other interest) of equivalent value is considered 
     a contribution to capital that is includable in gross income. 
     By contrast, a municipal tax abatement for locating a 
     business in a particular municipality is not considered a 
     contribution to capital.
       The provision further provides that a contribution of 
     capital in exchange for stock is not includible in the gross 
     income of the corporation to the extent that the fair market 
     value of any money or other property contributed does not 
     exceed the fair market value of stock received. It is 
     intended that, for this purpose, the fair market value of any 
     property contributed is calculated net of any liabilities to 
     which the property is subject and net of any liabilities or 
     obligations of the transferor assumed or taken subject to by 
     the entity in connection with the transaction. When valuing 
     stock or equity received, taxpayers may disregard discounts 
     for lack of control and the effect of limited liquidity on 
     valuation.
       The provision does not change the application of the 
     meaningless gesture doctrine, described in Lessinger v. 
     Commissioner, 872 F.2d

[[Page 19984]]

     519 (2d. Cir. 1989) and related cases, as well as in 
     administrative guidance.\734\ Thus, under the provision, 
     whether incremental shares of stock are issued when the 
     existing shareholder or shareholders of a corporation make a 
     pro-rata contribution to the capital of the corporation is 
     not determinative of whether the contribution is included in 
     income of the corporation.
---------------------------------------------------------------------------
     \734\ Rev. Rul. 64-155, 1964-1 CB 138.
---------------------------------------------------------------------------
       The fair market value requirement generally will be 
     satisfied in any arm's length transaction in which stock is 
     issued in consideration for cash. Thus, for example, in a 
     public offering, if the price of the stock was determined on 
     an arm's length basis, the fact the stock trades immediately 
     after its issuance at a price below the issue price will not 
     result in contribution to capital treatment.
       Finally, the provision provides rules clarifying the 
     contributee's basis in the property contributed.
       Effective date.--The provision applies to contributions 
     made, and transactions entered into, after the date of 
     enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the policy of the House 
     bill but takes a different approach. The conference agreement 
     does not repeal the provision of the Internal Revenue Code 
     under which, generally, a corporation's gross income does not 
     include contributions to capital. Rather, it preserves that 
     provision, but provides that the term ``contributions to 
     capital'' does not include (1) any contribution in aid of 
     construction or any other contribution as a customer or 
     potential customer, and (2) any contribution by any 
     governmental entity or civic group (other than a contribution 
     made by a shareholder as such). The conferees intend that 
     section 118, as modified, continue to apply only to 
     corporations.
       Effective date.--The provision applies to contributions 
     made after the date of enactment. However, the provision 
     shall not apply to any contribution made after the date of 
     enactment by a governmental entity pursuant to a master 
     development plan that has been approved prior to such date by 
     a governmental entity.
     5. Repeal of deduction for local lobbying expenses (sec. 3305 
         of the House bill, sec. 13308 of the Senate amendment, 
         and sec. 162(e) of the Code)


                              Present Law

     In general
       A taxpayer generally is allowed a deduction for ordinary 
     and necessary expenses paid or incurred in carrying on any 
     trade or business.\735\ However, section 162(e) denies a 
     deduction for amounts paid or incurred in connection with (1) 
     influencing legislation,\736\ (2) participation in, or 
     intervention in, any political campaign on behalf of (or in 
     opposition to) any candidate for public office, (3) any 
     attempt to influence the general public, or segments thereof, 
     with respect to elections, legislative matters, or 
     referendums, or (4) any direct communication with a covered 
     executive branch official \737\ in an attempt to influence 
     the official actions or positions of such official. Expenses 
     paid or incurred in connection with lobbying and political 
     activities (such as research for, or preparation, planning, 
     or coordination of, any previously described activity) also 
     are not deductible.\738\
---------------------------------------------------------------------------
     \735\ Sec. 162(a).
     \736\ The term ``influencing legislation'' means any attempt 
     to influence any legislation through communication with any 
     member or employee of a legislative body, or with any 
     government official or employee who may participate in the 
     formulation of legislation. The term ``legislation'' includes 
     actions with respect to Acts, bills, resolutions, or similar 
     items by the Congress, any State legislature, any local 
     council, or similar governing body, or by the public in a 
     referendum, initiative, constitutional amendment, or similar 
     procedure. Secs. 162(e)(4) and 4911(e)(2).
     \737\ The term ``covered executive branch official'' means 
     (1) the President, (2) the Vice President, (3) any officer or 
     employee of the White House Office of the Executive Office of 
     the President, and the two most senior level officers of each 
     of the other agencies in such Executive Office, (4) any 
     individual servicing in a position in level I of the 
     Executive Schedule under section 5312 of title 5, United 
     States Code, (5) any other individual designated by the 
     President as having Cabinet-level status, and (6) any 
     immediate deputy of an individual described in (4) or (5). 
     Sec. 162(e)(6).
     \738\ Sec. 162(e)(5)(C).
---------------------------------------------------------------------------
     Exceptions
       Local legislation
       Notwithstanding the above, a deduction is allowed for 
     ordinary and necessary expenses incurred in connection with 
     any legislation of any local council or similar governing 
     body (``local legislation'').\739\ With respect to local 
     legislation, the exception permits a deduction for amounts 
     paid or incurred in carrying on any trade or business (1) in 
     direct connection with appearances before, submission of 
     statements to, or sending communications to the committees or 
     individual members of such council or body with respect to 
     legislation or proposed legislation of direct interest to the 
     taxpayer, or (2) in direct connection with communication of 
     information between the taxpayer and an organization of which 
     the taxpayer is a member with respect to any such legislation 
     or proposed legislation which is of direct interest to the 
     taxpayer and such organization, and (3) that portion of the 
     dues paid or incurred with respect to any organization of 
     which the taxpayer is a member which is attributable to the 
     expenses of the activities described in (1) or (2) carried on 
     by such organization.\740\
---------------------------------------------------------------------------
     \739\ Sec. 162(e)(2)(A).
     \740\ Sec. 162(e)(2)(B).
---------------------------------------------------------------------------
       For purposes of this exception, legislation of an Indian 
     tribal government is treated in the same manner as local 
     legislation.\741\
---------------------------------------------------------------------------
     \741\ Sec. 162(e)(7).
---------------------------------------------------------------------------
       De minimis
       For taxpayers with $2,000 or less of in-house expenditures 
     related to lobbying and political activities, a de minimis 
     exception is provided that permits a deduction.\742\
---------------------------------------------------------------------------
     \742\ Sec. 162(e)(5)(B).
---------------------------------------------------------------------------


                               House Bill

       The provision repeals the exception for amounts paid or 
     incurred related to lobbying local councils or similar 
     governing bodies, including Indian tribal governments. Thus, 
     the general disallowance rules applicable to lobbying and 
     political expenditures will apply to costs incurred related 
     to such local legislation.
       Effective date.--The provision applies to amounts paid or 
     incurred after December 31, 2017.


                            Senate Amendment

       The Senate amendment follows the House bill other than to 
     change the effective date so that the provision applies to 
     amounts paid or incurred on or after the date of enactment.
       Effective date.--The provision applies to amounts paid or 
     incurred on or after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     6. Repeal of deduction for income attributable to domestic 
         production activities (sec. 3306 of the House bill, sec. 
         13305 of the Senate amendment, and sec. 199 of the Code)


                              Present Law

     In general
       Section 199 provides a deduction from taxable income (or, 
     in the case of an individual, adjusted gross income \743\) 
     that is equal to nine percent of the lesser of the taxpayer's 
     qualified production activities income or taxable income 
     (determined without regard to the section 199 deduction) for 
     the taxable year.\744\ For corporations subject to the 35-
     percent corporate income tax rate, the nine-percent deduction 
     effectively reduces the corporate income tax rate to slightly 
     less than 32 percent on qualified production activities 
     income.\745\ A similar reduction applies to the graduated 
     rates applicable to individuals with qualifying domestic 
     production activities income.
---------------------------------------------------------------------------
     \743\ For this purpose, adjusted gross income is determined 
     after application of sections 86, 135, 137, 219, 221, 222, 
     and 469, without regard to the section 199 deduction. Sec. 
     199(d)(2).
     \744\ 7Sec. 199(a). In the case of oil related qualified 
     production activities income, the deduction from taxable 
     income is equal to six percent of the lesser of the 
     taxpayer's oil related qualified production activities 
     income, qualified production activities income, or taxable 
     income. Sec. 199(d)(9).
     \745\ This example assumes the deduction does not exceed the 
     wage limitation discussed below.
---------------------------------------------------------------------------
       In general, qualified production activities income is equal 
     to domestic production gross receipts reduced by the sum of: 
     (1) the costs of goods sold that are allocable to those 
     receipts; and (2) other expenses, losses, or deductions which 
     are properly allocable to those receipts.\746\
---------------------------------------------------------------------------
     \746\ Sec. 199(c)(1). In computing qualified production 
     activities income, the domestic production activities 
     deduction itself is not an allocable deduction. Sec. 
     199(c)(1)(B)(ii). See Treas. Reg. secs. 1.199-1 through 
     1.199-9 where the Secretary has prescribed rules for the 
     proper allocation of items of income, deduction, expense, and 
     loss for purposes of determining qualified production 
     activities income.
---------------------------------------------------------------------------
       Domestic production gross receipts generally are gross 
     receipts of a taxpayer that are derived from: (1) any sale, 
     exchange, or other disposition, or any lease, rental, or 
     license, of qualifying production property \747\ that was 
     manufactured, produced, grown or extracted by the taxpayer in 
     whole or in significant part within the United States; \748\ 
     (2) any sale, exchange, or other disposition, or any lease, 
     rental, or license, of qualified film \749\ produced by the 
     taxpayer; (3) any

[[Page 19985]]

     sale, exchange, or other disposition, or any lease, rental, 
     or license, of electricity, natural gas, or potable water 
     produced by the taxpayer in the United States; (4) 
     construction of real property performed in the United States 
     by a taxpayer in the ordinary course of a construction trade 
     or business; or (5) engineering or architectural services 
     performed in the United States for the construction of real 
     property located in the United States.\750\
---------------------------------------------------------------------------
     \747\ Qualifying production property generally includes any 
     tangible personal property, computer software, and sound 
     recordings. Sec. 199(c)(5).
     \748\ When used in the Code in a geographical sense, the term 
     ``United States'' generally includes only the States and the 
     District of Columbia. Sec. 7701(a)(9). A special rule for 
     determining domestic production gross receipts, however, 
     provides that for taxable years beginning after December 31, 
     2005, and before January 1, 2017, in the case of any taxpayer 
     with gross receipts from sources within the Commonwealth of 
     Puerto Rico, the term ``United States'' includes the 
     Commonwealth of Puerto Rico, but only if all of the 
     taxpayer's Puerto Rico-sourced gross receipts are taxable 
     under the Federal income tax for individuals or corporations 
     for such taxable year. Secs. 199(d)(8)(A) and (C). In 
     computing the 50-percent wage limitation, the taxpayer is 
     permitted to take into account wages paid to bona fide 
     residents of Puerto Rico for services performed in Puerto 
     Rico. Sec. 199(d)(8)(B).
     \749\ Qualified film includes any motion picture film or 
     videotape (including live or delayed television programming, 
     but not including certain sexually explicit productions) if 
     50 percent or more of the total compensation relating to the 
     production of the film (including compensation in the form of 
     residuals and participations) constitutes compensation for 
     services performed in the United States by actors, production 
     personnel, directors, and producers. Sec. 199(c)(6).
     \750\ Sec. 199(c)(4)(A).
---------------------------------------------------------------------------
       The amount of the deduction for a taxable year is limited 
     to 50 percent of the W-2 wages paid by the taxpayer, and 
     properly allocable to domestic production gross receipts, 
     during the calendar year that ends in such taxable year.\751\
---------------------------------------------------------------------------
     \751\ Sec. 199(b)(1). For purposes of the provision, ``W-2 
     wages'' include the sum of the amounts of wages as defined in 
     section 3401(a) and elective deferrals that the taxpayer 
     properly reports to the Social Security Administration with 
     respect to the employment of employees of the taxpayer during 
     the calendar year ending during the taxpayer's taxable year. 
     Elective deferrals include elective deferrals as defined in 
     section 402(g)(3), amounts deferred under section 457, and 
     designated Roth contributions as defined in section 402A. See 
     sec. 199(b)(2)(A). The wage limitation for qualified films 
     includes any compensation for services performed in the 
     United States by actors, production personnel, directors, and 
     producers and is not restricted to W-2 wages. Sec. 
     199(b)(2)(D).
---------------------------------------------------------------------------
     Agricultural and horticultural cooperatives
       With regard to member-owned agricultural and horticultural 
     cooperatives formed under Subchapter T of the Code, section 
     199 provides the same treatment of qualified production 
     activities income derived from agricultural or horticultural 
     products that are manufactured, produced, grown, or extracted 
     by cooperatives,\752\ or that are marketed through 
     cooperatives, as it provides for qualified production 
     activities income of other taxpayers (i.e., the cooperative 
     may claim a deduction from qualified production activities 
     income).
---------------------------------------------------------------------------
     \752\ For this purpose, agricultural or horticultural 
     products also include fertilizer, diesel fuel and other 
     supplies used in agricultural or horticultural production 
     that are manufactured, produced, grown, or extracted by the 
     cooperative.
---------------------------------------------------------------------------
       In addition, section 199(d)(3)(A) provides that the amount 
     of any patronage dividends or per-unit retain allocations 
     paid to a member of an agricultural or horticultural 
     cooperative (to which Part I of Subchapter T applies), which 
     is allocable to the portion of qualified production 
     activities income of the cooperative that is deductible under 
     the provision, is deductible from the gross income of the 
     member. In order to qualify, such amount must be designated 
     by the organization as allocable to the deductible portion of 
     qualified production activities income in a written notice 
     mailed to its patrons not later than the payment period 
     described in section 1382(d). In addition, section 
     199(d)(3)(B) provides that the cooperative cannot reduce its 
     income under section 1382 (e.g., cannot claim a dividends-
     paid deduction) for such amounts.


                               House Bill

       The provision repeals the deduction for income attributable 
     to domestic production activities.


                            Senate Amendment

       The Senate amendment is the same as the House bill.
       Effective date.--The provision is effective for non-
     corporate taxpayers and for certain rules applicable to 
     agricultural and horticultural cooperates provided in section 
     199(d)(3)(A) and (B) for taxable years beginning after 
     December 31, 2017. The provision is effective for C 
     corporations for taxable years beginning after December 31, 
     2018.


                          Conference Agreement

       The conference agreement follows the House bill.
     7. Entertainment, etc. expenses (sec. 3307 of the House bill, 
         sec. 13304 of the Senate amendment, and sec. 274 of the 
         Code)


                              Present Law

     In general
       No deduction is allowed with respect to (1) an activity 
     generally considered to be entertainment, amusement, or 
     recreation (``entertainment''), 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.\753\ If the 
     taxpayer establishes that entertainment expenses are directly 
     related to (or associated with) the active conduct of its 
     trade or business, the deduction generally is limited to 50 
     percent of the amount otherwise deductible.\754\ Similarly, a 
     deduction for any expense for food or beverages generally is 
     limited to 50 percent of the amount otherwise 
     deductible.\755\ In addition, no deduction is allowed for 
     membership dues with respect to any club organized for 
     business, pleasure, recreation, or other social purpose.\756\
---------------------------------------------------------------------------
     \753\ Sec. 274(a)(1).
     \754\ Sec. 274(n)(1)(B).
     \755\ Sec. 274(n)(1)(A).
     \756\ Sec. 274(a)(3).
---------------------------------------------------------------------------
       There are a number of exceptions to the general rule 
     disallowing deduction of entertainment expenses and the rules 
     limiting deductions to 50 percent of the otherwise deductible 
     amount. Under one such exception, those rules do not apply to 
     expenses for goods, services, and facilities to the extent 
     that the expenses are reported by the taxpayer as 
     compensation and as wages to an employee.\757\ Those rules 
     also do not apply to expenses 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.\758\ 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 taxpayer's actual cost, even if a greater amount (i.e., 
     fair market value) is includible in income.\759\
---------------------------------------------------------------------------
     \757\ Sec. 274(e)(2)(A). See below for a discussion of the 
     recent modification of this rule for certain individuals.
     \758\ Sec. 274(e)(9).
     \759\ Treas. Reg. sec. 1.162-25T(a).
---------------------------------------------------------------------------
       Those deduction disallowance rules also do not apply to 
     expenses paid or incurred by the taxpayer, in connection with 
     the performance of services for another person (other than an 
     employer), under a reimbursement or other expense allowance 
     arrangement if the taxpayer accounts for the expenses to such 
     person.\760\ Another exception applies for expenses for 
     recreational, social, or similar activities primarily for the 
     benefit of employees other than certain owners and highly 
     compensated employees.\761\ An exception applies also to the 
     50 percent deduction limit for food and beverages provided to 
     crew members of certain commercial vessels and certain oil or 
     gas platform or drilling rig workers.\762\
---------------------------------------------------------------------------
     \760\ Sec. 274(e)(3).
     \761\ Sec. 274(e)(4).
     \762\ Sec. 274(n)(2)(E).
---------------------------------------------------------------------------
     Expenses treated as compensation
       Except as otherwise provided, gross income includes 
     compensation for services, including fees, commissions, 
     fringe benefits, and similar items.\763\ In general, an 
     employee (or other service provider) must include in gross 
     income the amount by which the fair market value of a fringe 
     benefit exceeds the sum of the amount (if any) paid by the 
     individual and the amount (if any) specifically excluded from 
     gross income.\764\ Treasury regulations provide detailed 
     rules regarding the valuation of certain fringe benefits, 
     including flights on an employer-provided aircraft. In 
     general, the value of a non-commercial flight generally is 
     determined under the base aircraft valuation formula, also 
     known as the Standard Industry Fare Level formula or 
     ``SIFL.'' \765\ If the SIFL valuation rules do not apply, the 
     value of a flight on an employer-provided aircraft generally 
     is 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.\766\
---------------------------------------------------------------------------
     \763\ Sec. 61(a)(1).
     \764\ Treas. Reg. sec. 1.61-21(b)(1).
     \765\ Treas. Reg. sec. 1.61-21(g)(5).
     \766\ 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 has been 
     interpreted as not limiting the company's deduction for 
     expenses attributable to the operation of the aircraft to the 
     amount of compensation reportable to its employees.\767\ The 
     result of that interpretation is often a deduction several 
     times larger than the amount required to be included in 
     income. Further, 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.
---------------------------------------------------------------------------
     \767\ Sutherland Lumber-Southwest, Inc. v. Commissioner, 114 
     T.C. 197 (2000), aff'd, 255 F.3d 495 (8th Cir. 2001).
---------------------------------------------------------------------------
       The exceptions for expenses treated as compensation or 
     otherwise includible income were subsequently modified in the 
     case of specified individuals such that the exceptions apply 
     only to the extent of the amount of expenses treated as 
     compensation or includible in income of the specified 
     individual.\768\ 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 Exchange Act of 1934, or would be 
     subject to such requirements if the employer or service 
     recipient (or related party) were an issuer of equity 
     securities referred to in section 16(a).\769\
---------------------------------------------------------------------------
     \768\ Sec. 274(e)(2)(B)(i). See also Treas. Reg. sec. 1.274-
     9(a).
     \769\ Sec. 274(e)(2)(B)(ii). See also Treas. Reg. sec. 1.274-
     9(b).
---------------------------------------------------------------------------
       As a result, in the case of specified individuals, 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 to the

[[Page 19986]]

     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. However, in the case of other 
     employees or service providers, the company's deduction is 
     not limited to the amount treated as compensation or 
     includible in income.\770\
---------------------------------------------------------------------------
     \770\ See Treas. Reg. sec. 1.274-10(a)(2).
---------------------------------------------------------------------------
     Excludable fringe benefits
       Certain employer-provided fringe benefits are excluded from 
     an employee's gross income and wages for employment tax 
     purposes, including, but not limited to, de minimis fringes, 
     qualified transportation fringes, on-premises athletic 
     facilities, and meals provided for the ``convenience of the 
     employer.'' \771\
---------------------------------------------------------------------------
     \771\ Secs. 132(a), 119(a), 3121(a)(19) and (20), 3231(e)(5) 
     and (9), 3306(b)(14) and (16), and 3401(a)(19).
---------------------------------------------------------------------------
       A de minimis fringe generally means any property or service 
     the value of which is (taking into account the frequency with 
     which similar fringes are provided by the employer) so small 
     as to make accounting for it unreasonable or administratively 
     impracticable,\772\ and also includes food and beverages 
     provided to employees through an eating facility operated by 
     the employer that is located on or near the employer's 
     business premises and meets certain requirements.\773\
---------------------------------------------------------------------------
     \772\ Sec. 132(e)(1). Examples include occasional personal 
     use of an employer's copying machine, occasional parties or 
     meals for employees and their guests, local telephone calls, 
     and coffee, doughnuts and soft drinks. Treas. Reg. sec. 
     1.132-6(e)(1).
     \773\ Sec. 132(e)(2). Revenue derived from such a facility 
     must normally equal or exceed the direct operating costs of 
     the facility. Employees who are entitled, under Section 119, 
     to exclude the value of a meal provided at such a facility 
     are treated as having paid an amount for the meal equal to 
     the direct operating costs of the facility attributable to 
     such meal.
---------------------------------------------------------------------------
       Qualified transportation fringes include qualified parking 
     (parking on or near the employer's business premises or on or 
     near a location from which the employee commutes to work by 
     public transit), transit passes, vanpool benefits, and 
     qualified bicycle commuting reimbursements.\774\
---------------------------------------------------------------------------
     \774\ Sec. 132(f)(1), (5). The qualified transportation 
     fringe exclusions are subject to monthly limits. Sec. 
     132(f)(2).
---------------------------------------------------------------------------
       On-premises athletic facilities are gyms or other athletic 
     facilities located on the employer's premises, operated by 
     the employer, and substantially all the use of which is by 
     employees of the employer, their spouses, and their dependent 
     children.\775\
---------------------------------------------------------------------------
     \775\ Sec. 132(j)(4).
---------------------------------------------------------------------------
       The value of meals furnished to an employee or the 
     employee's spouse or dependents by or on behalf of an 
     employer for the convenience of the employer is excludible 
     from the employee's gross income, but only if such meals are 
     provided on the employer's business premises.\776\
---------------------------------------------------------------------------
     \776\ Sec. 119(a).
---------------------------------------------------------------------------


                               House Bill

       The provision provides that no deduction is allowed with 
     respect to (1) an activity generally considered to be 
     entertainment, amusement or recreation, (2) membership dues 
     with respect to any club organized for business, pleasure, 
     recreation or other social purposes, (3) a de minimis fringe 
     that is primarily personal in nature and involving property 
     or services that are not directly related to the taxpayer's 
     trade or business, (4) a facility or portion thereof used in 
     connection with any of the above items, (5) a qualified 
     transportation fringe, including costs of operating a 
     facility used for qualified parking, and (6) an on-premises 
     athletic facility provided by an employer to its employees, 
     including costs of operating such a facility. Thus, the 
     provision repeals the present-law exception to the deduction 
     disallowance for entertainment, amusement, or recreation that 
     is directly related to (or, in certain cases, associated 
     with) the active conduct of the taxpayer's trade or business 
     (and the related rule applying a 50 percent limit to such 
     deductions). The provision also repeals the present-law 
     exception for recreational, social, or similar activities 
     primarily for the benefit of employees. However, taxpayers 
     may still, generally, deduct 50 percent of the food and 
     beverage expenses associated with operating their trade or 
     business (e.g., meals consumed by employees on work travel).
       Under the provision, in the case of all individuals (not 
     just 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. 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. 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.
       The provision amends the present-law exception for 
     reimbursed expenses. The provision disallows a deduction for 
     amounts paid or incurred by a taxpayer in connection with the 
     performance of services for another person (other than an 
     employer) under a reimbursement or other expense allowance 
     arrangement if the person for whom the services are performed 
     is a tax-exempt entity \777\ or the arrangement is designated 
     by the Secretary as having the effect of avoiding the 50 
     percent deduction disallowance.
---------------------------------------------------------------------------
     \777\ As defined in section 168(h)(2)(A), i.e., Federal, 
     State and local government entities, organizations (other 
     than certain cooperatives) exempt from income tax, any 
     foreign person or entity, and any Indian tribal government.
---------------------------------------------------------------------------
       The provision clarifies that the exception to the 50 
     percent deduction limit for food or beverages applies to any 
     expense excludible from the gross income of the recipient 
     related to meals furnished for the convenience of the 
     employer. The provision thereby repeals as deadwood the 
     special exceptions for food or beverages provided to crew 
     members of certain commercial vessels and certain oil or gas 
     platform or drilling rig workers.
       Effective date.--The provision applies to amounts paid or 
     incurred after December 31, 2017.


                            Senate Amendment

       The provision provides that no deduction is allowed with 
     respect to (1) an activity generally considered to be 
     entertainment, amusement or recreation, (2) membership dues 
     with respect to any club organized for business, pleasure, 
     recreation or other social purposes, or (3) a facility or 
     portion thereof used in connection with any of the above 
     items. Thus, the provision repeals the present-law exception 
     to the deduction disallowance for entertainment, amusement, 
     or recreation that is directly related to (or, in certain 
     cases, associated with) the active conduct of the taxpayer's 
     trade or business (and the related rule applying a 50 percent 
     limit to such deductions).
       In addition, the provision disallows a deduction for 
     expenses associated with providing any qualified 
     transportation fringe to employees of the taxpayer, and 
     except as necessary for ensuring the safety of an employee, 
     any expense incurred for providing transportation (or any 
     payment or reimbursement) for commuting between the 
     employee's residence and place of employment.
       Taxpayers may still generally deduct 50 percent of the food 
     and beverage expenses associated with operating their trade 
     or business (e.g., meals consumed by employees on work 
     travel). For amounts incurred and paid after December 31, 
     2017 and until December 31, 2025, the provision expands this 
     50 percent limitation to expenses of the employer associated 
     with providing food and beverages to employees through an 
     eating facility that meets requirements for de minimis 
     fringes and for the convenience of the employer. Such amounts 
     incurred and paid after December 31, 2025 are not deductible.
       Effective date.--The provision generally applies to amounts 
     paid or incurred after December 31, 2017. However, for 
     expenses of the employer associated with providing food and 
     beverages to employees through an eating facility that meets 
     requirements for de minimis fringes and for the convenience 
     of the employer, amounts paid or incurred after December 31, 
     2025 are not deductible.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     18. Repeal of exclusion, etc., for employee achievement 
         awards (sec. 1403 of the House bill, sec. 13310 of the 
         Senate amendment, and secs. 74(c) and 274(j) of the Code)


                              Present Law

       An employer's deduction for the cost of an employee 
     achievement award is limited to a certain amount.\778\ 
     Employee achievement awards that are deductible by an 
     employer (or would be deductible but for the fact that the 
     employer is a tax-exempt organization) are excludible from an 
     employee's gross income.\779\ Amounts that are excludible 
     from gross income under section 74(c) for income tax purposes 
     are also excluded from wages for employment tax purposes.
---------------------------------------------------------------------------
     \778\ Sec. 274(j).
     \779\ Sec. 74(c).
---------------------------------------------------------------------------
       An employee achievement award is an item of tangible 
     personal property given to an employee in recognition of 
     either length of service or safety achievement and presented 
     as part of a meaningful presentation.


                               House Bill

       The provision repeals the deduction limitation for employee 
     achievement awards. It also repeals the exclusions from gross 
     income and wages.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment adds a definition of ``tangible 
     personal property'' that may be considered a deductible 
     employee achievement award. It provides that tangible 
     personal property shall not include cash, cash equivalents, 
     gift cards, gift coupons or gift certificates (other than 
     arrangements conferring only the right to select and receive 
     tangible personal property from a limited array of such items 
     pre-selected or pre-approved by the employer), or vacations,

[[Page 19987]]

     meals, lodging, tickets to theater or sporting events, 
     stocks, bonds, other securities, and other similar items. No 
     inference is intended that this is a change from present law 
     and guidance.
       Effective date.--The provision applies to amounts paid or 
     incurred after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     9. Unrelated business taxable income increased by amount of 
         certain fringe benefit expenses for which deduction is 
         disallowed (sec. 3308 of the House bill and sec. 512 of 
         the Code)


                              Present Law

     Tax exemption for certain organizations
       Section 501(a) exempts certain organizations from Federal 
     income tax. Such organizations include: (1) tax-exempt 
     organizations described in section 501(c) (including among 
     others section 501(c)(3) charitable organizations and section 
     501(c)(4) social welfare organizations); (2) religious and 
     apostolic organizations described in section 501(d); and (3) 
     trusts forming part of a pension, profit-sharing, or stock 
     bonus plan of an employer described in section 401(a).
     Unrelated business income tax, in general
       The unrelated business income tax (``UBIT'') generally 
     applies to income derived from a trade or business regularly 
     carried on by the organization that is not substantially 
     related to the performance of the organization's tax-exempt 
     functions.\780\ An organization that is subject to UBIT and 
     that has $1,000 or more of gross unrelated business taxable 
     income must report that income on Form 990-T (Exempt 
     Organization Business Income Tax Return).
---------------------------------------------------------------------------
     \780\ Secs. 511-514.
---------------------------------------------------------------------------
       Most exempt organizations may operate an unrelated trade or 
     business so long as the organization remains primarily 
     engaged in activities that further its exempt purposes. 
     Therefore, an organization may engage in a substantial amount 
     of unrelated business activity without jeopardizing its 
     exempt status. A section 501(c)(3) (charitable) organization, 
     however, may not operate an unrelated trade or business as a 
     substantial part of its activities.\781\ Therefore, the 
     unrelated trade or business activity of a section 501(c)(3) 
     organization must be insubstantial.
---------------------------------------------------------------------------
     \781\ Treas. Reg. sec. 1.501(c)(3)-1(e).
---------------------------------------------------------------------------
       An organization determines its unrelated business taxable 
     income by subtracting from its gross unrelated business 
     income deductions directly connected with the unrelated trade 
     or business.\782\ Under regulations, in determining unrelated 
     business taxable income, an organization that operates 
     multiple unrelated trades or businesses aggregates income 
     from all such activities and subtracts from the aggregate 
     gross income the aggregate of deductions.\783\ As a result, 
     an organization may use a loss from one unrelated trade or 
     business to offset gain from another, thereby reducing total 
     unrelated business taxable income.
---------------------------------------------------------------------------
     \782\ Sec. 512(a).
     \783\ Treas. Reg. sec. 1.512(a)-1(a).
---------------------------------------------------------------------------
     Organizations subject to tax on unrelated business income
       Most exempt organizations are subject to the tax on 
     unrelated business income. Specifically, organizations 
     subject to the unrelated business income tax generally 
     include: (1) organizations exempt from tax under section 
     501(a), including organizations described in section 501(c) 
     (except for U.S. instrumentalities and certain charitable 
     trusts); (2) qualified pension, profit-sharing, and stock 
     bonus plans described in section 401(a); and (3) certain 
     State colleges and universities.\784\
---------------------------------------------------------------------------
     \784\ Sec. 511(a)(2).
---------------------------------------------------------------------------
     Exclusions from Unrelated Business Taxable Income
       Certain types of income are specifically exempt from 
     unrelated business taxable income, such as dividends, 
     interest, royalties, and certain rents,\785\ unless derived 
     from debt-financed property or from certain 50-percent 
     controlled subsidiaries.\786\ Other exemptions from UBIT are 
     provided for activities in which substantially all the work 
     is performed by volunteers, for income from the sale of 
     donated goods, and for certain activities carried on for the 
     convenience of members, students, patients, officers, or 
     employees of a charitable organization. In addition, special 
     UBIT provisions exempt from tax activities of trade shows and 
     State fairs, income from bingo games, and income from the 
     distribution of low-cost items incidental to the solicitation 
     of charitable contributions. Organizations liable for tax on 
     unrelated business taxable income may be liable for 
     alternative minimum tax determined after taking into account 
     adjustments and tax preference items.
---------------------------------------------------------------------------
     \785\ Secs. 511-514.
     \786\ Sec. 512(b)(13).
---------------------------------------------------------------------------


                               House Bill

       Under the provision, unrelated business taxable income 
     includes any expenses paid or incurred by a tax exempt 
     organization for qualified transportation fringe benefits (as 
     defined in section 132(f)), a parking facility used in 
     connection with qualified parking (as defined in section 
     132(f)(5)(C)), or any on-premises athletic facility (as 
     defined in section 132(j)(4)(B)), provided such amounts are 
     not deductible under section 274.
       Effective date.--The provision is effective for amounts 
     paid or incurred after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill.
     10. Limitation on deduction for FDIC premiums (sec. 3309 of 
         the House bill, sec. 13531 of the Senate amendment, and 
         sec. 162 of the Code)


                              Present Law

       Corporations organized under the laws of any of the 50 
     States (and the District of Columbia) generally are subject 
     to the U.S. corporate income tax on their worldwide taxable 
     income. The taxable income of a C corporation \787\ generally 
     comprises gross income less allowable deductions. A taxpayer 
     generally is allowed a deduction for ordinary and necessary 
     expenses paid or incurred in carrying on any trade or 
     business.\788\
---------------------------------------------------------------------------
     \787\ Corporations subject to tax are commonly referred to as 
     C corporations after subchapter C of the Code, which sets 
     forth corporate tax rules. Certain specialized entities that 
     invest primarily in real estate related assets (real estate 
     investment trusts) or in stock and securities (regulated 
     investment companies) and that meet other requirements, 
     generally including annual distribution of 90 percent of 
     their income, are allowed to deduct their distributions to 
     shareholders, thus generally paying little or no corporate-
     level tax despite otherwise being subject to subchapter C.
     \788\ Sec. 162(a). However, certain exceptions apply. No 
     deduction is allowed for (1) any charitable contribution or 
     gift that would be allowable as a deduction under section 170 
     were it not for the percentage limitations, the dollar 
     limitations, or the requirements as to the time of payment, 
     set forth in such section; (2) any illegal bribe, illegal 
     kickback, or other illegal payment; (3) certain lobbying and 
     political expenditures; (4) any fine or similar penalty paid 
     to a government for the violation of any law; (5) two-thirds 
     of treble damage payments under the antitrust laws; (6) 
     certain foreign advertising expenses; (7) certain amounts 
     paid or incurred by a corporation in connection with the 
     reacquisition of its stock or of the stock of any related 
     person; or (8) certain applicable employee remuneration.
---------------------------------------------------------------------------
       Corporations that make a valid election pursuant to section 
     1362 of subchapter S of the Code, referred to as S 
     corporations, generally are not subject to corporate-level 
     income tax on its items of income and loss. Instead, an S 
     corporation passes through to shareholders its items of 
     income and loss. The shareholders separately take into 
     account their shares of these items on their individual 
     income tax returns.
     Banks, thrifts, and credit unions
       In general
       Financial institutions are subject to the same Federal 
     income tax rules and rates as are applied to other 
     corporations or entities, with specified exceptions.
       C corporation banks and thrifts
       A bank is generally taxed for Federal income tax purposes 
     as a C corporation. For this purpose a bank generally means a 
     corporation, a substantial portion of whose business is 
     receiving deposits and making loans and discounts, or 
     exercising certain fiduciary powers.\789\ A bank for this 
     purpose generally includes domestic building and loan 
     associations, mutual stock or savings banks, and certain 
     cooperative banks that are commonly referred to as 
     thrifts.\790\
---------------------------------------------------------------------------
     \789\ Sec. 581. See also Treas. Reg. sec. 1.581-1(a).
     \790\ While the general principles for determining the 
     taxable income of a corporation are applicable to a mutual 
     savings bank, a building and loan association, and a 
     cooperative bank, there are certain exceptions and special 
     rules for such institutions. Treas. Reg. sec. 1.581-2(a).
---------------------------------------------------------------------------
       S corporation banks
       A bank is generally eligible to elect S corporation status 
     under section 1362, provided it meets the other requirements 
     for making this election and it does not use the reserve 
     method of accounting for bad debts as described in section 
     585.\791\
---------------------------------------------------------------------------
     \791\ Sec. 1361(b)(2)(A).
---------------------------------------------------------------------------
       Special bad debt loss rules for small banks
       Section 166 provides a deduction for any debt that becomes 
     worthless (wholly or partially) within a taxable year. The 
     reserve method of accounting for bad debts, repealed in 1986 
     \792\ for most taxpayers, is allowed under section 585 for 
     any bank (as defined in section 581) other than a large bank. 
     For this purpose, a bank is a large bank if, for the taxable 
     year (or for any preceding taxable year after 1986), the 
     average adjusted basis of all its assets (or the assets of 
     the controlled group of which it is a member) exceeds $500 
     million. Deductions for reserves are taken in lieu of a 
     worthless debt deduction under section 166. Accordingly, a 
     small bank is able to take deductions for additions to a bad 
     debt reserve. Additions to the reserve are determined under 
     an experience method that generally looks to the ratio of (1) 
     the total bad debts sustained during the taxable year and the 
     five preceding taxable years to (2) the sum of the loans 
     outstanding at the close of such taxable years.\793\
---------------------------------------------------------------------------
     \792\ Tax Reform Act of 1986, Pub. L. No. 99-514.
     \793\ Sec. 585(b)(2).

[[Page 19988]]


       Credit unions
       Credit unions are exempt from Federal income taxation.\794\ 
     The exemption is based on their status as not-for-profit 
     mutual or cooperative organizations (without capital stock) 
     operated for the benefit of their members, who generally must 
     share a common bond. The definition of common bond has been 
     expanded to permit greater use of credit unions.\795\ While 
     significant differences between the rules under which credit 
     unions and banks operate have existed in the past, most of 
     those differences have disappeared over time.\796\
---------------------------------------------------------------------------
     \794\ Sec. 501(c)(14)(A). For a discussion of the history of 
     and reasons for Federal tax exemption, see United States 
     Department of the Treasury, Comparing Credit Unions with 
     Other Depository Institutions, Report 3070, January 15, 2001, 
     available at https://www.treasury.gov/press-center/press-
releases/
Documents/report30702.doc.
     \795\ The Credit Union Membership Access Act, Pub. L. No. 
     105-219, allows multiple common bond credit unions. The 
     legislation in part responds to National Credit Union 
     Administration v. First National Bank & Trust Co., 522 U.S. 
     479 (1998), which interpreted the permissible membership of 
     tax-exempt credit unions narrowly.
     \796\ The Treasury Department has concluded that any 
     remaining regulatory differences do not raise competitive 
     equity concerns between credit unions and banks. United 
     States Department of the Treasury, Comparing Credit Unions 
     with Other Depository Institutions, Report 3070, January 15, 
     2001, p. 2, available at https://www.treasury.gov/press-
center/press-releases/Documents/report30702.doc.
---------------------------------------------------------------------------
     FDIC premiums
       The Federal Deposit Insurance Corporation (``FDIC'') 
     provides deposit insurance for banks and savings 
     institutions. To maintain its status as an insured depository 
     institution, a bank must pay semiannual assessments into the 
     deposit insurance fund (``DIF''). Assessments for deposit 
     insurance are treated as ordinary and necessary business 
     expenses. These assessments, also known as premiums, are 
     deductible once the all events test for the premium is 
     satisfied.\797\
---------------------------------------------------------------------------
     \797\ Technical Advice Memorandum 199924060, March 5, 1999, 
     and Rev. Rul. 80-230, 1980-2 C.B. 169, 1980.
---------------------------------------------------------------------------


                               House Bill

       No deduction is allowed for the applicable percentage of 
     any FDIC premium paid or incurred by the taxpayer. For 
     taxpayers with total consolidated assets of $50 billion or 
     more, the applicable percentage is 100 percent. Otherwise, 
     the applicable percentage is the ratio of the excess of total 
     consolidated assets over $10 billion to $40 billion. For 
     example, for a taxpayer with total consolidated assets of $20 
     billion, no deduction is allowed for 25 percent of FDIC 
     premiums. The provision does not apply to taxpayers with 
     total consolidated assets (as of the close of the taxable 
     year) that do not exceed $10 billion.
       FDIC premium means any assessment imposed under section 
     7(b) of the Federal Deposit Insurance Act.\798\ The term 
     total consolidated assets has the meaning given such term 
     under section 165 of the Dodd-Frank Wall Street Reform and 
     Consumer Protection Act.\799\
---------------------------------------------------------------------------
     \798\ 12 U.S.C. sec. 1817(b).
     \799\ Pub. L. No. 111-203.
---------------------------------------------------------------------------
       For purposes of determining a taxpayer's total consolidated 
     assets, members of an expanded affiliated group are treated 
     as a single taxpayer. An expanded affiliated group means an 
     affiliated group as defined in section 1504(a), determined by 
     substituting ``more than 50 percent'' for ``at least 80 
     percent'' each place it appears and without regard to the 
     exceptions from the definition of includible corporation for 
     insurance companies and foreign corporations. A partnership 
     or any other entity other than a corporation is treated as a 
     member of an expanded affiliated group if such entity is 
     controlled by members of such group.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment follows the House bill.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     11. Repeal of rollover of publicly traded securities gain 
         into specialized small business investment companies 
         (sec. 3310 of the House bill and sec. 1044 of the Code)


                              Present Law

       A corporation or individual may elect to roll over tax-free 
     any capital gain realized on the sale of publicly-traded 
     securities to the extent of the taxpayer's cost of purchasing 
     common stock or a partnership interest in a specialized small 
     business investment company within 60 days of the sale.\800\ 
     The amount of gain that an individual may elect to roll over 
     under this provision for a taxable year is limited to (1) 
     $50,000 or (2) $500,000 reduced by the gain previously 
     excluded under this provision.\801\ For corporations, these 
     limits are $250,000 and $1 million, respectively.\802\
---------------------------------------------------------------------------
     \800\ Sec. 1044(a).
     \801\ Sec. 1044(b)(1).
     \802\ Sec. 1044(b)(2).
---------------------------------------------------------------------------


                               House Bill

       The House bill repeals the election described above to roll 
     over tax-free capital gain realized on the sale of publicly-
     traded securities.
       Effective date.--The provision applies to sales after 
     December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill.
     12. Certain self-created property not treated as a capital 
         asset (sec. 3311 of the House bill and sec. 1221 of the 
         Code)


                              Present Law

       In general, property held by a taxpayer (whether or not 
     connected with his trade or business) is considered a capital 
     asset.\803\ Certain assets, however, are specifically 
     excluded from the definition of capital asset. Such excluded 
     assets are: inventory property, property of a character 
     subject to depreciation (including real property),\804\ 
     certain self-created intangibles, accounts or notes 
     receivable acquired in the ordinary course of business (e.g., 
     for providing services or selling property), publications of 
     the U.S. Government received by a taxpayer other than by 
     purchase at the price offered to the public, commodities 
     derivative financial instruments held by a commodities 
     derivatives dealer unless established to the satisfaction of 
     the Secretary that any such instrument has no connection to 
     the activities of such dealer as a dealer and clearly 
     identified as such before the close of the day on which it 
     was acquired, originated, or entered into, hedging 
     transactions clearly identified as such, and supplies 
     regularly used or consumed by the taxpayer in the ordinary 
     course of a trade or business of the taxpayer.\805\
---------------------------------------------------------------------------
     \803\ Sec. 1221(a).
     \804\ The net gain from the sale, exchange, or involuntary 
     conversion of certain property used in the taxpayer's trade 
     or business (in excess of depreciation recapture) is treated 
     as long-term capital gain. Sec. 1231. However, net gain from 
     such property is treated as ordinary income to the extent 
     that losses from such property in the previous five years 
     were treated as ordinary losses. Sec. 1231(c).
     \805\ Sec. 1221(a)(1)-(8).
---------------------------------------------------------------------------
       Self-created intangibles subject to the exception are 
     copyrights, literary, musical, or artistic compositions, 
     letters or memoranda, or similar property which is held 
     either by the taxpayer who created the property, or (in the 
     case of a letter, memorandum, or similar property) a taxpayer 
     for whom the property was produced.\806\ For the purpose of 
     determining gain, a taxpayer with a substituted or 
     transferred basis from the taxpayer who created the property, 
     or for whom the property was created, also is subject to the 
     exception.\807\ However, a taxpayer may elect to treat 
     musical compositions and copyrights in musical works as 
     capital assets.\808\
---------------------------------------------------------------------------
     \806\ Sec. 1221(a)(3)(A) and (B).
     \807\ Sec. 1221(a)(3)(C).
     \808\ Sec. 1221(b)(3). Thus, if a taxpayer who owns musical 
     compositions or copyrights in musical works that the taxpayer 
     created (or if a taxpayer to which the musical compositions 
     or copyrights have been transferred by the works' creator in 
     a substituted basis transaction) elects the application of 
     this provision, gain from a sale of the compositions or 
     copyrights is treated as capital gain, not ordinary income.
---------------------------------------------------------------------------
       Since the intent of Congress is that profits and losses 
     arising from everyday business operations be characterized as 
     ordinary income and loss, the general definition of capital 
     asset is narrowly applied and the categories of exclusions 
     are broadly interpreted.\809\
---------------------------------------------------------------------------
     \809\ Corn Products Refining Co. v. Commissioner, 350 U.S. 
     46, 52 (1955).
---------------------------------------------------------------------------


                               House Bill

       This provision amends section 1221(a)(3), resulting in the 
     exclusion of a patent, invention, model or design (whether or 
     not patented), and a secret formula or process which is held 
     either by the taxpayer who created the property or a taxpayer 
     with a substituted or transferred basis from the taxpayer who 
     created the property (or for whom the property was created) 
     from the definition of a ``capital asset.'' Thus, gains or 
     losses from the sale or exchange of a patent, invention, 
     model or design (whether or not patented), or a secret 
     formula or process which is held either by the taxpayer who 
     created the property or a taxpayer with a substituted or 
     transferred basis from the taxpayer who created the property 
     (or for whom the property was created) will not receive 
     capital gain treatment.
       Effective date.--The provision applies to dispositions 
     after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill.
     13. Repeal of special rule for sale or exchange of patents 
         (sec. 3312 of the House bill and sec. 1235 of the Code))


                              Present Law

       Section 1235 provides that a transfer \810\ of all 
     substantial rights to a patent, or an undivided interest 
     therein which includes a part of all such rights, by any 
     holder shall be considered the sale or exchange of a capital 
     asset held for more than one year, regardless of whether or 
     not payments in consideration of such transfer are (1) 
     payable periodically

[[Page 19989]]

     over a period generally conterminous with the transferee's 
     use of the patent, or (2) contingent on the productivity, 
     use, or disposition of the property transferred.\811\
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     \810\ A transfer by gift, inheritance, or devise is not 
     included.
     \811\ Sec. 1235(a).
---------------------------------------------------------------------------
       A holder is defined as (1) any individual whose efforts 
     created such property, or (2) any other individual who has 
     acquired his interest in such property in exchange for 
     consideration in money or money's worth paid to such creator 
     prior to actual reduction to practice of the invention 
     covered by the patent, if such individual is neither the 
     employer of such creator nor related (as defined) to such 
     creator.\812\
---------------------------------------------------------------------------
     \812\ Sec. 1235(b).
---------------------------------------------------------------------------


                               House Bill

       The provision repeals section 1235. Thus, the holder of a 
     patented invention may not transfer his or her rights to the 
     patent and treat amounts received as proceeds from the sale 
     of a capital asset. It is intended that the determination of 
     whether a transfer is a sale or exchange of a capital asset 
     that produces capital gain, or a transaction that produces 
     ordinary income, will be determined under generally 
     applicable principles.\813\
---------------------------------------------------------------------------
     \813\ See also section 3311 of the House bill (Certain self-
     created property not treated as a capital asset).
---------------------------------------------------------------------------
       Effective date.--The provision applies to dispositions 
     after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.
     14. Repeal of technical termination of partnerships (sec. 
         3313 of the House bill and sec. 708(b) of the Code)


                              Present Law

       A partnership is considered as terminated under specified 
     circumstances.\814\ Special rules apply in the case of the 
     merger, consolidation, or division of a partnership.\815\
---------------------------------------------------------------------------
     \814\ Sec. 708(b)(1).
     \815\ Sec. 708(b)(2). Mergers, consolidations, and divisions 
     of partnerships take either an assets-over form or an assets-
     up form pursuant to Treas. Reg. sec. 1.708-1(c).
---------------------------------------------------------------------------
       A partnership is treated as terminated if no part of any 
     business, financial operation, or venture of the partnership 
     continues to be carried on by any of its partners in a 
     partnership.\816\
---------------------------------------------------------------------------
     \816\ Sec. 708(b)(1)(A).
---------------------------------------------------------------------------
       A partnership is also treated as terminated if within any 
     12-month period, there is a sale or exchange of 50 percent or 
     more of the total interest in partnership capital and 
     profits.\817\ This is sometimes referred to as a technical 
     termination. Under regulations, the technical termination 
     gives rise to a deemed contribution of all the partnership's 
     assets and liabilities to a new partnership in exchange for 
     an interest in the new partnership, followed by a deemed 
     distribution of interests in the new partnership to the 
     purchasing partners and the other remaining partners.\818\
---------------------------------------------------------------------------
     \817\ Sec. 708(b)(1)(B).
     \818\ Treas. Reg. sec. 1.708-1(b)(4).
---------------------------------------------------------------------------
       The effect of a technical termination is not necessarily 
     the end of the partnership's existence, but rather the 
     termination of some tax attributes. Upon a technical 
     termination, the partnership's taxable year closes, 
     potentially resulting in short taxable years.\819\ 
     Partnership-level elections generally cease to apply 
     following a technical termination.\820\ A technical 
     termination generally results in the restart of partnership 
     depreciation recovery periods.
---------------------------------------------------------------------------
     \819\ Sec. 706(c)(1); Treas. Reg. sec. 1.708-1(b)(3).
     \820\ Partnership level elections include, for example, the 
     section 754 election to adjust basis on a transfer or 
     distribution, as well as other elections that determine the 
     partnership's tax treatment of partnership items. A list of 
     elections can be found at William S. McKee, William F. 
     Nelson, and Robert L. Whitmire, Federal Taxation of 
     Partnerships and Partners, 4th edition, para. 9.01[7], pp. 9-
     42--9-44.
---------------------------------------------------------------------------


                               House Bill

       The provision repeals the section 708(b)(1)(B) rule 
     providing for technical terminations of partnerships. The 
     provision does not change the present-law rule of section 
     708(b)(1)(A) that a partnership is considered as terminated 
     if no part of any business, financial operation, or venture 
     of the partnership continues to be carried on by any of its 
     partners in a partnership.
       Effective date.--The provision applies to partnership 
     taxable years beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill.
     15. Recharacterization of certain gains in the case of 
         partnership profits interests held in connection with 
         performance of investment services (sec. 3314 of the 
         House bill, sec. 13310 of the Senate amendment, and secs. 
         1061 and 83 of the Code)


                              Present Law

     Partnership profits interest for services
       A profits interest in a partnership is the right to receive 
     future profits in the partnership but does not generally 
     include any right to receive money or other property upon the 
     immediate liquidation of the partnership. The treatment of 
     the receipt of a profits interest in a partnership (sometimes 
     referred to as a carried interest) in exchange for the 
     performance of services has been the subject of controversy. 
     Though courts have differed, in some instances, a taxpayer 
     receiving a profits interest for performing services has not 
     been taxed upon the receipt of the partnership interest.\821\
---------------------------------------------------------------------------
     \821\ Only a handful of cases have addressed this issue. 
     Though one case required the value to be included currently, 
     where value was easily determined by a sale of the profits 
     interest soon after receipt (Diamond v. Commissioner, 56 T.C. 
     530 (1971), aff'd 492 F.2d 286 (7th Cir. 1974)), a more 
     recent case concluded that partnership profits interests were 
     not includable on receipt, because the profits interests were 
     speculative and without fair market value (Campbell v. 
     Commissioner, 943 F. 2d 815 (8th Cir. 1991)).
---------------------------------------------------------------------------
       In 1993, the Internal Revenue Service, referring to the 
     litigation of the tax treatment of receiving a partnership 
     profits interest and the results in the cases, issued 
     administrative guidance that the IRS generally would treat 
     the receipt of a partnership profits interest for services as 
     not a taxable event for the partnership or the partner.\822\ 
     Under this guidance, this treatment does not apply, however, 
     if: (1) the profits interest relates to a substantially 
     certain and predictable stream of income from partnership 
     assets, such as income from high-quality debt securities or a 
     high-quality net lease; (2) within two years of receipt, the 
     partner disposes of the profits interest; or (3) the profits 
     interest is a limited partnership interest in a publicly 
     traded partnership. More recent administrative guidance \823\ 
     clarifies that this treatment applies with respect to 
     substantially unvested profits interests provided the service 
     partner takes into income his distributive share of 
     partnership income, and the partnership does not deduct any 
     amount either on grant or on vesting of the profits 
     interest.\824\
---------------------------------------------------------------------------
     \822\ Rev. Proc. 93-27 (1993-2 C.B. 343), citing the Diamond 
     and Campbell cases, supra.
     \823\ Rev. Proc. 2001-43 (2001-2 C.B. 191). This result 
     applies under the guidance even if the interest is 
     substantially nonvested on the date of grant.
     \824\ A similar result would occur under the ``safe harbor'' 
     election under proposed regulations regarding the application 
     of section 83 to the compensatory transfer of a partnership 
     interest. REG-105346-03, 70 Fed. Reg. 29675 (May 24, 2005).
---------------------------------------------------------------------------
       By contrast, a partnership capital interest received for 
     services is includable in the partner's income under 
     generally applicable rules relating to the receipt of 
     property for the performance of services.\825\ A partnership 
     capital interest for this purpose is an interest that would 
     entitle the receiving partner to a share of the proceeds if 
     the partnership's assets were sold at fair market value and 
     the proceeds were distributed in liquidation.\826\
---------------------------------------------------------------------------
     \825\ Secs. 61 and 83; Treas. Reg. sec. 1.721-1(b)(1); see 
     U.S. v. Frazell, 335 F.2d 487 (5th Cir. 1964), cert. denied, 
     380 U.S. 961 (1965).
     \826\ Rev. Proc. 93-27, 1993-2 C.B. 343.
---------------------------------------------------------------------------
     Property received for services under section 83
       In general
       Section 83 governs the amount and timing of income and 
     deductions attributable to transfers of property in 
     connection with the performance of services. If property is 
     transferred in connection with the performance of services, 
     the person performing the services (the ``service provider'') 
     generally must recognize income for the taxable year in which 
     the property is first substantially vested (i.e., 
     transferable or not subject to a substantial risk of 
     forfeiture).\827\ The amount includible in the service 
     provider's income is the excess of the fair market value of 
     the property over the amount (if any) paid for the property. 
     A deduction is allowed to the person for whom such services 
     are performed (the ``service recipient'') equal to the amount 
     included in gross income by the service provider.\828\ The 
     deduction is allowed for the taxable year of the service 
     recipient in which or with which ends the taxable year in 
     which the amount is included in the service provider's 
     income.
---------------------------------------------------------------------------
     \827\ The Department of Treasury has issued proposed 
     regulations regarding the application of section 83 to the 
     compensatory transfer of a partnership interest. 70 Fed. Reg. 
     29675 (May 24, 2005). The proposed regulations provide that a 
     partnership interest is ``property'' for purposes of section 
     83. Thus, a compensatory transfer of a partnership interest 
     is includible in the service provider's gross income at the 
     time that it first becomes substantially vested (or, in the 
     case of a substantially nonvested partnership interest, at 
     the time of grant if a section 83(b) election is made). 
     However, because the fair market value of a compensatory 
     partnership interest is often difficult to determine, the 
     proposed regulations also permit a partnership and a partner 
     to elect a safe harbor under which the fair market value of a 
     compensatory partnership interest is treated as being equal 
     to the liquidation value of that interest. Therefore, in the 
     case of a true profits interest in a partnership (one under 
     which the partner would be entitled to nothing if the 
     partnership were liquidated immediately following the grant), 
     under the proposed regulations, the grant of a substantially 
     vested profits interest (or, if a section 83(b) election is 
     made, the grant of a substantially nonvested profits 
     interest) results in no income inclusion under section 83 
     because the fair market value of the property received by the 
     service provider is zero. The proposed safe harbor is subject 
     to a number of conditions. For example, the election cannot 
     be made retroactively and must apply to all compensatory 
     partnership transfers that occur during the period that the 
     election is in effect.
     \828\ Sec. 83(h).
---------------------------------------------------------------------------
       Property that is subject to a substantial risk of 
     forfeiture and that is not transferable is generally referred 
     to as ``substantially nonvested.'' Property is subject to a 
     substantial risk of forfeiture if the individual's right

[[Page 19990]]

     to the property is conditioned on the future performance (or 
     refraining from performance) of substantial services. In 
     addition, a substantial risk of forfeiture exists if the 
     right to the property is subject to a condition other than 
     the performance of services, provided that the condition 
     relates to a purpose of the transfer and there is a 
     substantial possibility that the property will be forfeited 
     if the condition does not occur.
       Section 83(b) election
       Under section 83(b), even if the property is substantially 
     nonvested at the time of transfer, the service provider may 
     nevertheless elect within 30 days of the transfer to 
     recognize income for the taxable year of the transfer. Such 
     an election is referred to as a ``section 83(b) election.'' 
     The service provider makes an election by filing with the IRS 
     a written statement that includes the fair market value of 
     the property at the time of transfer and the amount (if any) 
     paid for the property. The service provider must also provide 
     a copy of the statement to the service recipient.
     Passthrough tax treatment of partnerships
       The character of partnership items passes through to the 
     partners, as if the items were realized directly by the 
     partners.\829\ Thus, for example, long-term capital gain of 
     the partnership is treated as long-term capital gain in the 
     hands of the partners.
---------------------------------------------------------------------------
     \829\ Sec. 702.
---------------------------------------------------------------------------
       A partner holding a partnership interest includes in income 
     its distributive share (whether or not actually distributed) 
     of partnership items of income and gain, including capital 
     gain eligible for the lower tax rates. A partner's basis in 
     the partnership interest is increased by any amount of gain 
     thus included and is decreased by losses. These basis 
     adjustments prevent double taxation of partnership income to 
     the partner, preserving the partnership's tax status as a 
     passthrough entity. Money distributed to the partner by the 
     partnership is taxed to the extent the amount exceeds the 
     partner's basis in the partnership interest.
     Net long-term capital gain
       In the case of an individual, estate, or trust, any 
     adjusted net capital gain which otherwise would be taxed at 
     the 10- or 15-percent rate is not taxed. Any adjusted net 
     capital gain which otherwise would be taxed at rates over 15 
     percent and below 39.6 percent is taxed at a 15-percent rate. 
     Any adjusted net capital gain which otherwise would be taxed 
     at a 39.6-percent rate is taxed at a 20-percent rate.\830\
---------------------------------------------------------------------------
     \830\ Sec. 1. Other rates apply to certain types of gain. The 
     unrecaptured section 1250 gain is taxed at a maximum rate of 
     25 percent, and 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. In 
     addition, a tax is imposed on net investment income in the 
     case of an individual, estate, or trust. In the case of an 
     individual, the tax is 3.8 percent of the lesser of net 
     investment income, which includes gains and dividends, or the 
     excess of modified adjusted gross income over the threshold 
     amount. The threshold amount is $250,000 in the case of a 
     joint return or surviving spouse, $125,000 in the case of a 
     married individual filing a separate return, and $200,000 in 
     the case of any other individual.
---------------------------------------------------------------------------
       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,\831\ any gain generally is included in income.
---------------------------------------------------------------------------
     \831\ Sec. 1221. 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 available under the 
     straight-line method of depreciation.
---------------------------------------------------------------------------
       Short-term capital gain means gain from the sale or 
     exchange of a capital asset held for not more than one year, 
     if and to the extent such gain is taken into account in 
     computing gross income. Net short-term capital loss means the 
     excess of short term capital losses for the taxable year over 
     the short-term capital gains for the taxable year.
       Net long-term capital gain means the excess of long-term 
     capital gains for the taxable year over the long-term capital 
     losses for the taxable year.
       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.
       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.\832\
---------------------------------------------------------------------------
     \832\ Sec. 163(d).
---------------------------------------------------------------------------


                               House Bill

     General rule
       The provision provides for a three-year holding period in 
     the case of certain net long-term capital gain with respect 
     to any applicable partnership interest held by the taxpayer.
       Section 83 (relating to property transferred in connection 
     with performance of services) does not apply to the transfer 
     of a partnership interest to which the provision applies.
     Short-term capital gain
       The provision treats as short-term capital gain taxed at 
     ordinary income rates the amount of the taxpayer's net long-
     term capital gain with respect to an applicable partnership 
     interest for the taxable year that exceeds the amount of such 
     gain calculated as if a three-year (not one-year) holding 
     period applies. In making this calculation, the provision 
     takes account of long-term capital losses calculated as if a 
     three-year holding period applies.
       A special rule provides that, as provided in regulations or 
     other guidance issued by the Secretary, this rule does not 
     apply to income or gain attributable to any asset that is not 
     held for portfolio investment on behalf of third party 
     investors. Third party investor means a person (1) who holds 
     an interest in the partnership that is not property held in 
     connection with an applicable trade or business (defined 
     below) with respect to that person, and (2) who is not and 
     has not been actively engaged in directly or indirectly 
     providing substantial services for the partnership or any 
     applicable trade or business (and is (or was) not related to 
     a person so engaged). A related person for this purpose is a 
     family member (within the meaning of attribution rules \833\) 
     or colleague, that is a person who performed a service within 
     the current calendar year or the preceding three calendar 
     years in any applicable trade or business in which or for 
     which the taxpayer performed a service.
---------------------------------------------------------------------------
     \833\ Sec. 318(a)(1).
---------------------------------------------------------------------------
     Applicable partnership interest
       An applicable partnership interest is any interest in a 
     partnership that, directly or indirectly, is transferred to 
     (or held by) the taxpayer in connection with performance of 
     services in any applicable trade or business. The services 
     may be performed by the taxpayer or by any other related 
     person or persons in any applicable trade or business. It is 
     intended that partnership interests shall not fail to be 
     treated as transferred or held in connection with the 
     performance of services merely because the taxpayer also made 
     contributions to the partnership, and the Treasury Department 
     is directed to provide guidance implementing this intent. An 
     applicable partnership interest does not include an interest 
     held by a person who is employed by another entity that is 
     conducting a trade or business (which is not an applicable 
     trade or business) and who provides services only to the 
     other entity.
       An applicable partnership interest does not include an 
     interest in a partnership directly or indirectly held by a 
     corporation. For example, if two corporations form a 
     partnership to conduct a joint venture for developing and 
     marketing a pharmaceutical product, the partnership interests 
     held by the two corporations are not applicable partnership 
     interests.
       An applicable partnership interest does not include any 
     capital interest in a partnership giving the taxpayer a right 
     to share in partnership capital commensurate with the amount 
     of capital contributed (as of the time the partnership 
     interest was received), or commensurate with the value of the 
     partnership interest that is taxed under section 83 on 
     receipt or vesting of the partnership interest. For example, 
     in the case of a partner who holds a capital interest in the 
     partnership with respect to capital he or she contributed to 
     the partnership, if the partnership agreement provides that 
     the partner's share of partnership capital is commensurate 
     with the amount of capital he or she contributed (as of the 
     time the partnership interest was received) compared to total 
     partnership capital, the partnership interest is not an 
     applicable partnership interest to that extent.
       Applicable trade or business
       An applicable trade or business means any activity 
     (regardless of whether the activity are conducted in one or 
     more entities) that consists in whole or in part of the 
     following: (1) raising or returning capital, and either (2) 
     investing in (or disposing of) specified assets (or 
     identifying specified assets for investing or disposition), 
     or (3) developing specified assets.
       Developing specified assets takes place, for example, if it 
     is represented to investors, lenders, regulators, or others 
     that the value, price, or yield of a portfolio business may 
     be enhanced or increased in connection with choices or 
     actions of a service provider or of others acting in concert 
     with or at the direction of a service provider. Services 
     performed as an employee of an applicable trade or business 
     are treated as performed in an applicable trade or business 
     for purposes of this rule. Merely voting shares owned does 
     not amount to development; for example, a mutual fund that 
     merely votes proxies received with respect to shares of stock 
     it holds is not engaged in development.

[[Page 19991]]


       Specified assets
       Under the provision, specified assets means securities 
     (generally as defined under rules for mark-to-market 
     accounting for securities dealers), commodities (as defined 
     under rules for mark-to-market accounting for commodities 
     dealers), real estate held for rental or investment, cash or 
     cash equivalents, options or derivative contracts with 
     respect to such securities, commodities, real estate, cash or 
     cash equivalents, as well as an interest in a partnership to 
     the extent of the partnership's proportionate interest in the 
     foregoing. A security for this purpose means any (1) share of 
     corporate stock, (2) partnership interest or beneficial 
     ownership interest in a widely held or publicly traded 
     partnership or trust, (3) note, bond, debenture, or other 
     evidence of indebtedness, (4) interest rate, currency, or 
     equity notional principal contract, (5) interest in, or 
     derivative financial instrument in, any such security or any 
     currency (regardless of whether section 1256 applies to the 
     contract), and (6) position that is not such a security and 
     is a hedge with respect to such a security and is clearly 
     identified. A commodity for this purpose means any (1) 
     commodity that is actively traded, (2) notional principal 
     contract with respect to such a commodity, (3) interest in, 
     or derivative financial instrument in, such a commodity or 
     notional principal contract, or (4) position that is not such 
     a commodity and is a hedge with respect to such a commodity 
     and is clearly identified. For purposes of the provision, 
     real estate held for rental or investment does not include, 
     for example, real estate on which the holder operates an 
     active farm.
       A partnership interest, for purposes of determining the 
     proportionate interest of a partnership in any specified 
     asset, includes any partnership interest that is not 
     otherwise treated as a security for purposes of the provision 
     (for example, an interest in a partnership that is not widely 
     held or publicly traded). For example, assume that a hedge 
     fund acquires an interest in an operating business conducted 
     in the form of a non-publicly traded partnership that is not 
     widely held; the partnership interest is a specified asset 
     for purposes of the provision.
     Transfer of applicable partnership interest to related person
       If a taxpayer transfers any applicable partnership 
     interest, directly or indirectly, to a person related to the 
     taxpayer, then the taxpayer includes in gross income as 
     short-term capital gain so much of the taxpayer's net long-
     term capital gain attributable to the sale or exchange of an 
     asset held for not more than three years as is allocable to 
     the interest. The amount included as short-term capital gain 
     on the transfer is reduced by the amount treated as short-
     term capital gain on the transfer for the taxable year under 
     the general rule of the provision (that is, amounts are not 
     double-counted). A related person for this purpose is a 
     family member (within the meaning of attribution rules \834\) 
     or colleague, that is a person who performed a service within 
     the current calendar year or the preceding three calendar 
     years in any applicable trade or business in which or for 
     which the taxpayer performed a service.
---------------------------------------------------------------------------
     \834\ Sec. 318(a)(1).
---------------------------------------------------------------------------
     Reporting requirement
       The Secretary is directed to require reporting (at the time 
     in the manner determined by the Secretary) necessary to carry 
     out the purposes of the provision. The penalties otherwise 
     applicable to a failure to report to partners under section 
     6031(b) apply to failure to report under this requirement.
     Regulatory authority
       The Treasury Department is directed to issue regulations or 
     other guidance necessary to carry out the provision. Such 
     guidance is to address prevention of the abuse of the 
     purposes of the provision, including through the allocation 
     of income to tax-indifferent parties. Guidance is also to 
     provide for the application of the provision in the case of 
     tiered structures of entities.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment is generally the same as the House 
     bill, except with respect to the nonapplicability of section 
     83. Under the Senate amendment, the provision provides a 
     three-year holding period in the case of certain net long-
     term capital gain with respect to any applicable partnership 
     interest held by the taxpayer, notwithstanding the rules of 
     section 83 or any election in effect under section 83(b).


                          Conference Agreement

       The conference agreement follows the Senate amendment. The 
     conferees wish to clarify the interaction of section 83 with 
     the provision's three-year holding requirement, which applies 
     notwithstanding the rules of section 83 or any election in 
     effect under section 83(b). Under the provision, the fact 
     that an individual may have included an amount in income upon 
     acquisition of the applicable partnership interest, or that 
     an individual may have made a section 83(b) election with 
     respect to an applicable partnership interest, does not 
     change the three-year holding period requirement for long-
     term capital gain treatment with respect to the applicable 
     partnership interest. Thus, the provision treats as short-
     term capital gain taxed at ordinary income rates the amount 
     of the taxpayer's net long-term capital gain with respect to 
     an applicable partnership interest for the taxable year that 
     exceeds the amount of such gain calculated as if a three-year 
     (not one-year) holding period applies. In making this 
     calculation, the provision takes account of long-term capital 
     losses calculated as if a three-year holding period applies.
     16. Amortization of research and experimental expenditures 
         (sec. 3315 of the House bill, sec. 13206 of the Senate 
         amendment, and sec. 174 of the Code)


                              Present Law

       Business expenses associated with the development or 
     creation of an asset having a useful life extending beyond 
     the current year generally must be capitalized and 
     depreciated over such useful life.\835\ Taxpayers, however, 
     may elect to deduct currently the amount of certain 
     reasonable research or experimentation expenditures paid or 
     incurred in connection with a trade or business.\836\ 
     Taxpayers may choose to forgo a current deduction, capitalize 
     their research expenditures, and recover them ratably over 
     the useful life of the research, but in no case over a period 
     of less than 60 months.\837\ Taxpayers, alternatively, may 
     elect to amortize their research expenditures over a period 
     of 10 years.\838\ Research and experimental expenditures 
     deductible under section 174 are not subject to 
     capitalization under either section 263(a) \839\ or section 
     263A.\840\
---------------------------------------------------------------------------
     \835\ Secs. 167 and 263(a).
     \836\ Secs. 174(a) and (e).
     \837\ Sec. 174(b). Taxpayers generating significant short-
     term losses often choose to defer the deduction for their 
     research and experimentation expenditures under this section. 
     Additionally, section 174 amounts are excluded from the 
     definition of ``start-up expenditures'' under section 195 
     (section 195 generally provides that start-up expenditures in 
     excess of $5,000 either are not deductible or are amortizable 
     over a period of not less than 180 months once an active 
     trade or business begins). So as not to generate significant 
     losses before beginning their trade or business, a taxpayer 
     may choose to defer the deduction and amortize its section 
     174 costs beginning with the month in which the taxpayer 
     first realizes benefits from the expenditures.
     \838\ Secs. 174(f)(2) and 59(e). This special 10-year 
     election is available to mitigate the effect of the 
     alternative minimum tax adjustment for research expenditures 
     set forth in section 56(b)(2). Taxpayers with significant 
     losses also may elect to amortize their otherwise deductible 
     research and experimentation expenditures to reduce amounts 
     that could be subject to expiration under the net operating 
     loss carryforward regime.
     \839\ Sec. 263(a)(1)(B).
     \840\ Sec. 263A(c)(2).
---------------------------------------------------------------------------
       Amounts defined as research or experimental expenditures 
     under section 174 generally include all costs incurred in the 
     experimental or laboratory sense related to the development 
     or improvement of a product.\841\ In particular, qualifying 
     costs are those incurred for activities intended to discover 
     information that would eliminate uncertainty concerning the 
     development or improvement of a product.\842\ Uncertainty 
     exists when information available to the taxpayer is not 
     sufficient to ascertain the capability or method for 
     developing, improving, and/or appropriately designing the 
     product.\843\ The determination of whether expenditures 
     qualify as deductible research expenses depends on the nature 
     of the activity to which the costs relate, not the nature of 
     the product or improvement being developed or the level of 
     technological advancement the product or improvement 
     represents. Examples of qualifying costs include salaries for 
     those engaged in research or experimentation efforts, amounts 
     incurred to operate and maintain research facilities (e.g., 
     utilities, depreciation, rent), and expenditures for 
     materials and supplies used and consumed in the course of 
     research or experimentation (including amounts incurred in 
     conducting trials).\844\ In addition, under administrative 
     guidance, the costs of developing computer software have been 
     accorded treatment similar to research expenditures.\845\
---------------------------------------------------------------------------
     \841\ Treas. Reg. sec. 1.174-2(a)(1) and (2). Product is 
     defined to include any pilot model, process, formula, 
     invention, technique, patent, or similar property, and 
     includes products to be used by the taxpayer in its trade or 
     business as well as products to be held for sale, lease, or 
     license. Treas. Reg. sec. 1.174-2(a)(11), Example 10, 
     provides an example of new process development costs eligible 
     for section 174 treatment.
     \842\ Treas. Reg. sec. 1.174-2(a)(1).
     \843\ Ibid.
     \844\ See Treas. Reg. sec. 1.174-4(c). The definition of 
     research and experimental expenditures also includes the 
     costs of obtaining a patent, such as attorneys' fees incurred 
     in making and perfecting a patent. Treas. Reg. sec. 1.174-
     2(a)(1).
     \845\ Rev. Proc. 2000-50, 2000-2 C.B. 601.
---------------------------------------------------------------------------
       Research or experimental expenditures under section 174 do 
     not include expenditures for quality control testing; 
     efficiency surveys; management studies; consumer surveys; 
     advertising or promotions; the acquisition of another's 
     patent, model, production or process; or research in 
     connection with literary, historical, or similar 
     projects.\846\ For purposes of section 174, quality control 
     testing means testing to determine whether particular units 
     of materials or products conform to specified parameters, but 
     does

[[Page 19992]]

     not include testing to determine if the design of the product 
     is appropriate.\847\
---------------------------------------------------------------------------
     \846\ Treas. Reg. sec. 1.174-2(a)(6).
     \847\ Treas. Reg. sec. 1.174-2(a)(7).
---------------------------------------------------------------------------
       Generally, no current deduction under section 174 is 
     allowable for expenditures for the acquisition or improvement 
     of land or of depreciable or depletable property used in 
     connection with any research or experimentation.\848\ In 
     addition, no current deduction is allowed for research 
     expenses incurred for the purpose of ascertaining the 
     existence, location, extent, or quality of any deposit of ore 
     or other mineral, including oil and gas.\849\
---------------------------------------------------------------------------
     \848\ Sec. 174(c).
     \849\ Sec. 174(d). Special rules apply with respect to 
     geological and geophysical costs (section 167(h)), qualified 
     tertiary injectant expenses (section 193), intangible 
     drilling costs (sections 263(c) and 291(b)), and mining 
     exploration and development costs (sections 616 and 617).
---------------------------------------------------------------------------


                               House Bill

       Under the provision, amounts defined as specified research 
     or experimental expenditures are required to be capitalized 
     and amortized ratably over a five-year period, beginning with 
     the midpoint of the taxable year in which the specified 
     research or experimental expenditures were paid or incurred. 
     Specified research or experimental expenditures which are 
     attributable to research that is conducted outside of the 
     United States \850\ are required to be capitalized and 
     amortized ratably over a period of 15 years, beginning with 
     the midpoint of the taxable year in which such expenditures 
     were paid or incurred. Specified research or experimental 
     expenditures subject to capitalization include expenditures 
     for software development.
---------------------------------------------------------------------------
     \850\ For this purpose, the term ``United States'' includes 
     the United States, the Commonwealth of Puerto Rico, and any 
     possession of the United States.
---------------------------------------------------------------------------
       Specified research or experimental expenditures do not 
     include expenditures for land or for depreciable or 
     depletable property used in connection with the research or 
     experimentation, but do include the depreciation and 
     depletion allowances of such property. Also excluded are 
     exploration expenditures incurred for ore or other minerals 
     (including oil and gas).
       In the case of retired, abandoned, or disposed property 
     with respect to which specified research or experimental 
     expenditures are paid or incurred, any remaining basis may 
     not be recovered in the year of retirement, abandonment, or 
     disposal, but instead must continue to be amortized over the 
     remaining amortization period.
       As part of the repeal of the alternative minimum tax, 
     taxpayers may no longer elect to amortize their research or 
     experimental expenditures over a period of 10 years.\851\
---------------------------------------------------------------------------
     \851\ See section 2001 of the House bill (Repeal of 
     alternative minimum tax).
---------------------------------------------------------------------------
       Effective date.--The provision applies to amounts paid or 
     incurred in taxable years beginning after December 31, 2022.


                            senate amendment

       The Senate amendment follows the House bill, except with 
     the following modifications. The application of the Senate 
     amendment is treated as a change in the taxpayer's method of 
     accounting for purposes of section 481, initiated by the 
     taxpayer, and made with the consent of the Secretary. The 
     Senate amendment is applied on a cutoff basis to research or 
     experimental expenditures paid or incurred in taxable years 
     beginning after December 31, 2025 (hence there is no 
     adjustment under section 481(a) for research or experimental 
     expenditures paid or incurred in taxable years beginning 
     before January 1, 2026). In addition, the Senate amendment 
     makes conforming changes to sections 41 and 280C.
       Effective date.--The provision applies to amounts paid or 
     incurred in taxable years beginning after December 31, 2025.


                          conference agreement

       The conference agreement follows the Senate amendment.
       Effective date.--The provision applies to amounts paid or 
     incurred in taxable years beginning after December 31, 2021.
     17. Certain special rules for taxable year of inclusion (sec. 
         13221 of the Senate amendment and sec. 451 of the Code)


                              present law

     In general
       Under section 61(a), gross income generally includes all 
     income from whatever source derived, except as otherwise 
     provided in Subtitle A of the Code. Thus, gross income 
     generally includes income realized in any from, whether in 
     money, property, or services, except to the extent provided 
     in other sections of the Code.\852\ Once it is determined 
     that an item of gross income is clearly realized for Federal 
     income tax purposes, section 451 and the regulations 
     thereunder provide the general rules as to the timing of when 
     such item is to be included in gross income.\853\
---------------------------------------------------------------------------
     \852\ Treas. Reg. sec. 1.61-1.
     \853\ Treas. Reg. sec. 1.61-1(b)(3).
---------------------------------------------------------------------------
       A taxpayer generally is required to include an item in 
     gross income no later than the time of its actual or 
     constructive receipt, unless the item properly is accounted 
     for in a different period under the taxpayer's method of 
     accounting.\854\ If a taxpayer has an unrestricted right to 
     demand the payment of an amount, the taxpayer is in 
     constructive receipt of that amount whether or not the 
     taxpayer makes the demand and actually receives the 
     payment.\855\
---------------------------------------------------------------------------
     \854\ Sec. 451(a).
     \855\ See Treas. Reg. sec. 1.451-2.
---------------------------------------------------------------------------
       In general, for a cash basis taxpayer, an amount is 
     included in gross income when actually or constructively 
     received. For an accrual basis taxpayer, an amount is 
     included in gross income when all the events have occurred 
     that fix the right to receive such income and the amount 
     thereof can be determined with reasonable accuracy (i.e., 
     when the ``all events test'' is met), unless an exception 
     permits deferral or exclusion, or a special method of 
     accounting applies.\856\
---------------------------------------------------------------------------
     \856\ See Treas. Reg. secs. 1.446-1(c)(1)(ii) and 1.451-1(a).
---------------------------------------------------------------------------
       A number of exceptions that exist to permit deferral of 
     gross income relate to advance payments. An advance payment 
     is when a taxpayer receives payment before the taxpayer 
     provides goods or services to its customer. The exceptions 
     often allow tax deferral to mirror financial accounting 
     deferral (e.g., income is recognized as the goods are 
     provided or the services are performed).\857\
---------------------------------------------------------------------------
     \857\ For examples of provisions permitting deferral of 
     advance payments, see Treas. Reg. sec. 1.451-5 and Rev. Proc. 
     2004-34, 2004-1 C.B. 991, as modified and clarified by Rev. 
     Proc. 2011-18, 2011-5 I.R.B. 443, and Rev. Proc. 2013-29, 
     2013-33 I.R.B. 141.
---------------------------------------------------------------------------
     Interest income
       A taxpayer generally must include in gross income the 
     amount of interest received or accrued within the taxable 
     year on indebtedness held by the taxpayer.\858\
---------------------------------------------------------------------------
     \858\ Secs. 61(a)(4) and 451.
---------------------------------------------------------------------------
     Original issue discount
       The holder of a debt instrument with original issue 
     discount (``OID'') generally accrues and includes the OID in 
     gross income as interest over the term of the instrument, 
     regardless of when the stated interest (if any) is paid.\859\
---------------------------------------------------------------------------
     \859\ Sec. 1272.
---------------------------------------------------------------------------
       The amount of OID with respect to a debt instrument is the 
     excess of the stated redemption price at maturity over the 
     issue price of the debt instrument.\860\ The stated 
     redemption price at maturity is the sum of all payments 
     provided by the debt instrument other than qualified stated 
     interest payments.\861\ The holder includes in gross income 
     an amount equal to the sum of the daily portions of the OID 
     for each day during the taxable year the holder held such 
     debt instrument. The daily portion is determined by 
     allocating to each day in any accrual period its ratable 
     portion of the increase during such accrual period in the 
     adjusted issue price of the debt instrument.\862\ The 
     adjustment to the issue price is determined by multiplying 
     the adjusted issue price (i.e., the issue price increased by 
     adjustments prior to the accrual period) by the instrument's 
     yield to maturity, and then subtracting the interest payable 
     during the accrual period. Thus, to compute the amount of OID 
     and the portion of OID allocable to a period, the stated 
     redemption price at maturity and the term must be known. 
     Issuers of OID instruments accrue and deduct the amount of 
     OID as interest expense in the same manner as the 
     holder.\863\
---------------------------------------------------------------------------
     \860\ Sec. 1273(a)(1).
     \861\ Sec. 1273(a)(2) and Treas. Reg. sec. 1.1273-1(b).
     \862\ Sec. 1272(a)(1) and (3).
     \863\ Sec. 163(e).
---------------------------------------------------------------------------
     Debt instruments subject to acceleration
       Special rules for determining the amount of OID allocated 
     to a period apply to certain instruments that may be subject 
     to prepayment. If a borrower can reduce the yield on a debt 
     by exercising a prepayment option, the OID rules assume that 
     the borrower will prepay the debt.\864\ In addition, in the 
     case of (1) any regular interest in a real estate mortgage 
     investment conduit (``REMIC'') or qualified mortgages held by 
     a REMIC or (2) any other debt instrument if payments under 
     the instrument may be accelerated by reason of prepayments of 
     other obligations securing the instrument, the daily portions 
     of the OID on such debt instruments are determined by taking 
     into account an assumption regarding the prepayment of 
     principal for such instruments.\865\
---------------------------------------------------------------------------
     \864\ Treas. Reg. sec. 1.1272-1(c)(5).
     \865\ Sec. 1272(a)(6).
---------------------------------------------------------------------------
       The Taxpayer Relief Act of 1997 \866\ extended these rules 
     to any pool of debt instruments the payments on which may be 
     accelerated by reason of prepayments.\867\ Thus, if a 
     taxpayer holds a pool of credit card receivables that require 
     interest to be paid only if the borrowers do not pay their 
     accounts by a specified date (``grace-period interest''), the 
     taxpayer is required to accrue interest or OID on such pool 
     based upon a reasonable assumption regarding the timing of 
     the payments of the accounts in the pool. Under these rules, 
     certain amounts (other than grace-period interest) related to 
     credit card transactions, such as late-payment fees,\868\ 
     cash-advance fees,\869\ and interchange fees,\870\ have been 
     determined to create OID or increase the amount of OID on the 
     pool of credit card receivables to which the amounts 
     relate.\871\
---------------------------------------------------------------------------
     \866\ Pub. L. No. 105-34, sec. 1004(a).
     \867\ Sec. 1272(a)(6)(C)(iii).
     \868\ Rev. Proc. 2004-33, 2004-1 C.B. 989.
     \869\ Rev. Proc. 2005-47, 2005-2 C.B. 269.
     \870\ Capital One Financial Corp. and Subsidiaries v. 
     Commissioner, 133 T.C. No. 8 (2009); IRS Chief Counsel Notice 
     CC-2010-018, September 27, 2010.
     \871\ See also Rev. Proc. 2013-26, 2013-22 I.R.B. 1160, for a 
     safe harbor method of accounting for OID on a pool of credit 
     card receivables for purposes of section 1272(a)(6).

[[Page 19993]]




                               house bill

       No provision.


                            senate amendment

       The provision revises the rules associated with the timing 
     of the recognition of income.\872\ Specifically, the 
     provision requires an accrual method taxpayer subject to the 
     all events test for an item of gross income to recognize such 
     income no later than the taxable year in which such income is 
     taken into account as revenue in an applicable financial 
     statement \873\ or another financial statement under rules 
     specified by the Secretary, but provides an exception for 
     taxpayers without an applicable or other specified financial 
     statement.\874\ In the case of a contract which contains 
     multiple performance obligations, the provision allows the 
     taxpayer to allocate the transaction price in accordance with 
     the allocation made in the taxpayer's applicable financial 
     statement.
---------------------------------------------------------------------------
     \872\ The provision does not revise the rules associated with 
     when an item is realized for Federal income tax purposes and, 
     accordingly, does not require the recognition of income in 
     situations where the Federal income tax realization event has 
     not yet occurred. For example, the provision does not require 
     the recharacterization of a transaction from sale to lease, 
     or vice versa, to conform to how the transaction is reported 
     in the taxpayer's applicable financial statement. Similarly, 
     the provision does not require the recognition of gain or 
     loss from securities that are marked to market for financial 
     reporting purposes if the gain or loss from such investments 
     is not realized for Federal income tax purposes until such 
     time that the taxpayer sells or otherwise disposes of the 
     investment. As a further example, income from investments in 
     corporations or partnerships that are accounted for under the 
     equity method for financial reporting purposes will not 
     result in the recognition of income for Federal income tax 
     purposes until such time that the Federal income tax 
     realization even has occurred (e.g., when the taxpayer 
     receives a dividend from the corporation in which it owns 
     less than a controlling interest or when the taxpayer 
     receives its allocable share of income, deductions, gains, 
     and losses on its Schedule K-1 from the partnership).
     \873\ For purposes of the provision, the term ``applicable 
     financial statement'' means: (A) a financial statement which 
     is certified as being prepared in accordance with generally 
     accepted accounting principles and which is (i) a 10-K (or 
     successor form), or annual statement to shareholders, 
     required to be filed by the taxpayer with the United States 
     Securities and Exchange Commission (``SEC''), (ii) an audited 
     financial statement of the taxpayer which is used for (I) 
     credit purposes, (II) reporting to shareholders, partners, or 
     other proprietors, or to beneficiaries, or (III) any other 
     substantial nontax purpose, but only if there is no statement 
     of the taxpayer described in clause (i), or (iii) filed by 
     the taxpayer with any other Federal agency for purposes other 
     than Federal tax purposes, but only if there is no statement 
     of the taxpayer described in clause (i) or (ii); (B) a 
     financial statement which is made on the basis of 
     international financial reporting standards and is filed by 
     the taxpayer with an agency of a foreign government which is 
     equivalent to the SEC and which has reporting standards not 
     less stringent than the standards required by such 
     Commission, but only if there is no statement of the taxpayer 
     described in subparagraph (A); or (C) a financial statement 
     filed by the taxpayer with any other regulatory or 
     governmental body specified by the Secretary, but only if 
     there is no statement of the taxpayer described in 
     subparagraph (A) or (B). If the financial results of a 
     taxpayer are reported on the applicable financial statement 
     for a group of entities, such statement is treated as the 
     applicable financial statement of the taxpayer.
     \874\ The Committee intends that the provision apply to items 
     of gross income for which the timing of income inclusion is 
     determined using the all events test under present law. Under 
     the provision, an accrual method taxpayer with an applicable 
     financial statement will include an item in income under 
     section 451 upon the earlier of when the all events test is 
     met or when the taxpayer includes such item in revenue in an 
     applicable financial statement. For example, under the 
     provision, any unbilled receivables for partially performed 
     services must be recognized to the extent the amounts are 
     taken into income for financial statement purposes. However, 
     accrual method taxpayers without an applicable or other 
     specified financial statement will continue to determine 
     income inclusion under the all events test, unless an 
     exception permits deferral or exclusion. See sec. 451(a) and 
     Treas. Reg. sec. 1.451-1(a). The Committee intends that the 
     financial statement conformity requirement added to section 
     451 not be construed as preventing the use of special methods 
     of accounting provided elsewhere in the Code, other than part 
     V of subchapter P (special rules for bonds and other debt 
     instruments) excluding items of gross income in connection 
     with a mortgage servicing contract. For example, it does not 
     preclude the use of the installment method under section 453 
     or the use of long-term contract methods under section 460. 
     See Treas. Reg. sec. 1.446-1(c)(1)(iii).
---------------------------------------------------------------------------
       In addition, the provision directs accrual method taxpayers 
     with an applicable financial statement to apply the income 
     recognition rules under section 451 before applying the 
     special rules under part V of subchapter P, which, in 
     addition to the OID rules, also includes rules regarding the 
     treatment of market discount on bonds, discounts on short-
     term obligations, OID on tax-exempt bonds, and stripped bonds 
     and stripped coupons.\875\ Thus, for example, to the extent 
     amounts are included in revenue for financial statement 
     purposes when received (e.g., late-payment fees, cash-advance 
     fees, or interchange fees), such amounts generally are 
     includable in income at such time in accordance with the 
     general recognition principles under section 451. The 
     provision provides an exception for any item of gross income 
     in connection with a mortgage servicing contract. Thus, under 
     the provision, income from mortgage servicing rights will 
     continue to be recognized in accordance with the present law 
     rules for such items of gross income (i.e., ``normal'' 
     mortgage servicing rights will be included in income upon the 
     earlier of earned or received under the all events test of 
     section 451 (i.e., not averaged over the life of the 
     mortgage),\876\ and ``excess'' mortgage servicing rights will 
     be treated as stripped coupons under section 1286 and 
     therefore subject to the original issue discount rules 
     \877\).
---------------------------------------------------------------------------
     \875\ Secs. 1271-1288.
     \876\ See Rev. Rul. 70-142, 1970-2 C.B. 115.
     \877\ See Rev. Rul. 91-6, 1991-2, C.B. 358, and Rev. Proc. 
     91-50, 1991-2 C.B. 778.
---------------------------------------------------------------------------
       The provision also codifies the current deferral method of 
     accounting for advance payments for goods, services, and 
     other specified items provided by the IRS under Revenue 
     Procedure 2004-34.\878\ That is, the provision allows accrual 
     method taxpayers to elect \879\ to defer the inclusion of 
     income associated with certain advance payments to the end of 
     the tax year following the tax year of receipt if such income 
     also is deferred for financial statement purposes.\880\ In 
     the case of advance payments received for a combination of 
     services, goods, or other specified items, the provision 
     allows the taxpayer to allocate the transaction price in 
     accordance with the allocation made in the taxpayer's 
     applicable financial statement. The provision requires the 
     inclusion in gross income of a deferred advance payment if 
     the taxpayer ceases to exist.
---------------------------------------------------------------------------
     \878\ 2004-1 C.B. 991, as modified and clarified by Rev. 
     Proc. 2011-18, 2011-5 I.R.B. 443, and Rev. Proc. 2013-29, 
     2013-33 I.R.B. 141.
     \879\ The election shall be made at such time, in such form 
     and manner, and with respect to such categories of advance 
     payments as the Secretary may provide. For these purposes, 
     the recognition of income under such election is treated as a 
     method of accounting.
     \880\ Thus, the provision is intended to override any 
     deferral method provided by Treasury Regulation section 1.451 
     095 for advance payments received for goods.
---------------------------------------------------------------------------
       The application of these rules is a change in the 
     taxpayer's method of accounting for purposes of section 481. 
     In the case of any taxpayer required by this provision to 
     change its method of accounting for its first taxable year 
     beginning after December 31, 2017, such change is treated as 
     initiated by the taxpayer and made with the consent of the 
     Secretary. In the case of income from a debt instrument 
     having OID, the related section 481(a) adjustment is taken 
     into account over six taxable years.
       Effective date.--The provision generally applies to taxable 
     years beginning after December 31, 2017. In the case of 
     income from a debt instrument having OID, the provision 
     applies to taxable years beginning after December 31, 2018.


                          conference agreement

       The conference agreement follows the Senate amendment.
     18. Denial of deduction for certain fines, penalties, and 
         other amounts (sec. 13306 of the Senate amendment and 
         sec. 162(f) and new sec. 6050X of the Code)


                              present law

       The Code denies a deduction for fines or penalties paid to 
     a government for the violation of any law.\881\
---------------------------------------------------------------------------
     \881\Sec. 162(f).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The provision denies deductibility for any otherwise 
     deductible amount paid or incurred (whether by suit, 
     agreement, or otherwise) to or at the direction of a 
     government or specified nongovernmental entity in relation to 
     the violation of any law or the investigation or inquiry by 
     such government or entity into the potential violation of any 
     law. 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, that are identified in the court order or settlement 
     agreement as restitution, remediation, or required to come 
     into compliance. In the case of any amount of restitution for 
     failure to pay any tax and assessed as restitution under the 
     Code, such restitution is deductible only to the extent it 
     would have been allowed as a deduction if it had been timely 
     paid. The IRS remains free to challenge the characterization 
     of an amount so identified; however, no deduction is allowed 
     unless the identification is made. Restitution or included 
     remediation of property does not include reimbursement of 
     government investigative or litigation costs.
       The provision applies only where a government (or other 
     entity treated in a manner similar to a government under the 
     provision) is a complainant or investigator with respect to 
     the violation or potential violation of any law.\882\ An 
     exception also applies to any amount paid or incurred as 
     taxes due.
---------------------------------------------------------------------------
     \882\ Thus, for example, the provision does 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 the payment to 
     be made ``at the direction of a government'' for purposes of 
     the provision.
---------------------------------------------------------------------------
       The provision requires government agencies (or entities 
     treated as such agencies

[[Page 19994]]

     under the provision) to report to the IRS and to the taxpayer 
     the amount of each settlement agreement or order entered into 
     where the aggregate amount required to be paid or incurred to 
     or at the direction of the government is at 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 report must separately 
     identify any amounts that are for restitution or remediation 
     of property, or correction of noncompliance. The report must 
     be made at the time the agreement is entered into, as 
     determined by the Secretary of the Treasury.
       Effective date.--The provision denying the deduction and 
     the reporting provision are effective for amounts paid or 
     incurred on or after the date of enactment, except that it 
     would not apply to amounts paid or incurred under any binding 
     order or agreement entered into before such date. Such 
     exception does not apply to an order or agreement requiring 
     court approval unless the approval was obtained before such 
     date.


                          conference agreement

       The conference agreement follows the Senate amendment.
     19. Denial of deduction for settlements subject to 
         nondisclosure agreements paid in connection with sexual 
         harassment or sexual abuse (sec. 13307 of the Senate 
         amendment and new sec. 162(q) of the Code)


                              present law

       A taxpayer generally is allowed a deduction for ordinary 
     and necessary expenses paid or incurred in carrying on any 
     trade or business.\883\ However, certain exceptions apply. No 
     deduction is allowed for (1) any charitable contribution or 
     gift that would be allowable as a deduction under section 170 
     were it not for the percentage limitations, the dollar 
     limitations, or the requirements as to the time of payment, 
     set forth in such section; (2) any illegal bribe, illegal 
     kickback, or other illegal payment; (3) certain lobbying and 
     political expenditures; (4) any fine or similar penalty paid 
     to a government for the violation of any law; (5) two-thirds 
     of treble damage payments under the antitrust laws; (6) 
     certain foreign advertising expenses; (7) certain amounts 
     paid or incurred by a corporation in connection with the 
     reacquisition of its stock or of the stock of any related 
     person; or (8) certain applicable employee remuneration.
---------------------------------------------------------------------------
     \883\ Sec. 162(a).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       Under the provision, no deduction is allowed for any 
     settlement, payout, or attorney fees related to sexual 
     harassment or sexual abuse if such payments are subject to a 
     nondisclosure agreement.
       Effective date.--The provision is effective for amounts 
     paid or incurred after the date of enactment.


