[House Report 108-548]
[From the U.S. Government Publishing Office]
108th Congress Rept. 108-548
HOUSE OF REPRESENTATIVES
2d Session Part 1
======================================================================
AMERICAN JOBS CREATION ACT OF 2004
----------
R E P O R T
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
to accompany
H.R. 4520
together with
DISSENTING AND ADDITIONAL VIEWS
[Including cost estimate of the Congressional Budget Office]
June 16, 2004.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
108th Congress Rept. 108-548
HOUSE OF REPRESENTATIVES
2d Session Part 1
======================================================================
AMERICAN JOBS CREATION ACT OF 2004
_______
June 16, 2004.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Thomas, from the Committee on Ways and Means, submitted the
following
R E P O R T
together with
DISSENTING AND ADDITIONAL VIEWS
[To accompany H.R. 4520]
[Including cost estimate of the Congressional Budget office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 4520) to amend the Internal Revenue Code of 1986 to
remove impediments in such Code and make our manufacturing,
service, and high-technology businesses and workers more
competitive and productive both at home and abroad, having
considered the same, report favorably thereon with an amendment
and recommend that the bill as amended do pass.
CONTENTS
Page
I. Summary and Background..........................................112
Title I--End Sanctions and Reduce Corporate Tax Rates for Domestic
Manufacturing and Small Corporations............................113
A. Repeal of Exclusion for Extraterritorial Income (sec.
101 of the bill and secs. 114 and 941-943 of the
Code)................................................ 113
B. Reduced Corporate Income Tax Rate for Domestic
Production Activities Income (sec. 102 of the bill
and sec. 11 of the Code)............................. 115
C. Reduced Corporate Income Tax Rate for Small
Corporations (sec. 103 of the bill and sec. 11 of the
Code)................................................ 117
Title II--Corporate Reform and Growth Incentives for Manufacturers,
Small Businesses, and Farmers...................................119
A. Small Business Expensing.............................. 119
1. Extension of increased section 179 expensing (sec.
201 of the bill and sec. 179 of the Code)........ 119
B. Depreciation.......................................... 121
1. Recovery period for depreciation of certain
leasehold improvements and restaurant property
(sec. 211 of the bill and sec. 168 of the Code).. 121
2. Modification of depreciation allowance for
aircraft (sec. 212 of the bill and sec. 168 of
the Code)........................................ 123
3. Modification of placed in service rule for bonus
depreciation property (sec. 213 of the bill and
sec. 168 of the Code)............................ 126
C. S Corporation Reform and Simplification (secs. 221-231
of the bill and secs. 1361-1379 and 4975 of the Code) 127
1. Members of family treated as one shareholder;
increase in number of eligible shareholders to
100.............................................. 128
2. Expansion of bank S corporation eligible
shareholders to include IRAs..................... 129
3. Disregard of unexercised powers of appointment in
determining potential current beneficiaries of
ESBT............................................. 130
4. Transfers of suspended losses incident to divorce,
etc.............................................. 130
5. Use of passive activity loss and at-risk amounts
by qualified subchapter S trust income
beneficiaries.................................... 131
6. Exclusion of investment securities income from
passive investment income test for bank S
corporations..................................... 131
7. Treatment of bank director shares................. 132
8. Relief from inadvertently invalid qualified
subchapter S subsidiary elections and
terminations..................................... 133
9. Information returns for qualified subchapter S
subsidiaries..................................... 133
10. Repayment of loans for qualifying employer
securities....................................... 134
D. Alternative Minimum Tax Relief........................ 136
1. Foreign tax credit under alternative minimum tax;
expansion of exemption from alternative minimum
tax for small corporations; income averaging for
farmers not to increase alternative minimum tax
(secs. 241-243 of the bill and secs. 55-59 of the
Code)............................................ 136
E. Restructuring of Incentives for Alcohol Fuels, Etc.... 137
1. Reduced rates of tax on alcohol fuel mixtures
replaced with an excise tax credit, etc. (secs.
251 and 252 of the bill and secs. 4041, 4081,
4091, 6427 and 9503 of the Code)................. 137
F. Stock Options and Employee Stock Purchase Plan Stock
Options.............................................. 144
1. Exclusion of incentive stock options and employee
stock purchase plan stock options from wages
(sec. 261 of the bill and secs. 421(b), 423(c),
3121(a), 3231, and 3306(b) of the Code).......... 144
G. Incentives to Reinvest Foreign Earnings in the United
States (sec. 271 of the bill and new sec. 965 of the
Code)................................................ 145
H. Other Provisions...................................... 147
1. Special rules for livestock sold on account of
weather-related conditions (sec. 281 of the bill
and secs. 1033 and 451 of the Code).............. 147
2. Payment of dividends on stock of cooperatives
without reducing patronage dividends (sec. 282 of
the bill and sec. 1388 of the Code).............. 149
3. Capital gains treatment to apply to outright sales
of timber by landowner (sec. 283 of the bill and
sec. 631(b) of the Code)......................... 150
4. Distributions from publicly traded partnerships
treated as qualifying income of regulated
investment company (sec. 284 of the bill and
secs. 851 and 469(k) of the Code)................ 151
5. Improvements related to real estate investment
trusts (sec. 285 of the bill and secs. 856, 857
and 860 of the Code)............................. 153
6. Treatment of certain dividends of regulated
investment companies (sec. 286 of the bill and
secs. 871 and 881 of the Code)................... 161
7. Taxation of certain settlement funds (sec. 287 of
the bill and sec. 468B of the Code).............. 167
8. Expand human clinical trials expenses qualifying
for the orphan drug tax credit (sec. 288 of the
bill and sec. 45C of the Code)................... 168
9. Simplification of excise tax imposed on bows and
arrows (sec. 289 of the bill and sec. 4161 of the
Code)............................................ 170
10. Repeal excise tax on fishing tackle boxes (sec.
290 of the bill and sec. 4162 of the Code)....... 171
11. Repeal of excise tax on sonar devices suitable
for finding fish (sec. 291 of the bill and secs.
4161 and 4162 of the Code)....................... 171
12. Income tax credit for cost of carrying tax-paid
distilled spirits in wholesale inventories (sec.
292 of the bill and new sec. 5011 of the Code)... 172
13. Suspension of occupational taxes relating to
distilled spirits, wine, and beer (sec. 293 of
the bill and new sec. 5148 of the Code).......... 174
14. Exclusion of certain indebtedness of small
business investment companies from acquisition
indebtedness (sec. 294 of the bill and sec. 514
of the Code)..................................... 175
15. Election to determine taxable income from certain
international shipping activities using per ton
rate (sec. 295 of the bill and new secs. 1352-
1359 of the Code)................................ 176
16. Charitable contribution deduction for certain
expenses in support of native Alaskan subsistence
whaling (sec. 296 of the bill and sec. 170 of the
Code)............................................ 181
Title III--Tax Reform and Simplification for United States
Businesses......................................................182
A. Interest Expense Allocation Rules (sec. 301 of the
bill and sec. 864 of the Code)....................... 182
B. Recharacterization of Overall Domestic Loss (sec. 302
of the bill and sec. 904 of the Code)................ 186
C. Reduction to Two Foreign Tax Credit Baskets (sec. 303
of the bill and sec. 904 of the Code)................ 188
D. Look-Through Rules to Apply to Dividends from
Noncontrolled Section 902 Corporations (sec. 304 of
the bill and sec. 904 of the Code)................... 192
E. Attribution of Stock Ownership Through Partnerships to
Apply in Determining Section 902 and 960 Credits
(sec. 305 of the bill and secs. 901, 902, and 960 of
the Code)............................................ 193
F. Foreign Tax Credit Treatment of Deemed Payments Under
Section 367(d) (sec. 306 of the bill and sec. 367 of
the Code)............................................ 195
G. United States Property Not to Include Certain Assets
of Controlled Foreign Corporation (sec. 307 of the
bill and sec. 956 of the Code)....................... 196
H. Election Not to Use Average Exchange Rate for Foreign
Tax Paid Other Than in Functional Currency (sec. 308
of the bill and sec. 986 of the Code)................ 198
I. Repeal of Withholding Tax on Dividends from Certain
Foreign Corporations (sec. 309 of the bill and sec.
871 of the Code)..................................... 200
J. Provide Equal Treatment for Interest Paid by Foreign
Partnerships and Foreign Corporations (sec. 310 of
the bill and sec. 861 of the Code)................... 201
K. Look-Through Treatment of Payments Between Related
Controlled Foreign Corporations Under Foreign
Personal Holding Company Income Rules (sec. 311 of
the bill and sec. 954 of the Code)................... 202
L. Look-Through Treatment Under Subpart F for Sales of
Partnership Interests (sec. 312 of the bill and sec.
954 of the Code)..................................... 203
M. Repeal of Foreign Personal Holding Company Rules and
Foreign Investment Company Rules (sec. 313 of the
bill and secs. 542, 551-558, 954, 1246, and 1247 of
the Code)............................................ 204
N. Determination of Foreign Personal Holding Company
Income with Respect to Transactions in Commodities
(sec. 314 of the bill and sec. 954 of the Code)...... 205
O. Modifications to Treatment of Aircraft Leasing and
Shipping Income (sec. 315 of the bill and sec. 954 of
the Code)............................................ 208
P. Modification of Exceptions Under Subpart F for Active
Financing (sec. 316 of the bill and sec. 954 of the
Code)................................................ 211
Title IV--Extension of Certain Expiring Provisions..............213
A. Extend Alternative Minimum Tax Relief for Individuals
(sec. 401 of the bill and sec. 26 of the Code)....... 213
B. Extension of the Research Credit (sec. 402 of the bill
and sec. 41 of the Code)............................. 214
C. Extension and Modification of the Section 45
Electricity Production Credit (sec. 403 of the bill
and sec. 45 of the Code)............................. 217
D. Indian Employment Tax Credit (sec. 404 of the bill and
sec. 45A of the Code)................................ 218
E. Extend the Work Opportunity Tax Credit (sec. 405 of
the bill and sec. 51 of the Code).................... 219
F. Extend the Welfare-To-Work Tax Credit (sec. 406 of the
bill and sec. 51A of the Code)....................... 220
G. Extension of the Above-the-line Deduction for Certain
Expenses of Elementary and Secondary School Teachers
(sec. 407 of the bill and sec. 62 of the Code)....... 221
H. Extension of Accelerated Depreciation Benefit for
Property on Indian Reservations (sec. 408 of the bill
and sec. 168(j) of the Code)......................... 222
I. Extend Enhanced Charitable Deduction for Computer
Technology and Equipment (sec. 409 of the bill and
sec. 170 of the Code)................................ 223
J. Extension of Expensing of Certain Environmental
Remediation Costs (sec. 410 of the bill and sec. 198
of the Code)......................................... 224
K. Extension of Archer Medical Savings Accounts
(``MSAs'') (sec. 411 of the bill and sec. 220 of the
Code)................................................ 225
L. Taxable Income Limit on Percentage Depletion for Oil
and Natural Gas Produced from Marginal Properties
(sec. 412 of the bill and sec. 613A of the Code)..... 227
M. Qualified Zone Academy Bonds (sec. 413 of the bill and
sec. 1397E of the Code).............................. 228
N. Extension of Tax Incentives for Investment in the
District of Columbia (sec. 414 of the bill and secs.
1400, 1400A, 1400B, and 1400C of the Code)........... 230
O. Extend the Authority to Issue Liberty Zone Bonds (sec.
415 of the bill and sec. 1400L of the Code).......... 231
P. Disclosure to Law Enforcement Agencies Regarding
Terrorist Activities (sec. 416 of the bill and sec.