                          conference agreement

       The conference agreement follows the Senate amendment.
     20. Uniform treatment of expenses in contingency fee cases 
         (sec. 3316 of the House bill and new sec. 162(q) of the 
         Code)


                              present law

       The Code provides that a taxpayer may deduct all ordinary 
     and necessary expenses paid or incurred during the taxable 
     year in carrying on a trade or business.\884\
---------------------------------------------------------------------------
     \884\ Sec. 162(a); Treas. Reg. sec. 1.162-1(a).
---------------------------------------------------------------------------
       A current deduction for an expense for which there is a 
     right or expectation of reimbursement may be disallowed 
     because these payments are not expenses of the taxpayer and 
     are instead in the nature of an advance or a loan. The extent 
     to which the right must be established has varied. Some cases 
     have denied the current deduction because the right of 
     reimbursement was fixed,\885\ others have allowed the current 
     deduction because the right of reimbursement was 
     uncertain,\886\ and other cases have denied the current 
     deduction if the taxpayer's right to reimbursement was 
     subject to a contingency.
---------------------------------------------------------------------------
     \885\ Charles Baloian Company, Inc. v. Commissioner, 68 T.C. 
     620, 626, 628 (1977); Manocchio v. Commissioner, 710 F.2d 
     1400, 1402 (9th Cir. 1983); Glendinning, McLeish & Co. v. 
     Commissioner, 61 F.2d 950, 952 (2d Cir. 1932); Webbe v. 
     Commissioner, T.C. Memo. 1987-426, aff'd, 902 F.2d 688 (8th 
     Cir. 1990).
     \886\ George K. Herman Chevrolet, Inc. v. Commissioner, 39 
     T.C. 846, 853 (1963); Allegheny Corporation v. Commissioner, 
     28 T.C. 298, 305 (1957), acq., 1957-2 C.B. 3; Electric 
     Tachometer Corporation v. Commissioner, 37 T.C. 158, 161-162 
     (1961), acq., 1962-2 C.B. 4.
---------------------------------------------------------------------------
       Courts have held that an attorney representing clients on a 
     contingent fee basis may not currently deduct advances to or 
     expenses paid on behalf of the clients as ordinary and 
     necessary business expenses.\887\ The amounts in these cases 
     were to be repaid from any recovery. Courts have also held 
     that even if reimbursement is due only under certain 
     circumstances, generally no immediate deduction is 
     allowable.\888\
---------------------------------------------------------------------------
     \887\ Burnett v. Commissioner, 356 F.2d 755, 760 (5th Cir.), 
     cert. denied, 385 U.S. 832 (1966); Herrick v. Commissioner, 
     63 T.C. 562, 567, 568 (1975); Canelo v. Commissioner, 53 T.C. 
     217, 225 (1969), aff'd, 447 F.2d 484 (9th Cir. 1971), acq. 
     1971-2 C.B. 2, nonacq. in part, 1982-2 C.B. 2; Silverton v. 
     Commissioner, T.C. Memo. 1977-198, aff'd, 647 F.2d 172 (9th 
     Cir.), cert. denied, 454 U.S. 1033 (1981); Watts v. 
     Commissioner, T.C. Memo. 1968-183.
     \888\ Boccardo v. Commissioner, 12 Cl Ct. 184 (1987); 
     Boccardo v. Commissioner, 65 T.C.M. 2739 (1993).
---------------------------------------------------------------------------
       However, the Ninth Circuit reached the opposite conclusion 
     and held that attorneys who represent clients in ``gross 
     fee'' contingency fee cases are not extending loans to 
     clients and therefore may treat litigation costs, such as 
     court fees and witness expenses, as deductible business 
     expenses under the Code.\889\ The IRS does not follow this 
     decision, except in the Ninth Circuit, based on the fact that 
     amounts advanced by attorneys will be reimbursed by the 
     client and therefore are not deductible business 
     expenses.\890\
---------------------------------------------------------------------------
     \889\ Boccardo v. Commissioner, 56 F.3d 1016 (9th Cir. 1995), 
     rev'g 65 T.C.M. 2739 (1993).
     \890\ 1997 FSA LEXIS 442 (June 2, 1997).
---------------------------------------------------------------------------


                               house bill

       The provision denies attorneys an otherwise-allowable 
     deduction for litigation costs paid under arrangements that 
     are primarily on a contingent fee basis until the contingency 
     ends.
       The provision effects a legislative override of the opinion 
     in the Ninth Circuit Court of Appeals in Boccardo v. 
     Commissioner, 56 F.3d 1016 (9th Cir. 1995). No inference 
     regarding the tax treatment of these costs under present law 
     is intended.
       Effective date.--The provision applies to expenses and 
     costs paid or incurred in taxable years beginning after the 
     date of enactment.


                            senate amendment

       No provision.


                          conference agreement

       The conference agreement does not follow the House bill 
     provision.

                     E. Reform of Business Credits

     1. Repeal of credit for clinical testing expenses for certain 
         drugs for rare diseases or conditions (sec. 3401 of the 
         House bill, sec. 13401 of the Senate amendment, and sec. 
         45C of the Code)


                              present law

       Section 45C provides a 50-percent business tax credit for 
     qualified clinical testing expenses incurred in testing of 
     certain drugs for rare diseases or conditions, generally 
     referred to as ``orphan drugs.'' Qualified clinical testing 
     expenses are costs incurred to test an orphan drug after the 
     drug has been approved for human testing by the Food and Drug 
     Administration (``FDA'') but before the drug has been 
     approved for sale by the FDA.\891\ A rare disease or 
     condition is defined as one that (1) affects fewer than 
     200,000 persons in the United States, or (2) affects more 
     than 200,000 persons, but for which there is no reasonable 
     expectation that businesses could recoup the costs of 
     developing a drug for such disease or condition from sales in 
     the United States of the drug.\892\
---------------------------------------------------------------------------
     \891\ Sec. 45C(b).
     \892\ Sec. 45C(d).
---------------------------------------------------------------------------
       Amounts included in computing the credit under this section 
     are excluded from the computation of the research credit 
     under section 41.\893\
---------------------------------------------------------------------------
     \893\ Sec. 45C(c).
---------------------------------------------------------------------------


                               house bill

       The House bill repeals the credit for qualified clinical 
     testing expenses.
       Effective date.--The provision applies to amounts paid or 
     incurred in taxable years beginning after December 31, 2017.


                            senate amendment

       The Senate amendment reduces the credit rate to 27.5 
     percent of qualified clinical testing expenses.
       Effective date.--The provision applies to amounts paid or 
     incurred in taxable years beginning after December 31, 2017.


                          conference agreement

       The conference agreement follows the Senate amendment, but 
     reduces the credit rate to 25 percent of qualified clinical 
     testing expenses.
     2. Repeal of employer-provided child care credit (sec. 3402 
         of the House bill and sec. 42F of the Code)


                              present law

       Taxpayers are eligible for a tax credit equal to 25 percent 
     of qualified expenditures for employee child care and 10 
     percent of qualified expenditures for child care resource and 
     referral services. The maximum total credit that may be 
     claimed by a taxpayer may not exceed $150,000 per taxable 
     year. The credit is part of the general business credit.\894\
---------------------------------------------------------------------------
     \894\ Sec. 38(b)(15).
---------------------------------------------------------------------------
       Qualified child care expenditures generally include costs 
     paid or incurred: (1) to acquire, construct, rehabilitate or 
     expand property that is to be used as part of the taxpayer's 
     qualified child care facility; \895\ (2) for the operation of 
     the taxpayer's qualified child care facility, including the 
     costs of training and certain compensation for employees of 
     the child care facility, and scholarship programs; or (3) 
     under a contract with a qualified child care facility to 
     provide child care services to employees of the taxpayer. To 
     be

[[Page 19995]]

     a qualified child care facility, the principal use of the 
     facility must be for child care (unless it is the principal 
     residence of the taxpayer), and the facility must meet all 
     applicable State and local laws and regulations, including 
     any licensing laws.
---------------------------------------------------------------------------
     \895\ In addition, a depreciation deduction (or amortization 
     in lieu of depreciation) must be allowable with respect to 
     the property and the property must not be part of the 
     principal residence of the taxpayer or any employee of the 
     taxpayer.
---------------------------------------------------------------------------
       Qualified child care expenditures for resource and referral 
     services include amounts paid under contract to provide child 
     care resource and referral services to a taxpayer's 
     employees.


                               house bill

       The House bill repeals the credit for qualified child care 
     expenditures and qualified child care expenditures for 
     resource and referral services.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            senate amendment

       No provision.


                          conference agreement

       The Conference agreement does not follow the House bill 
     provision.
     3. Rehabilitation credit (sec. 3403 of the House bill, sec. 
         13402 of the Senate amendment, and sec. 47 of the Code)


                              present law

       Section 47 provides a two-tier tax credit for 
     rehabilitation expenditures.
       A 20-percent credit is provided for qualified 
     rehabilitation expenditures with respect to a certified 
     historic structure. For this purpose, a certified historic 
     structure means any building that is listed in the National 
     Register, or that is located in a registered historic 
     district and is certified by the Secretary of the Interior to 
     the Secretary of the Treasury as being of historic 
     significance to the district.
       A 10-percent credit is provided for qualified 
     rehabilitation expenditures with respect to a qualified 
     rehabilitated building, which generally means a building that 
     was first placed in service before 1936. A pre-1936 building 
     must meet requirements with respect to retention of existing 
     external walls and internal structural framework of the 
     building in order for expenditures with respect to it to 
     qualify for the 10-percent credit. A building is treated as 
     having met the substantial rehabilitation requirement under 
     the 10-percent credit only if the rehabilitation expenditures 
     during the 24-month period selected by the taxpayer and 
     ending within the taxable year exceed the greater of (1) the 
     adjusted basis of the building (and its structural 
     components), or (2) $5,000.
       The provision requires the use of straight-line 
     depreciation or the alternative depreciation system in order 
     for rehabilitation expenditures to be treated as qualified 
     under the provision.


                               house bill

       The House bill repeals the rehabilitation credit.
       Effective date.--The provision applies to amounts paid or 
     incurred after December 31, 2017. A transition rule provides 
     that in the case of qualified rehabilitation expenditures 
     (within the meaning of present law), with respect to any 
     building owned or leased by the taxpayer at all times on and 
     after January 1, 2018, the 24-month period selected by the 
     taxpayer (under section 47(c)(1)(C)) is to begin not later 
     than the end of the 180-day period beginning on the date of 
     the enactment of the Act, and the amendments made by the 
     provision apply to such expenditures paid or incurred after 
     the end of the taxable year in which such 24-month period 
     ends.


                            senate amendment

       The Senate amendment repeals the 10-percent credit for pre-
     1936 buildings. The provision retains the 20-percent credit 
     for qualified rehabilitation expenditures with respect to a 
     certified historic structure, with a modification. Under the 
     provision, the credit allowable for a taxable year during the 
     five- year period beginning in the taxable year in which the 
     qualified rehabilitated building is placed in service is an 
     amount equal to the ratable share. The ratable share for a 
     taxable year during the five-year period is amount equal to 
     20 percent of the qualified rehabilitation expenditures for 
     the building, as allocated ratably to each taxable year 
     during the five-year period. It is intended that the sum of 
     the ratable shares for the taxable years during the five-year 
     period does not exceed 100 percent of the credit for 
     qualified rehabilitation expenditures for the qualified 
     rehabilitated building.
       Effective date.--The provision applies to amounts paid or 
     incurred after December 31, 2017. A transition rule provides 
     that in the case of qualified rehabilitation expenditures 
     (for a pre-1936 building) with respect to any building owned 
     or leased (as provided under present law) by the taxpayer at 
     all times on and after January 1, 2018, the 24-month period 
     selected by the taxpayer (under section 47(c)(1)(C)) is to 
     begin not later than the end of the 180-day period beginning 
     on the date of the enactment of the Act, and the amendments 
     made by the provision apply to such expenditures paid or 
     incurred after the end of the taxable year in which such 24-
     month period ends.


                          conference agreement

       The conference agreement follows the Senate amendment with 
     a modification to the transition rule under the effective 
     date relating to qualified rehabilitation expenditures under 
     certain phased rehabilitations for which the taxpayer may 
     select a 60-month period.
       Effective date.--The provision applies to amounts paid or 
     incurred after December 31, 2017. A transition rule provides 
     that in the case of qualified rehabilitation expenditures 
     (for either a certified historic structure or a pre-1936 
     building), with respect to any building owned or leased (as 
     provided under present law) by the taxpayer at all times on 
     and after January 1, 2018, the 24-month period selected by 
     the taxpayer (section 47(c)(1)(C)(i)), or the 60-month period 
     selected by the taxpayer under the rule for phased 
     rehabilitation (section 47(c)(1)(C)(ii)), is to begin not 
     later than the end of the 180-day period beginning on the 
     date of the enactment of the Act, and the amendments made by 
     the provision apply to such expenditures paid or incurred 
     after the end of the taxable year in which such 24-month or 
     60-month period ends.
     4. Repeal of work opportunity tax credit (sec. 3404 of the 
         House bill and sec. 51 of the Code)


                              present law

     In general
       The work opportunity tax credit is available on an elective 
     basis for employers hiring individuals from one or more of 
     ten targeted groups. The amount of the credit available to an 
     employer is determined by the amount of qualified wages paid 
     by the employer. Generally, qualified wages consist of wages 
     attributable to services rendered by a member of a targeted 
     group during the one-year period beginning with the day the 
     individual begins work for the employer (two years in the 
     case of an individual in the long-term family assistance 
     recipient category).
     Targeted groups eligible for the credit
       Generally, an employer is eligible for the credit only for 
     qualified wages paid to members of a targeted group. These 
     targeted groups are: (1) Families receiving TANF; (2) 
     Qualified veterans; (3) Qualified ex-felons; (4) Designated 
     community residents; (5) Vocational rehabilitation referrals; 
     (6) Qualified summer youth employees; (7) Qualified food and 
     nutrition recipients; (8) Qualified SSI recipients; (9) Long-
     term family assistance recipients; and (10) Qualified long-
     term unemployment recipients.
     Qualified wages
       Generally, qualified wages are defined as cash wages paid 
     by the employer to a member of a targeted group. The 
     employer's deduction for wages is reduced by the amount of 
     the credit.
       For purposes of the credit, generally, wages are defined by 
     reference to the FUTA definition of wages contained in 
     section 3306(b) (without regard to the dollar limitation 
     therein contained). Special rules apply in the case of 
     certain agricultural labor and certain railroad labor.
     Calculation of the credit
       The credit available to an employer for qualified wages 
     paid to members of all targeted groups (except for long-term 
     family assistance recipients and qualified veterans) equals 
     40 percent (25 percent for employment of 400 hours or less) 
     of qualified first-year wages. Generally, qualified first-
     year wages are qualified wages (not in excess of $6,000) 
     attributable to service rendered by a member of a targeted 
     group during the one-year period beginning with the day the 
     individual began work for the employer. Therefore, the 
     maximum credit per employee is $2,400 (40 percent of the 
     first $6,000 of qualified first-year wages). With respect to 
     qualified summer youth employees, the maximum credit is 
     $1,200 (40 percent of the first $3,000 of qualified first-
     year wages). Except for long-term family assistance 
     recipients, no credit is allowed for second-year wages.
       In the case of long-term family assistance recipients, the 
     credit equals 40 percent (25 percent for employment of 400 
     hours or less) of $10,000 for qualified first-year wages and 
     50 percent of the first $10,000 of qualified second-year 
     wages. Generally, qualified second-year wages are qualified 
     wages (not in excess of $10,000) attributable to service 
     rendered by a member of the long-term family assistance 
     category during the one-year period beginning on the day 
     after the one-year period beginning with the day the 
     individual began work for the employer. Therefore, the 
     maximum credit per employee is $9,000 (40 percent of the 
     first $10,000 of qualified first-year wages plus 50 percent 
     of the first $10,000 of qualified second-year wages).
       In the case of a qualified veterans, the credit is 
     calculated as follows: (1) in the case of a qualified veteran 
     who was eligible to receive assistance under a supplemental 
     nutritional assistance program (for at least a three-month 
     period during the year prior to the hiring date) the employer 
     is entitled to a maximum credit of 40 percent of $6,000 of 
     qualified first-year wages; (2) in the case of a qualified 
     veteran who is entitled to compensation for a service 
     connected disability, who is hired within one year of 
     discharge, the employer is entitled to a maximum credit of 40 
     percent of $12,000 of qualified first-year wages; (3) in the 
     case of a qualified veteran who is entitled to compensation 
     for a service connected disability, and who has been 
     unemployed for an aggregate of at least six months during the 
     one-year period ending on the hiring date, the employer is 
     entitled to a maximum credit of 40 percent of $24,000 of 
     qualified first-year wages; (4) in the

[[Page 19996]]

     case of a qualified veteran unemployed for at least four 
     weeks but less than six months (whether or not consecutive) 
     during the one-year period ending on the date of hiring, the 
     maximum credit equals 40 percent of $6,000 of qualified 
     first-year wages; and (5) in the case of a qualified veteran 
     unemployed for at least six months (whether or not 
     consecutive) during the one-year period ending on the date of 
     hiring, the maximum credit equals 40 percent of $14,000 of 
     qualified first-year wages.
     Expiration
       The work opportunity tax credit is not available with 
     respect to wages paid to individuals who begin work for an 
     employer after December 31, 2019.


                               House Bill

       The provision repeals the work opportunity tax credit.
       Effective date.--The provision applies to amounts paid or 
     incurred to individuals who begin work for the employer after 
     December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.
     5. Repeal of deduction for certain unused business credits 
         (sec. 3405 of the House bill, sec. 13403 of the Senate 
         amendment, and sec. 196 of the Code)


                              Present Law

       The general business credit (``GBC'') consists of various 
     individual tax credits allowed with respect to certain 
     qualified expenditures and activities.\896\ In general, the 
     various individual tax credits contain provisions that 
     prohibit ``double benefits,'' either by denying deductions in 
     the case of expenditure-related credits or by requiring 
     income inclusions in the case of activity-related credits. 
     Unused credits may be carried back one year and carried 
     forward 20 years.\897\
---------------------------------------------------------------------------
     \896\ Sec. 38.
     \897\ Sec. 39.
---------------------------------------------------------------------------
       Section 196 allows a deduction to the extent that certain 
     portions of the GBC expire unused after the end of the carry 
     forward period. In general, 100 percent of the unused credit 
     is allowed as a deduction in the taxable year after such 
     credit expired. However, with respect to the investment 
     credit determined under section 46 (other than the 
     rehabilitation credit) and the research credit determined 
     under section 41(a) (for a taxable year beginning before 
     January 1, 1990), section 196 limits the deduction to 50 
     percent of such unused credits.\898\
---------------------------------------------------------------------------
     \898\ Sec. 196(d).
---------------------------------------------------------------------------


                               House Bill

       This provision repeals the deduction for certain unused 
     business credits.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment follows the House bill.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.
     6. Termination of new markets tax credit (sec. 3406 of the 
         House bill 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'').\899\ 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.\900\ The credit is determined by applying the 
     applicable percentage (five or six percent) to the amount 
     paid to the CDE for the investment at its original issue, and 
     is available to the taxpayer who holds the qualified equity 
     investment on the date of the initial investment or on the 
     respective anniversary date that occurs during the taxable 
     year.\901\ The credit is recaptured if at any time during the 
     seven-year period that begins on the date of the original 
     issue of the investment the entity (1) ceases to be a 
     qualified CDE, (2) the proceeds of the investment cease to be 
     used as required, or (3) the equity investment is 
     redeemed.\902\
---------------------------------------------------------------------------
     \899\ Section 45D was added by section 121(a) of the 
     Community Renewal Tax Relief Act of 2000, Pub. L. No. 106-
     554.
     \900\ Sec. 45D(a)(2).
     \901\ Sec. 45D(a)(3).
     \902\ Sec. 45D(g).
---------------------------------------------------------------------------
       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.\903\ A qualified 
     equity investment means stock (other than nonqualified 
     preferred stock) in a corporation or a capital interest in a 
     partnership that is acquired at its original issue directly 
     (or through an underwriter) from a CDE for cash, and includes 
     an investment of a subsequent purchaser if such investment 
     was a qualified equity investment in the hands of the prior 
     holder.\904\ Substantially all of the investment proceeds 
     must be used by the CDE to make qualified low-income 
     community investments and the investment must be designated 
     as a qualified equity investment by the CDE. For this 
     purpose, qualified low-income community investments include: 
     (1) capital or equity investments in, or loans to, qualified 
     active low-income community businesses; (2) certain financial 
     counseling and other services to businesses and residents in 
     low-income communities; (3) the purchase from another CDE of 
     any loan made by such entity that is a qualified low-income 
     community investment; or (4) an equity investment in, or loan 
     to, another CDE.\905\
---------------------------------------------------------------------------
     \903\ Sec. 45D(c).
     \904\ Sec. 45D(b).
     \905\ Sec. 45D(d).
---------------------------------------------------------------------------
       A ``low-income community'' is a population census tract 
     with either (1) a poverty rate of at least 20 percent or (2) 
     median family income which does not exceed 80 percent of the 
     greater of metropolitan area median family income or 
     statewide median family income (for a non-metropolitan census 
     tract, does not exceed 80 percent of statewide median family 
     income). In the case of a population census tract located 
     within a high migration rural county, low-income is defined 
     by reference to 85 percent (as opposed to 80 percent) of 
     statewide median family income.\906\ 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.
---------------------------------------------------------------------------
     \906\ Sec. 45D(e).
---------------------------------------------------------------------------
       The Secretary is authorized to designate ``targeted 
     populations'' as low-income communities for purposes of the 
     new markets tax credit.\907\ 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 \908\ (the ``Act'') to mean individuals, or an 
     identifiable group of individuals, including an Indian tribe, 
     who are low-income persons or otherwise lack adequate access 
     to loans or equity investments. Section 103(17) of the Act 
     provides that ``low-income'' means (1) for a targeted 
     population within a metropolitan area, less than 80 percent 
     of the area median family income; and (2) for a targeted 
     population within a non-metropolitan area, less than the 
     greater of 80 percent of the area median family income or 80 
     percent of the statewide non-metropolitan area median family 
     income. 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.
---------------------------------------------------------------------------
     \907\ Sec. 45D(e)(2).
     \908\ Pub. L. No. 103-325.
---------------------------------------------------------------------------
       A qualified active low-income community business is defined 
     as a business that satisfies, with respect to a taxable year, 
     the following requirements: (1) at least 50 percent of the 
     total gross income of the business is derived from the active 
     conduct of trade or business activities in any low-income 
     community; (2) a substantial portion of the tangible property 
     of the business is used in a low-income community; (3) a 
     substantial portion of the services performed for the 
     business by its employees is performed in a low-income 
     community; and (4) less than five percent of the average of 
     the aggregate unadjusted bases of the property of the 
     business is attributable to certain financial property or to 
     certain collectibles.\909\
---------------------------------------------------------------------------
     \909\ Sec. 45D(d)(2).
---------------------------------------------------------------------------
       The maximum annual amount of qualified equity investments 
     is $3.5 billion for calendar years 2010 through 2019. No 
     amount of unused allocation limitation may be carried to any 
     calendar year after 2024.


                               House Bill

       This provision provides that the new markets tax credit 
     limitation is zero for calendar year 2018 and thereafter and 
     no amount of unused allocation limitation may be carried to 
     any calendar year after 2022.
       Effective date.--The provision applies to calendar years 
     beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.
     7. Repeal of credit for expenditures to provide access to 
         disabled individuals (sec. 3407 of the House bill and 
         sec. 44 of the Code)


                              Present Law

       Section 44 provides a 50-percent credit for eligible access 
     expenditures paid or incurred

[[Page 19997]]

     by an eligible small business for the taxable year. The 
     credit is limited to eligible access expenditures exceeding 
     $250 but not exceeding 10,500. The credit is part of the 
     general business credit.\910\
---------------------------------------------------------------------------
     \910\ Sec. 38(b)(17).
---------------------------------------------------------------------------
       Eligible access expenditures generally means amounts paid 
     or incurred by an eligible small business to comply with 
     requirements under the Americans with Disabilities Act of 
     1990.\911\ These expenditures \912\ include: (1) removal of 
     architectural, communication, physical or transportation 
     barriers which prevent a business from being usable or 
     accessible to individuals with disabilities; \913\ (2) 
     provision of qualified interpreters or other effective 
     methods of making aurally-delivered materials available to 
     individuals with hearing impairments; (3) provision of 
     qualified readers, taped texts, or other effective methods of 
     making visually-delivered materials available to individuals 
     with visual impairments; (4) acquisition or modification of 
     equipment or devices for individuals with disabilities; or 
     (5) provision of other similar services, modifications, 
     materials or equipment.
---------------------------------------------------------------------------
     \911\ As in effect on November 5, 1990. Sec. 44(c)(1).
     \912\ These expenditures must be reasonable and necessary, 
     excluding those unnecessary to accomplish listed purposes, 
     and meet standards set forth by the Secretary and the 
     Architectural and Transportation Barriers Compliance Board. 
     Sec. 44(c)(3) and (5).
     \913\ Expenses related to this removal are not eligible in 
     connection with facilities placed in service after November 
     5, 1990. Sec. 44(c)(4).
---------------------------------------------------------------------------
       An eligible small business means any person that elects 
     application of section 44 and, during the preceding taxable 
     year, (1) had gross receipts not exceeding $1,000,000 or (2) 
     employed not more than 30 full-time employees.\914\
---------------------------------------------------------------------------
     \914\ For this definition, an employee is considered full-
     time if employed at least 30 hours per week for 20 or more 
     calendar weeks in the taxable year.
---------------------------------------------------------------------------


                               House Bill

       The House bill repeals the credit for eligible access 
     expenditures.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.
     8. Modification of credit for portion of employer social 
         security taxes paid with respect to employee tips (sec. 
         3408 of the House bill and sec. 45B of the Code)


                              Present Law

     Credit
       Certain food or beverage establishments may elect to claim 
     a business tax credit equal to an employer's taxes under the 
     Federal Insurance Contributions Act (``FICA'') \915\ paid on 
     tips in excess of those treated as wages for purposes of 
     meeting the minimum wage requirements of the Fair Labor 
     Standards Act (the ``FLSA'') as in effect on January 1, 
     2007.\916\ The credit applies only with respect to FICA taxes 
     paid on tips received from customers in connection with the 
     providing, delivering, or serving of food or beverages for 
     consumption if the tipping of employees delivering or serving 
     food or beverages by customers is customary. The credit is 
     available whether or not the tips are reported or a 
     percentage of gross receipts is allocated (described below). 
     No deduction is allowed for any amount taken into account in 
     determining the tip credit. A taxpayer may elect not to have 
     the credit apply for a taxable year.
---------------------------------------------------------------------------
     \915\ FICA taxes consist of social security (OASDI, or old 
     age, survivor, and disability insurance) and hospital 
     (Medicare) taxes imposed on employers and employees with 
     respect to wages paid to employees under sections 3101-3128.
     \916\ Sec. 45B. As of January 1, 2007, the Federal minimum 
     wage under the FLSA was $5.15 per hour. In the case of tipped 
     employees, the FLSA provided that the minimum wage could be 
     reduced to $2.13 per hour (that is, the employer is only 
     required to pay cash equal to $2.13 per hour) if the 
     combination of tips and cash income equaled the Federal 
     minimum wage.
---------------------------------------------------------------------------
     Reporting and allocation requirements
       Employees are required to report monthly tips to their 
     employer.\917\ Certain large \918\ food or beverage 
     establishments are required to report to the IRS and 
     employees various information including gross receipts of the 
     establishment, and to allocate among employees who 
     customarily receive tip income an amount equal to eight 
     percent of gross receipts in excess of the amount of tips 
     reported by such employees.\919\ Employee tip income that is 
     reported by employees is treated as employer-provided wages 
     subject to FICA.
---------------------------------------------------------------------------
     \917\ Sec. 6053(a).
     \918\ A large establishment for this purpose is one which 
     normally employed more than 10 employees on a typical 
     business day during the preceding calendar year.
     \919\ Sec. 6053(c).
---------------------------------------------------------------------------


                               House Bill

       The provision revises the amount of the credit for FICA 
     taxes an employer pays on tips, as an amount equal to the 
     employer's FICA taxes paid on tips in excess of those treated 
     as minimum wages under the FLSA without regard to the January 
     1, 2007 date. For 2017, this amount is $7.25. In addition, 
     the credit is permitted only if the employer satisfies the 
     reporting requirements of section 6053(c) to the IRS and 
     employees, and allocates among employees who customarily 
     receive tip income an amount equal to 10 percent (rather than 
     eight percent) of gross receipts in excess of the amount of 
     tips reported by such employees. The claiming of the credit 
     remains elective. However, if any size eligible food or 
     beverage establishment elects to claim the FICA tip credit 
     for any taxable year after the provision takes effect, the 
     establishment must satisfy this reporting and 10-percent 
     allocation requirement for that taxable year. Reporting and 
     allocation requirements for food and beverage establishments 
     that elect not to claim the credit remain unchanged.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.
     9. Employer credit for paid family and medical leave (sec. 
         13403 of the Senate amendment, and new sec. 45S of the 
         Code)


                              Present Law

       Present law does not provide a credit to employers for 
     compensation paid to employees while on leave.


                               House Bill

       No provision.


                            Senate Amendment

       The provision allows eligible employers to claim a general 
     business credit equal to 12.5 percent of the amount of wages 
     paid to qualifying employees during any period in which such 
     employees are on family and medical leave if the rate of 
     payment under the program is 50 percent of the wages normally 
     paid to an employee. The credit is increased by 0.25 
     percentage points (but not above 25 percent) for each 
     percentage point by which the rate of payment exceeds 50 
     percent. The maximum amount of family and medical leave that 
     may be taken into account with respect to any employee for 
     any taxable year is 12 weeks.
       An eligible employer is one who has in place a written 
     policy that allows all qualifying full-time employees not 
     less than two weeks of annual paid family and medical leave, 
     and who allows all less-than-full-time qualifying employees a 
     commensurate amount of leave on a pro rata basis. For 
     purposes of this requirement, leave paid for by a State or 
     local government is not taken into account. A ``qualifying 
     employee'' means any employee as defined in section 3(e) of 
     the Fair Labor Standards Act of 1938 who has been employed by 
     the employer for one year or more, and who for the preceding 
     year, had compensation not in excess of 60 percent of the 
     compensation threshold for highly compensated employees.\920\ 
     The Secretary will make determinations as to whether an 
     employer or an employee satisfies the applicable requirements 
     for an eligible employer or qualifying employee, based on 
     information provided by the employer.
---------------------------------------------------------------------------
     \920\ Sec. 414(g)(1)(B) ($120,000 for 2017).
---------------------------------------------------------------------------
       ``Family and medical leave'' is defined as leave described 
     under sections 102(a)(1)(a)-(e) or 102(a)(3) of the Family 
     and Medical Leave Act of 1993.\921\ If an employer provides 
     paid leave as vacation leave, personal leave, or other 
     medical or sick leave, this paid leave would not be 
     considered to be family and medical leave.
---------------------------------------------------------------------------
     \921\ In order to be an eligible employer, an employer must 
     provide certain protections applicable under the Family and 
     Medical Leave Act of 1993, regardless of whether they 
     otherwise apply. Specifically, the employer must provide paid 
     family and medical leave in compliance with a policy which 
     ensures that the employer will not interfere with, restrain, 
     or deny the exercise of or the attempt to exercise, any right 
     provided under the policy and will not discharge or in any 
     other manner discriminate against any individual for opposing 
     any practice prohibited by the policy.
---------------------------------------------------------------------------
       This proposal would not apply to wages paid in taxable 
     years beginning after December 31, 2019.
       Effective date.--The provision is generally effective for 
     wages paid in taxable years beginning after December 31, 
     2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

                           F. Energy Credits

     1. Modifications to credit for electricity produced from 
         certain renewable resources (sec. 3501 of the House bill 
         and sec. 45 of the Code)


                              Present Law

     In general
       An income tax credit is allowed for the production of 
     electricity from qualified energy resources at qualified 
     facilities (the ``renewable electricity production 
     credit'').\922\ Qualified energy resources comprise wind, 
     closed-loop biomass, open-loop biomass, geothermal energy, 
     municipal solid

[[Page 19998]]

     waste, qualified hydropower production, and marine and 
     hydrokinetic renewable energy. Qualified facilities are, 
     generally, facilities that generate electricity using 
     qualified energy resources. To be eligible for the credit, 
     electricity produced from qualified energy resources at 
     qualified facilities must be sold by the taxpayer to an 
     unrelated person.
---------------------------------------------------------------------------
     \922\ Sec. 45. In addition to the renewable electricity 
     production credit, section 45 also provides income tax 
     credits for the production of Indian coal and refined coal at 
     qualified facilities.

    SUMMARY OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE
                                RESOURCES
------------------------------------------------------------------------
                                   Credit amount for
 Eligible electricity production    2017 (cents per     Expiration \1\
       activity (sec. 45)           kilowatt-hour)
------------------------------------------------------------------------
Wind............................  2.4...............  December 31, 2019
Closed-loop biomass.............  2.4...............  December 31, 2016
Open-loop biomass (including      1.2...............  December 31, 2016
 agricultural livestock waste
 nutrient facilities).
Geothermal......................  2.4...............  December 31, 2016
Municipal solid waste (including  1.2...............  December 31, 2016
 landfill gas facilities and
 trash combustion facilities).
Qualified hydropower............  1.2...............  December 31, 2016
Marine and hydrokinetic.........  1.2...............  December 31, 2016
------------------------------------------------------------------------
\1\ Expires for property the construction of which begins after this
  date.

       The credit rate, initially set at 1.5 cents per kilowatt-
     hour (reduced by one-half for certain renewable resources) is 
     adjusted annually for inflation.\923\ In general, the credit 
     is available for electricity produced during the first 10 
     years after a facility has been placed in service. Taxpayers 
     may also elect to get a 30-percent investment tax credit in 
     lieu of this production tax credit.\924\
---------------------------------------------------------------------------
     \923\ The most recent inflation adjustment factors can be in 
     IRS Notice 2017-33, I.R.B. 2017-22, May 30, 2017.
     \924\ Sec. 48(a)(5).
---------------------------------------------------------------------------
     Phase-down for wind facilities
       In the case of wind facilities, the available production 
     tax credit or investment tax credit is reduced by 20 percent 
     for facilities the construction of which begins in 2017, by 
     40 percent for facilities the construction of which begins in 
     2018, and by 60 percent for facilities the construction of 
     which begins in 2019.
     Special rules for determining when the construction of a 
         facility begins
       In general, a taxpayer may establish the beginning of 
     construction of a facility by beginning physical work of a 
     significant nature (the ``physical work test'').\925\ 
     Alternatively, a taxpayer may establish the beginning of 
     construction by meeting the safe harbor test which generally 
     requires that the taxpayer have paid or incurred five percent 
     of the total cost of constructing the facility (the ``five 
     percent safe harbor'').\926\ Both methods require that a 
     taxpayer make continuous progress towards completion once 
     construction has begun.\927\ To demonstrate that continuous 
     progress is being made, taxpayers relying on the physical 
     work test must show that the project is undergoing 
     ``continuous construction,'' and taxpayer relying on the five 
     percent safe harbor must show ``continuous effort'' to 
     complete the project.\928\ Collectively, these two tests are 
     referred to as the ``continuity requirement.'' \929\
---------------------------------------------------------------------------
     \925\ IRS Notice 2013-29, 2013-20 I.R.B. 1085, April 14, 
     2013.
     \926\ Ibid.
     \927\ Ibid. See also, Notice 2016-31, 2016-23 I.R.B. 1025, 
     May 5, 2016.
     \928\ Ibid.
     \929\ Notice 2016-31, 2016-23 I.R.B. 1025, May 5, 2016.
---------------------------------------------------------------------------


                               House Bill

       The provision eliminates the inflation adjustment for wind 
     facilities the construction of which begins after the date of 
     enactment. Such facilities are entitled to a credit of 1.5 
     cents per kilowatt-hour (i.e., the statutory credit rate 
     unadjusted for inflation). Credits remain subject to the 
     phase-down based on the year construction begins.
       The provision includes a special rule for determining the 
     beginning of construction, which is intended to codify 
     Treasury guidance for determining when construction of a 
     facility has begun, including the physical work test, the 
     five percent safe harbor, and the continuity requirement.
       Effective date.--The provision terminating the inflation 
     adjustment is effective for taxable years ending after the 
     date of enactment. The provision codifying existing guidance 
     for determining when construction has begun is effective for 
     taxable years beginning before, on, or after the date of 
     enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.
     2. Modification of the energy investment tax credit (sec. 
         3502 of the House bill and sec. 48 of the Code)


                              Present Law

       In general
       A permanent, nonrefundable, 10-percent business energy 
     credit \930\ is allowed for the cost of new property that is 
     equipment that either (1) uses solar energy to generate 
     electricity, to heat or cool a structure, or to provide solar 
     process heat or (2) is used to produce, distribute, or use 
     energy derived from a geothermal deposit, but only, in the 
     case of electricity generated by geothermal power, up to the 
     electric transmission stage. Property used to generate energy 
     for the purposes of heating a swimming pool is not eligible 
     solar energy property.
---------------------------------------------------------------------------
     \930\ Sec. 48.
---------------------------------------------------------------------------
       In addition to the permanent credit, temporary investment 
     credits are available for a variety of renewable and 
     alternative energy property. The rules governing these 
     temporary credits are described below.
       The energy credit is a component of the general business 
     credit.\931\ An unused general business credit generally may 
     be carried back one year and carried forward 20 years.\932\ 
     The taxpayer's basis in the property is reduced by one-half 
     of the amount of the credit claimed. For projects whose 
     construction time is expected to equal or exceed two years, 
     the credit may be claimed as progress expenditures are made 
     on the project, rather than during the year the property is 
     placed in service. The credit is allowed against the 
     alternative minimum tax.
---------------------------------------------------------------------------
     \931\ Sec. 38(b)(1).
     \932\ Sec. 39.
---------------------------------------------------------------------------
       Solar energy property
       The credit rate for solar energy property is increased to 
     30 percent in the case of property the construction of which 
     begins before January 1, 2020. The rate is increased to 26 
     percent in the case of property the construction of which 
     begins in calendar year 2020. The rate is increased to 22 
     percent in the case of property the construction of which 
     begins in calendar year 2021. To qualify for the enhanced 
     credit rates, the property must be placed in service before 
     January 1, 2024.
       Additionally, equipment that uses fiber-optic distributed 
     sunlight (``fiber optic solar'') to illuminate the inside of 
     a structure is solar energy property eligible for the 30-
     percent credit, but only for property placed in service 
     before January 1, 2017.
       Fuel cell property and microturbine property
       The energy credit applies to qualified fuel cell power 
     plant property, but only for periods prior to January 1, 
     2017. The credit rate is 30 percent.
       A qualified fuel cell power plant is an integrated system 
     composed of a fuel cell stack assembly and associated balance 
     of plant components that (1) converts a fuel into electricity 
     using electrochemical means, and (2) has an electricity-only 
     generation efficiency of greater than 30 percent and a 
     capacity of at least one-half kilowatt. The credit may not 
     exceed $1,500 for each 0.5 kilowatt of capacity.
       The energy credit applies to qualifying stationary 
     microturbine power plant property for periods prior to 
     January 1, 2017. The credit is limited to the lesser of 10 
     percent of the basis of the property or $200 for each 
     kilowatt of capacity.
       A qualified stationary microturbine power plant is an 
     integrated system comprised of a gas turbine engine, a 
     combustor, a recuperator or regenerator, a generator or 
     alternator, and associated balance of plant components that 
     converts a fuel into electricity and thermal energy. Such 
     system also includes all secondary components located between 
     the existing infrastructure for fuel delivery and the 
     existing infrastructure for power distribution, including 
     equipment and controls for meeting relevant power standards, 
     such as voltage, frequency, and power factors. Such system 
     must have an electricity-only generation efficiency of not 
     less than 26 percent at International Standard Organization 
     conditions and a capacity of less than 2,000 kilowatts.
       Geothermal heat pump property
       The energy credit applies to qualified geothermal heat pump 
     property placed in service prior to January 1, 2017. The 
     credit rate is 10 percent. Qualified geothermal heat pump 
     property is equipment that uses the ground or ground water as 
     a thermal energy source to heat a structure or as a thermal 
     energy sink to cool a structure.
       Small wind property
       The energy credit applies to qualified small wind energy 
     property placed in service prior to January 1, 2017. The 
     credit rate is 30 percent. Qualified small wind energy 
     property is property that uses a qualified wind turbine to 
     generate electricity. A qualifying wind turbine means a wind 
     turbine of 100 kilowatts of rated capacity or less.
       Combined heat and power property
       The energy credit applies to combined heat and power 
     (``CHP'') property placed in service prior to January 1, 
     2017. The credit rate is 10 percent.
       CHP property is property: (1) that uses the same energy 
     source for the simultaneous or sequential generation of 
     electrical power, mechanical shaft power, or both, in 
     combination with the generation of steam or other forms of 
     useful thermal energy (including heating and cooling 
     applications); (2) that has an electrical capacity of not 
     more than 50 megawatts or a mechanical energy capacity of not 
     more than 67,000 horsepower or an equivalent combination of 
     electrical and mechanical energy capacities; (3) that 
     produces at least 20 percent of its total useful energy in 
     the form of thermal energy that is not used to produce 
     electrical or mechanical power, and produces at least 20 
     percent of its total useful energy in the form of electrical 
     or mechanical power (or a combination thereof); and (4) the 
     energy efficiency percentage of which exceeds 60 percent. CHP 
     property does not include property used to

[[Page 19999]]

     transport the energy source to the generating facility or to 
     distribute energy produced by the facility.
       The otherwise allowable credit with respect to CHP property 
     is reduced to the extent the property has an electrical 
     capacity or mechanical capacity in excess of any applicable 
     limits. Property in excess of the applicable limit (15 
     megawatts or a mechanical energy capacity of more than 20,000 
     horsepower or an equivalent combination of electrical and 
     mechanical energy capacities) is permitted to claim a 
     fraction of the otherwise allowable credit. The fraction is 
     equal to the applicable limit divided by the capacity of the 
     property. For example, a 45 megawatt property would be 
     eligible to claim 15/45ths, or one third, of the otherwise 
     allowable credit. Again, no credit is allowed if the property 
     exceeds the 50 megawatt or 67,000 horsepower limitations 
     described above.
       Additionally, systems whose fuel source is at least 90 
     percent open-loop biomass and that would qualify for the 
     credit but for the failure to meet the efficiency standard 
     are eligible for a credit that is reduced in proportion to 
     the degree to which the system fails to meet the efficiency 
     standard. For example, a system that would otherwise be 
     required to meet the 60-percent efficiency standard, but 
     which only achieves 30-percent efficiency, would be permitted 
     a credit equal to one-half of the otherwise allowable credit 
     (i.e., a 5-percent credit).
       Election of energy credit in lieu of section 45 production 
           tax credit
       A taxpayer may make an irrevocable election to have the 
     property used in certain qualified renewable power facilities 
     be treated as energy property eligible for a 30-percent 
     investment credit under section 48. For this purpose, 
     qualified facilities are facilities otherwise eligible for 
     the renewable electricity production tax credit with respect 
     to which no credit under section 45 has been allowed. A 
     taxpayer electing to treat a facility as energy property may 
     not claim the production credit under section 45. In the case 
     of non-wind facilities, to make this election, construction 
     must begin before January 1, 2017. For wind facilities, the 
     30-percent credit rate is reduced by 20 percent in the case 
     of any wind facility the construction of which begins in 
     calendar year 2017, by 40 percent in the case of any wind 
     facility the construction of which begins in calendar year 
     2018, and by 60 percent in the case of any wind facility the 
     construction of which begins in calendar year 2019. The 
     credit for wind facilities expires for facilities the 
     construction of which begins after calendar year 2019.
       In general, a taxpayer may establish the beginning of 
     construction of a facility by beginning physical work of a 
     significant nature (the ``physical work test'').\933\ 
     Alternatively, a taxpayer may establish the beginning of 
     construction by meeting the safe harbor test which generally 
     requires that the taxpayer have paid or incurred five percent 
     of the total cost of constructing the facility (the ``five 
     percent safe harbor'').\934\ Both methods require that a 
     taxpayer make continuous progress towards completion once 
     construction has begun.\935\ To demonstrate that continuous 
     progress is being made, taxpayers relying on the physical 
     work test must show that the project is undergoing 
     ``continuous construction,'' and taxpayers relying on the 
     five percent safe harbor must show ``continuous effort'' to 
     complete the project.\936\ Collectively, these two tests are 
     referred to as the ``continuity requirement.'' \937\
---------------------------------------------------------------------------
     \933\ IRS Notice 2013-29, 2013-20 I.R.B. 1085, April 14, 
     2013.
     \934\ Ibid.
     \935\ Ibid. See also, Notice 2016-31, 2016-23 I.R.B. 1025, 
     May 5, 2016.
     \936\ Ibid.
     \937\ Notice 2016-31, 2016-23 I.R.B. 1025, May 5, 2016.
---------------------------------------------------------------------------


                               House Bill

       The provision extends the energy credit for fiber optic 
     solar, fuel cell, microturbine, geothermal heat pump, small 
     wind, and combined heat and power property. In each case, the 
     credit is extended for property the construction of which 
     begins before January 1, 2022. In the case of fiber optic 
     solar, fuel cell, and small wind property, the credit rate is 
     reduced to 26 percent for property the construction of which 
     begins in calendar year 2020 and to 22 percent for property 
     the construction of which begins in calendar year 2021. 
     Qualified property must be placed in service before January 
     1, 2024.
       The provision terminates the permanent credits for solar 
     and geothermal property the construction of which begins 
     after December 31, 2027.
       The provision includes a special rule for determining the 
     beginning of construction, which is intended to adopt 
     Treasury guidance for determining when construction of a 
     facility has begun, including the physical work test, the 
     five percent safe harbor, and the continuity requirement.
       Effective date.--The provision generally applies to periods 
     after December 31, 2016, under rules similar to the rules of 
     section 48(m), as in effect on the day before the date of 
     enactment of the Revenue Reconciliation Act of 1990. The 
     extension of the credit for combined heat and power system 
     property applies to property placed in service after December 
     31, 2016. The reduced credit rates and the termination of the 
     permanent credits are effective on the date of the enactment 
     of the provision. The special rule for determining the 
     beginning of construction of qualified property applies to 
     taxable years beginning before, on, or after the date of 
     enactment of the provision.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.
     3. Extension and phaseout of residential energy efficient 
         property credit (sec. 3503 of the House bill and sec. 25D 
         of the Code)


                              Present Law

     In general
       Section 25D provides a personal tax credit for the purchase 
     of qualified solar electric property and qualified solar 
     water heating property that is used exclusively for purposes 
     other than heating swimming pools and hot tubs. The credit is 
     equal to 30 percent of qualifying expenditures.
       Section 25D also provides a 30 percent credit for the 
     purchase of qualified geothermal heat pump property, 
     qualified small wind energy property, and qualified fuel cell 
     power plants. The credit for any fuel cell may not exceed 
     $500 for each 0.5 kilowatt of capacity.
       The credit is nonrefundable. The credit with respect to all 
     qualifying property may be claimed against the alternative 
     minimum tax.
       With the exception of solar property, the credit expires 
     for property placed in service after December 31, 2016. In 
     the case of qualified solar electric property and solar water 
     heating property, the credit expires for property placed in 
     service after December 31, 2021. In addition, the credit rate 
     for such solar property is reduced to 26 percent for property 
     placed in service in calendar year 2020 and to 22 percent for 
     property placed in service in calendar year 2021.
     Qualified property
       Qualified solar electric property is property that uses 
     solar energy to generate electricity for use in a dwelling 
     unit. Qualifying solar water heating property is property 
     used to heat water for use in a dwelling unit located in the 
     United States and used as a residence if at least half of the 
     energy used by such property for such purpose is derived from 
     the sun.
       A qualified fuel cell power plant is an integrated system 
     comprised of a fuel cell stack assembly and associated 
     balance of plant components that (1) converts a fuel into 
     electricity using electrochemical means, (2) has an 
     electricity-only generation efficiency of greater than 30 
     percent, and (3) has a nameplate capacity of at least 0.5 
     kilowatt. The qualified fuel cell power plant must be 
     installed on or in connection with a dwelling unit located in 
     the United States and used by the taxpayer as a principal 
     residence.
       Qualified small wind energy property is property that uses 
     a wind turbine to generate electricity for use in a dwelling 
     unit located in the United States and used as a residence by 
     the taxpayer.
       Qualified geothermal heat pump property means any equipment 
     which (1) uses the ground or ground water as a thermal energy 
     source to heat the dwelling unit or as a thermal energy sink 
     to cool such dwelling unit, (2) meets the requirements of the 
     Energy Star program which are in effect at the time that the 
     expenditure for such equipment is made, and (3) is installed 
     on or in connection with a dwelling unit located in the 
     United States and used as a residence by the taxpayer.
     Additional rules
       The depreciable basis of the property is reduced by the 
     amount of the credit. Expenditures for labor costs allocable 
     to onsite preparation, assembly, or original installation of 
     property eligible for the credit are eligible expenditures.
       Special proration rules apply in the case of jointly owned 
     property, condominiums, and tenant-stockholders in 
     cooperative housing corporations. If less than 80 percent of 
     the property is used for nonbusiness purposes, only that 
     portion of expenditures that is used for nonbusiness purposes 
     is taken into account.


                               House Bill

       The provision extends the residential energy efficient 
     property credit with respect to non-solar qualified property 
     through December 31, 2021. The credit rate for such property 
     is reduced to 26 percent for property placed in service in 
     calendar year 2020 and to 22 percent for property placed in 
     service in calendar year 2021.
       Effective date.--The provision applies to property placed 
     in service after December 31, 2016.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.
     4. Repeal of enhanced oil recovery credit (sec. 3504 of the 
         House bill and sec. 43 of the Code)


                              Present Law

       Section 43 provides a 15-percent credit for expenses 
     associated with an enhanced oil recovery (``EOR'') project. 
     Qualified EOR costs

[[Page 20000]]

     consist of the following designated expenses associated with 
     an EOR project: (1) amounts paid for depreciable tangible 
     property; (2) intangible drilling and development expenses; 
     (3) tertiary injectant expenses; and (4) construction costs 
     for certain Alaskan natural gas treatment facilities. An EOR 
     project is generally a project that involves increasing the 
     amount of recoverable domestic crude oil through the use of 
     one or more tertiary recovery methods (as defined in section 
     193(b)(3)), such as injecting steam or carbon dioxide into a 
     well to effect oil displacement. The credit is reduced as the 
     price of oil exceeds a certain threshold.


                               House Bill

       The provision repeals the enhanced oil recovery credit.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.
     5. Repeal of credit for producing oil and gas from marginal 
         wells (sec. 3505 of the House bill and sec. 45I of the 
         Code)


                              Present Law

       Section 45I provides a $3-per-barrel credit for the 
     production of crude oil and a $0.50 credit per 1,000 cubic 
     feet of qualified natural gas production. In both cases, the 
     credit is available only for production from a ``qualified 
     marginal well.''
       A qualified marginal well is defined as a domestic well: 
     (1) production from which is treated as marginal production 
     for purposes of the Code's percentage depletion rules; or (2) 
     that during the taxable year had average daily production of 
     not more than 25 barrel equivalents and produces water at a 
     rate of not less than 95 percent of total well effluent. The 
     maximum amount of production on which credit could be claimed 
     is 1,095 barrels or barrel equivalents.
       The credit is not available to production occurring if the 
     reference price of oil exceeds $18 ($2.00 for natural gas). 
     The credit is reduced proportionately for reference prices 
     between $15 and $18 ($1.67 and $2.00 for natural gas).
       The credit is treated as a general business credit. Unused 
     credits can be carried back for up to five years rather than 
     the generally applicable carryback period of one year. The 
     credit is indexed for inflation.


                               House Bill

       The provision repeals the credit for producing oil and gas 
     from marginal wells.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.
     6. Modification of credit for production from advanced 
         nuclear power facilities (sec. 3506 of the House bill and 
         sec. 45J of the Code)


                              Present Law

       Taxpayers producing electricity at a qualifying advanced 
     nuclear power facility may claim a credit equal to 1.8 cents 
     per kilowatt-hour of electricity produced for the eight-year 
     period starting when the facility is placed in service.\938\ 
     The aggregate amount of credit that a taxpayer may claim in 
     any year during the eight-year period is subject to 
     limitation based on allocated capacity and an annual 
     limitation as described below.
---------------------------------------------------------------------------
     \938\ Sec. 45J. The 1.8-cents credit amount is reduced, but 
     not below zero, if the annual average contract price per 
     kilowatt-hour of electricity generated from advanced nuclear 
     power facilities in the preceding year exceeds eight cents 
     per kilowatt-hour. The eight-cent price comparison level is 
     indexed for inflation after 1992 (12.6 cents for 2017).
---------------------------------------------------------------------------
       An advanced nuclear facility is any nuclear facility for 
     the production of electricity, the reactor design for which 
     was approved after 1993 by the Nuclear Regulatory Commission. 
     For this purpose, a qualifying advanced nuclear facility does 
     not include any facility for which a substantially similar 
     design for a facility of comparable capacity was approved 
     before 1994.
       A qualifying advanced nuclear facility is an advanced 
     nuclear facility for which the taxpayer has received an 
     allocation of megawatt capacity from the Secretary of the 
     Treasury (``the Secretary'') and is placed in service before 
     January 1, 2021. The taxpayer may only claim credit for 
     production of electricity equal to the ratio of the allocated 
     capacity that the taxpayer receives from the Secretary to the 
     rated nameplate capacity of the taxpayer's facility. For 
     example, if the taxpayer receives an allocation of 750 
     megawatts of capacity from the Secretary and the taxpayer's 
     facility has a rated nameplate capacity of 1,000 megawatts, 
     then the taxpayer may claim three-quarters of the otherwise 
     allowable credit, or 1.35 cents per kilowatt-hour, for each 
     kilowatt-hour of electricity produced at the facility 
     (subject to the annual limitation described below). The 
     credit is restricted to 6,000 megawatts of national capacity. 
     Once that limitation has been reached, the Secretary may make 
     no additional allocations. Treasury guidance required 
     allocation applications to be filed before February 1, 
     2014.\939\
---------------------------------------------------------------------------
     \939\ I.R.S. Notice 2013-68.
---------------------------------------------------------------------------
       A taxpayer operating a qualified facility may claim no more 
     than $125 million in tax credits per 1,000 megawatts of 
     allocated capacity in any one year of the eight-year credit 
     period. If the taxpayer operates a 1,350 megawatt rated 
     nameplate capacity system and has received an allocation from 
     the Secretary for 1,350 megawatts of capacity eligible for 
     the credit, the taxpayer's annual limitation on credits that 
     may be claimed is equal to 1.35 times $125 million, or 
     $168.75 million. If the taxpayer operates a facility with a 
     nameplate rated capacity of 1,350 megawatts, but has received 
     an allocation from the Secretary for 750 megawatts of credit 
     eligible capacity, then the two limitations apply such that 
     the taxpayer may claim a credit effectively equal to one cent 
     per kilowatt-hour of electricity produced (calculated as 
     described above) subject to an annual credit limitation of 
     $93.75 million in credits (three-quarters of $125 million).
       The credit is part of the general business credit.


                               House Bill

       The provision modifies the national megawatt capacity 
     limitation for the advanced nuclear power production credit. 
     To the extent any amount of the 6,000 megawatts of authorized 
     capacity remains unutilized, the provision requires the 
     Secretary to allocate such capacity first to facilities 
     placed in service before the year 2021, to the extent such 
     facilities did not receive an allocation equal to their full 
     nameplate capacity, and then to facilities placed in service 
     after such date in the order in which such facilities are 
     placed in service. The provision provides that the present-
     law placed-in-service sunset date of January 1, 2021, does 
     not apply with respect to allocations of such unutilized 
     national megawatt capacity.
       The provision also allows qualified public entities to 
     elect to forgo credits to which they otherwise would be 
     entitled in favor of an eligible project partner. Qualified 
     public entities are defined as (1) a Federal, State, or local 
     government of any political subdivision, agency, or 
     instrumentality thereof; (2) a mutual or cooperative electric 
     company; or (3) a not-for-profit electric utility which has 
     or had received a loan or loan guarantee under the Rural 
     Electrification Act of 1936.\940\ An eligible project partner 
     under the provision generally includes any person who 
     designed or constructed the nuclear power plant, participates 
     in the provision of nuclear steam or nuclear fuel to the 
     power plant, or has an ownership interest in the facility. In 
     the case of a facility owned by a partnership, where the 
     credit is determined at the partnership level, any electing 
     qualified public entity is treated as the taxpayer with 
     respect to such entity's distributive share of such credits, 
     and any other partner is an eligible project partner.
---------------------------------------------------------------------------
     \940\ 7 U.S.C. sec. 901 et seq.
---------------------------------------------------------------------------
       Effective date.--The provision requiring the allocation of 
     unutilized national megawatt capacity limitation is effective 
     on the date of enactment. The provision allowing an election 
     by qualified public entities to forgo credits in favor of an 
     eligible project partner is effective for taxable years 
     beginning after the date of enactment.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include in the House 
     bill.

                            G. Bond Reforms

     1. Termination of private activity bonds (sec. 3601 of the 
         House bill and sec. 103 of the Code)


                              Present Law

     In general
       Under present law, gross income generally does not include 
     interest paid on State or local bonds.\941\ State and local 
     bonds are classified generally as either governmental bonds 
     or private activity bonds. Governmental bonds are bonds which 
     are primarily used to finance governmental functions or that 
     are repaid with governmental funds. Private activity bonds 
     are bonds with respect to which the State or local government 
     serves as a conduit providing financing to nongovernmental 
     persons (e.g., private businesses or individuals). The 
     exclusion from income for State and local bonds only applies 
     to private activity bonds if the bonds are issued for certain 
     permitted purposes (``qualified private activity bonds'').
---------------------------------------------------------------------------
     \941\ Sec. 103.
---------------------------------------------------------------------------
     Private activity bonds
       Present law provides three main tests for determining 
     whether a State or local bond is in substance a private 
     activity bond, the two-part private business test, the five-
     percent unrelated or disproportionate use test, and the 
     private loan test.
       Private business test
       Private business use and private payments result in State 
     and local bonds being private activity bonds if both parts of 
     the two-part private business test are satisfied--
       1. More than 10 percent of the bond proceeds is to be used 
     (directly or indirectly) by

[[Page 20001]]

     a private business (the ``private business use test''); and
       2. More than 10 percent of the debt service on the bonds is 
     secured by an interest in property to be used in a private 
     business use or to be derived from payments in respect of 
     such property (the ``private payment test'').
       Private business use generally includes any use by a 
     business entity (including the Federal government), which 
     occurs pursuant to terms not generally available to the 
     general public. For example, if bond-financed property is 
     leased to a private business (other than pursuant to certain 
     short-term leases for which safe harbors are provided under 
     Treasury regulations), bond proceeds used to finance the 
     property are treated as used in a private business use, and 
     rental payments are treated as securing the payment of the 
     bonds. Private business use also can arise when a 
     governmental entity contracts for the operation of a 
     governmental facility by a private business under a 
     management contract that does not satisfy Treasury regulatory 
     safe harbors regarding the types of payments made to the 
     private operator and the length of the contract.
       Five-percent unrelated or disproportionate business use 
           test
       A second standard to determine whether a bond is to be 
     treated as a private activity bond is the five percent 
     unrelated or disproportionate business use test. Under this 
     test the private business use and private payment test 
     (described above) are separately applied substituting five 
     percent for 10 percent and generally only taking into account 
     private business use and private payments that are not 
     related or not proportionate to the government use of the 
     bond proceeds. For example, while a bond issue that finances 
     a new State or local government office building may include a 
     cafeteria, the issue may become a private activity bond if 
     the size of the cafeteria is excessive (as determined under 
     this rule).
       Private loan test
       The third standard for determining whether a State or local 
     bond is a private activity bond is whether an amount 
     exceeding the lesser of (1) five percent of the bond proceeds 
     or (2) $5 million is used (directly or indirectly) to finance 
     loans to private persons. Private loans include both business 
     and other (e.g., personal) uses and payments by private 
     persons; however, in the case of business uses and payments, 
     all private loans also constitute private business uses and 
     payments subject to the private business test. Present law 
     provides that the substance of a transaction governs in 
     determining whether the transaction gives rise to a private 
     loan. In general, any transaction which transfers tax 
     ownership of property to a private person is treated as a 
     private loan.
       Special limit on certain output facilities
       A special rule for output facilities treats bonds as 
     private activity bonds if more than $15 million of the 
     proceeds of the bond issue are used to finance an output 
     facility (an output facility includes electric and gas 
     generation, transmission and related facilities but not a 
     facility for the furnishing of water).\942\
---------------------------------------------------------------------------
     \942\ Sec. 141(b)(4).
---------------------------------------------------------------------------
       Special volume cap requirement for larger transactions
       A special volume cap requirement for larger transactions 
     treats bonds as private activity bonds if the nonqualified 
     amount of private business use or private payments exceeds 
     $15 million (even if that amount is within the general 10-
     percent private business limitation for governmental bonds) 
     unless the issuer obtains a private activity bond volume 
     allocation.\943\
---------------------------------------------------------------------------
     \943\ Sec. 141(b)(5).
---------------------------------------------------------------------------
     Qualified private activity bonds
       As stated, interest on private activity bonds is taxable 
     unless the bonds meet the requirements for qualified private 
     activity bonds. Qualified private activity bonds permit 
     States or local governments to act as conduits providing tax-
     exempt financing for certain private activities. The 
     definition of qualified private activity bonds includes an 
     exempt facility bond, or qualified mortgage, veterans' 
     mortgage, small issue, redevelopment, 501(c)(3), or student 
     loan bond.\944\ The definition of exempt facility bond 
     includes bonds issued to finance certain transportation 
     facilities (airports, ports, mass commuting, and high-speed 
     intercity rail facilities); qualified residential rental 
     projects; privately owned and/or operated utility facilities 
     (sewage, water, solid waste disposal, and local district 
     heating and cooling facilities, certain private electric and 
     gas facilities, and hydroelectric dam enhancements); public/
     private educational facilities; qualified green building and 
     sustainable design projects; and qualified highway or surface 
     freight transfer facilities.\945\
---------------------------------------------------------------------------
     \944\ Sec. 141(e).
     \945\ Sec. 142(a).
---------------------------------------------------------------------------
       In most cases, the aggregate volume of these tax-exempt 
     private activity bonds is restricted by annual aggregate 
     volume limits imposed on bonds issued by issuers within each 
     State. For 2017, the State volume limit is the greater of 
     $100 multiplied by the State population, or $305.32 
     million.\946\
---------------------------------------------------------------------------
     \946\ Sec. 3.20 of Rev. Proc. 2016-55, 2016-2 C.B. 707.
---------------------------------------------------------------------------


                               House Bill

       The provision repeals the exception from the exclusion from 
     gross income for interest paid on qualified private activity 
     bonds issued after December 31, 2017. Thus, such interest on 
     private activity bond issued after such date is includible in 
     the gross income of the taxpayer.\947\
---------------------------------------------------------------------------
     \947\ The provisions do not apply to any previously issued 
     bond, nor would the provisions prevent State and local 
     governments from issuing private activity bonds in the 
     future; the provisions merely remove the Federal tax subsidy 
     for newly issued bonds. The bill also terminates section 25 
     of the Code as it relates to credits associated with mortgage 
     credit certificates issued after December 31, 2017. See 
     section 1102 of the bill (Repeal of nonrefundable credits).
---------------------------------------------------------------------------
       Effective date.--The provision applies to bonds issued 
     after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.
     2. Repeal of advance refunding bonds (sec. 3602 of the House 
         bill, sec. 13532 of the Senate amendment, and sec. 149(d) 
         of the Code)


                              Present Law

       Section 103 generally provides that gross income does not 
     include interest received on State or local bonds. 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).\948\ Bonds issued to finance the 
     activities of charitable organizations described in section 
     501(c)(3) (``qualified 501(c)(3) bonds'') are one type of 
     private activity bond. The exclusion from income for interest 
     on State and local bonds only applies if certain Code 
     requirements are met.
---------------------------------------------------------------------------
     \948\ Sec. 141.
---------------------------------------------------------------------------
       The exclusion for income for interest on State and local 
     bonds applies to refunding bonds but there are limits on 
     advance refunding bonds. A refunding bond is defined as any 
     bond used to pay principal, interest, or redemption price on 
     a prior bond issue (the refunded bond). Different rules apply 
     to current as opposed to advance refunding bonds. A current 
     refunding occurs when the refunded bond is redeemed within 90 
     days of issuance of the refunding bonds. Conversely, a bond 
     is classified as an advance refunding if it is issued more 
     than 90 days before the redemption of the refunded bond.\949\ 
     Proceeds of advance refunding bonds are generally invested in 
     an escrow account and held until a future date when the 
     refunded bond may be redeemed.
---------------------------------------------------------------------------
     \949\ Sec. 149(d)(5).
---------------------------------------------------------------------------
       Although there is no statutory limitation on the number of 
     times that tax-exempt bonds may be currently refunded, the 
     Code limits advance refundings. Generally, governmental bonds 
     and qualified 501(c)(3) bonds may be advance refunded one 
     time.\950\ Private activity bonds, other than qualified 
     501(c)(3) bonds, may not be advance refunded at all.\951\ 
     Furthermore, in the case of an advance refunding bond that 
     results in interest savings (e.g., a high interest rate to 
     low interest rate refunding), the refunded bond must be 
     redeemed on the first call date 90 days after the issuance of 
     the refunding bond that results in debt service savings.\952\
---------------------------------------------------------------------------
     \950\ Sec. 149(d)(3). Bonds issued before 1986 and pursuant 
     to certain transition rules contained in the Tax Reform Act 
     of 1986 may be advance refunded more than one time in certain 
     cases.
     \951\ Sec. 149(d)(2).
     \952\ Sec. 149(d)(3)(A)(iii) and (B); Treas. Reg. sec. 
     1.149(d)-1(f)(3). A ``call'' provision provides the issuer of 
     a bond with the right to redeem the bond prior to the stated 
     maturity.
---------------------------------------------------------------------------


                               House Bill

       The provision repeals the exclusion from gross income for 
     interest on a bond issued to advance refund another bond.
       Effective date.--The provision applies to advance refunding 
     bonds issued after December 31, 2017.


                            Senate Amendment

       The Senate amendment follows the House bill.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     3. Repeal of tax credit bonds (sec. 3603 of the House bill 
         and secs. 54A, 54B, 54C, 54D, 54E, 54F and 6431 of the 
         Code)


                              Present Law

     In general
       Tax-credit bonds provide tax credits to investors to 
     replace a prescribed portion of the interest cost. The 
     borrowing subsidy generally is measured by reference to the 
     credit rate set by the Treasury Department. Current tax-
     credit bonds include qualified tax credit bonds, which have 
     certain common general requirements, and include new clean 
     renewable energy bonds, qualified energy conservation bonds, 
     qualified zone academy

[[Page 20002]]

     bonds, and qualified school construction bonds.\953\
---------------------------------------------------------------------------
     \953\ The authority to issue two other types of tax-credit 
     bonds, recovery zone economic development bonds and Build 
     America Bonds, expired on January 1, 2011.
---------------------------------------------------------------------------
     Qualified tax-credit bonds
       General rules applicable to qualified tax-credit bonds 
           \954\
       Unlike tax-exempt bonds, qualified tax-credit bonds 
     generally are not interest-bearing obligations. Rather, the 
     taxpayer holding a qualified tax-credit bond on a credit 
     allowance date is entitled to a tax credit. The amount of the 
     credit is determined by multiplying the bond's credit rate by 
     the face amount on the holder's bond. The credit rate for an 
     issue of qualified tax credit bonds is determined by the 
     Secretary and is estimated to be a rate that permits issuance 
     of the qualified tax-credit bonds without discount and 
     interest cost to the qualified issuer.\955\ The credit 
     accrues quarterly and is includible in gross income (as if it 
     were an interest payment on the bond), and can be claimed 
     against regular income tax liability and alternative minimum 
     tax liability. Unused credits may be carried forward to 
     succeeding taxable years. In addition, credits may be 
     separated from the ownership of the underlying bond similar 
     to how interest coupons can be stripped for interest-bearing 
     bonds.
---------------------------------------------------------------------------
     \954\ Certain other rules apply to qualified tax credit 
     bonds, such as maturity limitations, reporting requirements, 
     spending rules, and rules relating to arbitrage. Separate 
     rules apply in the case of tax-credit bonds which are not 
     qualified tax-credit bonds (i.e., ``recovery zone economic 
     development bonds,'' and ``Build America Bonds'').
     \955\ However, for new clean renewable energy bonds and 
     qualified energy conservation bonds, the applicable credit 
     rate is 70 percent of the otherwise applicable rate.
---------------------------------------------------------------------------
       New clean renewable energy bonds
       New clean renewable energy bonds (``New CREBs'') may be 
     issued by qualified issuers to finance qualified renewable 
     energy facilities.\956\ Qualified renewable energy facilities 
     are facilities that: (1) qualify for the tax credit under 
     section 45 (other than Indian coal and refined coal 
     production facilities), without regard to the placed-in-
     service date requirements of that section; and (2) are owned 
     by a public power provider, governmental body, or cooperative 
     electric company.
---------------------------------------------------------------------------
     \956\ Sec. 54C.
---------------------------------------------------------------------------
       The term ``qualified issuers'' includes: (1) public power 
     providers; (2) a governmental body; (3) cooperative electric 
     companies; (4) a not-for-profit electric utility that has 
     received a loan or guarantee under the Rural Electrification 
     Act; and (5) clean renewable energy bond lenders. There was 
     originally a national limitation for New CREBs of $800 
     million. The national limitation was then increased by an 
     additional $1.6 billion in 2009. As with other tax credit 
     bonds, a taxpayer holding New CREBs on a credit allowance 
     date is entitled to a tax credit. However, the credit rate on 
     New CREBs is set by the Secretary at a rate that is 70 
     percent of the rate that would permit issuance of such bonds 
     without discount and interest cost to the issuer.\957\
---------------------------------------------------------------------------
     \957\ Given the differences in credit quality and other 
     characteristics of individual issuers, the Secretary cannot 
     set credit rates in a manner that will allow each issuer to 
     issue tax credit bonds at par.
---------------------------------------------------------------------------
       Qualified energy conservation bonds
       Qualified energy conservation bonds may be used to finance 
     qualified conservation purposes.
       The term ``qualified conservation purpose'' means:
       1. Capital expenditures incurred for purposes of: (a) 
     reducing energy consumption in publicly owned buildings by at 
     least 20 percent; (b) implementing green community programs; 
     \958\ (c) rural development involving the production of 
     electricity from renewable energy resources; or (d) any 
     facility eligible for the production tax credit under section 
     45 (other than Indian coal and refined coal production 
     facilities);
---------------------------------------------------------------------------
     \958\ Capital expenditures to implement green community 
     programs include grants, loans, and other repayment 
     mechanisms to implement such programs. For example, States 
     may issue these tax credit bonds to finance retrofits of 
     existing private buildings through loans and/or grants to 
     individual homeowners or businesses, or through other 
     repayment mechanisms. Other repayment mechanisms can include 
     periodic fees assessed on a government bill or utility bill 
     that approximates the energy savings of energy efficiency or 
     conservation retrofits. Retrofits can include heating, 
     cooling, lighting, water-saving, storm water-reducing, or 
     other efficiency measures.
---------------------------------------------------------------------------
       2. Expenditures with respect to facilities or grants that 
     support research in: (a) development of cellulosic ethanol or 
     other nonfossil fuels; (b) technologies for the capture and 
     sequestration of carbon dioxide produced through the use of 
     fossil fuels; (c) increasing the efficiency of existing 
     technologies for producing nonfossil fuels; (d) automobile 
     battery technologies and other technologies to reduce fossil 
     fuel consumption in transportation; and (e) technologies to 
     reduce energy use in buildings;
       3. Mass commuting facilities and related facilities that 
     reduce the consumption of energy, including expenditures to 
     reduce pollution from vehicles used for mass commuting;
       4. Demonstration projects designed to promote the 
     commercialization of: (a) green building technology; (b) 
     conversion of agricultural waste for use in the production of 
     fuel or otherwise; (c) advanced battery manufacturing 
     technologies; (d) technologies to reduce peak-use of 
     electricity; and (e) technologies for the capture and 
     sequestration of carbon dioxide emitted from combusting 
     fossil fuels in order to produce electricity; and
       5. Public education campaigns to promote energy efficiency 
     (other than movies, concerts, and other events held primarily 
     for entertainment purposes).
       There was originally a national limitation on qualified 
     energy conservation bonds of $800 million. The national 
     limitation was then increased by an additional $2.4 billion 
     in 2009. As with other qualified tax credit bonds, the 
     taxpayer holding qualified energy conservation bonds on a 
     credit allowance date is entitled to a tax credit. The credit 
     rate on the bonds is set by the Secretary at a rate that is 
     70 percent of the rate that would permit issuance of such 
     bonds without discount and interest cost to the issuer.\959\
---------------------------------------------------------------------------
     \959\ Given the differences in credit quality and other 
     characteristics of individual issuers, the Secretary cannot 
     set credit rates in a manner that will allow each issuer to 
     issue tax credit bonds at par.
---------------------------------------------------------------------------
       Qualified zone academy bonds
       Qualifies zone academy bonds (``QZABs'') are defined as any 
     bond issued by a State or local government, provided that (1) 
     at least 95 percent of the proceeds are used for the purpose 
     of renovating, providing equipment to, developing course 
     materials for use at, or training teachers and other school 
     personnel in a ``qualified zone academy,'' and (2) private 
     entities have promised to contribute to the qualified zone 
     academy certain equipment, technical assistance or training, 
     employee services, or other property or services with a value 
     equal to at least 10 percent of the bond proceeds.
       A total of $400 million of QZABs has been authorized to be 
     issued annually in calendar years 1998 through 2008. The 
     authorization was increased to $1.4 billion for calendar year 
     2009, and also for calendar year 2010. For each of the 
     calendar years 2011 through 2016, the authorization was set 
     at $400 million.
       Qualified school construction bonds
       Qualified school construction bonds must meet three 
     requirements: (1) 100 percent of the available project 
     proceeds of the bond issue is used for the construction, 
     rehabilitation, or repair of a public school facility or for 
     the acquisition of land on which such a bond-financed 
     facility is to be constructed; (2) the bonds are issued by a 
     State or local government within which such school is 
     located; and (3) the issuer designates such bonds as a 
     qualified school construction bond.
       There is a national limitation on qualified school 
     construction bonds of $11 billion for calendar years 2009 and 
     2010, and zero after 2010. If an amount allocated is unused 
     for a calendar year, it may be carried forward to the 
     following and subsequent calendar years. Under a separate 
     special rule, the Secretary of the Interior may allocate $200 
     million of school construction bond authority for Indian 
     schools.
     Direct-pay bonds and expired tax-credit bond provisions
       The Code provides that an issuer may elect to issue certain 
     tax credit bonds as ``direct-pay bonds.'' Instead of a credit 
     to the holder, with a ``direct-pay bond'' the Federal 
     government pays the issuer a percentage of the interest on 
     the bonds. The following tax credit bonds may be issued as 
     direct-pay bonds: new clean renewable energy bonds, qualified 
     energy conservation bonds, and qualified school construction 
     bonds. Qualified zone academy bonds may not be issued as 
     direct-pay using any national zone academy bond allocation 
     for calendar years after 2011 or any carryforward of such 
     allocations. The ability to issue Build America Bonds and 
     Recovery Zone bonds, which have direct-pay features, has 
     expired.


                               House Bill

       The provision prospectively repeals authority to issue tax-
     credit bonds and direct-pay bonds.
       Effective date.--The provision applies to bonds issued 
     after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill.
     4. No tax-exempt bonds for professional stadiums (sec. 3604 
         of the House sbill and sec. 103 of the Code)


                              Present Law

     In general
       Section 103 generally provides gross income does not 
     include interest on State or local bonds. 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

[[Page 20003]]

     not apply to private activity bonds, unless the bonds are 
     issued for certain purposes (``qualified private activity 
     bonds'') permitted by the Code and other Code requirements 
     are met.
     Private activity bond tests
       In general
       A private activity bond includes any bond that satisfies 
     (1) the ``private business test'' (consisting of two 
     components: a private business use test and a private 
     security or payment test); or (2) ``the private loan 
     financing test.'' \960\
---------------------------------------------------------------------------
     \960\ Sec. 141.
---------------------------------------------------------------------------
       Two-part private business test
       Under the private business test, a bond is a private 
     activity bond if it is part of an issue in which:
       More than 10 percent of the proceeds of the issue 
     (including use of the bond-financed property) are to be used 
     in the trade or business of any person other than a 
     governmental unit (``private business use test''); and
       More than 10 percent of the payment of principal or 
     interest on the issue is, directly or indirectly, secured by 
     (a) property used or to be used for a private business use or 
     (b) to be derived from payments in respect of property, or 
     borrowed money, used or to be used for a private business use 
     (``private payment test'').\961\
---------------------------------------------------------------------------
     \961\ The 10-percent private business test is reduced to five 
     percent in the case of private business uses (and payments 
     with respect to such uses) that are unrelated to any 
     governmental use being financed by the issue.
---------------------------------------------------------------------------
       A bond is not a private activity bond unless both parts of 
     the private business test (i.e., the private business use 
     test and the private payment test) are met. For purposes of 
     the private payment test, both direct and indirect payments 
     made by any private person treated as using the financed 
     property are taken into account. Payments by a person for the 
     use of proceeds generally do not include payments for 
     ordinary and necessary expenses (within the meaning of 
     section 162) attributable to the operation and maintenance of 
     financed property.\962\
---------------------------------------------------------------------------
     \962\ Treas. Reg. sec. 1.141-4(c)(3).
---------------------------------------------------------------------------
       Private loan financing test
       A bond issue satisfies the private loan financing test if 
     proceeds exceeding the lesser of $5 million or five percent 
     of such proceeds are used directly or indirectly to finance 
     loans to one or more nongovernmental persons.
     Types of qualified private activity bonds
       The interest of qualified private activity bonds is tax 
     exempt. A qualified private activity bond is a qualified 
     mortgage, veterans' mortgage, small issue, student loan, 
     redevelopment, 501(c)(3), or exempt facility bond.\963\ To 
     qualify as an exempt facility bond, 95 percent of the net 
     proceeds must be used to finance: (1) airports; (2) docks and 
     wharves; (3) mass commuting facilities; (4) high-speed 
     intercity rail facilities; (5) facilities for the furnishing 
     of water; (6) sewage facilities; (7) solid waste disposal 
     facilities; (8) hazardous waste disposal facilities; (9) 
     qualified residential rental projects; (10) facilities for 
     the local furnishing of electric energy or gas; (11) local 
     district heating or cooling facilities; (12) environmental 
     enhancements of hydroelectric generating facilities; (13) 
     qualified public educational facilities; or (14) qualified 
     green building and sustainable design projects.
---------------------------------------------------------------------------
     \963\ Sec. 141(e).
---------------------------------------------------------------------------
       Financing of sports facilities with governmental bonds
       In 1986, Congress eliminated a provision expressly allowing 
     tax-exempt financing for sports facilities.\964\ 
     Nevertheless, professional sports facilities continue to be 
     financed with tax-exempt bonds despite the fact that 
     privately owned sports teams are the primary (if not 
     exclusive) users of such facilities. Present law permits the 
     use of tax-exempt bond proceeds for private activities if 
     either part of the two-part private business test is not met. 
     Only if both parts of the private business test (private use 
     and private payment) are met will the interest on such bonds 
     be taxable. In the case of bond-financed professional sports 
     facilities, issuers have intentionally structured the tax-
     exempt bond issuance and related transactions to fail the 
     private payment test. In most of these transactions, the 
     professional sports team is not required to pay for more than 
     a small portion of its use of the sports facility. As a 
     result, the private payment test is not met and the bonds 
     financing the facility are not treated as private activity 
     bonds, despite the existence of substantial private business 
     use.
---------------------------------------------------------------------------
     \964\ Sec. 1301 of the Tax Reform Act of 1986 (Pub. L. 99-
     514, 1986) (prior to amendment, sec. 103(b)(4)(B) of the 
     Internal Revenue Code of 1954 permitted tax-exempt financing 
     for sports facilities).
---------------------------------------------------------------------------


                               House Bill

       The provision provides that the interest on bonds, the 
     proceeds of which are to be used to finance or refinance 
     capital expenditures allocable to a professional sports 
     stadium, is not tax-exempt. The term ``professional sports 
     stadium'' means any facility (or appurtenant real property) 
     which during at least five days during any calendar year is 
     used as a stadium or arena for professional sports, 
     exhibitions, games, or training.
       Effective date.--The provision applies to bonds issued 
     after November 2, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.

                              H. Insurance

     1. Net operating losses of life insurance companies (sec. 
         3701 of the House bill, sec. 13511 of the Senate 
         amendment, and sec. 810 of the Code)


                              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 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.\965\
---------------------------------------------------------------------------
     \965\ Sec. 172(b)(2).
---------------------------------------------------------------------------
       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.\966\
---------------------------------------------------------------------------
     \966\ Sec. 56(d).
---------------------------------------------------------------------------
       In the case of a life insurance company, a deduction is 
     allowed in the taxable year for operations loss carryovers 
     and carrybacks, in lieu of the deduction for net operation 
     losses allowed to other corporations.\967\ 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.\968\
---------------------------------------------------------------------------
     \967\ Secs. 810, 805(a)(5).
     \968\ Sec. 810(b)(1).
---------------------------------------------------------------------------


                               House Bill

       The provision repeals the operations loss deduction for 
     life insurance companies and allows the NOL deduction under 
     section 172.
       Effective date.--The provision applies to losses arising in 
     taxable years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Repeal of small life insurance company deduction (sec. 
         3702 of the House bill, sec. 13512 of the Senate 
         amendment, and sec. 806 of the Code)


                              Present Law

       The small life insurance company deduction for any taxable 
     year is 60 percent of so much of the tentative life insurance 
     company taxable income (``LICTI'') for such taxable year as 
     does not exceed $3 million, reduced by 15 percent of the 
     excess of tentative LICTI over $3 million. The maximum 
     deduction that can be claimed by a small company is $1.8 
     million, and a company with a tentative LICTI of $15 million 
     or more is not entitled to any small company deduction. A 
     small life insurance company for this purpose is one with 
     less than $500 million of assets.


                               House Bill

       The provision repeals the small life insurance company 
     deduction.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Surtax on life insurance company taxable income (sec. 3703 
         of the House bill and sec. 801 of the Code)


                              Present Law

     Tax on life insurance company taxable income
       In the case of a life insurance company, income tax is 
     imposed on life insurance company taxable income at the rate 
     applicable to taxable income of a corporation.


                               House Bill

       The provision imposes an additional eight-percent income 
     tax on life insurance company taxable income.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not follow the House bill 
     provision.
     4. Adjustment for change in computing reserves (sec. 3704 of 
         the House bill, sec. 13513 of the Senate amendment, and 
         sec. 807 of the Code)


                              Present Law

     Change in method of accounting
       In general, a taxpayer may change its method of accounting 
     under section 446 with

[[Page 20004]]

     the consent of the Secretary (or may be required to change 
     its method of accounting by the Secretary). In such 
     instances, a taxpayer generally is required to make an 
     adjustment (a ``section 481(a) adjustment'') to prevent 
     amounts from being duplicated in, or omitted from, the 
     calculation of the taxpayer's income. Pursuant to IRS 
     procedures, negative section 481(a) adjustments generally are 
     deducted from income in the year of the change whereas 
     positive section 481(a) adjustments generally are required to 
     be included in income ratably over four taxable years.\969\
---------------------------------------------------------------------------
     \969\ See, e.g., Rev. Proc. 2015-13, 2015-5 I.R.B. 419, and 
     Rev. Proc. 2017-30, 2017-18 I.R.B. 1131.
---------------------------------------------------------------------------
       However, section 807(f) explicitly provides that changes in 
     the basis for determining life insurance company reserves are 
     to be taken into account ratably over 10 years.
     10-year spread for change in computing life insurance company 
         reserves
       For Federal income tax purposes, a life insurance company 
     includes in gross income any net decrease in reserves, and 
     deducts a net increase in reserves.\970\ Methods for 
     determining reserves for tax purposes generally are based on 
     reserves prescribed by the National Association of Insurance 
     Commissioners for purposes of financial reporting under State 
     regulatory rules.
---------------------------------------------------------------------------
     \970\ Sec. 807.
---------------------------------------------------------------------------
       Income or loss resulting from a change in the method of 
     computing reserves is taken into account ratably over a 10-
     year period.\971\ The rule for a change in basis in computing 
     reserves applies only if there is a change in basis in 
     computing the Federally prescribed reserve (as distinguished 
     from the net surrender value). Although life insurance tax 
     reserves require the use of a Federally prescribed method, 
     interest rate, and mortality or morbidity table, changes in 
     other assumptions for computing statutory reserves (e.g., 
     when premiums are collected and claims are paid) may cause 
     increases or decreases in a company's life insurance reserves 
     that must be spread over a 10-year period. Changes in the net 
     surrender value of a contract are not subject to the 10-year 
     spread because, apart from its use as a minimum in 
     determining the amount of life insurance tax reserves, the 
     net surrender value is not a reserve but a current liability.
---------------------------------------------------------------------------
     \971\ Sec. 807(f).
---------------------------------------------------------------------------
       If for any taxable year the taxpayer is not a life 
     insurance company, the balance of any adjustments to reserves 
     is taken into account for the preceding taxable year.


                               House Bill

       Income or loss resulting from a change in method of 
     computing life insurance company reserves is taken into 
     account consistent with IRS procedures, generally ratably 
     over a four-year period, instead of over a 10-year period.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     5. Repeal of special rule for distributions to shareholders 
         from pre-1984 policyholders surplus account (sec. 3705 of 
         the House bill, sec. 13514 of the Senate amendment, and 
         sec. 815 of the Code)


                         Present and Prior Law

       Under the law in effect from 1959 through 1983, a life 
     insurance company was subject to a three-phase taxable income 
     computation under Federal tax law. Under the three-phase 
     system, a company was taxed on the lesser of its gain from 
     operations or its taxable investment income (Phase I) and, if 
     its gain from operations exceeded its taxable investment 
     income, 50 percent of such excess (Phase II). Federal income 
     tax on the other 50 percent of the gain from operations was 
     deferred, and was accounted for as part of a policyholder's 
     surplus account and, subject to certain limitations, taxed 
     only when distributed to stockholders or upon corporate 
     dissolution (Phase III). To determine whether amounts had 
     been distributed, a company maintained a shareholders surplus 
     account, which generally included the company's previously 
     taxed income that would be available for distribution to 
     shareholders. Distributions to shareholders were treated as 
     being first out of the shareholders surplus account, then out 
     of the policyholders surplus account, and finally out of 
     other accounts.
       The Deficit Reduction Act of 1984 \972\ included provisions 
     that, for 1984 and later years, eliminated further deferral 
     of tax on amounts (described above) that previously would 
     have been deferred under the three-phase system. Although for 
     taxable years after 1983, life insurance companies may not 
     enlarge their policyholders surplus account, the companies 
     are not taxed on previously deferred amounts unless the 
     amounts are treated as distributed to shareholders or 
     subtracted from the policyholders surplus account.\973\
---------------------------------------------------------------------------
     \972\ Pub. L. No. 98-369.
     \973\ Sec. 815.
---------------------------------------------------------------------------
       Any direct or indirect distribution to shareholders from an 
     existing policyholders surplus account of a stock life 
     insurance company is subject to tax at the corporate rate in 
     the taxable year of the distribution. Present law (like prior 
     law) provides that any distribution to shareholders is 
     treated as made (1) first out of the shareholders surplus 
     account, to the extent thereof, (2) then out of the 
     policyholders surplus account, to the extent thereof, and (3) 
     finally, out of other accounts.
       For taxable years beginning after December 31, 2004, and 
     before January 1, 2007, the application of the rules imposing 
     income tax on distributions to shareholders from the 
     policyholders surplus account of a life insurance company 
     were suspended. Distributions in those years were treated as 
     first made out of the policyholders surplus account, to the 
     extent thereof, and then out of the shareholders surplus 
     account, and lastly out of other accounts.


                               House Bill

       The provision repeals section 815, the rules imposing 
     income tax on distributions to shareholders from the 
     policyholders surplus account of a stock life insurance 
     company.
       In the case of any stock life insurance company with an 
     existing policyholders surplus account (as defined in section 
     815 before its repeal), tax is imposed on the balance of the 
     account as of December 31, 2017. A life insurance company is 
     required to pay tax on the balance of the account ratably 
     over the first eight taxable years beginning after December 
     31, 2017. Specifically, the tax imposed on a life insurance 
     company is the tax on the sum of life insurance company 
     taxable income for the taxable year (but not less than zero) 
     plus 1/8 of the balance of the existing policyholders surplus 
     account as of December 31, 2017. Thus, life insurance company 
     losses are not allowed to offset the amount of the 
     policyholders surplus account balance subject to tax.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     6. Modification of proration rules for property and casualty 
         insurance companies (sec. 3706 of the House bill, sec. 
         13515 of the Senate amendment, and sec. 832 of the Code)


                              Present Law

       The taxable income of a property and casualty insurance 
     company is determined as the sum of its gross income from 
     underwriting income and investment income (as well as gains 
     and other income items), reduced by allowable deductions.
       A proration rule applies to property and casualty insurance 
     companies. In calculating the deductible amount of its 
     reserve for losses incurred, a property and casualty 
     insurance company must reduce the amount of losses incurred 
     by 15 percent of (1) the insurer's tax-exempt interest, (2) 
     the deductible portion of dividends received (with special 
     rules for dividends from affiliates), and (3) the increase 
     for the taxable year in the cash value of life insurance, 
     endowment, or annuity contracts the company owns.\974\ This 
     proration rule reflects the fact that reserves are generally 
     funded in part from tax-exempt interest, from deductible 
     dividends, and from other untaxed amounts.
---------------------------------------------------------------------------
     \974\ Sec. 832(b)(5).
---------------------------------------------------------------------------


                               House Bill

       The provision replaces the 15-percent reduction under 
     present law with a 26.25-percent reduction under the 
     proration rule for property and casualty insurance companies. 
     This change in the percentage takes into account the 
     reduction in the corporate tax rate from 35 to 20 percent 
     under section 3001 of the bill (reduction in corporate tax 
     rate).
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       The provision replaces the 15-percent reduction under 
     present law with a reduction equal to 5.25 percent divided by 
     the top corporate tax rate. For 2018, the top corporate tax 
     rate is 35 percent, and the percentage reduction is 15 
     percent. For 2019 and thereafter, the corporate tax rate is 
     20 percent, and the percentage reduction is 26.25 percent 
     under the proration rule for property and casualty insurance 
     companies. The proration percentage will be automatically 
     adjusted in the future if the top corporate tax rate is 
     changed, so that the product of the proration percentage and 
     the top corporate tax rate always equals 5.25 percent.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment. The 
     top corporate tax rate is 21 percent for 2018 and 
     thereafter,\975\ so the percentage reduction is 25 percent 
     under the proration rule for property and casualty insurance 
     companies.
---------------------------------------------------------------------------
     \975\ See Part II.A.1 (Reduction in corporate tax rate).

[[Page 20005]]


     7. Modification of discounting rules for property and 
         casualty insurance companies (sec. 3707 of the House bill 
         and sec. 832 of the Code)


                              Present Law

       A property and casualty insurance company generally is 
     subject to tax on its taxable income.\976\ The taxable income 
     of a property and casualty insurance company is determined as 
     the sum of its underwriting income and investment income (as 
     well as gains and other income items), reduced by allowable 
     deductions.\977\ Among the items that are deductible in 
     calculating underwriting income are additions to reserves for 
     losses incurred and expenses incurred.
---------------------------------------------------------------------------
     \976\ Sec. 831(a).
     \977\ Sec. 832.
---------------------------------------------------------------------------
       To take account of the time value of money, discounting of 
     unpaid losses is required. All property and casualty loss 
     reserves (unpaid losses and unpaid loss adjustment expenses) 
     for each line of business (as shown on the annual statement) 
     are required to be discounted for Federal income tax 
     purposes.
       The discounted reserves are calculated using a prescribed 
     interest rate which is based on the applicable Federal mid-
     term rate (``mid-term AFR''). The discount rate is the 
     average of the mid-term AFRs effective at the beginning of 
     each month over the 60-month period preceding the calendar 
     year for which the determination is made.
       To determine the period over which the reserves are 
     discounted, a prescribed loss payment pattern applies. The 
     prescribed length of time is either the accident year and the 
     following three calendar years, or the accident year and the 
     following 10 calendar years, depending on the line of 
     business. In the case of certain ``long-tail'' lines of 
     business, the 10-year period is extended, but not by more 
     than five additional years. Thus, present law limits the 
     maximum duration of any loss payment pattern to the accident 
     year and the following 15 years. The Treasury Department is 
     directed to determine a loss payment pattern for each line of 
     business by reference to the historical loss payment pattern 
     for that line of business using aggregate experience reported 
     on the annual statements of insurance companies, and is 
     required to make this determination every five years, 
     starting with 1987.
       Under the discounting rules, an election is provided 
     permitting a taxpayer to use its own (rather than an 
     industry-wide) historical loss payment pattern with respect 
     to all lines of business, provided that applicable 
     requirements are met.
       Treasury publishes discount factors for each line of 
     business to be applied by taxpayers for discounting 
     reserves.\978\ The discount factors are published annually, 
     based on (1) the interest rate applicable to the calendar 
     year, and (2) the loss payment pattern for each line of 
     business as determined every five years.
---------------------------------------------------------------------------
     \978\ The most recent property and casualty reserve discount 
     factors published by Treasury are in Rev. Proc. 2016-58, 
     2016-51 I.R.B. 839, and see Rev. Proc. 2012-44, 2012-49 
     I.R.B. 645.
---------------------------------------------------------------------------


                               House Bill

       The provision modifies the reserve discounting rules 
     applicable to property and casualty insurance companies. In 
     general, the provision modifies the prescribed interest rate, 
     extends the periods applicable under the loss payment 
     pattern, and repeals the election to use a taxpayer's 
     historical loss payment pattern.
     Interest rate
       The provision provides that the interest rate is an annual 
     rate for any calendar year to be determined by Treasury based 
     on the corporate bond yield curve (rather than the mid-term 
     AFR as under present law). For this purpose, the corporate 
     bond yield curve means, with respect to any month, a yield 
     curve that reflects the average, for the preceding 24-month 
     period, of monthly yields on investment grade corporate bonds 
     with varying maturities and that are in the top three quality 
     levels available.\979\ Because the corporate bond yield curve 
     provides for 24-month averaging, the present-law rule 
     providing for 60-month averaging to determine the interest 
     rate is repealed under the provision. It is expected that 
     Treasury will determine a 24-month average for the 24 months 
     preceding the first month of the calendar year for which the 
     determination is made.
---------------------------------------------------------------------------
     \979\ This rule adopts the definition found in section 
     430(h)(2)(D)(i) of the term ``corporate bond yield curve.'' 
     Section 430, which relates to minimum funding standards for 
     single-employer defined benefit pension plans, includes other 
     rules for determining an ``effective interest rate,'' such as 
     segment rate rules. The term ``effective interest rate'' 
     along with these other rules, including the segment rate 
     rules, do not apply for purposes of property and casualty 
     insurance reserve discounting.
---------------------------------------------------------------------------
     Loss payment patterns
       The provision extends the periods applicable for 
     determining loss payment patterns. Under the provision, the 
     maximum duration of the loss payment pattern is determined by 
     the amount of losses remaining unpaid using aggregate 
     industry experience for each line of business, rather than by 
     a set number of years as under present law.
       Like present law, the provision provides that Treasury 
     determines a loss payment pattern for each line of business 
     by reference to the historical loss payment pattern for that 
     line of business using aggregate experience reported on the 
     annual statements of insurance companies, and is required to 
     make this determination every five years.
       Under the provision, the present-law three-year and 10-year 
     periods following the accident year are extended up to a 
     maximum of 15 more years for the lines of business to which 
     each period applies. For lines of business to which the 
     three-year period applies, the amount of losses that would 
     have been treated as paid in the third year after the 
     accident year is treated as paid in that year and each 
     subsequent year in an amount equal to the average of the 
     amounts treated as paid in the first and second years (or, if 
     less, the remaining amount). To the extent these unpaid 
     losses have not been treated as paid before the 18th year 
     after the accident year, they are treated as paid in that 
     18th year.
       Similarly, for lines of business to which the 10-year 
     period applies, the amount of losses that would have been 
     treated as paid in the 10th year following the accident year 
     is treated as paid in that year and each subsequent year in 
     an amount equal to the average of the amounts treated as paid 
     in the seventh, eighth, and ninth years (or if less, the 
     remaining amount). To the extent these unpaid losses have not 
     been treated as paid before the 25th year after the accident 
     year, they are treated as paid in that 25th year.
       The provision repeals the present-law rule providing that 
     in the case of certain ``long-tail'' lines of business, the 
     10-year period is extended, but not by more than five 
     additional years. The provision does not change the lines of 
     business to which the three-year, and 10-year, periods, 
     respectively, apply.
     Election to use own historical loss payment pattern
       The provision repeals the present-law election permitting a 
     taxpayer to use its own (rather than an aggregate industry-
     experience-based) historical loss payment pattern with 
     respect to all lines of business.
       Effective date.--The provision generally applies to taxable 
     years beginning after December 31, 2017. Under a transitional 
     rule for the first taxable year beginning in 2018, the amount 
     of unpaid losses and expenses unpaid (under section 
     832(b)(5)(B) and (6)) and the unpaid losses (under sections 
     807(c)(2) and 805(a)(1)) at the end of the preceding taxable 
     year are determined as if the provision had applied to these 
     items in such preceding taxable year, using the interest rate 
     and loss payment patterns for accident years ending with 
     calendar year 2018. Any adjustment is spread over eight 
     taxable years, i.e., is included in the taxpayer's gross 
     income ratably in the first taxable year beginning in 2018 
     and the seven succeeding taxable years. For taxable years 
     subsequent to the first taxable year beginning in 2018, the 
     provision applies to such unpaid losses and expenses unpaid 
     (i.e., unpaid losses and expenses unpaid at the end of the 
     taxable year preceding the first taxable year beginning in 
     2018) by using the interest rate and loss payment patterns 
     applicable to accident years ending with calendar year 2018.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement follows the House bill with 
     modifications. The corporate bond yield curve means, with 
     respect to any month, a yield curve that reflects the 
     average, for the preceding 60-month period (not 24-month 
     period), of monthly yields on investment grade corporate 
     bonds with varying maturities and that are in the top three 
     quality levels available. The present-law three-year period 
     for discounting certain lines of business other than long-
     tail lines of business is not modified under the conference 
     agreement. The present-law 10-year period for certain long 
     tail lines of business is extended for a maximum of 14 more 
     years (instead of 15 more years as under the House bill). The 
     present-law election permitting a taxpayer to use its own 
     (rather than an aggregate industry-experience-based) 
     historical loss payment pattern is repealed.
       Effective date.--The provision generally applies to taxable 
     years beginning after December 31, 2017. Under a transitional 
     rule for the first taxable year beginning in 2018, the amount 
     of unpaid losses and expenses unpaid (under section 
     832(b)(5)(B) and (6)) and the unpaid losses (under sections 
     807(c)(2) and 805(a)(1)) at the end of the preceding taxable 
     year are determined as if the provision had applied to these 
     items in such preceding taxable year, using the interest rate 
     and loss payment patterns for accident years ending with 
     calendar year 2018. Any adjustment is spread over eight 
     taxable years, i.e., is included in the taxpayer's gross 
     income ratably in the first taxable year beginning in 2018 
     and the seven succeeding taxable years. For taxable years 
     subsequent to the first taxable year beginning in 2018, the 
     provision applies to such unpaid losses and expenses unpaid 
     (i.e., unpaid losses and expenses unpaid at the end of the 
     taxable year preceding the first taxable year beginning in 
     2018) by using the interest rate and loss payment patterns 
     applicable to accident years ending with calendar year 2018.

[[Page 20006]]


     8. Repeal of special estimated tax payments (sec. 3708 of the 
         House bill, sec. 13516 of the Senate amendment, and sec. 
         847 of the Code)


                              Present Law

     Allowance of additional deduction and establishment of 
         special loss discount account
       Present law allows an insurance company required to 
     discount its reserves an additional deduction that is not to 
     exceed the excess of (1) the amount of the undiscounted 
     unpaid losses over (2) the amount of the related discounted 
     unpaid losses, to the extent the amount was not deducted in a 
     preceding taxable year.\980\ The provision imposes the 
     requirement that a special loss discount account be 
     established and maintained, and that special estimated tax 
     payments be made. Unused amounts of special estimated tax 
     payments are treated as a section 6655 estimated tax payment 
     for the 16th year after the year for which the special 
     estimated tax payment was made.
---------------------------------------------------------------------------
     \980\ Sec. 847.
---------------------------------------------------------------------------
       The total payments by a taxpayer, including section 6655 
     estimated tax payments and other tax payments, together with 
     special estimated tax payments made under this provision, are 
     generally the same as the total tax payments that the 
     taxpayer would make if the taxpayer did not elect to have 
     this provision apply, except to the extent amounts can be 
     refunded under the provision in the 16th year.
     Calculation of special estimated tax payments based on tax 
         benefit attributable to deduction
       More specifically, present law imposes a requirement that 
     the taxpayer make special estimated tax payments in an amount 
     equal to the tax benefit attributable to the additional 
     deduction allowed under the provision. If amounts are 
     included in gross income as a result of a reduction in the 
     taxpayer's special loss discount account or the liquidation 
     or termination of the taxpayer's insurance business, and an 
     additional tax is due for any year as a result of the 
     inclusion, then an amount of the special estimated tax 
     payments equal to such additional tax is applied against such 
     additional tax. If there is an adjustment reducing the amount 
     of additional tax against which the special estimated tax 
     payment was applied, then in lieu of any credit or refund for 
     the reduction, a special estimated tax payment is treated as 
     made in an amount equal to the amount that would otherwise be 
     allowable as a credit or refund.
       The amount of the tax benefit attributable to the deduction 
     is to be determined (under Treasury regulations (which have 
     not been promulgated)) by taking into account tax benefits 
     that would arise from the carryback of any net operating loss 
     for the year as well as current year benefits. In addition, 
     tax benefits for the current and carryback years are to take 
     into account the benefit of filing a consolidated return with 
     another insurance company without regard to the consolidation 
     limitations imposed by section 1503(c).
       The taxpayer's estimated tax payments under section 6655 
     are to be determined without regard to the additional 
     deduction allowed under this provision and the special 
     estimated tax payments. Legislative history \981\ indicates 
     that it is intended that the taxpayer may apply the amount of 
     an overpayment of any section 6655 estimated tax payments for 
     the taxable year against the amount of the special estimated 
     tax payment required under this provision. The special 
     estimated tax payments under this provision are not treated 
     as estimated tax payments for purposes of section 6655 (e.g., 
     for purposes of calculating penalties or interest on 
     underpayments of estimated tax) when such special estimated 
     tax payments are made.
---------------------------------------------------------------------------
     \981\ See H.R. Rep. No. 100-1104, Conference Report to 
     accompany H.R. 4333, the Technical and Miscellaneous Revenue 
     Act of 1988, October 21, 1988, p. 174.
---------------------------------------------------------------------------
     Refundable amount
       To the extent that a special estimated tax payment is not 
     used to offset additional tax due for any of the first 15 
     taxable years beginning after the year for which the payment 
     was made, such special estimated tax payment is treated as an 
     estimated tax payment made under section 6655 for the 16th 
     year after the year for which the special estimated tax 
     payment was made. If the amount of such deemed section 6655 
     payment, together with the taxpayer's other payments credited 
     against tax liability for such 16th year, exceeds the tax 
     liability for such year, then the excess (up to the amount of 
     the deemed section 6655 payment) may be refunded to the 
     taxpayer to the same extent provided under present law with 
     respect to overpayments of tax.
     Regulatory authority
       In addition to the regulatory authority to adjust the 
     amount of special estimated tax payments in the event of a 
     change in the corporate tax rate, authority is provided to 
     Treasury to prescribe regulations necessary or appropriate to 
     carry out the purposes of the provision.
       Such regulations include those providing for the separate 
     application of the provision with respect to each accident 
     year. Separate application of the provision with respect to 
     each accident year (i.e., applying a vintaging methodology) 
     may be appropriate under regulations to determine the amount 
     of tax liability for any taxable year against which special 
     estimated tax payments are applied, and to determine the 
     amount (if any) of special estimated tax payments remaining 
     after the 15th year which may be available to be refunded to 
     the taxpayer.
       Regulatory authority is also provided to make such 
     adjustments in the application of the provision as may be 
     necessary to take into account the corporate alternative 
     minimum tax. Under this regulatory authority, rules similar 
     to those applicable in the case of a change in the corporate 
     tax rate are intended to apply to determine the amount of 
     special estimated tax payments that may be applied against 
     tax calculated at the corporate alternative minimum tax rate. 
     The special estimated tax payments are not treated as 
     payments of regular tax for purposes of determining the 
     taxpayer's alternative minimum tax liability.
       Regulations have not been promulgated under section 847.


                               House Bill

       The provision repeals section 847. Thus, the election to 
     apply section 847, the additional deduction, special loss 
     discount account, special estimated tax payment, and 
     refundable amount rules of present law are eliminated.
       The entire balance of an existing account is included in 
     income of the taxpayer for the first taxable year beginning 
     after 2017, and the entire amount of existing special 
     estimated tax payments are applied against the amount of 
     additional tax attributable to this inclusion. Any special 
     estimated tax payments in excess of this amount are treated 
     as estimated tax payments under section 6655.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     9. Computation of life insurance tax reserves (sec. 13517 of 
         the Senate amendment and sec. 807 of the Code)


                              Present Law

     In general
       In determining life insurance company taxable income, a 
     life insurance company includes in gross income any net 
     decrease in reserves, and deducts a net increase in 
     reserves.\982\ Methods for determining reserves for tax 
     purposes generally are based on reserves prescribed by the 
     National Association of Insurance Commissioners for purposes 
     of financial reporting under State regulatory rules.
---------------------------------------------------------------------------
     \982\ Sec. 807.
---------------------------------------------------------------------------
       In computing the net increase or net decrease in reserves, 
     six items are taken into account. These are (1) life 
     insurance reserves; (2) unearned premiums and unpaid losses 
     included in total reserves; (3) amounts that are discounted 
     at interest to satisfy obligations under insurance and 
     annuity contracts that do not involve life, accident, or 
     health contingencies when the computation is made; (4) 
     dividend accumulations and other amounts held at interest in 
     connection with insurance and annuity contracts; (5) premiums 
     received in advance and liabilities for premium deposit 
     funds; and (6) reasonable special contingency reserves under 
     contracts of group term life insurance or group accident and 
     health insurance that are held for retired lives, premium 
     stabilization, or a combination of both.
       Life insurance reserves for any contract are the greater of 
     the net surrender value of the contract or the reserves 
     determined under Federally prescribed rules, but may not 
     exceed the statutory reserve with respect to the contract 
     (for regulatory reporting). In computing the Federally 
     prescribed reserve for any type of contract, the taxpayer 
     must use the tax reserve method applicable to the contract, 
     an interest rate for discounting of reserves to take account 
     of the time value of money, and the prevailing commissioners' 
     standard tables for mortality or morbidity.
     Interest rate
       The assumed interest rate to be used in computing the 
     Federally prescribed reserve is the greater of the applicable 
     Federal interest rate or the prevailing State assumed 
     interest rate. The applicable Federal interest rate is the 
     annual rate determined by the Secretary under the discounting 
     rules for property and casualty reserves for the calendar 
     year in which the contract is issued. The prevailing State 
     assumed interest rate is generally the highest assumed 
     interest rate permitted to be used in at least 26 States in 
     computing life insurance reserves for insurance or annuity 
     contracts of that type as of the beginning the calendar year 
     in which the contract is issued. In determining the highest 
     assumed rates permitted in at least 26 States, each State is 
     treated as permitting the use of every rate below its highest 
     rate.
       A one-time election is permitted (revocable only with the 
     consent of the Secretary) to apply an updated applicable 
     Federal interest rate every five years in calculating life 
     insurance reserves. The election is provided to take account 
     of the fluctuations

[[Page 20007]]

     in market rates of return that companies experience with 
     respect to life insurance contracts of long duration. The use 
     of the updated applicable Federal interest rate under the 
     election does not cause the recalculation of life insurance 
     reserves for any prior year. Under the election no change is 
     made to the interest rate used in determining life insurance 
     reserves if the updated applicable Federal interest rate is 
     less than one-half of one percentage point different from the 
     rate used by the company in calculating life insurance 
     reserves during the preceding five years.


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides that for purposes of determining the 
     deduction for increases in certain reserves of a life 
     insurance company, the amount of the life insurance reserves 
     for any contract (other than certain variable contracts) is 
     the greater of (1) the net surrender value of the contract 
     (if any), or (2) 92.87 percent of the amount determined using 
     the tax reserve method otherwise applicable to the contract 
     as of the date the reserve is determined. In the case of a 
     variable contract, the amount of life insurance reserves for 
     the contract is the sum of (1) the greater of (a) the net 
     surrender value of the contract, or (b) the separate-account 
     reserve amount under section 817 for the contract, plus (2) 
     92.87 percent of the excess (if any) of the amount determined 
     using the tax reserve method otherwise applicable to the 
     contract as of the date the reserve is determined over the 
     amount determined in (1). In no event shall the reserves 
     exceed the amount which would be taken into account in 
     determining statutory reserves. No amount or item shall be 
     taken into account more than once in determining any reserve. 
     As under present law, no deduction for asset adequacy or 
     deficiency reserves is allowed. The amount of life insurance 
     reserves may not exceed the annual statement reserves. The 
     provision provides reserve rules for supplemental benefits 
     and retains present-law rules regarding certain contracts 
     issued by foreign branches of domestic life insurance 
     companies.
       Effective date.--The proposal applies to taxable years 
     beginning after December 31, 2017. For the first taxable year 
     beginning after December 31, 2017, the difference in the 
     amount of the reserve with respect to any contract at the end 
     of the preceding taxable year and the amount of such reserve 
     determined as if the proposal had applied for that year is 
     taken into account for each of the eight taxable years 
     following that preceding year, one-eighth per year.


                          Conference Agreement

       The conference agreement follows the Senate amendment 
     except that, instead of 92.87 percent, the percentage 
     relating to the statutory reserve is 92.81 percent. More 
     specifically, the provision provides that for purposes of 
     determining the deduction for increases in certain reserves 
     of a life insurance company, the amount of the life insurance 
     reserves for any contract (other than certain variable 
     contracts) is the greater of (1) the net surrender value of 
     the contract (if any), or (2) 92.81 percent of the amount 
     determined using the tax reserve method otherwise applicable 
     to the contract as of the date the reserve is determined. In 
     the case of a variable contract, the amount of life insurance 
     reserves for the contract is the sum of (1) the greater of 
     (a) the net surrender value of the contract, or (b) the 
     separate-account reserve amount under section 817 for the 
     contract, plus (2) 92.81 percent of the excess (if any) of 
     the amount determined using the tax reserve method otherwise 
     applicable to the contract as of the date the reserve is 
     determined over the amount determined in (1). In no event 
     shall the reserves exceed the amount which would be taken 
     into account in determining statutory reserves. As under 
     present law, no deduction for asset adequacy or deficiency 
     reserves is allowed.
       The amount of life insurance reserves may not exceed the 
     annual statement reserves. A no-double-counting rule provides 
     that no amount or item is taken into account more than once 
     in determining any reserve under subchapter L of the Code. 
     For example, an amount taken into account in determining a 
     loss reserve under section 807 may not be taken into account 
     again in determining a loss reserve under section 832. 
     Similarly, a loss reserve determined under the tax reserve 
     method (whether the Commissioners Reserve Valuation Method, 
     the Commissioner's Annuity Reserve Valuation Method, a 
     principles-based reserve method, or another method developed 
     in the future, that is prescribed for a type of contract by 
     the National Association of Insurance Commissioners) may not 
     again be taken into account in determining the portion of the 
     reserve that is separately accounted for under section 817 or 
     be included also in determining the net surrender value of a 
     contract.
       The provision provides reserve rules for supplemental 
     benefits and retains present-law rules regarding certain 
     contracts issued by foreign branches of domestic life 
     insurance companies. The provision requires the Secretary to 
     provide for reporting (at such time and in such manner as the 
     Secretary shall prescribe) with respect to the opening 
     balance and closing balance or reserves and with respect to 
     the method of computing reserves for purposes of determining 
     income. For this purpose, the Secretary may require that a 
     life insurance company (including an affiliated group filing 
     a consolidated return that includes a life insurance company) 
     is required to report each of the line item elements of each 
     separate account by combining them with each such item from 
     all other separate accounts and the general account, and to 
     report the combined amounts on a line-by-line basis on the 
     taxpayer's return. Similarly, the Secretary may in such 
     guidance provide that reporting on a separate account by 
     separate account basis is generally not permitted. Under 
     existing regulatory authority, if the Secretary determines it 
     is necessary in order to carry out and enforce this 
     provision, the Secretary may require e-filing or comparable 
     filing of the return on magnetic medial or other machine 
     readable form, and may require that the taxpayer provide its 
     annual statement via a link, electronic copy, or other 
     similar means.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017. For the first taxable year 
     beginning after December 31, 2017, the difference in the 
     amount of the reserve with respect to any contract at the end 
     of the preceding taxable year and the amount of such reserve 
     determined as if the proposal had applied for that year is 
     taken into account for each of the eight taxable years 
     following that preceding year, one-eighth per year.
     10. Modification of rules for life insurance proration for 
         purposes of determining the dividends received deduction 
         (sec. 13518 of the Senate amendment and sec. 812 of the 
         Code)


                              Present Law

     Reduction of reserve deduction and dividends received 
         deduction to reflect untaxed income
       A life insurance company is subject to proration rules in 
     calculating life insurance company taxable income.
       The proration rules reduce the company's deductions, 
     including reserve deductions and dividends received 
     deductions, if the life insurance company has tax-exempt 
     income, deductible dividends received, or other similar 
     untaxed income items, because deductible reserve increases 
     can be viewed as being funded proportionately out of taxable 
     and tax-exempt income.
       Under the proration rules, the net increase and net 
     decrease in reserves are computed by reducing the ending 
     balance of the reserve items by the policyholders' share of 
     tax-exempt interest.\983\
---------------------------------------------------------------------------
     \983\ Secs. 807(a)(2)(B) and (b)(1)(B).
---------------------------------------------------------------------------
       Similarly, under the proration rules, a life insurance 
     company is allowed a dividends-received deduction for 
     intercorporate dividends from nonaffiliates only in 
     proportion to the company's share of such dividends,\984\ but 
     not for the policyholders' share. Fully deductible dividends 
     from affiliates are excluded from the application of this 
     proration formula, if such dividends are not themselves 
     distributions from tax-exempt interest or from dividend 
     income that would not be fully deductible if received 
     directly by the taxpayer. In addition, the proration rule 
     includes in prorated amounts the increase for the taxable 
     year in policy cash values of life insurance policies and 
     annuity and endowment contracts.
---------------------------------------------------------------------------
     \984\ Secs. 805(a)(4), 812.
---------------------------------------------------------------------------
     Company's share and policyholder's share
       The life insurance company proration rules provide that the 
     company's share, for this purpose, means the percentage 
     obtained by dividing the company's share of the net 
     investment income for the taxable year by the net investment 
     income for the taxable year.\985\ Net investment income means 
     95 percent of gross investment income, in the case of assets 
     held in segregated asset accounts under variable contracts, 
     and 90 percent of gross investment income in other 
     cases.\986\
---------------------------------------------------------------------------
     \985\ Sec. 812(a).
     \986\ Sec. 812(c).
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       Gross investment income includes specified items.\987\ The 
     specified items include interest (including tax-exempt 
     interest), dividends, rents, royalties and other related 
     specified items, short-term capital gains, and trade or 
     business income. Gross investment income does not include 
     gain (other than short-term capital gain to the extent it 
     exceeds net long-term capital loss) that is, or is considered 
     as, from the sale or exchange of a capital asset. Gross 
     investment income also does not include the appreciation in 
     the value of assets that is taken into account in computing 
     the company's tax reserve deduction under section 817.
---------------------------------------------------------------------------
     \987\ Sec. 812(d).
---------------------------------------------------------------------------
       The company's share of net investment income, for purposes 
     of this calculation, is the net investment income for the 
     taxable year, reduced by the sum of (a) the policy interest 
     for the taxable year and (b) a portion of policyholder 
     dividends.\988\ Policy interest is defined to include 
     required interest at the

[[Page 20008]]

     greater of the prevailing State assumed rate or the 
     applicable Federal rate (plus some other interest items). 
     Present law provides that in any case where neither the 
     prevailing State assumed interest rate nor the applicable 
     Federal rate is used, ``another appropriate rate'' is used 
     for this calculation. No statutory definition of ``another 
     appropriate rate'' is provided; the law is unclear as to what 
     rate or rates are appropriate for this purpose.\989\
---------------------------------------------------------------------------
     \988\ Sec. 812(b)(1). This portion is defined as gross 
     investment income's share of policyholder dividends.
     \989\ Legislative history of section 812 mentions that the 
     general concept that items of investment yield should be 
     allocated between policyholders and the company was retained 
     from prior law. H. Rep. 98-861, Conference Report to 
     accompany H.R. 4170, the Deficit Reduction Act of 1984, 98th 
     Cong., 2d Sess., 1065 (June 23, 1984). This concept is 
     referred to in Joint Committee on Taxation, General 
     Explanation of the Revenue Provisions of the Deficit 
     Reduction Act of 1984, JCS-41-84, December 31, 1984, p. 622, 
     stating, ``[u]nder the Act, the formula used for purposes of 
     determining the policyholders' share is based generally on 
     the proration formula used under prior law in computing gain 
     or loss from operations (i.e., by reference to `required 
     interest').'' This may imply that a reference to pre-1984-law 
     regulations may be appropriate. See Rev. Rul. 2003-120, 2003-
     2 C.B. 1154, and Technical Advice Memoranda 20038008 and 
     200339049.
---------------------------------------------------------------------------
       In 2007, the IRS issued Rev. Rul. 2007-54,\990\ 
     interpreting required interest under section 812(b) to be 
     calculated by multiplying the mean of a contract's beginning-
     of-year and end-of-year reserves by the greater of the 
     applicable Federal interest rate or the prevailing State 
     assumed interest rate, for purposes of determining separate 
     account reserves for variable contracts. However, Rev. Rul. 
     2007-54 was suspended by Rev. Rul. 2007-61, in which the IRS 
     and the Treasury Department stated that the issues would more 
     appropriately be addressed by regulation.\991\ No regulations 
     have been issued to date.
---------------------------------------------------------------------------
     \990\ 2007-38 I.R.B. 604.
     \991\ 2007-42 I.R.B. 799.
---------------------------------------------------------------------------
     General account and separate accounts
       A variable contract is generally a life insurance (or 
     annuity) contract whose death benefit (or annuity payout) 
     depends explicitly on the investment return and market value 
     of underlying assets.\992\ The investment risk is generally 
     that of the policyholder, not the insurer. The assets 
     underlying variable contracts are maintained in separate 
     accounts held by life insurers. These separate accounts are 
     distinct from the insurer's general account in which it 
     maintains assets supporting products other than variable 
     contracts.
---------------------------------------------------------------------------
     \992\ Section 817(d) provides a more detailed definition of a 
     variable contract.
---------------------------------------------------------------------------
     Reserves
       For Federal income tax purposes, a life insurance company 
     includes in gross income any net decrease in reserves, and 
     deducts a net increase in reserves.\993\ Methods for 
     determining reserves for tax purposes generally are based on 
     reserves prescribed by the National Association of Insurance 
     Commissioners for purposes of financial reporting under State 
     regulatory rules.
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     \993\ Sec. 807.
---------------------------------------------------------------------------
       For purposes of determining the amount of the tax reserves 
     for variable contracts, however, a special rule eliminates 
     gains and losses. Under this rule,\994\ in determining 
     reserves for variable contracts, realized and unrealized 
     gains are subtracted, and realized and unrealized losses are 
     added, whether or not the assets have been disposed of. The 
     basis of assets in the separate account is increased to 
     reflect appreciation, and reduced to reflect depreciation in 
     value, that are taken into account in computing reserves for 
     such contracts.
---------------------------------------------------------------------------
     \994\ Sec. 817.
---------------------------------------------------------------------------
     Dividends received deduction
       A corporate taxpayer may partially or fully deduct 
     dividends received.\995\ The percentage of the allowable 
     dividends received deduction depends on the percentage of the 
     stock of the distributing corporation that the recipient 
     corporation owns.
---------------------------------------------------------------------------
     \995\ Sec. 243 et seq. Conceptually, dividends received by a 
     corporation are retained in corporate solution; these amounts 
     are taxed when distributed to noncorporate shareholders.
---------------------------------------------------------------------------
       Limitation on dividends received deduction under section 
           246(c)(4)
       The dividends received deduction is not allowed with 
     respect to stock either (1) held for 45 days or less during a 
     91-day period beginning 45 days before the ex-dividend date, 
     or (2) to the extent the taxpayer is under an obligation to 
     make related payments with respect to positions in 
     substantially similar or related property.\996\ The 
     taxpayer's holding period is reduced for periods during which 
     its risk of loss is reduced.\997\
---------------------------------------------------------------------------
     \996\ Sec. 246(c).
     \997\ Sec. 246(c)(4). For this purpose, the holding period is 
     reduced for periods in which (1) the taxpayer has an 
     obligation to sell or has shorted substantially similar 
     stock; (2) the taxpayer has granted an option to buy 
     substantially similar stock; or (3) under Treasury 
     regulations, the taxpayer has diminished its risk of loss by 
     holding other positions with respect to substantially similar 
     or related property.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision modifies the life insurance company proration 
     rule for reducing dividends received deductions and reserve 
     deductions with respect to untaxed income. For purposes of 
     the life insurance proration rule of section 805(a)(4), the 
     company's share is 70 percent. The policyholder's share is 30 
     percent.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     11. Capitalization of certain policy acquisition expenses 
         (sec. 13519 of the Senate amendment and sec. 848 of the 
         Code)


                              Present Law

       In the case of an insurance company, specified policy 
     acquisition expenses for any taxable year are required to be 
     capitalized, and generally are amortized over the 120-month 
     period beginning with the first month in the second half of 
     the taxable year.\998\
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     \998\ Sec. 848.
---------------------------------------------------------------------------
       A special rule provides for 60-month amortization of the 
     first $5 million of specified policy acquisition expenses 
     with a phase-out. The phase-out reduces the amount amortized 
     over 60 months by the excess of the insurance company's 
     specified policy acquisition expenses for the taxable year 
     over $10 million.
       Specified policy acquisition expenses are determined as 
     that portion of the insurance company's general deductions 
     for the taxable year that does not exceed a specific 
     percentage of the net premiums for the taxable year on each 
     of three categories of insurance contracts. For annuity 
     contracts, the percentage is 1.75; for group life insurance 
     contracts, the percentage is 2.05; and for all other 
     specified insurance contracts, the percentage is 7.7.
       With certain exceptions, a specified insurance contract is 
     any life insurance, annuity, or noncancellable accident and 
     health insurance contract or combination thereof. A group 
     life insurance contract is any life insurance contract that 
     covers a group of individuals defined by reference to 
     employment relationship, membership in an organization, or 
     similar factor, the premiums for which are determined on a 
     group basis, and the proceeds of which are payable to (or for 
     the benefit of) persons other than the employer of the 
     insured, an organization to which the insured belongs, or 
     other similar person.


                               House Bill

       No provision.


                            Senate Amendment

       The provision extends the amortization period for specified 
     policy acquisition expenses from a 120-month period to the 
     180-month period beginning with the first month in the second 
     half of the taxable year. The provision does not change the 
     special rule providing for 60-month amortization of the first 
     $5 million of specified policy acquisition expenses (with 
     phaseout). The provision provides that for annuity contracts, 
     the percentage is 2.1 percent; for group life insurance 
     contracts, the percentage is 2.46 percent; and for all other 
     specified insurance contracts, the percentage is 9.24 
     percent.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     modifications. Under the conference agreement, the 
     amortization period is 180 months. For annuity contracts, the 
     percentage is 2.09 percent; for group life insurance 
     contracts, the percentage is 2.45 percent; and for all other 
     specified insurance contracts, the percentage is 9.20 
     percent.
     2. Tax reporting for life settlement transactions, 
         clarification of tax basis of life insurance contracts, 
         and exception to transfer for valuable consideration 
         rules (secs. 13518 through 13520 of the Senate amendment 
         and secs. 101, 1016, and 6050X of the Code)


                              Present Law

       An exclusion from Federal income tax is provided for 
     amounts received under a life insurance contract paid by 
     reason of the death of the insured.\999\
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     \999\ Sec. 101(a)(1). In the case of certain accelerated 
     death benefits and viatical settlements, special rules treat 
     certain amounts as amounts paid by reason of the death of an 
     insured (that is, generally, excludable from income). Sec. 
     101(g). The rules relating to accelerated death benefits 
     provide that amounts treated as paid by reason of the death 
     of the insured include any amount received under a life 
     insurance contract on the life of an insured who is a 
     terminally ill individual, or who is a chronically ill 
     individual (provided certain requirements are met). For this 
     purpose, a terminally ill individual is one who has been 
     certified by a physician as having an illness or physical 
     condition which can reasonably be expected to result in death 
     in 24 months or less after the date of the certification. A 
     chronically ill individual is one who has been certified by a 
     licensed health care practitioner within the preceding 12-
     month period as meeting certain ability-related requirements. 
     In the case of a viatical settlement, if any portion of the 
     death benefit under a life insurance contract on the life of 
     an insured who is terminally ill or chronically ill is sold 
     to a viatical settlement provider, the amount paid for the 
     sale or assignment of that portion is treated as an amount 
     paid under the life insurance contract by reason of the death 
     of the insured (that is, generally, excludable from income). 
     For this purpose, a viatical settlement provider is a person 
     regularly engaged in the trade or business of purchasing, or 
     taking assignments of, life insurance contracts on the lives 
     of terminally ill or chronically ill individuals (provided 
     certain requirements are met).

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[[Page 20009]]

       Under rules known as the transfer for value rules, if a 
     life insurance contract is sold or otherwise transferred for 
     valuable consideration, the amount paid by reason of the 
     death of the insured that is excludable generally is 
     limited.\1000\ Under the limitation, the excludable amount 
     may not exceed the sum of (1) the actual value of the 
     consideration, and (2) the premiums or other amounts 
     subsequently paid by the transferee of the contract. Thus, 
     for example, if a person buys a life insurance contract, and 
     the consideration he pays combined with his subsequent 
     premium payments on the contract are less than the amount of 
     the death benefit he later receives under the contract, then 
     the difference is includable in the buyer's income.
---------------------------------------------------------------------------
     \1000\ Sec. 101(a)(2).
---------------------------------------------------------------------------
       Exceptions are provided to the limitation on the excludable 
     amount. The limitation on the excludable amount does not 
     apply if (1) the transferee's basis in the contract is 
     determined in whole or in part by reference to the 
     transferor's basis in the contract,\1001\ or (2) the transfer 
     is to the insured, to a partner of the insured, to a 
     partnership in which the insured is a partner, or to a 
     corporation in which the insured is a shareholder or 
     officer.\1002\
---------------------------------------------------------------------------
     \1001\ Sec. 101(a)(2)(A).
     \1002\ Sec. 101(a)(2)(B).
---------------------------------------------------------------------------
       IRS guidance sets forth more details of the tax treatment 
     of a life insurance policyholder who sells or surrenders the 
     life insurance contract and the tax treatment of other 
     sellers and of buyers of life insurance contracts. The 
     guidance relates to the character of taxable amounts 
     (ordinary or capital) and to the taxpayer's basis in the life 
     insurance contract.
       In Revenue Ruling 2009-13,\1003\ the IRS ruled that income 
     recognized under section 72(e) on surrender to the life 
     insurance company of a life insurance contract with cash 
     value is ordinary income. In the case of sale of a cash value 
     life insurance contract, the IRS ruled that the insured's 
     (seller's) basis is reduced by the cost of insurance, and the 
     gain on sale of the contract is ordinary income to the extent 
     of the amount that would be recognized as ordinary income if 
     the contract were surrendered (the ``inside buildup''), and 
     any excess is long-term capital gain. Gain on the sale of a 
     term life insurance contract (without cash surrender value) 
     is long-term capital gain under the ruling.
---------------------------------------------------------------------------
     \1003\ 2009-21 I.R.B. 1029.
---------------------------------------------------------------------------
       In Revenue Ruling 2009-14,\1004\ the IRS ruled that under 
     the transfer for value rules, a portion of the death benefit 
     received by a buyer of a life insurance contract on the death 
     of the insured is includable as ordinary income. The portion 
     is the excess of the death benefit over the consideration and 
     other amounts (e.g., premiums) paid for the contract. Upon 
     sale of the contract by the purchaser of the contract, the 
     gain is long-term capital gain, and in determining the gain, 
     the basis of the contract is not reduced by the cost of 
     insurance.
---------------------------------------------------------------------------
     \1004\ 2009-21 I.R.B. 1031.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

     In general
       The provision imposes reporting requirements in the case of 
     the purchase of an existing life insurance contract in a 
     reportable policy sale and imposes reporting requirements on 
     the payor in the case of the payment of reportable death 
     benefits. The provision sets forth rules for determining the 
     basis of a life insurance or annuity contract. Lastly, the 
     provision modifies the transfer for value rules in a transfer 
     of an interest in a life insurance contract in a reportable 
     policy sale.
     Reporting requirements for acquisitions of life insurance 
         contracts
       Reporting upon acquisition of life insurance contract
       The reporting requirement applies to every person who 
     acquires a life insurance contract, or any interest in a life 
     insurance contract, in a reportable policy sale during the 
     taxable year. A reportable policy sale means the acquisition 
     of an interest in a life insurance contract, directly or 
     indirectly, if the acquirer has no substantial family, 
     business, or financial relationship with the insured (apart 
     from the acquirer's interest in the life insurance contract). 
     An indirect acquisition includes the acquisition of an 
     interest in a partnership, trust, or other entity that holds 
     an interest in the life insurance contract.
       Under the reporting requirement, the buyer reports 
     information about the purchase to the IRS, to the insurance 
     company that issued the contract, and to the seller. The 
     information reported by the buyer about the purchase is (1) 
     the buyer's name, address, and taxpayer identification number 
     (``TIN''), (2) the name, address, and TIN of each recipient 
     of payment in the reportable policy sale, (3) the date of the 
     sale, (4) the name of the issuer, and (5) the amount of each 
     payment. The statement the buyer provides to any issuer of a 
     life insurance contract is not required to include the amount 
     of the payment or payments for the purchase of the contract.
       Reporting of seller's basis in the life insurance contract
       On receipt of a report described above, or on any notice of 
     the transfer of a life insurance contract to a foreign 
     person, the issuer is required to report to the IRS and to 
     the seller (1)) the name, address, and TIN of the seller or 
     the transferor to a foreign person, (2) the basis of the 
     contract (i.e., the investment in the contract within the 
     meaning of section 72(e)(6)), and (3) the policy number of 
     the contract. Notice of the transfer of a life insurance 
     contract to a foreign person is intended to include any sort 
     of notice, including information provided for nontax purposes 
     such as change of address notices for purposes of sending 
     statements or for other purposes, or information relating to 
     loans, premiums, or death benefits with respect to the 
     contract.
       Reporting with respect to reportable death benefits
       When a reportable death benefit is paid under a life 
     insurance contract, the payor insurance company is required 
     to report information about the payment to the IRS and to the 
     payee. Under this reporting requirement, the payor reports 
     (1) the name, address and TIN of the person making the 
     payment, (2) the name, address, and TIN of each recipient of 
     a payment, (3) the date of each such payment, (4) the gross 
     amount of the payment (5) the payor's estimate of the buyer's 
     basis in the contract. A reportable death benefit means an 
     amount paid by reason of the death of the insured under a 
     life insurance contract that has been transferred in a 
     reportable policy sale.
       For purposes of these reporting requirements, a payment 
     means the amount of cash and the fair market value of any 
     consideration transferred in a reportable policy sale.
     Determination of basis
       The provision provides that in determining the basis of a 
     life insurance or annuity contract, no adjustment is made for 
     mortality, expense, or other reasonable charges incurred 
     under the contract (known as ``cost of insurance''). This 
     reverses the position of the IRS in Revenue Ruling 2009-13 
     that on sale of a cash value life insurance contract, the 
     insured's (seller's) basis is reduced by the cost of 
     insurance.
     Scope of transfer for value rules
       The provision provides that the exceptions to the transfer 
     for value rules do not apply in the case of a transfer of a 
     life insurance contract, or any interest in a life insurance 
     contract, in a reportable policy sale. Thus, some portion of 
     the death benefit ultimately payable under such a contract 
     may be includable in income.
       Effective date.--Under the provision, the reporting 
     requirement is effective for reportable policy sales 
     occurring after December 31, 2017, and reportable death 
     benefits paid after December 31, 2017. The clarification of 
     the basis rules for life insurance and annuity contracts is 
     effective for transactions entered into after August 25, 
     2009. The modification of exception to the transfer for value 
     rules is effective for transfers occurring after December 31, 
     2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

                         I. Compensation \1005\

     1. Modification of limitation on excessive employee 
         remuneration (sec. 3801 of the House bill, sec. 13601 of 
         the Senate amendment, and sec. 162(m) of the Code)


                              Present Law

     In general
       An employer generally may deduct reasonable compensation 
     for personal services as an ordinary and necessary business 
     expense. Section 162(m) provides an explicit limitation on 
     the deductibility of compensation expenses in the case of 
     publicly traded corporate employers. The otherwise allowable 
     deduction for compensation with respect to a covered employee 
     of a publicly held corporation \1006\ is limited to no more 
     than $1 million per year.\1007\ The deduction limitation 
     applies when the deduction attributable to the compensation 
     would otherwise be taken.
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     \1005\ Provisions relating to retirement plans are discussed 
     in Part I.E.
     \1006\ A corporation is treated as publicly held if it has a 
     class of common equity securities that is required to be 
     registered under section 12 of the Securities Exchange Act of 
     1934. Section 162(m)(2).
     \1007\ Sec. 162(m). This deduction limitation applies for 
     purposes of the regular income tax and the alternative 
     minimum tax.
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     Covered employees
       Section 162(m) defines a covered employee as (1) the chief 
     executive officer of the corporation (or an individual acting 
     in such capacity) as of the close of the taxable year and (2) 
     any employee whose total compensation is required to be 
     reported to shareholders under the Securities Exchange Act of 
     1934 (``Exchange Act'') by reason of being among the 
     corporation's four most highly compensated officers for the 
     taxable year (other than the chief executive officer).\1008\ 
     Treasury regulations under section 162(m) provide that 
     whether an employee is the chief executive officer or among 
     the four most highly compensated officers should be

[[Page 20010]]

     determined pursuant to the executive compensation disclosure 
     rules promulgated under the Exchange Act.
---------------------------------------------------------------------------
     \1008\ Sec. 162(m)(3).
---------------------------------------------------------------------------
       In 2006, the Securities and Exchange Commission amended 
     certain rules relating to executive compensation, including 
     which officers' compensation must be disclosed under the 
     Exchange Act. Under the new rules, such officers are (1) the 
     principal executive officer (or an individual acting in such 
     capacity), (2) the principal financial officer (or an 
     individual acting in such capacity), and (3) the three most 
     highly compensated officers, other than the principal 
     executive officer or principal financial officer.
       In response to the Securities and Exchange Commission's new 
     disclosure rules, the Internal Revenue Service issued updated 
     guidance on identifying which employees are covered by 
     section 162(m).\1009\ The new guidance provides that 
     ``covered employee'' means any employee who is (1) as of the 
     close of the taxable year, the principal executive officer 
     (or an individual acting in such capacity) defined in 
     reference to the Exchange Act, or (2) among the three most 
     highly compensated officers \1010\ for the taxable year 
     (other than the principal executive officer or principal 
     financial officer), again defined by reference to the 
     Exchange Act. Thus, under current guidance, only four 
     employees are covered under section 162(m) for any taxable 
     year. Under Treasury regulations, the requirement that the 
     individual meet the criteria as of the last day of the 
     taxable year applies to both the principal executive officer 
     and the three highest compensated officers.\1011\
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     \1009\ Notice 2007-49, 2007-25 I.R.B. 1429.
     \1010\ By reason of being among the officers whose total 
     compensation is required to be reported to shareholders under 
     the Securities Exchange Act of 1934.
     \1011\ Treas. Reg. sec. 1.162-27(c)(2).
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     Definition of publicly held corporation
       For purposes of the deduction disallowance of section 
     162(m), a publicly held corporation means any corporation 
     issuing any class of common equity securities required to be 
     registered under section 12 of the Securities Exchange Act of 
     1934.\1012\ All U.S. publicly traded companies are subject to 
     this registration requirement, including their foreign 
     affiliates. A foreign company publicly traded through 
     American depository receipts (``ADRs'') is also subject to 
     this registration requirement if more than 50 percent of the 
     issuer's outstanding voting securities are held, directly or 
     indirectly, by residents of United States and either (i) the 
     majority of the executive officers or directors are United 
     States citizens or residents, (ii) more than 50 percent of 
     the assets of the issuer are located in the United States, or 
     (iii) the business of the issuer is administered principally 
     in the United States. Other foreign companies are not subject 
     to the registration requirement.
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     \1012\ Sec. 162(m)(2).
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     Remuneration subject to the deduction limitation
       In general
       Unless specifically excluded, the deduction limitation 
     applies to all remuneration for services, including cash and 
     the cash value of all remuneration (including benefits) paid 
     in a medium other than cash. If an individual is a covered 
     employee for a taxable year, the deduction limitation applies 
     to all compensation not explicitly excluded from the 
     deduction limitation, regardless of whether the compensation 
     is for services as a covered employee and regardless of when 
     the compensation was earned. The $1 million cap is reduced by 
     excess parachute payments (as defined in section 280G) that 
     are not deductible by the corporation.\1013\
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     \1013\ Sec. 162(m)(4)(F).
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       Certain types of compensation are not subject to the 
     deduction limit and are not taken into account in determining 
     whether other compensation exceeds $1 million. The following 
     types of compensation are not taken into account: (1) 
     remuneration payable on a commission basis \1014\; (2) 
     remuneration payable solely on account of the attainment of 
     one or more performance goals if certain outside director and 
     shareholder approval requirements are met (``performance-
     based compensation'') \1015\; (3) payments to a tax-favored 
     retirement plan (including salary reduction contributions); 
     (4) amounts that are excludable from the executive's gross 
     income (such as employer-provided health benefits and 
     miscellaneous fringe benefits \1016\); and (5) any 
     remuneration payable under a written binding contract which 
     was in effect on February 17, 1993. In addition, remuneration 
     does not include compensation for which a deduction is 
     allowable after a covered employee ceases to be a covered 
     employee. Thus, the deduction limitation often does not apply 
     to deferred compensation that is otherwise subject to the 
     deduction limitation (e.g., is not performance-based 
     compensation) because the payment of compensation is deferred 
     until after termination of employment.
---------------------------------------------------------------------------
     \1014\ Sec. 162(m)(4)(B).
     \1015\ Sec. 162(m)(4)(C).
     \1016\ Secs. 105, 106, and 132.
---------------------------------------------------------------------------
       Performance-based compensation
       Compensation qualifies for the exception for performance-
     based compensation only if (1) it is paid solely on account 
     of the attainment of one or more performance goals, (2) the 
     performance goals are established by a compensation committee 
     consisting solely of two or more outside directors,\1017\ (3) 
     the material terms under which the compensation is to be 
     paid, including the performance goals, are disclosed to and 
     approved by the shareholders in a separate majority-approved 
     vote prior to payment, and (4) prior to payment, the 
     compensation committee certifies that the performance goals 
     and any other material terms were in fact satisfied.
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     \1017\ A director is considered an outside director if he or 
     she is not a current employee of the corporation (or related 
     entities), is not a former employee of the corporation (or 
     related entities) who is receiving compensation for prior 
     services (other than benefits under a qualified retirement 
     plan), was not an officer of the corporation (or related 
     entities) at any time, and is not currently receiving 
     compensation for personal services in any capacity (e.g., for 
     services as a consultant) other than as a director.
---------------------------------------------------------------------------
       Compensation (other than stock options or other stock 
     appreciation rights (``SARs'')) is not treated as paid solely 
     on account of the attainment of one or more performance goals 
     unless the compensation is paid to the particular executive 
     pursuant to a pre-established objective performance formula 
     or standard that precludes discretion. A stock option or SAR 
     with an exercise price not less than the fair market value, 
     on the date the option or SAR is granted, of the stock 
     subject to the option or SAR, generally is treated as meeting 
     the exception for performance-based compensation, provided 
     that the requirements for outside director and shareholder 
     approval are met (without the need for certification that the 
     performance standards have been met). This is the case 
     because the amount of compensation attributable to the 
     options or SARs received by the executive is based solely on 
     an increase in the corporation's stock price. Stock-based 
     compensation is not treated as performance-based if it 
     depends on factors other than corporate performance.


                               House Bill

     Definition of covered employee
       The provision revises the definition of covered employee to 
     include both the principal executive officer and the 
     principal financial officer. Further, an individual is a 
     covered employee if the individual holds one of these 
     positions at any time during the taxable year. The provision 
     also defines as a covered employee the three (rather than 
     four) most highly compensated officers for the taxable year 
     (other than the principal executive officer or principal 
     financial officer) who are required to be reported on the 
     company's proxy statement (i.e., the statement required 
     pursuant to executive compensation disclosure rules 
     promulgated under the Exchange Act) for the taxable year (or 
     who would be required to be reported on such a statement for 
     a company not required to make such a report to 
     shareholders). This includes such officers of a corporation 
     not required to file a proxy statement but which otherwise 
     falls within the revised definition of a publicly held 
     corporation, as well as such officers of a publicly traded 
     corporation that would otherwise have been required to file a 
     proxy statement for the year (for example, but for the fact 
     that the corporation delisted its securities or underwent a 
     transaction that resulted in the nonapplication of the proxy 
     statement requirement).
       In addition, if an individual is a covered employee with 
     respect to a corporation for a taxable year beginning after 
     December 31, 2016, the individual remains a covered employee 
     for all future years. Thus, an individual remains a covered 
     employee with respect to compensation otherwise deductible 
     for subsequent years, including for years during which the 
     individual is no longer employed by the corporation and years 
     after the individual has died. Compensation does not fail to 
     be compensation with respect to a covered employee and thus 
     subject to the deduction limit for a taxable year merely 
     because the compensation is includible in the income of, or 
     paid to, another individual, such as compensation paid to a 
     beneficiary after the employee's death, or to a former spouse 
     pursuant to a domestic relations order.
     Definition of publicly held corporation
       The provision extends the applicability of section 162(m) 
     to include all domestic publicly traded corporations and all 
     foreign companies publicly traded through ADRs. The proposed 
     definition may include certain additional corporations that 
     are not publicly traded, such as large private C or S 
     corporations.
     Performance-based compensation and commissions exceptions
       The provision eliminates the exceptions for commissions and 
     performance-based compensation from the definition of 
     compensation subject to the deduction limit. Thus, such 
     compensation is taken into account in determining the amount 
     of compensation with respect to a covered employee for a 
     taxable year that exceeds $1 million and is thus not 
     deductible under section 162.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment follows the House bill, except that it 
     adds a transition rule for

[[Page 20011]]

     remuneration which is provided pursuant to a written binding 
     contract which was in effect on November 2, 2017 and which 
     was not modified in any material respect on or after such 
     date.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017. A transition rule applies 
     to remuneration which is provided pursuant to a written 
     binding contract which was in effect on November 2, 2017 and 
     which was not modified in any material respect on or after 
     such date.


                          Conference Agreement

       The conference agreement follows the Senate amendment. For 
     purposes of the transition rule, compensation paid pursuant 
     to a plan qualifies for this exception provided that the 
     right to participate in the plan is part of a written binding 
     contract with the covered employee in effect on November 2, 
     2017. For example, suppose a covered employee was hired by 
     XYZ Corporation on October 2, 2017 and one of the terms of 
     the written employment contract is that the executive is 
     eligible to participate in the `XYZ Corporation Executive 
     Deferred Compensation Plan' in accordance with the terms of 
     the plan. Assume further that the terms of the plan provide 
     for participation after 6 months of employment, amounts 
     payable under the plan are not subject to discretion, and the 
     corporation does not have the right to amend materially the 
     plan or terminate the plan (except on a prospective basis 
     before any services are performed with respect to the 
     applicable period for which such compensation is to be paid). 
     Provided that the other conditions of the binding contract 
     exception are met (e.g., the plan itself is in writing), 
     payments under the plan are grandfathered, even though the 
     employee was not actually a participant in the plan on 
     November 2, 2017.\1018\
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     \1018\ As discussed in the text below, the grandfather ceases 
     to apply if the plan is materially amended.
---------------------------------------------------------------------------
       The fact that a plan was in existence on November 2, 2017 
     is not by itself sufficient to qualify the plan for the 
     exception for binding written contracts.
       The exception for remuneration paid pursuant to a binding 
     written contract ceases to apply to amounts paid after there 
     has been a material modification to the terms of the 
     contract. The exception does not apply to new contracts 
     entered into or renewed after November 2, 2017. For purposes 
     of this rule, any contract that is entered into on or before 
     November 2, 2017 and that is renewed after such date is 
     treated as a new contract entered into on the day the renewal 
     takes effect. A contract that is terminable or cancelable 
     unconditionally at will by either party to the contract 
     without the consent of the other, or by both parties to the 
     contract, is treated as a new contract entered into on the 
     date any such termination or cancellation, if made, would be 
     effective. However, a contract is not treated as so 
     terminable or cancelable if it can be terminated or cancelled 
     only by terminating the employment relationship of the 
     covered employee.
     2. Excise tax on excess tax-exempt organization executive 
         compensation (sec. 3802 of the House bill, sec. 13602 of 
         the Senate amendment, and sec. 4960 of the Code)


                              Present Law

       Taxable employers and other service recipients generally 
     may deduct reasonable compensation expenses.\1019\ However, 
     in some cases, compensation in excess of specific levels is 
     not deductible.
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     \1019\ Sec. 162(a)(1).
---------------------------------------------------------------------------
       A publicly held corporation generally cannot deduct more 
     than $1 million of compensation (that is not compensation 
     otherwise excepted from this limit) in a taxable year for 
     each ``covered employee.'' \1020\ For this purpose, a covered 
     employee is the corporation's principal executive officer (or 
     an individual acting in such capacity) defined in reference 
     to the Securities Exchange Act of 1934 (``Exchange Act'') as 
     of the close of the taxable year, or any employee whose total 
     compensation is required to be reported to shareholders under 
     the Exchange Act by reason of being among the corporation's 
     three most highly compensated officers for the taxable year 
     (other than the principal executive officer or principal 
     financial officer).\1021\
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     \1020\ Sec. 162(m)(1). Under section 162(m)(6), limits apply 
     to deductions for compensation of individuals performing 
     services for certain health insurance providers.
     \1021\ Notice 2007-49, 2007-2 I.R.B. 1429.
---------------------------------------------------------------------------
       Unless an exception applies, generally a corporation cannot 
     deduct that portion of the aggregate present value of a 
     ``parachute payment'' which equals or exceeds three times the 
     ``base amount'' of certain service providers. The 
     nondeductible excess is an ``excess parachute payment.'' 
     \1022\ A parachute payment is generally a payment of 
     compensation that is contingent on a change in corporate 
     ownership or control made to certain officers, shareholders, 
     and highly compensated individuals.\1023\ An individual's 
     base amount is the average annualized compensation includible 
     in the individual's gross income for the five taxable years 
     ending before the date on which the change in ownership or 
     control occurs.\1024\ Certain amounts are not considered 
     parachute payments, including payments under a qualified 
     retirement plan, a simplified employee pension plan, or a 
     simple retirement account.\1025\
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     \1022\ Sec. 280G(a) and (b)(1).
     \1023\ Sec. 280G(b)(2) and (c).
     \1024\ Sec. 280G(b)(3).
     \1025\ Secs. 401(a), 403(a), 408(k), and 408(p).
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       These deduction limits generally do not affect a tax-exempt 
     organization.


                               House Bill

       Under the provision, an employer is liable for an excise 
     tax equal to 20 percent of the sum of (1) any remuneration 
     (other than an excess parachute payment) in excess of $1 
     million paid to a covered employee by an applicable tax-
     exempt organization for a taxable year, and (2) any excess 
     parachute payment (under a new definition for this purpose 
     that relates solely to separation pay) paid by the applicable 
     tax-exempt organization to a covered employee. Accordingly, 
     the excise tax applies as a result of an excess parachute 
     payment, even if the covered employee's remuneration does not 
     exceed $1 million.
       For purposes of the provision, a covered employee is an 
     employee (including any former employee) of an applicable 
     tax-exempt organization if the employee is one of the five 
     highest compensated employees of the organization for the 
     taxable year or was a covered employee of the organization 
     (or a predecessor) for any preceding taxable year beginning 
     after December 31, 2016. An ``applicable tax-exempt 
     organization'' is an organization exempt from tax under 
     section 501(a), an exempt farmers' cooperative,\1026\ a 
     Federal, State or local governmental entity with excludable 
     income,\1027\ or a political organization.\1028\
---------------------------------------------------------------------------
     \1026\ Sec. 521(b).
     \1027\ Sec. 115(1).
     \1028\ Sec. 527(e)(1).
---------------------------------------------------------------------------
       Remuneration means wages as defined for income tax 
     withholding purposes,\1029\ but does not include any 
     designated Roth contribution.\1030\ Remuneration of a covered 
     employee includes any remuneration paid with respect to 
     employment of the covered employee by any person or 
     governmental entity related to the applicable tax-exempt 
     organization. A person or governmental entity is treated as 
     related to an applicable tax-exempt organization if the 
     person or governmental entity (1) controls, or is controlled 
     by, the organization, (2) is controlled by one or more 
     persons that control the organization, (3) is a supported 
     organization \1031\ during the taxable year with respect to 
     the organization, (4) is a supporting organization \1032\ 
     during the taxable year with respect to the organization, or 
     (5) in the case of a voluntary employees' beneficiary 
     association (``VEBA''),\1033\ establishes, maintains, or 
     makes contributions to the VEBA. However, remuneration of a 
     covered employee that is not deductible by reason of the $1 
     million limit on deductible compensation is not taken into 
     account for purposes of the provision.
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     \1029\ Sec. 3401(a).
     \1030\ Under section 402A(c), a designated Roth contribution 
     is an elective deferral (that is, a contribution to a tax-
     favored employer-sponsored retirement plan made at the 
     election of an employee) that the employee designates as not 
     being excludable from income.
     \1031\ Sec. 509(f)(3).
     \1032\ Sec. 509(a)(3).
     \1033\ Sec. 501(c)(9).
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       Under the provision, an excess parachute payment is the 
     amount by which any parachute payment exceeds the portion of 
     the base amount allocated to the payment. A parachute payment 
     is a payment in the nature of compensation to (or for the 
     benefit of) a covered employee if the payment is contingent 
     on the employee's separation from employment and the 
     aggregate present value of all such payments equals or 
     exceeds three times the base amount. The base amount is the 
     average annualized compensation includible in the covered 
     employee's gross income for the five taxable years ending 
     before the date of the employee's separation from employment. 
     Parachute payments do not include payments under a qualified 
     retirement plan, a simplified employee pension plan, a simple 
     retirement account, a tax-deferred annuity,\1034\ or an 
     eligible deferred compensation plan of a State or local 
     government employer.\1035\
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     \1034\ Sec. 403(b).
     \1035\ Sec. 457(b).
---------------------------------------------------------------------------
       The employer of a covered employee is liable for the excise 
     tax. If remuneration of a covered employee from more than one 
     employer is taken into account in determining the excise tax, 
     each employer is liable for the tax in an amount that bears 
     the same ratio to the total tax as the remuneration paid by 
     that employer bears to the remuneration paid by all employers 
     to the covered employee.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that remuneration is treated as paid when there is no 
     substantial risk of forfeiture of the rights to such 
     remuneration. In addition, the definition of remuneration for 
     this purpose includes amounts required to be included in 
     gross income under section 457(f).\1036\
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     \1036\ Sec. 457(f) applies to an ``ineligible'' deferred 
     compensation plan of a State or local government or a tax-
     exempt employer (that is, a plan that does not meet the 
     requirements to be an eligible plan under section 457(b)). 
     Under an ineligible plan, deferred amounts are treated as 
     nonqualified deferred compensation and includible in income 
     for the first taxable year in which there is no substantial 
     risk of forfeiture of the rights to such compensation. For 
     this purpose, a person's rights to compensation are subject 
     to a substantial risk of forfeiture if the rights are 
     conditioned on the future performance of substantial services 
     by any individual. Earnings post-vesting are generally taxed 
     when paid.

[[Page 20012]]




                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     modifications. Under the conference agreement, the tax rate 
     is equal to corporate tax rate, which is 21 percent under the 
     conference agreement. In addition, for purposes of the 
     requirement to treat remuneration as paid when the rights to 
     the remuneration are no longer subject to a substantial risk 
     of forfeiture, the conference agreement clarifies that 
     ``substantial risk of forfeiture'' is based on the definition 
     under section 457(f)(3)(B) which applies to ineligible 
     deferred compensation subject to section 457(f). Accordingly, 
     the tax imposed by this provision can apply to the value of 
     remuneration that is vested (and any increases in such value 
     or vested remuneration) under this definition, even if it is 
     not yet received.
       The conference agreement exempts compensation paid to 
     employees who are not highly compensated employees (within 
     the meaning of section 414(q)) from the definition of 
     parachute payment, and also exempts compensation attributable 
     to medical services of certain qualified medical 
     professionals from the definitions of remuneration and 
     parachute payment. For purposes of determining a covered 
     employee, remuneration paid to a licensed medical 
     professional which is directly related to the performance of 
     medical or veterinary services by such professional is not 
     taken into account, whereas remuneration paid to such a 
     professional in any other capacity is taken into account. A 
     medical professional for this purpose includes a doctor, 
     nurse, or veterinarian.
     3. Treatment of qualified equity grants (sec. 3803 of the 
         House bill, sec. 13603 of the Senate amendment, and secs. 
         83, 3401, and 6051 of the Code)


                              Present Law

     Income tax treatment of employer stock transferred to an 
         employee
       Specific rules apply to property, including employer stock, 
     transferred to an employee in connection with the performance 
     of services.\1037\ These rules govern the amount and timing 
     of income inclusion by the employee and the amount and timing 
     of the employer's compensation deduction.
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     \1037\ Sec. 83. Section 83 applies generally to transfers of 
     any property, not just employer stock, in connection with the 
     performance of services by any service provider, not just an 
     employee. However, the provision described herein applies 
     only with respect to certain employer stock transferred to 
     employees.
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       Under these rules, an employee generally must recognize 
     income in the taxable year in which the employee's right to 
     the stock is transferable or is not subject to a substantial 
     risk of forfeiture, whichever occurs earlier (referred to 
     herein as ``substantially vested''). Thus, if the employee's 
     right to the stock is substantially vested when the stock is 
     transferred to the employee, the employee recognizes income 
     in the taxable year of such transfer, in an amount equal to 
     the fair market value of the stock as of the date of transfer 
     (less any amount paid for the stock). If at the time the 
     stock is transferred to the employee, the employee's right to 
     the stock is not substantially vested (referred to herein as 
     ``nonvested''), the employee does not recognize income 
     attributable to the stock transfer until the taxable year in 
     which the employee's right becomes substantially vested. In 
     this case, the amount includible in the employee's income is 
     the fair market value of the stock as of the date that the 
     employee's right to the stock is substantially vested (less 
     any amount paid for the stock). However, if the employee's 
     right to the stock is nonvested at the time the stock is 
     transferred to employee, under section 83(b), the employee 
     may elect within 30 days of transfer to recognize income in 
     the taxable year of transfer, referred to as a ``section 
     83(b)'' election.\1038\ If a proper and timely election under 
     section 83(b) is made, the amount of compensatory income is 
     capped at the amount equal to the fair market value of the 
     stock as of the date of transfer (less any amount paid for 
     the stock). A section 83(b) election is available with 
     respect to grants of ``restricted stock'' (nonvested stock), 
     and does not generally apply to the grant of options.
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     \1038\ Under Treas. Reg. sec. 1.83-2, the employee makes an 
     election by filing with the Internal Revenue Service a 
     written statement that includes the fair market value of the 
     property at the time of transfer and the amount (if any) paid 
     for the property. The employee must also provide a copy of 
     the statement to the employer.
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       In general, an employee's right to stock or other property 
     is subject to a substantial risk of forfeiture if the 
     employee's right to full enjoyment of the property is subject 
     to a condition, such as the future performance of substantial 
     services.\1039\ An employee's right to stock or other 
     property is transferable if the employee can transfer an 
     interest in the property to any person other than the 
     transferor of the property.\1040\ Thus, generally, employer 
     stock transferred to an employee by an employer is not 
     transferable merely because the employee can sell it back to 
     the employer.
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     \1039\ See section 83(c)(1) and Treas. Reg. sec. 1.83-3(c) 
     for the definition of substantial risk of forfeiture.
     \1040\ Treas. Reg. sec. 1.83-3(d). In addition, under section 
     83(c)(2), the right to stock is transferable only if any 
     transferee's right to the stock would not be subject to a 
     substantial risk of forfeiture.
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       In the case of stock transferred to an employee, the 
     employer is allowed a deduction (to the extent a deduction 
     for a business expense is otherwise allowable) equal to the 
     amount included in the employee's income as a result of 
     transfer of the stock.\1041\ The employer deduction generally 
     is permitted in the employer's taxable year in which or with 
     which ends the employee's taxable year when the amount is 
     included and properly reported in the employee's 
     income.\1042\
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     \1041\ Sec. 83(h).
     \1042\ Treas. Reg. sec. 1.83-6.
---------------------------------------------------------------------------
       These rules do not apply to the grant of a nonqualified 
     option on employer stock unless the option has a readily 
     ascertainable fair market value.\1043\ Instead, these rules 
     apply to the transfer of employer stock by the employee on 
     exercise of the option. That is, if the right to the stock is 
     substantially vested on transfer (the time of exercise), 
     income recognition applies for the taxable year of transfer. 
     If the right to the stock is nonvested on transfer, the 
     timing of income inclusion is determined under the rules 
     applicable to the transfer of nonvested stock. In either 
     case, the amount includible in income by the employee is the 
     fair market value of the stock as of the required time of 
     income inclusion, less the exercise price paid by the 
     employee. A section 83(b) election generally does not apply 
     to the grant of options. If upon the exercise of an option, 
     nonvested stock is transferred to the employee, a section 
     83(b) election may apply. The employer's deduction is 
     generally determined under the rules that apply to transfers 
     of restricted stock, but a special accrual rule may apply 
     under Treasury regulations when the transferred stock is 
     substantially vested.\1044\
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     \1043\ See section 83(e)(3) and Treas. Reg. sec. 1.83-7. A 
     nonqualified option is an option on employer stock that is 
     not a statutory option, discussed below.
     \1044\ Treas. Reg. sec. 1.83-6(a)(3).
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     Employment taxes and reporting
       Employment taxes generally consist of taxes under the 
     Federal Insurance Contributions Act (``FICA''), tax under the 
     Federal Unemployment Tax Act (``FUTA''), and income taxes 
     required to be withheld by employers from wages paid to 
     employees (``income tax withholding'').\1045\ Unless an 
     exception applies under the applicable rules, compensation 
     provided to an employee constitutes wages subject to these 
     taxes.
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     \1045\ Secs. 3101-3128 (FICA), 3301-3311 (FUTA), and 3401-
     3404 (income tax withholding). Instead of FICA taxes, 
     railroad employers and employees are subject, under the 
     Railroad Retirement Tax Act (``RRTA''), sections 3201-3241, 
     to taxes equivalent to FICA taxes with respect to 
     compensation as defined for RRTA purposes. Sections 3501-3510 
     provide additional rules relating to all these taxes.
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       FICA imposes tax on employers and employees, generally 
     based on the amount of wages paid to an employee during the 
     year. Special rules as to the timing and amount of FICA taxes 
     apply in the case of nonqualified deferred compensation, as 
     defined for FICA purposes.\1046\
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     \1046\ Sec. 3121(v); Treas. Reg. sec. 31.3121(v)(2).
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       The tax imposed on the employer and on the employee is each 
     composed of two parts: (1) the Social Security or old age, 
     survivors, and disability insurance (``OASDI'') tax equal to 
     6.2 percent of covered wages up to the OASDI wage base 
     ($127,200 for 2017); and (2) the Medicare or hospital 
     insurance (``HI'') tax equal to 1.45 percent of all covered 
     wages.\1047\ The employee portion of FICA tax generally must 
     be withheld and, along with the employer portion, remitted to 
     the Federal government by the employer. FICA tax withholding 
     applies regardless of whether compensation is provided in the 
     form of cash or a noncash form, such as a transfer of 
     property (including employer stock) or in-kind 
     benefits.\1048\
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     \1047\ The employee portion of the HI tax under FICA (not the 
     employer portion) is increased by an additional tax of 0.9 
     percent on wages received in excess of a threshold amount. 
     The threshold amount is $250,000 in the case of a joint 
     return, $125,000 in the case of a married individual filing a 
     separate return, and $200,000 in any other case.
     \1048\ Under section 3501(b), employment taxes with respect 
     to noncash fringe benefits are to be collected (or paid) by 
     the employer at the time and in the manner prescribed by the 
     Secretary of the Treasury (``Treasury''). Announcement 85-
     113, 1985-31 I.R.B. 31, provides guidance on the application 
     of employment taxes with respect to noncash fringe benefits.
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       FUTA imposes a tax on employers of six percent of wages up 
     to the FUTA wage base of $7,000.
       Income tax withholding generally applies when wages are 
     paid by an employer to an employee, based on graduated 
     withholding rates set out in tables published by the Internal 
     Revenue Service (``IRS'').\1049\ Like FICA tax withholding, 
     income tax withholding applies regardless of whether 
     compensation is provided in the form of cash or

[[Page 20013]]

     a noncash form, such as a transfer of property (including 
     employer stock) or in-kind benefits.
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     \1049\ Sec. 3402. Specific withholding rates apply in the 
     case of supplemental wages.
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       An employer is required to furnish each employee with a 
     statement of compensation information for a calendar year, 
     including taxable compensation, FICA wages, and withheld 
     income and FICA taxes.\1050\ In addition, information 
     relating to certain nontaxable items must be reported, such 
     as certain retirement and health plan contributions. The 
     statement, made on Form W-2, Wage and Tax Statement, must be 
     provided to each employee by January 31 of the succeeding 
     year.\1051\
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     \1050\ Secs. 6041 and 6051.
     \1051\ Employers send Form W-2 information to the Social 
     Security Administration, which records information relating 
     to Social Security and Medicare and forwards the Form W-2 
     information to the IRS. Employees include a copy of Form W-2 
     with their income tax returns.
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     Statutory options
       Two types of statutory options apply with respect to 
     employer stock: incentive stock options (``ISOs'') and 
     options provided under an employee stock purchase plan 
     (``ESPP'').\1052\ Stock received pursuant to a statutory 
     option is subject to special rules, rather than the rules for 
     nonqualified options, discussed above. No amount is 
     includible in an employee's income on the grant, vesting, or 
     exercise of a statutory option.\1053\ In addition, generally 
     no deduction is allowed to the employer with respect to the 
     option or the stock transferred to an employee.
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     \1052\ Sections 421-424 govern statutory options. Section 
     423(b)(5) requires that, under the terms of an ESPP, all 
     employees granted options generally must have the same rights 
     and privileges.
     \1053\  Under section 56(b)(3), this income tax treatment 
     with respect to stock received on exercise of an ISO does not 
     apply for purposes of the alternative minimum tax under 
     section 55.
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       If a holding requirement is met with respect to the stock 
     transferred on exercise of a statutory option and the 
     employee later disposes of the stock, the employee's gain 
     generally is treated as capital gain rather than ordinary 
     income. Under the holding requirement, the employee must not 
     dispose of the stock within two years after the date the 
     option is granted and also must not dispose of the stock 
     within one year after the date the option is exercised. If a 
     disposition occurs before the end of the required holding 
     period (a ``disqualifying disposition''), the employee 
     recognizes ordinary income in the taxable year in which the 
     disqualifying disposition occurs and the employer may be 
     allowed a corresponding deduction in the taxable year in 
     which such disposition occurs. The amount of ordinary income 
     recognized when a disqualifying disposition occurs generally 
     equals the fair market value of the stock on the date of 
     exercise (that is, when the stock was transferred to the 
     employee) less the exercise price paid.
       Employment taxes do not apply with respect to the grant or 
     vesting of a statutory option, transfer of stock pursuant to 
     the option, or a disposition (including a disqualifying 
     disposition) of the stock.\1054\ However, certain special 
     reporting requirements apply.
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     \1054\ Secs. 3121(a)(22), 3306(b)(19), and the last sentence 
     of section 421(b).
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     Nonqualified deferred compensation
       Compensation is generally includible in an employee's 
     income when paid to the employee. However, in the case of a 
     nonqualified deferred compensation plan,\1055\ unless the 
     arrangement either is exempt from or meets the requirements 
     of section 409A, the amount of deferred compensation is first 
     includible in income for the taxable year when not subject to 
     a substantial risk of forfeiture (as defined \1056\), even if 
     payment will not occur until a later year.\1057\ In general, 
     to meet the requirements of section 409A, the time when 
     nonqualified deferred compensation will be paid, as well as 
     the amount, must be specified at the time of deferral with 
     limits on further deferral after the time for payment. 
     Various other requirements apply, including that payment can 
     only occur on specific defined events.
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     \1055\ Compensation earned by an employee is generally paid 
     to the employee shortly after being earned. However, in some 
     cases, payment is deferred to a later period, referred to as 
     ``deferred compensation.'' Deferred compensation may be 
     provided through a plan that receives tax-favored treatment, 
     such as a qualified retirement plan under section 401(a). 
     Deferred compensation provided through a plan that is not 
     eligible for tax-favored treatment is referred to as 
     ``nonqualified'' deferred compensation.
     \1056\ Treas. Reg. sec. 1.409A-1(d).
     \1057\ Section 409A and the regulations thereunder provide 
     rules for nonqualified deferred compensation. Compensation 
     that fails to meet the requirements of section 409A is also 
     subject to an additional income tax of 20% on amounts 
     includible in income and a potential interest factor tax 
     (``409A taxes''). Section 409A and the additional 409A taxes 
     apply to increases in the value of the failed compensation 
     each year until it is paid.
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       Various exemptions from section 409A apply, including 
     transfers of property subject to section 83.\1058\ 
     Nonqualified options are not automatically exempt from 
     section 409A, but may be structured so as not to be 
     considered nonqualified deferred compensation.\1059\ A 
     restricted stock unit (``RSU'') is a term used for an 
     arrangement under which an employee has the right to receive 
     at a specified time in the future an amount determined by 
     reference to the value of one or more shares of employer 
     stock. An employee's right to receive the future amount may 
     be subject to a condition, such as continued employment for a 
     certain period or the attainment of certain performance 
     goals. The payment to the employee of the amount due under 
     the arrangement is referred to as settlement of the RSU. The 
     arrangement may provide for the settlement amount to be paid 
     in cash or as a transfer of employer stock (or either). An 
     arrangement providing RSUs is generally considered a 
     nonqualified deferred compensation plan and is subject to the 
     rules, including the limits, of section 409A. The employer 
     deduction generally is permitted in the employer's taxable 
     year in which or with which ends the employee's taxable year 
     when the amount is included and properly reported in the 
     employee's income.\1060\
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     \1058\ Treas. Reg. sec. 1.409A-1(b)(6).
     \1059\ Treas. Reg. sec. 1.409A-1(b)(5). In addition, 
     statutory option arrangements are not nonqualified deferred 
     compensation arrangements.
     \1060\ Sec. 404(a)(5).
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                               House Bill

     In general
       The provision allows a qualified employee to elect to 
     defer, for income tax purposes, the inclusion in income of 
     the amount of income attributable to qualified stock 
     transferred to the employee by the employer. An election to 
     defer income inclusion (``inclusion deferral election'') with 
     respect to qualified stock must be made no later than 30 days 
     after the first time the employee's right to the stock is 
     substantially vested or is transferable, whichever occurs 
     earlier.
       If an employee elects to defer income inclusion under the 
     provision, the income must be included in the employee's 
     income for the taxable year that includes the earliest of (1) 
     the first date the qualified stock becomes transferable, 
     including, solely for this purpose, transferable to the 
     employer; \1061\ (2) the date the employee first becomes an 
     excluded employee (as described below); (3) the first date on 
     which any stock of the employer becomes readily tradable on 
     an established securities market; \1062\ (4) the date five 
     years after the first date the employee's right to the stock 
     becomes substantially vested; or (5) the date on which the 
     employee revokes her inclusion deferral election.\1063\
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     \1061\ Thus, for this purpose, the qualified stock is 
     considered transferable if the employee has the ability to 
     sell the stock to the employer (or any other person).
     \1062\ An established securities market is determined for 
     this purpose by the Secretary, but does not include any 
     market unless the market is recognized as an established 
     securities market for purposes of another Code provision.
     \1063\ An inclusion deferral election is revoked at the time 
     and in the manner as the Secretary provides.
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       An inclusion deferral election is made in a manner similar 
     to the manner in which a section 83(b) election is 
     made.\1064\ The provision does not apply to income with 
     respect to nonvested stock that is includible as a result of 
     a section 83(b) election. The provision clarifies that 
     Section 83 (other than the provision), including subsection 
     (b), shall not apply to RSUs. Therefore, RSUs are not 
     eligible for a section 83(b) election. This is the case 
     because, absent this provision, RSUs are nonqualified 
     deferred compensation and therefore subject to the rules that 
     apply to nonqualified deferred compensation.
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     \1064\ Thus, as in the case of a section 83(b) election under 
     present law, the employee must file with the IRS the 
     inclusion deferral election and provide the employer with a 
     copy.
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       An employee may not make an inclusion deferral election for 
     a year with respect to qualified stock if, in the preceding 
     calendar year, the corporation purchased any of its 
     outstanding stock unless at least 25 percent of the total 
     dollar amount of the stock so purchased is stock with respect 
     to which an inclusion deferral election is in effect 
     (``deferral stock'') and the determination of which 
     individuals from whom deferral stock is purchased is made on 
     a reasonable basis.\1065\ For purposes of this requirement, 
     stock purchased from an individual is not treated as deferral 
     stock (and the purchase is not treated as a purchase of 
     deferral stock) if, immediately after the purchase, the 
     individual holds any deferral stock with respect to which an 
     inclusion deferral election has been in effect for a longer 
     period than the election with respect to the purchased stock. 
     Thus, in general, in applying the purchase requirement, an 
     individual's deferral stock with respect to which an 
     inclusion deferral election has been in effect for the 
     longest periods must be purchased first. A corporation that 
     has deferral stock outstanding as of the beginning of any 
     calendar year and that purchases any of its outstanding stock 
     during the calendar year must report on its income tax return 
     for the taxable year in which, or with which, the calendar 
     year ends the total dollar amount of the outstanding stock 
     purchased during the calendar year and such other information 
     as the Secretary may require for purposes of administering 
     this requirement.
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     \1065\ This requirement is met if the stock purchased by the 
     corporation includes all the corporation's outstanding 
     deferral stock.

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[[Page 20014]]

       A qualified employee may make an inclusion deferral 
     election with respect to qualified stock attributable to a 
     statutory option.\1066\ In that case, the option is not 
     treated as a statutory option and the rules relating to 
     statutory options and related stock do not apply. In 
     addition, an arrangement under which an employee may receive 
     qualified stock is not treated as a nonqualified deferred 
     compensation plan solely because of an employee's inclusion 
     deferral election or ability to make an election.
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     \1066\ For purposes of the requirement that an ESPP provide 
     employees with the same rights and privileges, the rules of 
     the provision apply in determining which employees have the 
     right to make an inclusion deferral election with respect to 
     stock received under the ESPP.
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       Deferred income inclusion applies also for purposes of the 
     employer's deduction of the amount of income attributable to 
     the qualified stock. That is, if an employee makes an 
     inclusion deferral election, the employer's deduction is 
     deferred until the employer's taxable year in which or with 
     which ends the taxable year of the employee for which the 
     amount is included in the employee's income as described in 
     (1)-(5) above.
     Qualified employee and qualified stock
       Under the provision, a qualified employee means an 
     individual who is not an excluded employee and who agrees, in 
     the inclusion deferral election, to meet the requirements 
     necessary (as determined by the Secretary) to ensure the 
     income tax withholding requirements of the employer 
     corporation with respect to the qualified stock (as described 
     below) are met. For this purpose, an excluded employee with 
     respect to a corporation is any individual (1) who was a one-
     percent owner of the corporation at any time during the 10 
     preceding calendar years,\1067\ (2) who is, or has been at 
     any prior time, the chief executive officer or chief 
     financial officer of the corporation or an individual acting 
     in either capacity, (3) who is a family member of an 
     individual described in (1) or (2),\1068\ or (4) who has been 
     one of the four highest compensated officers of the 
     corporation for any of the 10 preceding taxable years.\1069\
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     \1067\ One-percent owner status is determined under the top-
     heavy rules for qualified retirement plans, that is, section 
     416(i)(1)(B)(ii).
     \1068\ In the case of one-percent owners, this results from 
     application of the attribution rules of section 318 under 
     section 416(i)(1)(B)(i)(II). Family members are determined 
     under section 318(a)(1) and generally include an individual's 
     spouse, children, grandchildren and parents.
     \1069\ These officers are determined on the basis of 
     shareholder disclosure rules for compensation under the 
     Securities Exchange Act of 1934, as if such rules applied to 
     the corporation.
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       Qualified stock is any stock of a corporation if--
         an employee receives the stock in connection with 
     the exercise of an option or in settlement of an RSU, and
         the option or RSU was granted by the corporation 
     to the employee in connection with the performance of 
     services and in a year in which the corporation was an 
     eligible corporation (as described below).
       However, qualified stock does not include any stock if, at 
     the time the employee's right to the stock becomes 
     substantially vested, the employee may sell the stock to, or 
     otherwise receive cash in lieu of stock from, the 
     corporation. Qualified stock can only be such if it relates 
     to stock received in connection with options or RSUs, and 
     does not include stock received in connection with other 
     forms of equity compensation, including stock appreciation 
     rights or restricted stock.
       A corporation is an eligible corporation with respect to a 
     calendar year if (1) no stock of the employer corporation (or 
     any predecessor) is readily tradable on an established 
     securities market during any preceding calendar year,\1070\ 
     and (2) the corporation has a written plan under which, in 
     the calendar year, not less than 80 percent of all employees 
     who provide services to the corporation in the United States 
     (or any U.S. possession) are granted stock options, or 
     restricted stock units (``RSUs''), with the same rights and 
     privileges to receive qualified stock (``80-percent 
     requirement'').\1071\ For this purpose, in general, the 
     determination of rights and privileges with respect to stock 
     is determined in a similar manner as provided under the 
     present-law ESPP rules.\1072\ However, employees will not 
     fail to be treated as having the same rights and privileges 
     to receive qualified stock solely because the number of 
     shares available to all employees is not equal in amount, 
     provided that the number of shares available to each employee 
     is more than a de minimis amount. In addition, rights and 
     privileges with respect to the exercise of a stock option are 
     not treated for this purpose as the same as rights and 
     privileges with respect to the settlement of an RSU.\1073\
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     \1070\ This requirement continues to apply up to the time an 
     inclusion deferral election is made. That is, under the 
     provision, no inclusion deferral election may be made with 
     respect to qualified stock if any stock of the corporation is 
     readily tradable on an established securities market at any 
     time before the election is made.
     \1071\ In applying the requirement that 80 percent of 
     employees receive stock options or RSUs, excluded employees 
     and part-time employees are not taken into account. For this 
     purpose, part-time employee is defined under section 
     4980G(d)(4), as an employee who is customarily employed for 
     fewer than 30 hours per week.
     \1072\ Sec. 423(b)(5).
     \1073\ Under a transition rule, in the case of a calendar 
     year beginning before January 1, 2018, the 80-percent 
     requirement is applied without regard to whether the rights 
     and privileges with respect to the qualified stock are the 
     same.
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       For purposes of the provision, corporations that are 
     members of the same controlled group \1074\ are treated as 
     one corporation.
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     \1074\ As defined in sec. 1563(a).
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     Notice, withholding and reporting requirements
       Under the provision, a corporation that transfers qualified 
     stock to a qualified employee must provide a notice to the 
     qualified employee at the time (or a reasonable period 
     before) the employee's right to the qualified stock is 
     substantially vested (and income attributable to the stock 
     would first be includible absent an inclusion deferral 
     election). The notice must (1) certify to the employee that 
     the stock is qualified stock, and (2) notify the employee (a) 
     that the employee may (if eligible) elect to defer income 
     inclusion with respect to the stock and (b) that, if the 
     employee makes an inclusion deferral election, the amount of 
     income required to be included at the end of the deferral 
     period will be based on the value of the stock at the time 
     the employee's right to the stock first becomes substantially 
     vested, notwithstanding whether the value of the stock has 
     declined during the deferral period (including whether the 
     value of the stock has declined below the employee's tax 
     liability with respect to such stock), and the amount of 
     income to be included at the end of the deferral period will 
     be subject to withholding as provided under the provision, as 
     well as of the employee's responsibilities with respect to 
     required withholding. Failure to provide the notice may 
     result in the imposition of a penalty of $100 for each 
     failure, subject to a maximum penalty of $50,000 for all 
     failures during any calendar year.
       An inclusion deferral election applies only for income tax 
     purposes. The application of FICA and FUTA are not affected. 
     The provision includes specific income tax withholding and 
     reporting requirements with respect to income subject to an 
     inclusion deferral election.
       For the taxable year for which income subject to an 
     inclusion deferral election is required to be included in 
     income by the employee (as described above), the amount 
     required to be included in income is treated as wages with 
     respect to which the employer is required to withhold income 
     tax at a rate not less than the highest income tax rate 
     applicable to individual taxpayers.\1075\ The employer must 
     report on Form W-2 the amount of income covered by an 
     inclusion deferral election (1) for the year of deferral and 
     (2) for the year the income is required to be included in 
     income by the employee. In addition, for any calendar year, 
     the employer must report on Form W-2 the aggregate amount of 
     income covered by inclusion deferral elections, determined as 
     of the close of the calendar year.
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     \1075\ That is, the maximum rate of tax in effect for the 
     year under section 1. The provision specifies that qualified 
     stock is treated as a noncash fringe benefit for income tax 
     withholding purposes.
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       Effective date.--The provision generally applies with 
     respect to stock attributable to options exercised or RSUs 
     settled after December 31, 2017. Under a transition rule, 
     until the Secretary (or the Secretary's delegate) issues 
     regulations or other guidance implementing the 80-percent and 
     employer notice requirements under the provision, a 
     corporation will be treated as complying with those 
     requirements (respectively) if it complies with a reasonable 
     good faith interpretation of the requirements. The penalty 
     for a failure to provide the notice required under the 
     provision applies to failures after December 31, 2017.


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     that, for purposes of determining corporations that are 
     members of the same controlled group and treated as one 
     corporation, the definition of controlled group under section 
     414(b) applies.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     modifications. The conference agreement clarifies that (1) 
     when an inclusion deferral election is made with respect to 
     stock transferred under an ESPP, the option is not considered 
     an ESPP, such that when an inclusion deferral election is 
     made in connection with the exercise of both ESPPs and ISOs, 
     the options are not treated as statutory options but rather 
     as nonqualified stock options for FICA purposes (in addition 
     to being subject to section 83(i) for income tax purposes), 
     (2) an excluded employee includes an individual who first 
     becomes a 1 percent owner or one of the 4 highest compensated 
     officers in a taxable year, notwithstanding that such 
     individual may not have been among such categories for the 10 
     preceding taxable years, (3) the requirement that 80 percent 
     of all applicable employees be granted stock options or 
     restricted stock units with the same rights and privileges 
     cannot be satisfied in a taxable year by granting a 
     combination of stock options and RSUs, and instead all such 
     employees must either be granted stock options or

[[Page 20015]]

     be granted restricted stock units for that year, and (4) the 
     exception from treatment as a nonqualified deferred 
     compensation plan for purposes of section 409A applies solely 
     with respect to an employee who may receive qualified stock. 
     It is intended that the requirement that 80 percent of all 
     applicable employees be granted stock options or be granted 
     restricted stock units apply consistently to eligible 
     employees, whether they are new hires or existing employees. 
     Additionally, it is intended that the limited circumstances 
     outlined in section 83(c)(3) and applicable regulations apply 
     with respect to the determination of when stock first becomes 
     transferrable or is no longer subject to a substantial risk 
     of forfeiture. For example, income inclusion cannot be 
     delayed due to a lock-up period as a result of an initial 
     public offering. Finally, it is intended that the transition 
     rule provided with respect to compliance with the 80-percent 
     and employer notice requirements not be expanded beyond these 
     specific items.
     4. Increase in excise tax rate for stock compensation of 
         insiders in expatriated corporations (sec. 13604 of the 
         Senate amendment and sec. 4985 of the Code)


                              Present Law

     Income tax treatment of employee stock compensation
       In general
       Employers may grant various forms of stock compensation to 
     employees,\1076\ including nonstatutory and statutory stock 
     options, restricted stock, restricted stock units, and stock 
     appreciation rights. The tax treatment of these various forms 
     of stock compensation depends on the specific terms and 
     conditions of the arrangement and applicable rules.
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     \1076\ The terms ``employer'' and ``employee'' are used, 
     although the provision herein also applies to individuals who 
     are not employees and the service recipients of such non-
     employee individuals.
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       Stock compensation treated as property transferred in 
           connection with the performance of services
       Section 83 generally governs the taxation of transfers of 
     any property in connection with the performance of services 
     by any service provider. Typically, this encompasses the 
     transfer of stock to an employee which is subject to 
     conditions that amount to a substantial risk of forfeiture, 
     called ``restricted stock.'' Section 83 also generally 
     governs the taxation of nonstatutory (or nonqualified) stock 
     options. In general, an employee's right to stock or other 
     property is subject to a substantial risk of forfeiture if 
     the employee's right to full enjoyment of the property is 
     subject to a condition, such as the future performance of 
     substantial services.\1077\
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     \1077\ See section 83(c)(1) and Treas. Reg. sec. 1.83-3(c) 
     for the definition of substantial risk of forfeiture.
---------------------------------------------------------------------------
       Generally, an employee must recognize income in the taxable 
     year in which the employee's right to the stock is 
     transferable or is not subject to a substantial risk of 
     forfeiture, whichever occurs earlier (referred to herein as 
     ``substantially vested''). Thus, if the employee's right to 
     the stock is substantially vested when the stock is 
     transferred to the employee, the employee recognizes income 
     in the taxable year of such transfer, in an amount equal to 
     the fair market value of the stock as of the date of transfer 
     (less any amount paid for the stock). If at the time the 
     stock is transferred to the employee, the employee's right to 
     the stock is not substantially vested (referred to herein as 
     ``nonvested''), the employee does not recognize income 
     attributable to the stock transfer until the taxable year in 
     which the employee's right becomes substantially vested. In 
     this case, the amount includible in the employee's income is 
     the fair market value of the stock as of the date that the 
     employee's right to the stock is substantially vested (less 
     any amount paid for the stock).\1078\
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     \1078\ Under section 83(b), the employee may elect within 30 
     days of transfer to recognize income in the taxable year of 
     transfer, referred to as a ``section 83(b)'' election. If a 
     proper and timely election under section 83(b) is made, the 
     amount of compensatory income is capped at the amount equal 
     to the fair market value of the stock as of the date of 
     transfer (less any amount paid for the stock).
---------------------------------------------------------------------------
       These rules do not apply to the grant of a nonqualified 
     option unless the option has a readily ascertainable fair 
     market value.\1079\ Instead, these rules generally apply to 
     the transfer of employer stock by the employee on exercise of 
     the option. That is, if the right to the stock is 
     substantially vested on transfer (the time of exercise), 
     income recognition applies for the taxable year of transfer. 
     If the right to the stock is nonvested on transfer, the 
     timing of income inclusion is determined under the rules 
     applicable to the transfer of nonvested stock. In either 
     case, the amount includible in income by the employee is the 
     fair market value of the stock as of the required time of 
     income inclusion, less the exercise price paid by the 
     employee.
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     \1079\ See section 83(e)(3) and Treas. Reg. sec. 1.83-7. A 
     nonqualified option is an option on employer stock that is 
     not a statutory option, discussed below.
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       Statutory stock options
       Two types of statutory options apply with respect to 
     employer stock: incentive stock options (``ISOs'') and 
     options provided under an employee stock purchase plan 
     (``ESPP'').\1080\ Stock received pursuant to a statutory 
     option is subject to special rules, rather than the rules for 
     nonqualified options, discussed above. Unlike nonqualified 
     options, statutory options may only be considered as such if 
     granted to employees.\1081\ No amount is includible in an 
     employee's income on the grant, vesting, or exercise of a 
     statutory option.
---------------------------------------------------------------------------
     \1080\ Sections 421-424 govern statutory options. Section 
     423(b)(5) requires that, under the terms of an ESPP, all 
     employees granted options generally must have the same rights 
     and privileges.
     \1081\ Secs. 422(a)(2) and 423(a)(2).
---------------------------------------------------------------------------
       If a holding requirement is met with respect to the stock 
     transferred on exercise of a statutory option and the 
     employee later disposes of the stock, the employee's gain 
     generally is treated as capital gain rather than ordinary 
     income. Under the holding requirement, the employee must not 
     dispose of the stock within two years after the date the 
     option is granted and also must not dispose of the stock 
     within one year after the date the option is exercised. If a 
     disposition occurs before the end of the required holding 
     period (a ``disqualifying disposition''), the employee 
     recognizes ordinary income in the taxable year in which the 
     disqualifying disposition occurs. The amount of ordinary 
     income recognized when a disqualifying disposition occurs 
     generally equals the fair market value of the stock on the 
     date of exercise (that is, when the stock was transferred to 
     the employee) less the exercise price paid.
       Stock compensation treated as deferred compensation
       A restricted stock unit (``RSU'') is a term used for an 
     arrangement under which an employee has the right to receive 
     at a specified time in the future an amount determined by 
     reference to the value of one or more shares of employer 
     stock. An employee's right to receive the future amount may 
     be subject to a condition, such as continued employment for a 
     certain period or the attainment of certain performance 
     goals. The payment to the employee of the amount due under 
     the arrangement is referred to as settlement of the RSU. The 
     arrangement may provide for the settlement amount to be paid 
     in cash or as a transfer of employer stock. An arrangement 
     providing RSUs is generally considered a nonqualified 
     deferred compensation plan and is subject to the rules, 
     including the limits, of section 409A,\1082\ unless it meets 
     an exemption from section 409A. If the RSU either is exempt 
     from or complies with section 409A, the employee is subject 
     to income taxation on receipt of cash or the transfer of 
     shares attributable to the RSU.
---------------------------------------------------------------------------
     \1082\ Section 409A and the regulations thereunder provide 
     rules for nonqualified deferred compensation. Unless an 
     arrangement either is exempt from or meets the requirements 
     of section 409A, the amount of deferred compensation is first 
     includible in income for the taxable year when not subject to 
     a substantial risk of forfeiture (as defined), even if 
     payment will not occur until a later year. In general, to 
     meet the requirements of section 409A, the time when 
     nonqualified deferred compensation will be paid, as well as 
     the amount, must be specified at the time of deferral with 
     limits on further deferral after the time for payment. 
     Various other requirements apply, including that payment can 
     only occur on specific defined events. Compensation that 
     fails to meet the requirements of section 409A is also 
     subject to an additional income tax of 20 percent on amounts 
     includible in income and a potential interest factor tax 
     (``409A taxes''). Section 409A and the additional 409A taxes 
     apply to increases in the value of the failed compensation 
     each year until it is paid.
---------------------------------------------------------------------------
       A stock appreciation right (``SAR'') is an arrangement 
     under which an employee has the right to receive an amount 
     (in the form of cash or stock) determined by reference to the 
     appreciation in value of one or more shares of employer 
     stock, based on the difference in the stock's value when the 
     employee chooses to exercise the right and the value of the 
     stock on the date of grant of the SAR. An SAR is generally 
     taxable at the time of exercise on the amount of cash or 
     value of stock transferred at the time of exercise of the 
     SAR.\1083\
---------------------------------------------------------------------------
     \1083\ Rev. Rul. 80-300, 1980-2 C.B. 165.
---------------------------------------------------------------------------
       Various exemptions from section 409A apply, including 
     transfers of property subject to section 83, such as 
     restricted stock.\1084\ Nonqualified options and SARs are not 
     automatically exempt from section 409A, but may be structured 
     so as not to be considered nonqualified deferred 
     compensation.\1085\ In addition, ISOs and ESPPs are exempt 
     from section 409A.\1086\
---------------------------------------------------------------------------
     \1084\ Treas. Reg. sec. 1.409A-1(b)(6).
     \1085\ Treas. Reg. sec. 1.409A-1(b)(5).
     \1086\ Treas. Reg. sec. 1.409A-1(b)(5)(ii).
---------------------------------------------------------------------------
     Section 4985 excise tax on stock compensation of insiders of 
         expatriated corporations
       Under section 4985, certain holders of stock options and 
     other stock-based compensation are subject to an excise tax 
     upon certain transactions that result in an expatriated 
     corporation\1087\ (also referred to as corporate 
     inversions).\1088\ The provision imposes an excise tax, 
     currently at the rate of 15 percent, on the value of 
     specified stock compensation held (directly or indirectly) by 
     or for the benefit of a disqualified individual, or a

[[Page 20016]]

     member of such individual's family, at any time during the 
     12-month period beginning six months before the corporation's 
     expatriation date. Specified stock compensation is treated as 
     held for the benefit of a disqualified individual if such 
     compensation is held by an entity, e.g., a partnership or 
     trust, in which the individual, or a member of the 
     individual's family, has an ownership interest.
---------------------------------------------------------------------------
     \1087\ Sec. 7874(a)(2).
     \1088\ For further discussion of the tax treatment of 
     expatriated entities before the effective date of section 
     7874 and concerns that led to the enactment of sections 7874 
     and 4985, see Joint Committee on Taxation, General 
     Explanation of Tax Legislation Enacted in the 108th Congress 
     (JCS-5-05), May 2005.
---------------------------------------------------------------------------
       A disqualified individual is any individual who, with 
     respect to a corporation, is, at any time during the 12-month 
     period beginning on the date which is six months before the 
     expatriation date, subject to the requirements of section 
     16(a) of the Securities and Exchange Act of 1934 with respect 
     to the corporation, or any member of the corporation's 
     expanded affiliated group,\1089\ or would be subject to such 
     requirements if the corporation (or member) were an issuer of 
     equity securities referred to in section 16(a). Disqualified 
     individuals generally include officers (as defined by section 
     16(a)),\1090\ directors, and 10-percent owners of private and 
     publicly-held corporations.
---------------------------------------------------------------------------
     \1089\ An expanded affiliated group is an affiliated group 
     (under section 1504) except that such group is determined 
     without regard to the exceptions for certain corporations and 
     is determined by substituting ``more than 50 percent'' for 
     ``at least 80 percent.''
     \1090\ An officer is defined as the president, principal 
     financial officer, principal accounting officer (or, if there 
     is no such accounting officer, the controller), any vice-
     president in charge of a principal business unit, division or 
     function (such as sales, administration or finance), any 
     other officer who performs a policy-making function, or any 
     other person who performs similar policy-making functions.
---------------------------------------------------------------------------
       The excise tax is imposed on a disqualified individual of 
     an expatriated corporation (as defined for this purpose) only 
     if gain is recognized in whole or part by any shareholder by 
     reason of the acquisition resulting in the corporate 
     inversion.\1091\
---------------------------------------------------------------------------
     \1091\ As referred to in section 7874(a)(2)(B)(i).
---------------------------------------------------------------------------
       Specified stock compensation subject to the excise tax 
     includes any payment (or right to payment) \1092\ granted by 
     the expatriated corporation (or any member of the 
     corporation's expanded affiliated group) to any person in 
     connection with the performance of services by a disqualified 
     individual for such corporation (or member of the 
     corporation's expanded affiliated group) if the value of the 
     payment or right is based on, or determined by reference to, 
     the value or change in value of stock of such corporation (or 
     any member of the corporation's expanded affiliated group). 
     In determining whether such compensation exists and valuing 
     such compensation, all restrictions, other than non-lapse 
     restrictions, are ignored. Thus, the excise tax applies, and 
     the value subject to the tax is determined, without regard to 
     whether such specified stock compensation is subject to a 
     substantial risk of forfeiture or is exercisable at the time 
     of the corporate inversion. Specified stock compensation 
     includes compensatory stock and restricted stock grants, 
     compensatory stock options, and other forms of stock-based 
     compensation, including stock appreciation rights, restricted 
     stock units, phantom stock, and phantom stock options. 
     Specified stock compensation also includes nonqualified 
     deferred compensation that is treated as though it were 
     invested in stock or stock options of the expatriating 
     corporation (or member). For example, the provision applies 
     to a disqualified individual's nonqualified deferred 
     compensation if company stock is one of the actual or deemed 
     investment options under the nonqualified deferred 
     compensation plan.
---------------------------------------------------------------------------
     \1092\ Under the provision, any transfer of property is 
     treated as a payment and any right to a transfer of property 
     is treated as a right to a payment.
---------------------------------------------------------------------------
       Specified stock compensation includes a compensation 
     arrangement that gives the disqualified individual an 
     economic stake substantially similar to that of a corporate 
     shareholder. A payment directly tied to the value of the 
     stock is specified stock compensation.
       The excise tax applies to any such specified stock 
     compensation previously granted to a disqualified individual 
     but cancelled or cashed-out within the six-month period 
     ending with the expatriation date, and to any specified stock 
     compensation awarded in the six-month period beginning with 
     the expatriation date. As a result, for example, if a 
     corporation cancels outstanding options three months before 
     the transaction and then reissues comparable options three 
     months after the transaction, the tax applies both to the 
     cancelled options and the newly granted options.
       Specified stock compensation subject to the tax does not 
     include a statutory stock option or any payment or right from 
     a qualified retirement plan or annuity, a tax-sheltered 
     annuity, a simplified employee pension, or a simple 
     retirement account. In addition, under the provision, the 
     excise tax does not apply to any stock option that is 
     exercised during the six-month period before the expatriation 
     date or to any stock acquired pursuant to such exercise, if 
     income is recognized under section 83 on or before the 
     expatriation date with respect to the stock acquired pursuant 
     to such exercise. The excise tax also does not apply to any 
     specified stock compensation that is exercised, sold, 
     exchanged, distributed, cashed out, or otherwise paid during 
     such period in a transaction in which income, gain, or loss 
     is recognized in full.
       For specified stock compensation held on the expatriation 
     date, the amount of the tax is determined based on the value 
     of the compensation on such date. The tax imposed on 
     specified stock compensation cancelled during the six-month 
     period before the expatriation date is determined based on 
     the value of the compensation on the day before such 
     cancellation, while specified stock compensation granted 
     after the expatriation date is valued on the date granted. 
     Under the provision, the cancellation of a non-lapse 
     restriction is treated as a grant.
       The value of the specified stock compensation on which the 
     excise tax is imposed is the fair value in the case of stock 
     options (including warrants and other similar rights to 
     acquire stock) and stock appreciation rights and the fair 
     market value for all other forms of compensation. For 
     purposes of the tax, the fair value of an option (or a 
     warrant or other similar right to acquire stock) or a stock 
     appreciation right is determined using an appropriate option-
     pricing model, as specified or permitted by the Treasury 
     Secretary, that takes into account the stock price at the 
     valuation date; the exercise price under the option; the 
     remaining term of the option; the volatility of the 
     underlying stock and the expected dividends on it; and the 
     risk-free interest rate over the remaining term of the 
     option. Options that have no intrinsic value (or ``spread'') 
     because the exercise price under the option equals or exceeds 
     the fair market value of the stock at valuation nevertheless 
     have a fair value and are subject to tax under the provision. 
     The value of other forms of compensation, such as phantom 
     stock or restricted stock, is the fair market value of the 
     stock as of the date of the expatriation transaction. The 
     value of any deferred compensation that can be valued by 
     reference to stock is the amount that the disqualified 
     individual would receive if the plan were to distribute all 
     such deferred compensation in a single sum on the date of the 
     expatriation transaction (or the date of cancellation or 
     grant, if applicable).
       The excise tax also applies to any payment by the 
     expatriated corporation or any member of the expanded 
     affiliated group made to an individual, directly or 
     indirectly, in respect of the tax. Whether a payment is made 
     in respect of the tax is determined under all of the facts 
     and circumstances. Any payment made to keep the individual in 
     the same after-tax position that the individual would have 
     been in had the tax not applied is a payment made in respect 
     of the tax. This includes direct payments of the tax and 
     payments to reimburse the individual for payment of the tax. 
     Any payment made in respect of the tax is includible in the 
     income of the individual, but is not deductible by the 
     corporation.
       To the extent that a disqualified individual is also a 
     covered employee under section 162(m), the limit on the 
     deduction allowed for employee remuneration for such employee 
     is reduced by the amount of any payment (including 
     reimbursements) made in respect of the tax under the 
     provision. As discussed above, this includes direct payments 
     of the tax and payments to reimburse the individual for 
     payment of the tax.
       The payment of the excise tax has no effect on the 
     subsequent tax treatment of any specified stock compensation. 
     Thus, the payment of the tax has no effect on the 
     individual's basis in any specified stock compensation and no 
     effect on the tax treatment for the individual at the time of 
     exercise of an option or payment of any specified stock 
     compensation, or at the time of any lapse or forfeiture of 
     such specified stock compensation. The payment of the tax is 
     not deductible and has no effect on any deduction that might 
     be allowed at the time of any future exercise or payment.