6103 of the Code).................................... 233
Q. Disclosure of Return Information Relating to Student
Loans (sec. 417 of the bill and sec. 6103(l) of the
Code)................................................ 235
R. Extension of Cover Over of Excise Tax on Distilled
Spirits to Puerto Rico and Virgin Islands (sec. 418
of the bill and sec. 7652 of the Code)............... 236
S. Extension of Joint Review (sec. 419 of the bill and
secs. 8021 and 8022 of the Code)..................... 237
T. Parity in the Application of Certain Limits to Mental
Health Benefits (sec. 420 of the bill and sec. 9812
of the Code)......................................... 238
U. Disclosure of Tax Information to Facilitate Combined
Employment Tax Reporting (sec. 421 of the bill)...... 239
V. Extension of Tax Credit for Electric Vehicles and Tax
Deduction for Clean-Fuel Vehicles (sec. 422 of the
bill and secs. 30 and 179A of the Code).............. 239
Title V--Deduction of State and Local General Sales Taxes.......240
A. Deduction of State and Local General Sales Taxes (sec.
501 of the bill and sec. 164 of the Code)............ 240
Title VI--Revenue Provisions....................................242
A. Provisions to Reduce Tax Avoidance Through Individual
and Corporate Expatriation........................... 242
1. Tax treatment of expatriated entities and their
foreign parents (sec. 601 of the bill and new
sec. 7874 of the Code)........................... 242
2. Excise tax on stock compensation of insiders in
expatriated corporations (sec. 602 of the bill
and secs. 162(m), 275(a), and new sec. 4985 of
the Code)........................................ 246
3. Reinsurance of U.S. risks in foreign jurisdictions
(sec. 603 of the bill and sec. 845(a) of the
Code)............................................ 250
4. Revision of tax rules on expatriation of
individuals (sec. 604 of the bill and secs. 877,
2107, 2501 and 6039G of the Code)................ 251
5. Reporting of taxable mergers and acquisitions
(sec. 605 of the bill and new sec. 6043A of the
Code)............................................ 257
6. Studies (sec. 606 of the bill).................... 258
B. Provisions Relating to Tax Shelters................... 260
1. Penalty for failure to disclose reportable
transactions (sec. 611 of the bill and new sec.
6707A of the Code)............................... 260
2. Modifications to the accuracy-related penalties
for listed transactions and reportable
transactions having a significant tax avoidance
purpose (sec. 612 of the bill and new sec. 6662A
of the Code)..................................... 262
3. Tax shelter exception to confidentiality
privileges relating to taxpayer communications
(sec. 613 of the bill and sec. 7525 of the Code). 266
4. Statute of limitations for unreported listed
transactions (sec. 614 of the bill and sec. 6501
of the Code)..................................... 267
5. Disclosure of reportable transactions by material
advisors (sec. 615 of the bill and secs. 6111 and
6707 of the Code)................................ 268
6. Investor lists and modification of penalty for
failure to maintain investor lists (secs. 616 and
617 of the bill and secs. 6112 and 6708 of the
Code)............................................ 271
7. Penalty on promoters of tax shelters (sec. 618 of
the bill and sec. 6700 of the Code).............. 273
8. Modifications of substantial understatement
penalty for nonreportable transactions (sec. 619
of the bill and sec. 6662 of the Code)........... 274
9. Modification of actions to enjoin certain conduct
related to tax shelters and reportable
transactions (sec. 620 of the bill and sec. 7408
of the Code)..................................... 274
10. Penalty on failure to report interests in foreign
financial accounts (sec. 621 of the bill and sec.
5321 of Title 31, United States Code)............ 275
11. Regulation of individuals practicing before the
Department of the Treasury (sec. 622 of the bill
and sec. 330 of Title 31, United States Code).... 276
12. Treatment of stripped interests in bond and
preferred stock funds, etc. (sec. 631 of the bill
and secs. 305 and 1286 of the Code).............. 277
13. Minimum holding period for foreign tax credit on
withholding taxes on income other than dividends
(sec. 632 of the bill and sec. 901 of the Code).. 280
14. Disallowance of certain partnership loss
transfers (sec. 633 of the bill and secs. 704,
734, and 743 of the Code)........................ 281
15. No reduction of basis under section 734 in stock
held by partnership in corporate partner (sec.
634 of the bill and sec. 755 of the Code)........ 285
16. Repeal of special rules for FASITs, etc. (sec.
635 of the bill and secs. 860H-860L of the Code). 287
17. Limitation on transfer of built-in losses on
REMIC residuals (sec. 636 of the bill and sec.
362 of the Code)................................. 292
18. Clarification of banking business for purposes of
determining investment of earnings in U.S.
property (sec. 637 of the bill and sec. 956 of
the Code)........................................ 294
19. Alternative tax for certain small insurance
companies (sec. 638 of the bill and sec. 831 of
the Code)........................................ 296
20. Denial of deduction for interest on underpayments
attributable to nondisclosed reportable
transactions (sec. 639 of the bill and sec. 163
of the Code)..................................... 297
21. Clarification of rules for payment of estimated
tax for certain deemed asset sales (sec. 640 of
the bill and sec. 338 of the Code)............... 297
22. Exclusion of like-kind exchange property from
nonrecognition treatment on the sale or exchange
of a principal residence (sec. 641 of the bill
and sec. 121 of the Code)........................ 298
23. Prevention of mismatching of interest and
original issue discount deductions and income
inclusions in transactions with related foreign
persons (sec. 642 of the bill and secs. 163 and
267 of the Code)................................. 299
24. Exclusion from gross income for interest on
overpayments of income tax by individuals (sec.
643 of the bill and new sec. 139A of the Code)... 302
25. Deposits made to suspend the running of interest
on potential underpayments (sec. 644 of the bill
and new sec. 6603 of the Code)................... 304
26. Authorize IRS to enter into installment
agreements that provide for partial payment (sec.
645 of the bill and sec. 6159 of the Code)....... 307
27. Affirmation of consolidated return regulation
authority (sec. 646 of the bill and sec. 1502 of
the Code)........................................ 308
28. Reform of tax treatment of certain leasing
arrangements and limitation on deductions
allocable to property used by governments or
other tax-exempt entities (secs. 647 through 649
of the bill, secs. 167 and 168 of the Code, and
new sec. 470 of the Code)........................ 312
C. Reduction of Fuel Tax Evasion......................... 319
1. Exemption from certain excise taxes for mobile
machinery vehicles (sec. 651 of the bill, and
secs. 4053, 4072, 4082, 4483 and 6421 of the
Code)............................................ 319
2. Taxation of aviation-grade kerosene (sec. 652 of
the bill and secs. 4041, 4081, 4082, 4083, 4091,
4092, 4093, 4101, and 6427 of the Code).......... 321
3. Mechanical dye injection and related penalties
(sec. 653 of the bill and sec. 4082 and new sec.
6715A of the Code)............................... 327
4. Authority to inspect on-site records (sec. 654 of
the bill and sec. 4083 of the Code).............. 330
5. Registration of pipeline or vessel operators
required for exemption of bulk transfers to
registered terminals or refineries (sec. 655 of
the bill and sec. 4081 of the Code).............. 330
6. Display of registration and penalties for failure
to display registration and to register (secs.
656 and 657 of the bill, secs. 4101, 7232, 7272
and new secs. 6717 and 6718 of the Code)......... 331
7. Penalties for failure to report (sec. 657 of the
bill and new sec. 6725 of the Code).............. 332
8. Collection from Customs bond where importer not
registered (sec. 658 of the bill and new sec.
4104 of the Code)................................ 333
9. Modification of the use tax on heavy highway
vehicles (sec. 659 of the bill and secs. 4481,
4483 and 6165 of the Code)....................... 334
10. Modification of ultimate vendor refund claims
with respect to farming(sec. 660 of the bill and
sec. 6427 of the Code)........................... 336
11. Dedication of revenue from certain penalties to
the Highway Trust Fund (sec. 661 of the bill and
sec. 9503 of the Code)........................... 336
12. Taxable fuel refunds for certain ultimate
vendors (sec. 662 of the bill and secs. 6416 and
6427 of the Code)................................ 337
13. Two party exchanges (sec. 663 of the bill and
new sec. 4105 of the Code)....................... 339
14. Simplification of tax on tires (sec. 664 of the
bill and sec. 4071 of the Code).................. 340
D. Nonqualified Deferred Compensation Plans.............. 341
1. Treatment of nonqualified deferred compensation
plans (sec. 671 of the bill and new sec. 409A and
sec. 6051 of the Code)........................... 341
E. Other Revenue Provisions.............................. 348
1. Qualified tax collection contracts (sec. 681 of
the bill and new sec. 6306 of the Code).......... 348
2. Modify charitable contribution rules for
donations of patents and other intellectual
property (sec. 682 of the bill and secs. 170 and
6050L of the Code)............................... 351
3. Require increased reporting for noncash
charitable contributions (sec. 683 of the bill
and sec. 170 of the Code)........................ 355
4. Require qualified appraisals for charitable
contributions of vehicles (sec. 684 of the bill
and sec. 170 of the Code)........................ 356
5. Extend the present-law intangible amortization
provisions to acquisitions of sports franchises
(sec. 685 of the bill and sec. 197 of the Code).. 358
6. Increase continuous levy for certain Federal
payments (sec. 686 of the bill and sec. 6331 of
the Code)........................................ 360
7. Modification of straddle rules (sec. 687 of the
bill and sec. 1092 of the Code).................. 361
8. Add vaccines against hepatitis A to the list of
taxable vaccines (sec. 688 of the bill and sec.
4132 of the Code)................................ 365
9. Add vaccines against influenza to the list of
taxable vaccines (sec. 689 of the bill and sec.
4132 of the Code)................................ 366
10. Extension of IRS user fees (sec. 690 of the bill
and sec. 7528 of the Code)....................... 367
11. Extension of customs user fees (sec. 691 of the
bill)............................................ 367
Title VII--Market Reform for Tobacco Growers (secs. 701-725 of the
bill)...........................................................369
Title VIII--Trade Provisions....................................371
A. Suspension of Duties on Ceiling Fans (sec. 801 of the
bill)................................................ 371
B. Suspension of Duties on Nuclear Steam Generators (sec.
802 of the bill)..................................... 371
C. Suspension of Duties on Nuclear Reactor Vessel Heads
(sec. 802 of the bill)............................... 372
II. Votes of the Committee..........................................372
III.Budget Effects of the Bill......................................375
IV. Other Matters To Be Discussed Under the Rules of the House......398
V. Changes in Existing Law Made by the Bill, as Reported...........399
VI. Dissenting Views................................................400
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE; ETC.
(a) Short Title.--This Act may be cited as the ``American Jobs
Creation Act of 2004''.
(b) Amendment of 1986 Code.--Except as otherwise expressly provided,
whenever in this Act an amendment or repeal is expressed in terms of an
amendment to, or repeal of, a section or other provision, the reference
shall be considered to be made to a section or other provision of the
Internal Revenue Code of 1986.
(c) Table of Contents.--The table of contents of this Act is as
follows:
Sec. 1. Short title; etc.
TITLE I--END SANCTIONS AND REDUCE CORPORATE TAX RATES FOR DOMESTIC
MANUFACTURING AND SMALL CORPORATIONS
Sec. 101. Repeal of exclusion for extraterritorial income.
Sec. 102. Reduced corporate income tax rate for domestic production
activities income.
Sec. 103. Reduced corporate income tax rate for small corporations.
TITLE II--JOB CREATION TAX INCENTIVES FOR MANUFACTURERS, SMALL
BUSINESSES, AND FARMERS
Subtitle A--Small Business Expensing
Sec. 201. 2-year extension of increased expensing for small business.
Subtitle B--Depreciation
Sec. 211. Recovery period for depreciation of certain leasehold
improvements and restaurant property.
Sec. 212. Modification of depreciation allowance for aircraft.
Sec. 213. Modification of placed in service rule for bonus depreciation
property.
Subtitle C--S Corporation Reform and Simplification
Sec. 221. Members of family treated as 1 shareholder.
Sec. 222. Increase in number of eligible shareholders to 100.
Sec. 223. Expansion of bank S corporation eligible shareholders to
include IRAs.
Sec. 224. Disregard of unexercised powers of appointment in determining
potential current beneficiaries of ESBT.
Sec. 225. Transfer of suspended losses incident to divorce, etc.
Sec. 226. Use of passive activity loss and at-risk amounts by qualified
subchapter S trust income beneficiaries.
Sec. 227. Exclusion of investment securities income from passive income
test for bank S corporations.
Sec. 228. Treatment of bank director shares.
Sec. 229. Relief from inadvertently invalid qualified subchapter S
subsidiary elections and terminations.