                               House Bill

       No provision.


                            Senate Amendment

       The provision increases the 15 percent rate of excise tax, 
     imposed on the value of stock compensation held by insiders 
     of an expatriated corporation, to 20 percent.
       Effective date.--The provision applies to corporations 
     first becoming expatriated corporations after the date of 
     enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

                          J. Other Provisions

     1. Treatment of gain or loss of foreign persons from sale or 
         exchange of interests in partnerships engaged in trade or 
         business within the United States (sec. 13501 of the 
         Senate amendment and secs. 864(c) and 1446 of the Code)


                              Present Law

     In general
       A partnership generally is not treated as a taxable entity, 
     but rather, income of the partnership is taken into account 
     on the tax returns of the partners. The character (as capital 
     or ordinary) of partnership items passes through to the 
     partners as if the items were realized directly by the 
     partners.\1093\ A partner holding a partnership interest 
     includes in income its distributive share (whether or not 
     actually distributed)

[[Page 20017]]

     of partnership items of income and gain, including capital 
     gain eligible for the lower tax rates, and deducts its 
     distributive share of partnership items of deduction and 
     loss. A partner's basis in the partnership interest is 
     increased by any amount of gain and decreased by ay amount of 
     losses thus included. These basis adjustments prevent double 
     taxation of partnership income to the partner. Money 
     distributed to the partner by the partnership is taxed to the 
     extent the amount exceeds the partner's basis in the 
     partnership interest.
---------------------------------------------------------------------------
     \1093\ Sec. 702.
---------------------------------------------------------------------------
       Gain or loss from the sale or exchange of a partnership 
     interest generally is treated as gain or loss from the sale 
     or exchange of a capital asset.\1094\ However, the amount of 
     money and the fair market value of property received in the 
     exchange that represent the partner's share of certain 
     ordinary income-producing assets of the partnership give rise 
     to ordinary income rather than capital gain.\1095\ In 
     general, a partnership does not adjust the basis of 
     partnership property following the transfer of a partnership 
     interest unless either the partnership has made a one-time 
     election to do so,\1096\ or the partnership has a substantial 
     built-in loss immediately after the transfer.\1097\ If an 
     election is in effect or the partnership has a substantial 
     built-in loss immediately after the transfer, adjustments are 
     made with respect to the transferee partner. These 
     adjustments are to account for the difference between the 
     transferee partner's proportionate share of the adjusted 
     basis of the partnership property and the transferee 
     partner's basis in its partnership interest.\1098\ The effect 
     of the adjustments on the basis of partnership property is to 
     approximate the result of a direct purchase of the property 
     by the transferee partner.
---------------------------------------------------------------------------
     \1094\ Sec. 741; Pollack v. Commissioner, 69 T.C. 142 (1977).
     \1095\ Sec. 751(a). These ordinary income-producing assets 
     are unrealized receivables of the partnership or inventory 
     items of the partnership (``751 assets'').
     \1096\ Sec. 754.
     \1097\ Sec. 743(a).
     \1098\ Sec. 743(b).
---------------------------------------------------------------------------
     Source of gain or loss on transfer of a partnership interest
       A foreign person that is engaged in a trade or business in 
     the United States is taxed on income that is ``effectively 
     connected'' with the conduct of that trade or business 
     (``effectively connected gain or loss'').\1099\ Partners in a 
     partnership are treated as engaged in the conduct of a trade 
     or business within the United States if the partnership is so 
     engaged.\1100\ Any gross income derived by the foreign person 
     that is not effectively connected with the person's U.S. 
     business is not taken into account in determining the rates 
     of U.S. tax applicable to the person's income from the 
     business.\1101\
---------------------------------------------------------------------------
     \1099\  Secs. 871(b), 864(c), 882.
     \1100\ Sec. 875.
     \1101\ Secs. 871(b)(2), and 882(a)(2). Non-business income 
     received by foreign persons from U.S. sources is generally 
     subject to tax on a gross basis at a rate of 30 percent, and 
     is collected by withholding at the source of the payment. The 
     income of non-resident aliens or foreign corporations that is 
     subject to tax at a rate of 30-percent is fixed, 
     determinable, annual or periodical income that is not 
     effectively connected with the conduct of a U.S. trade or 
     business.
---------------------------------------------------------------------------
       Among the factors taken into account in determining whether 
     income, gain, or loss is effectively connected gain or loss 
     are the extent to which the income, gain, or loss is derived 
     from assets used in or held for use in the conduct of the 
     U.S. trade or business and whether the activities of the 
     trade or business were a material factor in the realization 
     of the income, gain, or loss (the ``asset use'' and 
     ``business activities'' tests).\1102\ In determining whether 
     the asset use or business activities tests are met, due 
     regard is given to whether such assets or such income, gain, 
     or loss were accounted for through such trade or business. 
     Thus, notwithstanding the general rule that source of gain or 
     loss from the sale or exchange of personal property is 
     generally determined by the residence of the seller,\1103\ a 
     foreign partner may have effectively connected income by 
     reason of the asset use or business activities of the 
     partnership in which he is an investor.
---------------------------------------------------------------------------
     \1102\ Sec. 864(c)(2).
     \1103\ Sec. 865(a).
---------------------------------------------------------------------------
       Special rules apply to treat gain or loss from disposition 
     of U.S. real property interests as effectively connected with 
     the conduct of a U.S. trade or business.\1104\ To the extent 
     that consideration received by the nonresident alien or 
     foreign corporation for all or part of its interest in a 
     partnership is attributable to a U.S. real property interest, 
     that consideration is considered to be received from the sale 
     or exchange in the United States of such property.\1105\ In 
     certain circumstances, gain attributable to sales of U.S. 
     real property interests may be subject to withholding tax of 
     ten percent of the amount realized on the transfer.\1106\
---------------------------------------------------------------------------
     \1104\ Sec. 897(a), (g).
     \1105\ Sec. 897(g).
     \1106\ Sec. 1445(e)(5). Temp. Treas. Reg. sec. 1.1445-
     11T(b),(d).
---------------------------------------------------------------------------
       Under a 1991 revenue ruling, in determining the source of 
     gain or loss from the sale or exchange of an interest in a 
     foreign partnership, the IRS applied the asset-use test and 
     business activities test at the partnership level to 
     determine the extent to which income derived from the sale or 
     exchange is effectively connected with that U.S. 
     business.\1107\ Under the ruling, if there is unrealized gain 
     or loss in partnership assets that would be treated as 
     effectively connected with the conduct of a U.S. trade or 
     business if those assets were sold by the partnership, some 
     or all of the foreign person's gain or loss from the sale or 
     exchange of a partnership interest may be treated as 
     effectively connected with the conduct of a U.S. trade or 
     business. However, a 2017 Tax Court case rejects the logic of 
     the ruling and instead holds that, generally, gain or loss on 
     sale or exchange by a foreign person of an interest in a 
     partnership that is engaged in a U.S. trade or business is 
     foreign-source.\1108\
---------------------------------------------------------------------------
     \1107\ Rev. Rul. 91-32, 1991-1 C.B. 107.
     \1108\ See Grecian Magnesite Mining v. Commissioner, 149 T.C. 
     No. 3 (July 13, 2017).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       Under the provision, gain or loss from the sale or exchange 
     of a partnership interest is effectively connected with a 
     U.S. trade or business to the extent that the transferor 
     would have had effectively connected gain or loss had the 
     partnership sold all of its assets at fair market value as of 
     the date of the sale or exchange. The provision requires that 
     any gain or loss from the hypothetical asset sale by the 
     partnership be allocated to interests in the partnership in 
     the same manner as nonseparately stated income and loss.
       The provision also requires the transferee of a partnership 
     interest to withhold 10 percent of the amount realized on the 
     sale or exchange of a partnership interest unless the 
     transferor certifies that the transferor is not a nonresident 
     alien individual or foreign corporation. If the transferee 
     fails to withhold the correct amount, the partnership is 
     required to deduct and withhold from distributions to the 
     transferee partner an amount equal to the amount the 
     transferee failed to withhold.
       The provision provides the Secretary of the Treasury with 
     specific regulatory authority to address coordination with 
     the nonrecognition provisions of the Code.
       Effective date.--The provision is effective for sales and 
     exchanges on or after November 27, 2017.


                          conference agreement

       The conference agreement generally follows the Senate 
     amendment. The conference agreement modifies the grant of 
     authority to the Secretary of the Treasury to make clear that 
     the Secretary shall issues such regulations as the Secretary 
     determines appropriate for the application of the paragraph, 
     including in exchanges described in sections 332, 351, 354, 
     355, 356, or 361. The conference agreement also provides that 
     the provisions related to withholding are effective for sales 
     and exchanges after December 31, 2017. Additionally, the 
     conferees intend that, under regulatory authority provided by 
     the Senate amendment to carry out withholding requirements of 
     the provision, the Secretary may provide guidance permitting 
     a broker, as agent of the transferee, to deduct and withhold 
     the tax equal to 10 percent of the amount realized on the 
     disposition of a partnership interest to which the provision 
     applies. For example, such guidance may provide that if an 
     interest in a publicly traded partnership is sold by a 
     foreign partner through a broker, the broker may deduct and 
     withhold the 10-percent tax on behalf of the transferee.
       Effective date.--The portion of the provision treating gain 
     or loss on sale of a partnership interest as effectively 
     connected income is effective for sales, exchanges, and 
     dispositions on or after November 27, 2017. The portion of 
     the provision requiring withholding on sales or exchanges of 
     partnership interests is effective for sales, exchanges, and 
     dispositions after December 31, 2017.
     2. Modification of the definition of substantial built-in 
         loss in the case of transfer of partnership interest 
         (sec. 13502 of the Senate amendment and sec. 743 of the 
         Code)


                              present law

       In general, a partnership does not adjust the basis of 
     partnership property following the transfer of a partnership 
     interest unless either the partnership has made a one-time 
     election under section 754 to make basis adjustments, or the 
     partnership has a substantial built-in loss immediately after 
     the transfer.\1109\
---------------------------------------------------------------------------
     \1109\ Sec. 743(a).
---------------------------------------------------------------------------
       If an election is in effect, or if the partnership has a 
     substantial built-in loss immediately after the transfer, 
     adjustments are made with respect to the transferee partner. 
     These adjustments are to account for the difference between 
     the transferee partner's proportionate share of the adjusted 
     basis of the partnership property and the transferee's basis 
     in its partnership interest.\1110\ The adjustments are 
     intended to adjust the basis of partnership property to 
     approximate the result of a direct purchase of the property 
     by the transferee partner.
---------------------------------------------------------------------------
     \1110\ Sec. 743(b).
---------------------------------------------------------------------------
       Under the provision, a substantial built-in loss exists if 
     the partnership's adjusted basis in its property exceeds by 
     more than $250,000 the fair market value of the partnership

[[Page 20018]]

     property.\1111\ Certain securitization partnerships and 
     electing investment partnerships are not treated as having a 
     substantial built-in loss in certain instances, and thus are 
     not required to make basis adjustments to partnership 
     property.\1112\ For electing investment partnerships, in lieu 
     of the partnership basis adjustments, a partner-level loss 
     limitation rule applies.\1113\
---------------------------------------------------------------------------
     \1111\ Sec. 743(d).
     \1112\ See sec. 743(e) (alternative rules for electing 
     investment partnerships) and sec. 743(f) (exception for 
     securitization partnerships).
     \1113\ Unlike in the case of an electing investment 
     partnership, the partner-level loss limitation rule does not 
     apply for a securitization partnership.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The provision modifies the definition of a substantial 
     built-in loss for purposes of section 743(d), affecting 
     transfers of partnership interests. Under the provision, in 
     addition to the present-law definition, a substantial built-
     in loss also exists if the transferee would be allocated a 
     net loss in excess of $250,000 upon a hypothetical 
     disposition by the partnership of all partnership's assets in 
     a fully taxable transaction for cash equal to the assets' 
     fair market value, immediately after the transfer of the 
     partnership interest.
       For example, a partnership of three taxable partners 
     (partners A, B, and C) has not made an election pursuant to 
     section 754. The partnership has two assets, one of which, 
     Asset X, has a built-in gain of $1 million, while the other 
     asset, Asset Y, has a built-in loss of $900,000. Pursuant to 
     the partnership agreement, any gain on sale or exchange of 
     Asset X is specially allocated to partner A. The three 
     partners share equally in all other partnership items, 
     including in the built-in loss in Asset Y. In this case, each 
     of partner B and partner C has a net built-in loss of 
     $300,000 (one third of the loss attributable to asset Y) 
     allocable to his partnership interest. Nevertheless, the 
     partnership does not have an overall built-in loss, but a net 
     built-in gain of $100,000 ($1 million minus $900,000). 
     Partner C sells his partnership interest to another person, 
     D, for $33,333. Under the provision, the test for a 
     substantial built-in loss applies both at the partnership 
     level and at the transferee partner level. If the partnership 
     were to sell all its assets for cash at their fair market 
     value immediately after the transfer to D, D would be 
     allocated a loss of $300,000 (one third of the built-in loss 
     of $900,000 in Asset Y). A substantial built-in loss exists 
     under the partner-level test added by the provision, and the 
     partnership adjusts the basis of its assets accordingly with 
     respect to D.
       Effective date.--The provision applies to transfers of 
     partnership interests after December 31, 2017.


                          conference agreement

       The conference agreement follows the Senate amendment.
       Effective date.--The provision applies to transfers of 
     partnership interests after December 31, 2017.
     3. Charitable contributions and foreign taxes taken into 
         account in determining limitation on allowance of 
         partner's share of loss (sec. 13503 of the Senate 
         amendment and sec. 704 of the Code)


                              present law

       A partner's distributive share of partnership loss 
     (including capital loss) is allowed only to the extent of the 
     adjusted basis (before reduction by current year's losses) of 
     the partner's interest in the partnership at the end of the 
     partnership taxable year in which the loss occurred. Any 
     disallowed loss is allowable as a deduction at the end of the 
     first succeeding partnership taxable year, and subsequent 
     taxable years, to the extent that the partner's adjusted 
     basis for its partnership interest at the end of any such 
     year exceeds zero (before reduction by the loss for the 
     year).\1114\
---------------------------------------------------------------------------
     \1114\ Sec. 704(d) and Treas. Reg. sec. 1.704-1(d)(1).
---------------------------------------------------------------------------
       A partner's basis in its partnership interest is increased 
     by its distributive share of income (including tax exempt 
     income). A partner's basis in its partnership interest is 
     decreased (but not below zero) by distributions by the 
     partnership and its distributive share of partnership losses 
     and expenditures of the partnership not deductible in 
     computing partnership taxable income and not properly 
     chargeable to capital account.\1115\ In the case of a 
     charitable contribution, a partner's basis is reduced by the 
     partner's distributive share of the adjusted basis of the 
     contributed property.\1116\
---------------------------------------------------------------------------
     \1115\ Sec. 705(a).
     \1116\ Rev. Rul. 96-11, 1996-1 C. B. 140.
---------------------------------------------------------------------------
       A partnership computes its taxable income in the same 
     manner as an individual with certain exceptions. The 
     exceptions provide, in part, that the deductions for foreign 
     taxes and charitable contributions are not allowed to the 
     partnership.\1117\ Instead, a partner takes into account its 
     distributive share of the foreign taxes paid by the 
     partnership and the charitable contributions made by the 
     partnership for the taxable year.\1118\
---------------------------------------------------------------------------
     \1117\ Sec. 703(a)(2)(B) and (C). In addition, section 
     703(a)(2) provides that other deductions are not allowed to 
     the partnership, notwithstanding that the partnership's 
     taxable income is computed in the same manner as an 
     individual's taxable income, specifically: personal 
     exemptions, net operating loss deductions, certain itemized 
     deductions for individuals, or depletion.
     \1118\ Sec. 702.
---------------------------------------------------------------------------
       However, in applying the basis limitation on partner 
     losses, Treasury regulations do not take into account the 
     partner's share of partnership charitable contributions and 
     foreign taxes paid or accrued.\1119\ The IRS has taken the 
     position in a private letter ruling that the basis limitation 
     on partner losses does not apply to limit the partner's 
     deduction for its share of the partnership's charitable 
     contributions.\1120\ While the regulations relating to the 
     loss limitation do not mention the foreign tax credit, a 
     taxpayer may choose the foreign tax credit in lieu of 
     deducting foreign taxes.\1121\
---------------------------------------------------------------------------
     \1119\ The regulation provides that ``[i]f the partner's 
     distributive share of the aggregate of items of loss 
     specified in section 702(a)(1), (2), (3), (8) [now (7)], and 
     (9) [now (8)] exceeds the basis of the partner's interest 
     computed under the preceding sentence, the limitation on 
     losses under section 704(d) must be allocated to his 
     distributive share of each such loss.'' The regulation does 
     not refer to section 702(a)(4) (charitable contributions) and 
     702(a)(6) (foreign taxes paid or accrued). Treas. Reg. sec. 
     1.704-1(d)(2).
     \1120\ Priv. Ltr. Rul. 8405084. And see William S. McKee, 
     William F. Nelson and Robert L. Whitmire, Federal Taxation of 
     Partnerships and Partners, WG&L, 4th Edition (2011), 
     paragraph 11.05[1][b], pp. 11-214 (noting that the ``failure 
     to include charitable contributions in the Sec. 704(d) 
     limitation is an apparent technical flaw in the statute. 
     Because of it, a zero-basis partner may reap the benefits of 
     a partnership charitable contribution without an offsetting 
     decrease in the basis of his interest, whereas a fellow 
     partner who happens to have a positive basis may do so only 
     at the cost of a basis decrease.'').
     \1121\ Sec. 901.
---------------------------------------------------------------------------
       By contrast, under S corporation rules limiting the losses 
     and deductions which may be taken into account by a 
     shareholder of an S corporation to the shareholder's basis in 
     stock and debt of the corporation, the shareholder's pro rata 
     share of charitable contributions and foreign taxes are taken 
     into account.\1122\ In the case of charitable contributions, 
     a special rule is provided prorating the amount of 
     appreciation not subject to the limitation in the case of 
     charitable contributions of appreciated property by the S 
     corporation.\1123\
---------------------------------------------------------------------------
     \1122\ Sec. 1366(d) and sec. 1366(a)(1). Under a related 
     rule, the shareholder's basis in his interest is decreased by 
     the basis (rather than the fair market value) of appreciated 
     property by reason of a charitable contribution of the 
     property by the S corporation (sec. 1367(a)(2)).
     \1123\ Sec. 1366(d)(4).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The provision modifies the basis limitation on partner 
     losses to provide that the limitation takes into account a 
     partner's distributive share of partnership charitable 
     contributions (as defined in section 170(c)) and taxes 
     (described in section 901) paid or accrued to foreign 
     countries and to possessions of the United States. Thus, the 
     amount of the basis limitation on partner losses is decreased 
     to reflect these items. In the case of a charitable 
     contribution by the partnership, the amount of the basis 
     limitation on partner losses is decreased by the partner's 
     distributive share of the adjusted basis of the contributed 
     property. In the case of a charitable contribution by the 
     partnership of property whose fair market value exceeds its 
     adjusted basis, a special rule provides that the basis 
     limitation on partner losses does not apply to the extent of 
     the partner's distributive share of the excess.
       Effective date.--The provision applies to partnership 
     taxable years beginning after December 31, 2017.


                          conference agreement

       The conference agreement follows the Senate amendment.
       Effective date.--The provision applies to partnership 
     taxable years beginning after December 31, 2017.
     4. Cost basis of specified securities determined without 
         regard to identification (sec. 13533 of the Senate 
         amendment and sec. 1012 of the Code)


                              present law

     In general
       Gain or loss generally is recognized for Federal income tax 
     purposes on realization of that gain or loss (for example, as 
     the result of sale of property). The taxpayer's gain or loss 
     on a disposition of property is the difference between the 
     amount realized on the sale and the taxpayer's adjusted basis 
     in the property disposed of.\1124\
---------------------------------------------------------------------------
     \1124\ Sec. 1001.
---------------------------------------------------------------------------
       To compute adjusted basis, a taxpayer must first determine 
     the property's unadjusted or original basis and then make 
     adjustments prescribed by the Code.\1125\ The original basis 
     of property is its cost, except as otherwise prescribed by 
     the Code (for example, in the case of property acquired by 
     gift or bequest or in a tax-free exchange). Once determined, 
     the taxpayer's original basis generally is adjusted downward 
     to take account of depreciation or amortization, and 
     generally is adjusted upward to reflect income and gain 
     inclusions or capital improvements with respect to the 
     property.
---------------------------------------------------------------------------
     \1125\ Sec. 1016.
---------------------------------------------------------------------------
     Basis computation rules
       If a taxpayer has acquired stock in a corporation on 
     different dates or at different

[[Page 20019]]

     prices and sells or transfers some of the shares of that 
     stock, and the lot from which the stock is sold or 
     transferred is not adequately identified, the shares sold are 
     deemed to be drawn from the earliest acquired shares (the 
     ``first-in-first-out rule'').\1126\ However, if a taxpayer 
     makes an adequate identification (``specific 
     identification'') of shares of stock that it sells, the 
     shares of stock treated as sold are the shares that have been 
     identified.\1127\ A taxpayer who owns shares in a regulated 
     investment company (``RIC'') generally is permitted to elect, 
     in lieu of the specific identification or first-in-first-out 
     methods, to determine the basis of RIC shares sold under one 
     of two average-cost-basis methods described in Treasury 
     regulations (together, the ``average basis method'').\1128\
---------------------------------------------------------------------------
     \1126\ Treas. Reg. sec. 1.1012-1(c)(1).
     \1127\ Treas. Reg. sec. 1.1012-1(c)(2).
     \1128\ Treas. Reg. sec. 1.1012-1(e).
---------------------------------------------------------------------------
       In the case of the sale, exchange, or other disposition of 
     a specified security (defined below) to which the basis 
     reporting requirement described below applies, the first-in-
     first-out rule, specific identification, and average basis 
     method conventions are applied on an account by account 
     basis.\1129\ To facilitate the determination of the cost of 
     RIC stock under the average basis method, RIC stock acquired 
     before January 1, 2012, generally is treated as a separate 
     account from RIC stock acquired on or after that date unless 
     the RIC (or a broker holding the stock as a nominee) elects 
     otherwise with respect to one or more of its stockholders, in 
     which case all the RIC stock with respect to which the 
     election is made is treated as a single account and the basis 
     reporting requirement described below applies to all that 
     stock.\1130\
---------------------------------------------------------------------------
     \1129\ Sec. 1012(c)(1).
     \1130\ Sec. 1012(c)(2).
---------------------------------------------------------------------------
       The basis of stock acquired after December 31, 2010, in 
     connection with a dividend reinvestment plan (``DRP'') is 
     determined under the average basis method for as long as the 
     stock is held as part of that plan.\1131\
---------------------------------------------------------------------------
     \1131\ Sec. 1012(d)(1). Other special rules apply to DRP 
     stock. See sec. 1012(d)(2) and (3).
---------------------------------------------------------------------------
     Basis reporting
       A broker is required to report to the IRS a customer's 
     adjusted basis in a covered security that the customer has 
     sold and whether any gain or loss from the sale is long-term 
     or short-term.\1132\
---------------------------------------------------------------------------
     \1132\ Sec. 6045(g); Treas. Reg. sec. 1.6045-1(d).
---------------------------------------------------------------------------
       A covered security is, in general, any specified security 
     acquired after an applicable date specified in the basis 
     reporting rules. A specified security is any share of stock 
     of a corporation (including stock of a RIC); any note, bond, 
     debenture, or other evidence of indebtedness; any commodity, 
     or contract or derivative with respect to such commodity, if 
     the Treasury Secretary determines that adjusted basis 
     reporting is appropriate; and any other financial instrument 
     with respect to which the Treasury Secretary determines that 
     adjusted basis reporting is appropriate.
       For purposes of satisfying the basis reporting 
     requirements, a broker must determine a customer's adjusted 
     basis in accordance with rules intended to ensure that the 
     broker's reported adjusted basis numbers are the same numbers 
     that customers must use in filing their tax returns.\1133\
---------------------------------------------------------------------------
     \1133\ See sec. 6045(g)(2).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The provision requires that the cost of any specified 
     security sold, exchanged, or otherwise disposed of on or 
     after January 1, 2018, be determined on a first-in first-out 
     basis except to the extent the average basis method is 
     otherwise allowed (as in the case of a taxpayer holding 
     shares in a RIC). The provision does not apply to sales, 
     exchanges, or other dispositions of specified securities by 
     RICs.
       The provision includes several conforming amendments, 
     including a rule restricting a broker's basis reporting 
     method to the first-in first-out method in the case of the 
     sale of any stock for which the average basis method is not 
     permitted.
       Effective date.--The provision applies to sales, exchanges, 
     and other dispositions after December 31, 2017.


                          conference agreement

       The conference agreement does not include the Senate 
     amendment provision.
     5. Expansion of qualifying beneficiaries of an electing small 
         business trust (sec. 13541 of the Senate amendment and 
         sec. 1361 of the Code)


                              present law

       An electing small business trust (``ESBT'') may be a 
     shareholder of an S corporation.\1134\ Generally, the 
     eligible beneficiaries of an ESBT include individuals, 
     estates, and certain charitable organizations eligible to 
     hold S corporation stock directly. A nonresident alien 
     individual may not be a shareholder of an S corporation and 
     may not be a potential current beneficiary of an ESBT.\1135\
---------------------------------------------------------------------------
     \1134\ Sec. 1361(c)(2)(A)(v).
     \1135\ Sec. 1361(b)(1)(C) and (c)(2)(B)(v).
---------------------------------------------------------------------------
       The portion of an ESBT which consists of the stock of an S 
     corporation is treated as a separate trust and generally is 
     taxed on its share of the S corporation's income at the 
     highest rate of tax imposed on individual taxpayers. This 
     income (whether or not distributed by the ESBT) is not taxed 
     to the beneficiaries of the ESBT.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment allows a nonresident alien individual 
     to be a potential current beneficiary of an ESBT.
       Effective date.--The provision takes effect on January 1, 
     2018.


                          conference agreement

       The conference agreement follows the Senate amendment.
     6. Charitable contribution deduction for electing small 
         business trusts (sec. 13542 of the Senate amendment and 
         sec. 642(c) of the Code)


                              present law

       An electing small business trust (``ESBT'') may be a 
     shareholder of an S corporation.\1136\ The portion of an ESBT 
     that consists of the stock of an S corporation is treated as 
     a separate trust and generally is taxed on its share of the S 
     corporation's income at the highest rate of tax imposed on 
     individual taxpayers. This income (whether or not distributed 
     by the ESBT) is not taxed to the beneficiaries of the ESBT. 
     In addition to nonseparately computed income or loss, an S 
     corporation reports to its shareholders their pro rata share 
     of certain separately stated items of income, loss, 
     deduction, and credit.\1137\ For this purpose, charitable 
     contributions (as defined in section 170(c)) of an S 
     corporation are separately stated and taken by the 
     shareholder.
---------------------------------------------------------------------------
     \1136\ Sec. 1361(c)(2)(A)(v).
     \1137\ Sec. 1366(a)(1).
---------------------------------------------------------------------------
       The treatment of a charitable contribution passed through 
     by an S corporation depends on the shareholder. Because an 
     ESBT is a trust, the deduction for charitable contributions 
     applicable to trusts,\1138\ rather than the deduction 
     applicable to individuals,\1139\ applies to the trust. 
     Generally, a trust is allowed a charitable contribution 
     deduction for amounts of gross income, without limitation, 
     which pursuant to the terms of the governing instrument are 
     paid for a charitable purpose. No carryover of excess 
     contributions is allowed. An individual is allowed a 
     charitable contribution deduction limited to certain 
     percentages of adjusted gross income generally with a five-
     year carryforward of amounts in excess of this limitation.
---------------------------------------------------------------------------
     \1138\ Sec. 642(c).
     \1139\ Sec. 170.
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment provides that the charitable 
     contribution deduction of an ESBT is not determined by the 
     rules generally applicable to trusts but rather by the rules 
     applicable to individuals. Thus, the percentage limitations 
     and carryforward provisions applicable to individuals apply 
     to charitable contributions made by the portion of an ESBT 
     holding S corporation stock.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                          conference agreement

       The conference agreement follows the Senate amendment.
     7. Production period for beer, wine, and distilled spirits 
         (sec. 13801 of the Senate amendment and sec. 263A of the 
         Code)


                              present law

     In general
       The uniform capitalization (``UNICAP'') rules, which were 
     enacted as part of the Tax Reform Act of 1986,\1140\ require 
     certain direct and indirect costs allocable to real or 
     tangible personal property produced by the taxpayer to be 
     included in either inventory or capitalized into the basis of 
     such property, as applicable.\1141\ For real or personal 
     property acquired by the taxpayer for resale, section 263A 
     generally requires certain direct and indirect costs 
     allocable to such property to be included in inventory.
---------------------------------------------------------------------------
     \1140\ Sec. 803(a) of Pub. L. No. 99-514 (1986).
     \1141\ Sec. 263A.
---------------------------------------------------------------------------
       In the case of interest expense, the UNICAP rules apply 
     only to interest paid or incurred during the property's 
     production period \1142\ and that is allocable to property 
     produced by the taxpayer or acquired for resale which (1) is 
     either real property or property with a class life of at 
     least 20 years, (2) has an estimated production period 
     exceeding two years, or (3) has an estimated production 
     period exceeding one year and a cost exceeding 
     $1,000,000.\1143\ The production period with respect to any 
     property is the period beginning on the date on which 
     production of the property begins, and ending on the date on 
     which the property is ready to be placed in service or held 
     for sale.\1144\ In the case of property that is customarily 
     aged (e.g., tobacco, wine, and whiskey) before it is sold, 
     the production period includes the aging period.\1145\
---------------------------------------------------------------------------
     \1142\ See Treas. Reg. sec. 1.263A-12.
     \1143\ Sec. 263A(f).
     \1144\ Sec. 263A(f)(4)(B).
     \1145\ See Treas. Reg. sec. 1.263A-12(d)(1). See also TAM 
     9327007 (Mar. 31, 1993) (holding that producers of wine must 
     include the time that wine ages in bottles as part of the 
     production period, which concludes when the wine vintage is 
     officially released to the distribution chain).

[[Page 20020]]


     Exceptions from UNICAP
       Section 263A provides a number of exceptions to the general 
     capitalization requirements. One such exception exists for 
     certain small taxpayers who acquire property for resale and 
     have $10 million or less of average annual gross receipts for 
     the preceding three-taxable year period; \1146\ such 
     taxpayers are not required to include additional section 263A 
     costs in inventory.
---------------------------------------------------------------------------
     \1146\ Sec. 263A(b)(2)(B). No statutory exception is 
     available for small taxpayers who produce property subject to 
     section 263A. However, a de minimis rule under Treasury 
     regulations treats producers that use the simplified 
     production method and incur total indirect costs of $200,000 
     or less in a taxable year as having no additional indirect 
     costs beyond those normally capitalized for financial 
     accounting purposes. Treas. Reg. sec. 1.263A-2(b)(3)(iv). 
     However, the Chairman's Mark of the ``Tax Cuts and Jobs Act'' 
     proposes to expand the exception for small taxpayers from the 
     uniform capitalization rules. Under the provision, any 
     producer or reseller that meets the $15 million gross 
     receipts test is exempted from the application of section 
     263A. See section III.B.4 of Description of the Chairman's 
     Mark of the ``Tax Cuts and Jobs Act'' (JCX-51-17), November 
     9, 2017.
---------------------------------------------------------------------------
       Another exception exists for taxpayers who raise, harvest, 
     or grow trees.\1147\ Under this exception, section 263A does 
     not apply to trees raised, harvested, or grown by the 
     taxpayer (other than trees bearing fruit, nuts, or other 
     crops, or ornamental trees) and any real property underlying 
     such trees. Similarly, the UNICAP rules do not apply to any 
     animal or plant having a reproductive period of two years or 
     less, which is produced by a taxpayer in a farming business 
     (unless the taxpayer is required to use an accrual method of 
     accounting under section 447 or 448(a)(3)).\1148\
---------------------------------------------------------------------------
     \1147\ Sec. 263A(c)(5).
     \1148\ Sec. 263A(d). See also section III.B.3 of Description 
     of the Chairman's Mark of the ``Tax Cuts and Jobs Act'' (JCX-
     51-17), November 9, 2017, which expands the universe of 
     farming C corporations that may use the cash method to 
     include any farming C corporation that meets the $15 million 
     gross receipts test.
---------------------------------------------------------------------------
       Freelance authors, photographers, and artists also are 
     exempt from section 263A for any qualified creative 
     expenses.\1149\ Qualified creative expenses are defined as 
     amounts paid or incurred by an individual in the trade or 
     business of being a writer, photographer, or artist. However, 
     such term does not include any expense related to printing, 
     photographic plates, motion picture files, video tapes, or 
     similar items.
---------------------------------------------------------------------------
     \1149\ Sec. 263A(h).
---------------------------------------------------------------------------


                               house bill

       No provision.


                            senate amendment

       The Senate amendment would exclude the aging periods for 
     beer, wine, and distilled spirits from the production period 
     for purposes of the UNICAP interest capitalization rules. 
     Thus, under the provision, producers of beer, wine and 
     distilled spirits are able to deduct interest expenses 
     (subject to any other applicable limitation) attributable to 
     a shorter production period.
       The provision does not apply to interest costs paid or 
     accrued after December 31, 2019.
       Effective date.--The provision is effective for interest 
     costs paid or accrued after December 31, 2017.


                          conference agreement

       The conference agreement follows the Senate amendment.
     8. Reduced rate of excise tax on beer (sec. 13802 of the 
         Senate amendment and sec. 5051 of the Code)


                              present law

       Federal excise taxes are imposed at different rates on 
     distilled spirits, wine, and beer and are imposed on these 
     products when produced or imported. Generally, these excise 
     taxes are administered and enforced by the TTB, except the 
     taxes on imported bottled distilled spirits, wine, and beer 
     are collected by the Customs and Border Protection Bureau 
     (the ``CBP'') of the Department of Homeland Security (under 
     delegation by the Secretary of the Treasury).
       Liability for the excise tax on beer also come into 
     existence when the alcohol is produced but is not payable 
     until the beer is removed from the brewery for consumption or 
     sale. Generally, beer may be transferred between commonly 
     owned breweries without payment of tax; however, tax 
     liability follows these products. Imported bulk beer may be 
     released from customs custody without payment of tax and 
     transferred in bond to a brewery. Beer may be exported 
     without payment of tax and may be withdrawn without payment 
     of tax or free of tax from the production facility for 
     certain authorized uses, including industrial uses and non-
     beverage uses.
       The rate of tax on beer is $18 per barrel (31 
     gallons).\1150\ Small brewers are subject to a reduced tax 
     rate of $7 per barrel on the first 60,000 barrels of beer 
     domestically produced and removed each year.\1151\ Small 
     brewers are defined as brewers producing fewer than two 
     million barrels of beer during a calendar year. The credit 
     reduces the effective per-gallon tax rate from approximately 
     58 cents per gallon to approximately 22.6 cents per gallon 
     for this beer.
---------------------------------------------------------------------------
     \1150\ Sec. 5051.
     \1151\ Sec. 5051(a)(2).
---------------------------------------------------------------------------
       In the case of a controlled group, the two million barrel 
     limitation for small brewers is applied to the controlled 
     group, and the 60,000 barrels eligible for the reduced rate 
     of tax, are apportioned among the brewers who are component 
     members of such group. The term ``controlled group'' has the 
     meaning assigned to it by sec. 1563(a), except that the 
     phrase ``more than 50 percent'' is substituted for the phrase 
     ``at least 80 percent'' in each place it appears in sec. 
     1563(a).
       Individuals may produce limited quantities of beer for 
     personal or family use without payment of tax during each 
     calendar year. The limit is 200 gallons per calendar year for 
     households of two or more adults and 100 gallons per calendar 
     year for single-adult households.


                               house bill

       No provision.


                            senate amendment

       The Senate amendment lowers the rate of tax on beer to $16 
     per barrel on the first six million barrels brewed by the 
     brewer or imported by the importer. In general, in the case 
     of a controlled group of brewers, the six million barrel 
     limitation is applied and apportioned at the level of the 
     controlled group. Beer brewed or imported in excess of the 
     six million barrel limit would continue to be taxed at $18 
     per barrel. In the case of small brewers, such brewers would 
     be taxed at a rate of $3.50 per barrel on the first 60,000 
     barrels domestically produced, and $16 per barrel on any 
     further barrels produced. The same rules applicable to 
     controlled groups under present law apply with respect to 
     this limitation.
       For barrels of beer that have been brewed or produced 
     outside of the United States and imported into the United 
     States, the reduced tax rate may be assigned by the brewer to 
     any importer of such barrels pursuant to requirements set 
     forth by the Secretary of the Treasury in consultation with 
     the Secretary of Health and Human Services and the Secretary 
     of the Department of Homeland Security. These requirements 
     are to include: (1) a limitation to ensure that the number of 
     barrels of beer for which the reduced tax rate has been 
     assigned by a brewer to any importer does not exceed the 
     number of barrels of beer brewed or produced by such brewer 
     during the calendar year which were imported into the United 
     States by such importer; (2) procedures that allow a brewer 
     and an importer to elect whether to receive the reduced tax 
     rate; (3) requirements that the brewer provide any 
     information as the Secretary of the Treasury determines 
     necessary and appropriate for purposes of assignment of the 
     reduced tax rate; and (4) procedures that allow for 
     revocation of eligibility of the brewer and the importer for 
     the reduced tax rate in the case of erroneous or fraudulent 
     information provided in (3) which the Secretary of the 
     Treasury deems to be material for qualifying for the reduced 
     tax rate.
       Any importer making an election to receive the reduced tax 
     rate shall be deemed to be a member of the controlled group 
     of the brewer, within the meaning of sec. 1563(a), except 
     that the phrase ``more than 50 percent'' is substituted for 
     the phrase ``at least 80 percent'' in each place it appears 
     in sec 1563(a).\1152\
---------------------------------------------------------------------------
     \1152\ Members of the controlled group may include foreign 
     corporations.
---------------------------------------------------------------------------
       Under rules issued by the Secretary of the Treasury, two or 
     more entities (whether or not under common control) that 
     produce beer marketed under a similar brand, license, 
     franchise, or other arrangement shall be treated as a single 
     taxpayer for purposes of the excise tax on beer.
       The provision does not apply for beer removed after 
     December 31, 2019.
       Effective date.--The provision is effective for beer 
     removed after December 31, 2017.


                          conference agreement

       The conference agreement follows the Senate amendment.
     9. Transfer of beer between bonded facilities (sec. 13803 of 
         the Senate amendment and sec. 5414 of the Code)


                              present law

       Federal excise taxes are imposed at different rates on 
     distilled spirits, wine, and beer and are imposed on these 
     products when produced or imported. Generally, these excise 
     taxes are administered and enforced by the TTB, except the 
     taxes on imported bottled distilled spirits, wine, and beer 
     are collected by the Customs and Border Protection Bureau 
     (the ``CBP'') of the Department of Homeland Security (under 
     delegation by the Secretary of the Treasury). The rate of tax 
     on beer is $18 per barrel (31 gallons).\1153\
---------------------------------------------------------------------------
     \1153\ Sec. 5051.
---------------------------------------------------------------------------
       Liability for the excise tax on beer also come into 
     existence when the alcohol is produced but is not payable 
     until the beer is removed from the brewery for consumption or 
     sale. Generally, beer may be transferred between commonly 
     owned breweries without payment of tax; however, tax 
     liability follows these products. Imported bulk beer may be 
     released from customs custody without payment of tax and 
     transferred in bond to a brewery. Beer may be exported 
     without payment of tax and may be withdrawn without payment 
     of tax or free of tax from the production facility for 
     certain authorized uses, including industrial uses and non-
     beverage uses.

[[Page 20021]]

       Small domestic brewers are subject to a reduced tax rate of 
     $7 per barrel on the first 60,000 barrels of beer removed 
     each year.\1154\ Small brewers are defined as brewers 
     producing fewer than two million barrels of beer during a 
     calendar year. The credit reduces the effective per-gallon 
     tax rate from approximately 58 cents per gallon to 
     approximately 22.6 cents per gallon for this beer.
---------------------------------------------------------------------------
     \1154\ Sec. 5051(a)(2).
---------------------------------------------------------------------------
       Individuals may produce limited quantities of beer for 
     personal or family use without payment of tax during each 
     calendar year. The limit is 200 gallons per calendar year for 
     households of two or more adults and 100 gallons per calendar 
     year for single-adult households.
     Transfer rules and removals without tax
       Certain removals or transfers of beer are exempt from tax. 
     Beer may be transferred without payment of the tax between 
     bonded premises under certain conditions specified in the 
     regulations.\1155\ The tax liability accompanies the beer 
     that is transferred in bond. However, beer may only be 
     transferred free of tax between breweries if both breweries 
     are owned by the same brewer.
---------------------------------------------------------------------------
     \1155\ Sec. 5414.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment relaxes the shared ownership 
     requirement of section 5414. Thus, under the provision, a 
     brewer may transfer beer from one brewery to another without 
     incurring tax, provided that: (i) the breweries are owned by 
     the same person; (ii) one brewery owns a controlling interest 
     in the other; (iii) the same person or persons have a 
     controlling interest in both breweries; or (iv) the 
     proprietors of the transferring and receiving premises are 
     independent of each other, and the transferor has divested 
     itself of all interest in the beer so transferred, and the 
     transferee has accepted responsibility for payment of the 
     tax.
       For purposes of transferring the tax liability pursuant to 
     (iv) above, such relief from liability shall be effective 
     from the time of removal from the transferor's bonded 
     premises, or from the time of divestment, whichever is later.
       The provision does not apply for calendar quarters 
     beginning after December 31, 2019.
       Effective date.--The provision applies to any calendar 
     quarters beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     10. Reduced rate of excise tax on certain wine (sec. 13804 of 
         the Senate amendment and sec. 5041 of the Code)


                              Present Law

     In general
       Under present law, excise taxes are imposed at different 
     rates on wine, depending on the wine's alcohol content and 
     carbonation levels. The following table outlines the present 
     rates of tax on wine.
---------------------------------------------------------------------------
     \1156\ A ``still wine'' is a non-sparkling wine. Most common 
     table wines are still wines.
     \1157\ A wine gallon is a U.S. liquid gallon.

------------------------------------------------------------------------
          Tax (and Code Section)                      Tax Rates
------------------------------------------------------------------------
Wines (sec. 5041)
    ``Still wines'' \1156\ not more than    $1.07 per wine gallon \1157\
     14 percent alcohol.
    ``Still wines'' more than 14 percent,   $1.57 per wine gallon
     but not more than 21 percent, alcohol.
    ``Still wines'' more than 21 percent,   $3.15 per wine gallon
     but not more than 24 percent, alcohol.
    ``Still wines'' more than 24 percent    $13.50 per proof gallon
     alcohol.                                (taxed as distilled
                                             spirits)
    Champagne and other sparkling wines...  $3.40 per wine gallon
    Artificially carbonated wines.........  $3.30 per wine gallon
------------------------------------------------------------------------

       Liability for the excise taxes on wine come into existence 
     when the wine is produced but is not payable until the wine 
     is removed from the bonded wine cellar or winery for 
     consumption or sale. Generally, bulk and bottled wine may be 
     transferred in bond between bonded premises; however, tax 
     liability follows these products. Bulk natural wine may be 
     released from customs custody without payment of tax and 
     transferred in bond to a winery. Wine may be exported without 
     payment of tax and may be withdrawn without payment of tax or 
     free of tax from the production facility for certain 
     authorized uses, including industrial uses and non-beverage 
     uses.
     Reduced rates and exemptions for certain wine producers
       Wineries having aggregate annual production not exceeding 
     250,000 gallons (``small domestic producers'') receive a 
     credit against the wine excise tax equal to 90 cents per 
     gallon (the amount of a wine tax increase enacted in 1990) on 
     the first 100,000 gallons of wine domestically produced and 
     removed during a calendar year.\1158\ The credit is reduced 
     (but not below zero) by one percent for each 1,000 gallons 
     produced in excess of 150,000 gallons; the credit does not 
     apply to sparkling wines. In the case of a controlled group, 
     the 250,000 gallon limitation for wineries is applied to the 
     controlled group, and the 100,000 gallons eligible for the 
     credit, are apportioned among the wineries who are component 
     members of such group. The term ``controlled group'' has the 
     meaning assigned to it by sec. 1563(a), except that the 
     phrase ``more than 50 percent'' is substituted for the phrase 
     ``at least 80 percent'' in each place it appears in sec 
     1563(a).
---------------------------------------------------------------------------
     \1158\ Sec. 5041(c).
---------------------------------------------------------------------------
       Individuals may produce limited quantities of wine for 
     personal or family use without payment of tax during each 
     calendar year. The limit is 200 gallons per calendar year for 
     households of two or more adults and 100 gallons per calendar 
     year for single-adult households.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment modifies the credit against the wine 
     excise tax for small domestic producers, by removing the 
     250,000 wine gallon domestic production limitation (and thus 
     making the credit available for all wine producers and 
     importers). Additionally, under the provision, sparkling wine 
     producers and importers are now eligible for the credit. With 
     respect to wine produced in, or imported into, the United 
     States during a calendar year, the credit amount is (1) $1.00 
     per wine gallon for the first 30,000 wine gallons of wine, 
     plus; (2) 90 cents per wine gallon on the next 100,000 wine 
     gallons of wine, plus; (3) 53.5 cents per wine gallon on the 
     next 620,000 wine gallons of wine.\1159\ There is no phaseout 
     of the credit.
---------------------------------------------------------------------------
     \1159\ The credit rate for hard cider is tiered at the same 
     level of production or importation, but is equal to 6.2 
     cents, 5.6 cents and 3.3 cents, respectively.
---------------------------------------------------------------------------
       In the case of any wine gallons of wine that have been 
     produced outside of the United States and imported into the 
     United States, the tax credit allowable may be assigned by 
     the person who produced such wine (the ``foreign producer'') 
     to any electing importer of such wine gallons pursuant to 
     requirements established by the Secretary of the Treasury, in 
     consultation with the Secretary of Health and Human Services 
     and the Secretary of the Department of Homeland Security. 
     These requirement are to include: (1) a limitation to ensure 
     that the number of wine gallons of wine for which the tax 
     credit has been assigned by a foreign producer to any 
     importer does not exceed the number of wine gallons of wine 
     produced by such foreign producer, during the calendar year, 
     which were imported into the United States by such importer; 
     (2) procedures that allow the election of a foreign producer 
     to assign, and an importer to receive, the tax credit; (3) 
     requirements that the foreign producer provide any 
     information that the Secretary of the Treasury determines to 
     be necessary and appropriate for purposes of assigning the 
     tax credit; and (4) procedures that allow for revocation of 
     eligibility of the foreign producer and the importer for the 
     tax credit in the case of erroneous or fraudulent information 
     provided in (3) which the Secretary of the Treasury deems to 
     be material for qualifying for the reduced tax rate.
       Any importer making an election to receive the reduced tax 
     rate shall be deemed to be a member of the controlled group 
     of the winemaker, within the meaning of sec. 1563(a), except 
     that the phrase ``more than 50 percent'' is substitute for 
     the phrase ``at least 80 percent'' in each place it appears 
     in sec 1563(a).\1160\
---------------------------------------------------------------------------
     \1160\ Members of the controlled group may include foreign 
     corporations.
---------------------------------------------------------------------------
       The provision does not apply for wine removed in calendar 
     quarters beginning after December 31, 2019.
       Effective date.--The provision applies to wine removed 
     after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     11. Adjustment of alcohol content level for application of 
         excise tax rates (sec. 13805 of the Senate amendment and 
         sec. 5041 of the Code)


                              Present Law

     In general
       Under present law, excise taxes are imposed at different 
     rates on wine, depending on the wine's alcohol content and 
     carbonation levels. The following table outlines the present 
     rates of tax on wine.
---------------------------------------------------------------------------
     \1161\ A ``still wine'' is a non-sparkling wine. Most common 
     table wines are still wines.
     \1162\ A wine gallon is a U.S. liquid gallon.

------------------------------------------------------------------------
          Tax (and Code Section)                      Tax Rates
------------------------------------------------------------------------
Wines (sec. 5041)
    ``Still wines'' \1161\ not more than    $1.07 per wine gallon \1162\
     14 percent alcohol.
    ``Still wines'' more than 14 percent,   $1.57 per wine gallon
     but not more than 21 percent, alcohol.
    ``Still wines'' more than 21 percent,   $3.15 per wine gallon
     but not more than 24 percent, alcohol.
    ``Still wines'' more than 24 percent    $13.50 per proof gallon
     alcohol.                                (taxed as distilled
                                             spirits)
    Champagne and other sparkling wines...  $3.40 per wine gallon
    Artificially carbonated wines.........  $3.30 per wine gallon
------------------------------------------------------------------------

       Liability for the excise taxes on wine come into existence 
     when the wine is produced but is not payable until the wine 
     is removed from the bonded wine cellar or winery for 
     consumption or sale. Generally, bulk and bottled wine may be 
     transferred in bond between bonded premises; however, tax 
     liability follows these products. Bulk natural wine

[[Page 20022]]

     may be released from customs custody without payment of tax 
     and transferred in bond to a winery. Wine may be exported 
     without payment of tax and may be withdrawn without payment 
     of tax or free of tax from the production facility for 
     certain authorized uses, including industrial uses and non-
     beverage uses.
     Reduced rates and exemptions for certain wine producers
       Wineries having aggregate annual production not exceeding 
     250,000 gallons (``small domestic producers'') receive a 
     credit against the wine excise tax equal to 90 cents per 
     gallon (the amount of a wine tax increase enacted in 1990) on 
     the first 100,000 gallons of wine domestically produced and 
     removed during a calendar year.\1163\ The credit is reduced 
     (but not below zero) by one percent for each 1,000 gallons 
     produced in excess of 150,000 gallons; the credit does not 
     apply to sparkling wines. In the case of a controlled group, 
     the 250,000 gallon limitation for wineries is applied to the 
     controlled group, and the 100,000 gallons eligible for the 
     credit, are apportioned among the wineries who are component 
     members of such group. The term ``controlled group'' has the 
     meaning assigned to it by sec. 1563(a), except that the 
     phrase ``more than 50 percent'' is substituted for the phrase 
     ``at least 80 percent'' in each place it appears in sec. 
     1563(a).
---------------------------------------------------------------------------
     \1163\ Sec. 5041(c).
---------------------------------------------------------------------------
       Individuals may produce limited quantities of wine for 
     personal or family use without payment of tax during each 
     calendar year. The limit is 200 gallons per calendar year for 
     households of two or more adults and 100 gallons per calendar 
     year for single-adult households.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment modifies alcohol-by-volume levels of 
     the first two tiers of the excise tax on wine, by changing 14 
     percent to 16 percent. Thus, under the provision, a wine 
     producer or importer may produce or import ``still wine'' 
     that has an alcohol-by-volume level of up to 16 percent, and 
     remain subject to the lowest rate of $1.07 per wine gallon.
       The provision does not apply to wine removed after December 
     31, 2019.
       Effective date.--The provision applies to wine removed 
     after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     12. Definition of mead and low alcohol by volume wine (sec. 
         13806 of the Senate amendment and sec. 5041 of the Code)


                              Present Law

     In general
       Under present law, excise taxes are imposed at different 
     rates on wine, depending on the wine's alcohol content and 
     carbonation levels. The following table outlines the present 
     rates of tax on wine.
---------------------------------------------------------------------------
     \1164\ A ``still wine'' is a non-sparkling wine. Most common 
     table wines are still wines.
     \1165\ A wine gallon is a U.S. liquid gallon.

------------------------------------------------------------------------
          Tax (and Code Section)                      Tax Rates
------------------------------------------------------------------------
Wines (sec. 5041)
    ``Still wines'' \1164\ not more than    $1.07 per wine gallon \1165\
     14 percent alcohol.
    ``Still wines'' more than 14 percent,   $1.57 per wine gallon
     but not more than 21 percent, alcohol.
    ``Still wines'' more than 21 percent,   $3.15 per wine gallon
     but not more than 24 percent, alcohol.
    ``Still wines'' more than 24 percent    $13.50 per proof gallon
     alcohol.                                (taxed as distilled
                                             spirits)
    Champagne and other sparkling wines...  $3.40 per wine gallon
    Artificially carbonated wines.........  $3.30 per wine gallon
------------------------------------------------------------------------

       Liability for the excise taxes on wine come into existence 
     when the wine is produced but is not payable until the wine 
     is removed from the bonded wine cellar or winery for 
     consumption or sale. Generally, bulk and bottled wine may be 
     transferred in bond between bonded premises; however, tax 
     liability follows these products. Bulk natural wine may be 
     released from customs custody without payment of tax and 
     transferred in bond to a winery. Wine may be exported without 
     payment of tax and may be withdrawn without payment of tax or 
     free of tax from the production facility for certain 
     authorized uses, including industrial uses and non-beverage 
     uses.
     Reduced rates and exemptions for certain wine producers
       Wineries having aggregate annual production not exceeding 
     250,000 gallons (``small domestic producers'') receive a 
     credit against the wine excise tax equal to 90 cents per 
     gallon (the amount of a wine tax increase enacted in 1990) on 
     the first 100,000 gallons of wine domestically produced and 
     removed during a calendar year.\1166\ The credit is reduced 
     (but not below zero) by one percent for each 1,000 gallons 
     produced in excess of 150,000 gallons; the credit does not 
     apply to sparkling wines. In the case of a controlled group, 
     the 250,000 gallon limitation for wineries is applied to the 
     controlled group, and the 100,000 gallons eligible for the 
     credit, are apportioned among the wineries who are component 
     members of such group. The term ``controlled group'' has the 
     meaning assigned to it by sec. 1563(a), except that the 
     phrase ``more than 50 percent'' is substituted for the phrase 
     ``at least 80 percent'' in each place it appears in sec 
     1563(a).
---------------------------------------------------------------------------
     \1166\ Sec. 5041(c).
---------------------------------------------------------------------------
       Individuals may produce limited quantities of wine for 
     personal or family use without payment of tax during each 
     calendar year. The limit is 200 gallons per calendar year for 
     households of two or more adults and 100 gallons per calendar 
     year for single-adult households.


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment designates mead and certain sparkling 
     wines to be taxed at the lowest rate applicable to ``still 
     wine,'' of $1.07 per wine gallon of wine. Mead is defined as 
     a wine that contains not more than 0.64 grams of carbon 
     dioxide per hundred milliliters of wine,\1167\ which is 
     derived solely from honey and water, contains no fruit 
     product or fruit flavoring, and contains less than 8.5 
     percent alcohol-by-volume. The sparkling wines eligible to be 
     taxed at the lowest rate are those wines that contain not 
     more than 0.64 grams of carbon dioxide per hundred 
     milliliters of wine,\1168\ which are derived primarily from 
     grapes or grape juice concentrate and water, which contain no 
     fruit flavoring other than grape, and which contain less than 
     8.5 percent alcohol by volume.
---------------------------------------------------------------------------
     \1167\ The Secretary is authorized to prescribe tolerances to 
     this limitation as may be reasonably necessary in good 
     commercial practice.
     \1168\ The Secretary is authorized to prescribe tolerances to 
     this limitation as may be reasonably necessary in good 
     commercial practice.
---------------------------------------------------------------------------
       The provision does not apply to wine removed after December 
     31, 2019.
       Effective date.--The provision applies to wine removed 
     after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     13. Reduced rate of excise tax on certain distilled spirits 
         (sec. 13807 of the Senate amendment and sec. 5001 of the 
         Code)


                              Present Law

       An excise tax is imposed on all distilled spirits produced 
     in, or imported into, the United States.\1169\ The tax 
     liability legally comes into existence the moment the alcohol 
     is produced or imported but payment of the tax is not 
     required until a subsequent withdrawal or removal from the 
     distillery, or, in the case of an imported product, from 
     customs custody or bond.\1170\
---------------------------------------------------------------------------
     \1169\ Secs. 5001.
     \1170\ Secs. 5006, 5043, and 5054. In general, proprietors of 
     distilled spirit plants, proprietors of bonded wine cellars, 
     brewers, and importers are liable for the tax.
---------------------------------------------------------------------------
       Distilled spirits are taxed at a rate of $13.50 per proof 
     gallon.\1171\ Liability for the excise tax on distilled 
     spirits comes into existence when the alcohol is produced but 
     is not determined and payable until bottled distilled spirits 
     are removed from the bonded premises of the distilled spirits 
     plant where they are produced. Generally, bulk distilled 
     spirits may be transferred in bond between bonded premises; 
     however, tax liability follows these products. Imported bulk 
     distilled spirits may be released from customs custody 
     without payment of tax and transferred in bond to a 
     distillery. Distilled spirits be exported without payment of 
     tax and may be withdrawn without payment of tax or free of 
     tax from the production facility for certain authorized uses, 
     including industrial uses and non-beverage uses.
---------------------------------------------------------------------------
     \1171\ A ``proof gallon'' is a U.S. liquid gallon of proof 
     spirits, or the alcoholic equivalent thereof. Generally a 
     proof gallon is a U.S. liquid gallon consisting of 50 percent 
     alcohol. On lesser quantities, the tax is paid 
     proportionately. Credits are allowed for wine content and 
     flavors content of distilled spirits. Sec. 5010.
---------------------------------------------------------------------------
       A portion of the revenues from the distilled spirits excise 
     tax imposed on rum imported or brought into \1172\ the United 
     States (less certain administrative costs) is transferred 
     (``covered over'') to Puerto Rico and the U.S. Virgin 
     Islands.\1173\ The amount covered over is $10.50 per proof 
     gallon ($13.25 per proof gallon during the period from July 
     1, 1999, through December 31, 2016).
---------------------------------------------------------------------------
     \1172\ Because Puerto Rico is inside U.S. customs territory, 
     articles entering the United States from that commonwealth 
     are ``brought into'' rather than ``imported into'' the U.S.
     \1173\ Sec. 7652.
---------------------------------------------------------------------------
       Eligible distilled spirits wholesale distributors and 
     distillers receive an income tax credit for the average cost 
     of carrying previously imposed excise tax on beverages stored 
     in their warehouses.\1174\
---------------------------------------------------------------------------
     \1174\ Sec. 5011. Section 5011 is administered and enforced 
     by the IRS.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment institutes a tiered rate for distilled 
     spirits. The rate of tax is lowered to $2.70 per proof gallon 
     on the first 100,000 proof gallons of distilled spirits, 
     $13.34 for all proof gallons in excess of that amount but 
     below 22,130,000 proof gallons, and $13.50 for amounts 
     thereafter. The provision contains rules so as to prevent 
     members of the same controlled group from receiving the lower 
     rate on more than 100,000 proof gallons of distilled spirits. 
     Importers of distilled spirits are eligible for the lower 
     rates.

[[Page 20023]]

       The provision does not apply to distilled spirits removed 
     after December 31, 2019.
       Effective date.--The provision applies to distilled spirits 
     removed after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     14. Bulk distilled spirits (sec. 13808 of the Senate 
         amendment and sec. 5212 of the Code)


                              Present Law

       An excise tax is imposed on all distilled spirits produced 
     in, or imported into, the United States.\1175\ The tax 
     liability legally comes into existence the moment the alcohol 
     is produced or imported but payment of the tax is not 
     required until a subsequent withdrawal or removal from the 
     distillery, or, in the case of an imported product, from 
     customs custody or bond.\1176\
---------------------------------------------------------------------------
     \1175\ Secs. 5001.
     \1176\ Secs. 5006, 5043, and 5054. In general, proprietors of 
     distilled spirit plants, proprietors of bonded wine cellars, 
     brewers, and importers are liable for the tax.
---------------------------------------------------------------------------
       Distilled spirits are taxed at a rate of $13.50 per proof 
     gallon.\1177\ Liability for the excise tax on distilled 
     spirits comes into existence when the alcohol is produced but 
     is not determined and payable until bottled distilled spirits 
     are removed from the bonded premises of the distilled spirits 
     plant where they are produced. Generally, bulk distilled 
     spirits may be transferred in bond between bonded premises; 
     however, tax liability follows these products. Additionally, 
     in order to transfer such spirits in bond without payment of 
     tax, such spirits may not be transferred in containers 
     smaller than one gallon.\1178\ Imported bulk distilled 
     spirits may be released from customs custody without payment 
     of tax and transferred in bond to a distillery. Distilled 
     spirits be exported without payment of tax and may be 
     withdrawn without payment of tax or free of tax from the 
     production facility for certain authorized uses, including 
     industrial uses and non-beverage uses.
---------------------------------------------------------------------------
     \1177\ A``proof gallon'' is a U.S. liquid gallon of proof 
     spirits, or the alcoholic equivalent thereof. Generally a 
     proof gallon is a U.S. liquid gallon consisting of 50 percent 
     alcohol. On lesser quantities, the tax is paid 
     proportionately. Credits are allowed for wine content and 
     flavors content of distilled spirits. Sec. 5010.
     \1178\ Sec. 5212.
---------------------------------------------------------------------------
       A portion of the revenues from the distilled spirits excise 
     tax imposed on rum imported or brought into \1179\ the United 
     States (less certain administrative costs) is transferred 
     (``covered over'') to Puerto Rico and the U.S. Virgin 
     Islands.\1180\ The amount covered over is $10.50 per proof 
     gallon ($13.25 per proof gallon during the period from July 
     1, 1999, through December 31, 2016).
---------------------------------------------------------------------------
     \1179\ Because Puerto Rico is inside U.S. customs territory, 
     articles entering the United States from that commonwealth 
     are ``brought into'' rather than ``imported into'' the U.S.
     \1180\ Sec. 7652.
---------------------------------------------------------------------------
       Eligible distilled spirits wholesale distributors and 
     distillers receive an income tax credit for the average cost 
     of carrying previously imposed excise tax on beverages stored 
     in their warehouses.\1181\
---------------------------------------------------------------------------
     \1181\ Sec. 5011. Section 5011 is administered and enforced 
     by the IRS.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment allows distillers to transfer spirits 
     in approved containers other than bulk containers in bond 
     without payment of tax.
       The provision does not apply to distilled spirits 
     transferred in bond after December 31, 2019.
       Effective date.--The provision applies to distilled spirits 
     transferred in bond after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     15. Modification of tax treatment of Alaska Native 
         Corporations and Settlement Trusts (sec. 13821 of the 
         Senate amendment and sec. 6039H and new secs. 139G and 
         247 of the Code)


                              Present Law

       The Alaska Native Claims Settlement Act (``ANCSA'') \1182\ 
     established Native Corporations \1183\ to hold property for 
     Alaska Natives. Alaska Natives are generally the only 
     permitted common shareholders of those corporations under 
     section 7(h) of ANCSA, unless a Native Corporation 
     specifically allows other shareholders under specified 
     procedures.
---------------------------------------------------------------------------
     \1182\ 43 U.S.C. 1601 et seq.
     \1183\ Defined at 43 U.S.C. 1602(m).
---------------------------------------------------------------------------
       ANCSA permits a Native Corporation to transfer money or 
     other property to an Alaska Native Settlement Trust 
     (``Settlement Trust'') for the benefit of beneficiaries who 
     constitute all or a class of the shareholders of the Native 
     Corporation, to promote the health, education and welfare of 
     beneficiaries and to preserve the heritage and culture of 
     Alaska Natives.\1184\
---------------------------------------------------------------------------
     \1184\ With certain exceptions, once an Alaska Native 
     Corporation has made a conveyance to a Settlement Trust, the 
     assets conveyed shall not be subject to attachment, 
     distraint, or sale or execution of judgment, except with 
     respect to the lawful debts and obligations of the Settlement 
     Trust.
---------------------------------------------------------------------------
       Native Corporations and Settlement Trusts, as well as their 
     shareholders and beneficiaries, are generally subject to tax 
     under the same rules and in the same manner as other 
     taxpayers that are corporations, trusts, shareholders, or 
     beneficiaries.
       Special tax rules enacted in 2001 allow an election to use 
     a more favorable tax regime for transfers of property by a 
     Native Corporation to a Settlement Trust and for income 
     taxation of the Settlement Trust. There is also simplified 
     reporting to beneficiaries.
       Under the special tax rules, a Settlement Trust may make an 
     irrevocable election to pay tax on taxable income at the 
     lowest rate specified for individuals, (rather than the 
     highest rate that is generally applicable to trusts) and to 
     pay tax on capital gains at a rate consistent with being 
     subject to such lowest rate of tax. As described further 
     below, beneficiaries may generally thereafter exclude from 
     gross income distributions from a trust that has made this 
     election. Also, contributions from a Native Corporation to an 
     electing Settlement Trust generally will not result in the 
     recognition of gross income by beneficiaries on account of 
     the contribution. An electing Settlement Trust remains 
     subject to generally applicable requirements for 
     classification and taxation as a trust.
       A Settlement Trust distribution is excludable from the 
     gross income of beneficiaries to the extent of the taxable 
     income of the Settlement Trust for the taxable year and all 
     prior taxable years for which an election was in effect, 
     decreased by income tax paid by the Trust, plus tax-exempt 
     interest from State and local bonds for the same period. 
     Amounts distributed in excess of the amount excludable is 
     taxed to the beneficiaries as if distributed by the 
     sponsoring Native Corporation in the year of distribution by 
     the Trust, which means that the beneficiaries must include in 
     gross income as dividends the amount of the distribution, up 
     to the current and accumulated earnings and profits of the 
     Native Corporation. Amounts distributed in excess of the 
     current and accumulated earnings and profits are not included 
     in gross income by the beneficiaries.
       A special loss disallowance rule reduces (but not below 
     zero) any loss that would otherwise be recognized upon 
     disposition of stock of a sponsoring Native Corporation by a 
     proportion, determined on a per share basis, of all 
     contributions to all electing Settlement Trusts by the 
     sponsoring Native Corporation. This rule prevents a 
     stockholder from being able to take advantage of a decrease 
     in value of a Native Corporation that is caused by a transfer 
     of assets from the Native Corporation to a Settlement Trust.
       The fiduciary of an electing Settlement Trust is obligated 
     to provide certain information relating to distributions from 
     the trust in lieu of reporting requirements under Section 
     6034A.
       The election to pay tax at the lowest rate is not available 
     in certain disqualifying cases where transfer restrictions 
     have been modified to allow a transfer of either: (a) a 
     beneficial interest that would not be permitted by section 
     7(h) of the Alaska Native Claims Settlement Act if the 
     interest were Settlement common stock, or (b) any stock in an 
     Alaska Native Corporation that would not be permitted by 
     section 7(h) if it were Settlement common stock and the 
     Native Corporation thereafter makes a transfer to the Trust. 
     Where an election is already in effect at the time of such 
     disqualifying transfers, the special rules applicable to an 
     electing trust cease to apply and rules generally applicable 
     to trusts apply. In addition, the distributable net income of 
     the trust is increased by undistributed current and 
     accumulated earnings and profits of the trust, limited by the 
     fair market value of trust assets at the date the trust 
     becomes so disposable. The effect is to cause the trust to be 
     taxed at regular trust rates on the amount of recomputed 
     distributable net income not distributed to beneficiaries, 
     and to cause the beneficiaries to be taxed on the amount of 
     any distributions received consistent with the applicable tax 
     rate bracket.


                               House Bill

       No provision.


                            Senate Amendment

       The provision comprises three separate but related 
     sections. The first section allows a Native Corporation to 
     assign certain payments described in ANCSA to a Settlement 
     Trust without having to recognize gross income from those 
     payments, provided the assignment is in writing and the 
     Native Corporation has not received the payment prior to 
     assignment. The Settlement Trust is required to include the 
     assigned payment in gross income when received.
       The second section allows a Native Corporation to elect 
     annually to deduct contributions made to a Settlement Trust. 
     If the contribution is in cash, the deduction is in the 
     amount of cash contributed. If the contribution is property 
     other than cash, the deduction is the amount of the Native 
     Corporation's basis in the contributed property (or the fair 
     market value of such property, if less than the Native 
     Corporation's basis), and no gain or loss can be recognized 
     on the contribution. The Native Corporation's deduction is 
     limited to the amount of its taxable income for that year, 
     and any unused

[[Page 20024]]

     deduction may be carried forward 15 additional years. The 
     Native Corporation's earnings and profits for the taxable 
     year are reduced by the amount of any deduction claimed for 
     that year.
       Generally, the Settlement Trust must include income equal 
     to the deduction by the Native Corporation. For contributions 
     of property other than cash, the Settlement Trust takes a 
     basis in the property equal to its basis in the hands of the 
     Native Corporation immediately before the contribution (or 
     the fair market value of such property, if less than the 
     Native Corporation's basis), and may elect to defer 
     recognition of income associated with such property until the 
     Settlement Trust sells or disposes of the property. In that 
     case, any income that is deferred (i.e., the amount of income 
     that would have been included upon contribution absent the 
     election to defer) is treated as ordinary income, while any 
     gain in excess of the amount that is deferred takes the same 
     character as if the election had not been made. If property 
     subject to this election is disposed of within the first 
     taxable year subsequent to the taxable year in which the 
     property was contributed to the Settlement Trust, the 
     election is voided with respect to the property, and the 
     Settlement Trust is required to pay any tax applicable to the 
     disposition of the property, including interest, as well as a 
     penalty of 10 percent of the amount of the tax. The provision 
     provides for a four year assessment period in which to assess 
     the tax, interest, and penalty amounts. The provision permits 
     the amendment of the terms of any Settlement Trust agreement 
     to allow this election within one year of the enactment of 
     the provision, with certain restrictions.
       The third section of the provision requires any Native 
     Corporation which has made an election to deduct 
     contributions to a Settlement Trust as described above to 
     furnish a statement to the Settlement Trust containing: (1) 
     the total amount of contributions; (2) whether such 
     contribution was in cash; (3) for non-cash contributions, the 
     date that such property was acquired by the Native 
     Corporation and the adjusted basis of such property on the 
     contribution date; (4) the date on which each contribution 
     was made to the Settlement Trust; and (5) such information as 
     the Secretary determines is necessary for the accurate 
     reporting of income relating to such contributions.
       Effective date.--The provision relating to the exclusion 
     for ANCSA payments assigned to Settlement Trusts is effective 
     to taxable years beginning after December 31, 2016.
       The provision relating to the deduction of contributions is 
     effective for taxable years for which the Native 
     Corporation's refund statute of limitations period has not 
     expired, and the provision provides a one-year waiver of the 
     refund statute of limitations period in the event that the 
     limitation period expires before the end of the one-year 
     period beginning on the date of enactment.
       The provision relating to the reporting requirement applies 
     to taxable years beginning after December 31, 2016.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     16. Amounts paid for aircraft management services (sec. 13822 
         of the Senate amendment and sec. 4261 of the Code)


                              Present Law

     Excise tax on taxable transportation by air
       For domestic passenger transportation, section 4261 imposes 
     an excise tax on amounts paid for taxable transportation. In 
     general, for domestic flights, the tax consists of two parts: 
     a 7.5 percent ad valorem tax applied to the amount paid and a 
     flat dollar amount for each flight segment (consisting of one 
     takeoff and one landing). ``Taxable transportation'' 
     generally means transportation by air which begins and ends 
     in the United States. The tax is paid by the person making 
     the payment subject to tax and the tax is collected by the 
     person receiving the payment. For commercial freight 
     aviation, the ad valorem tax is 6.25 percent of the amount 
     paid for transportation.
       In determining whether a flight constitutes taxable 
     transportation and whether the amounts paid for such 
     transportation are subject to tax, the Internal Revenue 
     Service (``IRS'') has looked at who has ``possession, 
     command, and control'' of the aircraft based on the relevant 
     facts and circumstances.\1185\
---------------------------------------------------------------------------
     \1185\ See, e.g., Rev. Rul. 60-311, 1960-2 C.B. 341, which 
     held that, since the company in question retains the elements 
     of possession, command, and control of the aircraft and 
     performs all services in connection with the operation of the 
     aircraft, the company is, in fact, furnishing taxable 
     transportation to the lessee; and the tax on the 
     transportation of persons applies to the portion of the total 
     payment which is allocable to the transportation of persons, 
     provided such allocation is made on a fair and reasonable 
     basis. If no allocation is made, the tax applies to the total 
     payment for the lease of the aircraft.
---------------------------------------------------------------------------
     Applicability to aircraft management services
       Generally, an aircraft management services company 
     (``management company'') has as its business purpose the 
     management of aircraft owned by other corporations or 
     individuals (``aircraft owners''). In this function, 
     management companies provide aircraft owners, among other 
     things, with administrative and support services (such as 
     scheduling, flight planning, and weather forecasting), 
     aircraft maintenance services, the provision of pilots and 
     crew, and compliance with regulatory standards. Although the 
     arrangement between management companies and aircraft owners 
     may vary, it is our understanding that aircraft owners 
     generally pay management companies a monthly fee to cover the 
     fixed expenses of maintaining the aircraft (such as 
     insurance, maintenance, and recordkeeping) and a variable fee 
     to cover the cost of using the aircraft (such as the 
     provision of pilots, crew, and fuel).
       In March 2012, the IRS issued a Chief Counsel Advice 
     determining that a management company provided all of the 
     essential elements necessary for providing transportation by 
     air and the owner relinquished possession, command and 
     control to the management company.\1186\ Thus, the management 
     company was determined to be providing taxable transportation 
     to the owner and was required to collect the appropriate 
     federal excise tax from the aircraft owner and remit it to 
     the IRS. The Chief Counsel Advice resulted in increased audit 
     activity by the IRS on aircraft management companies.
---------------------------------------------------------------------------
     \1186\ CCA 2012-10026 (March, 2012).
---------------------------------------------------------------------------
       In May 2013, the IRS suspended assessment of the federal 
     excise tax with respect to aircraft management services while 
     it developed guidance on the tax treatment of aircraft 
     management issues. In a 2015 opinion,\1187\ an Ohio district 
     court held that the existing revenue rulings (in effect for 
     the tax period April 1, 2005, through June 30, 2009, the 
     period that was the subject of the litigation) regarding the 
     possession, command and control test, failed to provide 
     precise and not speculative notice of a collection obligation 
     as it related to whole-aircraft management contracts.\1188\ 
     As a result, the court ruled as a matter of law that because 
     precise and not speculative notice was not received, the 
     aircraft management company plaintiff did not have a 
     collection obligation with respect to the Federal excise tax 
     on payments received for whole-aircraft management services.
---------------------------------------------------------------------------
     \1187\ Netjets Large Aircraft Inc. v. United States, 116 
     A.F.T.R. 2d. 2015-6776 (S.D. Ohio, 2015).
     \1188\ The district court held that such notice is required 
     to persons having a deputy tax collection obligation under 
     the rationale of the Supreme Court's holding in Central 
     Illinois Public Service Company v. United States, 435 U.S. 21 
     (1978).
---------------------------------------------------------------------------
       In 2017, the IRS decided not to pursue examination of the 
     issue of whether amounts paid to aircraft companies by the 
     owners or lessors of the aircraft are taxable until further 
     guidance is made available. According to the IRS, for any 
     exam in suspense the aircraft management fee issue was 
     conceded and the taxpayers were notified accordingly.\1189\ 
     The IRS has not issued further guidance on this issue.
---------------------------------------------------------------------------
     \1189\ See also, Kerry Lynch, IRS To Shelve Pending Audits on 
     Aircraft Management Fees, AINonline (July 17, 2017) http://
www.ainonline.com/aviation-news/business-aviation/2017-07-17/
irs-shelve-pending-
audits-aircraft-management-fees.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The Senate amendment exempts certain payments related to 
     the management of private aircraft from the excise taxes 
     imposed on taxable transportation by air. Exempt payments are 
     those amounts paid by an aircraft owner for management 
     services related to maintenance and support of the owner's 
     aircraft or flights on the owner's aircraft. Applicable 
     services include support activities related to the aircraft 
     itself, such as its storage, maintenance, and fueling, and 
     those related to its operation, such as the hiring and 
     training of pilots and crew, as well as administrative 
     services such as scheduling, flight planning, weather 
     forecasting, obtaining insurance, and establishing and 
     complying with safety standards. Aircraft management services 
     also include such other services as are necessary to support 
     flights operated by an aircraft owner.
       Payments for flight services are exempt only to the extent 
     that they are attributable to flights on an aircraft owner's 
     own aircraft.\1190\ Thus, if an aircraft owner makes a 
     payment to a management company for the provision of a pilot 
     and the pilot provides his services on the aircraft owner's 
     aircraft, such payment is not subject to Federal excise tax. 
     However, if the pilot provides his

[[Page 20025]]

     services to the aircraft owner on an aircraft other than the 
     aircraft owner's (for instance, on an aircraft that is part 
     of a fleet of aircraft available for third-party charter 
     services), then such payment is subject to Federal excise 
     tax.
---------------------------------------------------------------------------
     \1190\ Examples of arrangements that cannot qualify a person 
     as an ``aircraft owner'' include ownership of stock in a 
     commercial airline and participation in a fractional 
     ownership aircraft program. Ownership of stock in a 
     commercial airline cannot qualify an individual as an 
     ``aircraft owner'' of a commercial airline's aircraft, and 
     amounts paid for transportation on such flights remain 
     subject to the tax under section 4261. Similarly, 
     participation in a fractional ownership aircraft program does 
     not constitute ``aircraft ownership'' for purposes of this 
     standard. Amounts paid to a fractional ownership aircraft 
     program for transportation under such a program are exempt 
     from the ticket tax under section 4261(j) if the aircraft is 
     operating under subpart K of part 91 of title 14 of the Code 
     of Federal Regulations (``subpart K''), and flights under 
     such program are subject to both the fuel tax levied on non-
     commercial aviation an additional fuel surtax under section 
     4043 of the Code. A business arrangement seeking to 
     circumvent that surtax by operating outside of subpart K, 
     allowing an aircraft owner the right to use any of a fleet of 
     aircraft, be it through an aircraft interchange agreement, 
     through holding nominal shares in a fleet of aircraft, or any 
     other arrangement that does not reflect true tax ownership of 
     the aircraft being flown upon, is not considered ownership 
     for purposes of the provision.
---------------------------------------------------------------------------
       The provision provides a pro rata allocation rule in the 
     event that a monthly payment made to a management company is 
     allocated in part to exempt services and flights on the 
     aircraft owner's aircraft, and in part to flights on aircraft 
     other than the aircraft owner's. In such a circumstance, 
     Federal excise tax must be collected on that portion of the 
     payment attributable to flights on aircraft not owned by the 
     aircraft owner.
       Under the provision, a lessee of an aircraft is considered 
     an aircraft owner provided that the lease is not a 
     ``disqualified lease.'' A disqualified lease is any lease of 
     an aircraft from a management company (or a related party) 
     for a term of 31 days or less.
       Effective date.--The provision is effective for amounts 
     paid after the date of enactment.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
       Effective date.--The provision is effective for amounts 
     paid after the date of enactment.
     17. Opportunity zones (sec. 13823 of the Senate amendment and 
         new secs. 1400Z-1 and 1400Z-2 of the Code)


                              Present Law

       The Code occasionally has provided several incentives aimed 
     at encouraging economic growth and investment in distressed 
     communities by providing Federal tax benefits to businesses 
     located within designated boundaries.\1191\
---------------------------------------------------------------------------
     \1191\ Such designated areas were referred to as empowerment 
     zones, the District of Columbia Enterprise (``DC'') Zone, and 
     the Gulf Opportunity (``GO'') Zone, and each of these 
     designations and attendant tax incentives have expired. The 
     designations and tax incentives for the DC Zone, and the GO 
     Zone generally expired after December 31, 2011. 1400(f), 
     1400N(h), 1400N(c)(5), 1400N(a)(2)(D), 1400N(a)(7)(C), 
     1400N(d). The empowerment zones program and attendant tax 
     incentives expired as of December 31, 2016. Secs. 1391(d)(1), 
     There are also areas that were designated as renewal 
     communities under section 1400E which received tax benefits 
     that all expired as of December 31, 2009, except that a zero-
     percent capital gains rate applies with respect to gain from 
     the sale through December 31, 2014 of a qualified community 
     asset acquired after December 31, 2001, and before January 1, 
     2010 and held for more than five years. For more information 
     on these programs and attendant tax incentives, see Joint 
     Committee on Taxation, Incentives for Distressed Communities: 
     Empowerment Zones and Renewal Communities (JCX-38-09), 
     October 5, 2009.
---------------------------------------------------------------------------
       One of these incentives is a federal income tax credit that 
     is allowed in the aggregate amount of 39 percent of a 
     taxpayer investment in a qualified community development 
     entity (CDE).\1192\ In general, the credit is allowed to a 
     taxpayer who makes a ``qualified equity investment'' in a CDE 
     which further invests in a ``qualified active low-income 
     community business.'' CDEs are required to make investments 
     in low income communities (generally communities with 20 
     percent or greater poverty rate or median family income less 
     than 80 percent of statewide median). The credit is allowed 
     over seven years, five percent in each of the first three 
     years and six percent in each of the next four years. The 
     credit is recaptured if at any time during the seven-year 
     period that begins on the date of the original issue of the 
     investment the entity (1) ceases to be a qualified CDE, (2) 
     the proceeds of the investment cease to be used as required, 
     or (3) the equity investment is redeemed. The Department of 
     Treasury's Community Development Financial Institutions Fund 
     (``CDFI'') allocates the new markets tax credits.
---------------------------------------------------------------------------
     \1192\ Sec. 45D.
---------------------------------------------------------------------------
       The maximum annual amount of qualified equity investments 
     is $3.5 billion for calendar years 2010 through 2019. The new 
     markets tax credit is set to expire on December 31, 2019. No 
     amount of unused allocation limitation may be carried to any 
     calendar year after 2024.


                               House Bill

       No provision.


                            Senate Amendment

       The provision provides for the temporary deferral of 
     inclusion in gross income for capital gains reinvested in a 
     qualified opportunity fund and the permanent exclusion of 
     capital gains from the sale or exchange of an investment in 
     the qualified opportunity fund.
       The provision allows for the designation of certain low-
     income community population census tracts as qualified 
     opportunity zones, where low-income communities are defined 
     in Section 45D(e). The designation of a population census 
     tract as a qualified opportunity zone remains in effect for 
     the period beginning on the date of the designation and 
     ending at the close of the tenth calendar year beginning on 
     or after the date of designation.
       Governors may submit nominations for a limited number of 
     opportunity zones to the Secretary for certification and 
     designation. If the number of low-income communities in a 
     State is less than 100, the Governor may designate up to 25 
     tracts, otherwise the Governor may designate tracts not 
     exceeding 25 percent of the number of low-income communities 
     in the State. Governors are required to provide particular 
     consideration to areas that: (1) are currently the focus of 
     mutually reinforcing state, local, or private economic 
     development initiatives to attract investment and foster 
     startup activity; (2) have demonstrated success in 
     geographically targeted development programs such as promise 
     zones, the new markets tax credit, empowerment zones, and 
     renewal communities; and (3) have recently experienced 
     significant layoffs due to business closures or relocations.
       The provision provides two main tax incentives to encourage 
     investment in qualified opportunity zones. First, it allows 
     for the temporary deferral of inclusion in gross income for 
     capital gains that are reinvested in a qualified opportunity 
     fund. A qualified opportunity fund is an investment vehicle 
     organized as a corporation or a partnership for the purpose 
     of investing in qualified opportunity zone property (other 
     than another qualified opportunity fund) that holds at least 
     90 percent of its assets in qualified opportunity zone 
     property. The provision intends that the certification 
     process for a qualified opportunity fund will be done in a 
     manner similar to the process for allocating the new markets 
     tax credit. The provision provides the Secretary authority to 
     carry out the process.
       If a qualified opportunity fund fails to meet the 90 
     percent requirement and unless the fund establishes 
     reasonable cause, the fund is required to pay a monthly 
     penalty of the excess of the amount equal to 90 percent of 
     its aggregate assets, over the aggregate amount of qualified 
     opportunity zone property held by the fund multiplied by the 
     underpayment rate in the Code. If the fund is a partnership, 
     the penalty is taken into account proportionately as part of 
     each partner's distributive share.
       Qualified opportunity zone property includes: any qualified 
     opportunity zone stock, any qualified opportunity zone 
     partnership interest, and any qualified opportunity zone 
     business property.
       The maximum amount of the deferred gain is equal to the 
     amount invested in a qualified opportunity fund by the 
     taxpayer during the 180-day period beginning on the date of 
     sale of the asset to which the deferral pertains. For amounts 
     of the capital gains that exceed the maximum deferral amount, 
     the capital gains must be recognized and included in gross 
     income as under present law.
       If the investment in the qualified opportunity zone fund is 
     held by the taxpayer for at least five years, the basis on 
     the original gain is increased by 10 percent of the original 
     gain. If the opportunity zone asset or investment is held by 
     the taxpayer for at least seven years, the basis on the 
     original gain is increased by an additional 5 percent of the 
     original gain. The deferred gain is recognized on the earlier 
     of the date on which the qualified opportunity zone 
     investment is disposed of or December 31, 2026. Only 
     taxpayers who rollover capital gains of non-zone assets 
     before December 31, 2026, will be able to take advantage of 
     the special treatment of capital gains for non-zone and zone 
     realizations under the provision.
       The basis of an investment in a qualified opportunity zone 
     fund immediately after its acquisition is zero. If the 
     investment is held by the taxpayer for at least five years, 
     the basis on the investment is increased by 10 percent of the 
     deferred gain. If the investment is held by the taxpayer for 
     at least seven years, the basis on the investment is 
     increased by an additional five percent of the deferred gain. 
     If the investment is held by the taxpayer until at least 
     December 31, 2026, the basis in the investment increases by 
     the remaining 85 percent of the deferred gain.
       The second main tax incentive in the bill excludes from 
     gross income the post-acquisition capital gains on 
     investments in opportunity zone funds that are held for at 
     least 10 years. Specifically, in the case of the sale or 
     exchange of an investment in a qualified opportunity zone 
     fund held for more than 10 years, at the election of the 
     taxpayer the basis of such investment in the hands of the 
     taxpayer shall be the fair market value of the investment at 
     the date of such sale or exchange. Taxpayers can continue to 
     recognize losses associated with investments in qualified 
     opportunity zone funds as under current law.
       The Secretary or the Secretary's delegate is required to 
     report annually to Congress on the opportunity zone 
     incentives beginning 5 years after the date of enactment. The 
     report is to include an assessment of investments held by the 
     qualified opportunity fund nationally and at the State level. 
     To the extent the information is available, the report is to 
     include the number of qualified opportunity funds, the amount 
     of assets held in qualified opportunity funds, the 
     composition of qualified opportunity fund investments by 
     asset class, and the percentage of qualified opportunity zone 
     census tracts designated under the provision that have 
     received qualified opportunity fund investments. The report 
     is also to include an assessment of the impacts and outcomes 
     of the investments in those areas on economic indicators 
     including job creation, poverty reduction and new business 
     starts, and other metrics as determined by the Secretary.

[[Page 20026]]

       Effective date.--The provision is effective on the date of 
     enactment.


                          Conference Agreement

       The conference agreement generally follows the Senate 
     amendment with the following modifications. First, the 
     provision provides that each population census tract in each 
     U.S. possession that is a low-income community is deemed 
     certified and designated as a qualified opportunity zone 
     effective on the date of enactment. Second, the provision 
     clarifies that chief executive officer of the State (which 
     includes the District of Columbia) may submit nominations for 
     a limited number of opportunity zones to the Secretary for 
     certification and designation. This change clarifies that the 
     mayor of the District of Columbia may also submit 
     nominations. Third, the provision clarifies that there is no 
     gain deferral available with respect to any sale or exchange 
     made after December 31, 2026, and there is no exclusion 
     available for investments in qualified opportunity zones made 
     after December 31, 2026. The agreement also makes some 
     technical changes to the Senate amendment to make it clear 
     which taxpayer may claim the tax benefits.
     18. Provisions relating to the low-income housing credit 
         (secs. 13411 and 13412 of the Senate amendment and sec. 
         42 of the Code)


                              Present Law

     In general
       The low-income housing credit may be claimed over a 10-year 
     period for the cost of building rental housing a sufficient 
     portion of which is rent restricted and occupied by tenants 
     having incomes below specified levels.\1193\ Qualified basis 
     is the low-income portion of the building times the eligible 
     basis. The amount of the credit for any taxable year in the 
     credit period is the applicable percentage of the qualified 
     basis of each qualified low-income building. The applicable 
     percentage for new buildings that are not Federally 
     subsidized, is computed to yield a present value of 70 
     percent of the qualified basis over a 10-year period. For 
     other buildings the applicable percentage is calculated to 
     yield 30 percent. Rehabilitation expenses are treated as a 
     separate new building.
---------------------------------------------------------------------------
     \1193\ Sec. 42.
---------------------------------------------------------------------------
     Increase in credit for certain high cost areas
       In the case of a building located in a qualified census 
     tract or difficult development area, the eligible basis of a 
     building is 130 percent of eligible basis. This ``basis boost 
     also applies to rehabilitation expenditures that are treated 
     as a separate new building.
       A ``difficult development area'' is an area designated by 
     the Secretary of Housing and Urban Development (``HUD'') as 
     having high construction, land, and utility costs relative to 
     the area's median income. The portions of metropolitan 
     statistical areas that may be designated for this purpose 
     cannot exceed an aggregate area having 20 percent of the 
     population of such metropolitan statistical areas. A 
     comparable rule applies to nonmetropolitan areas.
       A ``qualified census tract'' means any census tract which 
     is designated by HUD in which either: (1) 50 percent or more 
     of the households have an income which is less than 60 
     percent of the area median income for the year; or (2) the 
     poverty rate in that tract is 25 percent. The portion of a 
     metropolitan statistical area that may be designated for this 
     purpose cannot exceed an area having 20 percent of the 
     population of such metropolitan statistical area. Each 
     metropolitan statistical area is treated as a separate area 
     and all nonmetropolitan areas in a State are treated as one 
     area.
       In addition, a building which is designated by a State 
     housing credit agency as requiring an increase in credit to 
     be financially feasible is treated as located in a HUD-
     designated difficult development area. This rule does not 
     apply to a building if any portion of the eligible basis is 
     financed with tax-exempt bonds.
     General public use
       In order to be eligible for the low-income housing credit, 
     the residential units in a qualified low-income housing 
     project must be available for use by the general public. A 
     project is available for general public use if the project 
     complies with housing non-discrimination policies including 
     those set forth in the Fair Housing Act (42 U.S.C. sec. 3601) 
     and (2) the project does not restrict occupancy based on 
     membership in a social organization or employment by specific 
     employers. In addition, any residential unit that is part of 
     a hospital, nursing home, sanitarium, lifecare facility, 
     trailer park, or intermediate care facility for the mentally 
     or physically handicapped is not available for use by the 
     general public.
       However, a project that otherwise meets the general public 
     use requirements above shall not fail to meet the general 
     public use requirement solely because of occupancy 
     restrictions or preferences that favor tenants with (1) 
     special needs; (2) who are members of a specified group under 
     a Federal program or State program or policy that supports 
     housing for such specified group; or (3) who are involved in 
     artistic or literary activities.


                               House Bill

       No provision.


                            Senate Amendment

     Treatment of veterans' preference as not violating general 
         public use requirements
       The provision replaces the exception to the general public 
     use requirement for tenants engaged in artistic and literary 
     activities with an exception for veterans.
     Increase in credit for certain rural housing
       For buildings eligible for the 70 percent present-value 
     credit, the provision makes two changes. First, the provision 
     treats such buildings located in rural areas (as defined in 
     section 520 of the Fair Housing Act of 1949) as located in a 
     HUD-designated difficult development area. Second, the 
     provision reduces the eligible basis for difficult to develop 
     areas and qualified census tracts from 130 percent to 125 
     percent.\1194\
---------------------------------------------------------------------------
     \1194\ A correction to the language is needed to conform to 
     the intent that the change be limited to buildings eligible 
     for the 70 percent credit only.
---------------------------------------------------------------------------
       Effective date.--The provisions generally apply to 
     buildings placed in service after the date of enactment. The 
     changes related to the treatment of a veterans preference as 
     not violating general public use requirements applies to 
     buildings placed in service before, on, or after the date of 
     enactment.


                          Conference Agreement

       The conference agreement does not follow the Senate 
     amendment provisions.

                          EXEMPT ORGANIZATIONS

                    A. Unrelated Business Income Tax

     1. Clarification of unrelated business income tax treatment 
         of entities exempt from tax under section 501(a) (sec. 
         5001 of the House bill and sec. 511 of the Code)


                              Present Law

     Tax exemption for certain organizations
       Section 501(a) exempts certain organizations from Federal 
     income tax. Such organizations include: (1) tax-exempt 
     organizations described in section 501(c) (including among 
     others section 501(c)(3) charitable organizations and section 
     501(c)(4) social welfare organizations); (2) religious and 
     apostolic organizations described in section 501(d); and (3) 
     trusts forming part of a pension, profit-sharing, or stock 
     bonus plan of an employer described in section 401(a).
       Section 115 excludes from gross income certain income of 
     entities that perform an essential government function. The 
     exemption applies to: (1) income derived from any public 
     utility or the exercise of any essential governmental 
     function and accruing to a State or any political subdivision 
     thereof, or the District of Columbia; or (2) income accruing 
     to the government of any possession of the United States, or 
     any political subdivision thereof.
     Unrelated business income tax, in general
       An exempt organization generally may have revenue from four 
     sources: contributions, gifts, and grants; trade or business 
     income that is related to exempt activities (e.g., program 
     service revenue); investment income; and trade or business 
     income that is not related to exempt activities. The Federal 
     income tax exemption generally extends to the first three 
     categories, and does not extend to an organization's 
     unrelated trade or business income. In some cases, however, 
     the investment income of an organization is taxed as if it 
     were unrelated trade or business income.\1195\
---------------------------------------------------------------------------
     \1195\ This is the case for social clubs (sec. 501(c)(7)), 
     voluntary employees' beneficiary associations (sec. 
     501(c)(9)), and organizations and trusts described in 
     sections 501(c)(17) and 501(c)(20). Sec. 512(a)(3).
---------------------------------------------------------------------------
       The unrelated business income tax (``UBIT'') generally 
     applies to income derived from a trade or business regularly 
     carried on by the organization that is not substantially 
     related to the performance of the organization's tax-exempt 
     functions.\1196\ An organization that is subject to UBIT and 
     that has $1,000 or more of gross unrelated business taxable 
     income must report that income on Form 990-T (Exempt 
     Organization Business Income Tax Return).
---------------------------------------------------------------------------
     \1196\ Secs. 511-514.
---------------------------------------------------------------------------
       Most exempt organizations may operate an unrelated trade or 
     business so long as the organization remains primarily 
     engaged in activities that further its exempt purposes. 
     Therefore, an organization may engage in a substantial amount 
     of unrelated business activity without jeopardizing exempt 
     status. A section 501(c)(3) (charitable) organization, 
     however, may not operate an unrelated trade or business as a 
     substantial part of its activities.\1197\ Therefore, the 
     unrelated trade or business activity of a section 501(c)(3) 
     organization must be insubstantial.
---------------------------------------------------------------------------
     \1197\ Treas. Reg. sec. 1.501(c)(3)-1(e).
---------------------------------------------------------------------------
     Organizations subject to tax on unrelated business income
       Most exempt organizations are subject to the tax on 
     unrelated business income. Specifically, organizations 
     subject to the unrelated business income tax generally 
     include: (1) organizations exempt from tax under section 
     501(a), including organizations described

[[Page 20027]]

     in section 501(c) (except for U.S. instrumentalities and 
     certain charitable trusts); \1198\ (2) qualified pension, 
     profit-sharing, and stock bonus plans described in section 
     401(a); \1199\ and (3) certain State colleges and 
     universities.\1200\
---------------------------------------------------------------------------
     \1198\ Sec. 511(a)(2)(A).
     \1199\ Sec. 511(a)(2)(A).
     \1200\ Sec. 511(a)(2)(B).
---------------------------------------------------------------------------


                               House Bill

       The provision clarifies that an organization does not fail 
     to be subject to tax on its unrelated business income as an 
     organization exempt from tax under section 501(a) solely 
     because the organization also is exempt, or excludes amounts 
     from gross income, by reason of another provision of the 
     Code. For example, if an organization is described in section 
     401(a) (and thus is exempt from tax under section 501(a)) and 
     its income also is described in section 115 (relating to the 
     exclusion from gross income of certain income derived from 
     the exercise of an essential governmental function), its 
     status under section 115 does not cause it to be exempt from 
     tax on its unrelated business income.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     2. Exclusion of research income from unrelated business 
         taxable income limited to publicly available research 
         (sec. 5002 of the House bill and sec. 512(b)(9) of the 
         Code)


                              Present Law

     Tax exemption for certain organizations
       Section 501(a) exempts certain organizations from Federal 
     income tax. Such organizations include: (1) tax-exempt 
     organizations described in section 501(c) (including among 
     others section 501(c)(3) charitable organizations and section 
     501(c)(4) social welfare organizations); (2) religious and 
     apostolic organizations described in section 501(d); and (3) 
     trusts forming part of a pension, profit-sharing, or stock 
     bonus plan of an employer described in section 401(a).
     Unrelated business income tax, in general
       The unrelated business income tax (``UBIT'') generally 
     applies to income derived from a trade or business regularly 
     carried on by the organization that is not substantially 
     related to the performance of the organization's tax-exempt 
     functions.\1201\ An organization that is subject to UBIT and 
     that has $1,000 or more of gross unrelated business taxable 
     income must report that income on Form 990-T (Exempt 
     Organization Business Income Tax Return).
---------------------------------------------------------------------------
     \1201\ Secs. 511-514.
---------------------------------------------------------------------------
       Most exempt organizations may operate an unrelated trade or 
     business so long as the organization remains primarily 
     engaged in activities that further its exempt purposes. 
     Therefore, an organization may engage in a substantial amount 
     of unrelated business activity without jeopardizing exempt 
     status. A section 501(c)(3) (charitable) organization, 
     however, may not operate an unrelated trade or business as a 
     substantial part of its activities.\1202\ Therefore, the 
     unrelated trade or business activity of a section 501(c)(3) 
     organization must be insubstantial.
---------------------------------------------------------------------------
     \1202\ Treas. Reg. sec. 1.501(c)(3)-1(e).
---------------------------------------------------------------------------
     Organizations subject to tax on unrelated business income
       Most exempt organizations are subject to the tax on 
     unrelated business income. Specifically, organizations 
     subject to the unrelated business income tax generally 
     include: (1) organizations exempt from tax under section 
     501(a), including organizations described in section 501(c) 
     (except for U.S. instrumentalities and certain charitable 
     trusts); \1203\ (2) qualified pension, profit-sharing, and 
     stock bonus plans described in section 401(a); \1204\ and (3) 
     certain State colleges and universities.\1205\
---------------------------------------------------------------------------
     \1203\ Sec. 511(a)(2)(A).
     \1204\ Sec. 511(a)(2)(A).
     \1205\ Sec. 511(a)(2)(B).
---------------------------------------------------------------------------
     Exclusions from unrelated business taxable income
       In general
       Certain types of income are specifically exempt from 
     unrelated business taxable income, such as dividends, 
     interest, royalties, and certain rents,\1206\ unless derived 
     from debt-financed property or from certain 50-percent 
     controlled subsidiaries.\1207\ Other exemptions from UBIT are 
     provided for activities in which substantially all the work 
     is performed by volunteers, for income from the sale of 
     donated goods, and for certain activities carried on for the 
     convenience of members, students, patients, officers, or 
     employees of a charitable organization. In addition, special 
     UBIT provisions exempt from tax activities of trade shows and 
     State fairs, income from bingo games, and income from the 
     distribution of low-cost items incidental to the solicitation 
     of charitable contributions. Organizations liable for tax on 
     unrelated business taxable income may be liable for 
     alternative minimum tax determined after taking into account 
     adjustments and tax preference items.
---------------------------------------------------------------------------
     \1206\ Secs. 511-514.
     \1207\ Sec. 512(b)(13).
---------------------------------------------------------------------------
       Research income
       Certain income derived from research activities of exempt 
     organizations is excluded from unrelated business taxable 
     income. For example, income derived from research performed 
     for the United States, a State, and certain agencies and 
     subdivisions is excluded.\1208\ Income from research 
     performed by a college, university, or hospital for any 
     person also is excluded.\1209\ Finally, if an organization is 
     operated primarily for purposes of carrying on fundamental 
     research the results of which are freely available to the 
     general public, all income derived by research performed by 
     such organization for any person, not just income derived 
     from research available to the general public, is 
     excluded.\1210\
---------------------------------------------------------------------------
     \1208\ Sec. 512(b)(7).
     \1209\ Sec. 512(b)(8).
     \1210\ Sec. 512(b)(9).
---------------------------------------------------------------------------


                               House Bill

       The provision modifies the exclusion of income from 
     research performed by an organization operated primarily for 
     purposes of carrying on fundamental research the results of 
     which are freely available to the general public (section 
     512(b)(9)). Under the provision, the organization may exclude 
     from unrelated business taxable income under section 
     512(b)(9) only income from such fundamental research the 
     results of which are freely available to the general public.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     3. Unrelated business taxable income separately computed for 
         each trade or business activity (sec. 13703 of the Senate 
         amendment and sec. 512(a) of the Code)


                              Present Law

     Tax exemption for certain organizations
       Section 501(a) exempts certain organizations from Federal 
     income tax. Such organizations include: (1) tax-exempt 
     organizations described in section 501(c) (including among 
     others section 501(c)(3) charitable organizations and section 
     501(c)(4) social welfare organizations); (2) religious and 
     apostolic organizations described in section 501(d); and (3) 
     trusts forming part of a pension, profit-sharing, or stock 
     bonus plan of an employer described in section 401(a).
     Unrelated business income tax, in general
       An exempt organization generally may have revenue from four 
     sources: contributions, gifts, and grants; trade or business 
     income that is related to exempt activities (e.g., program 
     service revenue); investment income; and trade or business 
     income that is not related to exempt activities. The Federal 
     income tax exemption generally extends to the first three 
     categories, and does not extend to an organization's 
     unrelated trade or business income. In some cases, however, 
     the investment income of an organization is taxed as if it 
     were unrelated trade or business income.\1211\
---------------------------------------------------------------------------
     \1211\ This is the case for social clubs (sec. 501(c)(7)), 
     voluntary employees' beneficiary associations (sec. 
     501(c)(9)), and organizations and trusts described in 
     sections 501(c)(17) and 501(c)(20). Sec. 512(a)(3).
---------------------------------------------------------------------------
       The unrelated business income tax (``UBIT'') generally 
     applies to income derived from a trade or business regularly 
     carried on by the organization that is not substantially 
     related to the performance of the organization's tax-exempt 
     functions.\1212\ An organization that is subject to UBIT and 
     that has $1,000 or more of gross unrelated business taxable 
     income must report that income on Form 990-T (Exempt 
     Organization Business Income Tax Return).
---------------------------------------------------------------------------
     \1212\ Secs. 511-514.
---------------------------------------------------------------------------
       Most exempt organizations may operate an unrelated trade or 
     business so long as the organization remains primarily 
     engaged in activities that further its exempt purposes. 
     Therefore, an organization may engage in a substantial amount 
     of unrelated business activity without jeopardizing exempt 
     status. A section 501(c)(3) (charitable) organization, 
     however, may not operate an unrelated trade or business as a 
     substantial part of its activities.\1213\ Therefore, the 
     unrelated trade or business activity of a section 501(c)(3) 
     organization must be insubstantial.
---------------------------------------------------------------------------
     \1213\ Treas. Reg. sec. 1.501(c)(3)-1(e).
---------------------------------------------------------------------------
     Organizations subject to tax on unrelated business income
       Most exempt organizations are subject to the tax on 
     unrelated business income. Specifically, organizations 
     subject to the unrelated business income tax generally 
     include: (1) organizations exempt from tax under section 
     501(a), including organizations described in section 501(c) 
     (except for U.S. instrumentalities and certain charitable 
     trusts); \1214\ (2) qualified pension, profit-sharing, and 
     stock bonus plans described in section 401(a); \1215\ and (3) 
     certain State colleges and universities.\1216\
---------------------------------------------------------------------------
     \1214\ Sec. 511(a)(2)(A).
     \1215\ Sec. 511(a)(2)(A).
     \1216\ Sec. 511(a)(2)(B).

[[Page 20028]]


     Exclusions from Unrelated Business Taxable Income
       Certain types of income are specifically exempt from 
     unrelated business taxable income, such as dividends, 
     interest, royalties, and certain rents,\1217\ unless derived 
     from debt-financed property or from certain 50-percent 
     controlled subsidiaries.\1218\ Other exemptions from UBIT are 
     provided for activities in which substantially all the work 
     is performed by volunteers, for income from the sale of 
     donated goods, and for certain activities carried on for the 
     convenience of members, students, patients, officers, or 
     employees of a charitable organization. In addition, special 
     UBIT provisions exempt from tax activities of trade shows and 
     State fairs, income from bingo games, and income from the 
     distribution of low-cost items incidental to the solicitation 
     of charitable contributions. Organizations liable for tax on 
     unrelated business taxable income may be liable for 
     alternative minimum tax determined after taking into account 
     adjustments and tax preference items.
---------------------------------------------------------------------------
     \1217\ Secs. 511-514.
     \1218\ Sec. 512(b)(13).
---------------------------------------------------------------------------
     Specific deduction against unrelated business taxable income
       In computing unrelated business taxable income, an exempt 
     organization may take a specific deduction of $1,000. This 
     specific deduction may not be used to create a net operating 
     loss that will be carried back or forward to another 
     year.\1219\
---------------------------------------------------------------------------
     \1219\ Sec. 512(b)(12).
---------------------------------------------------------------------------
       In the case of a diocese, province or religious order, or a 
     convention or association of churches, a specific deduction 
     is allowed with respect to each parish, individual church, 
     district, or other local unit. The specific deduction is 
     equal to the lower of $1,000 or the gross income derived from 
     any unrelated trade or business regularly carried on by the 
     local unit.\1220\
---------------------------------------------------------------------------
     \1220\ Ibid.
---------------------------------------------------------------------------
     Operation of multiple unrelated trades or businesses
       An organization determines its unrelated business taxable 
     income by subtracting from its gross unrelated business 
     income deductions directly connected with the unrelated trade 
     or business.\1221\ Under regulations, in determining 
     unrelated business taxable income, an organization that 
     operates multiple unrelated trades or businesses aggregates 
     income from all such activities and subtracts from the 
     aggregate gross income the aggregate of deductions.\1222\ As 
     a result, an organization may use a deduction from one 
     unrelated trade or business to offset income from another, 
     thereby reducing total unrelated business taxable income.
---------------------------------------------------------------------------
     \1221\ Sec. 512(a).
     \1222\ Treas. Reg. sec. 1.512(a)-1(a).
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       For an organization with more than one unrelated trade or 
     business, the provision requires that unrelated business 
     taxable income first be computed separately with respect to 
     each trade or business and without regard to the specific 
     deduction generally allowed under section 512(b)(12). The 
     organization's unrelated business taxable income for a 
     taxable year is the sum of the amounts (not less than zero) 
     computed for each separate unrelated trade or business, less 
     the specific deduction allowed under section 512(b)(12). A 
     net operating loss deduction is allowed only with respect to 
     a trade or business from which the loss arose.
       The result of the provision is that a deduction from one 
     trade or business for a taxable year may not be used to 
     offset income from a different unrelated trade or business 
     for the same taxable year. The provision generally does not, 
     however, prevent an organization from using a deduction from 
     one taxable year to offset income from the same unrelated 
     trade or business activity in another taxable year, where 
     appropriate.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017. Under a special 
     transition rule, net operating losses arising in a taxable 
     year beginning before January 1, 2018, that are carried 
     forward to a taxable year beginning on or after such date are 
     not subject to the rule of the provision.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

                            B. Excise Taxes

     1. Simplification of excise tax on private foundation 
         investment income (sec. 5101 of the House bill and sec. 
         4940 of the Code)


                              Present Law

     Excise tax on the net investment income of private 
         foundations
       Under section 4940(a), private foundations that are 
     recognized as exempt from Federal income tax under section 
     501(a) (other than exempt operating foundations \1223\) are 
     subject to a two-percent excise tax on their net investment 
     income. Net investment income generally includes interest, 
     dividends, rents, royalties (and income from similar 
     sources), and capital gain net income, and is reduced by 
     expenses incurred to earn this income. The two-percent rate 
     of tax is reduced to one-percent in any year in which a 
     foundation exceeds the average historical level of its 
     charitable distributions. Specifically, the excise tax rate 
     is reduced if the foundation's qualifying distributions 
     (generally, amounts paid to accomplish exempt purposes) 
     \1224\ equal or exceed the sum of (1) the amount of the 
     foundation's assets for the taxable year multiplied by the 
     average percentage of the foundation's qualifying 
     distributions over the five taxable years immediately 
     preceding the taxable year in question, and (2) one percent 
     of the net investment income of the foundation for the 
     taxable year.\1225\ In addition, the foundation cannot have 
     been subject to tax in any of the five preceding years for 
     failure to meet minimum qualifying distribution requirements 
     in section 4942.
---------------------------------------------------------------------------
     \1223\ Sec. 4940(d)(1). Exempt operating foundations 
     generally include organizations such as museums or libraries 
     that devote their assets to operating charitable programs but 
     have difficulty meeting the ``public support'' tests 
     necessary not to be classified as a private foundation. To be 
     an exempt operating foundation, an organization must: (1) be 
     an operating foundation (as defined in section 4942(j)(3)); 
     (2) be publicly supported for at least 10 taxable years; (3) 
     have a governing body no more than 25 percent of whom are 
     disqualified persons and that is broadly representative of 
     the general public; and (4) have no officers who are 
     disqualified persons. Sec. 4940(d)(2).
     \1224\ Sec. 4942(g).
     \1225\ Sec. 4940(e).
---------------------------------------------------------------------------
       Private foundations that are not exempt from tax under 
     section 501(a), such as certain charitable trusts, are 
     subject to an excise tax under section 4940(b). The tax 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 tax on unrelated 
     business income 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.
       Private foundations are required to make a minimum amount 
     of qualifying distributions each year to avoid tax under 
     section 4942. The minimum amount of qualifying distributions 
     a foundation has to make to avoid tax under section 4942 is 
     reduced by the amount of section 4940 excise taxes 
     paid.\1226\
---------------------------------------------------------------------------
     \1226\ Sec. 4942(d)(2).
---------------------------------------------------------------------------


                               House Bill

       The provision replaces the two rates of excise tax on tax-
     exempt private foundations with a single rate of tax of 1.4 
     percent. Thus, under the provision, a tax-exempt private 
     foundation generally is subject to an excise tax of 1.4 
     percent on its net investment income. A taxable private 
     foundation is subject to an excise tax equal to the excess 
     (if any) of the sum of the 1.4-percent net investment income 
     excise tax and the amount of the tax on unrelated business 
     income (both calculated as if the foundation were tax-
     exempt), over the income tax imposed on the foundation. The 
     provision repeals the special reduced excise tax rate for 
     private foundations that exceed their historical level of 
     qualifying distributions.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     2. Private operating foundation requirements relating to 
         operation of an art museum (sec. 5102 of the House bill 
         and sec. 4942(j) of the Code)


                              Present Law

     Public charities and private foundations
       An organization qualifying for tax-exempt status under 
     section 501(c)(3) is further classified as either a public 
     charity or a private foundation. An organization may qualify 
     as a public charity in several ways.\1227\ Certain 
     organizations are classified as public charities per se, 
     regardless of their sources of support. These include 
     churches, certain schools, hospitals and other medical 
     organizations, certain organizations providing assistance to 
     colleges and universities, and governmental units.\1228\ 
     Other organizations qualify as public charities because they 
     are broadly publicly supported. First, a charity may qualify 
     as publicly supported if at least one-third of its total 
     support is from gifts, grants, or other contributions from 
     governmental units or the general public.\1229\ 
     Alternatively, it may qualify as publicly supported if it 
     receives more than one-third of its total support from a 
     combination of gifts, grants, and contributions from 
     governmental units and the public plus revenue arising from 
     activities related to its exempt purposes (e.g., fee for 
     service income). In addition, this category of public charity 
     must not rely excessively on endowment income as a source of 
     support.\1230\ A supporting organization, i.e., an 
     organization that provides

[[Page 20029]]

     support to another section 501(c)(3) entity that is not a 
     private foundation and meets certain other requirements of 
     the Code, also is classified as a public charity.\1231\
---------------------------------------------------------------------------
     \1227\ The Code does not expressly define the term ``public 
     charity,'' but rather provides exceptions to those entities 
     that are treated as private foundations.
     \1228\ Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) 
     through (iv) for a description of these organizations).
     \1229\ Treas. Reg. sec. 1.170A-9(f)(2). Failing this 
     mechanical test, the organization may qualify as a public 
     charity if it passes a ``facts and circumstances'' test. 
     Treas. Reg. sec. 1.170A-9(f)(3).
     \1230\ To meet this requirement, the organization must 
     normally receive more than one-third of its support from a 
     combination of (1) gifts, grants, contributions, or 
     membership fees and (2) certain gross receipts from 
     admissions, sales of merchandise, performance of services, 
     and furnishing of facilities in connection with activities 
     that are related to the organization's exempt purposes. Sec. 
     509(a)(2)(A). In addition, the organization must not normally 
     receive more than one-third of its public support in each 
     taxable year from the sum of (1) gross investment income and 
     (2) the excess of unrelated business taxable income as 
     determined under section 512 over the amount of unrelated 
     business income tax imposed by section 511. Sec. 
     509(a)(2)(B).
     \1231\ Sec. 509(a)(3). Supporting organizations are further 
     classified as Type I, II, or III depending on the 
     relationship they have with the organizations they support. 
     Supporting organizations must support public charities listed 
     in one of the other categories (i.e., per se public 
     charities, broadly supported public charities, or revenue 
     generating public charities), and they are not permitted to 
     support other supporting organizations or testing for public 
     safety organizations.
     Organizations organized and operated exclusively for testing 
     for public safety also are classified as public charities. 
     Sec. 509(a)(4). Such organizations, however, are not eligible 
     to receive deductible charitable contributions under section 
     170.
---------------------------------------------------------------------------
       A section 501(c)(3) organization that does not fit within 
     any of the above categories is a private foundation. In 
     general, private foundations receive funding from a limited 
     number of sources (e.g., an individual, a family, or a 
     corporation).
       The deduction for charitable contributions to private 
     foundations is in some instances less generous than the 
     deduction for charitable contributions to public charities. 
     In addition, private foundations are subject to a number of 
     operational rules and restrictions that do not apply to 
     public charities.\1232\
---------------------------------------------------------------------------
     \1232\ Unlike public charities, private foundations are 
     subject to tax on their net investment income at a rate of 
     two percent (one percent in some cases). Sec. 4940. Private 
     foundations also are subject to more restrictions on their 
     activities than are public charities. For example, private 
     foundations are prohibited from engaging in self-dealing 
     transactions (sec. 4941), are required to make a minimum 
     amount of charitable distributions each year, (sec. 4942), 
     are limited in the extent to which they may control a 
     business (sec. 4943), may not make speculative investments 
     (sec. 4944), and may not make certain expenditures (sec. 
     4945). Violations of these rules result in excise taxes on 
     the foundation and, in some cases, may result in excise taxes 
     on the managers of the foundation.
---------------------------------------------------------------------------
     Tax on failure to distribute income by private nonoperating 
         foundations
       Private nonoperating foundations are required to pay out a 
     minimum amount each year as qualifying distributions.\1233\ 
     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.\1234\ Failure to pay out the minimum required 
     amount results in an initial excise tax on the foundation of 
     30 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.\1235\ 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.\1236\
---------------------------------------------------------------------------
     \1233\ Sec. 4942.
     \1234\ Sec. 4942(g)(1)(A).
     \1235\ Sec. 4942(a) and (b). Taxes imposed may be abated if 
     certain conditions are met. Secs. 4961 and 4962.
     \1236\ 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).
---------------------------------------------------------------------------
     Private operating foundations
       The tax on failure to distribute income does not apply to 
     the undistributed income of a private foundation for any 
     taxable year for which it is an operating foundation.\1237\ 
     Private operating foundations generally operate their own 
     charitable programs directly, rather than serving primarily 
     as a grantmaking entity.
---------------------------------------------------------------------------
     \1237\ Sec. 4942(a)(1).
---------------------------------------------------------------------------
       Private operating foundations must satisfy several tests 
     designed to distinguish them from nonoperating (grantmaking) 
     foundations. First, an operating foundation generally must 
     make qualifying distributions for the direct conduct of 
     activities that are related to its exempt purpose (as opposed 
     to making such distributions in the form of grants to other 
     charities) equal to 85 percent of the lesser of its adjusted 
     net income or its minimum investment return, each as defined 
     under section 4942.\1238\ In addition, an operating 
     foundation must satisfy one of the following three 
     alternative tests: (1) an asset test, under which 
     substantially more than half of the organization's assets 
     (generally, 65 percent) are devoted to the direct conduct of 
     exempt activities or to functionally related businesses; (2) 
     an endowment test, under which the organization normally 
     makes qualifying distributions for the direct conduct of 
     activities related to its exempt purpose in an amount not 
     less than two-thirds of its minimum investment return; or (3) 
     a support test, under which the organization must meet 
     certain measures to show that it receives public 
     support.\1239\
---------------------------------------------------------------------------
     \1238\ Sec. 4942(j)(3)(A); Treas. Reg. sec. 53.4942(b)-1(c).
     \1239\ Sec. 4942(j)(3)(B).
---------------------------------------------------------------------------


                               House Bill

       Under the provision, an organization that operates an art 
     museum as a substantial activity does not qualify as a 
     private operating foundation unless the museum is open during 
     normal business hours to the public for at least 1,000 hours 
     during the taxable year.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     3. Excise tax based on investment income of private colleges 
         and universities (sec. 5103 of the House bill, sec. 13701 
         of the Senate amendment, and new sec. 4968 of the Code)


                              Present Law

     Public charities and private foundations
       An organization qualifying for tax-exempt status under 
     section 501(c)(3) is further classified as either a public 
     charity or a private foundation. An organization may qualify 
     as a public charity in several ways.\1240\ Certain 
     organizations are classified as public charities per se, 
     regardless of their sources of support. These include 
     churches, certain schools, hospitals and other medical 
     organizations, certain organizations providing assistance to 
     colleges and universities, and governmental units.\1241\ 
     Other organizations qualify as public charities because they 
     are broadly publicly supported. First, a charity may qualify 
     as publicly supported if at least one-third of its total 
     support is from gifts, grants or other contributions from 
     governmental units or the general public.\1242\ 
     Alternatively, it may qualify as publicly supported if it 
     receives more than one-third of its total support from a 
     combination of gifts, grants, and contributions from 
     governmental units and the public plus revenue arising from 
     activities related to its exempt purposes (e.g., fee for 
     service income). In addition, this category of public charity 
     must not rely excessively on endowment income as a source of 
     support.\1243\ A supporting organization, i.e., an 
     organization that provides support to another section 
     501(c)(3) entity that is not a private foundation and meets 
     the requirements of the Code, also is classified as a public 
     charity.\1244\
---------------------------------------------------------------------------
     \1240\ The Code does not expressly define the term ``public 
     charity,'' but rather provides exceptions to those entities 
     that are treated as private foundations.
     \1241\ Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) 
     through (iv) for a description of these organizations).
     \1242\ Treas. Reg. sec. 1.170A-9(f)(2). Failing this 
     mechanical test, the organization may qualify as a public 
     charity if it passes a ``facts and circumstances'' test. 
     Treas. Reg. sec. 1.170A-9(f)(3).
     \1243\ To meet this requirement, the organization must 
     normally receive more than one-third of its support from a 
     combination of (1) gifts, grants, contributions, or 
     membership fees and (2) certain gross receipts from 
     admissions, sales of merchandise, performance of services, 
     and furnishing of facilities in connection with activities 
     that are related to the organization's exempt purposes. Sec. 
     509(a)(2)(A). In addition, the organization must not normally 
     receive more than one-third of its public support in each 
     taxable year from the sum of (1) gross investment income and 
     (2) the excess of unrelated business taxable income as 
     determined under section 512 over the amount of unrelated 
     business income tax imposed by section 511. Sec. 
     509(a)(2)(B).
     \1244\ Sec. 509(a)(3). Supporting organizations are further 
     classified as Type I, II, or III depending on the 
     relationship they have with the organizations they support. 
     Supporting organizations must support public charities listed 
     in one of the other categories (i.e., per se public 
     charities, broadly supported public charities, or revenue 
     generating public charities), and they are not permitted to 
     support other supporting organizations or testing for public 
     safety organizations.
     Organizations organized and operated exclusively for testing 
     for public safety also are classified as public charities. 
     Sec. 509(a)(4). Such organizations, however, are not eligible 
     to receive deductible charitable contributions under section 
     170.
---------------------------------------------------------------------------
       A section 501(c)(3) organization that does not fit within 
     any of the above categories is a private foundation. In 
     general, private foundations receive funding from a limited 
     number of sources (e.g., an individual, a family, or a 
     corporation).
       The deduction for charitable contributions to private 
     foundations is in some instances less generous than the 
     deduction for charitable contributions to public charities. 
     In addition, private foundations are subject to a number of 
     operational rules and restrictions that do not apply to 
     public charities.\1245\
---------------------------------------------------------------------------
     \1245\ Unlike public charities, private foundations are 
     subject to tax on their net investment income at a rate of 
     two percent (one percent in some cases). Sec. 4940. Private 
     foundations also are subject to more restrictions on their 
     activities than are public charities. For example, private 
     foundations are prohibited from engaging in self-dealing 
     transactions (sec. 4941), are required to make a minimum 
     amount of charitable distributions each year, (sec. 4942), 
     are limited in the extent to which they may control a 
     business (sec. 4943), may not make speculative investments 
     (sec. 4944), and may not make certain expenditures (sec. 
     4945). Violations of these rules result in excise taxes on 
     the foundation and, in some cases, may result in excise taxes 
     on the managers of the foundation.

[[Page 20030]]


     Excise tax on investment income of private foundations
       Under section 4940(a), private foundations that are 
     recognized as exempt from Federal income tax under section 
     501(a) (other than exempt operating foundations) \1246\ are 
     subject to a two-percent excise tax on their net investment 
     income. Net investment income generally includes interest, 
     dividends, rents, royalties (and income from similar 
     sources), and capital gain net income, and is reduced by 
     expenses incurred to earn this income. The two-percent rate 
     of tax is reduced to one-percent in any year in which a 
     foundation exceeds the average historical level of its 
     charitable distributions. Specifically, the excise tax rate 
     is reduced if the foundation's qualifying distributions 
     (generally, amounts paid to accomplish exempt purposes) 
     \1247\ equal or exceed the sum of (1) the amount of the 
     foundation's assets for the taxable year multiplied by the 
     average percentage of the foundation's qualifying 
     distributions over the five taxable years immediately 
     preceding the taxable year in question, and (2) one percent 
     of the net investment income of the foundation for the 
     taxable year.\1248\ In addition, the foundation cannot have 
     been subject to tax in any of the five preceding years for 
     failure to meet minimum qualifying distribution requirements 
     in section 4942.
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     \1246\ Exempt operating foundations are exempt from the 
     section 4940 tax. Sec. 4940(d)(1). Exempt operating 
     foundations generally include organizations such as museums 
     or libraries that devote their assets to operating charitable 
     programs but have difficulty meeting the ``public support'' 
     tests necessary not to be classified as a private foundation. 
     To be an exempt operating foundation, an organization must: 
     (1) be an operating foundation (as defined in section 
     4942(j)(3)); (2) be publicly supported for at least 10 
     taxable years; (3) have a governing body no more than 25 
     percent of whom are disqualified persons and that is broadly 
     representative of the general public; and (4) have no 
     officers who are disqualified persons. Sec. 4940(d)(2).
     \1247\ Sec. 4942(g).
     \1248\ Sec. 4940(e).
---------------------------------------------------------------------------
       Private foundations that are not exempt from tax under 
     section 501(a), such as certain charitable trusts, are 
     subject to an excise tax under section 4940(b). The tax 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 tax on unrelated 
     business income 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.
       Private foundations are required to make a minimum amount 
     of qualifying distributions each year to avoid tax under 
     section 4942. The minimum amount of qualifying distributions 
     a foundation has to make to avoid tax under section 4942 is 
     reduced by the amount of section 4940 excise taxes 
     paid.\1249\
---------------------------------------------------------------------------
     \1249\ Sec. 4942(d)(2).
---------------------------------------------------------------------------
     Private colleges and universities
       Private colleges and universities generally are treated as 
     public charities rather than private foundations \1250\ and 
     thus are not subject to the private foundation excise tax on 
     net investment income.
---------------------------------------------------------------------------
     \1250\ Secs. 509(a)(1) and 170(b)(1)(A)(ii).
---------------------------------------------------------------------------


                               House Bill

       The provision imposes an excise tax on an applicable 
     educational institution for each taxable year equal to 1.4 
     percent of the net investment income of the institution for 
     the taxable year. Net investment income is determined using 
     rules similar to the rules of section 4940(c) (relating to 
     the net investment income of a private foundation).
       For purposes of the provision, an applicable educational 
     institution is an institution: (1) that has at least 500 
     students during the preceding taxable year; (2) that is an 
     eligible education institution as described in section 25A of 
     the Code; \1251\ (3) that is not described in the first 
     section of section 511(a)(2)(B) of the Code (generally 
     describing State colleges and universities); and (4) the 
     aggregate fair market value of the assets of which at the end 
     of the preceding taxable year (other than those assets that 
     are used directly in carrying out the institution's exempt 
     purpose \1252\) is at least $250,000 per student. For these 
     purposes, the number of students of an institution is based 
     on the daily average number of full-time students attending 
     the institution, with part-time students being taken into 
     account on a full-time student equivalent basis.
---------------------------------------------------------------------------
     \1251\ Section 25A defines an eligible educational 
     institution as an institution (1) which is described in 
     section 481 of the Higher Education Act of 1965 (20 U.S.C. 
     sec. 1088), as in effect on August 5, 1977, and (2) which is 
     eligible to participate in a program under title IV of such 
     Act.
     \1252\ Assets used directly in carrying out the institution's 
     exempt purpose include, for example, classroom buildings and 
     physical facilities used for educational activities and 
     office equipment or other administrative assets used by 
     employees of the institution in carrying out exempt 
     activities, among other assets.
---------------------------------------------------------------------------
       For purposes of determining whether an institution meets 
     the asset-per-student threshold and determining net 
     investment income, assets and net investment income include 
     amounts with respect to an organization that is related to 
     the institution. An organization is treated as related to the 
     institution for this purpose if the organization: (1) 
     controls, or is controlled by, the institution; (2) is 
     controlled by one or more persons that control the 
     institution; or (3) is a supported organization \1253\ or a 
     supporting organization \1254\ during the taxable year with 
     respect to the institution.
---------------------------------------------------------------------------
     \1253\ Secs. 509(f)(3).
     \1254\ Secs. 509(a)(3).
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment follows the House bill with the 
     following modifications. First, the definition of applicable 
     educational institution is modified in two ways: (1) it 
     requires that the educational institution have at least 500 
     tuition paying students; and (2) it increases the asset-per-
     student threshold from $250,000 to $500,000.
       Second, the Senate amendment clarifies the operation of the 
     related-party rules of the provision. For purposes of 
     determining whether an educational institution meets the 
     asset-per-student threshold and for purposes of determining 
     net investment income, assets and net investment income of a 
     related organization with respect to the educational 
     institution are treated as assets and net investment income, 
     respectively, of the educational institution, except that:
       1.  No such amount is taken into account with respect to 
     more than one educational institution; and
       2.  Unless the related organization is controlled by the 
     educational institution or is a supporting organization 
     (described in section 509(a)(3)) with respect to the 
     institution for the taxable year, assets and investment 
     income that are not intended or available for the use or 
     benefit of the educational institution are not taken into 
     account. For example, assets of a related organization that 
     are earmarked or restricted for (or fairly attributable to) 
     the educational institution would be treated as assets of the 
     educational institution, whereas assets of a related 
     organization that are held for unrelated purposes (and are 
     not fairly attributable to the educational institution) would 
     be disregarded.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     the following modification. The provision modifies the 
     definition of ``applicable educational institution'' to 
     include only institutions more than 50 percent of the tuition 
     paying students of which are located in the United States. 
     For this purpose, the number of students at a location is 
     based on the daily average number of full-time students 
     attending the institution, with part-time students being 
     taken into account on a full-time student equivalent basis.
       It is intended that the Secretary promulgate regulations to 
     carry out the intent of the provision, including regulations 
     that describe: (1) assets that are used directly in carrying 
     out the educational institution's exempt purpose; (2) the 
     computation of net investment income; and (3) assets that are 
     intended or available for the use or benefit of the 
     educational institution.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.
     4. Provide an exception to the private foundation excess 
         business holdings rules for philanthropic business 
         holdings (sec. 5104 of the House bill and sec. 4943 of 
         the Code)


                              Present Law

     Public charities and private foundations
       An organization qualifying for tax-exempt status under 
     section 501(c)(3) is further classified as either a public 
     charity or a private foundation. An organization may qualify 
     as a public charity in several ways.\1255\ Certain 
     organizations are classified as public charities per se, 
     regardless of their sources of support. These include 
     churches, certain schools, hospitals and other medical 
     organizations (including medical research organizations), 
     certain organizations providing assistance to colleges and 
     universities, and governmental units.\1256\ Other 
     organizations qualify as public charities because they are 
     broadly publicly supported. First, a charity may qualify as 
     publicly supported if at least one-third of its total support 
     is from gifts, grants, or other contributions from 
     governmental units or the general public.\1257\ 
     Alternatively, it may qualify as publicly supported if it 
     receives more than one-third of its total support from a 
     combination of gifts, grants, and contributions from 
     governmental units and the public plus revenue arising

[[Page 20031]]

     from activities related to its exempt purposes (e.g., fee for 
     service income). In addition, this category of public charity 
     must not rely excessively on endowment income as a source of 
     support.\1258\ A supporting organization, i.e., an 
     organization that provides support to another section 
     501(c)(3) entity that is not a private foundation and meets 
     certain other requirements of the Code, also is classified as 
     a public charity.\1259\
---------------------------------------------------------------------------
     \1255\ The Code does not expressly define the term ``public 
     charity,'' but rather provides exceptions to those entities 
     that are treated as private foundations.
     \1256\ Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) 
     through (iv) for a description of these organizations).
     \1257\ Treas. Reg. sec. 1.170A-9(f)(2). Failing this 
     mechanical test, the organization may qualify as a public 
     charity if it passes a ``facts and circumstances'' test. 
     Treas. Reg. sec. 1.170A-9(f)(3).
     \1258\ To meet this requirement, the organization must 
     normally receive more than one-third of its support from a 
     combination of (1) gifts, grants, contributions, or 
     membership fees and (2) certain gross receipts from 
     admissions, sales of merchandise, performance of services, 
     and furnishing of facilities in connection with activities 
     that are related to the organization's exempt purposes. Sec. 
     509(a)(2)(A). In addition, the organization must not normally 
     receive more than one-third of its public support in each 
     taxable year from the sum of (1) gross investment income and 
     (2) the excess of unrelated business taxable income as 
     determined under section 512 over the amount of unrelated 
     business income tax imposed by section 511. Sec. 
     509(a)(2)(B).
     \1259\ Sec. 509(a)(3). Organizations organized and operated 
     exclusively for testing for public safety also are classified 
     as public charities. Sec. 509(a)(4). Such organizations, 
     however, are not eligible to receive deductible charitable 
     contributions under section 170.
---------------------------------------------------------------------------
       A section 501(c)(3) organization that does not fit within 
     any of the above categories is a private foundation. In 
     general, private foundations receive funding from a limited 
     number of sources (e.g., an individual, a family, or a 
     corporation).
       The deduction for charitable contributions to private 
     foundations is in some instances less generous than the 
     deduction for charitable contributions to public charities. 
     In addition, private foundations are subject to a number of 
     operational rules and restrictions that do not apply to 
     public charities, as well as a tax on their net investment 
     income.\1260\
---------------------------------------------------------------------------
     \1260\ Unlike public charities, private foundations are 
     subject to tax on their net investment income at a rate of 
     two percent (one percent in some cases). Sec. 4940. Private 
     foundations also are subject to more restrictions on their 
     activities than are public charities. For example, private 
     foundations are prohibited from engaging in self-dealing 
     transactions (sec. 4941), are required to make a minimum 
     amount of charitable distributions each year (sec. 4942), are 
     limited in the extent to which they may control a business 
     (sec. 4943), may not make speculative investments (sec. 
     4944), and may not make certain expenditures (sec. 4945). 
     Violations of these rules result in excise taxes on the 
     foundation and, in some cases, may result in excise taxes on 
     the managers of the foundation.
---------------------------------------------------------------------------
     Excess business holdings of private foundations
       Private foundations are subject to tax on excess business 
     holdings.\1261\ 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 
     (substituting ``profits interest'' 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.\1262\ This five-year period may be 
     extended an additional five years in limited 
     circumstances.\1263\ The excess business holdings rules do 
     not apply to holdings in a functionally related business or 
     to holdings in a trade or business at least 95 percent of the 
     gross income of which is derived from passive sources.\1264\
---------------------------------------------------------------------------
     \1261\ Sec. 4943. Taxes imposed may be abated if certain 
     conditions are met. Secs. 4961 and 4962.
     \1262\ Sec. 4943(c)(6).
     \1263\ Sec. 4943(c)(7).
     \1264\ Sec. 4943(d)(3).
---------------------------------------------------------------------------
       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.


                               House Bill

       The provision creates an exception to the excess business 
     holdings rules for certain philanthropic business holdings. 
     Specifically, the tax on excess business holdings does not 
     apply with respect to the holdings of a private foundation in 
     any business enterprise that, for the taxable year, satisfies 
     the following requirements: (1) the ownership requirements; 
     (2) the ``all profits to charity'' distribution requirement; 
     and (3) the independent operation requirements.
       The ownership requirements are satisfied if: (1) all 
     ownership interests in the business enterprise are held by 
     the private foundation at all times during the taxable year; 
     and (2) all the private foundation's ownership interests in 
     the business enterprise were acquired not by purchase.
       The ``all profits to charity'' distribution requirement is 
     satisfied if the business enterprise, not later than 120 days 
     after the close of the taxable year, distributes an amount 
     equal to its net operating income for such taxable year to 
     the private foundation. For this purpose, the net operating 
     income of any business enterprise for any taxable year is an 
     amount equal to the gross income of the business enterprise 
     for the taxable year, reduced by the sum of: (1) the 
     deductions allowed by chapter 1 of the Code for the taxable 
     year that are directly connected with the production of the 
     income; (2) the tax imposed by chapter 1 on the business 
     enterprise for the taxable year; and (3) an amount for a 
     reasonable reserve for working capital and other business 
     needs of the business enterprise.
       The independent operation requirements are met if, at all 
     times during the taxable year, the following three 
     requirements are satisfied. First, no substantial contributor 
     to the private foundation, or family member of such a 
     contributor, is a director, officer, trustee, manager, 
     employee, or contractor of the business enterprise (or an 
     individual having powers or responsibilities similar to any 
     of the foregoing). Second, at least a majority of the board 
     of directors of the private foundation are not also directors 
     or officers of the business enterprise or members of the 
     family of a substantial contributor to the private 
     foundation. Third, there is no loan outstanding from the 
     business enterprise to a substantial contributor to the 
     private foundation or a family member of such contributor. 
     For purposes of the independent operation requirements, 
     ``substantial contributor'' has the meaning given to the term 
     under section 4958(c)(3)(C), and family members are 
     determined under section 4958(f)(4).
       The provision does not apply to the following 
     organizations: (1) donor advised funds or supporting 
     organizations that are subject to the excess business 
     holdings rules by reason of section 4943(e) or (f); (2) any 
     trust described in section 4947(a)(1) (relating to charitable 
     trusts); or (3) any trust described in section 4947(a)(2) 
     (relating to split-interest trusts).
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

           C. Requirements for Organizations Exempt From Tax

     1. Section 501(c)(3) organizations permitted to make 
         statements relating to political campaign in ordinary 
         course of activities in carrying out exempt purpose (sec. 
         5201 of the House bill and sec. 501 of the Code)


                              Present Law

     Section 501(c)(3) organizations
       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.\1265\ 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.\1266\ In general, an organization is 
     organized and operated for charitable purposes if it provides 
     relief for the poor and distressed or the underprivileged. 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) its net earnings 
     may not inure to the benefit of any person in a position to 
     influence the activities of the organization; (2) it must 
     operate to provide a public benefit, not a private benefit; 
     \1267\ (3) it may not be operated primarily to conduct an 
     unrelated trade or business; \1268\ (4) it may not engage in 
     substantial legislative lobbying; and (5) it may not 
     participate or intervene in any political campaign.
---------------------------------------------------------------------------
     \1265\ Treas. Reg. sec. 1.501(c)(3)-1(c)(1).
     \1266\ Treas. Reg. sec. 1.501(c)(3)-1(d)(2).
     \1267\ Treas. Reg. sec. 1.501(c)(3)-1(d)(1)(ii).
     \1268\ 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.
---------------------------------------------------------------------------
       Section 501(c)(3) organizations are classified either as 
     ``public charities'' or ``private foundations.'' \1269\ 
     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)

[[Page 20032]]

     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.
---------------------------------------------------------------------------
     \1269\ Sec. 509(a).
---------------------------------------------------------------------------
       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.\1270\ Public charities also have certain 
     advantages over private foundations regarding the 
     deductibility of contributions.
---------------------------------------------------------------------------
     \1270\ Secs. 4940-4945.
---------------------------------------------------------------------------
     Political campaign activities
       Charitable organizations may not participate in, or 
     intervene in (including the publishing or distributing of 
     statements), any political campaign on behalf of (or in 
     opposition to) any candidate for public office.\1271\ The 
     prohibition on such political campaign activity is absolute 
     and, in general, includes activities such as making 
     contributions to a candidate's political campaign, 
     endorsements of a candidate, lending employees to work in a 
     political campaign, or providing facilities for use by a 
     candidate. The absolute prohibition on campaign activities 
     was added in 1954 by the so called ``Johnson amendment.'' 
     \1272\ Many other activities may constitute political 
     campaign activity, depending on the facts and circumstances. 
     The sanction for a violation of the prohibition is loss of 
     the organization's tax-exempt status.
---------------------------------------------------------------------------
     \1271\ Sec. 501(c)(3).
     \1272\ Internal Revenue Code of 1954, sec. 501(c)(3), Pub. L. 
     No. 591 (August 16, 1954).
---------------------------------------------------------------------------
       For organizations that engage in prohibited political 
     campaign activity, the Code provides three penalties that may 
     be applied either as alternatives to revocation of tax 
     exemption or in addition to loss of tax-exempt status: an 
     excise tax on political expenditures,\1273\ termination 
     assessment of all taxes due,\1274\ and an injunction against 
     further political expenditures.\1275\
---------------------------------------------------------------------------
     \1273\ Sec. 4955.
     \1274\ Sec. 6852(a)(1).
     \1275\ Sec. 7409.
---------------------------------------------------------------------------


                               House Bill

       The provision modifies the present-law rules relating to 
     political campaign activity by section 501(c)(3) 
     organizations for the following purposes: (1) section 
     501(c)(3) tax-exempt status; (2) qualifying as an eligible 
     recipient of tax-deductible contributions for income,\1276\ 
     gift,\1277\ and estate tax \1278\ purposes; and (3) 
     application of the excise tax on political expenditures by 
     section 501(c)(3) organizations.\1279\
---------------------------------------------------------------------------
     \1276\ Sec. 170(c)(2).
     \1277\ Sec. 2522.
     \1278\ Secs. 2055 and 2106.
     \1279\ Sec. 4955.
---------------------------------------------------------------------------
       For such purposes, an organization shall not fail to be 
     treated as organized and operated exclusively for a purpose 
     described in section 501(c)(3), nor shall it be deemed to 
     have participated in, or intervened in any political campaign 
     on behalf of (or in opposition to) any candidate for public 
     office, solely because of the content of any statement that: 
     (A) is made in the ordinary course of the organization's 
     regular and customary activities in carrying out its exempt 
     purpose; and (B) results in the organization incurring not 
     more than de minimis incremental expenses.
       The provision does not apply to taxable years beginning 
     after December 31, 2023.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2018.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     2. Additional reporting requirements for donor advised fund 
         sponsoring organizations (sec. 5202 of the House bill and 
         sec. 6033 of the Code)


                              Present Law

     Overview
       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.\1280\ 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.
---------------------------------------------------------------------------
     \1280\ 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 for income, gift, or 
     estate tax purposes if the sponsoring organization is a Type 
     III supporting organization (other than a functionally 
     integrated Type III supporting organization). In addition to 
     satisfying generally applicable 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.
---------------------------------------------------------------------------
     Statutory definition of a donor advised fund
       The Code defines a ``donor advised fund'' as a fund or 
     account that is: (1) separately identified by reference to 
     contributions of a donor or donors; (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. All 
     three prongs of the definition must be met in order for a 
     fund or account to be treated as a donor advised fund.\1281\
---------------------------------------------------------------------------
     \1281\ See sec. 4966(d)(2)(A). A donor advised fund does not 
     include a fund or account that makes distributions only to a 
     single identified organization or governmental entity. A 
     donor advised fund also does not include certain funds or 
     accounts with respect to which a donor or donor advisor 
     provides advice as to which individuals receive grants for 
     travel, study, or other similar purposes. In addition, the 
     Secretary may exempt a fund or account from treatment as a 
     donor advised fund if such fund or account is advised by a 
     committee not directly or indirectly controlled by a donor, 
     donor advisor, or persons related to a donor or donor 
     advisor. The Secretary also may exempt a fund or account from 
     treatment as a donor advised fund if such fund or account 
     benefits a single identified charitable purpose. Secs. 
     4966(d)(2)(B) and (C).
---------------------------------------------------------------------------
       A ``sponsoring organization'' is an organization that: (1) 
     is described in section 170(c) \1282\ (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 \1283\); (2) is not a private 
     foundation (as defined in section 509(a)); and (3) maintains 
     one or more donor advised funds.\1284\
---------------------------------------------------------------------------
     \1282\ Section 170(c) describes organizations to which 
     charitable contributions that are deductible for income tax 
     purposes can be made.
     \1283\ See sec. 170(c)(2)(A).
     \1284\ Sec. 4966(d)(1).
---------------------------------------------------------------------------
     Reporting and disclosure
       Each sponsoring organization must 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.\1285\ In addition, when seeking 
     recognition of its tax-exempt status, a sponsoring 
     organization must disclose whether it intends to maintain 
     donor advised funds.\1286\
---------------------------------------------------------------------------
     \1285\ Sec. 6033(k).
     \1286\ Sec. 508(f).
---------------------------------------------------------------------------


                               House Bill

       The provision requires a sponsoring organization to report 
     additional information on its annual information return (Form 
     990). Sponsoring organizations must indicate: (1) the average 
     amount of grants made from donor advised funds during the 
     taxable year (expressed as a percentage of the value of 
     assets held in such funds at the beginning of the taxable 
     year), and (2) whether the organization has a policy with 
     respect to donor advised funds relating to the frequency and 
     minimum level of distributions from donor advised funds. The 
     sponsoring organization must include with its return a copy 
     of any such policy.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

                      INTERNATIONAL TAX PROVISIONS

                              PRESENT LAW

       The following discussion provides an overview of general 
     principles of taxation of cross-border activity as well as a 
     detailed explanation of provisions in present law that are 
     relevant to the provisions in the bill.

      A. General Overview of International Principles of Taxation

       International law generally recognizes the right of each 
     sovereign nation to prescribe

[[Page 20033]]

     rules to regulate conduct with a sufficient nexus to the 
     sovereign nation. The nexus may be based on nationality of 
     the actor, i.e., a nexus between said conduct and a person 
     (whether natural or juridical) with a connection to the 
     sovereign nation, or it may be territorial, i.e., a nexus 
     between the conduct to be regulated and the territory where 
     the conduct occurs.\1287\ For example, most legal systems 
     respect limits on the extent to which their measures may be 
     given extraterritorial effect. The broad acceptance of such 
     norms extends to authority to regulate cross-border trade and 
     economic dealings, including taxation.
---------------------------------------------------------------------------
     \1287\ American Law Institute, Restatement (Third) of Foreign 
     Relations Law of the United States, secs. 402 and 403, 
     (1987).
---------------------------------------------------------------------------
       The exercise of sovereign jurisdiction is usually based on 
     either nationality of the person whose conduct is regulated 
     or the territory in which the conduct or activity occurs. 
     These concepts have been refined and, in varying 
     combinations, adapted to form the principles for determining 
     whether sufficient nexus with a jurisdiction exists to 
     conclude that the jurisdiction may enforce its right to 
     impose a tax. The elements of nexus and the nomenclature of 
     the principles may differ based on the type of tax in 
     question. Taxes are categorized as either direct taxes or 
     indirect taxes. The former category generally refers to those 
     taxes that are imposed directly on a person (``capitation 
     tax''), property, or income from property and that cannot be 
     shifted to another person by the taxpayer. In contrast, 
     indirect taxes are taxes on consumption or production of 
     goods or services, for which a taxpayer may shift 
     responsibility to another person. Such taxes include sales or 
     use taxes, value-added taxes, or customs duties.\1288\
---------------------------------------------------------------------------
     \1288\ Maria S. Cox, Fritz Neumark, et al., ``Taxation'' 
     Encyclopedia Britannica, https://www.britannica.com/topic/
taxation/Classes-of-taxes, accessed May 16, 2017. Whether a 
     tax is considered a direct tax or indirect tax has varied 
     over time, and no single definition is used. For a review of 
     the significance of these terms in Federal tax history, see 
     Alan O. Dixler, ``Direct Taxes Under the Constitution: A 
     Review of the Precedents,'' Tax History Project, Tax 
     Analysts, available at http://www.taxhistory.org/thp/
readings.nsf/ArtWeb/
 2B34C7FBDA41D9DA8525730800067017?OpenDocument, accessed May 
     17, 2017.
---------------------------------------------------------------------------
       Although governments have imposed direct taxes on property 
     and indirect taxes and duties on specific transactions since 
     ancient times, the history of direct taxes in the form of an 
     income tax is relatively recent.\1289\ When determining how 
     to allocate the right to tax a particular item of income, 
     most jurisdictions consider principles based on either source 
     (territory or situs of the income) or residence (nationality 
     of the taxpayer).\1290\ By contrast, when the authority to 
     collect indirect taxes in the form of sales taxes or value 
     added taxes is under consideration, jurisdictions analyze the 
     taxing rights in terms of the origin principle or destination 
     principle. The balance of this Part I.A describes the 
     principles in more detail and how jurisdictions resolve 
     claims of overlapping jurisdiction.
---------------------------------------------------------------------------
     \1289\ The earliest western income tax system is traceable to 
     the British Tax Act of 1798, enacted in 1799 to raise funds 
     needed to prosecute the Napoleonic Wars, and rescinded in 
     1816. See, A.M. Bardopoulos, eCommerce and the Effects of 
     Technology on Taxation, Law, Governance and Technology Series 
     22, DOI 10.1007/978-3-319-15449-7_2, (Springer 2015), at 
     Section 2.2. ``History of Tax,'' pp. 23-24. See also, http://
www.parliament.uk/about/living-heritage/transformingsociety/
private-lives/taxation/overview/incometax/.
     \1290\ Reuven Avi-Yonah, ``International Tax as International 
     Law,'' 57 Tax Law Review 483 (2003-2004).
---------------------------------------------------------------------------
     1. Origin and destination principles
       Indirect taxes that are imposed based on the place where 
     production of goods or services occur, irrespective of the 
     location of the persons who own the means of production, and 
     where the goods and services go after being produced, are 
     examples of origin-based taxes. If, instead, authority to tax 
     a transaction or service is dependent on the location of use 
     or consumption of the goods or services, the tax system is an 
     example of a destination-based tax. The most common form of a 
     destination-based tax is the destination-based value-added 
     tax (``VAT''). Over 160 countries have adopted a VAT,\1291\ 
     which is generally a tax imposed and collected on the ``value 
     added'' at every stage in the production and distribution of 
     a good or service. Although there are several ways to compute 
     the taxable base for a VAT, the amount of value added can 
     generally be thought of as the difference between the value 
     of sales (outputs) and purchases (inputs) of a 
     business.\1292\ The United States does not have a VAT, nor is 
     there a Federal sales or use tax. However, the majority of 
     the States have enacted sales or use taxes, including both 
     origin-based taxes and destination-based taxes.\1293\
---------------------------------------------------------------------------
     \1291\ Alan Schenk, Victor Thuronyi, and Wei Cui, Value Added 
     Tax: A Comparative Approach, Cambridge University Press, 
     2015. Consistent with the OECD International VAT/GST 
     Guidelines, supra, the term VAT is used to refer to all 
     broad-based final consumption taxes, regardless of the 
     acronym used to identify. Thus, many countries that 
     denominate their national consumption tax as a GST (general 
     sales tax) are included in the estimate of the number of 
     countries with a VAT.
     \1292\ Nearly all countries use the credit-invoice method of 
     calculating value added to determine VAT liability. Under the 
     credit-invoice method, a tax is imposed on the seller for all 
     of its sales. The tax is calculated by applying the tax rate 
     to the sales price of the good or service, and the amount of 
     tax is generally disclosed on the sales invoice. A business 
     credit is provided for all VAT levied on purchases of taxable 
     goods and services (i.e., ``inputs'') used in the seller's 
     business. The ultimate consumer (i.e., a non-business 
     purchaser), however, does not receive a credit with respect 
     to his or her purchases. The VAT credit for inputs prevents 
     the imposition of multiple layers of tax with respect to the 
     total final purchase price (i.e., a ``cascading'' of the 
     VAT). As a result, the net tax paid at a particular stage of 
     production or distribution is based on the value added by 
     that taxpayer at that stage of production or distribution. In 
     theory, the total amount of tax paid with respect to a good 
     or service from all levels of production and distribution 
     should equal the sales price of the good or service to the 
     ultimate consumer multiplied by the VAT rate.
     In order to receive an input credit with respect to any 
     purchase, a business purchaser is generally required to 
     possess an invoice from a seller that contains the name of 
     the purchaser and indicates the amount of tax collected by 
     the seller on the sale of the input to the purchaser. At the 
     end of a reporting period, a taxpayer may calculate its tax 
     liability by subtracting the cumulative amount of tax stated 
     on its purchase invoices from the cumulative amount of tax 
     stated on its sales invoices.
     \1293\ EY, Worldwide VAT, GST and Sales Tax Guide 2015, p. 
     1021, available at http://www.ey.com/Publication/vwLUAssets/
Worldwide-VAT-GST-and-sales-tax-guide-2015/$FILE/
Worldwide%20VAT,%20GST%20 
     and%20Sales%20Tax%20Guide%202015.pdf.
---------------------------------------------------------------------------
       With respect to cross-border transactions, the OECD has 
     recommended that the destination principle be adopted for all 
     indirect taxes, in part to conform to the treatment of such 
     transactions for purposes of customs duties. The OECD defines 
     the destination principle as ``the principle whereby, for 
     consumption tax purposes, internationally traded services and 
     intangibles should be taxed according to the rules of the 
     jurisdiction of consumption.'' \1294\ A jurisdiction may 
     determine the place of use or consumption by adopting the 
     convention that the place of business or residence of a 
     customer is the place of consumption. Use of such proxies are 
     needed to determine the location of businesses that are 
     juridical entities, which are more able than natural persons 
     to move the location of use of goods, services or intangibles 
     in response to imposition of tax.
---------------------------------------------------------------------------
     \1294\ See, OECD, ``Recommendation of the Council on the 
     application of value added tax/goods and services tax to the 
     international trade in services and intangibles as approved 
     on September 27, 2016,'' [C(2016)120], appendix, page 3, 
     reproduced in the appendix, OECD, International VAT/GST 
     Guidelines, OECD Publishing, 2017.
---------------------------------------------------------------------------
     2. Source and residence principles
       Exercise of taxing authority based on a person's residence 
     may be based on status as a national, resident, or 
     domiciliary of a jurisdiction and may reach worldwide 
     activities of such persons. As such, it is the broadest 
     assertion of taxing authority. For individuals, the test for 
     residence may depend upon nationality, or a physical presence 
     test, or some combination of the two. For all other persons, 
     determining residency may require more complex consideration 
     of the level of activities within a jurisdiction, management, 
     control or place of incorporation. Such rules generally 
     reflect a policy decision about the requisite level of 
     activity within, or contact with, a jurisdiction by a person 
     that is sufficient to warrant assertion of taxing 
     jurisdiction.
       Source-based exercise of taxing authority taxes income from 
     activities that occur, or property that is located, within 
     the territory of the taxing jurisdiction. If a person 
     conducts business or owns property in a jurisdiction, or if a 
     transaction occurs in whole or in part in a jurisdiction, the 
     resulting taxation may require allocation and apportionment 
     of expenses attributable to the activity in order to ensure 
     that only the portion of profits that have the required nexus 
     with the territory are subject to tax. Most jurisdictions, 
     including the United States, have rules for determining the 
     source of items of income and expense in a broad range of 
     categories such as compensation for services, dividends, 
     interest, royalties and gains.
       Regardless of which of these two bases of taxing authority 
     is chosen by a jurisdiction, a jurisdiction's determination 
     of whether a transaction, activity or person is subject to 
     tax requires that the jurisdiction establish the limits on 
     its assertion of authority to tax.
     3. Resolving overlapping or conflicting jurisdiction to tax
       Countries have developed norms about what constitutes a 
     reasonable regulatory action by a sovereign state that will 
     be respected by other sovereign states. Consensus on what 
     constitutes a reasonable limit on the extent of one state's 
     jurisdiction helps to minimize the risk of conflicts arising 
     as a result of extraterritorial action by a state or 
     overlapping exercise of authority by states. Mechanisms to 
     eliminate double taxation have developed to address those 
     situations in which the source and residency determinations 
     of the respective jurisdictions result in duplicative 
     assertion of taxing authority. For example, asymmetry between 
     different standards adopted in two countries for determining 
     residency of persons, source of income, or other basis for 
     taxation may result in income that is subject to taxation in 
     both jurisdictions.
       When the rules of two or more countries overlap, potential 
     double taxation is usually

[[Page 20034]]

     mitigated by operation of bilateral tax treaties or by 
     legislative measures permitting credit for taxes paid to 
     another jurisdiction. The United States is a partner in 
     numerous bilateral agreements that have as their objective 
     the avoidance of international double taxation and the 
     prevention of tax avoidance and evasion. Another related 
     objective of U.S. tax treaties is the removal of the barriers 
     to trade, capital flows, and commercial travel that may be 
     caused by overlapping tax jurisdictions and by the burdens of 
     complying with the tax laws of a jurisdiction when a person's 
     contacts with, and income derived from, that jurisdiction are 
     minimal. The United States Model Income Tax Convention 
     (``U.S. Model Treaty of 2016'') with an accompanying Preamble 
     by the Department of Treasury, reflects the most recent 
     comprehensive statement of U.S. negotiating position with 
     respect to tax treaties.\1295\ Bilateral agreements are also 
     used to permit limited mutual administrative assistance 
     between jurisdictions.\1296\
---------------------------------------------------------------------------
     \1295\ The current U.S. Model treaty was published February 
     17, 2016, and is available at https://www.treasury.gov/
resource-center/tax-policy/treaties/Documents/Treaty-
US%20Model-2016.pdf; the Preamble is available at https://
www.treasury.gov/resource-
center/tax-policy/treaties/Documents/Preamble-US%20Model-
2016.pdf. The U.S. Model treaty is updated periodically to 
     reflect developments in the negotiating position of the 
     United States. Such changes include provisions that were 
     successfully included in bilateral treaties concluded by the 
     United States, as well as new proposed measures not yet 
     included in a bilateral agreement.
     \1296\ Although U.S. courts extend comity to foreign 
     judgments in some instances, they are not required to 
     recognize or assist in enforcement of foreign judgments for 
     collection of taxes, consistent with the common law ``revenue 
     rule'' in Holman v. Johnson, 1 Cowp. 341, 98 Eng. Rep. 1120 
     (K.B.1775). American Law Institute, Restatement (Third) of 
     Foreign Relations Law of the United States, sec. 483, (1987). 
     The rule retains vitality in U.S. case law. Pasquantino v. 
     United States, 544 U.S. 349; 125 S. Ct. 1766; 161 L. Ed. 2d 
     619 (2005) (a conviction for criminal wire fraud arising from 
     an intent to defraud Canadian tax authorities was found not 
     to conflict ``with any well-established revenue rule 
     principle[,]'' and thus was not in derogation of the revenue 
     rule). To the extent it is abrogated, it is done so in 
     bilateral treaties, to ensure reciprocity. At present, the 
     United States has such agreements in force with five 
     jurisdictions: Canada; Denmark; France; Netherlands; and 
     Sweden.
---------------------------------------------------------------------------
       In addition to entering into bilateral treaties, countries 
     have worked in multilateral organizations to develop common 
     principles to alleviate double taxation. Those principles are 
     generally reflected in the provisions of the Model Tax 
     Convention on Income and on Capital of the Organization for 
     Economic Cooperation and Development (the ``OECD Model 
     treaty''),\1297\ a precursor of which was first developed by 
     a predecessor organization in 1958, which in turn has 
     antecedents from work by the League of Nations in the 
     1920s.\1298\ As a consensus document, the OECD Model treaty 
     is intended to serve as a model for countries to use in 
     negotiating a bilateral treaty that would settle issues of 
     double taxation as well as to avoid inappropriate double 
     nontaxation. The provisions have developed over time as 
     practice with actual bilateral treaties leads to unexpected 
     results and new issues are raised by parties to the 
     treaties.\1299\
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     \1297\ OECD (2014), Model Tax Convention on Income and on 
     Capital: Condensed Version 2014, OECD Publishing, 2014, 
     available at http://dx.doi.org/10.1787//mtc_cond-2014-en. The 
     multinational organization was first established in 1961 by 
     the United States, Canada and 18 European countries, 
     dedicated to global development, and has since expanded to 35 
     members.
     \1298\ ``Report by the Experts on Double Taxation,'' League 
     of Nation Document E.F.S. (1923), a report commissioned by 
     the League at its second assembly. See also, Lara Friedlander 
     and Scott Wilkie, ``Policy Forum: The History of Tax Treaty 
     Provisions--And Why It Is Important to Know About It,'' 54 
     Canadian Tax Journal No. 4 (2006).
     \1299\ For example, the OECD initiated a multi-year study on 
     base-erosion and profit shifting in response to concerns of 
     multiple members. For an overview of that project, see Joint 
     Committee on Taxation, Background, Summary, and Implications 
     of the OECD/G20 Base Erosion and Profit Shifting Project 
     (JCX-139-15), November 30, 2015. This document can also be 
     found on the Joint Committee on Taxation website at 
     www.jct.gov.
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     4. International principles as applied in the U.S. system
       Present law combines taxation of all U.S. persons on their 
     worldwide income, whether derived in the United States or 
     abroad, with limited deferral of taxation of income earned by 
     foreign subsidiaries of U.S. companies and source-based 
     taxation of the U.S.-source income of nonresident aliens and 
     foreign entities. Under this system (sometimes described as 
     the U.S. hybrid system), the application of the Code differs 
     depending on whether income arises from outbound investment 
     or inbound investment. Outbound investment refers to the 
     foreign activities of U.S. persons, while inbound investment 
     is investment by foreign persons in U.S. assets or 
     activities, although certain rules are common to both inbound 
     and outbound activities.

         B. Principles Common to Inbound and Outbound Taxation

       Although the U.S. tax rules differ depending on whether the 
     activity in question is inbound or outbound, there are 
     certain concepts that apply to both inbound and outbound 
     investment. Such areas include the transfer pricing rules, 
     entity classification, the rules for determination of source, 
     and whether a corporation is foreign or domestic.
     1. Residence
       U.S. persons are subject to tax on their worldwide income. 
     The Code defines U.S. person to include all U.S. citizens and 
     residents as well as domestic entities such as partnerships, 
     corporations, estates and certain trusts.\1300\ The term 
     ``resident'' is defined only with respect to natural persons. 
     Noncitizens who are lawfully admitted as permanent residents 
     of the United States in accordance with immigration laws 
     (colloquially referred to as green card holders) are treated 
     as residents for tax purposes. In addition, noncitizens who 
     meet a substantial presence test and are not otherwise exempt 
     from U.S. taxation are also taxable as U.S. residents.\1301\
---------------------------------------------------------------------------
     \1300\ Sec. 7701(a)(30).
     \1301\ Sec. 7701(b).
---------------------------------------------------------------------------
       For legal entities, the Code determines whether an entity 
     is subject to U.S. taxation on its worldwide income on the 
     basis of its place of organization. For purposes of U.S. tax 
     law, a corporation or partnership is treated as domestic if 
     it is organized or created under the laws of the United 
     States or of any State, unless, in the case of a partnership, 
     the Secretary prescribes otherwise by regulation.\1302\ All 
     other partnerships and corporations (that is, those organized 
     under the laws of foreign countries) are treated as 
     foreign.\1303\ In contrast, place of organization is not 
     determinative of residence under taxing jurisdictions that 
     use factors such as situs, management and control to 
     determine residence. As a result, legal entities may have 
     more than one tax residence, or, in some case, no 
     residence.\1304\ Only domestic corporations are subject to 
     U.S. tax on a worldwide basis. Foreign corporations are taxed 
     only on income that has a sufficient connection with the 
     United States.
---------------------------------------------------------------------------
     \1302\ Sec. 7701(a)(4).
     \1303\ Secs. 7701(a)(5) and 7701(a)(9). Entities organized in 
     a possession or territory of the United States are not 
     considered to have been organized under the laws of the 
     United States.
     \1304\ ``The notion of corporate residence is an important 
     touchstone of taxation, however, in many foreign income tax 
     systems[,]'' with the result that the bilateral treaties are 
     often relied upon to resolve conflicting claims of taxing 
     jurisdiction. Joseph Isenbergh, Vol. 1 U.S. Taxation of 
     Foreign Persons and Foreign Income, Para. 7.1 (Fourth Ed. 
     2016).
---------------------------------------------------------------------------
       Tax benefits otherwise available to a domestic corporation 
     that migrates its tax home from the United States to foreign 
     jurisdiction may be denied to such corporation, in which case 
     it continues to be treated as a domestic corporation for ten 
     years following such migration.\1305\ These sanctions 
     generally apply to a transaction in which, pursuant to a plan 
     or a series of related transactions: (1) a domestic 
     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 domestic 
     corporation hold (by reason of the stock they had held in the 
     domestic corporation) at least 60 percent but less than 80 
     percent (by vote or value) of the stock of the foreign-
     incorporated entity after the transaction (this stock often 
     being referred to as ``stock held by reason of''); and (3) 
     the foreign-incorporated entity, considered together with all 
     companies connected to it by a chain of greater than 50 
     percent ownership (that is, 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.\1306\
---------------------------------------------------------------------------
     \1305\ Sec. 7874.
     \1306\ Section 7874(a). In addition, an excise tax may be 
     imposed on certain stock compensation of executives of 
     companies that undertake inversion transactions. Sec. 4985.
---------------------------------------------------------------------------
       The Treasury Department and the IRS have promulgated 
     detailed guidance, through both regulations and several 
     notices, addressing these requirements under section 7874 
     since the section was enacted in 2004,\1307\ and have sought 
     to expand the reach of the section or reduce the tax benefits 
     of inversion transactions. For example, Notice 2014-52 
     announced Treasury's and the IRS's intention to issue 
     regulations and took a two-pronged approached. First, it 
     addressed the treatment of cross-border combination 
     transactions themselves. Second, it addressed post-
     transaction steps that taxpayers may undertake with respect 
     to US-owned foreign subsidiaries making it more difficult to 
     access foreign earnings without incurring added U.S. tax. On 
     November 19, 2015, Treasury and the IRS issued Notice 2015-
     79, which announced their intent to issue further regulations 
     to limit cross-border merger transactions, expanding on the 
     guidance issued in Notice 2014-52. In 2016,

[[Page 20035]]

     Treasury and the IRS issued proposed and temporary 
     regulations that incorporate the rules previously announced 
     in Notice 2014-52 and Notice 2015-79 and a new multiple 
     domestic entity acquisition rule.\1308\
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     \1307\ Notice 2015-79, 2015 I.R.B. LEXIS 583 (Nov. 19, 2015), 
     which announced their intent to issue further regulations to 
     limit cross-border merger transactions, expanding on the 
     guidance issued in Notice 2014-52. On April 4, 2016, Treasury 
     and the IRS issued proposed and temporary regulations (T.D. 
     9761) that incorporate the rules previously announced in 
     Notice 2014-52 and Notice 2015-79 and a new multiple domestic 
     entity acquisition rule. On January 13, 2017, Treasury and 
     the IRS issued final and temporary regulations under section 
     7874 (T.D. 9812), which adopt, with few changes, prior 
     temporary and proposed regulations, which identify certain 
     stock of an acquiring foreign corporation that is disregarded 
     in calculating the ownership of the foreign corporation for 
     purposes of section 7874.
     \1308\ T.D. 9761, April 4, 2016. But see, Chamber of Commerce 
     v Internal Revenue Service, Cause No 1:16-CV-944-LY (W.D. 
     Tex. Sept. 29, 2017), granting summary judgment to plaintiff 
     in challenge to temporary regulations based on lack of 
     compliance with Administrative Procedure Requirements.
---------------------------------------------------------------------------
       In early 2017, Treasury issued final and temporary 
     regulations \1309\ that adopt, with few changes, the 2016 
     temporary and proposed regulations.
---------------------------------------------------------------------------
     \1309\ T.D. 9812, January 13, 2017.
---------------------------------------------------------------------------
     2. Entity classification
       Certain entities are eligible to elect their classification 
     for Federal tax purposes under the ``check-the-box'' 
     regulations adopted in 1997.\1310\ Those regulations 
     simplified the entity classification process for both 
     taxpayers and the IRS by making the entity classification of 
     unincorporated entities explicitly elective in most 
     instances.\1311\ The eligibility to elect and the breadth of 
     an entity's choices depend upon whether it is a ``per se 
     corporation'' and its number of beneficial owners. Foreign as 
     well as domestic entities may make the election. As a result, 
     it is possible for an entity that operates across countries 
     to be treated as a hybrid entity. A hybrid entity is one 
     which is treated as a flow-through or disregarded entity for 
     U.S. tax purposes but as a corporation for foreign tax 
     purposes. For ``reverse hybrid entities,'' the opposite is 
     true. The election can affect the determination of the source 
     of the income, availability of tax credits, and other tax 
     attributes.
---------------------------------------------------------------------------
     \1310\ Treas. Reg. sec. 301.7701-1, et seq.
     \1311\ The check-the-box regulations replaced Treas. Reg. 
     sec. 301.7701-2, as in effect prior to 1997, under which the 
     classification of unincorporated entities for Federal tax 
     purposes was determined on the basis of a four 
     characteristics indicative of status as a corporation: 
     continuity of life, centralization of management, limited 
     liability, and free transferability of interests. An entity 
     that possessed three or more of these characteristics was 
     treated as a corporation; if it possessed two or fewer, then 
     it was treated as a partnership. Thus, to achieve 
     characterization as a partnership under this system, 
     taxpayers needed to arrange the governing instruments of an 
     entity in such a way as to eliminate two of these corporate 
     characteristics. The advent and proliferation of limited 
     liability companies (``LLCs'') under State laws allowed 
     business owners to create customized entities that possessed 
     a critical common feature--limited liability for investors--
     as well as other corporate characteristics the owners found 
     desirable. As a consequence, classification was effectively 
     elective for well-advised taxpayers.
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     3. Source of income rules
       The rules for determining the source of certain types of 
     income are specified in the Code and described briefly below. 
     Various factors determine the source of income for U.S. tax 
     purposes, including the status or nationality of the payor, 
     the status or nationality of the recipient, the location of 
     the recipient's activities that generate the income, and the 
     location of the assets that generate the income. To the 
     extent that the source of income is not specified by statute, 
     the Treasury Secretary may promulgate regulations that 
     explain the appropriate treatment. However, many items of 
     income are not explicitly addressed by either the Code or 
     Treasury regulations, sometimes resulting in nontaxation of 
     the income. On several occasions, courts have determined the 
     source of such items by applying the rule for the type of 
     income to which the disputed income is most closely 
     analogous, based on all facts and circumstances.\1312\
---------------------------------------------------------------------------
     \1312\ See, e.g., Hunt v. Commissioner, 90 T.C. 1289 (1988).
---------------------------------------------------------------------------
     Interest
       Interest is derived from U.S. sources if it is paid by the 
     United States or any agency or instrumentality thereof, a 
     State or any political subdivision thereof, or the District 
     of Columbia. Interest is also from U.S. sources if it is paid 
     by a resident or a domestic corporation on a bond, note, or 
     other interest-bearing obligation.\1313\ Special rules apply 
     to treat as foreign-source certain amounts paid on deposits 
     with foreign commercial banking branches of U.S. corporations 
     or partnerships and certain other amounts paid by foreign 
     branches of domestic financial institutions.\1314\ Interest 
     paid by the U.S. branch of a foreign corporation is also 
     treated as U.S.-source income.\1315\
---------------------------------------------------------------------------
     \1313\ Sec. 861(a)(1); Treas. Reg. sec. 1.861-2(a)(1).
     \1314\ Secs. 861(a)(1) and 862(a)(1). For purposes of certain 
     reporting and withholding obligations the source rule in 
     section 861(a)(1)(B) does not apply to interest paid by the 
     foreign branch of a domestic financial institution. This 
     results in the payment being treated as a withholdable 
     payment. Sec. 1473(1)(C).
     \1315\ Sec. 884(f)(1).
---------------------------------------------------------------------------
     Dividends
       Dividend income is generally sourced by reference to the 
     payor's place of incorporation.\1316\ Thus, dividends paid by 
     a domestic corporation are generally treated as entirely 
     U.S.-source income. Similarly, dividends paid by a foreign 
     corporation are generally treated as entirely foreign-source 
     income. Under a special rule, dividends from certain foreign 
     corporations that conduct U.S. businesses are treated in part 
     as U.S.-source income.\1317\
---------------------------------------------------------------------------
     \1316\ Secs. 861(a)(2), 862(a)(2).
     \1317\ Sec. 861(a)(2)(B).
---------------------------------------------------------------------------
     Rents and royalties
       Rental income is sourced by reference to the location or 
     place of use of the leased property.\1318\ The nationality or 
     the country of residence of the lessor or lessee does not 
     affect the source of rental income. Rental income from 
     property located or used in the United States (or from any 
     interest in such property) is U.S.-source income, regardless 
     of whether the property is real or personal, intangible or 
     tangible.
---------------------------------------------------------------------------
     \1318\ Sec. 861(a)(4).
---------------------------------------------------------------------------
       Royalties are sourced in the place of use of (or the place 
     of privilege to use) the property for which the royalties are 
     paid.\1319\ This source rule applies to royalties for the use 
     of either tangible or intangible property, including patents, 
     copyrights, secret processes, formulas, goodwill, trademarks, 
     trade names, and franchises.
---------------------------------------------------------------------------
     \1319\ Ibid.
---------------------------------------------------------------------------
     Income from sales of personal property
       Subject to significant exceptions, income from the sale of 
     personal property is sourced on the basis of the residence of 
     the seller.\1320\ For this purpose, special definitions of 
     the terms ``U.S. resident'' and ``nonresident'' are provided. 
     A nonresident is defined as any person who is not a U.S. 
     resident,\1321\ while the term ``U.S. resident'' comprises 
     any juridical entity which is a U.S. person, all U.S. 
     citizens, as well as any individual who is a U.S. resident 
     without a tax home in a foreign country or a nonresident 
     alien with a tax home in the United States.\1322\ As a 
     result, nonresident includes any foreign corporation.\1323\
---------------------------------------------------------------------------
     \1320\ Sec. 865(a).
     \1321\ Sec. 865(g)(1)(B).
     \1322\ Sec. 865(g)(1)(A).
     \1323\ Sec. 865(g).
---------------------------------------------------------------------------
       Several special rules apply. For example, income from the 
     sale of inventory property is generally sourced to the place 
     of sale, which is determined by where title to the property 
     passes.\1324\ However, if the sale is by a nonresident and is 
     attributable to an office or other fixed place of business in 
     the United States, the sale is treated as income from U.S. 
     sources without regard to the place of sale, unless it is 
     sold for use, disposition, or consumption outside the United 
     States and a foreign office materially participates in the 
     sale.\1325\ Income from the sale of inventory property that a 
     taxpayer produces (in whole or in part) in the United States 
     and sells outside the United States, or that a taxpayer 
     produces (in whole or in part) outside the United States and 
     sells in the United States, is treated as partly U.S.-source 
     and partly foreign-source.\1326\
---------------------------------------------------------------------------
     \1324\ Secs. 865(b), 861(a)(6), 862(a)(6); Treas. Reg. sec. 
     1.861-7(c).
     \1325\ Sec. 865(e)(2).
     \1326\ Sec. 863(b). A taxpayer may elect one of three methods 
     for allocating and apportioning income as U.S.- or foreign-
     source: (1) the 50-50 method under which 50 percent of the 
     income from the sale of inventory property in such a 
     situation is attributable to the production activities and 50 
     percent to the sales activities, with the income sourced 
     based on the location of those activities; (2) independent 
     factory price (``IFP'') method under which, in certain 
     circumstances, an IFP may be established by the taxpayer to 
     determine income from production activities; (3) the books 
     and records method under which, with advance permission, the 
     taxpayer may use books of account to detail the allocation of 
     receipts and expenditures between production and sales 
     activities. Treas. Reg. sec. 1.863-3(b), (c). If production 
     activity occurs only within the United States, or only within 
     foreign countries, then all income is sourced to where the 
     production activity occurs; when production activities occur 
     in both the United States and one or more foreign countries, 
     the income attributable to production activities must be 
     split between U.S. and foreign sources. Treas. Reg. sec. 
     1.863-3(c)(1). The sales activity is generally sourced based 
     on where title to the property passes. Treas. Reg. secs. 
     1.863-3(c)(2), 1.861-7(c).
---------------------------------------------------------------------------
       In determining the source of gain or loss from the sale or 
     exchange of an interest in a foreign partnership, the IRS has 
     taken the position that to the extent that there is 
     unrealized gain attributable to partnership assets that are 
     effectively connected with the U.S. business, the foreign 
     person's gain or loss from the sale or exchange of a 
     partnership interest is effectively connected gain or loss to 
     the extent of the partner's distributive share of such 
     unrealized gain or loss, and not capital gain or loss. 
     Similarly, to the extent that the partner's distributive 
     share of unrealized gain is attributable to a permanent 
     establishment of the partnership under an applicable treaty 
     provision, it may be subject to U.S. tax under a 
     treaty.\1327\
---------------------------------------------------------------------------
     \1327\ Rev. Rul. 91-32, 1991-1 C.B. 107. But see, Grecian 
     Magnesite Mining, Industrial & Shipping Co. SA v 
     Commissioner, 149 T.C. No. 3 (2017).
---------------------------------------------------------------------------
       Gain on the sale of depreciable property is divided between 
     U.S.-source and foreign-source in the same ratio that the 
     depreciation was previously deductible for U.S. tax 
     purposes.\1328\ Payments received on sales of intangible 
     property are sourced in the same manner as royalties to the 
     extent the payments are contingent on the productivity, use, 
     or disposition of the intangible property.\1329\
---------------------------------------------------------------------------
     \1328\ Sec. 865(c).
     \1329\ Sec. 865(d).
---------------------------------------------------------------------------
     Personal services income
       Compensation for labor or personal services is generally 
     sourced to the place-of-performance. Thus, compensation for 
     labor or personal services performed in the United States 
     generally is treated as U.S.-source income, subject to an 
     exception for amounts

[[Page 20036]]

     that meet certain de minimis criteria.\1330\ Compensation for 
     services performed both within and without the United States 
     is allocated between U.S.-and foreign-source.\1331\
---------------------------------------------------------------------------
     \1330\ Sec. 861(a)(3). Gross income of a nonresident alien 
     individual, who is present in the United States as a member 
     of the regular crew of a foreign vessel, from the performance 
     of personal services in connection with the international 
     operation of a ship is generally treated as foreign-source 
     income.
     \1331\ Treas. Reg. sec. 1.861-4(b).
---------------------------------------------------------------------------
     Insurance income
       Underwriting income from issuing insurance or annuity 
     contracts generally is treated as U.S.-source income if the 
     contract involves property in, liability arising out of an 
     activity in, or the lives or health of residents of, the 
     United States.\1332\
---------------------------------------------------------------------------
     \1332\ Sec. 861(a)(7).
---------------------------------------------------------------------------
     Transportation income
       Transportation income is any income derived from, or in 
     connection with, the use (or hiring or leasing for use) of a 
     vessel or aircraft (or a container used in connection 
     therewith) or the performance of services directly related to 
     such use.\1333\ That definition does not encompass land 
     transport except to the extent that it is directly related to 
     shipping by vessel or aircraft, but regulations extend a 
     similar rule for determining the source of income from 
     transportation services other than shipping or aviation. 
     Sources rules generally provide that income from furnishing 
     transportation that both begins and ends in the United States 
     is U.S.-source income,\1334\ and 50-percent of income 
     attributable to transportation that either begins or the ends 
     in the United States is treated as U.S.-source income. 
     However, to the extent that the operator of a shipping or 
     cruise line is foreign, its ownership structure and the 
     maritime law \1335\ applicable for determining what 
     constitutes international shipping as well as specific income 
     tax provisions combine to create an industry-specific 
     departure from the rules generally applicable.\1336\
---------------------------------------------------------------------------
     \1333\ Sec. 863(c)(3).
     \1334\ Sec. 863(c).
     \1335\ U.S. law on navigation is codified in U.S. Code at 
     title 33, and is consistent with the body of international 
     maritime law. The normative principles of international 
     maritime law for determining the maritime zones and 
     territorial sovereignty over seas are embodied in the United 
     Nations Convention on the Law of the Sea, first opened for 
     signature in 1982. Since 1983, the Executive Branch has 
     agreed that the treaty is generally consistent with existing 
     international norms of the law of the sea and that the United 
     States would act in conformity to the principles of the 
     treaty other than those portions regarding deep seabed 
     exploitation, even in the absence of ratification of the 
     treaty.
     \1336\ Due to the regulatory framework for aviation, an 
     international flight must either originate or conclude in the 
     country of residence of the airline's owner, where income tax 
     for the international flight is assessed. In contrast to 
     international shipping, international aviation cannot be 
     carried out using flags-of-convenience. Thus, although tax 
     law treats shipping and aviation similarly, the differences 
     between the two industries and the applicable regulatory 
     regimes produce different tax outcomes. Full territorial 
     sovereignty applies within 12 nautical miles of one's coast; 
     the contiguous waters beyond 12 nautical miles but up to 24 
     nautical miles are subject to some regulation. Within 200 
     nautical miles, a country may assert an economic zone for 
     exploitation of living marine resources and some minerals. 
     Beyond 200 nautical miles are the ``high seas'' in which no 
     sovereign state may assert exclusive jurisdiction.
---------------------------------------------------------------------------
       A subcategory of transportation income, ``U.S. source gross 
     transportation income'' is subject to taxation on a gross 
     basis at the rate of four percent.\1337\ Income is within the 
     scope of this special tax if it is considered to be U.S. 
     source because travel begins or ends in the United States, is 
     not effectively connected, and is not of a kind to which the 
     exemption from tax applies.\1338\
---------------------------------------------------------------------------
     \1337\ Sec. 887(a). Special rules for determining whether 
     transportation income is effectively connected with the 
     conduct of a U.S. trade or business are also provided, and 
     for coordinating the application of sections 871, 882, and 
     887.
     \1338\ Sec. 887(b)(1).
---------------------------------------------------------------------------
       An exemption from U.S. tax is provided for transportation 
     income of foreign persons from countries that extend 
     reciprocal relief to U.S. persons. A nonresident alien 
     individual with income from the international operation of a 
     ship may qualify, provided that the foreign country in which 
     such individual is resident grants an equivalent exemption to 
     individual residents of the United States.\1339\ A similar 
     exemption from U.S. tax is provided for gross income derived 
     by a foreign corporation from the international operation of 
     an aircraft, provided that the foreign country in which the 
     corporation is organized grants an equivalent exemption to 
     corporations organized in the United States.\1340\ To 
     determine whether income from shipping or aviation is 
     eligible for an exemption under section 883, one must examine 
     the extent to which the foreign jurisdiction has extended 
     reciprocity for U.S. businesses; whether the party claiming 
     an exemption is eligible for the tax relief; and the nature 
     of the activities that give rise to the income.
---------------------------------------------------------------------------
     \1339\ Sec. 872(b)(1).
     \1340\ Sec. 883(a)(2).
---------------------------------------------------------------------------
     Income from space or ocean activities or international 
         communications
       In the case of a foreign person, generally no income from a 
     space or ocean activity or from international communications 
     is treated as U.S.-source income.\1341\ With respect to the 
     latter, an exception is provided if the foreign person 
     maintains an office or other fixed place of business in the 
     United States, in which case the international communications 
     income attributable to such fixed place of business is 
     treated as U.S.-source income.\1342\ For U.S. persons, all 
     income from space or ocean activities and 50 percent of 
     income from international communications is treated as U.S.-
     source income.
---------------------------------------------------------------------------
     \1341\ Sec. 863(d).
     \1342\ Sec. 863(e).
---------------------------------------------------------------------------
     Amounts received with respect to guarantees of indebtedness
       Amounts received, directly or indirectly, from a 
     noncorporate resident or from a domestic corporation for the 
     provision of a guarantee of indebtedness of such person are 
     income from U.S. sources.\1343\ This includes payments that 
     are made indirectly for the provision of a guarantee. For 
     example, U.S.-source income under this rule includes a 
     guarantee fee paid by a foreign bank to a foreign corporation 
     for the foreign corporation's guarantee of indebtedness owed 
     to the bank by the foreign corporation's domestic subsidiary, 
     where the cost of the guarantee fee is passed on to the 
     domestic subsidiary through, for instance, additional 
     interest charged on the indebtedness. In this situation, the 
     domestic subsidiary has paid the guarantee fee as an economic 
     matter through higher interest costs, and the additional 
     interest payments made by the subsidiary are treated as 
     indirect payments of the guarantee fee and, therefore, as 
     income from U.S. sources.
---------------------------------------------------------------------------
     \1343\ Sec. 861(a)(9). This provision effects a legislative 
     override of the opinion in Container Corp. v. Commissioner, 
     134 T.C. 122 (February 17, 2010), aff'd 2011 WL1664358, 107 
     A.F.T.R.2d 2011-1831 (5th Cir. May 2, 2011), in which the Tax 
     Court held that fees paid by a domestic corporation to its 
     foreign parent with respect to guarantees issued by the 
     parent for the debts of the domestic corporation were more 
     closely analogous to compensation for services than to 
     interest, and determined that the source of the fees should 
     be determined by reference to the residence of the foreign 
     parent-guarantor. As a result, the income was treated as 
     income from foreign sources.
---------------------------------------------------------------------------
       Such U.S.-source income also includes amounts received from 
     a foreign person, whether directly or indirectly, for the 
     provision of a guarantee of indebtedness of that foreign 
     person if the payments received are connected with income of 
     such person that is effectively connected with the conduct of 
     a U.S. trade or business. Amounts received from a foreign 
     person, whether directly or indirectly, for the provision of 
     a guarantee of that person's debt, are treated as foreign-
     source income if they are not from sources within the United 
     States under section 861(a)(9).
     4. Intercompany transfers

     Transfer pricing
       A basic U.S. tax principle applicable in dividing profits 
     from transactions between related taxpayers is that the 
     amount of profit allocated to each related taxpayer must be 
     measured by reference to the amount of profit that a 
     similarly situated taxpayer would realize in similar 
     transactions with unrelated parties. The transfer pricing 
     rules of section 482 and the accompanying Treasury 
     regulations are intended to preserve the U.S. tax base by 
     ensuring that taxpayers do not shift income properly 
     attributable to the United States to a related foreign 
     company through pricing that does not reflect an arm's-length 
     result.\1344\ Similarly, the domestic laws of most U.S. 
     trading partners include rules to limit income shifting 
     through transfer pricing. The arm's-length standard is 
     difficult to administer in situations in which no unrelated 
     party market prices exist for transactions between related 
     parties. When a foreign person with U.S. activities has 
     transactions with related U.S. taxpayers, the amount of 
     income attributable to U.S. activities is determined in part 
     by the same transfer pricing rules of section 482 that apply 
     when U.S. persons with foreign activities transact with 
     related foreign taxpayers.
---------------------------------------------------------------------------
     \1344\ For a detailed description of the U.S. transfer 
     pricing rules, see Joint Committee on Taxation, Present Law 
     and Background Related to Possible Income Shifting and 
     Transfer Pricing (JCX-37-10), July 20, 2010, pp. 18-50.
---------------------------------------------------------------------------
       Section 482 authorizes the Secretary of the Treasury to 
     allocate income, deductions, credits, or allowances among 
     related business entities \1345\ when necessary to clearly 
     reflect income or otherwise prevent tax avoidance, and 
     comprehensive Treasury regulations under that section adopt 
     the arm's-length standard as the method for determining 
     whether allocations are appropriate.\1346\ The regulations 
     generally attempt to identify the respective amounts of 
     taxable income of the related parties that would have 
     resulted if the parties had been unrelated parties dealing at 
     arm's length. For income from intangible property, section 
     482 provides ``in the case of any transfer (or license) of 
     intangible property (within the

[[Page 20037]]

     meaning of section 936(h)(3)(B)), the income with respect to 
     such transfer or license shall be commensurate with the 
     income attributable to the intangible.'' By requiring 
     inclusion in income of amounts commensurate with the income 
     attributable to the intangible, Congress was responding to 
     concerns regarding the effectiveness of the arm's-length 
     standard with respect to intangible property--including, in 
     particular, high-profit-potential intangibles.\1347\
---------------------------------------------------------------------------
     \1345\ The term ``related'' as used herein refers to 
     relationships described in section 482, which refers to ``two 
     or more organizations, trades or businesses (whether or not 
     incorporated, whether or not organized in the United States, 
     and whether or not affiliated) owned or controlled directly 
     or indirectly by the same interests.''
     \1346\ Section 1059A buttresses section 482 by limiting the 
     extent to which costs used to determine custom valuation can 
     also be used to determine basis in property imported from a 
     related party. A taxpayer that imports property from a 
     related party may not assign a value to the property for cost 
     purposes that exceeds its customs value.
     \1347\ H.R. Rep. No. 99-426, p. 423.
---------------------------------------------------------------------------
     Gain recognition on outbound transfers
       If a transfer of intangible property to a foreign affiliate 
     occurs in connection with certain corporate transactions, 
     nonrecognition rules that may otherwise apply are suspended. 
     The transferor of intangible property must recognize gain 
     from the transfer as though he had sold the intangible 
     (regardless of the stage of development of the intangible 
     property) in exchange for payments contingent on the use, 
     productivity or disposition of the transferred property in 
     amounts that would have been received either annually over 
     the useful life of the property or upon disposition of the 
     property after the transfer.\1348\ The appropriate amounts of 
     those imputed payments are determined using transfer-pricing 
     principles. Final regulations issued in 2016 eliminate an 
     exception under temporary regulations that permitted 
     nonrecognition of gain from outbound transfers of foreign 
     goodwill and going concern value. However, the Secretary 
     announced that reinstatement of an exception for active trade 
     or business is under consideration for cases with little 
     potential for abuse and administrative difficulties.\1349\
---------------------------------------------------------------------------
     \1348\ Sec. 367(d).
     \1349\ See, T.D. 9803, 81 F.R. 91012 (December 17, 2016). 
     Treas. Reg. sec. 1.367(d)-1(b) now provides that the rules of 
     section 367(d) apply to transfers of intangible property as 
     defined under Treas. Sec. 1.367(a)-1(d)(5) after September 
     14, 2015, and to any transfers occurring before that date 
     resulting from entity classification elections filed on or 
     after September 15, 2015. Noting that commenters on the 
     regulations had cited legislative history that contemplated 
     active business exceptions, Treasury announced the 
     reconsideration of the rule. U.S. Treasury Department, Second 
     Report to the President on Identifying and Reducing Tax 
     Regulatory Burdens, Executive Order 13789 October 2, 2017, 
     TNT Doc 2017-72131. The relevant legislative history is found 
     at in H.R. Rep. No. 98-432, 98th Cong., 2d Sess. 1318-1320 
     (March 5, 1984) and Conference Report, H.R. Rep. No. 98-861, 
     98th Cong. 2d Sess. 951-957 (June 23, 1984).
---------------------------------------------------------------------------

    C. U.S. Tax Rules Applicable to Nonresident Aliens and Foreign 
                         Corporations (Inbound)

       Nonresident aliens and foreign corporations are generally 
     subject to U.S. tax only on their U.S.-source income. Thus, 
     the source and type of income received by a foreign person 
     generally determines whether there is any U.S. income tax 
     liability and the mechanism by which it is taxed. The U.S. 
     tax rules for U.S. activities of foreign taxpayers apply 
     differently to two broad types of income: U.S.-source income 
     that is ``fixed or determinable annual or periodical gains, 
     profits, and income'' (``FDAP income'') or income that is 
     ``effectively connected with the conduct of a trade or 
     business within the United States'' (``ECI''). FDAP income 
     generally is subject to a 30-percent gross-basis tax withheld 
     at its source, while ECI is generally subject to the same 
     U.S. tax rules that apply to business income derived by U.S. 
     persons. That is, deductions are permitted in determining 
     taxable ECI, which is then taxed at the same rates applicable 
     to U.S. persons. Much FDAP income and similar income is, 
     however, exempt from tax or is subject to a reduced rate of 
     tax under the Code \1350\ or a bilateral income tax 
     treaty.\1351\
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     \1350\ E.g., the portfolio interest exception in section 
     871(h) (discussed below).
     \1351\  Because each treaty reflects considerations unique to 
     the relationship between the two treaty countries, treaty 
     withholding tax rates on each category of income are not 
     uniform across treaties.
---------------------------------------------------------------------------
     1. Gross-basis taxation of U.S.-source income.
       Non-business income received by foreign persons from U.S. 
     sources is generally subject to tax on a gross basis at a 
     rate of 30 percent, which is collected by withholding at the 
     source of the payment. As explained below, the categories of 
     income subject to the 30-percent tax and the categories for 
     which withholding is required are generally coextensive, with 
     the result that determining the withholding tax liability 
     determines the substantive liability.
       The income of non-resident aliens or foreign corporations 
     that is subject to tax at a rate of 30-percent includes FDAP 
     income that is not effectively connected with the conduct of 
     a U.S. trade or business.\1352\ The items enumerated in 
     defining FDAP income are illustrative; the common 
     characteristic of types of FDAP income is that taxes with 
     respect to the income may be readily computed and 
     collected at the source, in contrast to the administrative 
     difficulty involved in determining the seller's basis and 
     resulting gain from sales of property.\1353\ The words 
     ``annual or periodical'' are ``merely generally 
     descriptive'' of the payments that could be within the 
     purview of the statute and do not preclude application of 
     the withholding tax to one-time, lump sum payments to 
     nonresident aliens.\1354\
---------------------------------------------------------------------------
     \1352\ Secs. 871(a), 881. If the FDAP income is also ECI, it 
     is taxed on a net basis, at graduated rates.
     \1353\ Commissioner v. Wodehouse, 337 U.S. 369, 388-89 
     (1949). After reviewing legislative history of the Revenue 
     Act of 1936, the Supreme Court noted that Congress expressly 
     intended to limit taxes on nonresident aliens to taxes that 
     could be readily collectible, i.e., subject to withholding, 
     in response to ``a theoretical system impractical of 
     administration in a great number of cases. H.R. Rep. No. 
     2475, 74th Cong., 2d Sess. 9-10 (1936).'' In doing so, the 
     Court rejected P.G. Wodehouse's arguments that an advance 
     royalty payment was not within the purview of the statutory 
     definition of FDAP income.
     \1354\ Commissioner v. Wodehouse, 337 U.S. 369, 393 (1949).
---------------------------------------------------------------------------
       With respect to income from shipping, the gross basis tax 
     potentially applicable is four percent,\1355\ unless the 
     income is effectively connected with a U.S. trade or 
     business, and thus subject to the graduated rates, as 
     determined under rules specific to U.S.-source gross 
     transportation income rather than the more broadly applicable 
     rules defining effectively connected income in section 
     864(c). Even if the income is within the purview of those 
     special rules, it may nevertheless be exempt if the income is 
     derived from the international operation of a ship or 
     aircraft by a foreign entity organized in a jurisdiction 
     which provides a reciprocal exemption to U.S. entities.\1356\
---------------------------------------------------------------------------
     \1355\ Sec. 887.
     \1356\ Sec. 883(a)(1). In addition, to the extent provided in 
     regulations, income from shipping and aviation is not subject 
     to the four-percent gross basis tax if the income is of a 
     type that is not subject to the reciprocal exemption for net 
     basis taxation. See sec. 887(b)(1). Comparable rules under 
     section 872(b)(1) apply to income of nonresident alien 
     individuals from shipping operations.
---------------------------------------------------------------------------
     Types of FDAP income
       FDAP income encompasses a broad range of types of gross 
     income, but has limited application to gains on sales of 
     property, including market discount on bonds and option 
     premiums.\1357\ Capital gains received by nonresident aliens 
     present in the United States for fewer than 183 days are 
     generally treated as foreign source and are thus not subject 
     to U.S. tax, unless the gains are effectively connected with 
     a U.S. trade or business; capital gains received by 
     nonresident aliens present in the United States for 183 days 
     or more \1358\ that are treated as income from U.S. sources 
     are subject to gross-basis taxation.\1359\ In contrast, U.S-
     source gains from the sale or exchange of intangibles are 
     subject to tax and withholding if they are contingent upon 
     the productivity of the property sold and are not effectively 
     connected with a U.S. trade or business.\1360\
---------------------------------------------------------------------------
     \1357\ Although technically insurance premiums paid to a 
     foreign insurer or reinsurer are FDAP income, they are exempt 
     from withholding under Treas. Reg. sec. 1.1441-2(a)(7) if the 
     insurance contract is subject to the excise tax under section 
     4371. Treas. Reg. secs. 1.1441-2(b)(1)(i) and 1.1441-2(b)(2).
     \1358\ For purposes of this rule, whether a person is 
     considered a resident in the United States is determined by 
     application of the rules under section 7701(b).
     \1359\ Sec. 871(a)(2). In addition, certain capital gains 
     from sales of U.S. real property interests are subject to tax 
     as effectively connected income (or in some instances as 
     dividend income) under the Foreign Investment in Real 
     Property Tax Act of 1980 (``FIRPTA'').
     \1360\ Secs. 871(a)(1)(D), 881(a)(4).
---------------------------------------------------------------------------
       Interest on bank deposits may qualify for exemption on two 
     grounds, depending on where the underlying principal is held 
     on deposit. Interest paid with respect to deposits with 
     domestic banks and savings and loan associations, and certain 
     amounts held by insurance companies, are U.S.-source income 
     but are not subject to the U.S. tax when paid to a foreign 
     person, unless the interest is effectively connected with a 
     U.S. trade or business of the recipient.\1361\ Interest on 
     deposits with foreign branches of domestic banks and domestic 
     savings and loan associations is not treated as U.S.-source 
     income and is thus exempt from U.S. tax (regardless of 
     whether the recipient is engaged in a U.S. trade or 
     business).\1362\ Similarly, interest and original issue 
     discount on certain short-term obligations is also exempt 
     from U.S. tax when paid to a foreign person.\1363\ 
     Additionally, there is generally no information reporting 
     required with respect to payments of such amounts.\1364\
---------------------------------------------------------------------------
     \1361\ Secs. 871(i)(2)(A), 881(d); Treas. Reg. sec. 1.1441-
     1(b)(4)(ii).
     \1362\ Sec. 861(a)(1)(B); Treas. Reg. sec. 1.1441-
     1(b)(4)(iii).
     \1363\ Secs. 871(g)(1)(B), 881(a)(3); Treas. Reg. sec. 
     1.1441-1(b)(4)(iv).
     \1364\ Treas. Reg. sec. 1.1461-1(c)(2)(ii)(A), (B). 
     Regulations require a bank to report interest if the 
     recipient is a nonresident alien who resides in a country 
     with which the United States has a satisfactory exchange of 
     information program under a bilateral agreement and the 
     deposit is maintained at an office in the United States. 
     Treas. Reg. secs. 1.6049-4(b)(5) and 1.6049-8. The IRS 
     publishes lists of the countries whose residents are subject 
     to the reporting requirements, and those countries with 
     respect to which the reported information will be 
     automatically exchanged. Rev. Proc. 2017-31, available at 
     https://www.irs.gov/pub/irs-drop/rp-17-31.pdf, supplementing 
     Rev. Proc. 2014-64.
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       Although FDAP income includes U.S.-source portfolio 
     interest, such interest is specifically exempt from the 30-
     percent gross-basis tax. Portfolio interest is any interest 
     (including original issue discount) that is paid on an 
     obligation that is in registered form and for which the 
     beneficial owner has provided to the U.S. withholding