Sec. 230. Information returns for qualified subchapter S subsidiaries.
Sec. 231. Repayment of loans for qualifying employer securities.
Subtitle D--Alternative Minimum Tax Relief
Sec. 241. Foreign tax credit under alternative minimum tax.
Sec. 242. Expansion of exemption from alternative minimum tax for small
corporations.
Sec. 243. Income averaging for farmers not to increase alternative
minimum tax.
Subtitle E--Restructuring of Incentives for Alcohol Fuels, Etc.
Sec. 251. Reduced rates of tax on gasohol replaced with excise tax
credit; repeal of other alcohol-based fuel incentives; etc.
Sec. 252. Alcohol fuel subsidies borne by general fund.
Subtitle F--Stock Options and Employee Stock Purchase Plan Stock
Options
Sec. 261. Exclusion of incentive stock options and employee stock
purchase plan stock options from wages.
Subtitle G--Incentives to Reinvest Foreign Earnings in United States
Sec. 271. Incentives to reinvest foreign earnings in United States.
Subtitle H--Other Incentive Provisions
Sec. 281. Special rules for livestock sold on account of weather-
related conditions.
Sec. 282. Payment of dividends on stock of cooperatives without
reducing patronage dividends.
Sec. 283. Capital gain treatment under section 631(b) to apply to
outright sales by landowners.
Sec. 284. Distributions from publicly traded partnerships treated as
qualifying income of regulated investment companies.
Sec. 285. Improvements related to real estate investment trusts.
Sec. 286. Treatment of certain dividends of regulated investment
companies.
Sec. 287. Taxation of certain settlement funds.
Sec. 288. Expansion of human clinical trials qualifying for orphan drug
credit.
Sec. 289. Simplification of excise tax imposed on bows and arrows.
Sec. 290. Repeal of excise tax on fishing tackle boxes.
Sec. 291. Sonar devices suitable for finding fish.
Sec. 292. Income tax credit to distilled spirits wholesalers for cost
of carrying Federal excise taxes on bottled distilled spirits.
Sec. 293. Suspension of occupational taxes relating to distilled
spirits, wine, and beer.
Sec. 294. Modification of unrelated business income limitation on
investment in certain small business investment companies.
Sec. 295. Election to determine taxable income from certain
international shipping activities using per ton rate.
Sec. 296. Charitable contribution deduction for certain expenses
incurred in support of Native Alaskan subsistence whaling.
TITLE III--TAX REFORM AND SIMPLIFICATION FOR UNITED STATES BUSINESSES
Sec. 301. Interest expense allocation rules.
Sec. 302. Recharacterization of overall domestic loss.
Sec. 303. Reduction to 2 foreign tax credit baskets.
Sec. 304. Look-thru rules to apply to dividends from noncontrolled
section 902 corporations.
Sec. 305. Attribution of stock ownership through partnerships to apply
in determining section 902 and 960 credits.
Sec. 306. Clarification of treatment of certain transfers of intangible
property.
Sec. 307. United States property not to include certain assets of
controlled foreign corporation.
Sec. 308. Election not to use average exchange rate for foreign tax
paid other than in functional currency.
Sec. 309. Repeal of withholding tax on dividends from certain foreign
corporations.
Sec. 310. Provide equal treatment for interest paid by foreign
partnerships and foreign corporations.
Sec. 311. Look-thru treatment of payments between related controlled
foreign corporations under foreign personal holding company income
rules.
Sec. 312. Look-thru treatment for sales of partnership interests.
Sec. 313. Repeal of foreign personal holding company rules and foreign
investment company rules.
Sec. 314. Determination of foreign personal holding company income with
respect to transactions in commodities.
Sec. 315. Modifications to treatment of aircraft leasing and shipping
income.
Sec. 316. Modification of exceptions under subpart F for active
financing.
TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS
Sec. 401. Allowance of nonrefundable personal credits against regular
and minimum tax liability.
Sec. 402. Extension of research credit.
Sec. 403. Extension of credit for electricity produced from certain
renewable resources.
Sec. 404. Indian employment tax credit.
Sec. 405. Work opportunity credit.
Sec. 406. Welfare-to-work credit.
Sec. 407. Certain expenses of elementary and secondary school teachers.
Sec. 408. Extension of accelerated depreciation benefit for property on
Indian reservations.
Sec. 409. Charitable contributions of computer technology and equipment
used for educational purposes.
Sec. 410. Expensing of environmental remediation costs.
Sec. 411. Availability of medical savings accounts.
Sec. 412. Taxable income limit on percentage depletion for oil and
natural gas produced from marginal properties.
Sec. 413. Qualified zone academy bonds.
Sec. 414. District of Columbia.
Sec. 415. Extension of certain New York Liberty Zone bond financing.
Sec. 416. Disclosures relating to terrorist activities.
Sec. 417. Disclosure of return information relating to student loans.
Sec. 418. Cover over of tax on distilled spirits.
Sec. 419. Joint review of strategic plans and budget for the Internal
Revenue Service.
Sec. 420. Parity in the application of certain limits to mental health
benefits.
Sec. 421. Combined employment tax reporting project.
Sec. 422. Clean-fuel vehicles.
TITLE V--DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES
Sec. 501. Deduction of State and local general sales taxes in lieu of
State and local income taxes.
TITLE VI--REVENUE PROVISIONS
Subtitle A--Provisions to Reduce Tax Avoidance Through Individual and
Corporate Expatriation
Sec. 601. Tax treatment of expatriated entities and their foreign
parents.
Sec. 602. Excise tax on stock compensation of insiders in expatriated
corporations.
Sec. 603. Reinsurance of United States risks in foreign jurisdictions.
Sec. 604. Revision of tax rules on expatriation of individuals.
Sec. 605. Reporting of taxable mergers and acquisitions.
Sec. 606. Studies.
Subtitle B--Provisions Relating to Tax Shelters
Part I--Taxpayer-Related Provisions
Sec. 611. Penalty for failing to disclose reportable transactions.
Sec. 612. Accuracy-related penalty for listed transactions, other
reportable transactions having a significant tax avoidance purpose,
etc.
Sec. 613. Tax shelter exception to confidentiality privileges relating
to taxpayer communications.
Sec. 614. Statute of limitations for taxable years for which required
listed transactions not reported.
Sec. 615. Disclosure of reportable transactions.
Sec. 616. Failure to furnish information regarding reportable
transactions.
Sec. 617. Modification of penalty for failure to maintain lists of
investors.
Sec. 618. Penalty on promoters of tax shelters.
Sec. 619. Modifications of substantial understatement penalty for
nonreportable transactions.
Sec. 620. Modification of actions to enjoin certain conduct related to
tax shelters and reportable transactions.
Sec. 621. Penalty on failure to report interests in foreign financial
accounts.
Sec. 622. Regulation of individuals practicing before the Department of
the Treasury.
Part II--Other Provisions
Sec. 631. Treatment of stripped interests in bond and preferred stock
funds, etc.
Sec. 632. Minimum holding period for foreign tax credit on withholding
taxes on income other than dividends.
Sec. 633. Disallowance of certain partnership loss transfers.
Sec. 634. No reduction of basis under section 734 in stock held by
partnership in corporate partner.
Sec. 635. Repeal of special rules for FASITs.
Sec. 636. Limitation on transfer of built-in losses on REMIC residuals.
Sec. 637. Clarification of banking business for purposes of determining
investment of earnings in United States property.
Sec. 638. Alternative tax for certain small insurance companies.
Sec. 639. Denial of deduction for interest on underpayments
attributable to nondisclosed reportable transactions.
Sec. 640. Clarification of rules for payment of estimated tax for
certain deemed asset sales.
Sec. 641. Recognition of gain from the sale of a principal residence
acquired in a like-kind exchange within 5 years of sale.
Sec. 642. Prevention of mismatching of interest and original issue
discount deductions and income inclusions in transactions with related
foreign persons.
Sec. 643. Exclusion from gross income for interest on overpayments of
income tax by individuals.
Sec. 644. Deposits made to suspend running of interest on potential
underpayments.
Sec. 645. Partial payment of tax liability in installment agreements.
Sec. 646. Affirmation of consolidated return regulation authority.
Part III--Leasing
Sec. 647. Reform of tax treatment of certain leasing arrangements.
Sec. 648. Limitation on deductions allocable to property used by
governments or other tax-exempt entities.
Sec. 649. Effective date.
Subtitle C--Reduction of Fuel Tax Evasion
Sec. 651. Exemption from certain excise taxes for mobile machinery.
Sec. 652. Taxation of aviation-grade kerosene.
Sec. 653. Dye injection equipment.
Sec. 654. Authority to inspect on-site records.
Sec. 655. Registration of pipeline or vessel operators required for
exemption of bulk transfers to registered terminals or refineries.
Sec. 656. Display of registration.
Sec. 657. Penalties for failure to register and failure to report.
Sec. 658. Collection from customs bond where importer not registered.
Sec. 659. Modifications of tax on use of certain vehicles.
Sec. 660. Modification of ultimate vendor refund claims with respect to
farming.
Sec. 661. Dedication of revenues from certain penalties to the Highway
Trust Fund.
Sec. 662. Taxable fuel refunds for certain ultimate vendors.
Sec. 663. Two-party exchanges.
Sec. 664. Simplification of tax on tires.
Subtitle D--Nonqualified Deferred Compensation Plans
Sec. 671. Treatment of nonqualified deferred compensation plans.
Subtitle E--Other Revenue Provisions
Sec. 681. Qualified tax collection contracts.
Sec. 682. Treatment of charitable contributions of patents and similar
property.
Sec. 683. Increased reporting for noncash charitable contributions.
Sec. 684. Donations of motor vehicles, boats, and aircraft.
Sec. 685. Extension of amortization of intangibles to sports
franchises.
Sec. 686. Modification of continuing levy on payments to Federal
venders.
Sec. 687. Modification of straddle rules.
Sec. 688. Addition of vaccines against hepatitis A to list of taxable
vaccines.
Sec. 689. Addition of vaccines against influenza to list of taxable
vaccines.
Sec. 690. Extension of IRS user fees.
Sec. 691. COBRA fees.
TITLE VII--MARKET REFORM FOR TOBACCO GROWERS
Sec. 701. Short title.
Sec. 702. Effective date.
Subtitle A--Termination of Federal Tobacco Quota and Price Support
Programs
Sec. 711. Termination of tobacco quota program and related provisions.
Sec. 712. Termination of tobacco price support program and related
provisions.
Sec. 713. Liability.
Subtitle B--Transitional Payments to Tobacco Quota Holders and Active
Producers of Tobacco
Sec. 721. Definitions of active tobacco producer and quota holder.
Sec. 722. Payments to tobacco quota holders.
Sec. 723. Transition payments for active producers of quota tobacco.
Sec. 724. Resolution of disputes.
Sec. 725. Source of funds for payments.
TITLE VIII--TRADE PROVISIONS
Sec. 801. Ceiling fans.
Sec. 802. Certain steam generators, and certain reactor vessel heads,
used in nuclear facilities.
TITLE I--END SANCTIONS AND REDUCE CORPORATE TAX RATES FOR DOMESTIC
MANUFACTURING AND SMALL CORPORATIONS
SEC. 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.
(a) In General.--Section 114 is hereby repealed.
(b) Conforming Amendments.--
(1) Subpart E of part III of subchapter N of chapter 1
(relating to qualifying foreign trade income) is hereby
repealed.
(2) The table of subparts for such part III is amended by
striking the item relating to subpart E.
(3) The table of sections for part III of subchapter B of
chapter 1 is amended by striking the item relating to section
114.
(4) The second sentence of section 56(g)(4)(B)(i) is amended
by striking ``114 or''.
(5) Section 275(a) is amended--
(A) by inserting ``or'' at the end of paragraph
(4)(A), by striking ``or'' at the end of paragraph
(4)(B) and inserting a period, and by striking
subparagraph (C), and
(B) by striking the last sentence.
(6) Paragraph (3) of section 864(e) is amended--
(A) by striking:
``(3) Tax-exempt assets not taken into account.--
``(A) In general.--For purposes of''; and inserting:
``(3) Tax-exempt assets not taken into account.--For purposes
of'', and
(B) by striking subparagraph (B).
(7) Section 903 is amended by striking ``114, 164(a),'' and
inserting ``164(a)''.
(8) Section 999(c)(1) is amended by striking ``941(a)(5),''.
(c) Effective Date.--Except as provided in subsection (d), the
amendments made by this section shall apply to transactions after
December 31, 2004.
(d) Transitional Rule for 2005 and 2006.--
(1) In general.--In the case of transactions during 2005 or
2006, the amount includible in gross income by reason of the
amendments made by this section shall not exceed the applicable
percentage of the amount which would have been so included but
for this subsection.
(2) Applicable percentage.--For purposes of paragraph (1),
the applicable percentage shall be as follows:
(A) For 2005, the applicable percentage shall be 20
percent.
(B) For 2006, the applicable percentage shall be 40
percent.
(e) Revocation of Election To Be Treated as Domestic Corporation.--
If, during the 1-year period beginning on the date of the enactment of
this Act, a corporation for which an election is in effect under
section 943(e) of the Internal Revenue Code of 1986 revokes such
election, no gain or loss shall be recognized with respect to property
treated as transferred under clause (ii) of section 943(e)(4)(B) of
such Code to the extent such property--
(1) was treated as transferred under clause (i) thereof, or
(2) was acquired during a taxable year to which such election
applies and before May 1, 2003, in the ordinary course of its
trade or business.
The Secretary of the Treasury (or such Secretary's delegate) may
prescribe such regulations as may be necessary to prevent the abuse of
the purposes of this subsection.
(f) Binding Contracts.--The amendments made by this section shall not
apply to any transaction in the ordinary course of a trade or business
which occurs pursuant to a binding contract--
(1) which is between the taxpayer and a person who is not a
related person (as defined in section 943(b)(3) of such Code,
as in effect on the day before the date of the enactment of
this Act), and
(2) which is in effect on January 14, 2002, and at all times
thereafter.
For purposes of this subsection, a binding contract shall include a
purchase option, renewal option, or replacement option which is
included in such contract and which is enforceable against the seller
or lessor.
SEC. 102. REDUCED CORPORATE INCOME TAX RATE FOR DOMESTIC PRODUCTION
ACTIVITIES INCOME.
(a) Limitation on Tax on Qualified Production Activities Income.--
Section 11 is amended by redesignating subsections (c) and (d) as
subsections (d) and (e), respectively, and by inserting after
subsection (b) the following new subsection:
``(c) Limitation on Tax on Qualified Production Activities Income.--
``(1) In general.--If a corporation has qualified production
activities income for any taxable year, the tax imposed by this
section shall not exceed the sum of--
``(A) a tax computed at the rates and in the manner
as if this subsection had not been enacted on the
taxable income reduced by the amount of qualified
production activities income, plus
``(B) a tax equal to 32 percent (34 percent in the
case of taxable years beginning before January 1, 2007)
of the qualified production activities income (or, if
less, taxable income).
``(2) Qualified production activities income.--
``(A) In general.--The term `qualified production
activities income' for any taxable year means an amount
equal to the excess (if any) of--
``(i) the taxpayer's domestic production
gross receipts for such taxable year, over
``(ii) the sum of--
``(I) the cost of goods sold that are
allocable to such receipts,
``(II) other deductions, expenses, or
losses directly allocable to such
receipts, and
``(III) a ratable portion of other
deductions, expenses, and losses that
are not directly allocable to such
receipts or another class of income.
``(B) Allocation method.--The Secretary shall
prescribe rules for the proper allocation of items of
income, deduction, expense, and loss for purposes of
determining income attributable to domestic production
activities.
``(3) Domestic production gross receipts.--For purposes of
this subsection, the term `domestic production gross receipts'
means the gross receipts of the taxpayer which are derived
from--
``(A) any lease, rental, license, sale, exchange, or
other disposition of--
``(i) qualifying production property which
was manufactured, produced, grown, or extracted
in whole or in significant part by the taxpayer
within the United States, or
``(ii) any qualified film produced by the
taxpayer, or
``(B) construction, engineering, or architectural
services performed in the United States for
construction projects in the United States.
``(4) Qualifying production property.--For purposes of this
subsection, the term `qualifying production property' means--
``(A) tangible personal property,
``(B) any computer software, and
``(C) any property described in section 168(f)(4).
``(5) Qualified film.--For purposes of this subsection--
``(A) In general.--The term `qualified film' means
any property described in section 168(f)(3) if not less
than 50 percent of the total compensation relating to
the production of such property is compensation for
services performed in the United States by actors,
production personnel, directors, and producers.
``(B) Exception.--Such term does not include property
with respect to which records are required to be
maintained under section 2257 of title 18, United
States Code.
``(6) Related persons.--For purposes of this subsection--
``(A) In general.--The term `domestic production
gross receipts' shall not include any gross receipts of
the taxpayer derived from property leased, licensed, or
rented by the taxpayer for use by any related person.
``(B) Related person.--For purposes of subparagraph
(A), a person shall be treated as related to another
person if such persons are treated as a single employer
under subsection (a) or (b) of section 52 or subsection
(m) or (o) of section 414, except that determinations
under subsections (a) and (b) of section 52 shall be
made without regard to section 1563(b).''.
(b) Special Rule Relating to Election To Treat Cutting of Timber as a
Sale or Exchange.--In the case of a corporation, any election under
section 631(a) of the Internal Revenue Code of 1986 made for a taxable
year ending on or before the date of the enactment of this Act may be
revoked by the taxpayer for any taxable year ending after such date.
For purposes of determining whether such taxpayer may make a further
election under such section, such election (and any revocation under
this section) shall not be taken into account.
(c) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 103. REDUCED CORPORATE INCOME TAX RATE FOR SMALL CORPORATIONS.
(a) In General.--Subsection (b) of section 11 (relating to tax
imposed on corporations) is amended by redesignating paragraph (2) as
paragraph (6) and by striking paragraph (1) and inserting the following
new paragraphs:
``(1) For taxable years beginning after 2012.--In the case of
taxable years beginning after 2012, the amount of the tax
imposed by subsection (a) shall be determined in accordance
with the following table:
``If taxable income is: The tax is:
Not over $50,000
15% of taxable income.
Over $50,000 but not over
$75,000
$7,500, plus 25% of the excess
over $50,000.
Over $75,000 but not over
$20,000,000
$13,750, plus 32% of the excess
over $75,000.
Over $20,000,000
$6,389,750, plus 35% of the
excess over
$20,000,000.
``(2) For taxable years beginning in 2011 or 2012.--In the
case of taxable years beginning in 2011 or 2012, the amount of
the tax imposed by subsection (a) shall be determined in
accordance with the following table:
``If taxable income is: The tax is:
Not over $50,000
15% of taxable income.
Over $50,000 but not over
$75,000
$7,500, plus 25% of the excess
over $50,000.
Over $75,000 but not over
$5,000,000
$13,750, plus 32% of the excess
over $75,000.
Over $5,000,000 but not over
$10,000,000
$1,589,750, plus 34% of the
excess over $5,000,000.
Over $10,000,000
$3,289,750, plus 35% of the
excess over
$10,000,000.
``(3) For taxable years beginning in 2008, 2009, or 2010.--In
the case of taxable years beginning in 2008, 2009, or 2010, the
amount of the tax imposed by subsection (a) shall be determined
in accordance with the following table:
``If taxable income is: The tax is:
Not over $50,000
15% of taxable income.
Over $50,000 but not over
$75,000
$7,500, plus 25% of the excess
over $50,000.
Over $75,000 but not over
$1,000,000
$13,750, plus 32% of the excess
over $75,000.
Over $1,000,000 but not over
$10,000,000
$309,750, plus 34% of the
excess over $1,000,000.
Over $10,000,000
$3,369,750, plus 35% of the
excess over
$10,000,000.
``(4) For taxable years beginning in 2005, 2006, or 2007.--In
the case of taxable years beginning in 2005, 2006, or 2007, the
amount of the tax imposed by subsection (a) shall be determined
in accordance with the following table:
``If taxable income is: The tax is:
Not over $50,000
15% of taxable income.
Over $50,000 but not over
$75,000
$7,500, plus 25% of the excess
over $50,000.
Over $75,000 but not over
$1,000,000
$13,750, plus 33% of the excess
over $75,000.
Over $1,000,000 but not over
$10,000,000
$319,000, plus 34% of the
excess over $1,000,000.
Over $10,000,000
$3,379,000, plus 35% of the
excess over
$10,000,000.
``(5) Phaseout of lower rates for certain taxpayers.--
``(A) General rule for years before 2013.--
``(i) In general.--In the case of taxable
years beginning before 2013 with respect to a
corporation which has taxable income in excess
of the applicable amount for any taxable year,
the amount of tax determined under paragraph
(1), (2), (3) or (4) for such taxable year
shall be increased by the lesser of (I) 5
percent of such excess, or (II) the maximum
increase amount.
``(ii) Maximum increase amount.--For purposes
of clause (i)--
------------------------------------------------------------------------
``In the case of any taxable The maximum
year beginning during: The applicable increase amount
amount is: is:
------------------------------------------------------------------------
2005, 2006, or 2007............... $1,000,000 $21,000
2008, 2009, or 2010............... $1,000,000 $30,250
2011 or 2012...................... $5,000,000 $110,250.
------------------------------------------------------------------------
``(B) Higher income corporations.--In the case of a
corporation which has taxable income in excess of
$20,000,000 ($15,000,000 in the case of taxable years
beginning before 2013), the amount of the tax
determined under the foregoing provisions of this
subsection shall be increased by an additional amount
equal to the lesser of (i) 3 percent of such excess, or
(ii) $610,250 ($100,000 in the case of taxable years
beginning before 2013).''.
(b) Conforming Amendments.--
(1) Section 904(b)(3)(D)(ii) is amended to read as follows:
``(ii) in the case of a corporation, section
1201(a) applies to such taxable year.''.
(2) Section 1201(a) is amended by striking ``the last 2
sentences of section 11(b)(1)'' and inserting ``section
11(b)(5)''.
(3) Section 1561(a) is amended--
(A) by striking ``the last 2 sentences of section
11(b)(1)'' and inserting ``section 11(b)(5)'', and
(B) by striking ``such last 2 sentences'' and
inserting ``section 11(b)(5)''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2004.
TITLE II--JOB CREATION TAX INCENTIVES FOR MANUFACTURERS, SMALL
BUSINESSES, AND FARMERS
Subtitle A--Small Business Expensing
SEC. 201. 2-YEAR EXTENSION OF INCREASED EXPENSING FOR SMALL BUSINESS.
Subsections (b), (c), and (d) of section 179 are each amended by
striking ``2006'' each place it appears and inserting ``2008''.
Subtitle B--Depreciation
SEC. 211. RECOVERY PERIOD FOR DEPRECIATION OF CERTAIN LEASEHOLD
IMPROVEMENTS AND RESTAURANT PROPERTY.
(a) 15-Year Recovery Period.--Subparagraph (E) of section 168(e)(3)
(relating to classification of certain property) is amended by striking
``and'' at the end of clause (ii), by striking the period at the end of
clause (iii) and inserting a comma, and by adding at the end the
following new clauses:
``(iv) any qualified leasehold improvement
property placed in service before January 1,
2006, and
``(v) any qualified restaurant property
placed in service before January 1, 2006.''
(b) Qualified Leasehold Improvement Property.--Subsection (e) of
section 168 is amended by adding at the end the following new
paragraph:
``(6) Qualified leasehold improvement property.--The term
`qualified leasehold improvement property' has the meaning
given such term in section 168(k)(3) except that the following
special rules shall apply:
``(A) Improvements made by lessor.--In the case of an
improvement made by the person who was the lessor of
such improvement when such improvement was placed in
service, such improvement shall be qualified leasehold
improvement property (if at all) only so long as such
improvement is held by such person.