[[Page 20038]]

     agent a statement certifying that the beneficial owner is not 
     a U.S. person.\1365\ For obligations issued before March 19, 
     2012, portfolio interest also includes interest paid on an 
     obligation that is not in registered form, provided that the 
     obligation is shown to be targeted to foreign investors under 
     the conditions sufficient to establish deductibility of the 
     payment of such interest.\1366\ Portfolio interest, however, 
     does not include interest received by a 10-percent 
     shareholder,\1367\ certain contingent interest,\1368\ 
     interest received by a controlled foreign corporation from a 
     related person,\1369\ or interest received by a bank on an 
     extension of credit made pursuant to a loan agreement entered 
     into in the ordinary course of its trade or business.\1370\
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     \1365\ Sec. 871(h)(2).
     \1366\ Sec. 163(f)(2)(B). The exception to the registration 
     requirements for foreign targeted securities was repealed in 
     2010, effective for obligations issued two years after 
     enactment, thus narrowing the portfolio interest exemption 
     for obligations issued after March 18, 2012. See Hiring 
     Incentives to Restore Employment Law of 2010, Pub. L. No. 
     111-147, sec. 502(b).
     \1367\ Sec. 871(h)(3).
     \1368\ Sec. 871(h)(4).
     \1369\ Sec. 881(c)(3)(C).
     \1370\ Sec. 881(c)(3)(A).
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     Imposition of gross-basis tax and reporting by U.S. 
         withholding agents
       The 30-percent tax on FDAP income is generally collected by 
     means of withholding.\1371\ Withholding on FDAP payments to 
     foreign payees is required unless the withholding 
     agent,\1372\ i.e., the person making the payment to the 
     foreign person receiving the income, can establish that the 
     beneficial owner of the amount is eligible for an exemption 
     from withholding or a reduced rate of withholding under an 
     income tax treaty.\1373\ The principal statutory exemptions 
     from the 30-percent tax apply to interest on bank deposits, 
     and portfolio interest, described above.\1374\
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     \1371\ Secs. 1441, 1442.
     \1372\ Withholding agent is defined broadly to include any 
     U.S. or foreign person that has the control, receipt, 
     custody, disposal, or payment of an item of income of a 
     foreign person subject to withholding. Treas. Reg. sec. 
     1.1441-7(a).
     \1373\ Secs. 871, 881, 1441, 1442; Treas. Reg. sec. 1.1441-
     1(b).
     \1374\ A reduced rate of withholding of 14 percent applies to 
     certain scholarships and fellowships paid to individuals 
     temporarily present in the United States. Sec. 1441(b). In 
     addition to statutory exemptions, the 30-percent tax with 
     respect to interest, dividends and royalties may be reduced 
     or eliminated by a tax treaty between the United States and 
     the country in which the recipient of income otherwise 
     subject to tax is resident.
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       In many instances, the income subject to withholding is the 
     only income of the foreign recipient that is subject to any 
     U.S. tax. No U.S. Federal income tax return from the foreign 
     recipient is generally required with respect to the income 
     from which tax was withheld, if the recipient has no ECI 
     income and the withholding is sufficient to satisfy the 
     recipient's liability. Accordingly, although the 30-percent 
     gross-basis tax is a withholding tax, it is also generally 
     the final tax liability of the foreign recipient (unless the 
     foreign recipients files for a refund).
       A withholding agent that makes payments of U.S.-source 
     amounts to a foreign person is required to report and pay 
     over any amounts of U.S. tax withheld. The reports are due to 
     be filed with the IRS by March 15 of the calendar year 
     following the year in which the payment is made. Two types of 
     reports are required: (1) a summary of the total U.S.-source 
     income paid and withholding tax withheld on foreign persons 
     for the year and (2) a report to both the IRS and the foreign 
     person of that person's U.S.-source income that is subject to 
     reporting.\1375\ The nonresident withholding rules apply 
     broadly to any financial institution or other payor, 
     including foreign financial institutions.\1376\
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     \1375\ Treas. Reg. sec. 1.1461-1(b), (c).
     \1376\ See Treas. Reg. sec. 1.1441-7(a) (definition of 
     withholding agent includes foreign persons).
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       To the extent that the withholding agent deducts and 
     withholds an amount, the withheld tax is credited to the 
     recipient of the income.\1377\ If the agent withholds more 
     than is required, and results in an overpayment of tax, the 
     excess may be refunded to the recipient of the income upon 
     filing of a timely claim for refund.
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     \1377\ Sec. 1462.
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     Excise tax on foreign reinsurance premiums
       An excise tax applies to premiums paid to foreign insurers 
     and reinsurers covering U.S. risks.\1378\ The excise tax is 
     imposed on a gross basis at the rate of one percent on 
     reinsurance and life insurance premiums, and at the rate of 
     four percent on property and casualty insurance premiums. The 
     excise tax does not apply to premiums that are effectively 
     connected with the conduct of a U.S. trade or business or 
     that are exempted from the excise tax under an applicable 
     income tax treaty. The excise tax paid by one party cannot be 
     credited if, for example, the risk is reinsured with a second 
     party in a transaction that is also subject to the excise 
     tax.
---------------------------------------------------------------------------
     \1378\ Secs. 4371-4374.
---------------------------------------------------------------------------
       Many U.S. tax treaties provide an exemption from the excise 
     tax, including the treaties with Germany, Japan, Switzerland, 
     and the United Kingdom.\1379\ To prevent persons from 
     inappropriately obtaining the benefits of exemption from the 
     excise tax, the treaties generally include an anti-conduit 
     rule. The most common anti-conduit rule provides that the 
     treaty exemption applies to the excise tax only to the extent 
     that the risks covered by the premiums are not reinsured with 
     a person not entitled to the benefits of the treaty (or any 
     other treaty that provides exemption from the excise 
     tax).\1380\
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     \1379\ Generally, when a foreign person qualifies for 
     benefits under such a treaty, the United States is not 
     permitted to collect the insurance premiums excise tax from 
     that person.
     \1380\ In Rev. Rul. 2008-15, 2008-1 C.B. 633, the IRS 
     provided guidance to the effect that the excise tax is 
     imposed separately on each reinsurance policy covering a U.S. 
     risk. Thus, if a U.S. insurer or reinsurer reinsures a U.S. 
     risk with a foreign reinsurer, and that foreign reinsurer in 
     turn reinsures the risk with a second foreign reinsurer, the 
     excise tax applies to both the premium to the first foreign 
     reinsurer and the premium to the second foreign reinsurer. In 
     addition, if the first foreign reinsurer is resident in a 
     jurisdiction with a tax treaty containing an excise tax 
     exemption, the revenue ruling provides that the excise tax 
     still applies to both payments to the extent that the 
     transaction violates an anti-conduit rule in the applicable 
     tax treaty. Even if no violation of an anti-conduit rule 
     occurs, under the revenue ruling, the excise tax still 
     applies to the premiums paid to the second foreign reinsurer, 
     unless the second foreign reinsurer is itself entitled to an 
     excise tax exemption.
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     2. Net-basis taxation of U.S.-source income
       The United States taxes on a net basis the income of 
     foreign persons that is ``effectively connected'' with the 
     conduct of a trade or business in the United States.\1381\ 
     Any gross income derived by the foreign person that is not 
     effectively connected with the person's U.S. business is not 
     taken into account in determining the rates of U.S. tax 
     applicable to the person's income from the business.\1382\
---------------------------------------------------------------------------
     \1381\ Secs. 871(b), 882.
     \1382\ Secs. 871(b)(2), 882(a)(2).
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     U.S. trade or business
       A foreign person is subject to U.S. tax on a net basis if 
     the person is engaged in a U.S. trade or business. Partners 
     in a partnership and beneficiaries of an estate or trust are 
     treated as engaged in the conduct of a trade or business 
     within the United States if the partnership, estate, or trust 
     is so engaged.\1383\
---------------------------------------------------------------------------
     \1383\ Sec. 875.
---------------------------------------------------------------------------
       The question whether a foreign person is engaged in a U.S. 
     trade or business is factual and has generated much case law. 
     Basic issues include whether the activity constitutes 
     business rather than investing, whether sufficient activities 
     in connection with the business are conducted in the United 
     States, and whether the relationship between the foreign 
     person and persons performing functions in the United States 
     in respect of the business is sufficient to attribute those 
     functions to the foreign person.
       The trade or business rules differ from one activity to 
     another. The term ``trade or business within the United 
     States'' expressly includes the performance of personal 
     services within the United States.\1384\ If, however, a 
     nonresident alien individual performs personal services for a 
     foreign employer, and the individual's total compensation for 
     the services and period in the United States are minimal 
     ($3,000 or less in total compensation and 90 days or fewer of 
     physical presence in a year), the individual is not 
     considered to be engaged in a U.S. trade or business.\1385\ 
     Detailed rules govern whether trading in stocks or securities 
     or commodities constitutes the conduct of a U.S. trade or 
     business.\1386\ A foreign person who trades in stock or 
     securities or commodities in the United States through an 
     independent agent generally is not treated as engaged in a 
     U.S. trade or business if the foreign person does not have an 
     office or other fixed place of business in the United States 
     through which trades are carried out. A foreign person who 
     trades stock or securities or commodities for the person's 
     own account also generally is not considered to be engaged in 
     a U.S. business so long as the foreign person is not a dealer 
     in stock or securities or commodities.
---------------------------------------------------------------------------
     \1384\ Sec. 864(b).
     \1385\ Sec. 864(b)(1).
     \1386\ Sec. 864(b)(2).
---------------------------------------------------------------------------
       For eligible foreign persons, U.S. bilateral income tax 
     treaties restrict the application of net-basis U.S. taxation. 
     Under each treaty, the United States is permitted to tax 
     business profits only to the extent those profits are 
     attributable to a U.S. permanent establishment of the foreign 
     person. The threshold level of activities that constitute a 
     permanent establishment is generally higher than the 
     threshold level of activities that constitute a U.S. trade or 
     business. For example, a permanent establishment typically 
     requires the maintenance of a fixed place of business over a 
     significant period of time.
     Effectively connected income
       A foreign person that is engaged in the conduct of a trade 
     or business within the United States is subject to U.S. net-
     basis taxation on the income that is ``effectively 
     connected'' with the business. Specific statutory rules 
     govern whether income is ECI.\1387\
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     \1387\ Sec. 864(c).
---------------------------------------------------------------------------
       In the case of U.S.-source capital gain and U.S.-source 
     income of a type that would be subject to gross basis U.S. 
     taxation, the factors taken into account in determining 
     whether the income is ECI include whether the income is 
     derived from assets used in or held for use in the conduct of 
     the U.S. trade or business and whether the activities of the 
     trade or business were a material factor in the realization 
     of the amount (the ``asset use'' and ``business activities'' 
     tests).\1388\

[[Page 20039]]

     Under the asset use and business activities tests, due regard 
     is given to whether the income, gain, or asset was accounted 
     for through the U.S. trade or business. All other U.S.-source 
     income is treated as ECI.\1389\
---------------------------------------------------------------------------
     \1388\ Sec. 864(c)(2).
     \1389\ Sec. 864(c)(3).
---------------------------------------------------------------------------
       A foreign person who is engaged in a U.S. trade or business 
     may have limited categories of foreign-source income that are 
     considered to be ECI.\1390\ Foreign-source income not 
     included in one of these categories (described next) 
     generally is exempt from U.S. tax.
---------------------------------------------------------------------------
     \1390\ This income is subject to net-basis U.S. taxation 
     after allowance of a credit for any foreign income tax 
     imposed on the income. Sec. 906.
---------------------------------------------------------------------------
       A foreign person's income from foreign sources generally is 
     considered to be ECI only if the person has an office or 
     other fixed place of business within the United States to 
     which the income is attributable and the income is in one of 
     the following categories: (1) rents or royalties for the use 
     of patents, copyrights, secret processes or formulas, good 
     will, trade-marks, trade brands, franchises, or other like 
     intangible properties derived in the active conduct of the 
     trade or business; (2) interest or dividends derived in the 
     active conduct of a banking, financing, or similar business 
     within the United States or received by a corporation the 
     principal business of which is trading in stocks or 
     securities for its own account; or (3) income derived from 
     the sale or exchange (outside the United States), through the 
     U.S. office or fixed place of business, of inventory or 
     property held by the foreign person primarily for sale to 
     customers in the ordinary course of the trade or business, 
     unless the sale or exchange is for use, consumption, or 
     disposition outside the United States and an office or other 
     fixed place of business of the foreign person in a foreign 
     country participated materially in the sale or 
     exchange.\1391\ Foreign-source dividends, interest, and 
     royalties are not treated as ECI if the items are paid by a 
     foreign corporation more than 50 percent (by vote) of which 
     is owned directly, indirectly, or constructively by the 
     recipient of the income.\1392\
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     \1391\ Sec. 864(c)(4)(B).
     \1392\ Sec. 864(c)(4)(D)(i).
---------------------------------------------------------------------------
       In determining whether a foreign person has a U.S. office 
     or other fixed place of business, the office or other fixed 
     place of business of an agent generally is disregarded. The 
     place of business of an agent other than an independent agent 
     acting in the ordinary course of business is not disregarded, 
     however, if the agent either has the authority (regularly 
     exercised) to negotiate and conclude contracts in the name of 
     the foreign person or has a stock of merchandise from which 
     he regularly fills orders on behalf of the foreign 
     person.\1393\ If a foreign person has a U.S. office or fixed 
     place of business, income, gain, deduction, or loss is not 
     considered attributable to the office unless the office was a 
     material factor in the production of the income, gain, 
     deduction, or loss and the office regularly carries on 
     activities of the type from which the income, gain, 
     deduction, or loss was derived.\1394\
---------------------------------------------------------------------------
     \1393\ Sec. 864(c)(5)(A).
     \1394\ Sec. 864(c)(5)(B).
---------------------------------------------------------------------------
       Special rules apply in determining the ECI of an insurance 
     company. The foreign-source income of a foreign corporation 
     that is subject to tax under the insurance company provisions 
     of the Code is treated as ECI if the income is attributable 
     to its United States business.\1395\
---------------------------------------------------------------------------
     \1395\ Sec. 864(c)(4)(C).
---------------------------------------------------------------------------
       Income, gain, deduction, or loss for a particular year 
     generally is not treated as ECI if the foreign person is not 
     engaged in a U.S. trade or business in that year.\1396\ If, 
     however, income or gain taken into account for a taxable year 
     is attributable to the sale or exchange of property, the 
     performance of services, or any other transaction that 
     occurred in a prior taxable year, the determination whether 
     the income or gain is taxable on a net basis is made as if 
     the income were taken into account in the earlier year and 
     without regard to the requirement that the taxpayer be 
     engaged in a trade or business within the United States 
     during the later taxable year.\1397\ If any property ceases 
     to be used or held for use in connection with the conduct of 
     a U.S. trade or business and the property is disposed of 
     within 10 years after the cessation, the determination 
     whether any income or gain attributable to the disposition of 
     the property is taxable on a net basis is made as if the 
     disposition occurred immediately before the property ceased 
     to be used or held for use in connection with the conduct of 
     a U.S. trade or business and without regard to the 
     requirement that the taxpayer be engaged in a U.S. business 
     during the taxable year for which the income or gain is taken 
     into account.\1398\
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     \1396\ Sec. 864(c)(1)(B).
     \1397\ Sec. 864(c)(6).
     \1398\ Sec. 864(c)(7).
---------------------------------------------------------------------------
       Transportation income from U.S. sources is treated as 
     effectively connected with a foreign person's conduct of a 
     U.S. trade or business only if the foreign person has a fixed 
     place of business in the United States that is involved in 
     the earning of such income and substantially all of such 
     income of the foreign person is attributable to regularly 
     scheduled transportation.\1399\ If the transportation income 
     is effectively connected with conduct of a U.S. trade or 
     business, the transportation income, along with 
     transportation income that is from U.S. sources because the 
     transportation both begins and ends in the United States, may 
     be subject to net-basis taxation. Income from the 
     international operation of a ship or aircraft may be eligible 
     for an exemption under section 883, provided that the foreign 
     jurisdiction has extended reciprocity for U.S. businesses; 
     \1400\ whether the party claiming an exemption is eligible 
     for the tax relief; \1401\ and the activities that give rise 
     to the income qualify under relevant regulations.
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     \1399\ Sec. 887(b)(4).
     \1400\ The most recent compilation of countries that the 
     United States recognizes as providing exemptions lists 
     countries in three groups: Twenty-seven countries are 
     eligible for exemption on the basis of a review of the 
     legislation in the foreign jurisdiction; 39 nations exchanged 
     diplomatic notes with the United States that grant exemption 
     to some extent; and more than 50 nations are parties with the 
     United States to bilateral income tax treaties that include a 
     shipping article. Rev. Rul. 2008-17, 2008-1 C.B. 626, 
     modified by Ann. 2008-57, 2008-C.B. 1192, 2008.
     \1401\ Sec. 883(c) and regulations thereunder.
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       Allowance of deductions
       Taxable ECI is computed by taking into account deductions 
     associated with gross ECI. For this purpose, the 
     apportionment and allocation of deductions is addressed in 
     detailed regulations. The regulations applicable to 
     deductions other than interest expense set forth general 
     guidelines for allocating deductions among classes of income 
     and apportioning deductions between ECI and non-ECI. In some 
     circumstances, deductions may be allocated on the basis of 
     units sold, gross sales or receipts, costs of goods sold, 
     profits contributed, expenses incurred, assets used, salaries 
     paid, space used, time spent, or gross income received. More 
     specific guidelines are provided for the allocation and 
     apportionment of research and experimental expenditures, 
     legal and accounting fees, income taxes, losses on 
     dispositions of property, and net operating losses. Detailed 
     regulations under section 861 address the allocation and 
     apportionment of interest deductions. In general, interest is 
     allocated and apportioned based on assets rather than income.
     3. Special rules

     FIRPTA
       A foreign person's gain or loss from the disposition of a 
     U.S. real property interest (``USRPI'') is treated as ECI 
     and, therefore, as taxable at the income tax rates applicable 
     to U.S. persons, including the rates for net capital gain. A 
     foreign person subject to tax on this income is required to 
     file a U.S. tax return under the normal rules relating to 
     receipt of ECI.\1402\ In the case of a foreign corporation, 
     the gain from the disposition of a USRPI may also be subject 
     to the branch profits tax at a 30-percent rate (or lower 
     treaty rate).
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     \1402\ Sec. 897(a).
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       The payor of income that FIRPTA treats as ECI (``FIRPTA 
     income'') is generally required to withhold U.S. tax from the 
     payment.\1403\ The foreign person can request a refund with 
     its U.S. tax return, if appropriate, based on that person's 
     total ECI and deductions (if any) for the taxable year.
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     \1403\ Sec. 1445 and Treasury regulations thereunder.
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     Branch profits taxes
       A domestic corporation owned by foreign persons is subject 
     to U.S. income tax on its net income. The earnings of the 
     domestic corporation are subject to a second tax, this time 
     at the shareholder level, when dividends are paid. As 
     described previously, when the shareholders are foreign, the 
     second-level tax is imposed at a flat rate and collected by 
     withholding. Unless the portfolio interest exemption or 
     another exemption applies, interest payments made by a 
     domestic corporation to foreign creditors are likewise 
     subject to U.S. tax. To approximate these second-level 
     withholding taxes imposed on payments made by domestic 
     subsidiaries to their foreign parent corporations, the United 
     States taxes a foreign corporation that is engaged in a U.S. 
     trade or business through a U.S. branch on amounts of U.S. 
     earnings and profits that are shifted out of, or amounts of 
     interest that are deducted by, the U.S. branch of the foreign 
     corporation. These branch taxes may be reduced or eliminated 
     under an applicable income tax treaty.\1404\
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     \1404\ See Treas. Reg. sec. 1.884-1(g), -5.
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       Under the branch profits tax, the United States imposes a 
     tax of 30 percent on a foreign corporation's ``dividend 
     equivalent amount.'' \1405\ The dividend equivalent amount 
     generally is the earnings and profits of a U.S. branch of a 
     foreign corporation attributable to its ECI.\1406\ Limited 
     categories of earnings and profits attributable to a foreign 
     corporation's ECI are excluded in calculating the dividend 
     equivalent amount.\1407\
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     \1405\ Sec. 884(a).
     \1406\ Sec. 884(b).
     \1407\ See sec. 884(d)(2) (excluding, for example, earnings 
     and profits attributable to gain from the sale of domestic 
     corporation stock that constitutes a U.S. real property 
     interest described in section 897.
---------------------------------------------------------------------------
       In arriving at the dividend equivalent amount, a branch's 
     effectively connected earnings and profits are adjusted to 
     reflect changes in a branch's U.S. net equity (that is, the 
     excess of the branch's assets over its liabilities, taking 
     into account only amounts

[[Page 20040]]

     treated as connected with its U.S. trade or business).\1408\ 
     The first adjustment reduces the dividend equivalent amount 
     to the extent the branch's earnings are reinvested in trade 
     or business assets in the United States (or reduce U.S. trade 
     or business liabilities). The second adjustment increases the 
     dividend equivalent amount to the extent prior reinvested 
     earnings are considered remitted to the home office of the 
     foreign corporation.
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     \1408\ Sec. 884(b).
---------------------------------------------------------------------------
       Interest paid by a U.S. trade or business of a foreign 
     corporation generally is treated as if paid by a domestic 
     corporation and therefore is subject to U.S. 30-percent 
     withholding tax (if the interest is paid to a foreign person 
     and a Code or treaty exemption or reduction would not be 
     available if the interest were actually paid by a domestic 
     corporation).\1409\ Certain ``excess interest'' of a U.S. 
     trade or business of a foreign corporation is treated as if 
     paid by a U.S. corporation to a foreign parent and, 
     therefore, is subject to U.S. 30-percent withholding 
     tax.\1410\ For this purpose, excess interest is the excess of 
     the interest expense of the foreign corporation apportioned 
     to the U.S. trade or business over the amount of interest 
     paid by the trade or business.
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     \1409\ Sec. 884(f)(1)(A).
     \1410\ Sec. 884(f)(1)(B).
---------------------------------------------------------------------------
     Earnings stripping
       Taxpayers are limited in their ability to reduce the U.S. 
     tax on the income derived from their U.S. operations through 
     certain earnings stripping transactions that involve interest 
     payments. If the payor's debt-to-equity ratio exceeds 1.5 to 
     1 (a debt-to-equity ratio of 1.5 to 1 or less is considered a 
     ``safe harbor''), a deduction for disqualified interest paid 
     or accrued by the payor in a taxable year is generally 
     disallowed to the extent of the payor's excess interest 
     expense.\1411\ Disqualified interest includes interest paid 
     or accrued to related parties when no Federal income tax is 
     imposed with respect to such interest; \1412\ to unrelated 
     parties in certain instances in which a related party 
     guarantees the debt (``guaranteed debt''); or to a REIT by a 
     taxable REIT subsidiary of that REIT. Excess interest expense 
     is the amount by which the payor's net interest expense (that 
     is, the excess of interest paid or accrued over interest 
     income) exceeds 50 percent of its adjusted taxable income 
     (generally taxable income computed without regard to 
     deductions for net interest expense, net operating losses, 
     domestic production activities under section 199, 
     depreciation, amortization, and depletion). Interest amounts 
     disallowed under these rules can be carried forward 
     indefinitely and are allowed as a deduction to the extent of 
     excess limitation in a subsequent tax year. In addition, any 
     excess limitation (that is, the excess, if any, of 50 percent 
     of the adjusted taxable income of the payor over the payor's 
     net interest expense) can be carried forward three years.
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     \1411\ Sec. 163(j).
     \1412\ If a tax treaty reduces the rate of tax on interest 
     paid or accrued by the taxpayer, the interest is treated as 
     interest on which no Federal income tax is imposed to the 
     extent of the same proportion of such interest as the rate of 
     tax imposed without regard to the treaty, reduced by the rate 
     of tax imposed under the treaty, bears to the rate of tax 
     imposed without regard to the treaty. Sec. 163(j)(5)(B).
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  D. U.S. Tax Rules Applicable to Foreign Activities of U.S. Persons 
                               (Outbound)

     1. In general
       In general, income earned directly by a U.S. person from 
     the conduct of a foreign business is taxed on a current 
     basis,\1413\ but income earned indirectly from a separate 
     legal entity operating the foreign business is not. Instead, 
     active foreign business income earned by a U.S. person 
     indirectly through an interest in a foreign corporation 
     generally is not subject to U.S. tax until the income is 
     distributed as a dividend to the U.S. person. Certain anti-
     deferral regimes may cause the U.S. owner to be taxed on a 
     current basis in the United States on certain categories of 
     passive or highly mobile income earned by the foreign 
     corporation regardless of whether the income has been 
     distributed as a dividend to the U.S. owner. The main anti-
     deferral regimes that provide such exceptions are the 
     controlled foreign corporation (``CFC'') rules of subpart F 
     \1414\ and the passive foreign investment company (``PFIC'') 
     rules.\1415\ A foreign tax credit generally is available to 
     offset, in whole or in part, the U.S. tax owed on foreign-
     source income, whether the income is earned directly by the 
     domestic corporation, repatriated as an actual dividend, or 
     included in the domestic parent corporation's income under 
     one of the anti-deferral regimes.\1416\
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     \1413\ 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 under section 911. 
     For a description of this exclusion, see Present Law and 
     Issues in U.S. Taxation of Cross-Border Income (JCX-42-11), 
     September 6, 2011, p. 52.
     \1414\ Secs. 951-964.
     \1415\ Secs. 1291-1298.
     \1416\ Secs. 901, 902, 960, 1293(f).
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     2. Anti-deferral regimes

     Subpart F
       Subpart F,\1417\ applicable to CFCs and their shareholders, 
     is the main anti-deferral regime of relevance to a U.S.-based 
     multinational corporate group. A CFC generally is defined as 
     any foreign corporation if U.S. persons own (directly, 
     indirectly, or constructively) more than 50 percent of the 
     corporation's stock (measured by vote or value), taking into 
     account only those U.S. persons that are within the meaning 
     of the term ``United States shareholder,'' which refers only 
     to those U.S. persons who own at least 10 percent of the 
     stock (measured by vote only).\1418\
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     \1417\ Secs. 951-964.
     \1418\ Secs. 951(b), 957, 958. The term ``United States 
     shareholder'' is used interchangeably herein with ``U.S. 
     shareholder.''
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       Subpart F income
       Under the subpart F rules, the United States generally 
     taxes the 10-percent U.S. shareholders of a CFC on their pro 
     rata shares of certain income of the CFC (referred to as 
     ``subpart F income''), without regard to whether the income 
     is distributed to the shareholders.\1419\ In effect, the 
     United States treats the 10-percent U.S. shareholders of a 
     CFC as having received a current distribution of the 
     corporation's subpart F income. With exceptions described 
     below, subpart F income generally includes passive income and 
     other income that is readily movable from one taxing 
     jurisdiction to another. Subpart F income consists of foreign 
     base company income,\1420\ insurance income,\1421\ and 
     certain income relating to international boycotts and other 
     violations of public policy.\1422\
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     \1419\ Sec. 951(a).
     \1420\ Sec. 954.
     \1421\ Sec. 953.
     \1422\ Sec. 952(a)(3)-(5).
---------------------------------------------------------------------------
       Foreign base company income consists of foreign personal 
     holding company income, which includes passive income such as 
     dividends, interest, rents, and royalties, and a number of 
     categories of income from business operations, including 
     foreign base company sales income, foreign base company 
     services income, and foreign base company oil-related 
     income.\1423\
---------------------------------------------------------------------------
     \1423\ Sec. 954.
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       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. 
     Finally, special rules apply under subpart F with respect to 
     related person insurance income \1424\ in order to address 
     captive insurance companies.\1425\ Under these rules, the 
     threshold for determining control is reduced to 25 percent, 
     and any level of stock ownership by a U.S. person in such 
     corporation is sufficient for the person to be treated as a 
     U.S. shareholder.
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     \1424\ Sec. 953(c). Related person insurance income is 
     defined for this purpose to mean any insurance income 
     attributable to a policy of insurance or reinsurance with 
     respect to which the primary insured is either a U.S. 
     shareholder (within the meaning of the provision) in the 
     foreign corporation receiving the income or a person related 
     to such a shareholder.
     \1425\ Joint Committee on Taxation, General Explanation of 
     the Tax Reform Act of 1986 (JCS-10-87), May 4, 1987, p. 968.
---------------------------------------------------------------------------
       Investments in U.S. property
       The 10-percent U.S. shareholders of a CFC also are required 
     to include currently in income for U.S. tax purposes their 
     pro rata shares of the corporation's untaxed earnings 
     invested in certain items of U.S. property.\1426\ This U.S. 
     property generally includes tangible property located in the 
     United States, stock of a U.S. corporation, an obligation of 
     a U.S. person, and certain intangible assets, such as patents 
     and copyrights, acquired or developed by the CFC for use in 
     the United States.\1427\ There are specific exceptions to the 
     general definition of U.S. property, including for bank 
     deposits, certain export property, and certain trade or 
     business obligations.\1428\ The inclusion rule for investment 
     of earnings in U.S. property is intended to prevent taxpayers 
     from avoiding U.S. tax on dividend repatriations by 
     repatriating CFC earnings through non-dividend payments, such 
     as loans to U.S. persons.
---------------------------------------------------------------------------
     \1426\ Secs. 951(a)(1)(B), 956.
     \1427\ Sec. 956(c)(1).
     \1428\ Sec. 956(c)(2).
---------------------------------------------------------------------------
       Subpart F exceptions
       Several exceptions to the broad definition of subpart F 
     income permit continued deferral for income from certain 
     transactions, dividends, interest and certain rents and 
     royalties received by a CFC from a related corporation 
     organized and operating in the same foreign country in which 
     the CFC is organized.\1429\ The same-country exception is not 
     available to the extent that the payments reduce the subpart 
     F income of the payor. A second exception from foreign base 
     company income and insurance income is available for any item 
     of income received by a CFC if the taxpayer establishes that 
     the income was subject to an effective foreign income tax 
     rate greater than 90 percent of the maximum U.S. corporate 
     income tax rate (that is, more than 90 percent of 35 percent, 
     or 31.5 percent).\1430\
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     \1429\ Sec. 954(c)(3).
     \1430\ Sec. 954(b)(4).

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[[Page 20041]]

       A provision colloquially referred to as the ``CFC look-
     through'' rule excludes from foreign personal holding company 
     income dividends, interest, rents, and royalties received or 
     accrued by one CFC from a related CFC (with relation based on 
     control) to the extent attributable or properly allocable to 
     non-subpart-F income of the payor.\1431\ The look-through 
     rule applies to taxable years of foreign corporations 
     beginning before January 1, 2020, and to taxable years of 
     U.S. shareholders with or within which such taxable years of 
     foreign corporations end.\1432\
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     \1431\ Sec. 954(c)(6).
     \1432\ See section 144 of the Protecting Americans from Tax 
     Hikes Act of 2015 (Division Q of Pub. L. No. 114-113), H.R. 
     2029 [``the PATH Act of 2015''], which extended section 
     954(c)(6) for five years. Congress has previously extended 
     the application of section 954(c)(6) several times, most 
     recently in the Tax Increase Prevention Act of 2014, Pub. L. 
     No. 113-295; Pub. L. No. 107-147, sec. 614, 2002; Pub. L. No. 
     106-170, sec. 503, 1999; Pub. L. No. 105-277, 1998.
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       There is also an exclusion from subpart F income for 
     certain income of a CFC that is derived in the active conduct 
     of banking or financing business (``active financing 
     income''), which applies to all taxable years of the foreign 
     corporation beginning after December 31, 2014, and for 
     taxable years of the shareholders that end during or within 
     such taxable years of the corporation.\1433\ 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 
     active financing exceptions. In addition, certain nexus 
     requirements apply, which provide that income derived by a 
     CFC or a qualified business unit (``QBU'') of a CFC from 
     transactions with customers is eligible for the exceptions 
     if, among other things, substantially all of the activities 
     in connection with such transactions are conducted directly 
     by the CFC or QBU in its home country, and such income is 
     treated as earned by the CFC or QBU in its home country for 
     purposes of such country's tax laws. Moreover, the exceptions 
     apply to income derived from certain cross border 
     transactions, provided that certain requirements are met.
---------------------------------------------------------------------------
     \1433\ Sec. 954(h). See section 128 of the PATH Act of 2015, 
     which made the active financing exception permanent.
---------------------------------------------------------------------------
       In the case of a securities dealer, an exception from 
     foreign personal holding company income applies to any 
     interest or dividend (or certain equivalent amounts) from any 
     transaction, including a hedging transaction or a transaction 
     consisting of a deposit of collateral or margin, entered into 
     in the ordinary course of the dealer's trade or business as a 
     dealer in securities within the meaning of section 475.\1434\ 
     In the case of a QBU of the dealer, the income is required to 
     be attributable to activities of the QBU in the country of 
     incorporation, or to a QBU in the country in which the QBU 
     both maintains its principal office and conducts substantial 
     business activity. A coordination rule provides that, for 
     securities dealers, this exception generally takes precedence 
     over the exception for active financing income.
---------------------------------------------------------------------------
     \1434\ Sec. 954(c)(2)(C).
---------------------------------------------------------------------------
       Income is treated as active financing income only if, among 
     other requirements, it is derived by a CFC or by a QBU of 
     that CFC. Certain activities conducted by persons related to 
     the CFC or its QBU are treated as conducted directly by the 
     CFC or QBU.\1435\ An activity qualifies under this rule if 
     the activity is performed by employees of the related person 
     and if the related person is an eligible CFC, the home 
     country of which is the same as the home country of the 
     related CFC or QBU; the activity is performed in the home 
     country of the related person; and the related person 
     receives arm's-length compensation that is treated as earned 
     in the home country. Income from an activity qualifying under 
     this rule is excluded from subpart F income so long as the 
     other active financing requirements are satisfied.
---------------------------------------------------------------------------
     \1435\ Sec. 954(h)(3)(E).
---------------------------------------------------------------------------
       Certain income of a qualifying branch of a qualifying 
     insurance company with respect to risks located within the 
     home country of the branch or within the CFC's country of 
     creation or organization are also excepted from foreign 
     personal holding company income, provided that certain 
     requirements are met. Further, additional 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, including reserve requirements, are met.\1436\
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     \1436\ Subject to approval by the IRS, a taxpayer may 
     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.
---------------------------------------------------------------------------
       Exclusion of previously taxed earnings and profits
       A 10-percent U.S. shareholder of a CFC may exclude from its 
     income actual distributions of earnings and profits from the 
     CFC that were previously included in the 10-percent U.S. 
     shareholder's income under subpart F.\1437\ Any income 
     inclusion (under section 956) resulting from investments in 
     U.S. property may also be excluded from the 10-percent U.S. 
     shareholder's income when such earnings are ultimately 
     distributed.\1438\ Ordering rules provide that distributions 
     from a CFC are treated as coming first out of earnings and 
     profits of the CFC that have been previously taxed under 
     subpart F, then out of other earnings and profits.\1439\
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     \1437\ Sec. 959(a)(1).
     \1438\ Sec. 959(a)(2).
     \1439\ Sec. 959(c).
---------------------------------------------------------------------------
       Basis adjustments
       In general, a 10-percent U.S. shareholder of a CFC receives 
     a basis increase with respect to its stock in the CFC equal 
     to the amount of the CFC's earnings that are included in the 
     10-percent U.S. shareholder's income under subpart F.\1440\ 
     Similarly, a 10-percent U.S. shareholder of a CFC generally 
     reduces its basis in the CFC's stock in an amount equal to 
     any distributions that the 10-percent U.S. shareholder 
     receives from the CFC that are excluded from its income as 
     previously taxed under subpart F.\1441\
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     \1440\ Sec. 961(a).
     \1441\ Sec. 961(b).
---------------------------------------------------------------------------
     Passive foreign investment companies
       The Tax Reform Act of 1986 \1442\ established the PFIC 
     anti-deferral regime. A PFIC is generally defined as any 
     foreign corporation if 75 percent or more of its gross income 
     for the taxable year consists of passive income, or 50 
     percent or more of its assets consists of assets that 
     produce, or are held for the production of, passive 
     income.\1443\ Alternative sets of income inclusion rules 
     apply to U.S. persons that are shareholders in a PFIC, 
     regardless of their percentage ownership in the company. One 
     set of rules applies to PFICs that are qualified electing 
     funds, under which electing U.S. shareholders currently 
     include in gross income their respective shares of the 
     company's earnings, with a separate election to defer payment 
     of tax, subject to an interest charge, on income not 
     currently received.\1444\ A second set of rules applies to 
     PFICs that are not qualified electing funds, under which U.S. 
     shareholders pay tax on certain income or gain realized 
     through the company, plus an interest charge that is 
     attributable to the value of deferral.\1445\ A third set of 
     rules applies to PFIC stock that is marketable, under which 
     electing U.S. shareholders currently take into account as 
     income (or loss) the difference between the fair market value 
     of the stock as of the close of the taxable year and their 
     adjusted basis in such stock (subject to certain 
     limitations), often referred to as ``marking to market.'' 
     \1446\
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     \1442\ Pub. L. No. 99-514.
     \1443\ Sec. 1297.
     \1444\ Secs. 1293-1295.
     \1445\ Sec. 1291.
     \1446\ Sec. 1296.
---------------------------------------------------------------------------
       Under the PFIC regime, passive income is any income which 
     is of a kind that would be foreign personal holding company 
     income, including dividends, interest, royalties, rents, and 
     certain gains on the sale or exchange of property, 
     commodities, or foreign currency. However, among other 
     exceptions, passive income does not include any income 
     derived in the active conduct of an insurance business by a 
     corporation that is predominantly engaged in an insurance 
     business and that would be subject to tax under subchapter L 
     if it were a domestic corporation.\1447\ In applying the 
     insurance exception, the IRS analyzes whether risks assumed 
     under contracts issued by a foreign company organized as an 
     insurer are truly insurance risks, whether the risks are 
     limited under the terms of the contracts, and the status of 
     the company as an insurance company.\1448\
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     \1447\ Sec. 1297(b)(2)(B).
     \1448\ Notice 2003-34, 2003-C.B. 1 990, June 9, 2003. See 
     also, Prop. Treas. Reg. sec. 1.1297-4, 26 CFR Part 1, REG-
     108214-15, April 24, 2015.
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     Other anti-deferral rules
       The subpart F and PFIC rules are not the only anti-deferral 
     regimes. Other rules that impose current U.S. taxation on 
     income earned through corporations include the accumulated 
     earnings tax rules \1449\ and the personal holding company 
     rules.
---------------------------------------------------------------------------
     \1449\ Secs. 531-537.
---------------------------------------------------------------------------
       Rules for coordination among the anti-deferral regimes are 
     provided to prevent U.S. persons from being subject to U.S. 
     tax on the same item of income under multiple regimes. For 
     example, a corporation generally is not treated as a PFIC 
     with respect to a particular shareholder if the corporation 
     is also a CFC and the shareholder is a 10-percent U.S. 
     shareholder. Thus, subpart F is allowed to trump the PFIC 
     rules.
     3. Foreign tax credit
       Subject to certain limitations, U.S. citizens, resident 
     individuals, and domestic corporations are allowed to claim 
     credit for foreign income taxes they pay. A domestic 
     corporation that owns at least 10 percent of the voting stock 
     of a foreign corporation is allowed a ``deemed-paid'' credit 
     for foreign income taxes paid by the foreign corporation that 
     the domestic corporation is deemed to

[[Page 20042]]

     have paid when the related income is distributed as a 
     dividend or is included in the domestic corporation's income 
     under the anti-deferral rules.\1450\
---------------------------------------------------------------------------
     \1450\ Secs. 901, 902, 960, 1291(g).
---------------------------------------------------------------------------
       The foreign tax credit generally is limited to a taxpayer's 
     U.S. tax liability on its foreign-source taxable income (as 
     determined under U.S. tax accounting principles). This limit 
     is intended to ensure that the credit serves its purpose of 
     mitigating double taxation of foreign-source income without 
     offsetting U.S. tax on U.S.-source income.\1451\ The limit is 
     computed by multiplying a taxpayer's total U.S. tax liability 
     for the year by the ratio of the taxpayer's foreign-source 
     taxable income for the year to the taxpayer's total taxable 
     income for the year. If the total amount of foreign income 
     taxes paid and deemed paid for the year exceeds the 
     taxpayer's foreign tax credit limitation for the year, the 
     taxpayer may carry back the excess foreign taxes to the 
     previous year or carry forward the excess taxes to one of the 
     succeeding 10 years.\1452\
---------------------------------------------------------------------------
     \1451\ Secs. 901, 904.
     \1452\ Sec. 904(c).
---------------------------------------------------------------------------
       The computation of the foreign tax credit limitation 
     requires a taxpayer to determine the amount of its taxable 
     income from foreign sources in each limitation category 
     (described below) by allocating and apportioning deductions 
     between U.S.-source gross income, on the one hand, and 
     foreign-source gross income in each limitation category, on 
     the other. In general, deductions are allocated and 
     apportioned to the gross income to which the deductions 
     factually relate.\1453\ However, subject to certain 
     exceptions, deductions for interest expense and research and 
     experimental expenses are apportioned based on taxpayer 
     ratios.\1454\ In the case of interest expense, this ratio is 
     the ratio of the corporation's foreign or domestic (as 
     applicable) assets to its worldwide assets. In the case of 
     research and experimental expenses, the apportionment ratio 
     is based on either sales or gross income. All members of an 
     affiliated group of corporations generally are treated as a 
     single corporation for purposes of determining the 
     apportionment ratios.\1455\
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     \1453\ Treas. Reg. sec. 1.861-8(b), Temp. Treas. Reg. sec. 
     1.861-8T(c).
     \1454\ Temp. Treas. Reg. sec. 1.861-9T, Treas. Reg. sec. 
     1.861-17.
     \1455\ Sec. 864(e)(1), (6); Temp. Treas. Reg. sec. 1.861-
     14T(e)(2).
---------------------------------------------------------------------------
       The term ``affiliated group'' is determined generally by 
     reference to the rules for determining whether corporations 
     are eligible to file consolidated returns.\1456\ These rules 
     exclude foreign corporations from an affiliated group.\1457\ 
     Interest expense allocation rules permitting a U.S. 
     affiliated group to apportion the interest expense of the 
     members of the U.S. affiliated group on a worldwide-group 
     basis were modified in 2004, and initially effective for 
     taxable years beginning after December 31, 2008.\1458\ The 
     effective date of the modified rules has been delayed to 
     January 1, 2021.\1459\ A result of this rule is that interest 
     expense of foreign members of a U.S. affiliated group is 
     taken into account in determining whether a portion of the 
     interest expense of the domestic members of the group must be 
     allocated to foreign-source income. An allocation to foreign-
     source income generally is required only if, in broad terms, 
     the domestic members of the group are more highly leveraged 
     than is the entire worldwide group. The new rules are 
     generally expected to reduce the amount of the U.S. group's 
     interest expense that is allocated to foreign-source income.
---------------------------------------------------------------------------
     \1456\ Secs. 864(e)(5), 1504.
     \1457\ Sec. 1504(b)(3).
     \1458\ Sec. 864(f); ``American Jobs Creation Act of 2004'' 
     (``AJCA''), Pub. L. 108-357, sec. 401(a).
     \1459\ Hiring Incentives to Restore Employment Act, Pub. L. 
     No. 111-147, sec. 551(a).
---------------------------------------------------------------------------
       The foreign tax credit limitation is applied separately to 
     passive category income and to general category income.\1460\ 
     Passive category income includes passive income, such as 
     portfolio interest and dividend income, and certain specified 
     types of income. All other income is in the general category. 
     Passive income is treated as general category income if it is 
     earned by a qualifying financial services entity. Passive 
     income is also treated as general category income if it is 
     highly taxed (that is, if the foreign tax rate is determined 
     to exceed the highest rate of tax specified in Code section 1 
     or 11, as applicable). Dividends (and subpart F inclusions), 
     interest, rents, and royalties received by a 10-percent U.S. 
     shareholder from a CFC are assigned to a separate limitation 
     category by reference to the category of income out of which 
     the dividends or other payments were made.\1461\ Dividends 
     received by a 10-percent corporate shareholder of a foreign 
     corporation that is not a CFC are also categorized on a look-
     through basis.\1462\
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     \1460\ Sec. 904(d). AJCA generally reduced the number of 
     income categories from nine to two, effective for tax years 
     beginning in 2006. Before AJCA, the foreign tax credit 
     limitation was applied separately to the following categories 
     of income: (1) passive income, (2) high withholding tax 
     interest, (3) financial services income, (4) shipping income, 
     (5) certain dividends received from noncontrolled section 902 
     foreign corporations (also known as ``10/50 companies''), (6) 
     certain dividends from a domestic international sales 
     corporation or former domestic international sales 
     corporation, (7) taxable income attributable to certain 
     foreign trade income, (8) certain distributions from a 
     foreign sales corporation or former foreign sales 
     corporation, and (9) any other income not described in items 
     (1) through (8) (so-called ``general basket'' income). A 
     number of other provisions of the Code, including several 
     enacted in 2010 as part of Pub. L. No. 111-226, create 
     additional separate categories in specific circumstances or 
     limit the availability of the foreign tax credit in other 
     ways. See, e.g., secs. 865(h), 901(j), 904(d)(6), 904(h)(10).
     \1461\ Sec. 904(d)(3). The subpart F rules applicable to CFCs 
     and their 10-percent U.S. shareholders are described below.
     \1462\ Sec. 904(d)(4).
---------------------------------------------------------------------------
       Special rules apply to the allocation of income and losses 
     from foreign and U.S. sources within each category of 
     income.\1463\ Foreign losses from one category will first be 
     used to offset income from foreign sources of other 
     categories. If there remains an overall foreign loss, it will 
     be deducted against income from U.S. sources. The same 
     principle applies to losses from U.S. sources. In subsequent 
     years, the losses that were deducted against another category 
     or source of income will be recaptured. That is, an equal 
     amount of income from the same category or source that 
     generated a loss in the prior year will be recharacterized as 
     income from the other category or source against which the 
     loss was deducted. Up to 50 percent of income from one source 
     in any subsequent year will be recharacterized as income from 
     the other source, whereas foreign-source income in a 
     particular category can be fully recharacterized as income in 
     another category until the losses from prior years are fully 
     recaptured.\1464\
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     \1463\ Secs. 904(f), (g).
     \1464\ Secs. 904(f)(1), (g)(1).
---------------------------------------------------------------------------
       In addition to the foreign tax credit limitation just 
     described, a taxpayer's ability to claim a foreign tax credit 
     may be further limited by a matching rule that prevents the 
     separation of creditable foreign taxes from the associated 
     foreign income. Under this rule, a foreign tax generally is 
     not taken into account for U.S. tax purposes, and thus no 
     foreign tax credit is available with respect to that foreign 
     tax, until the taxable year in which the related income is 
     taken into account for U.S. tax purposes.\1465\
---------------------------------------------------------------------------
     \1465\ Sec. 909.
---------------------------------------------------------------------------
     4. Special rules
       Dual consolidated loss rules
       Under the rules applicable to corporations filing 
     consolidated returns, a dual consolidated loss (``DCL'') is 
     any net operating loss of a domestic corporation if the 
     corporation is subject to an income tax of a foreign country 
     without regard to whether such income is from sources in or 
     outside of such foreign country, or if the corporation is 
     subject to such a tax on a residence basis (a ``dual resident 
     corporation'').\1466\ A DCL generally cannot be used to 
     reduce the taxable income of any member of the corporation's 
     affiliated group. Losses of a separate unit of a domestic 
     corporation (a foreign branch or an interest in a hybrid 
     entity owned by the corporation) are subject to this 
     limitation in the same manner as if the unit were a wholly 
     owned subsidiary of such corporation. An exemption is 
     available under Treasury regulations in the case of DCLs for 
     which a domestic use election (that is, an election to use 
     the loss only for domestic, and not foreign, tax purposes) 
     has been made.\1467\ Recapture is required, however, upon the 
     occurrence of certain triggering events, including the 
     conversion of a separate unit to a foreign corporation and 
     the transfer of 50 percent or more of the assets of a 
     separate unit within a twelve-month period.\1468\
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     \1466\ Sec. 1503(d).
     \1467\ Treas. Reg. sec. 1.1503(d)-6(d).
     \1468\ See Treas. Reg. sec. 1.1503(d)-6(e)(1).
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       Temporary dividends-received deduction for repatriated 
           foreign earnings
       AJCA section 421 added to the Code section 965, a temporary 
     provision intended to encourage U.S. multinational companies 
     to repatriate foreign earnings. Under section 965, for one 
     taxable year certain dividends received by a U.S. corporation 
     from its CFCs were eligible for an 85-percent dividends-
     received deduction. At the taxpayer's election, this 
     deduction was available for dividends received either during 
     the taxpayer's first taxable year beginning on or after 
     October 22, 2004, or during the taxpayer's last taxable year 
     beginning before such date.
       The temporary deduction was subject to a number of general 
     limitations. First, it applied only to cash repatriations 
     generally in excess of the taxpayer's average repatriation 
     level calculated for a three-year base period preceding the 
     year of the deduction. Second, the amount of dividends 
     eligible for the deduction was generally limited to the 
     amount of earnings shown as permanently invested outside the 
     United States on the taxpayer's recent audited financial 
     statements. Third, to qualify for the deduction, dividends 
     were required to be invested in the United States according 
     to a domestic reinvestment plan approved by the taxpayer's 
     senior management and board of directors.\1469\
---------------------------------------------------------------------------
     \1469\ Section 965(b)(4). The plan was required to provide 
     for the reinvestment of the repatriated dividends in the 
     United States, including as a source for the funding of 
     worker hiring and training, infrastructure, research and 
     development, capital investments, and the financial 
     stabilization of the corporation for the purposes of job 
     retention or creation.
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       No foreign tax credit (or deduction) was allowed for 
     foreign taxes attributable to the

[[Page 20043]]

     deductible portion of any dividend.\1470\ For this purpose, 
     the taxpayer was permitted to specifically identify which 
     dividends were treated as carrying the deduction and which 
     dividends were not. In other words, the taxpayer was allowed 
     to choose which of its dividends were treated as meeting the 
     base-period repatriation level (and thus carry foreign tax 
     credits, to the extent otherwise allowable), and which of its 
     dividends were treated as part of the excess eligible for the 
     deduction (and thus subject to proportional disallowance of 
     any associated foreign tax credits).\1471\ Deductions were 
     disallowed for expenses that were directly allocable to the 
     deductible portion of any dividend.\1472\
---------------------------------------------------------------------------
     \1470\ Sec. 965(d)(1).
     \1471\ Accordingly, taxpayers generally were expected to pay 
     regular dividends out of high-taxed CFC earnings (thereby 
     generating deemed-paid credits available to offset foreign-
     source income) and section 965 dividends out of low-taxed CFC 
     earnings (thereby availing themselves of the 85-percent 
     deduction).
     \1472\ Sec. 965(d)(2).
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       Domestic international sales corporations
       A domestic international sales corporations (``DISC'') is a 
     domestic corporation that satisfies the following conditions: 
     95 percent of its gross receipts must be qualified export 
     receipts; 95 percent of the sum of the adjusted bases of all 
     its assets must be attributable to the sum of the adjusted 
     bases of qualified export assets; the corporation must have 
     no more than one class of stock; the par or stated value of 
     the outstanding stock must be at least $2,500 on each day of 
     the taxable year; and an election must be in effect to be 
     taxed as a DISC.\1473\ In general, a DISC is not subject to 
     corporate-level tax and offers limited deferral of tax 
     liability to its shareholders.\1474\ DISC income attributable 
     to a maximum of $10 million annually of qualified export 
     receipts is generally exempt from income tax at both the 
     corporate and shareholder level. Shareholders must pay 
     interest to account for the benefit of deferring the tax 
     liability on undistributed DISC income related to this $10 
     million maximum annual amount.\1475\ Such entities are also 
     referred to as interest charge DISCs, or IC-DISCs. 
     Shareholders of a DISC are deemed to receive a dividend out 
     of current earnings and profits from qualified export 
     receipts in excess of $10 million.\1476\ Gain on the sale of 
     DISC stock is treated as a dividend to the extent of 
     accumulated DISC income.\1477\ The shareholders of a 
     corporation which is not a DISC, but was a DISC in a previous 
     taxable year, and which has previously taxed income or 
     accumulated DISC income, are also required to pay interest on 
     the deferral benefit, and gain on the sale or exchange of 
     stock in such corporation is treated as a dividend.
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     \1473\ Secs. 992(a) and (b). If a corporation fails to 
     satisfy either or both of the 95-percent tests, it is deemed 
     to satisfy such tests if it makes a pro rata distribution of 
     its gross receipts which are not qualified export receipts 
     and the fair market value of its assets which are not 
     qualified export assets. Sec. 992(c).
     \1474\ Sec. 991. Prior to the 1984 Revenue Act (Pub. L. 98-
     369), DISCs were eligible for more generous tax benefits that 
     were eliminated in favor of the since-repealed foreign sales 
     corporation regime (``FSC''). An overview of the history of 
     the DISCs and FSCs regimes is provided in Joseph Isenbergh, 
     Vol. 3 U.S. Taxation of Foreign Persons and Foreign Income, 
     Para. 81. (Fourth Ed. 2016).
     \1475\ The rate is the average of one-year constant maturity 
     Treasury yields. The deferral benefit is the excess of the 
     amount of tax for which the shareholder would be liable if 
     deferred DISC income were included as ordinary income over 
     the actual tax liability of such shareholder. Sec. 995(f).
     \1476\ The amount of the deemed distribution is the sum of 
     several items, including qualified export receipts in excess 
     of $10 million. See sec. 955(b).
     \1477\ Sec. 995(c).
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                      INTERNATIONAL TAX PROVISIONS

  A. Establishment of Participation Exemption System for Taxation of 
                             Foreign Income

     1. Deduction for foreign-source portion of dividends received 
         by domestic corporations from specified 10-percent owned 
         foreign corporations (sec. 4001 of the House bill, sec. 
         14101 of the Senate amendment, and new sec. 245A of the 
         Code)


                               House Bill

     In general
       The provision generally establishes a participation 
     exemption system for foreign income. This exemption is 
     provided for by means of a 100-percent deduction for the 
     foreign-source portion of dividends received from specified 
     10-percent owned foreign corporations by domestic 
     corporations that are United States shareholders of those 
     foreign corporations within the meaning of section 951(b) 
     (referred to here as ``participation DRD'').\1478\
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     \1478\ Under section 951(b), a domestic corporation is a 
     United States shareholder of a foreign corporation if it 
     owns, within the meaning of section 958(a), or is considered 
     as owning by applying the rules of section 958(b), 10 percent 
     or more of the voting stock of the foreign corporation.
---------------------------------------------------------------------------
       A specified 10-percent owned foreign corporation is any 
     foreign corporation with respect to which any domestic 
     corporation is a United States shareholder. The phrase does 
     not include a passive foreign investment company within the 
     meaning of subpart D of part VI of subchapter P.
       The term ``dividend received'' is intended to be 
     interpreted broadly, consistently with the meaning of the 
     phrases ``amount received as dividends'' and ``dividends 
     received'' under sections 243 and 245, respectively.\1479\ 
     Under proposed section 245A(e), the Secretary of the Treasury 
     may prescribe such regulations or other guidance as may be 
     necessary or appropriate to carry out the rules of section 
     245A, including clarifying the intended broad scope of the 
     term ``dividend received.''
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     \1479\ Consequently, for example, gain included in gross 
     income as a dividend under section 1248(a) or 964(e) would 
     constitute a dividend received for which the deduction under 
     section 245A may be available.
---------------------------------------------------------------------------
       For example, if a domestic corporation indirectly owns 
     stock of a foreign corporation through a foreign partnership 
     and the domestic corporation would qualify for the 
     participation DRD with respect to dividends from the foreign 
     corporation if the domestic corporation owned such stock 
     directly, the domestic corporation would be allowed a 
     participation DRD with respect to its distributive share of 
     the partnership's dividend from the foreign corporation.
     Foreign-source portion of a dividend
       The participation DRD is available only for the foreign-
     source portion of dividends received from specified 10-
     percent owned foreign corporations. The foreign-source 
     portion of any dividend is the amount that bears the same 
     ratio to the dividend as the specified foreign corporation's 
     post-1986 undistributed foreign earnings bears to the 
     corporation's total post-1986 undistributed earnings. Post-
     1986 undistributed earnings are the amount of the earnings 
     and profits of a specified 10-percent owned foreign 
     corporation accumulated in taxable years beginning after 
     December 31, 1986, as of the close of the taxable year of the 
     foreign corporation in which the dividend is distributed and 
     not reduced by dividends \1480\ distributed during that year. 
     Post-1986 undistributed foreign earnings are, in general, the 
     portion of post-1986 undistributed earnings that is not 
     attributable to post-1986 undistributed U.S. earnings. Post-
     1986 undistributed U.S. earnings are, in general, 
     undistributed earnings attributable to: (a) the corporation's 
     income that is effectively connected with the conduct of a 
     trade or business within the United States, or (b) any 
     dividend received (directly or through a wholly owned foreign 
     corporation) from an 80-percent-owned (by vote or value) 
     domestic corporation.
---------------------------------------------------------------------------
     \1480\ Pursuant to section 959(d), a distribution of 
     previously taxed income does not constitute a dividend even 
     if it reduces earnings and profits.
---------------------------------------------------------------------------
       Rules similar to the rules described above apply when a 
     dividend is paid out of earnings and profits of a specified 
     10-percent owned foreign corporation accumulated in taxable 
     years beginning before January 1, 1987. As a consequence, the 
     participation exemption system is available for both post-
     1986 and pre-1987 foreign earnings. An ordering rule provides 
     that dividends are treated as first being paid out of post-
     1986 undistributed earnings to the extent of those earnings.
       An additional rule provides for the treatment of 
     distributions of a specified 10-percent owned foreign 
     corporation in excess of undistributed earnings. Under 
     section 316(a)(2), a distribution of earnings and profits of 
     a corporation in the taxable year of the distribution is 
     treated as a dividend even if the distribution exceeds 
     accumulated earnings and profits.\1481\ The determination of 
     the foreign-source portion of such a distribution is 
     calculated in a similar manner as for other types of 
     dividends.
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     \1481\ Called a ``nimble dividend.'' See, Boris I. Bittker 
     and James S. Eustice, Federal Income Taxation of Corporations 
     and Shareholders, (7th ed. 2016) para. 8-12.
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     Foreign tax credit disallowance; foreign tax credit 
         limitation
       No foreign tax credit or deduction is allowed for any taxes 
     (including withholding taxes) paid or accrued with respect to 
     a dividend that qualifies for the participation DRD.
       For purposes of computing the section 904(a) foreign tax 
     credit limitation, a domestic corporation that is a United 
     States shareholder of a specified 10-percent owned foreign 
     corporation must compute its foreign-source taxable income 
     (and entire taxable income) by disregarding the foreign-
     source portion of any dividend received from that foreign 
     corporation for which the participation DRD is taken, as well 
     as and any deductions properly allocable or apportioned to 
     that foreign-source portion or the stock with respect to 
     which it is paid.
     Six-month holding period requirement
       A domestic corporation is not permitted a participation DRD 
     in respect of any dividend on any share of stock that is held 
     by the domestic corporation for 180 days or less during the 
     361-day period beginning on the date that is 180 days before 
     the date on which the share becomes ex-dividend with respect 
     to the dividend. For this purpose, a domestic corporation is 
     treated as holding a share of stock for any period only if 
     the corporation is a specified 10-percent owned foreign 
     corporation and the taxpayer is a United States shareholder 
     with respect to such corporation during that period.
       Effective date.--The provision applies to distributions 
     made (and for purposes of determining a taxpayer's foreign 
     tax credit

[[Page 20044]]

     limitation under section 904, deductions in taxable years 
     beginning) after December 31, 2017.


                            Senate Amendment

     In general
       The provision allows an exemption for certain foreign 
     income. This exemption is provided for by means of a 100-
     percent deduction for the foreign-source portion of dividends 
     received from specified 10-percent owned foreign corporations 
     by domestic corporations that are United States shareholders 
     of those foreign corporations within the meaning of section 
     951(b) \1482\ (referred to here as ``DRD'').
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     \1482\ Under section 951(b), a domestic corporation is a 
     United States shareholder of a foreign corporation if it 
     owns, within the meaning of section 958(a), or is considered 
     as owning by applying the rules of section 958(b), 10-percent 
     or more of the voting stock of the foreign corporation.
---------------------------------------------------------------------------
       A specified 10-percent owned foreign corporation is any 
     foreign corporation (other than a PFIC that is not also a 
     CFC) with respect to which any domestic corporation is a U.S. 
     shareholder.\1483\
---------------------------------------------------------------------------
     \1483\ Secs. 1297, 1298.
---------------------------------------------------------------------------
     Foreign-source portion of a dividend
       The DRD is available only for the foreign-source portion of 
     dividends received by a domestic corporation from specified 
     10-percent owned foreign corporations. The foreign-source 
     portion of any dividend is the amount that bears the same 
     ratio to the dividend as the undistributed foreign earnings 
     bears to the total undistributed earnings of the foreign 
     corporation. Undistributed earnings are the amount of the 
     earnings and profits of a specified 10-percent owned foreign 
     corporation \1484\ as of the close of the taxable year of the 
     specified 10-percent owned foreign corporation in which the 
     dividend is distributed and not reduced by dividends \1485\ 
     distributed during that taxable year. Undistributed foreign 
     earnings are the portion of the undistributed earnings 
     attributable to neither income described in section 
     245(a)(5)(A) nor section 245(a)(5)(B), without regard to 
     section 245(a)(12).
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     \1484\ Computed in accordance with secs. 964(a) and 986.
     \1485\ Pursuant to section 959(d), a distribution of 
     previously taxed income does not constitute a dividend even 
     if it reduces earnings and profits.
---------------------------------------------------------------------------
     Hybrid dividends
       The DRD is not available for any dividend received by a 
     U.S. shareholder from a controlled foreign corporation if the 
     dividend is a hybrid dividend. A hybrid dividend is an amount 
     received from a controlled foreign corporation for which a 
     deduction would be allowed under this provision and for which 
     the specified 10-percent owned foreign corporation received a 
     deduction (or other tax benefit) from taxes imposed by a 
     foreign country.
       If a controlled foreign corporation with respect to which a 
     domestic corporation is a U.S. shareholder receives a hybrid 
     dividend from any other controlled foreign corporation with 
     respect to which the domestic corporation is also a U.S. 
     shareholder, then the hybrid dividend is treated for purposes 
     of section 951(a)(1)(A) as subpart F income of the recipient 
     controlled foreign corporation for the taxable year of the 
     controlled foreign corporation in which the dividends was 
     received and the U.S. shareholder includes in gross income an 
     amount equal to the shareholder's pro rata share of the 
     subpart F income, determined in the same manner as section 
     951(a)(2).
     Foreign tax credit disallowance
       No foreign tax credit or deduction is allowed for any taxes 
     paid or accrued with respect to a dividend that qualifies for 
     the DRD.
       For purposes of computing the section 904(a) foreign tax 
     credit limitation, a domestic corporation that is a U.S. 
     shareholder of a specified 10-percent owned foreign 
     corporation must compute its foreign-source taxable income by 
     disregarding the foreign-source portion of any dividend 
     received from that foreign corporation for which the DRD is 
     taken, and any deductions properly allocable or apportioned 
     to that foreign-source portion or the stock with respect to 
     which it is paid.
     Holding period requirement
       A domestic corporation is not permitted a DRD in respect of 
     any dividend on any share of stock that is held by the 
     domestic corporation for 365 days or less during the 731-day 
     period beginning on the date that is 365 days before the date 
     on which the share becomes ex-dividend with respect to the 
     dividend. For this purpose, the holding period requirement is 
     treated as met only if the specified 10-percent owned foreign 
     corporation is a specified 10-percent owned foreign 
     corporation at all times during the period and the taxpayer 
     is a U.S. shareholder with respect to such specified 10-
     percent owned foreign corporation at all times during the 
     period.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and for taxable years of U.S. shareholders in which or 
     with which such taxable years of foreign corporations end.


                          Conference Agreement

     In general
       The provision in the conference agreement generally follows 
     the provision in the Senate amendment, with some changes, as 
     described below, and allows an exemption for certain foreign 
     income by means of a 100-percent deduction for the foreign-
     source portion of dividends received from specified 10-
     percent owned foreign corporations by domestic corporations 
     \1486\ that are United States shareholders of those foreign 
     corporations within the meaning of section 951(b) \1487\ 
     (referred to here, as above, as ``DRD'').
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     \1486\ Including a controlled foreign corporation treated as 
     a domestic corporation for purposes of computing the taxable 
     income thereof. See Treas. Reg. sec. 1.952-2(b)(1). 
     Therefore, a CFC receiving a dividend from a 10-percent owned 
     foreign corporation that constitutes subpart F income may be 
     eligible for the DRD with respect to such income.
     \1487\ Under section 951(b) as revised by the Act, a domestic 
     corporation is a United States shareholder of a foreign 
     corporation if it owns, within the meaning of section 958(a), 
     or is considered as owning by applying the rules of section 
     958(b), 10-percent or more of the vote or value of the 
     foreign corporation.
---------------------------------------------------------------------------
       A specified 10-percent owned foreign corporation is any 
     foreign corporation (other than a PFIC that is not also a 
     CFC) with respect to which any domestic corporation is a U.S. 
     shareholder.\1488\
---------------------------------------------------------------------------
     \1488\ Secs. 1297, 1298.
---------------------------------------------------------------------------
       The term ``dividend received'' is intended to be 
     interpreted broadly, consistently with the meaning of the 
     phrases ``amount received as dividends'' and ``dividends 
     received'' under sections 243 and 245, respectively. For 
     example, if a domestic corporation indirectly owns stock of a 
     foreign corporation through a partnership and the domestic 
     corporation would qualify for the participation DRD with 
     respect to dividends from the foreign corporation if the 
     domestic corporation owned such stock directly, the domestic 
     corporation would be allowed a participation DRD with respect 
     to its distributive share of the partnership's dividend from 
     the foreign corporation.
       The DRD is available only to C corporations that are not 
     RICs or REITs.
     Foreign-source portion of a dividend
       The DRD is available only for the foreign-source portion of 
     dividends received by a domestic corporation from specified 
     10-percent owned foreign corporations. The foreign-source 
     portion of any dividend is the amount that bears the same 
     ratio to the dividend as the undistributed foreign earnings 
     bears to the total undistributed earnings of the foreign 
     corporation. Undistributed earnings are the amount of the 
     earnings and profits of a specified 10-percent owned foreign 
     corporation \1489\ as of the close of the taxable year of the 
     specified 10-percent owned foreign corporation in which the 
     dividend is distributed and not reduced by dividends \1490\ 
     distributed during that taxable year. Undistributed foreign 
     earnings are the portion of the undistributed earnings 
     attributable to neither income described in section 
     245(a)(5)(A) nor section 245(a)(5)(B), without regard to 
     section 245(a)(12).
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     \1489\ Computed in accordance with secs. 964(a) and 986.
     \1490\ Pursuant to section 959(d), a distribution of 
     previously taxed income does not constitute a dividend even 
     if it reduces earnings and profits.
---------------------------------------------------------------------------
     Hybrid dividends
       The DRD is not available for any dividend received by a 
     U.S. shareholder from a controlled foreign corporation if the 
     dividend is a hybrid dividend. A hybrid dividend is an amount 
     received from a controlled foreign corporation for which a 
     deduction would be allowed under this provision and for which 
     the specified 10-percent owned foreign corporation received a 
     deduction (or other tax benefit) with respect to any income, 
     war profits, and excess profits taxes imposed by any foreign 
     country.
       If a controlled foreign corporation with respect to which a 
     domestic corporation is a U.S. shareholder receives a hybrid 
     dividend from any other controlled foreign corporation with 
     respect to which the domestic corporation is also a U.S. 
     shareholder, then the hybrid dividend is treated for purposes 
     of section 951(a)(1)(A) as subpart F income of the recipient 
     controlled foreign corporation (notwithstanding section 
     954(c)(6)) for the taxable year of the controlled foreign 
     corporation in which the dividends was received and the U.S. 
     shareholder includes in gross income an amount equal to the 
     shareholder's pro rata share of the subpart F income, 
     determined in the same manner as section 951(a)(2).
     Foreign tax credit disallowance
       No foreign tax credit or deduction is allowed for any taxes 
     paid or accrued with respect to any portion of a distribution 
     treated as a dividend that qualifies for the DRD.
       For purposes of computing the section 904(a) foreign tax 
     credit limitation, a domestic corporation that is a U.S. 
     shareholder of a specified 10-percent owned foreign 
     corporation must compute its foreign-source taxable income 
     (and entire taxable income) by disregarding the foreign-
     source portion of any dividend received from that foreign 
     corporation for which the DRD is taken, and any deductions 
     properly allocable or apportioned to that foreign-source 
     portion or the stock with respect to which it is paid.
     Holding period requirement
       A domestic corporation is not permitted a DRD in respect of 
     any dividend on any share

[[Page 20045]]

     of stock that is held by the domestic corporation for 365 
     days or less during the 731-day period beginning on the date 
     that is 365 days before the date on which the share becomes 
     ex-dividend with respect to the dividend. For this purpose, 
     the holding period requirement is treated as met only if the 
     specified 10-percent owned foreign corporation is a specified 
     10-percent owned foreign corporation at all times during the 
     period and the taxpayer is a U.S. shareholder with respect to 
     such specified 10-percent owned foreign corporation at all 
     times during the period.
       Effective date.--The provision applies to distributions 
     made (and for purposes of determining a taxpayer's foreign 
     tax credit limitation under section 904, deductions in 
     taxable years beginning) after December 31, 2017.
     2. Modification of subpart F inclusion for increased 
         investments in United States property (sec. 4002 of the 
         House bill, sec. 14218 of the Senate amendment, and sec. 
         956 of the Code)


                               House Bill

       Under the provision, the amount determined under section 
     956 (relating to CFC investments in United States property) 
     with respect to a domestic corporation is zero. A similar 
     rule is intended for domestic corporations that own a CFC 
     through a domestic partnership. The provision includes a 
     specific grant of authority to the Secretary to issue 
     regulations to effect that intent.
       Effective date.--The provision applies to taxable years of 
     foreign corporations beginning after December 31, 2017.


                            Senate Amendment

       The provision excepts domestic corporations that are U.S. 
     shareholders in the CFC from the requirement that they 
     recognize income when the CFC increases its investment in 
     U.S. property.
       Effective date.--The provision applies to taxable years of 
     foreign corporations beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement does not follow the House bill or 
     the Senate amendment.
     3. Special rules relating to sales or transfers involving 
         specified 10-percent owned foreign corporations (sec. 
         4003 of the House bill, sec. 14102 of the Senate 
         Amendment and secs. 367(a)(3)(C), 961, 1248 and new sec. 
         91 of the Code)


                               House Bill

     Reduction in basis of certain foreign stock
       Solely for the purpose of determining a loss, a domestic 
     corporate shareholder's adjusted basis in the stock of a 
     specified 10-percent owned foreign corporation (as defined in 
     new section 245A) is reduced by an amount equal to the 
     portion of any dividend received with respect to such stock 
     from such foreign corporation that was not taxed by reason of 
     a dividends received deduction allowable under section 245A 
     in any taxable year of such domestic corporation. This rule 
     applies in coordination with section 1059, such that any 
     reduction in basis required pursuant to this provision will 
     be disregarded, to the extent the basis in the 10-percent 
     owned foreign corporation's stock has already been reduced 
     pursuant to section 1059.
     Inclusion of transferred loss amount in certain assets 
         transfers
       Under the provision, if a domestic corporation transfers 
     substantially all of the assets of a foreign branch (within 
     the meaning of section 367(a)(3)(C)) to a foreign corporation 
     which, after such transfer, is a specified 10-percent owned 
     foreign corporation with respect to which the domestic 
     corporation is a United States shareholder, the domestic 
     corporation includes in gross income an amount equal to the 
     transferred loss amount, subject to certain limitations.
       The transferred loss amount is the excess of: (1) losses 
     incurred by the foreign branch after December 31, 2017 for 
     which a deduction was allowed to the domestic corporation, 
     over (2) the sum of taxable income earned by the foreign 
     branch and gain recognized by reason of an overall foreign 
     loss recapture arising out of disposition of assets on 
     account of the underlying transfer. For the purposes of (2), 
     only taxable income of the foreign branch in taxable years 
     after the loss is incurred through the close of the taxable 
     year of the transfer is included.
       For transfers not covered by section 367(a)(3)(C), the 
     transferred loss amount is reduced by the amount of gain 
     recognized by the domestic corporation on the transfer (other 
     than gains recognized by reason of overall foreign loss 
     recapture). For transfers covered by section 367(a)(3)(C), 
     the transferred loss amount is reduced by the amount of gain 
     recognized by reason of such subparagraph.
       Amounts included in gross income by reason of the provision 
     or by reason of section 367(a)(3)(C) are treated as derived 
     from sources within the United States.
       The provision provides authority for the Secretary of the 
     Treasury to prescribe regulations or other guidance for 
     proper adjustments to the adjusted basis of the specified 10-
     percent owned foreign corporation to which the transfer is 
     made, and to the adjusted basis of the property transferred, 
     to reflect amounts included in gross income under the 
     provision.
       Effective date.--The provision relating to reduction of 
     basis in certain foreign stock for the purposes of 
     determining a loss is effective for distributions made after 
     December 31, 2017.
       The provision relating to transfer of loss amounts from 
     foreign branches to certain foreign corporations is effective 
     for transfers after December 31, 2017.


                            Senate Amendment

     Sales by United States persons of stock
       In the case of the sale or exchange by a domestic 
     corporation of stock in a foreign corporation held for one 
     year or more, any amount received by the domestic corporation 
     which is treated as a dividend for purposes of section 1248, 
     is treated as a dividend for purposes of applying the 
     provision.
     Reduction in basis of certain foreign stock
       Solely for the purpose of determining a loss, a domestic 
     corporate shareholder's adjusted basis in the stock of a 
     specified 10-percent owned foreign corporation (as defined in 
     this provision) is reduced by an amount equal to the portion 
     of any dividend received with respect to such stock from such 
     foreign corporation that was not taxed by reason of a 
     dividends received deduction allowable under section 245A in 
     any taxable year of such domestic corporation. This rule 
     applies in coordination with section 1059, such that any 
     reduction in basis required pursuant to this provision will 
     be disregarded, to the extent the basis in the specified 10-
     percent owned foreign corporation's stock has already been 
     reduced pursuant to section 1059.
     Sale by a CFC of a lower-tier CFC
       If for any taxable year of a CFC beginning after December 
     31, 2017, an amount is treated as a dividend under section 
     964(e)(1) because of a sale or exchange by the CFC of stock 
     in another foreign corporation held for a year or more, then: 
     (i) the foreign-source portion of the dividend is treated as 
     subpart F income of the selling CFC for purposes of section 
     951(a)(1)(A), (ii) a United States shareholder with respect 
     to the selling CFC includes in gross income for the taxable 
     year of the shareholder with or within the taxable year of 
     the CFC ends, an amount equal to the shareholder's pro rata 
     share (determined in the same manner as under section 
     951(a)(2)) of the amount treated as subpart F income under 
     (i), and (iii) the deduction under section 245A(a) is 
     allowable to the United States shareholder with respect to 
     the subpart F income included in gross income under (ii) in 
     the same manner as if the subpart F income were a dividend 
     received by the shareholder from the selling CFC.
       In the case of a sale or exchange by a CFC of stock in 
     another corporation in a taxable year of the selling CFC 
     beginning after December 31, 2017, to which this provision 
     applies if gain were recognized, rules similar to those in 
     section 961(d) apply.
     Inclusion of transferred loss amount in certain assets 
         transfers
       Under the provision, if a domestic corporation transfers 
     substantially all of the assets of a foreign branch (within 
     the meaning of section 367(a)(3)(C) as in effect before the 
     date of enactment of TCJA) to a specified 10-percent owned 
     foreign corporation with respect to which it is a U.S. 
     shareholder after the transfer, the domestic corporation 
     includes in gross income an amount equal to the transferred 
     loss amount, subject to certain limitations.
       The transferred loss amount is the excess (if any) of: (1) 
     losses incurred by the foreign branch after December 31, 
     2017, and before the transfer, for which a deduction was 
     allowed to the domestic corporation, over (2) the sum of 
     certain taxable income earned by the foreign branch and gain 
     recognized by reason of an overall foreign loss recapture 
     arising out of disposition of assets on account of the 
     underlying transfer. For the purposes of (2), only taxable 
     income of the foreign branch in taxable years after the loss 
     is incurred through the close of the taxable year of the 
     transfer, is included. The transferred loss amount is reduced 
     by the amount of gain recognized by the taxpayer (other than 
     gain recognized by reason of an overall foreign loss 
     recapture) on account of the transfer.
       The amount of loss included in the gross income of the 
     taxpayer under the proposed rule above for any taxable year 
     cannot exceed the amount allowed as a deduction under new 
     section 245A for the taxable year (taking into account 
     dividends received from all specified 10-percent owned 
     foreign corporations with respect to which the taxpayer is a 
     U.S. shareholder). Any amount not included in gross income 
     for a taxable year because of this proposed rule is included 
     in gross income in the succeeding taxable year.
       Amounts included in gross income by reason of the provision 
     are treated as derived from sources within the United States. 
     Consistent with regulations or guidance that the Secretary of 
     the Treasury may prescribe, proper adjustments are made in 
     the adjusted basis of the taxpayer's stock in the specified 
     10-percent owned foreign corporation to which the transfer is 
     made, and in the transferee's adjusted basis in the property 
     transferred, to reflect amounts included in gross income 
     under this provision.
     Repeal of active trade or business exception
       Section 367 is amended to provide that in connection with 
     any exchange described in

[[Page 20046]]

     section 332, 351, 354, 356, or 361, if a U.S. person 
     transfers property used in the active conduct of a trade or 
     business to a foreign corporation, such foreign corporation 
     shall not, for purposes of determining the extent to which 
     gain shall be recognized on such transfer, be considered to 
     be a corporation.
       Effective date.--The provision relating to reduction of 
     basis in certain foreign stock for the purposes of 
     determining a loss is effective for dividends received in 
     taxable years beginning after December 31, 2017.
       The provisions relating to transfer of loss amounts from 
     foreign branches to certain foreign corporations and to the 
     repeal of the active trade or business exception are 
     effective for transfers after December 31, 2017.


                          Conference Agreement

       The provision in the conference agreement retains elements 
     of both the House Bill and the Senate amendment, as follows.
     Sales by United States persons of stock
       In the case of the sale or exchange by a domestic 
     corporation of stock in a foreign corporation held for one 
     year or more, any amount received by the domestic corporation 
     which is treated as a dividend for purposes of section 1248, 
     is treated as a dividend for purposes of applying the 
     provision.
     Reduction in basis of certain foreign stock
       Solely for the purpose of determining a loss, a domestic 
     corporate shareholder's adjusted basis in the stock of a 
     specified 10-percent owned foreign corporation (as defined in 
     this provision) is reduced by an amount equal to the portion 
     of any dividend received with respect to such stock from such 
     foreign corporation that was not taxed by reason of a 
     dividends received deduction allowable under section 245A in 
     any taxable year of such domestic corporation. This rule 
     applies in coordination with section 1059, such that any 
     reduction in basis required pursuant to this provision will 
     be disregarded, to the extent the basis in the specified 10-
     percent owned foreign corporation's stock has already been 
     reduced pursuant to section 1059.
     Sale by a CFC of a lower-tier CFC
       If for any taxable year of a CFC beginning after December 
     31, 2017, an amount is treated as a dividend under section 
     964(e)(1) because of a sale or exchange by the CFC of stock 
     in another foreign corporation held for a year or more, then: 
     (i) the foreign-source portion of the dividend is treated as 
     subpart F income of the selling CFC for purposes of section 
     951(a)(1)(A), (ii) a United States shareholder with respect 
     to the selling CFC includes in gross income for the taxable 
     year of the shareholder with or within the taxable year of 
     the CFC ends, an amount equal to the shareholder's pro rata 
     share (determined in the same manner as under section 
     951(a)(2)) of the amount treated as subpart F income under 
     (i), and (iii) the deduction under section 245A(a) is 
     allowable to the United States shareholder with respect to 
     the subpart F income included in gross income under (ii) in 
     the same manner as if the subpart F income were a dividend 
     received by the shareholder from the selling CFC.
       In the case of a sale or exchange by a CFC of stock in 
     another corporation in a taxable year of the selling CFC 
     beginning after December 31, 2017, to which this provision 
     applies if gain were recognized, rules similar to section 
     961(d) apply.
     Inclusion of transferred loss amount in certain assets 
         transfers
       Under the provision, if a domestic corporation transfers 
     substantially all of the assets of a foreign branch (within 
     the meaning of section 367(a)(3)(C)) as in effect before the 
     date of enactment of TCJA) to a specified 10-percent owned 
     foreign corporation with respect to which it is a U.S. 
     shareholder after the transfer, the domestic corporation 
     includes in gross income an amount equal to the transferred 
     loss amount, subject to certain limitations.
       The transferred loss amount is the excess (if any) of: (1) 
     losses incurred by the foreign branch after December 31, 
     2017, and before the transfer, for which a deduction was 
     allowed to the domestic corporation, over (2) the sum of 
     certain taxable income earned by the foreign branch and gain 
     recognized by reason of an overall foreign loss recapture 
     arising out of disposition of assets on account of the 
     underlying transfer. For the purposes of (2), only taxable 
     income of the foreign branch in taxable years after the loss 
     is incurred through the close of the taxable year of the 
     transfer, is included. The transferred loss amount is reduced 
     by the amount of gain recognized by the taxpayer (other than 
     gain recognized by reason of an overall foreign loss 
     recapture) on account of the transfer.
       Amounts included in gross income by reason of the provision 
     are treated as derived from sources within the United States. 
     Consistent with regulations or guidance that the Secretary of 
     the Treasury may prescribe, proper adjustments are made in 
     the adjusted basis of the taxpayer's stock in the specified 
     10-percent owned foreign corporation to which the transfer is 
     made, and in the transferee's adjusted basis in the property 
     transferred, to reflect amounts included in gross income 
     under this provision.
       The amount of gain taken into account under this provision 
     is reduced by the amount of gain which would be recognized 
     under section 367(a)(3)(C) as in effect before the date of 
     enactment of TCJA \1491\ with respect to losses incurred 
     before January 1, 2018.
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     \1491\ Determined without regard to the rule providing for 
     proper adjustment of basis in the stock in the specified 10-
     percent owned foreign corporation to which the transfer is 
     made.
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     Repeal of active trade or business exception
       Section 367 is amended to provide that in connection with 
     any exchange described in section 332, 351, 354, 356, or 361, 
     if a U.S. person transfers property used in the active 
     conduct of a trade or business to a foreign corporation, such 
     foreign corporation shall not, for purposes of determining 
     the extent to which gain shall be recognized on such 
     transfer, be considered to be a corporation.
       Effective date.--The provisions relating to sales or 
     exchanges of stock apply to sales or exchanges after December 
     31, 2017.
       The provision relating to reduction of basis in certain 
     foreign stock for the purposes of determining a loss is 
     effective for distributions made after December 31, 2017.
       The provisions relating to transfer of loss amounts from 
     foreign branches to certain foreign corporations and to the 
     repeal of the active trade or business are effective for 
     transfers after December 31, 2017.
     4. Treatment of deferred foreign income upon transition to 
         participation exemption system of taxation and deemed 
         repatriation at two-tier rate (sec. 4004 of the House 
         bill, sec. 14103 of the Senate amendment, and secs. 78, 
         904, 907 and 965 of the Code)


                               House Bill

     In general
       The provision generally requires that, for the last taxable 
     year of a foreign corporation beginning before January 1, 
     2018, all U.S. shareholders of any CFC or other foreign 
     corporation that is at least 10-percent U.S.-owned but not 
     controlled (other than a PFIC) must include in income their 
     pro rata shares of the accumulated post-1986 deferred foreign 
     income that was not previously taxed. A portion of that pro 
     rata share of deferred foreign income is deductible; the 
     amount deductible varies depending upon whether the deferred 
     foreign income is held in the form of liquid or illiquid 
     assets. The deduction results in a reduced rate of tax of 14 
     percent for the included deferred foreign income held in 
     liquid form and 7 percent for remaining deferred foreign 
     income. A corresponding portion of the credit for foreign 
     taxes is disallowed, thus limiting the credit to the taxable 
     portion of the included income. The increased tax liability 
     generally may be paid over an eight-year period.
     Subpart F inclusion of deferred foreign income
       The mechanism for the mandatory inclusion of pre-effective 
     date foreign earnings is subpart F. The provision provides 
     that the subpart F income of all specified foreign 
     corporations is increased for the last taxable year \1492\ 
     that begins before January 1, 2018, by its accumulated post-
     1986 deferred foreign income. In contrast to the 
     participation exemption deduction available only to domestic 
     corporations that are U.S. shareholders under subpart F, the 
     transition rule applies to all U.S. shareholders \1493\ of a 
     specified foreign corporation. A specified foreign 
     corporation means (1) a CFC or (2) any foreign corporation in 
     which a domestic corporation is a U.S. shareholder 
     (determined without regard to the special attribution rules 
     of section 958(b)(4)), other than a PFIC that is not a 
     CFC.\1494\ A specified foreign corporation that has deferred 
     foreign income is a deferred foreign income corporation. 
     Consistent with the general operation of subpart F, each U.S. 
     shareholder of a specified foreign corporation must include 
     in income its pro rata share of the foreign corporation's 
     subpart F income attributable to its accumulated deferred 
     foreign income.\1495\
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     \1492\ Foreign corporations no longer in existence and for 
     which there is no taxable year beginning or ending in 2017 
     are not within the scope of this provision.
     \1493\ Sec. 951(b), which defines United States shareholder 
     as any U.S. person that owns 10 percent or more of the voting 
     classes of stock of a foreign corporation.
     \1494\ Taxation of income earned by PFICs remains subject to 
     the antideferral PFIC regime and are ineligible for the 
     dividend received deduction under new section 245A.
     \1495\ For purposes of taking into account its subpart F 
     income under this rule, a noncontrolled 10/50 corporation is 
     treated as a CFC.
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       Accumulated post-1986 deferred foreign income
       Accumulated post-1986 deferred foreign income of a 
     specified foreign corporation that is the subject of the 
     mandatory inclusion under this provision is the greater of 
     the accumulated post-1986 deferred foreign income determined 
     as of November 2, 2017 (the date of introduction of the bill) 
     or as of December 31, 2017. The includible portion of the 
     accumulated post-1986 deferred foreign income is all post-
     1986 earnings and profits that are (1) not attributable to 
     income that is effectively connected with the conduct of a 
     trade or business in the United States and thus subject to 
     current U.S. income tax, or (2) when distributed, not 
     excludible from the gross income of a U.S. shareholder as 
     previously taxed income under section 959.

[[Page 20047]]

       Post-1986 earnings and profits are those earnings that 
     accumulated in taxable years beginning after 1986, computed 
     in in accordance with sections 964(a) and 986, even if 
     arising from periods during which the U.S. shareholder did 
     not own stock of the foreign corporation. Post-1986 earnings 
     are not reduced by distributions during the taxable year to 
     which section 965 applies. Such earnings are increased by the 
     amount of qualified deficits \1496\ that arose in a taxable 
     year beginning before January 1, 2018, if such deficit is 
     also treated as a qualified deficit for purposes of taxable 
     years beginning after December 31, 2017. Finally, the post-
     1986 earnings and profits are determined by reference to the 
     foreign corporation's total earnings and profits, 
     irrespective of the foreign tax credit separate category 
     limitations.
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     \1496\ Sec. 952(c)(1)(B)(ii).
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       The Secretary may prescribe appropriate rules regarding the 
     treatment of accumulated post-1986 foreign deferred income of 
     specified foreign corporations that have shareholders who are 
     not U.S. shareholders. Such rules may also include rules that 
     are appropriate to implement the intent of the revised 
     section 965 and the use of the date of introduction as one of 
     the measurement dates in order to establish a floor for 
     determining the post-1986 deferred foreign earnings and 
     profits. For example, guidance may address the extent to 
     which retroactive effective dates selected in entity 
     classification elections filed after introduction of the bill 
     will be permitted.\1497\
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     \1497\ See Treas, Reg, 301.7701-3(c), under which an election 
     may specify an effective date up to 75 days prior to the date 
     on which the election is filed.
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       Reductions of amounts included in income of U.S. 
           shareholder of foreign corporations with deficits in 
           earnings and profits
       The income inclusion required of a U.S. shareholder under 
     this transition rule is reduced by the portion of aggregate 
     foreign earnings and profits deficit allocated to that person 
     by reason of that person's interest in an ``E&P deficit 
     foreign corporation.'' An E&P deficit foreign corporation is 
     defined as any specified foreign corporation owned by the 
     U.S. shareholder as of the date on which accumulated earnings 
     and profits are measure for that corporation (November 2, 
     2017 or December 31, 2017, as the case may be) and which also 
     has a deficit in post-1986 earnings and profits as of that 
     date. Accordingly, the deficits of a foreign subsidiary that 
     accumulated prior to its acquisition by the U.S. shareholder 
     may be taken into account in determining the aggregate 
     foreign earnings and profits deficit of a U.S. 
     shareholder.\1498\
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     \1498\ For example, assume that a foreign corporation 
     organized after December 31, 1986 has $100 of accumulated 
     earnings and profits as of November 1, 2017, and December 31, 
     2017 (determined without diminution by reason of dividends 
     distributed during the taxable year and after any increase 
     for qualified deficits), which consist of $120 general 
     limitation earnings and profits and a $20 passive limitation 
     deficit, the foreign corporation's post-1986 earnings and 
     profits would be $100, even if the $20 passive limitation 
     deficit was a hovering deficit described in Treas. Reg. sec. 
     1.367(b)-17(d)(2). Foreign income taxes related to the 
     hovering deficit, however, would not be deemed paid by the 
     U.S. shareholder recognizing an incremental income inclusion.
---------------------------------------------------------------------------
       The U.S. shareholder aggregates its pro rata share in the 
     foreign E&P deficits of each such company and allocates such 
     aggregate amount among the deferred foreign income 
     corporations in which the shareholder is a U.S. shareholder. 
     The aggregate foreign E&P deficit is allocable to a specified 
     foreign corporation in the same ratio as the U.S. 
     shareholder's pro rata share of post-1986 deferred income in 
     that corporation bears to the U.S. shareholder's pro rata 
     share of accumulated post-1986 deferred foreign income from 
     all deferred income companies of such shareholder.
       To illustrate the ratio, assume that Z, a domestic 
     corporation, is a U.S. shareholder with respect to each of 
     four specified foreign corporations, two of which are E&P 
     deficit foreign corporations. Assume further the foreign 
     companies have the following accumulated post-1986 deferred 
     foreign income or foreign earnings and profits deficits as of 
     November 2, 2017, and December 31, 2017:
     Example

------------------------------------------------------------------------
                                                 Post-1986
     Specified Foreign Corp.        Percentage    profit/      Pro Rata
                                      Owned     deficit USD     Share
------------------------------------------------------------------------
A................................          60%     ($1,000)       ($600)
B................................          10%       ($200)        ($20)
C................................          70%       $2,000       $1,400
D................................         100%       $1,000       $1,000
------------------------------------------------------------------------

       The aggregate foreign earnings and profits deficit of the 
     U. S. shareholder is ($620), and the aggregate share of 
     accumulated post-1986 deferred foreign income is $2,400. 
     Thus, the portion of the aggregate foreign earnings and 
     profits deficit allocable to Corporation C is ($362), that 
     is, ($620)  x  400/2400. The remainder of the aggregate 
     foreign earnings and profits deficit is allocable to 
     Corporation D. The U.S. shareholder has a net surplus of 
     earnings and profits in the amount of $1,780.
       The provision also permits intragroup netting among U.S. 
     shareholders in an affiliated group in which there is at 
     least one U.S. shareholder with a net E&P surplus and another 
     with a net E&P deficit. The net E&P surplus shareholder may 
     reduce its net surplus by the shareholder's applicable share 
     of aggregate unused E&P deficit, based on the group's 
     ownership percentage of the members. For example, a U.S. 
     corporation may have two domestic subsidiaries, X and Y, in 
     which it owns 100 percent and 80 percent, respectively. If X 
     has a $1,000 net E&P surplus, and Y has $1,000 net E&P 
     deficit, X is an E&P net surplus shareholder, and Y is an E&P 
     net deficit shareholder. The net E&P surplus of X may be 
     reduced by the net E&P deficit of Y to the extent of the 
     group's ownership percentage in Y, which is 80-percent. The 
     remaining net E&P deficit of Y is unused. If the U.S. 
     shareholder Z is also a wholly owned domestic subsidiary of 
     the same U.S. parent as X and Y, the group ownership 
     percentage of Y is unchanged, and the surpluses of X and Z 
     are reduced ratably by 800 of the net E&P deficit of Y.
     Participation exemption applied to accumulated post-1986 
         deferred foreign income
       A U.S. shareholder of a specified foreign corporation is 
     allowed a deduction of a portion of the increased subpart F 
     income attributable to the inclusion of pre-effective date 
     deferred foreign income. The amount of the deduction is the 
     sum of the 14-percent rate equivalent percentage of the 
     inclusion amount that is the shareholder's aggregate cash 
     position and the 7-percent rate equivalent percentage of the 
     portion of the inclusion that exceeds the aggregate cash 
     position. By stating the permitted deduction in the form of a 
     tax rate equivalent percentage, the provision ensures that 
     all pre-effective date accumulated post-1986 deferred foreign 
     income is subject to either a 7-percent or 14-percent rate of 
     tax, depending on the underlying assets as of the measurement 
     date, without regard to the corporate tax rate that may be in 
     effect at the time of the inclusion. For example, corporate 
     taxpayers that use a fiscal year as the taxable year may 
     report the increased subpart F income in a taxable year for 
     which a reduced corporate tax rate would otherwise apply (on 
     a pro-rated basis under section 15), but the allowable 
     deduction would be reduced such that the rate of U.S. tax on 
     the income inclusion would be 7 or 14 percent.
       Aggregate cash position
       The aggregate cash position of a U.S. shareholder is the 
     average of the sum of the shareholder's pro rata share of the 
     cash position of each specified foreign corporation with 
     respect to which that shareholder is a U.S. shareholder on 
     each of three dates: Date of introduction (November 2, 2017) 
     and the last day of the two most recent taxable years ending 
     before the date of introduction. Appropriate adjustments are 
     made if a specified foreign corporation is not in existence 
     on one or more of those dates. By using a three-year average 
     as the aggregate cash position for a U.S. shareholders, the 
     effect of unusual or anomalous transactions is muted.
       For purposes of this computation, the cash position of 
     certain non-corporate entities that would be treated as 
     specified foreign corporations if they were foreign 
     corporations is also included. The cash position of an entity 
     consists of all cash, net accounts receivables, and the fair 
     market value of similarly liquid assets, specifically 
     including personal property that is actively traded on an 
     established financial market, government securities, 
     certificates of deposit, commercial paper, foreign currency, 
     and short-term obligations. In addition, the Secretary may 
     identify other assets that are economically equivalent to the 
     enumerated assets that are included.
       Certain reductions from aggregate cash position are 
     specified in the provision. First, rules are provided to 
     avoid the double counting of cash position of specified 
     foreign corporations in an affiliated group, while ensuring 
     that all of the cash position is taken into account. Second, 
     regardless of the form in which a specified foreign 
     corporation holds earnings, to the extent that the earnings 
     constitute blocked income that could not be distributed by 
     the corporation due to local jurisdiction restrictions,\1499\ 
     such earnings are not included in the cash position of that 
     specified foreign corporation. The blocked income remains 
     within the scope of the accumulated post-1986 deferred 
     foreign income that is subject to inclusion under this 
     provision.
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     \1499\ Sec. 964(b) and regulations thereunder.
---------------------------------------------------------------------------
       In addition to the authority to identify other assets that 
     are subject to the cash position determination by regulation, 
     the provision also authorizes the Secretary to disregard 
     transactions that he determines had the principal purpose of 
     reducing the aggregate foreign cash position.
     Foreign tax credits reduced
       A portion of foreign income taxes deemed paid or accrued 
     with respect to the increased subpart F income attributable 
     to the inclusion of pre-effective date deferred foreign 
     income is not creditable against the Federal income tax 
     attributable to the inclusion, nor is it deductible. The 
     disallowed portion of foreign tax credits is 60-percent of 
     foreign taxes paid attributable to the portion of the 
     inclusion attributable to the aggregate cash position plus 
     80-percent of foreign taxes paid attributable to the 
     remaining portion of the section 965 inclusion.\1500\
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     \1500\ Other foreign tax credits used by a taxpayer against 
     tax liability resulting from the deemed inclusion apply in 
     full.