``(B) Exception for changes in form of business.--
Property shall not cease to be qualified leasehold
improvement property under subparagraph (A) by reason
of--
``(i) death,
``(ii) a transaction to which section 381(a)
applies,
``(iii) a mere change in the form of
conducting the trade or business so long as the
property is retained in such trade or business
as qualified leasehold improvement property and
the taxpayer retains a substantial interest in
such trade or business,
``(iv) the acquisition of such property in an
exchange described in section 1031, 1033, or
1038 to the extent that the basis of such
property includes an amount representing the
adjusted basis of other property owned by the
taxpayer or a related person, or
``(v) the acquisition of such property by the
taxpayer in a transaction described in section
332, 351, 361, 721, or 731 (or the acquisition
of such property by the taxpayer from the
transferee or acquiring corporation in a
transaction described in such section), to the
extent that the basis of the property in the
hands of the taxpayer is determined by
reference to its basis in the hands of the
transferor or distributor.''.
(c) Qualified Restaurant Property.--Subsection (e) of section 168 (as
amended by subsection (b)) is further amended by adding at the end the
following new paragraph:
``(7) Qualified restaurant property.--The term `qualified
restaurant property' means any section 1250 property which is
an improvement to a building if--
``(A) such improvement is placed in service more than
3 years after the date such building was first placed
in service, and
``(B) more than 50 percent of the building's square
footage is devoted to preparation of, and seating for
on-premises consumption of, prepared meals.''.
(d) Requirement To Use Straight Line Method.--
(1) Paragraph (3) of section 168(b) is amended by adding at
the end the following new subparagraphs:
``(G) Qualified leasehold improvement property
described in subsection (e)(6).
``(H) Qualified restaurant property described in
subsection (e)(7).''.
(2) Subparagraph (A) of section 168(b)(2) is amended by
inserting before the comma ``not referred to in paragraph
(3)''.
(e) Alternative System.--The table contained in section 168(g)(3)(B)
is amended by adding at the end the following new items:
``(E)(iv)...................................... 39
``(E)(v)....................................... 39''.
(f) Effective Date.--The amendments made by this section shall apply
to property placed in service after the date of the enactment of this
Act.
SEC. 212. MODIFICATION OF DEPRECIATION ALLOWANCE FOR AIRCRAFT.
(a) Aircraft Treated as Qualified Property.--
(1) In general.--Paragraph (2) of section 168(k) is amended
by redesignating subparagraphs (C) through (F) as subparagraphs
(D) through (G), respectively, and by inserting after
subparagraph (B) the following new subparagraph:
``(C) Certain aircraft.--The term `qualified
property' includes property--
``(i) which meets the requirements of clauses
(ii) and (iii) of subparagraph (A),
``(ii) which is an aircraft which is not a
transportation property (as defined in
subparagraph (B)(iii)) other than for
agricultural or firefighting purposes,
``(iii) which is purchased and on which such
purchaser, at the time of the contract for
purchase, has made a nonrefundable deposit of
the lesser of--
``(I) 10 percent of the cost, or
``(II) $100,000, and
``(iv) which has--
``(I) an estimated production period
exceeding 4 months, and
``(II) a cost exceeding $200,000.''.
(2) Placed in service date.--Clause (iv) of section
168(k)(2)(A) is amended by striking ``subparagraph (B)'' and
inserting ``subparagraphs (B) and (C)''.
(b) Conforming Amendments.--
(1) Section 168(k)(2)(B) is amended by adding at the end the
following new clause:
``(iv) Application of subparagraph.--This
subparagraph shall not apply to any property
which is described in subparagraph (C).''.
(2) Section 168(k)(4)(A)(ii) is amended by striking
``paragraph (2)(C)'' and inserting ``paragraph (2)(D)''.
(3) Section 168(k)(4)(B)(iii) is amended by inserting ``and
paragraph (2)(C)'' after ``of this paragraph)''.
(4) Section 168(k)(4)(C) is amended by striking
``subparagraphs (B) and (D)'' and inserting ``subparagraphs
(B), (C), and (E)''.
(5) Section 168(k)(4)(D) is amended by striking ``Paragraph
(2)(E)'' and inserting ``Paragraph (2)(F)''.
(c) Effective Date.--The amendments made by this section shall take
effect as if included in the amendments made by section 101 of the Job
Creation and Worker Assistance Act of 2002.
SEC. 213. MODIFICATION OF PLACED IN SERVICE RULE FOR BONUS DEPRECIATION
PROPERTY.
(a) In General.--Section 168(k)(2)(D) (relating to special rules) is
amended by adding at the end the following new clause:
``(iii) Syndication.--For purposes of
subparagraph (A)(ii), if--
``(I) property is originally placed
in service after September 10, 2001, by
the lessor of such property,
``(II) such property is sold by such
lessor or any subsequent purchaser
within 3 months after the date so
placed in service (or, in the case of
multiple units of property subject to
the same lease, within 3 months after
the date the final unit is placed in
service, so long as the period between
the time the first unit is placed in
service and the time the last unit is
placed in service does not exceed 12
months), and
``(III) the user of such property
after the last sale during such 3-month
period remains the same as when such
property was originally placed in
service,
such property shall be treated as originally
placed in service not earlier than the date of
such last sale, so long as no previous owner of
such property elects the application of this
subsection with respect to such property.''.
(b) Effective Date.--The amendments made by this section shall take
effect as if included in the amendments made by section 101 of the Job
Creation and Worker Assistance Act of 2002; except that the
parenthetical material in section 168(k)(2)(D)(iii)(II) of the Internal
Revenue Code of 1986, as added by this section, shall apply to property
sold after June 4, 2004.
Subtitle C--S Corporation Reform and Simplification
SEC. 221. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.
(a) In General.--Paragraph (1) of section 1361(c) (relating to
special rules for applying subsection (b)) is amended to read as
follows:
``(1) Members of family treated as 1 shareholder.--
``(A) In general.--For purpose of subsection
(b)(1)(A)--
``(i) except as provided in clause (ii), a
husband and wife (and their estates) shall be
treated as 1 shareholder, and
``(ii) in the case of a family with respect
to which an election is in effect under
subparagraph (D), all members of the family
shall be treated as 1 shareholder.
``(B) Members of the family.--For purpose of
subparagraph (A)(ii)--
``(i) In general.--The term `members of the
family' means the common ancestor, lineal
descendants of the common ancestor, and the
spouses (or former spouses) of such lineal
descendants or common ancestor.
``(ii) Common Ancestor.--For purposes of this
paragraph, an individual shall not be
considered a common ancestor if, as of the
later of the effective date of this paragraph
or the time the election under section 1362(a)
is made, the individual is more than 3
generations removed from the youngest
generation of shareholders who would (but for
this clause) be members of the family. For
purposes of the preceding sentence, a spouse
(or former spouse) shall be treated as being of
the same generation as the individual to which
such spouse is (or was) married.
``(C) Effect of adoption, etc.--In determining
whether any relationship specified in subparagraph (B)
exists, the rules of section 152(b)(2) shall apply.
``(D) Election.--An election under subparagraph
(A)(ii)--
``(i) may, except as otherwise provided in
regulations prescribed by the Secretary, be
made by any member of the family, and
``(ii) shall remain in effect until
terminated as provided in regulations
prescribed by the Secretary.''.
(b) Relief From Inadvertent Invalid Election or Termination.--Section
1362(f) (relating to inadvertent invalid elections or terminations), as
amended by section 229, is amended--
(1) by inserting ``or section 1361(c)(1)(A)(ii)'' after
``section 1361(b)(3)(B)(ii),'' in paragraph (1), and
(2) by inserting ``or section 1361(c)(1)(D)(iii)'' after
``section 1361(b)(3)(C),'' in paragraph (1)(B).
(c) Effective Dates.--
(1) Subsection (a).--The amendment made by subsection (a)
shall apply to taxable years beginning after December 31, 2004.
(2) Subsection (b).--The amendments made by subsection (b)
shall apply to elections and terminations made after December
31, 2004.
SEC. 222. INCREASE IN NUMBER OF ELIGIBLE SHAREHOLDERS TO 100.
(a) In General.--Section 1361(b)(1)(A) (defining small business
corporation) is amended by striking ``75'' and inserting ``100''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 223. EXPANSION OF BANK S CORPORATION ELIGIBLE SHAREHOLDERS TO
INCLUDE IRAS.
(a) In General.--Section 1361(c)(2)(A) (relating to certain trusts
permitted as shareholders) is amended by inserting after clause (v) the
following new clause:
``(vi) In the case of a corporation which is
a bank (as defined in section 581), a trust
which constitutes an individual retirement
account under section 408(a), including one
designated as a Roth IRA under section 408A,
but only to the extent of the stock held by
such trust in such bank as of the date of the
enactment of this clause.''.
(b) Treatment as Shareholder.--Section 1361(c)(2)(B) (relating to
treatment as shareholders) is amended by adding at the end the
following new clause:
``(vi) In the case of a trust described in
clause (vi) of subparagraph (A), the individual
for whose benefit the trust was created shall
be treated as a shareholder.''.
(c) Sale of Bank Stock in IRA Relating to S Corporation Election
Exempt From Prohibited Transaction Rules.--Section 4975(d) (relating to
exemptions) is amended by striking ``or'' at the end of paragraph (14),
by striking the period at the end of paragraph (15) and inserting ``;
or'', and by adding at the end the following new paragraph:
``(16) a sale of stock held by a trust which constitutes an
individual retirement account under section 408(a) to the
individual for whose benefit such account is established if--
``(A) such stock is in a bank (as defined in section
581),
``(B) such stock is held by such trust as of the date
of the enactment of this paragraph,
``(C) such sale is pursuant to an election under
section 1362(a) by such bank,
``(D) such sale is for fair market value at the time
of sale (as established by an independent appraiser)
and the terms of the sale are otherwise at least as
favorable to such trust as the terms that would apply
on a sale to an unrelated party,
``(E) such trust does not pay any commissions, costs,
or other expenses in connection with the sale, and
``(F) the stock is sold in a single transaction for
cash not later than 120 days after the S corporation
election is made.''.
(d) Conforming Amendment.--Section 512(e)(1) is amended by inserting
``1361(c)(2)(A)(vi) or'' before ``1361(c)(6)''.
(e) Effective Date.--The amendments made by this section shall take
effect on the date of the enactment of this Act.
SEC. 224. DISREGARD OF UNEXERCISED POWERS OF APPOINTMENT IN DETERMINING
POTENTIAL CURRENT BENEFICIARIES OF ESBT.
(a) In General.--Section 1361(e)(2) (defining potential current
beneficiary) is amended--
(1) by inserting ``(determined without regard to any power of
appointment to the extent such power remains unexercised at the
end of such period)'' after ``of the trust'' in the first
sentence, and
(2) by striking ``60-day'' in the second sentence and
inserting ``1-year''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 225. TRANSFER OF SUSPENDED LOSSES INCIDENT TO DIVORCE, ETC.
(a) In General.--Section 1366(d)(2) (relating to indefinite carryover
of disallowed losses and deductions) is amended to read as follows:
``(2) Indefinite carryover of disallowed losses and
deductions.--
``(A) In general.--Except as provided in subparagraph
(B), any loss or deduction which is disallowed for any
taxable year by reason of paragraph (1) shall be
treated as incurred by the corporation in the
succeeding taxable year with respect to that
shareholder.
``(B) Transfers of stock between spouses or incident
to divorce.--In the case of any transfer described in
section 1041(a) of stock of an S corporation, any loss
or deduction described in subparagraph (A) with respect
such stock shall be treated as incurred by the
corporation in the succeeding taxable year with respect
to the transferee.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 226. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK AMOUNTS BY QUALIFIED
SUBCHAPTER S TRUST INCOME BENEFICIARIES.
(a) In General.--Section 1361(d)(1) (relating to special rule for
qualified subchapter S trust) is amended--
(1) by striking ``and'' at the end of subparagraph (A),
(2) by striking the period at the end of subparagraph (B) and
inserting ``, and'', and
(3) by adding at the end the following new subparagraph:
``(C) for purposes of applying sections 465 and 469
to the beneficiary of the trust, the disposition of the
S corporation stock by the trust shall be treated as a
disposition by such beneficiary.''.
(b) Effective Date.--The amendments made by this section shall apply
to transfers made after December 31, 2004.
SEC. 227. EXCLUSION OF INVESTMENT SECURITIES INCOME FROM PASSIVE INCOME
TEST FOR BANK S CORPORATIONS.
(a) In General.--Section 1362(d)(3) (relating to where passive
investment income exceeds 25 percent of gross receipts for 3
consecutive taxable years and corporation has accumulated earnings and
profits) is amended by adding at the end the following new
subparagraph:
``(F) Exception for banks; etc.--In the case of a
bank (as defined in section 581), a bank holding
company (within the meaning of section 2(a) of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841(a))), or a
financial holding company (within the meaning of
section 2(p) of such Act), the term `passive investment
income' shall not include--
``(i) interest income earned by such bank or
company, or
``(ii) dividends on assets required to be
held by such bank or company, including stock
in the Federal Reserve Bank, the Federal Home
Loan Bank, or the Federal Agricultural Mortgage
Bank or participation certificates issued by a
Federal Intermediate Credit Bank.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 228. TREATMENT OF BANK DIRECTOR SHARES.
(a) In General.--Section 1361 (defining S corporation) is amended by
adding at the end the following new subsection:
``(f) Restricted Bank Director Stock.--
``(1) In general.--Restricted bank director stock shall not
be taken into account as outstanding stock of the S corporation
in applying this subchapter (other than section 1368(f)).
``(2) Restricted bank director stock.--For purposes of this
subsection, the term `restricted bank director stock' means
stock in a bank (as defined in section 581), a bank holding
company (within the meaning of section 2(a) of the Bank Holding
Company Act of 1956 (12 U.S.C. 1841(a))), or a financial
holding company (within the meaning of section 2(p) of such
Act), registered with the Federal Reserve System, if such
stock--
``(A) is required to be held by an individual under
applicable Federal or State law in order to permit such
individual to serve as a director, and
``(B) is subject to an agreement with such bank or
company (or a corporation which controls (within the
meaning of section 368(c)) such bank or company)
pursuant to which the holder is required to sell back
such stock (at the same price as the individual
acquired such stock) upon ceasing to hold the office of
director.
``(3) Cross reference.--
``For treatment of certain distributions with respect
to restricted bank director stock, see section 1368(f).''.
(b) Distributions.--Section 1368 (relating to distributions) is
amended by adding at the end the following new subsection:
``(f) Restricted Bank Director Stock.--If a director receives a
distribution (not in part or full payment in exchange for stock) from
an S corporation with respect to any restricted bank director stock (as
defined in section 1361(f)), the amount of such distribution--
``(1) shall be includible in gross income of the director,
and
``(2) shall be deductible by the corporation for the taxable
year of such corporation in which or with which ends the
taxable year in which such amount in included in the gross
income of the director.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 229. RELIEF FROM INADVERTENTLY INVALID QUALIFIED SUBCHAPTER S
SUBSIDIARY ELECTIONS AND TERMINATIONS.
(a) In General.--Section 1362(f) (relating to inadvertent invalid
elections or terminations) is amended--
(1) by inserting ``, section 1361(b)(3)(B)(ii),'' after
``subsection (a)'' in paragraph (1),
(2) by inserting ``, section 1361(b)(3)(C),'' after
``subsection (d)'' in paragraph (1)(B),
(3) by amending paragraph (3)(A) to read as follows:
``(A) so that the corporation for which the election
was made is a small business corporation or a qualified
subchapter S subsidiary, as the case may be, or'',
(4) by amending paragraph (4) to read as follows:
``(4) the corporation for which the election was made, and
each person who was a shareholder in such corporation at any
time during the period specified pursuant to this subsection,
agrees to make such adjustments (consistent with the treatment
of such corporation as an S corporation or a qualified
subchapter S subsidiary, as the case may be) as may be required
by the Secretary with respect to such period,'', and
(5) by inserting ``or a qualified subchapter S subsidiary, as
the case may be'' after ``S corporation'' in the matter
following paragraph (4).
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 230. INFORMATION RETURNS FOR QUALIFIED SUBCHAPTER S SUBSIDIARIES.
(a) In General.--Section 1361(b)(3)(A) (relating to treatment of
certain wholly owned subsidiaries) is amended by inserting ``and in the
case of information returns required under part III of subchapter A of
chapter 61'' after ``Secretary''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 231. REPAYMENT OF LOANS FOR QUALIFYING EMPLOYER SECURITIES.
(a) In General.--Subsection (f) of section 4975 (relating to other
definitions and special rules) is amended by adding at the end the
following new paragraph:
``(7) S corporation repayment of loans for qualifying
employer securities.--A plan shall not be treated as violating
the requirements of section 401 or 409 or subsection (e)(7), or
as engaging in a prohibited transaction for purposes of
subsection (d)(3), merely by reason of any distribution (as
described in section 1368(a)) with respect to S corporation
stock that constitutes qualifying employer securities, which in
accordance with the plan provisions is used to make payments on
a loan described in subsection (d)(3) the proceeds of which
were used to acquire such qualifying employer securities
(whether or not allocated to participants). The preceding
sentence shall not apply in the case of a distribution which is
paid with respect to any employer security which is allocated
to a participant unless the plan provides that employer
securities with a fair market value of not less than the amount
of such distribution are allocated to such participant for the
year which (but for the preceding sentence) such distribution
would have been allocated to such participant.''.
(b) Effective Date.--The amendment made by this section shall apply
to distributions with respect to S corporation stock made after
December 31, 2004.
Subtitle D--Alternative Minimum Tax Relief
SEC. 241. FOREIGN TAX CREDIT UNDER ALTERNATIVE MINIMUM TAX.
(a) In General.--
(1) Subsection (a) of section 59 is amended by striking
paragraph (2) and by redesignating paragraphs (3) and (4) as
paragraphs (2) and (3), respectively.
(2) Section 53(d)(1)(B)(i)(II) is amended by striking ``and
if section 59(a)(2) did not apply''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 242. EXPANSION OF EXEMPTION FROM ALTERNATIVE MINIMUM TAX FOR SMALL
CORPORATIONS.
(a) In General.--Subparagraphs (A) and (B) of section 55(e)(1) are
each amended by striking ``$7,500,000'' each place it appears and
inserting ``$20,000,000''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2005.
SEC. 243. INCOME AVERAGING FOR FARMERS NOT TO INCREASE ALTERNATIVE
MINIMUM TAX.
(a) In General.--Subsection (c) of section 55 (defining regular tax)
is amended by redesignating paragraph (2) as paragraph (3) and by
inserting after paragraph (1) the following new paragraph:
``(2) Coordination with income averaging for farmers.--Solely
for purposes of this section, section 1301 (relating to
averaging of farm income) shall not apply in computing the
regular tax liability.''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 2003.
Subtitle E--Restructuring of Incentives for Alcohol Fuels, Etc.
SEC. 251. REDUCED RATES OF TAX ON GASOHOL REPLACED WITH EXCISE TAX
CREDIT; REPEAL OF OTHER ALCOHOL-BASED FUEL
INCENTIVES; ETC.
(a) Excise Tax Credit for Alcohol Fuel Mixtures.--
(1) In general.--Subsection (f) of section 6427 is amended to
read as follows:
``(f) Alcohol Fuel Mixtures.--
``(1) In general.--The amount of credit which would (but for
section 40(c)) be determined under section 40(a)(1) for any
period--
``(A) shall, with respect to taxable events occurring
during such period, be treated--
``(i) as a payment of the taxpayer's
liability for tax imposed by section 4081, and
``(ii) as received at the time of the taxable
event, and
``(B) to the extent such amount of credit exceeds
such liability for such period, shall (except as
provided in subsection (k)) be paid subject to
subsection (i)(3) by the Secretary without interest.
``(2) Special rules.--
``(A) Only certain alcohol taken into account.--For
purposes of paragraph (1), section 40 shall be
applied--
``(i) by not taking into account alcohol with
a proof of less than 190, and
``(ii) by treating as alcohol the alcohol
gallon equivalent of ethyl tertiary butyl ether
or other ethers produced from such alcohol.
``(B) Treatment of refiners.--For purposes of
paragraph (1), in the case of a mixture--
``(i) the alcohol in which is described in
subparagraph (A)(ii), and
``(ii) which is produced by any person at a
refinery prior to any taxable event,
section 40 shall be applied by treating such person as
having sold such mixture at the time of its removal
from the refinery (and only at such time) to another
person for use as a fuel.
``(3) Mixtures not used as fuel.--Rules similar to the rules
of subparagraphs (A) and (D) of section 40(d)(3) shall apply
for purposes of this subsection.
``(4) Termination.--This section shall apply only to periods
to which section 40 applies, determined by substituting in
section 40(e)--
``(A) `December 31, 2010' for `December 31, 2007',
and
``(B) `January 1, 2011' for `January 1, 2008'.''
(2) Revision of rules for payment of credit.--Paragraph (3)
of section 6427(i) is amended to read as follows:
``(3) Special rule for alcohol mixture credit.--
``(A) In general.--A claim may be filed under
subsection (f)(1)(B) by any person for any period--
``(i) for which $200 or more is payable under
such subsection (f)(1)(B), and
``(ii) which is not less than 1 week.
In the case of an electronic claim, this subparagraph
shall be applied without regard to clause (i).
``(B) Payment of claim.--Notwithstanding subsection
(f)(1)(B), if the Secretary has not paid pursuant to a
claim filed under this section within 45 days of the
date of the filing of such claim (20 days in the case
of an electronic claim), the claim shall be paid with
interest from such date determined by using the
overpayment rate and method under section 6621.
``(C) Time for filing claim.--No claim filed under
this paragraph shall be allowed unless filed on or
before the last day of the first quarter following the
earliest quarter included in the claim.''
(b) Repeal of Other Incentives for Fuel Mixtures.--
(1) Subsection (b) of section 4041 is amended to read as
follows:
``(b) Exemption for Off-Highway Business Use.--
``(1) In general.--No tax shall be imposed by subsection (a)
or (d)(1) on liquids sold for use or used in an off-highway
business use.
``(2) Tax where other use.--If a liquid on which no tax was
imposed by reason of paragraph (1) is used otherwise than in an
off-highway business use, a tax shall be imposed by paragraph
(1)(B), (2)(B), or (3)(A)(ii) of subsection (a) (whichever is
appropriate) and by the corresponding provision of subsection
(d)(1) (if any).
``(3) Off-highway business use defined.--For purposes of this
subsection, the term `off-highway business use' has the meaning
given to such term by section 6421(e)(2); except that such term
shall not, for purposes of subsection (a)(1), include use in a
diesel-powered train.''
(2) Section 4041(k) is hereby repealed.
(3) Section 4081(c) is hereby repealed.
(4) Section 4091(c) is hereby repealed.
(c) Transfers to Highway Trust Fund.--Paragraph (4) of section
9503(b) is amended by adding ``or'' at the end of subparagraph (B), by
striking the comma at the end of subparagraph (C) and inserting a
period, and by striking subparagraphs (D), (E), and (F).
(d) Conforming Amendments.--
(1) Subsection (c) of section 40 is amended to read as
follows:
``(c) Coordination With Excise Tax Benefits.--The amount of the
credit determined under this section with respect to any alcohol shall,
under regulations prescribed by the Secretary, be properly reduced to
take into account the benefit provided with respect to such alcohol
under section 6427(f).''
(2) Subparagraph (B) of section 40(d)(4) is amended by
striking ``under section 4041(k) or 4081(c)'' and inserting
``under section 6427(f)''.
(e) Effective Dates.--
(1) In general.--Except as provided by paragraph (2), the
amendments made by this section shall apply to fuel sold or
used after September 30, 2004.
(2) Subsection (c).--The amendments made by subsection (c)
shall apply to taxes imposed after September 30, 2003.
SEC. 252. ALCOHOL FUEL SUBSIDIES BORNE BY GENERAL FUND.
(a) Transfers to Fund.--Section 9503(b)(1) is amended by adding at
the end the following new flush sentence:
``For purposes of this paragraph, the amount of taxes received
under section 4081 shall include any amount treated as a
payment under section 6427(f)(1)(A) and shall not be reduced by
the amount paid under section 6427(f)(1)(B).''.