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[[Page 20048]]

       The provision coordinates the disallowance of foreign tax 
     credits described above with the requirement \1501\ that a 
     domestic corporate shareholder is deemed to receive a 
     dividend in an amount equal to foreign taxes it is deemed to 
     have paid and for which it claimed a credit. Under the 
     coordination rule, the foreign taxes treated as paid or 
     accrued by a domestic corporation as a result of the 
     inclusion are limited to the those taxes in proportion to the 
     taxable portion of the section 965 inclusion. The gross-up 
     amount equals the total foreign income taxes multiplied by 
     the fraction, numerator of which is taxable portion of the 
     increased subpart F income under this provision and the 
     denominator of which is the total increase in subpart F 
     income under this provision.
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     \1501\ Sec. 78.
---------------------------------------------------------------------------
       The amount of deferred foreign income required to be 
     included in subpart F income under this provision is 
     disregarded for purposes of determining the amount of income 
     from foreign sources and the combined foreign oil and gas 
     income that a U.S. shareholder has for purposes of the 
     recapture rules applicable to overall foreign losses, 
     separate limitation losses, and foreign oil and gas losses 
     under sections 904(f)(1) and 907(c)(4).
       The foreign income taxes deemed paid with respect to the 
     inclusion required by the provision and for which no credit 
     is allowed in the year of inclusion by reason of section 904 
     limitations (e.g., because part or all of the inclusion 
     required by the provision is offset by a net operating loss 
     deduction) are eligible for a special 20 year carry forward 
     period, rather than the otherwise available 10 year period.
     Installment payments
       A U.S. shareholder may elect to pay the net tax liability 
     resulting from the mandatory inclusion of pre-effective-date 
     undistributed CFC earnings in eight equal installments. The 
     net tax liability that may be paid in installments is the 
     excess of the U.S. shareholder's net income tax for the 
     taxable year in which the pre-effective-date undistributed 
     CFC earnings are included in income over the taxpayer's net 
     income tax for that year determined without regard to the 
     inclusion. Net income tax means net income tax as defined for 
     purposes of the general business credit, but reduced by the 
     amount of that credit.
       An election to pay tax in installments must be made by the 
     due date for the tax return for the taxable year in which the 
     pre-effective-date undistributed CFC earnings are included in 
     income. The Treasury Secretary has authority to prescribe the 
     manner of making the election. The first installment must be 
     paid on the due date (determined without regard to 
     extensions) for the tax return for the taxable year of the 
     income inclusion. Succeeding installments must be paid 
     annually no later than the due dates (without extensions) for 
     the income tax return of each succeeding year. If a 
     deficiency is later determined with respect to the net tax 
     liability, the additional tax due may be prorated among all 
     installment payments in most circumstances. The portions of 
     the deficiency prorated to an installment that was due before 
     the deficiency was assessed must be paid upon notice and 
     demand. The portion prorated to any remaining installment is 
     payable with the timely payment of that installment payment, 
     unless the deficiency is attributable to negligence, 
     intentional disregard of rules or regulations, or fraud with 
     intent to evade tax, in which case the entire deficiency is 
     payable upon notice and demand.
       The timely payment of an installment does not incur 
     interest. If a deficiency is determined that is attributable 
     to an understatement of the net tax liability due under this 
     provision, the deficiency is payable with underpayment 
     interest for the period beginning on the date on which the 
     net tax liability would have been due, without regard to an 
     election to pay in installments, and ending with the payment 
     of the deficiency. Furthermore, any amount of deficiency 
     prorated to a remaining installment also bears interest on 
     the deficiency, but not on the original installment amount.
       The provision also includes an acceleration rule. If (1) 
     there is a failure to pay timely any required installment, 
     (2) there is a liquidation or sale of substantially all of 
     the U.S. shareholder's assets (including in a bankruptcy 
     case), (3) the U.S. shareholder ceases business, or (4) 
     another similar circumstance arises, the unpaid portion of 
     all remaining installments is due on the date of the event 
     (or, in a title 11 case or similar proceeding, the day before 
     the petition is filed).
     Special rule for S corporations
       A special rule permits deferral of the transition net tax 
     liability for shareholders of a U.S. shareholder that is a 
     flow-through entity known as an S corporation.\1502\ The S 
     corporation is required to report on its income tax return 
     the amount includible in gross income by reason of this 
     provision, as well as the amount of deduction that would be 
     allowable, and provide a copy of such information to its 
     shareholders. Any shareholder of the S corporation may elect 
     to defer his portion of the net tax liability at transition 
     to the participation exemption system until the shareholder's 
     taxable year in which a triggering event occurs. The election 
     to defer the tax is due not later than the due date for the 
     return of the S corporation for its last taxable year that 
     begins before January 1, 2018.
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     \1502\ Section 1361 defines an S corporation as a domestic 
     small business corporation that has an election in effect for 
     status as an S corporation, with fewer than 100 shareholders, 
     none of whom are nonresident aliens, and all of whom are 
     individuals, estates, trusts or certain exempt organizations.
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       Three types of events may trigger an end to deferral of the 
     net tax liability. The first type of triggering event is a 
     change in the status of the corporation as an S corporation. 
     The second category includes liquidation, sale of 
     substantially all corporate assets, termination of the 
     company or end of business, or similar event, including 
     reorganization in bankruptcy. The third type of triggering 
     event is a transfer of shares of stock in the S corporation 
     by the electing taxpayer, whether by sale, death or 
     otherwise, unless the transferee of the stock agrees with the 
     Secretary to be liable for net tax liability in the same 
     manner as the transferor. Partial transfers trigger the end 
     of deferral only with respect to the portion of tax properly 
     allocable to the portion of stock sold.
       If a shareholder of an S corporation has elected deferral 
     under the special rule for S corporation shareholders and a 
     triggering event occurs, the S corporation and the electing 
     shareholder are jointly and severally liable for any net tax 
     liability and related interest or penalties. The period 
     within which the IRS may collect such liability does not 
     begin before the date of an event that triggers the end of 
     the deferral. If an election to defer payment of the net tax 
     liability is in effect for a shareholder, that shareholder 
     must report the amount of the deferred net tax liability on 
     each income tax return due during the period that the 
     election is in effect. Failure to include that information 
     with each income tax return will result in a penalty equal to 
     five-percent of the amount that should have been reported.
       After a triggering event occurs, a shareholder is the S 
     corporation may elect to pay the net tax liability in eight 
     equal installments, subject to rules similar to those 
     generally applicable absent deferral. Whether a shareholder 
     may elect to pay in installments depends upon the type of 
     event that triggered the end of deferral. If the triggering 
     event is a liquidation, sale of substantially all corporate 
     assets, termination of the company or end of business, or 
     similar event, the installment payment election is not 
     available. Instead, the entire net tax liability is due upon 
     notice and demand. The installment election is due with the 
     timely return for the year in which the triggering event 
     occurs. The first installment payment is required by the due 
     date of the same return, determined without regard to 
     extensions of time to file.
       Effective Date.--The provision is effective for the last 
     taxable year of a foreign corporation that begins before 
     January 1, 2018, and with respect to U.S. shareholders, for 
     the taxable years in which or with which such taxable years 
     of the foreign corporations end.


                            Senate Amendment

     In general
       The provision generally requires that, for the last taxable 
     year beginning before January 1, 2018, any U.S. shareholder 
     of a specified foreign corporation must include in income its 
     pro rata share of the accumulated post-1986 deferred foreign 
     income of the corporation. For purposes of this provision, a 
     specified foreign corporation is any foreign corporation that 
     has at least one U.S. shareholder. It excludes PFICs that are 
     not also CFCs. A portion of that pro rata share of foreign 
     earnings is deductible; the amount of the deductible portion 
     depends upon whether the deferred earnings are held in cash 
     or other assets. The deduction results in a reduced rate of 
     tax with respect to income from the required inclusion of 
     pre-effective date earnings. A corresponding portion of the 
     credit for foreign taxes is disallowed, thus limiting the 
     credit to the taxable portion of the included income. The 
     separate foreign tax credit limitation rules of present law 
     section 904 apply, with coordinating rules. The increased tax 
     liability generally may be paid over an eight-year period. 
     Special rules are provided for S corporations and real estate 
     investment trusts (``REITs'').
     Subpart F
       The mechanism for requiring an inclusion of pre-effective-
     date foreign earnings is subpart F. The provision provides 
     that in the last taxable year of a deferred foreign income 
     corporation that begins before January 1, 2018, which is that 
     foreign corporation's last taxable year before the transition 
     to the new corporate tax regime elsewhere in the bill goes 
     into effect, the subpart F income of the foreign corporation 
     is increased by the greater of the accumulated post-1986 
     deferred foreign income of the corporation, determined as of 
     November 9, 2017, or as of December 31, 2017 (``measurement 
     date''). The amount so determined is includible in gross 
     income under section 951 (hereinafter, ``the section 951 
     inclusion'').

[[Page 20049]]

       The transition rule applies to all U.S. shareholders \1503\ 
     of a deferred foreign income corporation. ``Deferred foreign 
     income corporation'' is any specified foreign corporation 
     with accumulated post-1986 deferred income that is greater 
     than zero. A specified foreign corporation is defined as any 
     CFC as well as any section 902 corporation, as defined in 
     section 909(d)(5) prior to date of enactment of this bill, 
     i.e., any foreign corporation in which a U.S. person owns 10 
     percent of the voting stock. Consistent with the general 
     operation of subpart F, each U.S. shareholder of a deferred 
     foreign income corporation must include in income the 
     shareholder's pro rata share of the foreign corporation's 
     subpart F income attributable to its section 951 
     inclusion.\1504\
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     \1503\ Sec. 951(b) defines United States shareholder as any 
     U.S. person that owns 10 percent or more of combined voting 
     classes of stock of a foreign corporation.
     \1504\ For purposes of taking into account its subpart F 
     income under this rule, a noncontrolled section 902 
     corporation is treated as a CFC.
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     Accumulated post-1986 deferred foreign income

       A specified foreign corporation's accumulated post-1986 
     deferred foreign income on the measurement date is based on 
     all post-1986 foreign earnings and profits (``E&P'') that are 
     not previously taxed and are neither (1) attributable to 
     income that is effectively connected with the conduct of a 
     trade or business in the United States and subject to U.S. 
     income tax nor (2) subpart F income (determined without 
     regard to the section 951 inclusion) included in the gross 
     income of a U.S. shareholder. The potential pool of 
     includible earnings includes all undistributed foreign 
     earnings accumulated in taxable years beginning after 1986, 
     computed in accordance with sections 964(a) and 986, taking 
     into account only periods when the foreign corporation was a 
     specified corporation. The pool of post-1986 foreign earnings 
     and profits is not reduced by distributions during the 
     taxable year to which section 965 applies.
       Reductions of amounts included in income of U.S. 
           shareholder of foreign corporations with deficits in 
           E&P

       The pool of post-1986 earnings and profits taken into 
     consideration in computing the section 951 inclusion required 
     of a U.S. shareholder under this transition rule generally is 
     reduced by foreign earnings and profits deficits that are 
     properly allocated to that person. The U.S. shareholder must 
     determine its aggregate E&P deficit based on its interest in 
     each specified foreign corporation with a deficit in post-
     1986 foreign earnings and profits as of the measurement date 
     (``E&P deficit foreign corporation'').
       The U.S. shareholder's aggregate E&P deficit is then 
     allocated among the deferred foreign income corporations in 
     the same ratio as the U.S. shareholder's pro rata share of 
     post-1986 deferred income in that corporation bears to the 
     U.S. shareholder's pro rata share of accumulated post-1986 
     deferred foreign income from all deferred foreign income 
     corporations with respect to which the shareholder is a U.S. 
     shareholder. For the portion of aggregate E&P deficits that 
     include qualified deficits, the portion of the deficit that 
     is attributable to a qualified deficit, and the qualified 
     activity, must be identified. The provision does not permit 
     intragroup netting among U.S. shareholders within an 
     affiliated group.
       In taxable years beginning after 2017, amounts by which the 
     section 951 inclusion was reduced by aggregate E&P deficits 
     are considered as amounts included in the gross income of the 
     U.S. shareholder. The shareholder's pro rata share of the E&P 
     of an E&P deficit foreign corporation that used qualified 
     deficits to reduce its section 951 inclusion is increased by 
     the amount of such deficit and attributed to the same 
     activity to which the income was attributed.
     Deductions from section 951 inclusion

       To determine the taxable portion of the section 951 
     inclusion, the U.S. shareholders with accumulated deferred 
     foreign income may deduct a portion of the section 951 
     inclusion in an amount that depends upon the proportion of 
     aggregate earnings and profits attributable to cash assets 
     rather than noncash assets, in the nature of a partial 
     dividends-received deduction. A U.S. shareholder may deduct 
     71.4 percent of the aggregate earnings and profits 
     attributable to cash assets, and 85.7 percent of the 
     remainder of the aggregate earnings and profits in the 
     section 951 inclusion.\1505\
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     \1505\ Committee Print, Reconciliation Recommendations 
     Pursuant to H. Con. Res. 71, S. Prt. 115-20, (December 2017), 
     as reprinted on the website of the Senate Budget Committee, 
     available at https://www.budget.senate.gov/taxreform., at 
     footnote 1198, indicated that the income deducted was to be 
     treated as exempt from tax, with the result that the deducted 
     income, if earned by a partnership, could give rise to an 
     increase in a partner's basis under section 705(a)(1)(B).
---------------------------------------------------------------------------
       A U.S. shareholder may elect, no later than with a timely 
     filed return for the taxable year, not to apply its net 
     operating loss deduction to the deemed repatriation. If so, 
     neither the section 951 inclusion nor any related deemed paid 
     foreign tax credits may be taken into account in computing 
     the net operating loss deduction for that year.
       Cash position

       The aggregate earnings and profits attributable to cash 
     assets for a U.S. shareholder is the greater of the pro rata 
     share of the cash position of all specified foreign 
     corporations as of the last day of the last taxable year 
     beginning before January 1, 2018, or the average of the cash 
     position determined on the last day of each of the two 
     taxable years ending immediately before November 9, 2017. For 
     purposes of this computation, the cash position of certain 
     non-corporate entities that would be treated as specified 
     foreign corporations if they were foreign corporations is 
     also included. The cash position of an entity consists of all 
     cash, net accounts receivables, and the fair market value of 
     similarly liquid assets, specifically including personal 
     property that is actively traded on an established financial 
     market (other than stock in the specified foreign 
     corporation) government securities, certificates of deposit, 
     commercial paper, and short-term obligations.
       To avoid double counting of cash assets, a U.S. shareholder 
     may disregard accounts receivable and short-term obligations 
     of a specified foreign corporation if that shareholder can 
     establish that the amounts were already taken into account by 
     that shareholder with respect to another specified foreign 
     corporation.
       The Secretary may identify other assets that are 
     economically equivalent to the enumerated assets that are 
     treated as cash. The provision also authorizes the Secretary 
     to disregard transactions that are determined to have the 
     principal purpose of reducing the aggregate foreign cash 
     position.
     Foreign tax credit

       A portion of foreign income tax that is deemed paid or 
     accrued with respect to the section 951 inclusion is not 
     creditable or deductible against the Federal income tax 
     attributable to the inclusion. The disallowed portion of 
     foreign tax credits is 71.4 percent of foreign taxes paid 
     attributable to the portion of the section 965 inclusion 
     attributable to the aggregate cash position plus, 85.7 
     percent of foreign taxes paid attributable to the remaining 
     portion of the section 965 inclusion.\1506\ The provision 
     coordinates the disallowance of foreign tax credits with the 
     requirement \1507\ that a domestic corporate shareholder is 
     deemed to receive a dividend in an amount equal to foreign 
     taxes it is deemed to have paid and for which it claimed a 
     credit.
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     \1506\ Other foreign tax credits used by a taxpayer against 
     tax liability resulting from the deemed inclusion apply in 
     full.
     \1507\ Sec. 78.
---------------------------------------------------------------------------
     Limitations on assessment extended

       The provision also allows an exception to the otherwise 
     applicable limitations period for assessment of tax to ensure 
     that the period for assessment of underpayments in tax 
     related to the treatment of the pre-effective date foreign 
     earnings does not expire prior to six years from the date on 
     which the return initially reflecting the section 951 
     inclusion was filed.
     Installment payments

       The Senate amendment follows the House provision in 
     allowing a U.S. shareholder to elect to pay the net tax 
     liability resulting from the section 951 inclusion in eight 
     installments. However, if installment payment is elected, 
     rather than requiring eight equal installments, the Senate 
     amendment requires that the payments for each of the first 
     five years equal 8 percent of the net tax liability, the 
     sixth installment equals 15 percent of the net tax liability, 
     increasing to 20 percent for the seventh installment and the 
     remaining balance of 25 percent in the eighth year.
     Special rule for S corporations

       The Senate amendment also includes the special rule of the 
     House provision that permits deferral of the transition net 
     tax liability for shareholders of a U.S. shareholder that is 
     a flow-through entity known as an S corporation.\1508\ After 
     a triggering event occurs, a shareholder in the S corporation 
     may elect to pay the net tax liability in eight installments, 
     subject to rules similar to those generally applicable absent 
     deferral.
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     \1508\ Section 1361 defines an S corporation as a domestic 
     small business corporation that has an election in effect for 
     status as an S corporation, with no more than 100 
     shareholders, none of whom are nonresident aliens, and all of 
     whom are individuals, estates, trusts or certain exempt 
     organizations.
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     Special rules for REITs

       To alleviate burden of compliance with this section by 
     REITs, special rules are provided if a U.S. shareholder is a 
     REIT. First, although it must determine its pro rata share of 
     the increase in subpart F income in accordance with the rules 
     described above, the REIT is not required to take into 
     account the section 951 inclusion for purposes of determining 
     the REIT's amount of qualified REIT gross income.\1509\ The 
     section 951

[[Page 20050]]

     inclusion is, however, taken into account for purposes of 
     determining the income potentially required to be included in 
     taxable income under section 857(b). Unlike a regular 
     subchapter C corporation, a REIT is able to deduct the 
     portion of its income that is distributed to its shareholders 
     as a dividend or qualifying liquidating distribution each 
     year.\1510\ The distributed income of the REIT is not taxed 
     at the entity level; instead, it is taxed once, at the 
     investor level. As a result, a required inclusion under this 
     section may trigger a requirement that the REIT distribute an 
     amount equal to 90 percent of that inclusion despite the fact 
     that it received no distribution from the deferred foreign 
     income corporation.
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     \1509\ To qualify as a REIT, an entity must meet certain 
     income requirements. A REIT is restricted to earning certain 
     types of generally passive income. Among other requirements, 
     at least 75 percent of the gross income of a REIT in each 
     taxable year must consist of real estate-related income. 
     Secs. 856. In addition, a REIT is required to distribute at 
     least 90 percent of REIT income (other than net capital gain) 
     annually. Sec. 857. Even if a REIT meets the 90-percent 
     income distribution requirement for REIT qualification, more 
     stringent distribution requirements must be met in order to 
     avoid an excise tax under section 4981.
     \1510\ Liquidating distributions are covered to the extent of 
     earnings and profits, and are defined to include redemptions 
     of stock that are treated by shareholders as a sale of stock 
     under section 302. Secs. 857(b)(2)(B), 561, and 562(b).
---------------------------------------------------------------------------
       To avoid requiring that any distribution requirement be 
     satisfied in one year, an election to defer the section 951 
     inclusion is permitted. Under a timely election, a REIT may 
     instead take the amounts into income over a period of eight 
     years. It must include 8 percent in each of the five years 
     beginning with the initial year in which the section 951 
     inclusion is determined, 15 percent in the sixth year, 20 
     percent in the seventh year and 25 percent in the eighth 
     year. In each of those years, it may claim a partial 
     dividends-received deduction in the applicable percentages in 
     proportion to the amount included in each of the eight years. 
     Neither the REIT nor the recipient of the distribution may 
     elect to use the installment payment.
       In the event that a REIT liquidates, ceases to operate its 
     business, or distributes substantially all its assets (or any 
     other similar event occurs), any portion of the required 
     inclusion not yet taken into income is accelerated and 
     required to be included as gross income as of the day before 
     the event.
     Recapture from expatriated entities

       The provision denies any deduction claimed with respect to 
     the mandatory subpart F inclusion and imposes a 35-percent 
     tax on the entire inclusion if a U.S. shareholder becomes an 
     expatriated entity within the meaning of section 7874(a)(2) 
     at any point within the ten-year period following enactment 
     of the Tax Cuts and Jobs Act. An entity that becomes a 
     surrogate foreign corporation that is treated as a domestic 
     corporation under section 7874(b) is not within the scope of 
     this recapture provision. Although the amount due is computed 
     by reference to the year in which the deemed subpart F income 
     was originally reported, the additional tax arises and is 
     assessed for the taxable year in which the U.S. shareholder 
     becomes an expatriated entity. No foreign tax credits are 
     permitted with respect to the additional tax due as a result 
     of the recapture rule.
     Regulatory authority

       A specific grant of regulatory authority to carry out the 
     intent of this provision is included. For example, the 
     Secretary may identify instances in which it is appropriate 
     to grant relief from potential double-counting of earnings 
     and profits, which may occur due to different measurement 
     dates applicable to specified foreign corporations within an 
     affiliated group, or the timing of intragroup distributions. 
     It also specifies that the Secretary shall prescribe rules or 
     guidance in order to deter tax avoidance through use of 
     entity classification elections and accounting method 
     changes, among other possible strategies.
       Effective date.--The provision is effective for the last 
     taxable year of a foreign corporation that begins before 
     January 1, 2018, and with respect to U.S. shareholders, for 
     the taxable years in which or with which such taxable years 
     of the foreign corporations end.


                          Conference Agreement

       The conference agreement generally follows the Senate 
     amendment, with several modifications, including those 
     described below.
     Scope of earnings and profits subject to the transition tax

       The provision applies to all CFCs. It also applies to all 
     foreign corporations (other than PFICs), in which a U.S. 
     person owns a 10-percent voting interest, rather than only 
     CFCs and those corporations within the definition of section 
     902 corporation. However, in the case of a foreign 
     corporation that is not a CFC, there must be at least one 
     U.S. shareholder that is a domestic corporation in order for 
     the foreign corporation to be a specified foreign 
     corporation. Such entities must determine their deferred 
     foreign income based on the greater of the aggregate post-
     1986 accumulated foreign earnings and profits as of November 
     2, 2017 or December 31, 2017, not reduced by distributions 
     during the taxable year ending with or including the 
     measurement date, unless such distributions were made to 
     another specified foreign corporation. The portion of post-
     1986 earnings and profits subject to the transition tax does 
     not include earnings and profits that were accumulated by a 
     foreign company prior to attaining its status as a specified 
     foreign corporation.
       Deferred earnings of a U.S. shareholder are reduced (but 
     not below zero) by the shareholder's share of deficits as of 
     November 2, 2017, from a specified foreign corporation that 
     is not a deferred foreign income corporations, including the 
     pro rata share of deficits of another U.S. shareholder in a 
     different U.S. ownership chain within the same U.S. 
     affiliated group. The deficits (including hovering deficits 
     \1511\) of a foreign subsidiary that accumulated while it was 
     a specified foreign corporation may be taken into account in 
     determining the aggregate foreign earnings and profits 
     deficit of a U.S. shareholder. Therefore, the amount of post-
     1986 earnings and profits of a specified foreign corporation 
     is the amount of positive earnings and profits accumulated as 
     of the measurement date reduced by any deficit in earnings 
     and profits of the specified foreign corporation as of the 
     measurement date, without regard to the limitation category 
     of the earnings or deficit. In taxable years beginning with 
     the year of the section 951 inclusion, amounts by which the 
     section 951 inclusion was reduced by aggregate E&P deficits 
     are considered as amounts included in the gross income of the 
     U.S. shareholder for purposes of applying section 959.
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     \1511\ See, Treas. Reg. sec. 1.367(b)-7(d)(2) (definition of 
     hovering deficit).
---------------------------------------------------------------------------
       For example, assume that a foreign corporation organized 
     after December 31, 1986 has $100 of accumulated earnings and 
     profits as of November 2, 2017, and December 31, 2017 
     (determined without diminution by reason of dividends 
     distributed during the taxable year and after any increase 
     for qualified deficits), which consist of $120 general 
     limitation earnings and profits and a $20 passive limitation 
     deficit, the foreign corporation's post-1986 earnings and 
     profits would be $100, even if the $20 passive limitation 
     deficit was a hovering deficit. Foreign income taxes related 
     to the hovering deficit, however, would not generally be 
     deemed paid by the U.S. shareholder recognizing an 
     incremental income inclusion. However, the conferees expect 
     the Secretary may issue guidance to provide that, solely for 
     purposes of calculating the amount of foreign income taxes 
     deemed paid by the U.S. shareholder with respect to an 
     inclusion under section 965, a hovering deficit may be 
     absorbed by current year earnings and profits and the foreign 
     income taxes related to the hovering deficit may be added to 
     the specified foreign corporation's post-1986 foreign income 
     taxes in that separate category on a pro rata basis in the 
     year of inclusion.\1512\
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     \1512\ Cf. Treas. Reg. sec. 1.367(b)-7(d)(2)(ii) and (iii).
---------------------------------------------------------------------------
       In order to avoid double-counting and double non-counting 
     of earnings, the Secretary may provide guidance to adjust the 
     amount of post-1986 earnings and profits of a specified 
     foreign corporation to ensure that a single item of a 
     specified foreign corporation is taken into account only once 
     in determining the income of a United States shareholder 
     subject to this provision. Such an adjustment may be 
     necessary, for example, when there is a deductible payment 
     (e.g., interest or royalties) from one specified foreign 
     corporation to another specified foreign corporation between 
     measurement dates.
       The conferees are also aware that certain taxpayers may 
     have engaged in tax strategies designed to reduce the amount 
     of post-1986 earnings and profits in order to decrease the 
     amount of the inclusion required under this provision. Such 
     tax strategies may include a change in entity classification, 
     accounting method, and taxable year, or intragroup 
     transactions such as distributions or liquidations. The 
     conferees expect the Secretary to prescribe rules to adjust 
     the amount of post-1986 earnings and profits in such cases in 
     order to prevent the avoidance of the purposes of this 
     section.
       Furthermore, the conferees expect that the Secretary will 
     exercise his authority under the consolidated return 
     provisions to appropriately limit the netting across chains 
     of ownership within a group of related parties in the 
     application of this provision. However, nothing in this 
     provision is intended to be interpreted as limiting the 
     Secretary's authority to use such regulatory authority to 
     prescribe regulations on proper application of this section 
     on a consolidated basis for affiliated groups filing a 
     consolidated return.
     Application of participation exemption deduction and related 
         foreign tax credits

       Instead of prescribing a fixed percentage of the section 
     951 inclusion resulting from section 965 for which a partial 
     dividends-received deduction is permitted, the conference 
     agreement adopts the rate equivalent percentage method used 
     in the House bill. As a result, the total deduction from the 
     amount of the section 951 inclusion is the amount necessary 
     to result in a 15.5-percent rate of tax on accumulated post-
     1986 foreign earnings held in the form of cash or cash 
     equivalents, and 8-percent rate of tax on all other earnings. 
     The calculation is based on the highest rate of tax 
     applicable to corporations in the taxable year of inclusion, 
     even if the U.S. shareholder is an individual.

[[Page 20051]]

       The use of rate equivalent percentages is intended to 
     ensure that the rates of tax imposed on the deferred foreign 
     income is similar for all U.S. shareholders, regardless of 
     the year in which section 965 gives rise to an income 
     inclusion. Individual U.S. shareholders, and the investors in 
     U.S. shareholders that are pass-through entities generally 
     can elect application of corporate rates for the year of 
     inclusion.\1513\ In addition, the increase in income that is 
     not taxed by reason of the partial dividends-received 
     deduction allowed under this provision is treated as income 
     exempt from tax for purposes of determining the basis in an 
     interest in a partnership or subchapter S corporation, but 
     not as income exempt from tax for purposes of determining the 
     accumulated adjustments account of a subchapter S 
     corporation.\1514\ Similarly, the conferees expect the 
     Secretary to provide regulations or other guidance that 
     provide for similar treatment under section 986(c), such that 
     any gain or loss recognized thereunder with respect to 
     distributions of earnings previously taxed (or treated as 
     previously taxed) by reason of section 965(a) will be 
     diminished proportionately to the diminution of the net 
     taxable income resulting from section 965(a) by reason of the 
     deduction allowed under section 965(c).
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     \1513\ Sec. 962 allows individuals to make the election for a 
     specific taxable year, subject to regulations provided by the 
     Secretary.
     \1514\ Secs. 705(a)(1)(B), 1367(a)(1)(A) and 1368(e)(1)(A).
---------------------------------------------------------------------------
       To reflect the change in the applicable rates of deduction, 
     the amounts by which foreign tax credits are reduced are also 
     changed. In addition, the rules for coordination of this 
     provision with the limitations on foreign tax credits follows 
     the House provision. Under the coordination rule, the foreign 
     taxes treated as paid or accrued by a domestic corporation as 
     a result of the inclusion are limited to the those taxes in 
     proportion to the taxable portion of the section 965 
     inclusion. The gross-up amount equals the total foreign 
     income taxes multiplied by the fraction, numerator of which 
     is taxable portion of the increased subpart F income under 
     this provision and the denominator of which is the total 
     increase in subpart F income under this provision.
       The conferees recognize that basis adjustments (increases 
     or decreases) may be necessary with respect to both the stock 
     of the deferred foreign income corporation and the E&P 
     deficit foreign corporation and authorizes the Secretary to 
     provide for such basis adjustments or other adjustments, as 
     may be appropriate. For example, with respect to the stock of 
     the deferred foreign income corporation, the Secretary may 
     determine that a basis increase is appropriate in the taxable 
     year of the section 951A inclusion or, alternatively, the 
     Secretary may modify the application of section 961(b)(1) 
     with respect to such stock. Moreover, with respect to the 
     stock of the E&P deficit corporation, the Secretary may 
     require a reduction in basis for the taxable year in which 
     the U.S. shareholder's pro rata share of the earnings of the 
     E&P deficit corporation are increased.
       With respect to the denial of the partial dividend to any 
     U.S. shareholder that becomes an expatriated entity within 
     the meaning of section 7874(a)(2) at any point within the 
     ten-year period following enactment of the Tax Cuts and Jobs 
     Act, the conference agreement clarifies that U.S. 
     shareholders acquired by a surrogate corporation are within 
     the scope of the provision only if the surrogate corporation 
     inverted post-enactment.
     Determination of cash position

       The determination of assets to be considered in measuring 
     the cash position of an entity is modified in several ways. 
     First, cash holdings of a specified foreign corporation in 
     the form of publicly traded stock may be excluded to the 
     extent that a U.S. shareholder can demonstrate that the value 
     of such stock was taken into account as cash or cash 
     equivalent by another specified foreign corporation with 
     respect to which such shareholder is a U.S. shareholder.
       The conference agreement also provides that the cash 
     position of a U.S. shareholder does not generally include the 
     cash attributable to a direct ownership interest in a 
     partnership, but preserves the rule that cash positions of 
     certain noncorporate foreign entities owned by a specified 
     foreign corporation are taken into account if such entities 
     would be specified foreign corporations with respect to the 
     U.S. shareholder if the entity were a foreign corporation. 
     For example, if a U.S. shareholder owns a five-percent 
     interest in a partnership, the balance of which is held by a 
     specified foreign corporation with respect to which such 
     shareholder is a U.S. shareholder, the partnership is treated 
     as a specified foreign corporation with respect to the U.S. 
     shareholder, and the cash or cash equivalents held by the 
     partnership are includible in the aggregate cash position of 
     the U.S. shareholder on a look-through basis. The conferees 
     anticipate that the Secretary will provide guidance for 
     taking into account only the specified foreign corporation's 
     share of the partnership's cash position, and not the five-
     percent interest directly owned by the U.S. shareholder.
       Effective date.--The provision is effective for the last 
     taxable year of a foreign corporation that begins before 
     January 1, 2018, and with respect to U.S. shareholders, for 
     the taxable years in which or with which such taxable years 
     of the foreign corporations end.
     15. Election to increase percentage of domestic taxable 
         income offset by overall domestic loss treated as foreign 
         source (sec. 14305 of the Senate amendment and sec. 
         904(g) of the Code)


                               House Bill

       No provision.


                            Senate Amendment

       The provision modifies section 904(g) by providing an 
     election to increase the percentage (but not greater than 100 
     percent) of domestic taxable income offset by any pre-2018 
     unused overall domestic loss and recharacterized as foreign 
     source. The term ``pre-2018 unused overall domestic loss'' 
     means any overall domestic loss which: (1) arises in a 
     qualified taxable year beginning before January 1, 2018, and 
     (2) has not been used under the general rule set forth in 
     section 904(g)(1). The term ``qualified taxable year'' means 
     any taxable year of the taxpayer beginning after December 31, 
     2017, and before January 1, 2028.
       Effective date.--The provision shall apply to taxable years 
     beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.

             B. Rules Related to Passive and Mobile Income

     1. Deduction for foreign-derived intangible income and global 
         intangible low-taxed income (sec. 14202 of the Senate 
         amendment and new sec. 250 of the Code)


                               house bill

       No provision.


                            senate amendment

     In general
       The provision provides domestic corporations with reduced 
     rates of U.S. tax on their foreign-derived intangible income 
     (``FDII'') and global intangible low-taxed income 
     (``GILTI'').\1515\ GILTI is defined in section 14201 of the 
     Senate amendment and new section 951A, while a domestic 
     corporation's FDII is the portion of its intangible income, 
     determined on a formulaic basis, that is derived from serving 
     foreign markets. For taxable years beginning after December 
     31, 2017, and before January 1, 2019, the effective tax rate 
     on FDII is 21.875 percent and the effective U.S. tax rate on 
     GILTI is 17.5 percent under the Senate amendment.\1516\ For 
     taxable years beginning after December 31, 2018, and before 
     January 1, 2026, the effective tax rate on FDII is 12.5 
     percent and the effective U.S. tax rate on GILTI is 10 
     percent. For taxable years beginning after December 31, 2025, 
     the effective tax rate on FDII is 15.625 percent and the 
     effective U.S. tax rate on GILTI is 12.5 percent.
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     \1515\ The deduction for FDII and GILTI is only available to 
     domestic corporations. U.S. shareholders that are not 
     domestic corporations are subject to full U.S. tax on their 
     GILTI.
     \1516\ Under sec. 13001 of the Senate amendment, the 
     corporate tax rate is reduced to 20 percent for taxable years 
     beginning after December 31, 2018.
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     Deduction for FDII and GILTI

       Deduction for FDII and GILTI and taxable income limitation
       In the case of domestic corporations for taxable years 
     beginning after December 31, 2017, and before January 1, 
     2026, the provision generally allows as a deduction an amount 
     equal to the sum of 37.5 percent of its FDII plus 50 percent 
     of its GILTI (if any). For taxable years beginning after 
     December 31, 2025, the deduction for FDII is reduced to 
     21.875 percent and the deduction for GILTI is lowered to 37.5 
     percent.\1517\
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     \1517\ The Committee intends that the deduction allowed by 
     new Code section 250 be treated as exempting the deducted 
     income from tax. Thus, for example, the deduction for global 
     intangible low-taxed income could give rise to an increase in 
     a domestic corporate partner's basis in a domestic 
     partnership under section 705(a)(1)(B).
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       If the sum of a domestic corporation's FDII and GILTI 
     amounts exceeds its taxable income determined without regard 
     to this provision, then the amount of FDII and GILTI for 
     which a deduction is allowed is reduced by an amount 
     determined by such excess. The reduction in FDII for which a 
     deduction is allowed equals such excess multiplied by a 
     percentage equal to the corporation's FDII divided by the sum 
     of its FDII and GILTI. The reduction in GILTI for which a 
     deduction is allowed equals the remainder of such 
     excess.\1518\
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     \1518\ For example, consider a domestic corporation with 
     $1,250 of FDII, $750 of GILTI, and taxable income (determined 
     without regard to this provision) of $1,500. The sum of the 
     corporation's FDII and GILTI amounts is $2,000, which exceeds 
     $1,500 by $500. For purposes of this provision, the amount of 
     FDII for which a deduction is allowed is reduced by $500 
     multiplied by $1,250/$2,000, or $312.50. The amount of GILTI 
     for which a deduction is allowed is reduced by the remainder 
     of the excess, or $187.50 (= $500  x  $750/$2,000).
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     FDII
       The FDII of any domestic corporation is the amount which 
     bears the same ratio to the corporation's deemed intangible 
     income as its foreign-derived deduction eligible income bears 
     to its deduction eligible income. In other words, a domestic 
     corporation's

[[Page 20052]]

     FDII is its deemed intangible income multiplied by the 
     percentage of its deduction eligible income that is foreign-
     derived. The calculation can also be expressed as the 
     following:
     [GRAPHIC] [TIFF OMITTED] TH15DE17.011
     
       The Secretary is authorized to prescribe regulations or 
     other guidance as may be necessary or appropriate to carry 
     out this provision.
     Deduction eligible income
       Deduction eligible income means, with respect to any 
     domestic corporation, the excess (if any) of the gross income 
     of the corporation--determined without regard to certain 
     exceptions to deduction eligible income--over deductions 
     (including taxes) properly allocable to such gross income 
     (referred to in this document as ``deduction eligible gross 
     income''). The exceptions to deduction eligible income are: 
     (1) the subpart F income of the corporation determined under 
     section 951; (2) the GILTI of the corporation; (3) any 
     financial services income (as defined in section 
     904(d)(2)(D)) of the corporation; (4) any dividend received 
     from a CFC with respect to which the corporation is a U.S. 
     shareholder; and (5) any domestic oil and gas extraction 
     income of the corporation; and (6) any foreign branch income 
     (as defined in section 904(d)(2)(J)) of the corporation.
       The formula for deduction eligible income can generally be 
     written as follows: \1519\

     \1519\ This formula assumes that the excess described in the 
     preceding paragraph is positive. Otherwise there is no 
     deduction eligible income.
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       Deduction Eligible Income = Gross 
     Income-Exceptions-Allocable Deductions

       where Exceptions refers to the exceptions to deduction 
     eligible income and Allocable Deductions encompass all 
     deductions (including taxes) property allocable to deduction 
     eligible gross income.

     Deemed intangible income
       The domestic corporation's deemed intangible income means 
     the excess (if any) of its deduction eligible income over its 
     deemed tangible income return. The deemed tangible income 
     return means, with respect to any corporation, an amount 
     equal to 10 percent of the corporation's qualified business 
     asset investment (``QBAI''). Deemed intangible income can be 
     calculated as follows: \1520\

     \1520\ If the quantity in this formula is negative, deemed 
     intangible income is zero.
---------------------------------------------------------------------------
       Deemed Intangible Income = Deduction Eligible Income-(10% 
     x  QBAI)

       For purposes of computing its FDII, a domestic 
     corporation's QBAI is the average of the aggregate of its 
     adjusted bases, determined as of the close of each quarter of 
     the taxable year, in specified tangible property used in its 
     trade or business and of a type with respect to which a 
     deduction is allowable under section 167. The adjusted basis 
     in any property must be determined using the alternative 
     depreciation system under section 168(g), notwithstanding any 
     provision of law (or any other section of the Senate 
     amendment) which is enacted after the date of enactment of 
     this provision (unless such later enacted law specifically 
     and directly amends this provision's definition).
       Specified tangible property means any tangible property 
     used in the production of deduction eligible income. If such 
     property was used in the production of deduction eligible 
     income and income that is not deduction eligible income 
     (i.e., dual-use property), the property is treated as 
     specified tangible property in the same proportion that the 
     amount of deduction eligible gross income produced with 
     respect to the property bears to the total amount of gross 
     income produced with respect to the property.\1521\ In other 
     words, the percentage of a domestic corporation's adjusted 
     basis in dual-use property that is included in QBAI equals 
     the deduction eligible gross income produced with respect to 
     the property divided by the total gross income produced with 
     respect to the property.
---------------------------------------------------------------------------
     \1521\ For example, if a building is used in the production 
     of $1,000 of total gross income for a taxable year, $250 of 
     which was domestic oil and gas extraction income and the 
     remaining $750 of which was deduction eligible gross income, 
     then 75 percent of a domestic corporation's average adjusted 
     basis in the building is included in QBAI for that taxable 
     year.
---------------------------------------------------------------------------
     Foreign-derived deduction eligible income
       Foreign-derived deduction eligible income means, with 
     respect to a taxpayer for its taxable year, any deduction 
     eligible income of the taxpayer that is derived in connection 
     with (1) property that is sold by the taxpayer to any person 
     who is not a United States person and that the taxpayer 
     establishes to the satisfaction of the Secretary is for a 
     foreign use \1522\ or (2) services provided by the taxpayer 
     that the taxpayer establishes to the satisfaction of the 
     Secretary are provided to any person, or with respect to 
     property, not located within the United States. Foreign use 
     means any use, consumption, or disposition that is not within 
     the United States. Special rules for determining foreign use 
     apply to transactions that involve property or services 
     provided to domestic intermediaries or related parties.
---------------------------------------------------------------------------
     \1522\ If property is sold by a taxpayer to a person who is 
     not a U.S. person, and after such sale the property is 
     subject to manufacture, assembly, or other processing 
     (including the incorporation of such property, as a 
     component, into a second product by means of production, 
     manufacture, or assembly) outside the United States by such 
     person, then the property is for a foreign use.
---------------------------------------------------------------------------
       For purposes of the provision, the terms ``sold,'' 
     ``sells'', and ``sale'' include any lease, license, exchange, 
     or other disposition.
       Property or services provided to domestic intermediaries
       If a taxpayer sells property to another person (other than 
     a related party) for further manufacture or modification 
     within the United States, the property is generally not 
     treated as sold for a foreign use even if such other person 
     subsequently uses such property for foreign use. However, 
     there is an exception to this general rule for property (1) 
     that is ultimately sold by a related party, or used by a 
     related party in connection with property that is sold or the 
     provision of services, to another person who is an unrelated 
     party who is not a U.S. person and (2) that the taxpayer 
     establishes to the satisfaction of the Secretary is for a 
     foreign use.\1523\ Deduction eligible income derived in 
     connection with services provided to another person (other 
     than a related party) located within the United States is not 
     treated as foreign-derived deduction eligible income, even if 
     the other person uses the services in providing services the 
     income from which is considered foreign-derived deduction 
     eligible income.
---------------------------------------------------------------------------
     \1523\ In other words, the fact that a component is included 
     in a piece of property that is eventually sold for a foreign 
     use is insufficient for the sale of the component to be 
     considered for a foreign use.
---------------------------------------------------------------------------
       Special rules with respect to related party transactions
       If property is sold to a related foreign party, the sale is 
     not treated as for a foreign use unless the property is sold 
     by the related foreign party to another person who is 
     unrelated and is not a U.S. person and the taxpayer 
     establishes to the satisfaction of the Secretary that such 
     property is for a foreign use. Income derived in connection 
     with services provided to a related party who is not located 
     in the United States is not treated as foreign-derived 
     deduction eligible income unless the taxpayer establishes to 
     the satisfaction of the Secretary that such service is not 
     substantially similar to services provided by the related 
     party to persons located within the United States.
       For purposes of applying these rules, a related party means 
     any member of an affiliated group as defined in section 
     1504(a) determined by substituting ``more than 50 percent'' 
     for ``at least 80 percent'' each place it appears and without 
     regard to sections 1504(b)(2) and 1504(b)(3). Any person 
     (other than a corporation) is treated as a member of the 
     affiliated group if the person is controlled by members of 
     the group (including any entity treated as a member of the 
     group by reason of this sentence) or controls any member, 
     with control being determined under the rules of section 
     954(d)(3).
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment, with 
     clarifications and modifications that include the following:
        The deduction for FDII and GILTI is available only 
     to C corporations that are not RICs or REITs.\1524\
---------------------------------------------------------------------------
     \1524\ An S corporation's taxable income is computed in the 
     same manner as an individual (sec. 1363(b)) so that 
     deductions allowable only to corporations, such as FDII and 
     GILTI, do not apply. See Report by the House Committee on 
     Ways and Means to accompany H.R. 6055, Subchapter S Revision 
     Act of 1982, H. Rep. No. 97-826, p. 14; and Report by the 
     Senate Committee on Finance to accompany H.R. 6055, 
     Subchapter S Revision Act of 1982, S. Rep. 97-640, p. 15.
     The Code provides that deductions for corporations provided 
     in part VIII of subchapter B, which include the deduction for 
     FDII and GILTI, do not apply in computing investment company 
     taxable income (sec. 852(b)(2)(C)) or real estate investment 
     trust taxable income (sec. 857(b)(2)(A)). Therefore, the 
     deduction for FDII and GILTI does not apply to RICs or REITs.
---------------------------------------------------------------------------
        The deduction for GILTI applies to the amount 
     treated as a dividend received by a domestic corporation 
     under section 78 that is attributable to the corporation's 
     GILTI amount under new section 951A.
        The exclusions from deduction eligible income are 
     clarified.

[[Page 20053]]

        The definition of deemed tangible income return is 
     clarified.
       Illustration of effective tax rates on FDII and GILTI
       Under a 21-percent corporate tax rate, and as a result of 
     the deduction for FDII and GILTI, the effective tax rate on 
     FDII is 13.125 percent and the effective U.S. tax rate on 
     GILTI (with respect to domestic corporations) is 10.5 percent 
     for taxable years beginning after December 31, 2017, and 
     before January 1, 2026.\1525\ Since only a portion (80 
     percent) of foreign tax credits are allowed to offset U.S. 
     tax on GILTI, the minimum foreign tax rate, with respect to 
     GILTI, at which no U.S. residual tax is owed by a domestic 
     corporation is 13.125 percent.\1526\ If the foreign tax rate 
     on GILTI is zero percent, then the U.S. residual tax rate on 
     GILTI is 10.5 percent. Therefore, as foreign tax rates on 
     GILTI range between zero percent and 13.125 percent, the 
     total combined foreign and U.S. tax rate on GILTI ranges 
     between 10.5 percent and 13.125 percent. At foreign tax rates 
     greater than or equal to 13.125 percent, there is no residual 
     U.S. tax owed on GILTI, so that the combined foreign and U.S. 
     tax rate on GILTI equals the foreign tax rate.
---------------------------------------------------------------------------
     \1525\ Due to the reduction in the effective U.S. tax rate 
     resulting from the deduction for FDII and GILTI, the 
     conferees expect the Secretary to provide, as appropriate, 
     regulations or other guidance similar to that under amended 
     section 965 with respect to the determination of basis 
     adjustments under section 705(a)(1) and the determination of 
     gain or loss under section 986(c).
     \1526\ 13.125 percent equals the effective GILTI rate of 10.5 
     percent divided by 80 percent. If the foreign tax rate on 
     GILTI is 13.125 percent, and domestic corporations are 
     allowed a credit equal to 80 percent of foreign taxes paid, 
     then the post-credit foreign tax rate on GILTI equals 10.5 
     percent (= 13.125 percent  x  80 percent), which equals the 
     effective GILTI rate of 10.5 percent. Therefore, no U.S. 
     residual tax is owed.
---------------------------------------------------------------------------
       For domestic corporations in taxable years beginning after 
     December 31, 2025, the effective tax rate on FDII is 16.406 
     percent and the effective U.S. tax rate on GILTI is 13.125 
     percent. The minimum foreign tax rate, with respect to GILTI, 
     at which no U.S. residual tax is owed is 16.406 
     percent.\1527\
---------------------------------------------------------------------------
     \1527\ If the foreign tax rate on GILTI is zero percent, then 
     the U.S. residual tax rate on GILTI is 13.125 percent. 
     Therefore, as foreign tax rates on GILTI range between zero 
     percent and 16.406 percent, the total combined foreign and 
     U.S. tax rate on GILTI ranges between 13.125 percent and 
     16.406 percent. At foreign tax rates greater than or equal to 
     16.406 percent, there is no residual U.S. tax on GILTI, and 
     the combined foreign and U.S. tax rate on GILTI equals the 
     foreign tax rate.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.
     2. Special rules for transfers of intangible property from 
         controlled foreign corporations to United States 
         shareholders (sec. 14203 of the Senate amendment and new 
         sec. 966 of the Code)


                               House Bill

       No provision.


                            Senate Amendment

       For certain distributions of intangible property held by a 
     CFC on the date of enactment of this provision, the fair 
     market value of the property on the date of the distribution 
     is treated as not exceeding the adjusted basis of the 
     property immediately before the distribution. If the 
     distribution is not a dividend, a U.S. shareholder's adjusted 
     basis in the stock of the CFC with respect to which the 
     distribution is made is increased by the amount (if any) of 
     the distribution that would, but for this provision, be 
     includible in gross income. The adjusted basis of the 
     property in the hands of the U.S. shareholder immediately 
     after the distribution is the adjusted basis immediately 
     before the distribution, reduced by the amount of the 
     increase (if any) described previously.
       For purposes of the provision, intangible property means 
     intangible property as described in section 936(h)(3)(B) and 
     computer software as described in section 197(e)(3)(B).
       The provision applies to distributions that are (1) 
     received by a domestic corporation from a CFC with respect to 
     which it is a U.S. shareholder and (2) made by the CFC before 
     the last day of the third taxable year of the CFC beginning 
     after December 31, 2017.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and for taxable years of U.S. shareholders in which or 
     with which such taxable years of foreign corporations end.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

         C. Modifications Related to Foreign Tax Credit System

     1. Repeal of section 902 indirect foreign tax credits; 
         determination of section 960 credit on current year basis 
         (sec. 4101 of the House bill, sec. 14301 of the Senate 
         amendment, and secs. 902 and 960 of the Code)


                               House Bill

       The provision repeals the deemed-paid credit with respect 
     to dividends received by a domestic corporation that owns 10 
     percent or more of the voting stock of a foreign corporation.
       A deemed-paid credit is provided with respect to any income 
     inclusion under subpart F. The deemed-paid credit is limited 
     to the amount of foreign income taxes properly attributable 
     to the subpart F inclusion. Foreign income taxes under the 
     proposal include income, war profits, or excess profits taxes 
     paid or accrued by the CFC to any foreign country or 
     possession of the United States. The proposal eliminates the 
     need for computing and tracking cumulative tax pools.
       Additionally, the provision provides rules applicable to 
     foreign taxes attributable to distributions from previously 
     taxed earnings and profits, including distributions made 
     through tiered-CFCs.
       The Secretary is granted authority under the proposal to 
     provide regulations and other guidance as may be necessary 
     and appropriate to carry out the purposes of this proposal. 
     It is anticipated that the Secretary would provide 
     regulations with rules for allocating taxes similar to rules 
     in place for purposes of determining the allocation of taxes 
     to specific foreign tax credit baskets.\1528\ Under such 
     rules, taxes are not attributable to an item of subpart F 
     income if the base upon which the tax was imposed does not 
     include the item of subpart F income. For example, if foreign 
     law exempts a certain type of income from its tax base, no 
     deemed-paid credit results from the inclusion of such income 
     as subpart F. Tax imposed on income that is not included in 
     subpart F income, is not considered attributable to subpart F 
     income.
---------------------------------------------------------------------------
     \1528\ See Treas. Reg. sec. 1.904-6(a).
---------------------------------------------------------------------------
       In addition to the rules described in this section, the 
     proposal makes several conforming amendments to various other 
     sections of the Code reflecting the repeal of section 902 and 
     the modification of section 960. These conforming amendments 
     include amending the section 78 gross-up provision to apply 
     solely to taxes deemed paid under the amended section 960.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment is the same as the House bill, except 
     with respect to certain conforming amendments.


                          Conference Agreement

       The conference agreement follows the House bill with the 
     following modifications. The conference agreement applies the 
     existing language of section 78, which treats the gross-up as 
     a dividend to the domestic corporation, to foreign income 
     taxes deemed paid under section 960(a), (b), and (d) (without 
     regard to the phrase `80 percent of' in section 960(d)(1), 
     except with respect to section 245 and new section 245A 
     (i.e., the deemed dividend would not receive the benefit of 
     the participation exemption). The conference agreement 
     further revises new section 250(a)(1)(B) to apply the 
     deduction with respect to inclusions under new section 951A 
     to the section 78 gross-up.
       In addition, the conference agreement eliminates the 
     dividend reference in section 907(c)(3)(A) without disturbing 
     the application of section 907(c)(3)(A) to certain interest 
     payments. The conference agreement also amends section 
     1293(f) to provide section 960(a) credits to an inclusion of 
     income of a qualified electing fund (as defined in section 
     1295) consistent with present law.
       The conference agreement makes certain conforming 
     amendments to sections 901(m), 904, 907, and 909, including 
     replacing the reference to section 960(b) in section 904(k) 
     to section 960(c), striking the reference to section 902 in 
     section 904(d)(2)(E), and preserving the current 
     applicability of sections 901(m) and 909 to all taxpayers who 
     claim foreign tax credits, including qualified electing 
     funds.
       Effective date.--The provision applies to taxable years 
     taxable years of foreign corporations beginning after 
     December 31, 2017, and to taxable years of United States 
     shareholders in which or with which such taxable years of 
     foreign corporations end.
     2. Source of income from sales of inventory determined solely 
         on basis of production activities (sec. 4102 of the House 
         bill, sec. 14304 of the Senate amendment, and sec. 863(b) 
         of the Code)


                               House Bill

       Under the provision, gains, profits, and income from the 
     sale or exchange of inventory property produced partly in, 
     and partly outside, the United States is allocated and 
     apportioned on the basis of the location of production with 
     respect to the property. For example, income derived from the 
     sale of inventory property to a foreign jurisdiction is 
     sourced wholly within the United States if the property was 
     produced entirely in the United States, even if title passage 
     occurred elsewhere. Likewise, income derived from inventory 
     property sold in the United States, but produced entirely in 
     another country, is sourced in that country even if title 
     passage occurs in the United States. If the inventory 
     property is produced partly in, and partly outside, the 
     United States, however, the income derived from its sale is 
     sourced partly in the United States.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment is identical to the House bill.

[[Page 20054]]




                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     3. Separate foreign tax credit limitation basket for foreign 
         branch income (sec. 14302 of the Senate amendment and 
         sec. 904 of the Code)


                               House Bill

       No provision.


                            Senate Amendment

       The provision requires foreign branch income to be 
     allocated to a specific foreign tax credit basket. Foreign 
     branch income is the business profits of a United States 
     person which are attributable to one or more QBUs in one or 
     more foreign countries.
       Under this provision, business profits of a QBU shall be 
     determined under rules established by the Secretary. Business 
     profits of a QBU shall not, however, include any income which 
     is passive category income.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     4. Acceleration of election to allocate interest, etc., on a 
         worldwide basis (sec. 14303 of the Senate amendment and 
         sec. 864 of the Code)


                               House Bill

       No provision.


                            Senate Amendment

       This provision accelerates the effective date of the 
     worldwide interest allocation rules to apply to taxable years 
     beginning after December 31, 2017, rather than to taxable 
     years beginning after December 31, 2020.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                D. Modification of Subpart F Provisions

     1. Repeal of inclusion based on withdrawal of previously 
         excluded subpart F income from qualified investment (sec. 
         4201 of the House bill, sec. 14213 of the Senate 
         amendment, and sec. 955 of the Code)


                               House Bill

       The provision repeals section 955. As a result, a U.S. 
     shareholder in a CFC that invested its previously excluded 
     subpart F income in qualified foreign base company shipping 
     operations is no longer required to include in income a pro 
     rata share of the previously excluded subpart F income when 
     the CFC decreases such investments.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and to taxable years of U.S. shareholders within which 
     or with which such taxable years of foreign corporations end.


                            Senate Amendment

       The Senate amendment follows the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
     2. Repeal of treatment of foreign base company oil related 
         income as subpart F income (sec. 4202 of the House bill, 
         sec. 14211 of the Senate amendment, and sec. 954(a) of 
         the Code)


                               House Bill

       The provision eliminates foreign base company oil related 
     income as a category of foreign base company income.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and for taxable years of U.S. shareholders in which or 
     with which such taxable years of foreign corporations end.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and for taxable years of U.S. shareholders in which or 
     with which such taxable years of foreign corporations end.
     3. Inflation adjustment of de minimis exception for foreign 
         base company income (sec. 4203 of the House bill, sec. 
         14212 of the Senate amendment, and sec. 954(b)(3) of the 
         Code)


                               House Bill

       The provision amends the de minimis exception of present 
     law, which permits a CFC to exclude its foreign base company 
     income if the sum of its total foreign base company income 
     and gross insurance income is the lesser of five percent of 
     its gross income or $1,000,000. In the case of any taxable 
     year beginning after 2017, the provision indexes for 
     inflation the $1,000,000 de minimis amount for foreign base 
     company income, with all increases rounded to the nearest 
     multiple of $50,000.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and for taxable years of U.S. shareholders in which or 
     with which such taxable years of foreign corporations end.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     4. Look-thru rule for related controlled foreign corporations 
         made permanent (sec. 4204 of the House bill, sec. 14217 
         of the Senate amendment, and sec. 954(c)(6) of the Code)


                               House Bill

       The provision makes the exclusion from foreign personal 
     holding company income for certain dividends, interest 
     (including factoring income that is treated as equivalent to 
     interest under section 954(c)(1)(E)), rents, and royalties 
     received or accrued by one CFC from a related CFC permanent.
       Effective date.--The proposal is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2019, and for taxable years of U.S. shareholders in which or 
     with which such taxable years of foreign corporations end.


                            Senate Amendment

       The Senate amendment is the same as the House bill.
       Effective date.--The proposal is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and for taxable years of U.S. shareholders in which or 
     with which such taxable years of foreign corporations end.


                          Conference Agreement

       The conference agreement does not include the House bill or 
     the Senate amendment provision.
     5. Modification of stock attribution rules for determining 
         CFC status (sec. 4205 of the House bill, sec. 14214 of 
         the Senate amendment, and secs. 318 and 958 of the Code)


                               House Bill

       The provision amends the ownership attribution rules of 
     section 958(b) so that certain stock of a foreign corporation 
     owned by a foreign person is attributed to a related U.S. 
     person for purposes of determining whether the related U.S. 
     person is a U.S. shareholder of the foreign corporation and, 
     therefore, whether the foreign corporation is a CFC. In other 
     words, the provision provides ``downward attribution'' from a 
     foreign person to a related U.S. person in circumstances in 
     which present law does not so provide. The pro rata share of 
     a CFC's subpart F income that a U.S. shareholder is required 
     to include in gross income, however, continues to be 
     determined based on direct or indirect ownership of the CFC, 
     without application of the new downward attribution rule.
       It also conforms the reporting requirements of section 6038 
     to require that entities that are treated as CFCs by reason 
     of the rules on constructive ownership are within the scope 
     of the reporting requirements.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and to taxable years of U.S. shareholders in which or 
     with which such taxable years of foreign corporations end.


                            Senate Amendment

       The Senate amendment is similar to the House bill, except 
     that it does not adopt the change to the reporting 
     requirements of section 6038 and has a different effective 
     date. Furthermore, the Senate Finance Committee explanation 
     states that the provision is not intended to cause a foreign 
     corporation to be treated as a controlled foreign corporation 
     with respect to a U.S. shareholder as a result of attribution 
     of ownership under section 318(a)(3) to a U.S. person that is 
     not a related person (within the meaning of section 
     954(d)(3)) to such U.S. shareholder as a result of the repeal 
     of section 958(b)(4).\1529\
---------------------------------------------------------------------------
     \1529\ Committee Print, Reconciliation Recommendations 
     Pursuant to H. Con. Res. 71, S. Prt. 115-20, (December 2017), 
     p. 378, as reprinted on the website of the Senate Budget 
     Committee, available at https://www.budget.senate.gov/
 taxreform.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for the last 
     taxable year of foreign corporations beginning before January 
     1, 2018 and each subsequent year of such foreign corporations 
     and for the taxable years of U.S. shareholders in which or 
     with which such taxable years of foreign corporations end.


                          Conference Agreement

       The conference agreement follows the Senate amendment. In 
     adopting this provision, the conferees intend to render 
     ineffective certain transactions that are used to as a means 
     of avoiding the subpart F provisions. One such transaction 
     involves effectuating ``de-control'' of a foreign subsidiary, 
     by taking advantage of the section 958(b)(4) rule that 
     effectively turns off the constructive stock ownership rules 
     of 318(a)(3) when to do otherwise would result in a U.S. 
     person being treated as owning stock owned by a foreign 
     person. Such a transaction converts former CFCs to non-CFCs, 
     despite continuous ownership by U.S. shareholders.
       Effective date.--The provision is effective for the last 
     taxable year of foreign corporations beginning before January 
     1, 2018 and each subsequent year of such foreign corporations 
     and for the taxable years of U.S.

[[Page 20055]]

     shareholders in which or with which such taxable years of 
     foreign corporations end.
     6. Modification of definition of United States shareholder 
         (sec. 14215 of the Senate amendment and sec. 951 of the 
         Code)


                               House Bill

       No provision.


                            Senate Amendment

       The provision expands the definition of U.S. shareholder 
     under subpart F to include any U.S. person who owns 10 
     percent or more of the total value of shares of all classes 
     of stock of a foreign corporation.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and for taxable years of U.S. shareholders with or 
     within which such taxable years of foreign corporations end.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     7. Elimination of requirement that corporation must be 
         controlled for 30 days before subpart F inclusions apply 
         (sec. 4206 of the House bill, sec. 14216 of the Senate 
         amendment, and sec. 951(a)(1) of the Code)


                               House Bill

       The provision eliminates the requirement that a corporation 
     must be controlled for an uninterrupted period of 30 days 
     before subpart F inclusions apply.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and for taxable years of U.S. shareholders with or 
     within which such taxable years of foreign corporations end.


                            Senate Amendment

       The Senate amendment is the same as the House bill.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and for taxable years of U.S. shareholders with or 
     within which such taxable years of foreign corporations end.
     8. Current year inclusion of foreign high return amounts or 
         global intangible low-taxed income by United States 
         shareholders (sec. 4301 of the House bill, sec. 14201 of 
         the Senate amendment, and secs. 78 and 960 and new sec. 
         951A of the Code)


                               House Bill

     In general
       Under the provision, a U.S. shareholder of any CFC must 
     include in gross income for a taxable year an amount equal to 
     50 percent of its foreign high return amount (``FHRA'') in a 
     manner generally similar to inclusions of subpart F income. 
     FHRA means, with respect to any U.S. shareholder for the 
     shareholder's taxable year, the shareholder's net CFC tested 
     income less an amount equal to the excess (if any) of (1) the 
     applicable percentage of the aggregate of the shareholder's 
     pro rata share of the qualified business asset investment 
     (``QBAI'') of each CFC with respect to which it is a U.S. 
     shareholder over (2) the amount of interest expense taken 
     into account in determining the shareholder's net CFC tested 
     income. The applicable percentage is the Federal short-term 
     rate (determined under section 1274(d) for the month in which 
     such shareholder's taxable year ends) plus seven percentage 
     points.
       The formula for FHRA, which is calculated at the U.S. 
     shareholder level, is generally: \1530\

     \1530\ If the amount of interest expense exceeds [(7% + AFR) 
     x  QBAI], then the quantity in brackets in the formula equals 
     zero in the determination of FHRA.
---------------------------------------------------------------------------
       FHRA = Net CFC Tested Income-[(7% + AFR)  x  QBAI-Interest 
     Expense]

       where AFR is the short-term Federal rate.

     Net CFC tested income
       Net CFC tested income means, with respect to any U.S. 
     shareholder, the excess of the aggregate of its pro rata 
     share of the tested income of each CFC with respect to which 
     it is a U.S. shareholder over the aggregate of its pro rata 
     share of the tested loss of each CFC with respect to which it 
     is a U.S. shareholder. Pro rata shares are determined under 
     the rules of section 951(a)(2).
       The formula for net CFC tested income, which is calculated 
     at the U.S. shareholder level, is:

       Net CFC Tested Income = Sum of CFC Tested Income-Sum of CFC 
     Tested Loss

       The tested income of a CFC means the excess (if any) of the 
     gross income of the corporation determined without regard to 
     certain exceptions to tested income, over deductions 
     (including taxes) properly allocable to such gross income. 
     The exceptions to tested income are: (1) the corporation's 
     ECI if the income is subject to tax; \1531\ (2) any gross 
     income taken into account in determining the corporation's 
     subpart F income; (3) any amount, except as otherwise 
     provided by the Secretary, that qualifies for CFC look-
     through treatment, but only to the extent that any deduction 
     allowable for the payment or accrual of such amount does not 
     result in a reduction of the FHRA of any U.S. shareholder 
     (determined without regard to such amount); (4) any gross 
     income excluded as foreign personal holding company income by 
     reason of the exceptions for active financing income and 
     active insurance income as well as the exception for dealers 
     under section 954(c)(2)(C); (5) any gross income excluded 
     from foreign base company income or insurance income by 
     reason of the high-tax exception under section 954(b)(4); (6) 
     any dividend received from a related person (as defined in 
     section 954(d)(3)); and (7) any commodities gross income.
---------------------------------------------------------------------------
     \1531\ ECI includes income that is subject to the election 
     described in section 4303 of the House bill and new sec. 
     4491. As a result, income that a CFC derives from certain 
     sales to the U.S. market is excluded from the FHRA 
     calculation and is subject to new sec. 4491, to the extent 
     that the sales are made to a related party.
---------------------------------------------------------------------------
       Commodities gross income means (1) gross income of a 
     corporation (or of a partnership in which the corporation is 
     a partner) from the disposition of commodities that it has 
     produced or extracted and that are commodities described in 
     sections 475(e)(2)(A) and 475(e)(2)(D), and (2) the gross 
     income of the corporation from the disposition of property 
     that gives rise to income described in (1). Commodities 
     income is intended to include any foreign oil and gas 
     extraction income \1532\ and any foreign oil related 
     income.\1533\
---------------------------------------------------------------------------
     \1532\ Sec. 907(c)(1).
     \1533\ Sec. 907(c)(2).
---------------------------------------------------------------------------
       The tested loss of a CFC means the excess (if any) of the 
     deductions (including taxes) properly allocable to the 
     corporation's gross income determined without regard to the 
     tested income exceptions over the amount of such gross 
     income.
     Qualified business asset investment
       QBAI means, with respect to any CFC for a taxable year, the 
     aggregate of its adjusted bases (determined as of the close 
     of the taxable year and after any adjustments with respect to 
     such taxable year) in specified tangible property used in its 
     trade or business and with respect to which a deduction is 
     allowable under section 168. Specified tangible property 
     means any tangible property to the extent such property is 
     used in the production of tested income or tested loss. The 
     adjusted basis in any property is determined without regard 
     to any provision of law that is enacted after the date of 
     enactment of this provision, unless such law specifically and 
     directly amends this provision's definition.
       If a CFC holds an interest in a partnership as of the close 
     of the corporation's taxable year, the corporation takes into 
     account its distributive share of the aggregate of the 
     partnership's adjusted bases (determined as of such date in 
     the hands of the partnership) in tangible property held by 
     the partnership to the extent that such property is used in 
     the trade or business of the partnership, is of a type with 
     respect to which a deduction is allowable under section 168, 
     and is used in the production of tested income or tested loss 
     (determined with respect to the corporation's distributive 
     share of income or loss with respect to such property). The 
     corporation's distributive share of the adjusted basis of any 
     property is the corporation's distributive share of income 
     and loss with respect to such property.
       For purposes of determining QBAI, the Secretary is 
     authorized to issue anti-avoidance regulations or other 
     guidance as the Secretary determines appropriate, including 
     regulations or other guidance that provide for the treatment 
     of property if the property is transferred or held 
     temporarily, or if avoidance was a factor in the transfer or 
     holding of the property.
     Foreign tax credits and coordination with subpart F
       Deemed-paid credit for taxes properly attributable to 
           tested income
       For any FHRA included in the gross income of a domestic 
     corporation, the corporation is deemed to have paid foreign 
     income taxes equal to 80 percent of its foreign high return 
     percentage multiplied by the aggregate tested foreign income 
     taxes paid or accrued by each CFC with respect to which the 
     corporation is a U.S. shareholder. The foreign high return 
     percentage is the corporation's FHRA divided by the aggregate 
     amount of its pro rata share of the tested income of each CFC 
     with respect to which it is a U.S. shareholder. Tested 
     foreign income taxes are the foreign income taxes paid or 
     accrued by a CFC that are properly attributable to gross 
     income taken into account in determining tested income or 
     tested loss.
       The provision creates a separate foreign tax credit basket 
     for the FHRA inclusion, with no carryforward or carryback 
     available for excess credits. For purpose of determining the 
     foreign tax credit limitation, any FHRA is not general 
     category income, and income that can be classified as both a 
     FHRA and passive category income is considered passive 
     category income. The taxes deemed to have been paid are 
     treated as an increase in the FHRA for purposes of section 
     78, determined by taking into account 100 percent of its 
     foreign high return percentage multiplied by the aggregate 
     tested foreign income taxes.
       Coordination with subpart F
       Although FHRA inclusions do not constitute subpart F 
     income, FHRA inclusions are generally treated similarly to 
     subpart F inclusions. Thus, with respect to any CFC

[[Page 20056]]

     any pro rata amount from which is taken into account in 
     determining the FHRA included in gross income of a U.S. 
     shareholder, such amount, except as otherwise provided by the 
     Secretary, is treated in the same manner as an amount 
     included under section 951(a)(1)(A) for purposes of applying 
     sections 168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 959, 
     961, 962, 993(a)(1)(E), 996(f)(1), 1248(b)(1), 1248(d)(1), 
     6501(e)(1)(C), 6654(d)(2)(D), and 6655(e)(4).
       The provision requires that the amount of FHRA included by 
     a U.S. corporation be allocated across each CFC with respect 
     to which it is a U.S. shareholder. The portion of the FHRA 
     treated as being with respect to a CFC equals zero for a 
     foreign corporation with tested loss and, for a foreign 
     corporation with tested income, the portion of the FHRA which 
     bears the same ratio to the total FHRA as the shareholder's 
     pro rata amount of the tested income of the foreign 
     corporation bears to the aggregate amount of the 
     shareholder's pro rata share of the tested income of each CFC 
     with respect to which it is a U.S. shareholder.
       Tested losses taken into account in determining a U.S. 
     shareholder's FHRA cannot also reduce the shareholder's 
     inclusions in gross income under section 951(a)(1)(A) by 
     reason of the earnings and profits limitation in section 
     952(c). Accordingly, a U.S. shareholder's amount included in 
     gross income under section 951(a)(1)(A) with respect to a CFC 
     is determined by increasing the earnings and profits of such 
     corporation (solely for purposes of determining such amount) 
     by an amount that bears the same ratio (not greater than 1) 
     to the shareholder's pro rata share of the tested loss of 
     such CFC as (1) the aggregate amount of the shareholder's pro 
     rata share of the tested income of each CFC with respect to 
     which it is a U.S. shareholder bears to (2) the aggregate 
     amount of the shareholder's tested loss of each CFC with 
     respect to which it is a U.S. shareholder. If this increase 
     in earnings and profits results in an incremental inclusion 
     under section 951(a)(1)(A, the CFC will increases its 
     earnings and profits described in section 959(c)(2) by that 
     amount and decrease its earnings and profits in section 
     959(c)(3) by that amount (even if that results in, or 
     increases, a deficit).
       Taxable years for which persons are treated as U.S. 
           shareholders of a CFC
       For purposes of the FHRA inclusion, a U.S. shareholder of a 
     CFC is treated as a U.S. shareholder of the corporation for 
     any taxable year of the shareholder if a taxable year of the 
     corporation ends in or with the taxable year of such person 
     and the person owns (within the meaning of section 958(a)) 
     stock in the corporation on the last day in the taxable year 
     of the corporation on which the corporation is a CFC. A 
     corporation is generally treated as a CFC for any taxable 
     year if the corporation is a CFC at any time during the 
     taxable year.
     Examples
       The following examples illustrate how FHRA is calculated. 
     The examples are highly stylized and are not meant to 
     represent actual taxpayer scenarios.
     Example 1: Two Wholly Owned CFCs, Each with Tested Income
       Assume a domestic corporation, US1, wholly owns two CFCs, 
     CFC1 and CFC2. These are the only CFCs with respect to which 
     US1 is a U.S. shareholder. Assume that the applicable 
     percentage to be applied to QBAI is 10 percent. The following 
     table includes more information about CFC1 and CFC2. Assume 
     that their foreign sales income are items of gross income 
     included in the computation of tested income, and that all 
     expenses are allocable to their foreign sales income. Also 
     assume a U.S. corporate tax rate of 20 percent, and that the 
     foreign tax rates faced by CFC1 and CFC2 are applied evenly 
     across each of its sources of income.
     Facts for Example 1

------------------------------------------------------------------------
                                         CFC1                CFC2
------------------------------------------------------------------------
Gross Income
    Foreign Sales Income........  $300..............  $2,000
    Subpart F Income............  $100..............  $0
    Commodities Income..........  $600..............  $0
Expenses
    Operating Expenses..........  $200..............  $300
    Net Income..................  $800..............  $1,700
    Foreign Tax Rate............  20 percent........  5 percent
    QBAI........................  $500..............  $0
------------------------------------------------------------------------

       CFC-level calculations of tested income and QBAI
       CFC1 earns foreign sales income of $300 and has deductions 
     of $220 (= $20 of taxes plus $200 of operating expenses) 
     allocable to its foreign sales income. Therefore, it has 
     tested income of $80 (= $300-$220) and tested foreign income 
     tax of $20 (= 20%  x  $100). CFC1 has QBAI of $500.
       CFC2 earns foreign sales income of $2,000 and has 
     deductions of $385 (= $85 of taxes plus $300 of operating 
     expenses) allocable to its foreign sales income. Therefore, 
     it has tested income of $1,615 (= $2,000-$385) and tested 
     foreign income tax of $85 (= 5%  x  $1,700). CFC2 has QBAI of 
     $0.
       U.S.-shareholder-level calculation of FHRA and tax 
           liability
       US1 has net CFC tested income of $1,695, which is the sum 
     of CFC1's tested income of $80 and CFC2's tested income of 
     $1,615. Its pro rata share of QBAI is $500 (= [100%  x  $500] 
     + [100%  x  $0]). No interest expense is taken into account 
     in determining US1's net CFC tested income. Therefore, US1's 
     FHRA = $1,695-([10%  x  $500]-$0) = $1,645.
       US1 receives a deemed-paid credit equal to 80 percent of 
     its foreign high return percentage multiplied by the 
     aggregate tested foreign income taxes paid or accrued by CFC1 
     and CFC2. Its foreign high return percentage is 97.1 percent 
     (= FHRA/Aggregate Tested Income = $1,645/$1,695). The 
     aggregate tested foreign income taxes paid or accrued by CFC1 
     and CFC2 is $105 (= $20 + $85). Therefore, US1's deemed-paid 
     credit is 80 percent  x  97.1 percent  x  $105 = $81.52.
       US1 includes 50 percent of its FHRA and 50 percent of its 
     section 78 gross-up in gross income, or $873.45 (= 50%  x  
     [$1,645 + $101.90]).\1534\ The tentative U.S. tax owed on 
     this income is the U.S. corporate tax rate of 20 percent 
     applied to the total inclusion of $873.45, or $174.69.
---------------------------------------------------------------------------
     \1534\ The section 78 gross-up amount = 100 percent  x  97.1 
     percent  x  $105 = 101.90.
---------------------------------------------------------------------------
       The residual U.S. tax paid by US1 on its FHRA is its 
     tentative U.S. tax of $174.69 less its deemed-paid credit of 
     $81.52, or $93.17.
     Example 2: Variant of Example 1, With Tested Loss
       Example 2 generally has the same facts as example 1, except 
     that CFC2 earns foreign sales of $360. This means that CFC2 
     has tested income (before taking into account taxes) of $60. 
     Assume, for simplicity, that it still pays foreign taxes of 
     $85 with respect to the $360 of foreign sales, so that its 
     tested loss is $25 (= $60-$85) and its tested foreign income 
     tax is $85.
       Like in Example 1, CFC1 has tested income of $80 and tested 
     foreign income tax of $20.
       U.S.-shareholder-level calculation of FHRA and tax 
           liability
       US1 has net CFC tested income of $55, which is CFC1's 
     tested income of $80 less CFC2's tested loss of $25. Its pro 
     rata share of QBAI is $500 (= [100%  x  $500] + [100%  x  
     $0]). No interest expense is taken into account in 
     determining US1's net CFC tested income. Therefore, US1's 
     FHRA = $55-(10%  x  $500)-$0 = $5.
       US1 receives a deemed-paid credit equal to 80 percent of 
     its foreign high return percentage multiplied by the 
     aggregate tested foreign income taxes paid or accrued by CFC1 
     and CFC2. Its foreign high return percentage is 6.25 percent 
     (= FHRA/Aggregate Tested Income = $5/$80). The aggregate 
     tested foreign income taxes paid or accrued by CFC1 and CFC2 
     is $105 (= $20 + $85). Therefore, US1's deemed-paid credit is 
     80 percent  x  6.25 percent  x  $105 = $5.25.
       US1 includes 50 percent of its FHRA in gross income and 50 
     percent of its section 78 gross-up in gross income, or $5.78 
     (= 50%  x  [$5 + $6.56]).\1535\ The tentative U.S. tax owed 
     on this income is the U.S. corporate tax rate of 20 percent 
     applied to the total inclusion of $5.78, or $1.16.
---------------------------------------------------------------------------
     \1535\ The section 78 gross-up amount = 100 percent  x  6.25 
     percent  x  $105 = $6.56.
---------------------------------------------------------------------------
       The residual U.S. tax paid by US1 on its FHRA is its 
     tentative U.S. tax of $1.16 less its deemed-paid credit of 
     $5.25, or $0. The amount of US1's deemed-paid credit that is 
     unused, $4.09, may not be carried back or carried forward.
     Example 3: CFC Look-Through Payment
       Example 3 illustrates how the FHRA calculation is applied 
     when there are payments that qualify for CFC look-through 
     treatment. Example 3 is limited to the calculation of the 
     FHRA and does not provide calculations of the amount of U.S. 
     or foreign income tax related to the FHRA.
       USCo, a domestic corporation, wholly owns US1 and US2, each 
     a domestic corporation. US1 wholly owns CFC1, and US2 wholly 
     owns CFC2. These are the only CFCs with respect to which 
     either US1 or US2 is a U.S. shareholder. Assume the 
     applicable percentage for QBAI is 10 percent.
       CFC1 has total gross income of $100, none of which consists 
     of a tested income exception, and has interest expense of 
     $30, which it pays to CFC2. CFC1 has no other deductions and 
     has QBAI of $200. As a result, CFC1 has tested income of $70 
     (= $100 of gross income less $30 of interest expense). US1's 
     net CFC tested income is $70 and the applicable percentage of 
     its pro rata share of QBAI is $20 (= 10%  x  $200). As CFC1's 
     interest expense of $30 was taken into account in determining 
     its tested income of $70, the excess of US1's applicable 
     percentage of QBAI over this amount of interest expense is 
     $0. As a result, US1's FHRA is $70 (= $70-$0).
       CFC2 has $30 of interest income, all of which qualifies for 
     CFC look-through treatment because CFC1 has no subpart F 
     income. Assume CFC2 has no other gross income, no deductions, 
     and no QBAI. CFC2's interest income is not includible in its 
     tested income, but only to the extent a deduction for its 
     payment or accrual does not reduce the FHRA of any U.S. 
     shareholder. Absent the $30 interest expense deduction used 
     in determining its net CFC tested income, US1's net CFC 
     tested income would have been $100, and US1's FHRA would have 
     been $80 (= $100-$20). With the $30 deduction, US1's net 
     CFC's tested income is $70. Therefore, the deduction 
     allowable for the payment or accrual of the interest reduced 
     the FHRA of US1 by

[[Page 20057]]

     $10, so only $20 of CFC2's interest income is excluded from 
     tested income. As a result, CFC2 has tested income of $10 (= 
     $30-$20), and US2 has net CFC tested income of $10 (= 
     $10-$0).
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and for taxable years of U.S. shareholders in which or 
     with which such taxable years of foreign corporations end.


                            Senate Amendment

     In general
       Under the provision, a U.S. shareholder of any CFC must 
     include in gross income for a taxable year its global 
     intangible low-taxed income (``GILTI'') in a manner generally 
     similar to inclusions of subpart F income. GILTI means, with 
     respect to any U.S. shareholder for the shareholder's taxable 
     year, the excess (if any) of the shareholder's net CFC tested 
     income over the shareholder's net deemed tangible income 
     return. The shareholder's net deemed tangible income return 
     is an amount equal to 10 percent of the aggregate of the 
     shareholder's pro rata share of the qualified business asset 
     investment (``QBAI'') of each CFC with respect to which it is 
     a U.S. shareholder.
       The formula for GILTI, which is calculated at the U.S. 
     shareholder level, is:

       GILTI = Net CFC Tested Income-(10%  x  QBAI)

     Net CFC tested income
       Net CFC tested income means, with respect to any U.S. 
     shareholder, the excess of the aggregate of the shareholder's 
     pro rata share of the tested income of each CFC with respect 
     to which it is a U.S. shareholder over the aggregate of its 
     pro rata share of the tested loss of each CFC with respect to 
     which it is a U.S. shareholder. Pro rata shares are 
     determined under the rules of section 951(a)(2).
       The formula for net CFC tested income, which is calculated 
     at the U.S. shareholder level, is:

       Net CFC Tested Income = Sum of CFC Tested Income-Sum of CFC 
     Tested Loss

       The tested income of a CFC means the excess (if any) of the 
     gross income of the corporation--determined without regard to 
     certain exceptions to tested income--over deductions 
     (including taxes) properly allocable to such gross income 
     (referred to in this document as ``tested gross income''). 
     The exceptions to tested income are: (1) the corporation's 
     ECI under section 952(b); (2) any gross income taken into 
     account in determining the corporation's subpart F income; 
     (3) any gross income excluded from foreign base company 
     income or insurance income by reason of the high-tax 
     exception under section 954(b)(4); (4) any dividend received 
     from a related person (as defined in section 954(d)(3)); and 
     (5) any foreign oil and gas extraction income (as defined in 
     section 907(c)(1)).
       The tested loss of a CFC means the excess (if any) of 
     deductions (including taxes) properly allocable to the 
     corporation's gross income--determined without regard to the 
     tested income exceptions--over the amount of such gross 
     income.
     Qualified business asset investment
       QBAI means, with respect to any CFC for a taxable year, the 
     average of the aggregate of its adjusted bases, determined as 
     of the close of each quarter of the taxable year, in 
     specified tangible property used in its trade or business and 
     of a type with respect to which a deduction is generally 
     allowable under section 167. The adjusted basis in any 
     property must be determined using the alternative 
     depreciation system under current section 168(g), 
     notwithstanding any provision of law (or any other section of 
     the Senate amendment) which is enacted after the date of 
     enactment of this provision (unless such later enacted law 
     specifically and directly amends this provision's 
     definition).
       Specified tangible property means any property used in the 
     production of tested income.\1536\ If such property was used 
     in the production of both tested income and income that is 
     not tested income (i.e., dual-use property), the property is 
     treated as specified tangible property in the same proportion 
     that the amount of tested gross income produced with respect 
     to the property bears to the total amount of gross income 
     produced with respect to the property.\1537\
---------------------------------------------------------------------------
     \1536\ Specified tangible property does not include property 
     used in the production of tested loss, so that a CFC that has 
     a tested loss in a taxable year does not have QBAI for the 
     taxable year.
     \1537\ For example, if a building produces $1,000 of tested 
     gross income and $250 of subpart F income for a taxable year, 
     then 80 percent (= $1,000/$1,250) of a domestic corporation's 
     average adjusted basis in the building is included in QBAI 
     for that taxable year.
---------------------------------------------------------------------------
       For purposes of determining QBAI, the Secretary is 
     authorized to issue anti-avoidance regulations or other 
     guidance as the Secretary determines appropriate, including 
     regulations or other guidance that provide for the treatment 
     of property if the property is transferred or held 
     temporarily, or if avoidance was a factor in the transfer or 
     holding of the property.
     Coordination with subpart F
       Although GILTI inclusions do not constitute subpart F 
     income, GILTI inclusions are generally treated similarly to 
     subpart F inclusions. Thus they are generally treated in the 
     same manner as amounts included under section 951(a)(1)(A) 
     for purposes of applying sections 168(h)(2)(B), 535(b)(10), 
     904(h)(1), 959, 961, 962, 993(a)(1)(E), 996(f)(1), 
     1248(b)(1), 1248(d)(1), 6501(e)(1)(C), 6654(d)(2)(D), and 
     6655(e)(4). However, the Secretary may provide rules for 
     coordinating the GILTI inclusion with provisions of law in 
     which the determination of subpart F income is required to be 
     made at the CFC level.
       The provision requires that the amount of GILTI included by 
     a U.S. shareholder be allocated across each CFC with respect 
     to which it is a U.S. shareholder. The portion of GILTI 
     treated as being with respect to a CFC equals zero for a CFC 
     with no tested income and, for a CFC with tested income, the 
     portion of GILTI which bears the same ratio to the total 
     amount of GILTI as the U.S. shareholder's pro rata amount of 
     tested income of the CFC bears to the aggregate amount of the 
     U.S. shareholder's pro rata amount of the tested income of 
     each CFC with respect to which it is a U.S. shareholder. For 
     a CFC with tested income, the following formula expresses how 
     to determine the portion of GILTI treated as being with 
     respect to the CFC:
     [GRAPHIC] [TIFF OMITTED] TH15DE17.012
     
       where Share of CFC's Tested Income is the U.S. 
     shareholder's pro rata amount of the tested income of a CFC 
     and Share of Agg. CFC Tested Income is the aggregate amount 
     of the U.S. shareholder's pro rata amount of the tested 
     income of each CFC with respect to which it is a U.S. 
     shareholder.

       For purposes of the GILTI inclusion, a person is treated as 
     a U.S. shareholder of a CFC for any taxable year only if such 
     person owns (within the meaning of section 958(a)) stock in 
     the corporation on the last day, in such year, on which the 
     corporation is a CFC. A corporation is generally treated as a 
     CFC for any taxable year if the corporation is a CFC at any 
     time during the taxable year.
     Deemed-paid credit for taxes properly attributable to tested 
         income
       For any amount of GILTI included in the gross income of a 
     domestic corporation, the corporation's deemed-paid credit 
     equals 80 percent of the product of the corporation's 
     inclusion percentage multiplied by the aggregate tested 
     foreign income taxes paid or accrued, with respect to tested 
     income, by each CFC with respect to which the domestic 
     corporation is a U.S. shareholder.
       The inclusion percentage means, with respect to any 
     domestic corporation, the ratio (expressed as a percentage) 
     of such corporation's GILTI amount divided by the aggregate 
     amount of its pro rata share of the tested income of each CFC 
     with respect to which it is a U.S. shareholder (referred to 
     as ``aggregate tested income'' in the formulas below). Tested 
     foreign income taxes means, with respect to any domestic 
     corporation that is a U.S. shareholder of a CFC, the foreign 
     income taxes paid or accrued by the CFC that are properly 
     attributable to the CFC's tested income.\1538\
---------------------------------------------------------------------------
     \1538\ Tested foreign income taxes do not include any foreign 
     income tax paid or accrued by a CFC that is properly 
     attributable to the CFC's tested loss (if any).
---------------------------------------------------------------------------
       The deemed-paid credit with respect to the GILTI inclusion 
     can be expressed in the following formula:
     [GRAPHIC] [TIFF OMITTED] TH15DE17.013
     

[[Page 20058]]

       The provision creates a separate foreign tax credit basket 
     for GILTI, with no carryforward or carryback available for 
     excess credits. For purposes of determining the foreign tax 
     credit limitation, GILTI is not general category income, and 
     income that is both GILTI and passive category income is 
     considered passive category income. As described in section 
     14301 of the Senate amendment and new section 78, the taxes 
     deemed to have been paid are treated as an increase in GILTI 
     for purposes of section 78, determined by taking into account 
     100 percent of the product of the inclusion percentage and 
     aggregate tested foreign income taxes (instead of 80 percent 
     in the determination of the deemed-paid credit). Therefore, 
     the section 78 gross-up can be expressed in the following 
     formula:
     [GRAPHIC] [TIFF OMITTED] TH15DE17.014
     
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and for taxable years of U.S. shareholders in which or 
     with which such taxable years of foreign corporations end.


                          Conference Agreement

       The conference agreement follows the Senate amendment 
     provision, with clarifications and modifications that include 
     the following.
     Net deemed tangible income return
       The conference agreement modifies, along lines similar to 
     an approach taken in the House bill provision, the 
     calculation of net deemed tangible income return for purposes 
     of determining GILTI. Net deemed tangible income return is, 
     with respect to any U.S. shareholder for a taxable year, the 
     excess (if any) of 10 percent of the aggregate of its pro 
     rata share of the QBAI of each CFC with respect to which it 
     is a U.S. shareholder over the amount of interest expense 
     taken into account in determining its net CFC tested income 
     for the taxable year to the extent that the interest expense 
     exceeds the interest income properly allocable to the 
     interest expense that is taken into account in determining 
     its net CFC tested income. As a result, the formula for GILTI 
     in the conference agreement is generally: \1539\

     \1539\ If the amount of interest expense exceeds 10%  x  
     QBAI, then the quantity in brackets in the formula equals 
     zero in the determination of GILTI.
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       GILTI = Net CFC Tested Income-[(10%  x  QBAI)-Interest 
     Expense]

       where Interest Expense is defined and limited in the manner 
     described above.