(b) Transfers From Fund.--Subparagraph (A) of section 9503(c)(2) is
amended by adding at the end the following new sentence: ``Clauses
(i)(III) and (ii) shall not apply to claims under section
6427(f)(1)(B).''
(c) Effective Date.--
(1) Subsection (a).--The amendment made by subsection (a)
shall apply to taxes received after September 30, 2004.
(2) Subsection (b).--The amendment made by subsection (b)
shall apply to amounts paid after September 30, 2004, and (to
the extent related to section 34 of the Internal Revenue Code
of 1986) to fuel used after such date.
Subtitle F--Stock Options and Employee Stock Purchase Plan Stock
Options
SEC. 261. EXCLUSION OF INCENTIVE STOCK OPTIONS AND EMPLOYEE STOCK
PURCHASE PLAN STOCK OPTIONS FROM WAGES.
(a) Exclusion From Employment Taxes.--
(1) Social security taxes.--
(A) Section 3121(a) (relating to definition of wages)
is amended by striking ``or'' at the end of paragraph
(20), by striking the period at the end of paragraph
(21) and inserting ``; or'', and by inserting after
paragraph (21) the following new paragraph:
``(22) remuneration on account of--
``(A) a transfer of a share of stock to any
individual pursuant to an exercise of an incentive
stock option (as defined in section 422(b)) or under an
employee stock purchase plan (as defined in section
423(b)), or
``(B) any disposition by the individual of such
stock.''.
(B) Section 209(a) of the Social Security Act is
amended by striking ``or'' at the end of paragraph
(17), by striking the period at the end of paragraph
(18) and inserting ``; or'', and by inserting after
paragraph (18) the following new paragraph:
``(19) Remuneration on account of--
``(A) a transfer of a share of stock to any
individual pursuant to an exercise of an incentive
stock option (as defined in section 422(b) of the
Internal Revenue Code of 1986) or under an employee
stock purchase plan (as defined in section 423(b) of
such Code), or
``(B) any disposition by the individual of such
stock.''.
(2) Railroad retirement taxes.--Subsection (e) of section
3231 is amended by adding at the end the following new
paragraph:
``(12) Qualified stock options.--The term `compensation'
shall not include any remuneration on account of--
``(A) a transfer of a share of stock to any
individual pursuant to an exercise of an incentive
stock option (as defined in section 422(b)) or under an
employee stock purchase plan (as defined in section
423(b)), or
``(B) any disposition by the individual of such
stock.''.
(3) Unemployment taxes.--Section 3306(b) (relating to
definition of wages) is amended by striking ``or'' at the end
of paragraph (17), by striking the period at the end of
paragraph (18) and inserting ``; or'', and by inserting after
paragraph (18) the following new paragraph:
``(19) remuneration on account of--
``(A) a transfer of a share of stock to any
individual pursuant to an exercise of an incentive
stock option (as defined in section 422(b)) or under an
employee stock purchase plan (as defined in section
423(b)), or
``(B) any disposition by the individual of such
stock.''.
(b) Wage Withholding Not Required on Disqualifying Dispositions.--
Section 421(b) (relating to effect of disqualifying dispositions) is
amended by adding at the end the following new sentence: ``No amount
shall be required to be deducted and withheld under chapter 24 with
respect to any increase in income attributable to a disposition
described in the preceding sentence.''.
(c) Wage Withholding Not Required on Compensation Where Option Price
Is Between 85 Percent and 100 Percent of Value of Stock.--Section
423(c) (relating to special rule where option price is between 85
percent and 100 percent of value of stock) is amended by adding at the
end the following new sentence: ``No amount shall be required to be
deducted and withheld under chapter 24 with respect to any amount
treated as compensation under this subsection.''.
(d) Effective Date.--The amendments made by this section shall apply
to stock acquired pursuant to options exercised after the date of the
enactment of this Act.
Subtitle G--Incentives to Reinvest Foreign Earnings in United States
SEC. 271. INCENTIVES TO REINVEST FOREIGN EARNINGS IN UNITED STATES.
(a) In General.--Subpart F of part III of subchapter N of chapter 1
(relating to controlled foreign corporations) is amended by adding at
the end the following new section:
``SEC. 965. TEMPORARY DIVIDENDS RECEIVED DEDUCTION.
``(a) Deduction.--
``(1) In general.--In the case of a corporation which is a
United States shareholder, there shall be allowed as a
deduction an amount equal to 85 percent of the dividends which
are received by such shareholder from controlled foreign
corporations during the election period.
``(2) Dividends paid indirectly from controlled foreign
corporations.--If, within the election period, a United States
shareholder receives a distribution from a controlled foreign
corporation which is excluded from gross income under section
959(a), such distribution shall be treated for purposes of this
section as a dividend to the extent of any amount included in
income by such United States shareholder under section
951(a)(1)(A) as a result of any dividend paid during the
election period to--
``(A) such controlled foreign corporation from
another controlled foreign corporation that is in a
chain of ownership described in section 958(a), or
``(B) any other controlled foreign corporation in
such chain of ownership, but only to the extent of
distributions described in section 959(b) which are
made during the election period to the controlled
foreign corporation from which such United States
shareholder received such distribution.
``(b) Limitations.--
``(1) In general.--The amount of dividends taken into account
under subsection (a) shall not exceed the greater of--
``(A) $500,000,000,
``(B) the amount shown on the applicable financial
statement as earnings permanently reinvested outside
the United States, or
``(C) in the case of an applicable financial
statement which fails to show a specific amount of
earnings permanently reinvested outside the United
States and which shows a specific amount of tax
liability attributable to such earnings, the amount of
such earnings determined in such manner as the
Secretary may prescribe.
Except as provided in subparagraph (C), if there is no
statement or such statement fails to show a specific amount of
such earnings or liability, such amount shall be treated as
being zero for purposes of this paragraph.
``(2) Dividends must be extraordinary.--The amount of
dividends taken into account under subsection (a) shall not
exceed the excess (if any) of--
``(A) the dividends received during the taxable year
by such shareholder from controlled foreign
corporations, over
``(B) the annual average for the base period years
of--
``(i) the dividends received during each base
period year by such shareholder from such
corporations,
``(ii) the amounts includible in such
shareholder's gross income for each base period
year under section 951(a)(1)(B) with respect to
such corporations, and
``(iii) the amounts that would have been
included for each base period year but for
section 959(a) with respect to such
corporations.
The amount taken into account under clause (iii) for
any base period year shall not include any amount which
is not includible in gross income by reason of an
amount described in clause (ii) with respect to a prior
taxable year.
``(3) Requirement to invest in united states.--Subsection (a)
shall not apply to any dividend received by a United States
shareholder unless the amount of the dividend is invested in
the United States pursuant to a plan describing the
expenditures to be made with such amount--
``(A) which, before the dividend is received, is
approved by the president or chief executive officer of
such shareholder, and
``(B) which is approved by the Board of Directors (or
management committee) of such shareholder no later than
its first meeting on or after the date the dividend is
received.
``(c) Definitions and Special Rules.--For purposes of this section--
``(1) Election period.--The term `election period' means--
``(A) if this section applies to the taxpayer's last
taxable year beginning before the date of the enactment
of this section, any 6-month or shorter period during
such year which is after the date of the enactment of
this section and which is selected by the taxpayer, and
``(B) if this section applies to the taxpayer's first
taxable year beginning on or after such date, the 1st 6
months of such taxable year.
``(2) Applicable financial statement.--The term `applicable
financial statement' means the most recently audited financial
statement (including notes and other documents which accompany
such statement)--
``(A) which is certified on or before March 31, 2003,
as being prepared in accordance with generally accepted
accounting principles, and
``(B) which is used for the purposes of a statement
or report--
``(i) to creditors,
``(ii) to shareholders, or
``(iii) for any other substantial nontax
purpose.
In the case of a corporation required to file a financial
statement with the Securities and Exchange Commission, such
term means the most recent such statement filed on or before
March 31, 2003.
``(3) Base period years.--The base period years are the 3
taxable years--
``(A) which are among the 5 most recent taxable years
ending on or before March 31, 2003, and
``(B) which are determined by disregarding--
``(i) 1 taxable year for which the sum of the
amounts described in clauses (i), (ii), and
(iii) of subsection (b)(2)(B) is the largest,
and
``(ii) 1 taxable year for which such sum is
the smallest.
Rules similar to the rules of subparagraphs (A) and (B) of
section 41(f)(3) shall apply for purposes of this paragraph.
``(4) Coordination with dividends received deduction.--No
deduction shall be allowed under section 243 or 245 for any
dividend for which a deduction is allowed under this section.
``(d) Denial of Foreign Tax Credit.--
``(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 the deductible portion of any dividend
or of any amount described in subsection (a)(2). No deduction
shall be allowed under this chapter for any tax for which
credit is not allowable by reason of the preceding sentence.
``(2) Deductible portion.--For purposes of paragraph (1),
unless the taxpayer otherwise specifies, the deductible portion
of any dividend is the amount which bears the same ratio to the
amount of such dividend as the amount allowed as a deduction
under subsection (a) for the taxable year bears to the amount
described in subsection (b)(2)(A) for such year.
``(e) Increase in Tax on Included Amounts Not Reduced by Credits,
Etc.--
``(1) In general.--Any tax under this chapter by reason of
nondeductible CFC dividends shall not be treated as tax imposed
by this chapter for purposes of determining--
``(A) the amount of any credit allowable under this
chapter, or
``(B) the amount of the tax imposed by section 55.
Subparagraph (A) shall not apply to the credit under section 53
or to the credit under section 27(a) with respect to taxes
attributable to such dividends.
``(2) Inclusions may not be offset by net operating losses.--
``(A) In general.--The taxable income of any United
States shareholder for any taxable year shall in no
event be less than the amount of nondeductible CFC
dividends received during such year.
``(B) Coordination with section 172.--The
nondeductible CFC dividends for any taxable year shall
not be taken into account--
``(i) in determining under section 172 the
amount of any net operating loss for such
taxable year, and
``(ii) in determining taxable income for such
taxable year for purposes of the 2nd sentence
of section 172(b)(2).
``(3) Nondeductible cfc dividends.--For purposes of this
subsection, the term `nondeductible CFC dividends' means the
excess of the amount of dividends taken into account under
subsection (a) over the deduction allowed under subsection (a)
for such dividends.
``(f) Election.--This section shall apply for the taxpayer's first
taxable year beginning on or after the date of the enactment of this
section if the taxpayer elects its application for such taxable year.
The taxpayer may elect to apply this section to the taxpayer's last
taxable year beginning before the date of the enactment of this section
in lieu of such first taxable year.''
(b) Alternative Minimum Tax.--Subparagraph (C) of section 56(g)(4) is
amended by adding at the end the following new clause:
``(v) Special rule for certain distributions
from controlled foreign corporations.--Clause
(i) shall not apply to any deduction allowable
under section 965.''.
(c) Clerical Amendment.--The table of sections for subpart F of part
III of subchapter N of chapter 1 is amended by adding at the end the
following new item:
``Sec. 965. Temporary dividends received
deduction.''.
(d) Effective Date.--The amendments made by this section shall apply
to taxable years ending on or after the date of the enactment of this
Act.
Subtitle H--Other Incentive Provisions
SEC. 281. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF WEATHER-
RELATED CONDITIONS.
(a) Rules for Replacement of Involuntarily Converted Livestock.--
Subsection (e) of section 1033 (relating to involuntary conversions) is
amended--
(1) by striking ``Conditions.--For purposes'' and inserting
``Conditions.--
``(1) In general.--For purposes'', and
(2) by adding at the end the following new paragraph:
``(2) Extension of replacement period.--
``(A) In general.--In the case of drought, flood, or
other weather-related conditions described in paragraph
(1) which result in the area being designated as
eligible for assistance by the Federal Government,
subsection (a)(2)(B) shall be applied with respect to
any converted property by substituting `4 years' for `2
years'.
``(B) Further extension by secretary.--The Secretary
may extend on a regional basis the period for
replacement under this section (after the application
of subparagraph (A)) for such additional time as the
Secretary determines appropriate if the weather-related
conditions which resulted in such application continue
for more than 3 years.''.