     Computation of tested income and tested loss
       For purposes of computing deductions (including taxes) 
     properly allocable to gross income included in tested income 
     or tested loss with respect to a CFC, the deductions are 
     allocated to such gross income following rules similar to the 
     rules of section 954(b)(5) (or to which such deductions would 
     be allocable if there were such gross income).
     Calculation of pro rata shares
       For purposes of determining pro rata shares in the 
     computation of a U.S. shareholder's GILTI amount, a person is 
     treated as a U.S. shareholder of a CFC for any taxable year 
     of such person only if the person owns (within the meaning of 
     section 958(a)) stock in the foreign corporation on the last 
     day in the taxable year of the foreign corporation on which 
     the foreign corporation is a CFC.
     Qualified business asset investment
       For purposes of determining a CFC's QBAI and its adjusted 
     basis in specified tangible property, the adjusted basis is 
     determined by allocating the depreciation deduction with 
     respect to the property ratably to each day during the period 
     in the taxable year to which the depreciation relates. In 
     addition, if a CFC holds an interest in a partnership at the 
     close of the CFC's taxable year, the CFC takes into account 
     its distributive share of the aggregate of the partnership's 
     adjusted bases (determined as of such date in the hands of 
     the partnership) in tangible property held by the partnership 
     to the extent that the property is used in the trade or 
     business of the partnership, is of a type with respect to 
     which a deduction is allowable under section 167, and is used 
     in the production of tested income (determined with respect 
     to the CFC's distributive share of income with respect to the 
     property). The CFC's distributive share of the adjusted basis 
     of any property is the CFC's distributive share of income 
     with respect to the property.
     Regulatory authority to address abuse
       The conferees intend that non-economic transactions 
     intended to affect tax attributes of CFCs and their U.S. 
     shareholders (including amounts of tested income and tested 
     loss, tested foreign income taxes, net deemed tangible income 
     return, and QBAI) to minimize tax under this provision be 
     disregarded. For example, the conferees expect the Secretary 
     to prescribe regulations to address transactions that occur 
     after the measurement date of post-1986 earnings and profits 
     under amended section 965, but before the first taxable year 
     for which new section 951A applies, if such transactions are 
     undertaken to increase a CFC's QBAI.
       Effective date.--The provision is effective for taxable 
     years of foreign corporations beginning after December 31, 
     2017, and for taxable years of U.S. shareholders in which or 
     with which such taxable years of foreign corporations end.
     9. Limitation on deduction of interest by domestic 
         corporations which are members of an international group 
         (sec. 4302 of the House bill, sec. 14221 of the Senate 
         amendment, and new sec. 163(n) of the Code)


                               House Bill

       The provision limits the amount of U.S. interest expense 
     that a domestic corporation which is a member of an 
     international financial reporting group can deduct to the sum 
     of the member's interest income plus the allowable percentage 
     of 110 percent of net interest expense. An international 
     financial reporting group is a group that: (1) includes at 
     least one foreign corporation engaged in a U.S. trade or 
     business or at least one domestic corporation and one foreign 
     corporation at any time during the group's reporting year, 
     (2) prepares consolidated financial statements in accordance 
     with U.S. Generally Accepted Accounting Principles 
     (``GAAP''), International Financial Reporting Standards 
     (``IFRS''), or any other comparable method identified by the 
     Secretary,\1540\ and (3) reports in such statements average 
     annual gross receipts in excess of $100,000,000 (determined 
     in the aggregate with respect to all entities which are part 
     of such group) for the three-reporting-year period ending 
     with such reporting year.
---------------------------------------------------------------------------
     \1540\ The International Financial Reporting Standards are a 
     set of accounting standards commonly used for the preparation 
     of financial statements of public companies listed in 
     countries outside the United States.
---------------------------------------------------------------------------
       The allowable percentage is the ratio of a corporation's 
     allocable share of the international financial reporting 
     group's net interest expense over such corporation's reported 
     net interest expense. A corporation's allocable share of an 
     international financial reporting group's net interest 
     expense is determined based on the corporation's share of the 
     group's earnings (computed by adding back net interest 
     expense, taxes, depreciation, and amortization) as reflected 
     in the group's consolidated financial statements. A 
     corporation's reported net interest expense is its net 
     interest expense reported in the books and records used to 
     prepare the group's consolidated financial statements. For 
     international financial reporting groups that do not prepare 
     consolidated financial statements under U.S. GAAP, IFRS, or 
     any other comparable method identified by the Secretary and 
     which are filed with the United States Securities and 
     Exchange Commission, the provision provides a hierarchy of 
     other audited consolidated financial statements that may be 
     relied upon by such group.
       The provision applies to partnerships at the partnership 
     level under rules similar to the rules of section 3301 of the 
     bill. The provision also applies to foreign corporations 
     engaged in a U.S. trade or business. A U.S. consolidated 
     group is considered a single corporation under this 
     provision.
       The amount of any interest not allowed as a deduction for 
     any taxable year by reason of this provision or section 3301 
     of the bill (depending on whichever imposes the lower 
     limitation for the amount allowed as an interest deduction 
     with respect to such taxable year) can be carried forward as 
     interest (and as business interest for purposes of section 
     3301 of the bill) for up to five years.
       The following example illustrates the coordination of this 
     provision with section 3301 of the bill in a context 
     involving a partnership.
     Example
       FP, a foreign corporation, wholly owns USS, a domestic 
     corporation. FP and USS each own 50 percent of PS, a 
     partnership. FP, USS, and PS prepare audited consolidated 
     financial statements in accordance with U.S. GAAP that are 
     used for internal management purposes and under which average 
     annual gross receipts for the 3-reporting-year period ending 
     with the current reporting year in excess of $100 million are 
     reported. During the current reporting year, the FP-USS-PS 
     group has consolidated EBITDA of 300 and consolidated 
     interest expense of 50. During that period, USS has EBITDA of 
     50 (determined without regard to distributions from PS), 
     reported interest expense of 25, business interest of 30, and 
     adjusted taxable income (determined without regard to USS's

[[Page 20059]]

     distributive share of PS's non-separately stated taxable 
     income or loss) of 40. Also during that period, PS has EBITDA 
     of 150, reported interest expense of 15, business interest of 
     20, and adjusted taxable income of 120.
       PS's business interest is deductible only to the extent it 
     does not exceed the limitations in each of section 163(j) (as 
     provided in section 3301 of the bill) and section 163(n) (as 
     provided in section 4302 of the bill). PS's limitation under 
     section 163(j) is 36, which equals 30 percent of its adjusted 
     taxable income of 120 (i.e., 30%  x  120 = 36). PS's 
     limitation under section 163(n) is 22, which equals the 
     allowable percentage (i.e., 160% = 50  x  150 / 300 / 15, not 
     greater than 100%) of 110 percent of PS's business interest 
     (i.e., 22 = 110%  x  20). Therefore, all 20 of PS's business 
     interest is deductible. PS's excess amount under section 
     163(j) (i.e., 36-20 = 16) and excess EBITDA under section 
     163(n) (i.e., 150-300  x  15 / 50 = 60) flow through to its 
     partners.
       Similarly, USS's business interest is deductible only to 
     the extent it does not exceed the limitations in each of 
     section 163(j) and section 163(n). USS's limitation under 
     section 163(j) is 20, which equals 30 percent of the sum of 
     its adjustable taxable income of 40 (determined without 
     regard to USS's distributive share of PS's non-separately 
     stated taxable income or loss) or 12 (i.e., 30%  x  40 = 12) 
     plus USS's distributive share of PS's excess amount under 
     section 163(j)(3)(B) (i.e., 50%  x  16 = 8). USS's limitation 
     under section 163(n) is 17.60, which equals the allowable 
     percentage (i.e., 53% = 50  x  (50 + 30) / 300 / 25) of 110 
     percent of USS's business interest (i.e., 33 = 110%  x  30) 
     after taking into account USS's distributive share of PS's 
     excess EBITDA under section 163(n) (i.e., 50%  x  60 = 30). 
     Therefore, USS may deduct 17.60 of its 30 of business 
     interest in the current year.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                            Senate Amendment

       For any domestic corporation that is a member of a 
     worldwide affiliated group (hereinafter referred to as the 
     ``U.S. corporate members''), the provision reduces the 
     deduction for interest paid or accrued by the corporation by 
     the product of the net interest expense of the domestic 
     corporation multiplied by the debt-to-equity differential 
     percentage of the worldwide affiliated group. Net interest 
     expense means the excess (if any) of: (1) interest paid or 
     accrued by the taxpayer during the taxable year, over (2) the 
     amount of interest includible in the gross income of the 
     taxpayer for the taxable year.\1541\
---------------------------------------------------------------------------
     \1541\ The Secretary is provided is regulatory authority to 
     provide for adjustments in determining the amount of net 
     interest expense.
---------------------------------------------------------------------------
       A worldwide affiliated group is one or more chains of 
     corporations, connected through stock ownership with a common 
     parent that would qualify as an affiliated group under 
     section 1504(a), with two differences. First, the ownership 
     threshold of section 1504(a)(2) is applied using 50 percent 
     rather than 80 percent. Second, the restrictions on inclusion 
     described in sections 1504(b)(2), (b)(3) and (b)(4) are 
     disregarded for purposes of identifying the worldwide 
     affiliated group.
       The debt-to-equity differential percentage means, with 
     respect to any worldwide affiliated group, the excess 
     domestic indebtedness of the group divided by the total 
     indebtedness of the domestic corporations that are members of 
     the group. All U.S. corporate members of the worldwide 
     affiliated group are treated as one member when determining 
     whether the group has excess domestic indebtedness as a 
     result of a debt-to-equity differential. Excess domestic 
     indebtedness is the amount by which the total indebtedness of 
     the U.S. corporate members exceeds 110 percent of the total 
     indebtedness those members would hold if their total 
     indebtedness to total equity ratio equaled the ratio of total 
     indebtedness to total equity for the worldwide affiliated 
     group. Total equity means, with respect to one or more 
     corporations, the excess (if any) of: (1) the money and all 
     other assets of such corporations, over (2) the total 
     indebtedness of such corporations. For purposes of this 
     computation, intragroup debt and equity interests are 
     disregarded, and assets of the U.S. corporate members of the 
     worldwide affiliated group exclude any interest held by any 
     U.S. corporate member in any foreign corporation that is a 
     member of the group.
       The amount of any interest not allowed as a deduction for 
     any taxable year by reason of this provision or new section 
     163(j) (depending on whichever imposes the lower limitation 
     with respect to such taxable year) can be carried forward 
     indefinitely.
       The Secretary is provided regulatory authority to provide 
     rules for: (1) the prevention of the avoidance of this 
     provision, (2) adjustments in the case of corporations which 
     are members of an affiliated group as may be appropriate to 
     carry out the purposes of the provision, (3) the coordination 
     of this provision with section 884, (4) the treatment of 
     partnership indebtedness, allocation of partnership debt, 
     interest, or distributive shares, and (5) the coordination of 
     this provision with new section 163(j).
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

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

                     E. Prevention of Base Erosion

     1. Base erosion using deductible cross-border payments 
         between affiliated companies (sec. 4303 of the House bill 
         and new secs. 4491 and 6038E of the Code; sec. 14401 of 
         the Senate amendment and secs. 6038A and 6038C and new 
         secs. 59A and 59B of the Code)


                               House Bill

     In general
       This provision imposes an excise tax on certain amounts 
     paid by U.S. payors to certain related foreign recipients to 
     the extent the amounts are deductible by the U.S. payor. 
     However, the excise tax does not apply if the foreign 
     recipient elects to be subject to U.S. income tax on the 
     amounts received. In calculating the U.S. income tax 
     liability imposed under such an election, deemed expenses are 
     allowed as a deduction. A foreign tax credit of 80% of 
     applicable foreign credits are allowed against the U.S. tax 
     liability imposed by this provision if an election is made.
     Excise tax
       The provision provides for an excise tax on specified 
     amounts paid or incurred by a domestic corporation to a 
     foreign corporation if both the foreign and domestic 
     corporations are members of the same international financial 
     reporting group. The amount of the tax is equal to 20 percent 
     of the specified amounts paid or incurred. The excise tax is 
     not imposed with respect to amounts that are or are deemed to 
     be effectively connected with a U.S. trade or business of the 
     foreign corporation. The excise tax imposed is neither 
     deductible nor creditable.
       A specified amount is any amount which is allowable by the 
     payor as a deduction or includible in costs of goods sold, or 
     inventory, or in the basis of an amortizable or depreciable 
     asset. A specified amount does not include: (i) interest, 
     (ii) an amount paid or incurred for the acquisition of a 
     security defined in section 475(c)(2) (without regard to the 
     last sentence thereof) or a commodity defined in sections 
     475(e)(2), that is, a commodity actively traded within the 
     meaning of section 1092(d)(1) or an identified hedge of such 
     commodity, or, (iii) for a payor which has elected to use a 
     services cost method under section 482, an amount paid or 
     incurred for services if such amount is the total services 
     cost with no markup.
       An international financial reporting group is any group of 
     entities that prepares consolidated financial statements 
     \1542\ if the average annual aggregate payment amount for the 
     group for the three-year period ending in the reporting year 
     exceeds $100,000,000. The annual aggregate payment amount 
     means the aggregate of the specified amounts made by U.S. 
     members of the group to foreign members of the group during 
     the reporting year.
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     \1542\ This term is defined in new section 163(n)(4) as a 
     financial statement certified as being prepared in accordance 
     with generally accepted accounting principles, international 
     financial reporting standards, or any other comparable method 
     of accounting identified by the Secretary of the Treasury and 
     which is: (i) a 10-K (or successor form), or annual statement 
     to shareholders required to be filed with the United States 
     Securities and Exchange Commission, or, if this is not 
     available, (ii) an audited financial statement used for (1) 
     credit purposes, (2) reporting to shareholders, partners or 
     other proprietors, or to beneficiaries, or (3) any other 
     substantial nontax purpose, or, if (i) and (ii) are not 
     available, (iii) filed with any other Federal or State agency 
     for nontax purposes, or, if (i), (ii), or (iii) are not 
     available, a financial statement used for a purpose described 
     in (ii)(1), (2) and (3), or filed with any regulatory or 
     governmental body, within or outside the United States, 
     specified by the Secretary of the Treasury.
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     Partnerships and branches
       For purposes of this provision, a partnership is treated as 
     an aggregate of its partners. Accordingly, a payment made to 
     a partnership is treated as a payment to the partners, and a 
     payment from a partnership is treated as a payment from the 
     partners, in an amount equal to the partner's distributive 
     share of the relevant item of income, gain, deduction, or 
     loss.
       For purposes of this provision, U.S. branches are treated 
     as separate entities for purposes of determining the 
     treatment of payments between a branch and entities other 
     than its owner and for purposes of deemed payments between a 
     branch and its owner.
     Election to treat payments as effectively connected income
       If a specified amount is paid or incurred by a domestic 
     corporation with respect to a foreign corporation and both 
     the foreign and domestic corporations are members of the same 
     international financial reporting group, the foreign 
     corporation may elect to take into account all such specified 
     amounts as if the foreign corporation were engaged in a U.S. 
     trade or business and had a permanent establishment and as if 
     the payment were effectively connected with that U.S. trade 
     or business and were attributable to the permanent 
     establishment, irrespective of any otherwise applicable 
     treaty. If the foreign corporation makes such election, the 
     excise tax

[[Page 20060]]

     is not imposed and tax is imposed on a net basis on such 
     specified amounts less deemed expenses. The election applies 
     for the taxable year for which the election is made and all 
     subsequent taxable years unless revoked with consent of the 
     Secretary of the Treasury.
       In general, the amount treated as effectively connected 
     income under this provision is treated as such for all 
     purposes of the Code. For example, it is subject to the 
     branch profit tax (unless otherwise reduced, such as by an 
     applicable treaty) and is not subject to the excise tax under 
     section 4371. However, for purposes of section 245 and new 
     section 245A, these amounts are not treated as effectively 
     connected income. Therefore, a distribution of earnings 
     attributable to the amounts described in this provision is 
     eligible for the participation DRD under new section 245A.
       The deemed expenses with respect to any specified amount 
     received by a foreign corporation during any reporting year 
     is the amount of expenses such that the net income ratio of 
     the foreign corporation with respect to the specified amount 
     (taking into account only such specified amounts and such 
     deemed expenses) is equal to the net income ratio of the 
     international financial reporting group determined for the 
     reporting year with respect to the product line to which the 
     specified amount relates. The net income ratio is the ratio 
     of net income determined without regard to income taxes, 
     interest income, and interest expense, divided by revenue. 
     The net income ratio is calculated in accordance with the 
     books and records used in preparing the group's consolidated 
     financial statements. The net income ratio is determined by 
     taking into account only revenues and expenses of the foreign 
     members of the international financial reporting group (other 
     than the members of the group that are or are treated as 
     domestic corporations for purposes of the provision) derived 
     from, or incurred with respect to, persons that are not 
     members of the group or members of the group that are or are 
     treated as domestic corporations for purposes of the 
     provision.
       The following example illustrates the determination of a 
     foreign affiliate's deemed expenses under the provision:
       According to the books and records (after taking into 
     account intercompany transactions otherwise eliminated in 
     consolidation) of an international financial reporting group 
     consisting of US, FS1, and FS2, a domestic corporation, US 
     has third-party revenues of $1000, incurs third-party 
     expenses of $500, and makes a $300 payment for intercompany 
     services to its foreign affiliate, FS1. FS1 has revenues of 
     $500 ($200 of which are third-party) and incurs third-party 
     expenses of $250. US's other foreign affiliate, FS2, has $300 
     of revenues, incurs $150 of third-party expenses, and makes a 
     $100 intercompany payment to US. US's entire payment to FS1 
     is deductible for Federal income tax purposes, and FS1 elects 
     to treat the $300 amount as subject to section 882(g)(1). On 
     a consolidated basis, the US-FS1-FS2 group has revenues of 
     $1500 and incurs third-party expenses of $900.
       To determine the foreign affiliate's deemed expenses, its 
     foreign profit margin will be determined by reference to 
     ratio of the foreign earnings before interest and taxes 
     (``EBIT'') against the foreign revenues, with adjustments for 
     related party inbound and outbound payments. In other words, 
     the foreign affiliate's profit margin can be determined as 
     follows:

       (GEBIT-USEBIT + RPOP-RPIP)  (GREV-USREV + RPOP)

       GEBIT is global EBIT (determined on a consolidated basis), 
     USEBIT is the domestic corporation's EBIT (without regard to 
     related party transactions), RPOP is the group's related 
     party outbound payments made from domestic corporations to 
     foreign affiliates, and RPIP is the group's related party 
     inbound payments made from foreign affiliates to domestic 
     corporations.
       In the denominator, GREV is global revenues (determined on 
     a consolidated basis) and USREV is the domestic corporation's 
     revenues (without regard to related party transactions).
       Under the aforementioned facts, the foreign affiliate's 
     profit margin would be 37.5%, or
       (600-500 + 300-100)  (1500-1000 + 300)

       Accordingly, of the $300 payment from US to FS1, $112.50 
     would be deemed to be income effectively connected to a US 
     trade or business, and subject to corporate tax. The 
     remaining $187.50 of the payment would be deemed expenses for 
     which FSI would be allowed a deduction.
     Coordination with FDAP
       Amounts treated as effectively connected income under this 
     provision are not excluded from the definition of fixed or 
     determinable annual or periodical (``FDAP'') income. Payments 
     subject to tax under section 881 do not constitute specified 
     payments under this provision except to the extent that the 
     rate of tax imposed under section 881 is reduced by a 
     bilateral income tax treaty.
     Joint and several liability
       If there is an underpayment with respect to any taxable 
     year of an electing foreign corporation which is a member of 
     an international financial accounting group, each domestic 
     corporation in the group is jointly and severally liable for 
     as much of the underpayment as does not exceed the excess of 
     such underpayment over the amount of such underpayment 
     determined without regard to this rule and any penalty, 
     addition to tax, or additional amount attributable to the 
     above amount.
     Foreign tax credit
       The foreign tax credit allowed under section 906(a) with 
     respect to amounts taken into account as effectively 
     connected income is limited to 80 percent of the amount of 
     taxes paid or accrued (and determined without regard to 
     section 906(b)(1)). These foreign tax credits are effectively 
     separately basketed and may not be carried backwards or 
     forwards.
     Reporting
       An electing foreign corporation that receives a specified 
     amount is required to report, with respect to each member of 
     the international financial reporting group from which any 
     such amount is received: (i) the name and taxpayer 
     identification number of each member, (ii) the aggregate 
     amounts received from each member, (iii) the product lines to 
     which such amounts relate, the aggregate amounts relating to 
     each product line, and the net income ratio for each product 
     line, and (iv) a summary of changes in financial accounting 
     methods that affect the computation of any net income ratio 
     described above.
       A domestic corporation that pays or accrues a specified 
     amount with respect to which a foreign corporation has made 
     the election is required to make a return according to the 
     forms and regulations prescribed by the Secretary of the 
     Treasury containing certain information and to maintain 
     sufficient records to determine the tax liability imposed by 
     this provision. The information required to be provided is as 
     follows: (1) the name and taxpayer identification number of 
     the common parent of the international financial reporting 
     group of which the domestic corporation is a member, and (2) 
     with respect to a specified amount: (A) the name and taxpayer 
     identification number of the recipient of the amount, (B) the 
     aggregate amounts received by the recipient, (C) the product 
     lines to which the amounts relate and the aggregate amounts 
     for each product line, and the net income ratio for each 
     product line, and (D) a summary of any changes in financial 
     accounting methods that affect the computation of any net 
     income ratio described in (C).
       Treasury may prescribe regulations or other guidance that 
     address reporting requirements of foreign affiliates under 
     this provision, such as allowing reporting or elections on a 
     group basis.
       Effective date.--The provisions of this section apply to 
     amounts paid or incurred after December 31, 2018.


                            Senate Amendment

     In general
       Under the provision, an applicable taxpayer is required to 
     pay a tax equal to the base erosion minimum tax amount for 
     the taxable year. The base erosion minimum tax amount is the 
     excess of 10 percent of the modified taxable income of the 
     taxpayer for the taxable year over an amount equal to the 
     regular tax liability (defined in section 26(b)) of the 
     taxpayer for the taxable year reduced (but not below zero) by 
     the excess of an amount equal to the credits allowed under 
     Chapter 1 less the credit allowed under section 38 (general 
     business credits) for the taxable year allocable to the 
     research credit under section 41(a). For taxable years 
     beginning after December 31, 2025, two changes are made, (A) 
     the 10-percent provided for above is changed to 12.5-percent, 
     and (B) the regular tax liability is reduced by the aggregate 
     amount of the credits allowed under Chapter 1 (and no other 
     adjustment is made).\1543\
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     \1543\ In the case of an applicable taxpayer that is a member 
     of an affiliated group (defined in section 1504(a)(1)) that 
     includes a bank as defined in section 581 or a registered 
     securities dealer defined in section 15(a) of the Securities 
     Exchange Act of 1934, the rates are 11 percent instead of the 
     abovementioned 10 percent and 13.5 percent instead of the 
     abovementioned 12.5 percent.
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       To determine its modified taxable income, the applicable 
     taxpayer computes its taxable income for the year without 
     regard to any base erosion tax benefit of a base erosion 
     payment or base erosion percentage of any allowable net 
     operating loss deduction.
     Base erosion payments
       A base erosion payment generally includes any amount paid 
     or accrued by a taxpayer to a foreign person that is a 
     related party of the taxpayer and with respect to which a 
     deduction is allowable under Chapter 1. Such payments also 
     include any amount paid or accrued by the taxpayer to the 
     related party in connection with the acquisition by the 
     taxpayer from the related party of property of a character 
     subject to the allowance of depreciation (or amortization in 
     lieu of depreciation).
       Base erosion payments do not include payments for cost of 
     goods sold (which is not a deduction but rather a reduction 
     to income). A base erosion payment includes any amount that 
     constitutes reductions in gross receipts of the taxpayer that 
     is paid or accrued by the taxpayer with respect to: (1) a 
     surrogate foreign corporation which is a related party

[[Page 20061]]

     of the taxpayer, but only if such person first became a 
     surrogate foreign corporation after November 9, 2017, or (2) 
     a foreign person that is a member of the same expanded 
     affiliated group as the surrogate foreign corporation. A 
     surrogate foreign corporation has the meaning given in 
     section 7874(a)(2), but does not include a foreign 
     corporation treated as a domestic corporation under section 
     7874(b).aid or accrued by the taxpayer with respect to: (1) a 
     surrogate foreign corporation which is a related party of the 
     taxpayer, but only if such person first became a surrogate 
     foreign corporation after November 9, 2017, or (2) a foreign 
     person that is a member of the same expanded affiliated group 
     as the surrogate foreign corporation
       A base erosion payment does not apply to any amount paid or 
     accrued by a taxpayer for services if such services meet the 
     requirements for eligibility for use of the services cost 
     method under section 482,\1544\ determined without regard to 
     the requirement that the services not contribute 
     significantly to fundamental risks of business success or 
     failure and such amount constitutes the total services cost 
     with no markup.
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     \1544\ Described in Treas. Reg. sec. 1.482-9(b).
---------------------------------------------------------------------------
       Any qualified derivative payment is not treated as a base 
     erosion payment. A qualified derivative payment means any 
     payment made by a taxpayer pursuant to a derivative with 
     respect to which the taxpayer: (i) recognizes gain or loss as 
     if such derivative were sold for its fair market value on the 
     last business day of the taxable year (and such additional 
     times as are required by this title or the taxpayer's method 
     of accounting), (ii) treats any gain or loss so recognized as 
     ordinary, and (iii) treats the character of all items of 
     income, deduction, gain or loss with respect to a payment 
     pursuant to the derivative as ordinary.
       No payment is treated as a qualified derivative payment 
     unless the taxpayer includes in the information required to 
     be reported under section 6038B(b)(2) with respect to such 
     taxable year such information as is necessary to identify the 
     payments to be so treated and such other information as the 
     Secretary of the Treasury determines necessary to carry out 
     the provision.
       The rule for qualified derivative payments does not apply 
     if such payment would be treated as a base erosion payment if 
     it were not made pursuant to a derivative, including any 
     interest, royalty, or service payment, or in the case of a 
     contract which has derivative and nonderivative components, 
     the payment is properly allocable to the nonderivative 
     component.
       For these purposes, the term derivative means any contract 
     (including any option, forward contract, futures contract, 
     short position, swap, or similar contract) the value of 
     which, or any payment or other transfer with respect to 
     which, is (directly or indirectly) determined by reference to 
     one or more of the following: (i) any share of stock of a 
     corporation, (ii) any evidence of indebtedness, (iii) any 
     commodity which is actively traded, (iv) any currency, (v) 
     any rate, price, amount, index, formula, or algorithm. Except 
     as otherwise provided by the Secretary of the Treasury, 
     American depository receipts and similar instruments with 
     respect to shares of stock in foreign corporations are 
     treated as shares of stock in such foreign corporations.
       A base erosion tax benefit means: (i) any deduction allowed 
     under Chapter 1 for the taxable year with respect to a base 
     erosion payment, (ii) in the case of a base erosion payment 
     with respect to the purchase of property of a character 
     subject to the allowance for depreciation (or amortization in 
     lieu of depreciation), any deduction allowed in Chapter 1 for 
     depreciation or amortization in lieu of depreciation with 
     respect to the property acquired with such payment, or (iii) 
     any reduction in gross receipts with respect to a payment 
     described above with respect to a surrogate foreign 
     corporation (as defined there) in computing gross income of 
     the taxpayer for the taxable year.
       Any base erosion tax benefit attributable to any base 
     erosion payment on which tax is imposed by sections 871 or 
     881 and with respect to which tax has been deducted and 
     withheld under sections 1441 or 1442, is not taken into 
     account in computing modified taxable income as defined 
     above. The amount not taken into account in computing 
     modified taxable income is reduced under rules similar to the 
     rules under section 163(j)(5)(B).\1545\
---------------------------------------------------------------------------
     \1545\ As in effect before the date of enactment of Tax Cuts 
     and Jobs Act.
---------------------------------------------------------------------------
       The base erosion percentage means for any taxable year, the 
     percentage determined by dividing the aggregate amount of 
     base erosion tax benefits of the taxpayer for the taxable 
     year by the aggregate amount of the deductions allowable to 
     the taxpayer under Chapter 1 for the taxable year, taking 
     into account base erosion tax benefits described above and by 
     not taking into account any deduction allowed under sections 
     172, 245A or 250 for the taxable year.
     Applicable taxpayers and related parties
       Applicable taxpayer means with respect to any taxable year, 
     a taxpayer: (A) which is a corporation other than a regulated 
     investment company, a real estate investment trust, or an S 
     corporation; (B) the average annual gross receipts of the 
     corporation for the three-taxable-year period ending with the 
     preceding taxable year are at least $500 million, and (C) the 
     base erosion percentage (as defined above) of the corporation 
     for the taxable year is four percent or higher.
       In the case of a foreign person the gross receipts of which 
     are taken into account for purposes of this provision, only 
     gross receipts which are taken into account in determining 
     income effectively connected with the conduct of a trade or 
     business within the United States is taken into account. If a 
     foreign person's gross receipts are aggregated with a U.S. 
     person's gross receipts for reasons described in the 
     aggregation rules below, the preceding sentence does not 
     apply to the gross receipts of any U.S. person which are 
     aggregated with the taxpayer's gross receipts.
       All persons treated as a single employer under section 
     52(a) are treated as one person for purposes of this 
     provision, except that in applying section 1563 for purposes 
     of section 52, the exception for foreign corporations under 
     section 1563(b)(2)(C) is disregarded (called the 
     ``aggregation rules'').
       For purposes of this provision, foreign person has the 
     meaning given in section 6038A(c)(3).
       Related party means: (i) any 25-percent owner of the 
     taxpayer, (ii) any person who is related to the taxpayer or 
     any 25-percent owner of the taxpayer, within the meaning of 
     sections 267(b) or 707(b)(1), and (iii) any other person 
     related to the taxpayer within the meaning of section 482. 
     For these purposes, section 318 regarding constructive 
     ownership of stock applies to these related party rules 
     except that 10-percent is substituted for 50-percent in 
     section 318(a)(2)(C), and for these purposes section 
     318(a)(3)(A), (B) and (C) do not cause a United States person 
     to own stock owned by a person who is not a United States 
     person.
       The provision provides that the Secretary of the Treasury 
     is to prescribe such regulations or other guidance necessary 
     or appropriate, including regulations providing for such 
     adjustments to the application of this section necessary to 
     prevent avoidance of the provision, including through: (1) 
     the use of unrelated persons, conduit transactions, or other 
     intermediaries, or (2) transactions or arrangements designed 
     in whole or in part: (A) to characterize payments otherwise 
     subject to this provision as payments not subject to this 
     provision, or (B) to substitute payments not subject to this 
     provision for payments otherwise subject to this provision.
     Information reporting requirements \1546\
---------------------------------------------------------------------------
     \1546\ Section 15006 of the bill (and new section 6050Z) 
     establishes certain reporting requirements. These reporting 
     requirements are effective for taxable years beginning after 
     December 31, 2024, and continue to be required regardless of 
     whether the revenue requirement is met. Any taxpayer who 
     makes a payment to a foreign person who is a related party 
     (as such term is defined in section 14401 of the bill and new 
     section 59A) of the taxpayer during the taxable year is 
     required to make a return, according to forms and regulations 
     prescribed by the Secretary, setting forth (1) the amount of 
     such payments by type and separately stated and (2) any 
     amount paid that results in a reduction of gross receipts to 
     the taxpayer (e.g., cost of goods sold).
---------------------------------------------------------------------------
       The provision authorizes the Secretary of the Treasury to 
     prescribe additional reporting requirements under section 
     6038A relating to: (A) the name, principal place of business, 
     and country or countries in which organized or resident of 
     each person which: (i) is a related party to the reporting 
     corporation, and (ii) had any transaction with the reporting 
     corporation during its taxable year, (B) the manner of 
     relation between the reporting corporation and the person 
     referred to in (A), and (C) transactions between the 
     reporting corporation and each related foreign person.
       In addition, for purposes of information reporting under 
     sections 6038A and 6038C, if the reporting corporation or the 
     foreign corporation to which section 6038C applies is an 
     applicable taxpayer under this provision, the information 
     that may be required includes: (A) base erosion payments paid 
     or accrued during the taxable year by the taxpayer to a 
     foreign person which is a related party of the taxpayer, (B) 
     such information as the Secretary of the Treasury finds 
     necessary to determine the base erosion minimum amount of the 
     taxpayer for the taxable year, and (C) such other information 
     as the Secretary of the Treasury determines is necessary.
       The penalties provided for under sections 6038A(D)(1) and 
     (2) are both increased to $25,000.
       Effective date.--The provision applies to base erosion 
     payments paid or accrued in taxable years beginning after 
     December 31, 2017.


                          Conference Agreement

       The provision in the conference agreement follows the 
     Senate amendment with some changes, as follows.
     In general
       Under the provision, an applicable taxpayer is required to 
     pay a tax equal to the base erosion minimum tax amount for 
     the taxable year. The base erosion minimum tax amount is the 
     excess of 10 percent \1547\ of the

[[Page 20062]]

     modified taxable income of the taxpayer for the taxable year 
     over an amount equal to the regular tax liability (defined in 
     section 26(b)) of the taxpayer for the taxable year reduced 
     (but not below zero) by the excess (if any) of the credits 
     allowed under Chapter 1 against such regular tax liability 
     over the sum of: (1) the credit allowed under section 38 for 
     the taxable year which is properly allocable to the research 
     credit determined under section 41(a), plus (2) the portion 
     of the applicable section 38 credits not in excess of 80 
     percent of the lesser of the amount of such credits or the 
     base erosion minimum tax amount (determined without regard to 
     this clause (2)). For taxable years beginning after December 
     31, 2025, two changes are made, (A) the 10-percent provided 
     for above is changed to 12.5-percent, and (B) the regular tax 
     liability is reduced by the aggregate amount of the credits 
     allowed under Chapter 1 (and no other adjustment is 
     made).\1548\
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     \1547\ 5 percent rate applies for one year for base erosion 
     payments paid or accrued in taxable years beginning after 
     December 31, 2017.
     \1548\ In the case of a taxpayer that is a member of an 
     affiliated group (defined in section 1504(a)(1)) that 
     includes a bank as defined in section 581 or a registered 
     securities dealer defined in section 15(a) of the Securities 
     Exchange Act of 1934, the rates are 6 percent instead of 5 
     percent, 11 percent instead of 10 percent and 13.5 percent 
     instead of 12.5 percent.
---------------------------------------------------------------------------
       Applicable section 38 credits means the credit allowed 
     under section 38 for the taxable year which is properly 
     allocable to: (A) the low-income housing credit determined 
     under section 42(a), (B) the renewable electricity production 
     credit determined under section 45(a), and (C) the investment 
     credit determined under section 46, but only to the extent 
     properly allocable to the energy credit determined under 
     section 48.
       To determine its modified taxable income, the applicable 
     taxpayer computes its taxable income for the year without 
     regard to any base erosion tax benefit with respect to any 
     base erosion payment or the base erosion percentage of any 
     allowable net operating loss deduction allowed under section 
     172 for the taxable year.
     Base erosion payments
       A base erosion payment means any amount paid or accrued by 
     a taxpayer to a foreign person that is a related party of the 
     taxpayer and with respect to which a deduction is allowable 
     under Chapter 1. Such payments include any amount paid or 
     accrued by the taxpayer to the related party in connection 
     with the acquisition by the taxpayer from the related party 
     of property of a character subject to the allowance of 
     depreciation (or amortization in lieu of depreciation). A 
     base erosion payment includes any premium or other 
     consideration paid or accrued by the taxpayer to a foreign 
     person which is a related party of the taxpayer for any 
     reinsurance payments taken into account under sections 
     803(a)(1)(B) or 832(b)(4)(A).
       Base erosion payments do not include any amount that 
     constitutes reductions in gross receipts including payments 
     for costs of goods sold. However, base erosion payment 
     includes any amount that constitutes reductions in gross 
     receipts of the taxpayer that is paid or accrued by the 
     taxpayer with respect to: (1) a surrogate foreign corporation 
     which is a related party of the taxpayer, but only if such 
     person first became a surrogate foreign corporation after 
     November 9, 2017, or (2) a foreign person that is a member of 
     the same expanded affiliated group as the surrogate foreign 
     corporation. A surrogate foreign corporation has the meaning 
     given in section 7874(a)(2), but does not include a foreign 
     corporation treated as a domestic corporation under section 
     7874(b).
       A base erosion payment does not include any amount paid or 
     accrued by a taxpayer for services if such services meet the 
     requirements for eligibility for use of the services cost 
     method described in Treas. Reg. sec. 1.482-9, as in effect as 
     of the date of enactment of TCJA, without regard to the 
     requirement that the services not contribute significantly to 
     fundamental risks of business success or failure and only if 
     the payments are made for services that have no markup 
     component.
       Any qualified derivative payment is not treated as a base 
     erosion payment. A qualified derivative payment means any 
     payment made by a taxpayer pursuant to a derivative with 
     respect to which the taxpayer: (i) recognizes gain or loss as 
     if such derivative were sold for its fair market value on the 
     last business day of the taxable year (and such additional 
     times as are required by this title or the taxpayer's method 
     of accounting), (ii) treats any gain or loss so recognized as 
     ordinary, and (iii) treats the character of all items of 
     income, deduction, gain or loss with respect to a payment 
     pursuant to the derivative as ordinary.
       No payment is treated as a qualified derivative payment 
     unless the taxpayer includes in the information required to 
     be reported under section 6038B(b)(2) with respect to such 
     taxable year such information as is necessary to identify the 
     payments to be so treated and such other information as the 
     Secretary of the Treasury determines necessary to carry out 
     the provision.
       The rule for qualified derivative payments does not apply 
     if a payment with respect to a derivative is in substance, or 
     is disguising, the kind of payment that would be treated as a 
     base erosion payment if it were not made pursuant to a 
     derivative, including any interest, royalty, or service 
     payment, (or any other payment subject to this provision) or 
     in the case of a contract which has derivative and 
     nonderivative components, the payment is properly allocable 
     to the nonderivative component.
       For these purposes, the term derivative means any contract 
     (including any option, forward contract, futures contract, 
     short position, swap, or similar contract) the value of 
     which, or any payment or other transfer with respect to 
     which, is (directly or indirectly) determined by reference to 
     one or more of the following: (i) any share of stock of a 
     corporation, (ii) any evidence of indebtedness, (iii) any 
     commodity which is actively traded, (iv) any currency, (v) 
     any rate, price, amount, index, formula, or algorithm. Except 
     as otherwise provided by the Secretary of the Treasury, 
     American depository receipts and similar instruments with 
     respect to shares of stock in foreign corporations are 
     treated as shares of stock in such foreign corporations. The 
     term derivative does not include any item described in 
     paragraphs (i) through (v) above nor shall the term 
     `derivative' include any insurance, annuity, or endowment 
     contract issued by an insurance company to which subchapter L 
     applies (or issued by any foreign corporation to which such 
     subchapter would apply if such foreign corporation were a 
     domestic corporation).
       A base erosion tax benefit means: (i) any deduction allowed 
     under Chapter 1 for the taxable year with respect to a base 
     erosion payment, (ii) in the case of a base erosion payment 
     with respect to the purchase of property of a character 
     subject to the allowance for depreciation (or amortization in 
     lieu of depreciation), any deduction allowed in Chapter 1 for 
     depreciation or amortization in lieu of depreciation with 
     respect to the property acquired with such payment, or (iii) 
     any reduction in gross receipts with respect to a payment 
     described above with respect to a surrogate foreign 
     corporation (as defined there) in computing gross income of 
     the taxpayer for the taxable year.
       Any base erosion tax benefit attributable to any base 
     erosion payment on which tax is imposed by sections 871 or 
     881 and with respect to which tax has been deducted and 
     withheld under sections 1441 or 1442, is not taken into 
     account in computing modified taxable income as defined 
     above. The amount not taken into account in computing 
     modified taxable income is reduced under rules similar to the 
     rules under section 163(j)(5)(B).\1549\
---------------------------------------------------------------------------
     \1549\ As in effect before the date of enactment of TCJA.
---------------------------------------------------------------------------
       The base erosion percentage means for any taxable year, the 
     percentage determined by dividing the aggregate amount of 
     base erosion tax benefits of the taxpayer for the taxable 
     year by the aggregate amount of the deductions allowable to 
     the taxpayer under Chapter 1 for the taxable year, taking 
     into account base erosion tax benefits described above and by 
     not taking into account any deduction allowed under sections 
     172, 245A or 250 for the taxable year, any deduction for 
     amounts paid or accrued for services to which the exception 
     for the services cost method (as described above) applies, 
     and any deduction for qualified derivative payments which are 
     not treated as a base erosion payment as described above.
     Applicable taxpayers and related parties
       Applicable taxpayer means with respect to any taxable year, 
     a taxpayer: (A) which is a corporation other than a regulated 
     investment company, a real estate investment trust, or an S 
     corporation; (B) the average annual gross receipts of the 
     corporation for the three-taxable-year period ending with the 
     preceding taxable year are at least $500 million, and (C) the 
     base erosion percentage (as defined above) of the corporation 
     for the taxable year is three percent or higher.\1550\
---------------------------------------------------------------------------
     \1550\ In the case of an applicable taxpayer that is a member 
     of an affiliated group (defined in section 1504(a)(1)) that 
     includes a bank as defined in section 581 or a registered 
     securities dealer defined in section 15(a) of the Securities 
     Exchange Act of 1934, the base erosion percentage of which is 
     two percent or higher.
---------------------------------------------------------------------------
       In the case of a foreign person the gross receipts of which 
     are taken into account for purposes of this provision, only 
     gross receipts which are taken into account in determining 
     income effectively connected with the conduct of a trade or 
     business within the United States is taken into account. If a 
     foreign person's gross receipts are aggregated with a U.S. 
     person's gross receipts for reasons described in the 
     aggregation rules below, the preceding sentence does not 
     apply to the gross receipts of any U.S. person which are 
     aggregated with the taxpayer's gross receipts.
       All persons treated as a single employer under section 
     52(a) are treated as one person for purposes of this 
     provision, except that in applying section 1563 for purposes 
     of section 52, the exception for foreign corporations under 
     section 1563(b)(2)(C) is disregarded (called the 
     ``aggregation rules'').
       For purposes of this provision, foreign person has the 
     meaning given in section 6038A(c)(3).
       Related party means: (i) any 25-percent owner of the 
     taxpayer, (ii) any person who is related to the taxpayer or 
     any 25-percent owner of the taxpayer, within the meaning of 
     sections 267(b) or 707(b)(1), and (iii) any other

[[Page 20063]]

     person related to the taxpayer within the meaning of section 
     482. For these purposes, section 318 regarding constructive 
     ownership of stock applies to these related party rules 
     except that 10-percent is substituted for 50-percent in 
     section 318(a)(2)(C), and for these purposes section 
     318(a)(3)(A), (B) and (C) do not cause a United States person 
     to own stock owned by a person who is not a United States 
     person.
       The provision provides that the Secretary of the Treasury 
     is to prescribe such regulations or other guidance necessary 
     or appropriate, including regulations providing for such 
     adjustments to the application of this section necessary to 
     prevent avoidance of the provision, including through: (1) 
     the use of unrelated persons, conduit transactions, or other 
     intermediaries, or (2) transactions or arrangements designed 
     in whole or in part: (A) to characterize payments otherwise 
     subject to this provision as payments not subject to this 
     provision, or (B) to substitute payments not subject to this 
     provision for payments otherwise subject to this provision.
     Information reporting requirements \1551\
---------------------------------------------------------------------------
     \1551\ Section 15006 of the bill (and new section 6050Z) 
     establishes certain reporting requirements. These reporting 
     requirements are effective for taxable years beginning after 
     December 31, 2024, and continue to be required regardless of 
     whether the revenue requirement is met. Any taxpayer who 
     makes a payment to a foreign person who is a related party 
     (as such term is defined in section 14401 of the bill and new 
     section 59A) of the taxpayer during the taxable year is 
     required to make a return, according to forms and regulations 
     prescribed by the Secretary, setting forth (1) the amount of 
     such payments by type and separately stated and (2) any 
     amount paid that results in a reduction of gross receipts to 
     the taxpayer (e.g., cost of goods sold).
---------------------------------------------------------------------------
       The provision authorizes the Secretary of the Treasury to 
     prescribe additional reporting requirements under section 
     6038A relating to: (A) the name, principal place of business, 
     and country or countries in which organized or resident of 
     each person which: (i) is a related party to the reporting 
     corporation, and (ii) had any transaction with the reporting 
     corporation during its taxable year, (B) the manner of 
     relation between the reporting corporation and the person 
     referred to in (A), and (C) transactions between the 
     reporting corporation and each related foreign person.
       In addition, for purposes of information reporting under 
     sections 6038A and 6038C, if the reporting corporation or the 
     foreign corporation to which section 6038C applies is an 
     applicable taxpayer under this provision, the information 
     that may be required includes: (A) base erosion payments paid 
     or accrued during the taxable year by the taxpayer to a 
     foreign person which is a related party of the taxpayer, (B) 
     such information as the Secretary of the Treasury finds 
     necessary to determine the base erosion minimum amount of the 
     taxpayer for the taxable year, and (C) such other information 
     as the Secretary of the Treasury determines is necessary.
       The penalties provided for under sections 6038A(D)(1) and 
     (2) are both increased to $25,000.
       Effective date.--The provision applies to base erosion 
     payments paid or accrued in taxable years beginning after 
     December 31, 2017.
     2. Limitations on income shifting through intangible property 
         transfers (sec. 14222 of the bill and secs. 367, 482, and 
         936 of the Code)


                               House Bill

       No provision.


                            Senate Amendment

       The provision addresses recurring definitional and 
     methodological issues that have arisen in controversies 
     \1552\ in transfers of intangible property for purposes of 
     sections 367(d) and 482, both of which use the statutory 
     definition of intangible property in section 936(h)(3)(B). 
     The provision revises that definition and confirms the 
     authority to require certain valuation methods. It does not 
     modify the basic approach of the existing transfer pricing 
     rules with regard to income from intangible property.
---------------------------------------------------------------------------
     \1552\ Veritas v. Commissioner, 133 T.C. No. 14 (December 10, 
     2009), non-acq., IRB 2010-49 (December 6, 2010). (stating 
     that including goodwill and going concern value within the 
     definition would ``expand[]'' that definition, and that 
     ``taxpayers are merely required to be compliant, not 
     prescient''); Amazon v. Commissioner, 148 T.C. No. 8 (2017) 
     (holding that ``workforce in place, going concern value, 
     goodwill, and what trial witnesses described as `growth 
     options' and corporate `resources' or `opportunities' '' all 
     fell outside the definition under present law).
---------------------------------------------------------------------------
       Under the provision, workforce in place, goodwill (both 
     foreign and domestic), and going concern value are intangible 
     property within the meaning of section 936(h)(3)(B), as is 
     the residual category of ``any similar item'' the value of 
     which is not attributable to tangible property or the 
     services of an individual. The flush language at the end of 
     that subparagraph is removed, to make clear that the source 
     or amount of value is not relevant to whether property that 
     is one of the specified types of intangible property is 
     within the scope of the definition.
       The provision clarifies the authority of the Secretary to 
     specify the method to be used to determine the value of 
     intangible property, both with respect to outbound 
     restructurings of U.S. operations and to intercompany pricing 
     allocations,\1553\ by amending 482 as well as the grant of 
     regulatory authority under section 367 regarding the use of 
     aggregate basis valuation and the application of the 
     realistic alternative principle.
---------------------------------------------------------------------------
     \1553\ Secs. 367(d) and 482.
---------------------------------------------------------------------------
       With respect to aggregate basis valuation, the provision 
     requires use of that method of valuation in the case of 
     transfers of multiple intangible properties in one or more 
     related transactions if the Secretary determines that an 
     aggregate basis achieves a more reliable result than an 
     asset-by-asset approach. The provision is consistent with the 
     position that the additional value that results from the 
     interrelation of intangible assets can be properly attributed 
     to the underlying intangible assets in the aggregate, where 
     doing so yields a more reliable result. This approach is also 
     consistent with Tax Court decisions in cases outside of the 
     section 482 context, where collections of multiple, related 
     intangible assets were viewed by the Tax Court in the 
     aggregate.\1554\ Finally, it is also consistent with the 
     cost-sharing regulations.\1555\
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     \1554\ See, e.g., Kraft Foods Co. v. Commissioner, 21 T.C. 
     513 (1954) (thirty-one related patents must be valued as a 
     group and the useful life for depreciation should be based on 
     the average of the patents' useful lives); Standard Conveyor 
     Co. v. Commissioner, 25 B.T.A. 281, p. 283 (1932) (``[I]t is 
     evident that it is impossible to value these seven patents 
     separately. Their value, as in the case of many groups of 
     patents representing improvements on the prior art, appears 
     largely to consist of their combination.''); Massey-Ferguson, 
     Inc. v. Commissioner, 59 T.C. 220 (1972) (taxpayer who 
     abandoned a distribution network of contracts with separate 
     distributorships was entitled to an abandonment loss for the 
     entire network in the taxable year during which the last of 
     the contracts was terminated because that was the year in 
     which the entire intangible value was lost).
     \1555\ See Treas. Reg. sec. 1.482-7(g)(2)(iv) (if multiple 
     transactions in connection with a cost-sharing arrangement 
     involve platform, operating and other contributions of 
     resources, capabilities or rights that are reasonably 
     anticipated to be interrelated, then determination of the 
     arm's-length charge for platform contribution transactions 
     and other transactions on an aggregate basis may provide the 
     most reliable measure of an arm's-length result).
---------------------------------------------------------------------------
       The provision codifies use of the realistic alternative 
     principles to determine valuation with respect to intangible 
     property transactions. The realistic alternative principle is 
     predicated on the notion that a taxpayer will only enter into 
     a particular transaction if none of its realistic 
     alternatives is economically preferable to the transaction 
     under consideration. For example, under the existing 
     regulations provide the IRS with the ability to determine an 
     arm's-length price by reference to a transaction (such as the 
     owner of intangible property using it to make a product 
     itself) that is different from the transaction that was 
     actually completed (such as the owner of that same intangible 
     property licensing the manufacturing rights and then buying 
     the product from the licensee).
       Effective date.--The provision applies to transfers in 
     taxable years beginning after December 31, 2017. No inference 
     is intended with respect to application of section 
     936(h)(3)(B) or the authority of the Secretary to provide by 
     regulation for such application with respect to taxable years 
     beginning before January 1, 2018.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
     3. Certain related party amounts paid or accrued in hybrid 
         transactions or with hybrid entities (sec. 14223 of the 
         Senate amendment and sec. 267A of the Code)


                               House Bill

       No provision.


                            Senate Amendment

       The provision denies a deduction for any disqualified 
     related party amount paid or accrued pursuant to a hybrid 
     transaction or by, or to, a hybrid entity. A disqualified 
     related party amount is any interest or royalty paid or 
     accrued to a related party to the extent that: (1) there is 
     no corresponding inclusion to the related party under the tax 
     law of the country of which such related party is a resident 
     for tax purposes or is subject to tax, or (2) such related 
     party is allowed a deduction with respect to such amount 
     under the tax law of such country. A disqualified related 
     party amount does not include any payment to the extent such 
     payment is included in the gross income of a U.S. shareholder 
     under section 951(a). A related party for these purposes is 
     determined under the rules of section 954(d)(3), except that 
     such section applies with respect to the payor as opposed to 
     the CFC otherwise referred to in such section.
       A hybrid transaction is any transaction, series of 
     transactions, agreement, or instrument one or more payments 
     with respect to which are treated as interest or royalties 
     for Federal income tax purposes and which are not so treated 
     for purposes of the tax law of the foreign country of which 
     the recipient of such payment is resident for tax purposes or 
     is subject to tax. A hybrid entity is any entity which is 
     either: (1) treated as fiscally transparent for Federal 
     income tax purposes but not so treated for purposes of the 
     tax law of the foreign country of which the entity is 
     resident for tax purposes or is subject to tax, or (2) 
     treated as fiscally transparent for purposes of the tax law 
     of the foreign country of

[[Page 20064]]

     which the entity is resident for tax purposes or is subject 
     to tax but not so treated for Federal income tax purposes.
       The provision further provides that the Secretary shall 
     issue regulations or other guidance as may be necessary or 
     appropriate to carry out the purposes of the provision, 
     including regulations or other guidance providing rules for: 
     (1) denying deductions for conduit arrangements that involve 
     a hybrid transaction or a hybrid entity, (2) the application 
     of this provision to foreign branches, (3) applying this 
     provision to certain structured transactions, (4) denying all 
     or a portion of a deduction claimed for an interest or a 
     royalty payment that, as a result of the hybrid transaction 
     or entity, is included in the recipient's income under a 
     preferential tax regime of the country of residence of the 
     recipient and has the effect of reducing the country's 
     generally applicable statutory tax rate by at least 25 
     percent, (5) denying all of a deduction claimed for an 
     interest or a royalty payment if such amount is subject to a 
     participation exemption system or other system which provides 
     for the exclusion or deduction of a substantial portion of 
     such amount, (6) rules for determining the tax residence of a 
     foreign entity if the foreign entity is otherwise considered 
     a resident of more than one country or of no country, (7) 
     exceptions to the general rule set forth in the provision, 
     and (8) requirements for record keeping and information in 
     addition to any requirements imposed by section 6038A.
       Effective date.--The provision shall apply to taxable years 
     beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     the following modifications. The bill provides that the 
     Secretary shall issue regulations or other guidance as may be 
     necessary or appropriate to carry out the purposes of the 
     provision for branches (domestic or foreign) and domestic 
     entities, even if such branches or entities do not meet the 
     statutory definition of a hybrid entity.
     4. Shareholders of surrogate foreign corporations not 
         eligible not eligible for reduced rate on dividends (sec. 
         14225 of the Senate amendment and sec. 1 of the Code)


                               House Bill

       No provision.


                            Senate Amendment

       Any individual shareholder who receives a dividend from a 
     corporation which is a surrogate foreign corporation as 
     defined in section 7874(a)(2)(B), other than a foreign 
     corporation which is treated as a domestic corporation under 
     section 7874(b), is not entitled to the lower rates on 
     qualified dividends provided for in section 1(h).
       Effective date.--The provision is effective for dividends 
     paid in taxable years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment with 
     a modification. The modification is that the provision 
     applies to dividends received from foreign corporations that 
     first become surrogate foreign corporations after date of 
     enactment.
       Effective date.--The provision is effective for dividends 
     received after date of enactment.

     F. Provisions Related to the Possessions of the United States

     1. Extension of deduction allowable with respect to income 
         attributable to domestic production activities in Puerto 
         Rico (sec. 4401 of the House bill and sec. 199 of the 
         Code)


                              Present Law

     In general
       Present law generally provides a deduction from taxable 
     income (or, in the case of an individual, adjusted gross 
     income) that is equal to nine percent of the lesser of the 
     taxpayer's qualified production activities income or taxable 
     income for the taxable year. For taxpayers subject to the 35-
     percent corporate income tax rate, the nine-percent deduction 
     effectively reduces the corporate income tax rate to slightly 
     less than 32 percent on qualified production activities 
     income.
       In general, qualified production activities income is equal 
     to domestic production gross receipts reduced by the sum of: 
     (1) the costs of goods sold that are allocable to those 
     receipts; and (2) other expenses, losses, or deductions which 
     are properly allocable to those receipts.
       Domestic production gross receipts generally are gross 
     receipts of a taxpayer that are derived from: (1) any sale, 
     exchange, or other disposition, or any lease, rental, or 
     license, of qualifying production property \1556\ that was 
     manufactured, produced, grown or extracted by the taxpayer in 
     whole or in significant part within the United States; (2) 
     any sale, exchange, or other disposition, or any lease, 
     rental, or license, of qualified film \1557\ produced by the 
     taxpayer; (3) any lease, rental, license, sale, exchange, or 
     other disposition of electricity, natural gas, or potable 
     water produced by the taxpayer in the United States; (4) 
     construction of real property performed in the United States 
     by a taxpayer in the ordinary course of a construction trade 
     or business; or (5) engineering or architectural services 
     performed in the United States for the construction of real 
     property located in the United States.
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     \1556\  Qualifying production property generally includes any 
     tangible personal property, computer software, and sound 
     recordings.
     \1557\ Qualified film includes any motion picture film or 
     videotape (including live or delayed television programming, 
     but not including certain sexually explicit productions) if 
     50 percent or more of the total compensation relating to the 
     production of the film (including compensation in the form of 
     residuals and participations) constitutes compensation for 
     services performed in the United States by actors, production 
     personnel, directors, and producers.
---------------------------------------------------------------------------
       The amount of the deduction for a taxable year is limited 
     to 50 percent of the wages paid by the taxpayer, and properly 
     allocable to domestic production gross receipts, during the 
     calendar year that ends in such taxable year.\1558\ Wages 
     paid to bona fide residents of Puerto Rico generally are not 
     included in the definition of wages for purposes of computing 
     the wage limitation amount.\1559\
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     \1558\ 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.
     \1559\  Section 3401(a)(8)(C) excludes wages paid to U.S. 
     citizens who are bona fide residents of Puerto Rico from the 
     term wages for purposes of income tax withholding.
---------------------------------------------------------------------------
     Rules for Puerto Rico
       When used in the Code in a geographical sense, the term 
     ``United States'' generally includes only the States and the 
     District of Columbia.\1560\ A special rule for determining 
     domestic production gross receipts, however, provides that in 
     the case of any taxpayer with gross receipts from sources 
     within the Commonwealth of Puerto Rico, the term ``United 
     States'' includes the Commonwealth of Puerto Rico, but only 
     if all of the taxpayer's Puerto Rico-sourced gross receipts 
     are taxable under the Federal income tax for individuals or 
     corporations.\1561\ In computing the 50-percent wage 
     limitation, the taxpayer is permitted to take into account 
     wages paid to bona fide residents of Puerto Rico for services 
     performed in Puerto Rico.\1562\
---------------------------------------------------------------------------
     \1560\ Sec. 7701(a)(9).
     \1561\  Sec. 199(d)(8)(A).
     \1562\ Sec. 199(d)(8)(B).
---------------------------------------------------------------------------
       The special rules for Puerto Rico apply only with respect 
     to the first 11 taxable years of a taxpayer beginning after 
     December 31, 2005 and before January 1, 2017.


                               House Bill

       The provision extends the special domestic production 
     activities rules for Puerto Rico to apply for the first 12 
     taxable years of a taxpayer beginning after December 31, 2005 
     and before January 1, 2018.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2016.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     2. Extension of temporary increase in limit on cover over of 
         rum excise taxes to Puerto Rico and the Virgin Islands 
         (sec. 4402 of the House bill and sec. 7652(f) of the 
         Code)


                              Present Law

       A $13.50 per proof gallon \1563\ excise tax is imposed on 
     distilled spirits produced in or imported into the United 
     States.\1564\ The excise tax does not apply to distilled 
     spirits that are exported from the United States, including 
     exports to U.S. possessions (e.g., Puerto Rico and the U.S. 
     Virgin Islands).\1565\
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     \1563\ A proof gallon is a liquid gallon consisting of 50 
     percent alcohol. See secs. 5002(a)(10) and (11).
     \1564\ Sec. 5001(a)(1).
     \1565\ Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c).
---------------------------------------------------------------------------
       The Code provides for cover over (payment) to Puerto Rico 
     and the U.S. Virgin Islands of the excise tax imposed on rum 
     imported (or brought) into the United States, without regard 
     to the country of origin.\1566\ The amount of the cover over 
     is limited under section 7652(f) to the lesser of (1) $10.50 
     per proof gallon ($13.25 per proof gallon before January 1, 
     2017) or (2) the excise tax imposed under section 5001(a)(1) 
     on each proof gallon.
---------------------------------------------------------------------------
     \1566\ Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of 
     the amount of excise tax collected from imports into the 
     United States of articles produced in the U.S. Virgin Islands 
     is retained by the United States under section 7652(b)(3).
---------------------------------------------------------------------------
       Tax amounts attributable to shipments to the United States 
     of rum produced in Puerto Rico are covered over to Puerto 
     Rico. Tax amounts attributable to shipments to the United 
     States of rum produced in the U.S. Virgin Islands are covered 
     over to the U.S. Virgin Islands. Tax amounts attributable to 
     shipments to the United States of rum produced in neither 
     Puerto Rico nor the U.S. Virgin Islands are divided and 
     covered over to the two possessions under a formula.\1567\ 
     Amounts covered over to Puerto Rico and the U.S. Virgin 
     Islands are deposited into the treasuries of the two 
     possessions for use as

[[Page 20065]]

     those possessions determine.\1568\ All of the amounts covered 
     over are subject to the limitation.
---------------------------------------------------------------------------
     \1567\ Secs. 7652(e)(2).
     \1568\ Secs. 7652(a)(3), (b)(3), and (e)(1).
---------------------------------------------------------------------------


                               House Bill

       The provision suspends for six years the $10.50 per proof 
     gallon limitation on the amount of excise taxes on rum 
     covered over to Puerto Rico and the U.S. Virgin Islands. 
     Under the provision, the cover-over limitation of $13.25 per 
     proof gallon is extended for rum brought into the United 
     States after December 31, 2016 and before January 1, 2023. 
     After December 31, 2022, the cover over amount reverts to 
     $10.50 per proof gallon.
       Effective date.--The provision applies to distilled spirits 
     brought into the United States after December 31, 2016.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.
     3. Extension of American Samoa economic development credit 
         (sec. 4403 of the House bill and sec. 119 of Pub. L. No. 
         109-432)


                              Present Law

       A domestic corporation that was an existing credit claimant 
     with respect to American Samoa and that elected the 
     application of section 936 for its last taxable year 
     beginning before January 1, 2006 is allowed a credit based on 
     the corporation's economic activity-based limitation with 
     respect to American Samoa. The credit is not part of the Code 
     but is computed based on the rules of sections 30A and 936. 
     The credit is allowed for the first eleven taxable years of a 
     corporation that begin after December 31, 2005, and before 
     January 1, 2017.
       A corporation was an existing credit claimant with respect 
     to a American Samoa if (1) the corporation was engaged in the 
     active conduct of a trade or business within American Samoa 
     on October 13, 1995, and (2) the corporation elected the 
     benefits of the possession tax credit \1569\ in an election 
     in effect for its taxable year that included October 13, 
     1995.\1570\ A corporation that added a substantial new line 
     of business (other than in a qualifying acquisition of all 
     the assets of a trade or business of an existing credit 
     claimant) ceased to be an existing credit claimant as of the 
     close of the taxable year ending before the date on which 
     that new line of business was added.
---------------------------------------------------------------------------
     \1569\ For taxable years beginning before January 1, 2006, 
     certain domestic corporations with business operations in the 
     U.S. possessions were eligible for the possession tax credit. 
     Secs. 27(b) and 936. This credit offset the U.S. tax imposed 
     on certain income related to operations in the U.S. 
     possessions. Subject to certain limitations, the amount of 
     the possession tax credit allowed to any domestic corporation 
     equaled the portion of that corporation's U.S. tax that was 
     attributable to the corporation's non-U.S. source taxable 
     income from (1) the active conduct of a trade or business 
     within a U.S. possession, (2) the sale or exchange of 
     substantially all of the assets that were used in such a 
     trade or business, or (3) certain possessions investment. No 
     deduction or foreign tax credit was allowed for any 
     possessions or foreign tax paid or accrued with respect to 
     taxable income that was taken into account in computing the 
     credit under section 936. Under the economic activity-based 
     limit, the amount of the credit could not exceed an amount 
     equal to the sum of (1) 60 percent of the taxpayer's 
     qualified possession wages and allocable employee fringe 
     benefit expenses, (2) 15 percent of depreciation allowances 
     with respect to short-life qualified tangible property, plus 
     40 percent of depreciation allowances with respect to medium-
     life qualified tangible property, plus 65 percent of 
     depreciation allowances with respect to long-life qualified 
     tangible property, and (3) in certain cases, a portion of the 
     taxpayer's possession income taxes. A taxpayer could elect, 
     instead of the economic activity-based limit, a limit equal 
     to the applicable percentage of the credit that otherwise 
     would have been allowable with respect to possession business 
     income, beginning in 1998, the applicable percentage was 40 
     percent.
     To qualify for the possession tax credit for a taxable year, 
     a domestic corporation was required to satisfy two 
     conditions. First, the corporation was required to derive at 
     least 80 percent of its gross income for the three-year 
     period immediately preceding the close of the taxable year 
     from sources within a possession. Second, the corporation was 
     required to derive at least 75 percent of its gross income 
     for that same period from the active conduct of a possession 
     business. Sec. 936(a)(2). The section 936 credit generally 
     expired for taxable years beginning after December 31, 2005.
     \1570\ A corporation will qualify as an existing credit 
     claimant if it acquired all the assets of a trade or business 
     of a corporation that (1) actively conducted that trade or 
     business in a possession on October 13, 1995, and (2) had 
     elected the benefits of the possession tax credit in an 
     election in effect for the taxable year that included October 
     13, 1995.
---------------------------------------------------------------------------
       The amount of the credit allowed to a qualifying domestic 
     corporation under the provision is equal to the sum of the 
     amounts used in computing the corporation's economic 
     activity-based limitation with respect to American Samoa, 
     except that no credit is allowed for the amount of any 
     American Samoa income taxes. Thus, for any qualifying 
     corporation the amount of the credit equals the sum of (1) 60 
     percent of the corporation's qualified American Samoa wages 
     and allocable employee fringe benefit expenses and (2) 15 
     percent of the corporation's depreciation allowances with 
     respect to short-life qualified American Samoa tangible 
     property, plus 40 percent of the corporation's depreciation 
     allowances with respect to medium-life qualified American 
     Samoa tangible property, plus 65 percent of the corporation's 
     depreciation allowances with respect to long-life qualified 
     American Samoa tangible property.
       The section 936(c) rule denying a credit or deduction for 
     any possessions or foreign tax paid with respect to taxable 
     income taken into account in computing the credit under 
     section 936 does not apply with respect to the credit allowed 
     by the provision.
       For taxable years beginning after December 31, 2016 the 
     credit rules are modified in two ways. First, domestic 
     corporations with operations in American Samoa are allowed 
     the credit even if those corporations are not existing credit 
     claimants. Second, the credit is available to a domestic 
     corporation (either an existing credit claimant or a new 
     credit claimant) only if, in addition to satisfying all the 
     present law requirements for claiming the credit, the 
     corporation also has qualified production activities income 
     (as defined in section 199(c) by substituting ``American 
     Samoa'' for ``the United States'' in each place that latter 
     term appears).
       In the case of a corporation that is an existing credit 
     claimant with respect to American Samoa and that elected the 
     application of section 936 for its last taxable year 
     beginning before January 1, 2006, the credit applies to the 
     first nine taxable years of the corporation which begin after 
     December 31, 2005, and before January 1, 2017. For any other 
     corporation, the credit applies to the first three taxable 
     years of that corporation which begin after December 31, 2011 
     and before January 1, 2017.


                               House Bill

       The provision extends the credit for five years to apply 
     (a) in the case of a corporation that is an existing credit 
     claimant with respect to American Samoa and that elected the 
     application of section 936 for its last taxable year 
     beginning before January 1, 2006, to the first 17 taxable 
     years of the corporation which begin after December 31, 2005, 
     and before January 1, 2023, and (b) in the case of any other 
     corporation, to the first 11 taxable years of the corporation 
     which begin after December 31, 2011 and before January 1, 
     2023.
       For purposes of this provision, section 119(e) of division 
     A of the Tax Relief and Health Care Act of 2006 \1571\ is 
     amended to indicate that any reference to section 199 of the 
     Code is to be treated as a reference to section 199 as in 
     effect before its repeal by the House bill.
---------------------------------------------------------------------------
     \1571\ Tax Relief and Health Care Act of 2006, Pub. L. No. 
     109-432, sec. 119.
---------------------------------------------------------------------------
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2016.


                            Senate Amendment

       No provision.


                          Conference Agreement

       The conference agreement does not include the House bill 
     provision.

                     G. Other International Reforms

     1. Restriction on insurance business exception to the passive 
         foreign investment company rules (sec. 4501 of the House 
         bill, sec. 14502 of the Senate amendment, and sec. 1297 
         of the Code)


                              Present Law

     Passive foreign investment companies.
       The Tax Reform Act of 1986 \1572\ established the PFIC 
     anti-deferral regime. A PFIC is generally defined as any 
     foreign corporation if 75 percent or more of its gross income 
     for the taxable year consists of passive income, or 50 
     percent or more of its assets consists of assets that 
     produce, or are held for the production of, passive 
     income.\1573\ Alternative sets of income inclusion rules 
     apply to U.S. persons that are shareholders in a PFIC, 
     regardless of their percentage ownership in the company. One 
     set of rules applies to PFICs that are qualified electing 
     funds, under which electing U.S. shareholders currently 
     include in gross income their respective shares of the 
     company's earnings, with a separate election to defer payment 
     of tax, subject to an interest charge, on income not 
     currently received.\1574\ A second set of rules applies to 
     PFICs that are not qualified electing funds, under which U.S. 
     shareholders pay tax on certain income or gain realized 
     through the company, plus an interest charge that is 
     attributable to the value of deferral.\1575\ A third set of 
     rules applies to PFIC stock that is marketable, under which 
     electing U.S. shareholders currently take into account as 
     income (or loss) the difference between the fair market value 
     of the stock as of the close of the taxable year and their 
     adjusted basis in such stock (subject to certain 
     limitations), often referred to as ``marking to market.'' 
     \1576\
---------------------------------------------------------------------------
     \1572\ Pub. L. No. 99-514.
     \1573\ Sec. 1297.
     \1574\ Secs. 1293-1295.
     \1575\ Sec. 1291.
     \1576\ Sec. 1296
---------------------------------------------------------------------------
       Under the PFIC regime, passive income is any income which 
     is of a kind that would be foreign personal holding company 
     income, including dividends, interest, royalties, rents, and 
     certain gains on the sale or exchange of property, 
     commodities, or foreign currency. However, among other 
     exceptions, passive income does not include any income 
     derived in the active conduct of an insurance business by a 
     corporation that is predominantly engaged in an insurance 
     business and

[[Page 20066]]

     that would be subject to tax under subchapter L if it were a 
     domestic corporation.\1577\ In applying the insurance 
     exception, the IRS analyzes whether risks assumed under 
     contracts issued by a foreign company organized as an insurer 
     are truly insurance risks, whether the risks are limited 
     under the terms of the contracts, and the status of the 
     company as an insurance company.\1578\
---------------------------------------------------------------------------
     \1577\ Sec. 1297(b)(2)(B).
     \1578\ Notice 2003-34, 2003-C.B. 1 990, June 9, 2003. See 
     also, Prop. Treas. Reg. sec. 1.1297-4, 26 CFR Part 1, REG-
     108214-15, April 24, 2015.
---------------------------------------------------------------------------


                               House Bill

       The provision modifies the requirements for a corporation 
     the income of which is not included in passive income for 
     purposes of the PFIC rules. The provision replaces the test 
     based on whether a corporation is predominantly engaged in an 
     insurance business with a test based on the corporation's 
     insurance liabilities.\1579\ The requirement that the foreign 
     corporation would be subject to tax under subchapter L if it 
     were a domestic corporation is retained.
---------------------------------------------------------------------------
     \1579\  Treasury regulations proposed in 2015 have taken a 
     different approach that is based on the current statutory 
     rule. Prop. Treas. Reg. sec. 1.1297-4, 26 CFR Part 1, REG-
     108214-15, April 24, 2015. The proposed regulations provide 
     that ``the term insurance business means the business of 
     issuing insurance and annuity contracts and the reinsuring of 
     risks underwritten by insurance companies, together with 
     those investment activities and administrative services that 
     are required to support or are substantially related to 
     insurance and annuity contracts issued or reinsured by the 
     foreign corporation.'' The proposed regulations provide that 
     an investment activity is an activity producing foreign 
     personal holding company income, and that is ``required to 
     support or [is] substantially related to insurance and 
     annuity contracts issued or reinsured by the foreign 
     corporation to the extent that income from the activities is 
     earned from assets held by the foreign corporation to meet 
     obligations under the contracts.'' The preamble to the 
     proposed regulations specifically requests comments on the 
     proposed regulations ``with regard to how to determine the 
     portion of a foreign insurance company's assets that are held 
     to meet obligations under insurance contracts issued or 
     reinsured by the company,'' for example, if the assets ``do 
     not exceed a specified percentage of the corporation's total 
     insurance liabilities for the year.'' Ibid.
---------------------------------------------------------------------------
       Under the provision, passive income for purposes of the 
     PFIC rules does not include income derived in the active 
     conduct of an insurance business by a corporation (1) that 
     would be subject to tax under subchapter L if it were a 
     domestic corporation; and (2) the applicable insurance 
     liabilities of which constitute more than 25 percent of its 
     total assets as reported on the company's applicable 
     financial statement for the last year ending with or within 
     the taxable year.
       For the purpose of the provision's exception from passive 
     income, applicable insurance liabilities mean, with respect 
     to any property and casualty or life insurance business (1) 
     loss and loss adjustment expenses, (2) reserves (other than 
     deficiency, contingency, or unearned premium reserves) for 
     life and health insurance risks and life and health insurance 
     claims with respect to contracts providing coverage for 
     mortality or morbidity risks. This includes loss reserves for 
     property and casualty, life, and health insurance contracts 
     and annuity contracts. Unearned premium reserves with respect 
     to any type of risk are not treated as applicable insurance 
     liabilities for purposes of the provision. For purposes of 
     the provision, the amount of any applicable insurance 
     liability may not exceed the lesser of such amount (1) as 
     reported to the applicable insurance regulatory body in the 
     applicable financial statement (or, if less, the amount 
     required by applicable law or regulation), or (2) as 
     determined under regulations prescribed by the Secretary.
       An applicable financial statement is a statement for 
     financial reporting purposes that (1) is made on the basis of 
     generally accepted accounting principles, (2) is made on the 
     basis of international financial reporting standards, but 
     only if there is no statement made on the basis of generally 
     accepted accounting principles, or (3) except as otherwise 
     provided by the Secretary in regulations, is the annual 
     statement required to be filed with the applicable insurance 
     regulatory body, but only if there is no statement made on 
     either of the foregoing bases. Unless otherwise provided in 
     regulations, it is intended that generally accepted 
     accounting principles means U.S. GAAP.
       The applicable insurance regulatory body means, with 
     respect to any insurance business, the entity established by 
     law to license, authorize, or regulate such insurance 
     business and to which the applicable financial statement is 
     provided. For example, in the United States, the applicable 
     insurance regulatory body is the State insurance regulator to 
     which the corporation provides its annual statement.
       If a corporation fails to qualify solely because its 
     applicable insurance liabilities constitute 25 percent or 
     less of its total assets, a United States person who owns 
     stock of the corporation may elect in such manner as the 
     Secretary prescribes to treat the stock as stock of a 
     qualifying insurance corporation if (1) the corporation's 
     applicable insurance liabilities constitute at least 10 
     percent of its total assets, and (2) based on the applicable 
     facts and circumstances, the corporation is predominantly 
     engaged in an insurance business, and its failure to qualify 
     under the 25 percent threshold is due solely to runoff-
     related or rating-related circumstances involving such 
     insurance business.
       Facts and circumstances that tend to show the firm may not 
     be predominantly engaged in an insurance business include a 
     small number of insured risks with low likelihood but large 
     potential costs; workers focused to a greater degree on 
     investment activities than underwriting activities; and low 
     loss exposure. Additional relevant facts for determining 
     whether the firm is predominantly engaged in an insurance 
     business include: claims payment patterns for the current and 
     prior years; the firm's loss exposure as calculated for a 
     regulator such as the SEC or for a rating agency, or if those 
     are not calculated, for internal pricing purposes; the 
     percentage of gross receipts constituting premiums for the 
     current and prior years; and the number and size of insurance 
     contracts issued or taken on through reinsurance by the firm. 
     The fact that a firm has been holding itself out as an 
     insurer for a long period is not determinative either way.
       Runoff-related or rating-related circumstances include, for 
     example, the fact that the company is in runoff, that is, it 
     is not taking on new insurance business (and consequently has 
     little or no premium income), and is using its remaining 
     assets to pay off claims with respect to pre-existing 
     insurance risks on its books. Such circumstances also 
     include, for example, the application to the company of 
     specific requirements with respect to capital and surplus 
     relating to insurance liabilities imposed by a rating agency 
     as a condition of obtaining a rating necessary to write new 
     insurance business for the current year.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                            Senate Amendment

       The Senate amendment is the same as the House bill.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the House bill and the 
     Senate amendment.
       Effective date.--The provision applies to taxable years 
     beginning after December 31, 2017.
     2. Repeal of fair market value of interest expense 
         apportionment (sec. 14503 of the Senate amendment and 
         sec. 864 of the Code)


                               House Bill

       No provision.


                            Senate Amendment

       The provision prohibits members of a U.S. affiliated group 
     from allocating interest expense on the basis of the fair 
     market value of assets for purposes of section 864(e). 
     Instead, the members must allocate interest expense based on 
     the adjusted tax basis of assets.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.


                          Conference Agreement

       The conference agreement follows the Senate amendment.
       Effective date.--The provision is effective for taxable 
     years beginning after December 31, 2017.
     3. Modification to source rules involving possessions (sec. 
         14504 of the Senate amendment and sec. 865 of the Code)


                              Present Law

     In general
       The U.S. Virgin Islands, Guam, and the Commonwealth of the 
     Northern Mariana Islands have income tax systems that 
     ``mirror'' the U.S. Code, with the latter two possessions 
     being permitted under current law to delink and use their own 
     tax systems provided certain conditions are met. The U.S. 
     Virgin Islands may also impose certain local income taxes in 
     addition to taxes imposed by the mirror Code. The Code 
     provides rules for coordination of United States and U.S. 
     Virgin Islands taxation.\1580\ It permits the U.S. Virgin 
     Islands to reduce or remit tax otherwise imposed by the 
     mirror code if the tax is attributable to U.S. Virgin Islands 
     source income or income effectively connected to the conduct 
     of a trade or business in U.S. Virgin Islands.\1581\ The U.S. 
     Virgin Islands has exercised that authority to provide 
     development incentives for certain types of businesses 
     operating within its borders. Under such initiatives, 
     companies can receive a 90 percent reduction in their tax 
     liability on certain income.
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     \1580\ Secs. 932 and 934.
     \1581\ Sec. 934. In general, a bona fide resident of the U.S. 
     Virgin Islands is required to file and pay tax only to the 
     possession. Persons incurring income tax liability in both 
     the United States and the U.S. Virgin Islands are required to 
     file tax returns and pay income tax to both jurisdictions.
---------------------------------------------------------------------------
     Taxation of individuals
       Under the mirror Code, U.S. Virgin Islands citizens and 
     residents are taxable on their worldwide income. A foreign 
     tax credit is allowed for income taxes paid to the United 
     States, foreign countries, and other possessions of the 
     United States. In general, a bona fide resident of the U.S. 
     Virgin Islands is required to file and pay tax only to the 
     possession; compliance with that obligation satisfies any 
     Federal income tax filing obligation.

[[Page 20067]]

     All other U.S. residents or citizens with income from U.S. 
     Virgin Island sources are subject to a dual filing 
     requirement.
       In the case of an individual who is a U.S. citizen or alien 
     residing in the United States or the U.S. Virgin Islands, 
     only one tax is computed under the Code. If an individual is 
     a bona fide resident of U.S. Virgin Islands for the entire 
     taxable year, such tax is payable to the U.S. Virgin Islands 
     and no U.S. tax is imposed. Otherwise, a citizen or resident 
     of the United States who has income from sources within the 
     U.S. Virgin Islands must determine the portion of income 
     attributable to the U.S. Virgin Islands and the related tax 
     payable to the U.S. Virgin Islands. The remaining portion is 
     payable to the United States.\1582\
---------------------------------------------------------------------------
     \1582\ Sec. 932(b). See, Internal Revenue Service, Tax Guide 
     for Individuals with Income from U.S. Possessions (Pub. 570), 
     2011, pp. 17-18.
---------------------------------------------------------------------------
       Concerns that U.S. citizens not resident in the U.S. Virgin 
     Islands were improperly claiming residence in the U.S. Virgin 
     Islands \1583\ or forming entities in the U.S. Virgin Islands 
     in order to recharacterize income earned in the United States 
     as sourced in the U.S. Virgin Islands and claim the 90 
     percent economic development credit led to legislative 
     changes in 2004.\1584\ These changes provided a definition of 
     bona fide residence in a possession and rules to determine 
     source of income from possessions. They also impose a 
     requirement that individuals report any change in residency 
     status with respect to a possession during a taxable 
     year.\1585\
---------------------------------------------------------------------------
     \1583\ In Notice 2004-45, 2004-2 C.B. 33 (2004), the IRS 
     described several scenarios in which U.S. persons claimed to 
     have satisfied U.S. liabilities by having filed a return with 
     the U.S. Virgin Islands.
     \1584\ McHenry v. Commissioner, 2012 U.S. App. LEXIS 7562 
     (April 16, 2012) and Huff v. Commissioner, 135 T.C. 605 
     (2010).
     \1585\ Sec. 937. In the preamble to final regulations issued 
     in 2008, certain de minimis exceptions are provided for the 
     U.S. citizen or resident with income from U.S. Virgin Island 
     sources, in recognition that ``the interaction of section 937 
     and other sections of the Code relating to the territories 
     requires a balance between implementing the policies Congress 
     intended in section 937(b) while recognizing the territories' 
     efforts to retain and attract workers and businesses.'' T.D. 
     9391, 73 F.R. 19350 (April 9, 2008); Treas. Reg. Sec. 1.937-
     2. Those required to report changes in residency status must 
     use Form 8898, ``Statement for Individuals Who Begin or End 
     Bona Fide Residence in a U.S. Possession.''
---------------------------------------------------------------------------
     Taxation of corporations
       If a corporation is formed in U.S. Virgin Islands, it is 
     classified as a domestic corporation for U.S. Virgin Islands 
     purposes and a foreign corporation for U.S. tax purposes. 
     Such a corporation is only subject to U.S. tax if it has 
     U.S.-source income or income effectively connected with the 
     conduct of a trade or business in the United States. U.S. 
     Virgin Islands taxes a domestic corporation on its worldwide 
     income, but the company is allowed a foreign tax credit 
     against U.S. Virgin Islands tax for taxes imposed by the 
     United States, foreign countries and other possessions. A 
     corporation that is not formed in U.S. Virgin Islands is 
     treated as a foreign corporation under the U.S. Virgin 
     Islands mirror Code. A company not formed in U.S. Virgin 
     Islands is only subject to U.S. Virgin Islands tax if it has 
     U.S. Virgin Islands source income or income effectively 
     connected with the conduct of a trade or business in U.S. 
     Virgin Islands. The United States taxes its domestic 
     corporations on their worldwide income, but allows a foreign 
     tax credit for taxes imposed by foreign jurisdictions, 
     including U.S. Virgin Islands.
     Sourcing rules
       As a general rule, the principles for determining whether 
     income is U.S. source are applicable for purposes of 
     determining whether income is possession source. In addition, 
     the principles for determining whether income is effectively 
     connected with the conduct of a U.S. trade or business are 
     applicable for purposes of determining whether income is 
     effectively connected to the conduct of a possession trade or 
     business. However, except as provided in regulations, any 
     income treated as U.S. source income or as effectively 
     connected with the conduct of a U.S. trade or business is not 
     treated as income from within any possession or as 
     effectively connected with a trade or business within any 
     such possession.\1586\ This rule applies regardless of where 
     the office or fixed place of business connected to such trade 
     or business is located.
---------------------------------------------------------------------------
     \1586\ 1586 Sec. 937(b).
---------------------------------------------------------------------------
       Section 865(j)(3) was added by the Technical and 
     Miscellaneous Revenue Act of 1988 (``TAMRA''),\1587\ and 
     states that Treasury is authorized to waive the requirements 
     imposed by sections 865(e)(1)(B) and 865(g)(2) (both of which 
     impose a 10 percent foreign tax requirement for source 
     treatment of sales of personal property) for the purposes of 
     determining Guam, American Samoa, Commonwealth of the 
     Northern Mariana Islands, and Puerto Rico-source income 
     (sections 931 and 933, respectively).
---------------------------------------------------------------------------
     \1587\ Pub. L. No. 100-647.
---------------------------------------------------------------------------


                               House Bill

       No provision.


                            Senate Amendment

       The provision modifies the sourcing rule in section 
     937(b)(2) by modifying the U.S. income limitation to exclude 
     only U.S. source (or effectively connected) income 
     attributable to a U.S. office or fixed place of business. The 
     provision also modifies section 865(j)(3) by providing 
     Treasury with the authority to waive the 10% foreign tax 
     requirement for source treatment of capital gains income 
     earned by a U.S. Virgin Islands resident.
       Effective date.--The provision shall apply to taxable years 
     beginning after December 31, 2018.


                          Conference Agreement

       The conference agreement does not include the Senate 
     amendment provision.

                                TITLE II

     Section 20001. Oil and Gas Program
       Section 20001 directs the Secretary of the Interior to 
     establish and administer all aspects of a competitive oil and 
     gas program in the non-wilderness portion of the Arctic 
     National Wildlife Refuge, known as the ``1002 Area'' or 
     Coastal Plain. The legislation defines the term ``Coastal 
     Plain'' by referencing Plate 1 and Plate 2 of the October 24, 
     2017 Map prepared by the United States Geological Survey.
       The legislation repeals the prohibition on development from 
     the Coastal Plain contained in section 1003 of the Alaska 
     National Interest Lands Conservation Act (16 U.S.C. 3143), 
     and directs the Secretary to manage the oil and gas program 
     on the Coastal Plain in a manner similar to what is required 
     by the Naval Petroleum Reserves Production Act of 1976 (42 
     U.S.C. 6501 et seq.). The legislation sets a 16.67 percent 
     royalty rate for leases and allocates 50 percent of the 
     revenue derived from the program to the State of Alaska, with 
     the remainder going to the Federal Treasury.
       Section 20001 further requires the Secretary to conduct at 
     least two area-wide lease sales within the 10-year budget 
     window--the first lease sale within four years of the Act's 
     enactment and the second lease sale within seven years of 
     enactment. Each lease sale must contain not fewer than 
     400,000 acres and be comprised of those areas that have the 
     highest hydrocarbon potential.
       The legislation directs the Secretary to issue any 
     necessary rights-of-way or easements across the Coastal Plain 
     for the exploration, development, production, or 
     transportation associated with the oil and gas program. 
     Additionally, the section authorizes the development of up to 
     2,000 surface acres of federal land on the Coastal Plain.
     Section 20002. Limitations on Amount of Distributed Qualified 
         Outer Continental Shelf Revenues
       Section 20002 temporarily increases the annual limitation 
     on offshore revenue sharing under section 105(f)(1) of the 
     Gulf of Mexico Energy Security Act of 2006 (Public Law 109-
     432) for the states of Alabama, Louisiana, Mississippi, and 
     Texas from $500 million annually for FY 2020 and FY 2021, to 
     $650 million annually for those two fiscal years.
     Section 20003. Strategic Petroleum Reserve Drawdown and Sale
       Section 20003 directs the Secretary of Energy to draw down 
     and sell a total of seven million barrels of crude oil from 
     the Strategic Petroleum Reserve during FY 2026 through FY 
     2027. The section prohibits the Secretary from taking actions 
     that would limit the President's authority to direct a 
     drawdown and sale of petroleum products to address a domestic 
     or international energy supply shortage pursuant to section 
     161(h) of the Energy Policy and Conservation Act (42 U.S.C. 
     6241). The Secretary is further directed to stop the drawdown 
     or sale of crude oil after the date on which a total of $600 
     million has been deposited in the general fund of the Federal 
     Treasury.

   CONGRESSIONAL EARMARKS, LIMITED TAX BENEFITS, AND LIMITED TARIFF 
                                BENEFITS

       With respect to clause 9 of rule XXI of the Rules of the 
     House of Representatives, the Committee has carefully 
     reviewed the provisions of the bill and states that the 
     provisions of the bill do not contain any congressional 
     earmarks, limited tax benefits, or limited tariff benefits 
     within the meaning of the rule.

                        TAX COMPLEXITY ANALYSIS

       Section 4022(b) of the Internal Revenue Service Reform and 
     Restructuring Act of 1998 requires the staff of the Joint 
     Committee on Taxation (in consultation with the Internal 
     Revenue Service and the Treasury Department) 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 Code and has widespread 
     applicability to individuals or small businesses. The staff 
     of the Joint Committee on Taxation has determined that the 
     following provisions are of widespread applicability to 
     individuals or small businesses.
     1. Temporary modification of tax rates, tax brackets, 
         standard deduction and repeal of personal exemptions 
         (secs. 11001, 11002, 11021 and 11041 of the bill)
       Summary description of the provisions
       The bill temporarily changes the structure of the 
     individual income tax by modifying

[[Page 20068]]

     the rate structure such that the tax brackets are 10-percent, 
     12-percent, 22-percent, 24-percent, 32-percent, 35-percent 
     and 37-percent. The bill temporarily increases the size of 
     the standard deduction (for 2018 the standard deduction is 
     $24,000 for joint filers, $18,000 for heads of household and 
     $12,000 for other filers), and temporarily eliminates 
     personal exemptions. These provisions sunset for taxable 
     years beginning after December 31, 2025.
       Number of affected taxpayers
       It is estimated that the provision will affect 
     approximately 120 million tax returns.
       Discussion
       It is not anticipated that individuals will need to keep 
     additional records due to these provisions. It should not 
     result in an increase in disputes with the IRS, nor will 
     regulatory guidance be necessary to implement this provision.
       The IRS will need to adjust its wage withholding tables to 
     reflect the repeal of personal exemptions. Because revised 
     wage withholding will occur within the first month of 2018, 
     this would require employers to switch to new withholding 
     tables somewhat quickly, which can be expected to result in a 
     one-time additional burden for employers (or potential 
     additional costs for employers that rely on a bookkeeping or 
     payroll service).
       The IRS will need to modify its forms and publications. The 
     temporary nature of the provision will necessitate that the 
     IRS do this again once the temporary provisions expire.
       Some taxpayers who currently itemize deductions may respond 
     to the provision by claiming the increased standard deduction 
     in lieu of itemizing. According to estimates by the staff of 
     the Joint Committee on Taxation, approximately 94-percent of 
     taxpayers will claim the standard deduction under the bill, 
     up from approximately 70-percent under present law. These 
     taxpayers will no longer have to file Schedule A to Form 
     1040, a significant number of which will no longer need to 
     engage in the record keeping inherent in itemizing below-the-
     line deductions. Moreover, by claiming the standard 
     deduction, such taxpayers may qualify to use simpler versions 
     of the Form 1040 (i.e., Form 1040EZ or Form 1040A) that are 
     not available to individuals who itemize their deductions. 
     These forms simplify the return preparation process by 
     eliminating from the Form 1040 those items that do not apply 
     to particular taxpayers.
       This reduction in complexity and record keeping also may 
     result in a decline in the number of individuals using a tax 
     preparation service, or tax preparation software, or a 
     decline in the cost of such service or software. The 
     provision also should reduce the number of disputes between 
     taxpayers and the IRS regarding the substantiation of 
     itemized deductions.
     2. Temporary deduction for qualified business income (sec. 
         11011 of the bill)
       Summary description of the provisions
       For taxable years beginning after December 31, 2017 and 
     before January 1, 2026, an individual taxpayer generally may 
     deduct 20 percent of qualified business income from a 
     partnership, S corporation, or sole proprietorship, as well 
     as 20 percent of aggregate qualified REIT dividends, 
     qualified cooperative dividends, and qualified publicly 
     traded partnership income. Special rules apply to specified 
     agricultural or horticultural cooperatives permitting the 
     cooperative a deduction.
       A limitation based on the greater of 50 percent of W-2 
     wages paid, or the sum of 25 percent of W-2 wages paid plus a 
     capital allowance, is phased in above a threshold amount of 
     taxable income. A disallowance of the deduction with respect 
     to specified service trades or businesses is also phased in 
     above the same threshold amount of taxable income. The 
     threshold amount is $157,500 (twice that amount or $315,000 
     in the case of a joint return), indexed. These limitations 
     are fully phased in for a taxpayer with taxable income in 
     excess of the threshold amount plus $50,000 ($100,000 in the 
     case of a joint return).
       Qualified business income for a taxable year generally 
     means the net amount of domestic qualified items of income, 
     gain, deduction, and loss with respect to the taxpayer's 
     qualified businesses. Qualified business income does not 
     include any amount paid by an S corporation that is treated 
     as reasonable compensation of the taxpayer. Similarly, 
     qualified business income does not include any guaranteed 
     payment for services rendered with respect to the trade or 
     business, and to the extent provided in regulations, does not 
     include any amount allocated or distributed by a partnership 
     to a partner who is acting other than in his or her capacity 
     as a partner for services. Qualified business income or loss 
     does not include certain investment-related income, gain, 
     deductions, or loss.
       Number of affected taxpayers
       It is estimated that the provision will affect over ten 
     percent of small business tax returns.
       Discussion
       It is not anticipated that individuals will need to keep 
     additional records due to the provision. It should not result 
     in an increase in disputes with the IRS, nor will regulatory 
     guidance be necessary to implement this provision. It may, 
     however, increase the number of questions that taxpayers ask 
     the IRS, such as how to calculate qualified business income 
     and how to apply the phaseins of the W-2 wage (or W-2 wage 
     and capital) limit and of the exclusion of service business 
     income in the case of taxpayers with taxable income exceeding 
     the threshold amount of $157,500 (twice that amount or 
     $315,000 in the case of a joint return), indexed. This 
     increased volume of questions could have an adverse impact on 
     other elements of IRS's operation, such as the levels of 
     taxpayer service. The provision should not increase the tax 
     preparation costs for most individuals.
       The IRS will need to add to the individual income tax forms 
     package a new worksheet so that taxpayers can calculate their 
     qualified business income, as well as the phaseins. This 
     worksheet will require a series of calculations.
     3. Temporary increase in child tax credit (sec. 11022 of the 
         bill)
       Summary description of the provisions
       The bill temporarily increases the value of the child tax 
     credit to $2,000, providing that no more than $1,400 per 
     child shall be refundable. This $1,400 limitation is indexed 
     for inflation. In order to qualify for the child tax credit, 
     a Social Security number must be provided for the qualifying 
     child for whom such credit is claimed. These provisions 
     sunset for taxable years beginning after December 31, 2025.
       Number of affected taxpayers
       It is estimated that the provision will affect 
     approximately 90 million tax returns.
       Discussion
       It is not anticipated that individuals will need to keep 
     additional records due to these provisions. It should not 
     result in an increase in disputes with the IRS, nor will 
     regulatory guidance be necessary to implement this provision. 
     The provision may, however, increase the number of questions 
     that taxpayers ask the IRS, such as whether they may claim 
     the new family credit for certain members of their household, 
     or whether and to what extent the combined tax credit is 
     refundable.
       The IRS will need to modify its forms and publications to 
     reflect this change. The temporary nature of the provision 
     will necessitate that the IRS do this again once the 
     temporary provision expires.
     4. Temporary suspension of the deduction for State and local 
         income taxes (sec. 11042 of the bill)
       Summary description of the provisions
       The bill provides that in the case of an individual, as a 
     general matter, State, local, and foreign property taxes and 
     State and local sales taxes are allowed as a deduction only 
     when paid or accrued in carrying on a trade or business, or 
     an activity described in section 212 (relating to expenses 
     for the production of income). Thus, the provision allows 
     only those deductions for State, local, and foreign property 
     taxes, and sales taxes, that are presently deductible in 
     computing income on an individual's Schedule C, Schedule E, 
     or Schedule F on such individual's tax return. Thus, for 
     instance, in the case of property taxes, an individual may 
     deduct such items only if these taxes were imposed on 
     business assets (such as residential rental property).
       Under the bill, in the case of an individual, State and 
     local income, war profits, and excess profits taxes are not 
     allowable as a deduction.
       The bill contains an exception to the above-stated rule. 
     Under the provision a taxpayer may claim an itemized 
     deduction of up to $10,000 ($5,000 for married taxpayer 
     filing a separate return) for the aggregate of (i) State and 
     local property taxes not paid or accrued in carrying on a 
     trade or business, or an activity described in section 212, 
     and (ii) State and local income, war profits, and excess 
     profits taxes (or sales taxes in lieu of income, etc. taxes) 
     paid or accrued in the taxable year. Foreign real property 
     taxes may not be deducted under this exception.
       The above rules apply to taxable years beginning after 
     December 31, 2017, and beginning before January 1, 2026.
       The bill also provides that, in the case of an amount paid 
     in a taxable year beginning before January 1, 2018, with 
     respect to a State or local income tax imposed for a taxable 
     year beginning after December 31, 2017, the payment shall be 
     treated as paid on the last day of the taxable year for which 
     such tax is so imposed for purposes of applying the provision 
     limiting the dollar amount of the deduction. Thus, under the 
     provision, an individual may not claim an itemized deduction 
     in 2017 on a pre-payment of income tax for a future taxable 
     year in order to avoid the dollar limitation applicable for 
     taxable years beginning after 2017.
       Number of affected taxpayers
       It is estimated that the provision will affect 
     approximately 44 million tax returns.
       Discussion
       It is not anticipated that individuals will need to keep 
     additional records due to this provision. Because the 
     deduction for State and local taxes has been longstanding in 
     the Code, its repeal may require regulatory guidance, so as 
     to provide guidance for taxpayers regarding which taxes 
     remain properly deductible on an individual's Schedule C,

[[Page 20069]]

     Schedule E or Schedule F. This may also result in an increase 
     in disputes with the IRS.
       The IRS will need to modify its forms and publications to 
     reflect this change. The temporary nature of the provision 
     will necessitate that the IRS do this again once the 
     temporary provision expires.
     5. Modifications of rules for expensing depreciable business 
         assets (sec. 13101 of the bill)
       The bill increases the maximum amount a taxpayer may 
     expense under section 179 to $1,000,000, and increases the 
     phase-out threshold amount to $2,500,000. The $1,000,000 and 
     $2,500,000 amounts, as well as the $25,000 sport utility 
     vehicle limitation, are indexed for inflation for taxable 
     years beginning after 2018.
       The bill expands the definition of section 179 property to 
     include certain depreciable tangible personal property used 
     predominantly to furnish lodging or in connection with 
     furnishing lodging.
       The bill also expands the definition of qualified real 
     property eligible for section 179 expensing to include any of 
     the following improvements to nonresidential real property 
     placed in service after the date such property was first 
     placed in service: roofs; heating, ventilation, and air-
     conditioning property; fire protection and alarm systems; and 
     security systems.
       The bill applies to property placed in service in taxable 
     years beginning after December 31, 2017.
       Number of affected taxpayers
       It is estimated that the provision will affect over ten 
     percent of small business tax returns.
       Discussion
       While taxpayers purchasing section 179 property will still 
     be required to complete and file Form 4562, Depreciation and 
     Amortization (Including Information on Listed Property), 
     significantly less detail is required to be included on such 
     form. Accordingly, the compliance burden of many taxpayers 
     will be reduced.
     6. Temporary 100-percent expensing for certain business 
         assets (sec. 13201 of the bill)
       The bill extends and modifies the additional first-year 
     depreciation deduction through 2026 (through 2027 for longer 
     production period property and certain aircraft). The 50-
     percent allowance is increased to 100 percent for property 
     acquired and placed in service after September 27, 2017, and 
     before January 1, 2023 (January 1, 2024, for longer 
     production period property and certain aircraft), as well as 
     for specified plants planted or grafted after September 27, 
     2017, and before January 1, 2023. Thus, the bill follows the 
     present-law phase-down of bonus depreciation for property 
     acquired before September 28, 2017, and placed in service 
     after September 27, 2017. The 100-percent allowance is phased 
     down by 20 percent per calendar year for property placed in 
     service, and specified plants planted or grafted, in taxable 
     years beginning after 2022 (after 2023 for longer production 
     period property and certain aircraft).
       The bill removes the requirement that the original use of 
     qualified property must commence with the taxpayer (i.e., it 
     allows the additional first-year depreciation deduction for 
     new and used property).
       As a conforming amendment to the repeal of corporate AMT, 
     the election to accelerate AMT credits in lieu of bonus 
     depreciation is repealed.
       The bill maintains the section 280F increase amount of 
     $8,000 for passenger automobiles placed in service after 
     December 31, 2017. However, the bill follows the present-law 
     phase-down of the section 280F increase amount in the 
     limitation on the depreciation deduction allowed with respect 
     to certain passenger automobiles acquired before September 
     28, 2017, and placed in service after September 27, 2017.
       The bill extends the special rule under the percentage-of-
     completion method for the allocation of bonus depreciation to 
     a long-term contract for property placed in service before 
     January 1, 2027 (January 1, 2028, in the case of longer 
     production period property).
       The bill expands the definition of qualified property 
     eligible for the additional first-year depreciation allowance 
     to include qualified film, television and live theatrical 
     productions (as defined in section 181(d) and (e)) for which 
     a deduction otherwise would have been allowable under section 
     181 without regard to the dollar limitation or termination of 
     such section, effective for productions placed in service 
     after September 27, 2017, and before January 1, 2027. For 
     purposes of this provision, a production is considered placed 
     in service at the time of initial release, broadcast, or live 
     staged performance (i.e., at the time of the first commercial 
     exhibition, broadcast, or live staged performance of a 
     production to an audience).
       The bill excludes from the definition of qualified property 
     any property which is primarily used in the trade or business 
     of the furnishing or sale of (1) electrical energy, water, or 
     sewage disposal services, (2) gas or steam through a local 
     distribution system, or (3) transportation of gas or steam by 
     pipeline, if the rates for such furnishing or sale, as the 
     case may be, have been established or approved by a State or 
     political subdivision thereof, by any agency or 
     instrumentality of the United States, by a public service or 
     public utility commission or other similar body of any State 
     or political subdivision thereof, or by the governing or 
     ratemaking body of an electric cooperative.
       The bill excludes from the definition of qualified property 
     any property used in a trade or business that has had floor 
     plan financing indebtedness, unless the taxpayer with such 
     trade or business is not a tax shelter prohibited from using 
     the cash method and is exempt from the interest limitation 
     rules by meeting a small business $25 million gross receipts 
     test.
       Number of affected taxpayers
       It is estimated that the provision will affect over ten 
     percent of small business tax returns.
       Discussion
       The reporting requirements are unchanged by this provision. 
     Capital assets purchased during the tax year will still need 
     to be reported on Form 4562, Depreciation and Amortization 
     (Including Information on Listed Property); however, the 
     current year tax deduction associated with such assets will 
     increase.

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[[Page 20080]]


     From the Committee on Ways and Means, for consideration of 
     the House bill and the Senate amendment, and modifications 
     committed to conference:
     Kevin Brady,
     Devin Nunes,
     Peter J. Roskam,
     Diane Black,
     Kristi L. Noem,
     From the Committee on Energy and Commerce, for consideration 
     of sec. 20003 of the Senate amendment, and modifications 
     committed to conference:
     Fred Upton,
     John Shimkus,
     From the Committee on Natural Resources, for consideration of 
     secs. 20001 and 20002 of the Senate amendment, and 
     modifications committed to conference:
     Rob Bishop,
     Don Young,
                                Managers on the Part of the House.

     Orrin G. Hatch,
     Michael B. Enzi,
     Lisa Murkowski,
     John Cornyn,
     John Thune,
     Rob Portman,
     Tim Scott,
     Patrick J. Toomey,
     Managers on the Part of the Senate.

                          ____________________