(b) Income Inclusion Rules.--Subsection (e) of section 451 (relating
to special rule for proceeds from livestock sold on account of drought,
flood, or other weather-related conditions) is amended by adding at the
end the following new paragraph:
``(3) Special election rules.--If section 1033(e)(2) applies
to a sale or exchange of livestock described in paragraph (1),
the election under paragraph (1) shall be deemed valid if made
during the replacement period described in such section.''.
(c) Effective Date.--The amendments made by this section shall apply
to any taxable year with respect to which the due date (without regard
to extensions) for the return is after December 31, 2002.
SEC. 282. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES WITHOUT
REDUCING PATRONAGE DIVIDENDS.
(a) In General.--Subsection (a) of section 1388 (relating to
patronage dividend defined) is amended by adding at the end the
following: ``For purposes of paragraph (3), net earnings shall not be
reduced by amounts paid during the year as dividends on capital stock
or other proprietary capital interests of the organization to the
extent that the articles of incorporation or bylaws of such
organization or other contract with patrons provide that such dividends
are in addition to amounts otherwise payable to patrons which are
derived from business done with or for patrons during the taxable
year.''.
(b) Effective Date.--The amendment made by this section shall apply
to distributions in taxable years beginning after the date of the
enactment of this Act.
SEC. 283. CAPITAL GAIN TREATMENT UNDER SECTION 631(B) TO APPLY TO
OUTRIGHT SALES BY LANDOWNERS.
(a) In General.--The first sentence of section 631(b) (relating to
disposal of timber with a retained economic interest) is amended by
striking ``retains an economic interest in such timber'' and inserting
``either retains an economic interest in such timber or makes an
outright sale of such timber''.
(b) Conforming Amendments.--
(1) The third sentence of section 631(b) is amended by
striking ``The date of disposal'' and inserting ``In the case
of disposal of timber with a retained economic interest, the
date of disposal''.
(2) The heading for section 631(b) is amended by striking
``With a Retained Economic Interest''.
(c) Effective Date.--The amendments made by this section shall apply
to sales after December 31, 2004.
SEC. 284. DISTRIBUTIONS FROM PUBLICLY TRADED PARTNERSHIPS TREATED AS
QUALIFYING INCOME OF REGULATED INVESTMENT
COMPANIES.
(a) In General.--Paragraph (2) of section 851(b) (defining regulated
investment company) is amended to read as follows:
``(2) at least 90 percent of its gross income is derived
from--
``(A) dividends, interest, payments with respect to
securities loans (as defined in section 512(a)(5)), and
gains from the sale or other disposition of stock or
securities (as defined in section 2(a)(36) of the
Investment Company Act of 1940, as amended) or foreign
currencies, or other income (including but not limited
to gains from options, futures or forward contracts)
derived with respect to its business of investing in
such stock, securities, or currencies, and
``(B) distributions or other income derived from an
interest in a qualified publicly traded partnership (as
defined in subsection (h)); and''.
(b) Source Flow-Through Rule Not To Apply.--The last sentence of
section 851(b) is amended by inserting ``(other than a qualified
publicly traded partnership as defined in subsection (h))'' after
``derived from a partnership''.
(c) Limitation on Ownership.--Subsection (c) of section 851 is
amended by redesignating paragraph (5) as paragraph (6) and inserting
after paragraph (4) the following new paragraph:
``(5) The term `outstanding voting securities of such issuer'
shall include the equity securities of a qualified publicly
traded partnership (as defined in subsection (h)).''.
(d) Definition of Qualified Publicly Traded Partnership.--Section 851
is amended by adding at the end the following new subsection:
``(h) Qualified Publicly Traded Partnership.--For purposes of this
section, the term `qualified publicly traded partnership' means a
publicly traded partnership described in section 7704(b) other than a
partnership which would satisfy the gross income requirements of
section 7704(c)(2) if qualifying income included only income described
in subsection (b)(2)(A).''.
(e) Definition of Qualifying Income.--Section 7704(d)(4) is amended
by striking ``section 851(b)(2)'' and inserting ``section
851(b)(2)(A)''.
(f) Limitation on Composition of Assets.--Subparagraph (B) of section
851(b)(3) is amended to read as follows:
``(B) not more than 25 percent of the value of its
total assets is invested in--
``(i) the securities (other than Government
securities or the securities of other regulated
investment companies) of any one issuer,
``(ii) the securities (other than the
securities of other regulated investment
companies) of two or more issuers which the
taxpayer controls and which are determined,
under regulations prescribed by the Secretary,
to be engaged in the same or similar trades or
businesses or related trades or businesses, or
``(iii) the securities of one or more
qualified publicly traded partnerships (as
defined in subsection (h)).''.
(g) Application of Special Passive Activity Rule to Regulated
Investment Companies.--Subsection (k) of section 469 (relating to
separate application of section in case of publicly traded
partnerships) is amended by adding at the end the following new
paragraph:
``(4) Application to regulated investment companies.--For
purposes of this section, a regulated investment company (as
defined in section 851) holding an interest in a qualified
publicly traded partnership (as defined in section 851(h))
shall be treated as a taxpayer described in subsection (a)(2)
with respect to items attributable to such interest.''.
(h) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after the date of the enactment of this Act.
SEC. 285. IMPROVEMENTS RELATED TO REAL ESTATE INVESTMENT TRUSTS.
(a) Expansion of Straight Debt Safe Harbor.--Section 856 (defining
real estate investment trust) is amended--
(1) in subsection (c) by striking paragraph (7), and
(2) by adding at the end the following new subsection:
``(m) Safe Harbor in Applying Subsection (c)(4).--
``(1) In general.--In applying subclause (III) of subsection
(c)(4)(B)(iii), except as otherwise determined by the Secretary
in regulations, the following shall not be considered
securities held by the trust:
``(A) Straight debt securities of an issuer which
meet the requirements of paragraph (2).
``(B) Any loan to an individual or an estate.
``(C) Any section 467 rental agreement (as defined in
section 467(d)), other than with a person described in
subsection (d)(2)(B).
``(D) Any obligation to pay rents from real property
(as defined in subsection (d)(1)).
``(E) Any security issued by a State or any political
subdivision thereof, the District of Columbia, a
foreign government or any political subdivision
thereof, or the Commonwealth of Puerto Rico, but only
if the determination of any payment received or accrued
under such security does not depend in whole or in part
on the profits of any entity not described in this
subparagraph or payments on any obligation issued by
such an entity,
``(F) Any security issued by a real estate investment
trust.
``(G) Any other arrangement as determined by the
Secretary.
``(2) Special rules relating to straight debt securities.--
``(A) In general.--For purposes of paragraph (1)(A),
securities meet the requirements of this paragraph if
such securities are straight debt, as defined in
section 1361(c)(5) (without regard to subparagraph
(B)(iii) thereof).
``(B) Special rules relating to certain
contingencies.--For purposes of subparagraph (A), any
interest or principal shall not be treated as failing
to satisfy section 1361(c)(5)(B)(i) solely by reason of
the fact that--
``(i) the time of payment of such interest or
principal is subject to a contingency, but only
if--
``(I) any such contingency does not
have the effect of changing the
effective yield to maturity, as
determined under section 1272, other
than a change in the annual yield to
maturity which does not exceed the
greater of \1/4\ of 1 percent or 5
percent of the annual yield to
maturity, or
``(II) neither the aggregate issue price nor
the aggregate face amount of the issuer's debt
instruments held by the trust exceeds
$1,000,000 and not more than 12 months of
unaccrued interest can be required to be
prepaid thereunder, or
``(ii) the time or amount of payment is
subject to a contingency upon a default or the
exercise of a prepayment right by the issuer of
the debt, but only if such contingency is
consistent with customary commercial practice.
``(C) Special rules relating to corporate or
partnership issuers.--In the case of an issuer which is
a corporation or a partnership, securities that
otherwise would be described in paragraph (1)(A) shall
be considered not to be so described if the trust
holding such securities and any of its controlled
taxable REIT subsidiaries (as defined in subsection
(d)(8)(A)(iv)) hold any securities of the issuer
which--
``(i) are not described in paragraph (1)
(prior to the application of this
subparagraph), and
``(ii) have an aggregate value greater than 1
percent of the issuer's outstanding securities
determined without regard to paragraph
(3)(A)(i).
``(3) Look-through rule for partnership securities.--
``(A) In general.--For purposes of applying subclause
(III) of subsection (c)(4)(B)(iii)--
``(i) a trust's interest as a partner in a
partnership (as defined in section 7701(a)(2))
shall not be considered a security, and
``(ii) the trust shall be deemed to own its
proportionate share of each of the assets of
the partnership.
``(B) Determination of trust's interest in
partnership assets.--For purposes of subparagraph (A),
with respect to any taxable year beginning after the
date of the enactment of this subparagraph--
``(i) the trust's interest in the partnership
assets shall be the trust's proportionate
interest in any securities issued by the
partnership (determined without regard to
subparagraph (A)(i) and paragraph (4), but not
including securities described in paragraph
(1)), and
``(ii) the value of any debt instrument shall
be the adjusted issue price thereof, as defined
in section 1272(a)(4).
``(4) Certain partnership debt instruments not treated as a
security.--For purposes of applying subclause (III) of
subsection (c)(4)(B)(iii)--
``(A) any debt instrument issued by a partnership and
not described in paragraph (1) shall not be considered
a security to the extent of the trust's interest as a
partner in the partnership, and
``(B) any debt instrument issued by a partnership and
not described in paragraph (1) shall not be considered
a security if at least 75 percent of the partnership's
gross income (excluding gross income from prohibited
transactions) is derived from sources referred to in
subsection (c)(3).
``(5) Secretarial guidance.--The Secretary is authorized to
provide guidance (including through the issuance of a written
determination, as defined in section 6110(b)) that an
arrangement shall not be considered a security held by the
trust for purposes of applying subclause (III) of subsection
(c)(4)(B)(iii) notwithstanding that such arrangement otherwise
could be considered a security under subparagraph (F) of
subsection (c)(5).''.
(b) Clarification of Application of Limited Rental Exception.--
Subparagraph (A) of section 856(d)(8) (relating to special rules for
taxable REIT subsidiaries) is amended to read as follows:
``(A) Limited rental exception.--
``(i) In general.--The requirements of this
subparagraph are met with respect to any
property if at least 90 percent of the leased
space of the property is rented to persons
other than taxable REIT subsidiaries of such
trust and other than persons described in
paragraph (2)(B).
``(ii) Rents must be substantially
comparable.--Clause (i) shall apply only to the
extent that the amounts paid to the trust as
rents from real property (as defined in
paragraph (1) without regard to paragraph
(2)(B)) from such property are substantially
comparable to such rents paid by the other
tenants of the trust's property for comparable
space.
``(iii) Times for testing rent
comparability.--The substantial comparability
requirement of clause (ii) shall be treated as
met with respect to a lease to a taxable REIT
subsidiary of the trust if such requirement is
met under the terms of the lease--
``(I) at the time such lease is
entered into,
``(II) at the time of each extension
of the lease, including a failure to
exercise a right to terminate, and
``(III) at the time of any
modification of the lease between the
trust and the taxable REIT subsidiary
if the rent under such lease is
effectively increased pursuant to such
modification.
With respect to subclause (III), if the taxable
REIT subsidiary of the trust is a controlled
taxable REIT subsidiary of the trust, the term
`rents from real property' shall not in any
event include rent under such lease to the
extent of the increase in such rent on account
of such modification.
``(iv) Controlled taxable reit subsidiary.--
For purposes of clause (iii), the term
`controlled taxable REIT subsidiary' means,
with respect to any real estate investment
trust, any taxable REIT subsidiary of such
trust if such trust owns directly or
indirectly--
``(I) stock possessing more than 50
percent of the total voting power of
the outstanding stock of such
subsidiary, or
``(II) stock having a value of more
than 50 percent of the total value of
the outstanding stock of such
subsidiary.
``(v) Continuing qualification based on third
party actions.--If the requirements of clause
(i) are met at a time referred to in clause
(iii), such requirements shall continue to be
treated as met so long as there is no increase
in the space leased to any taxable REIT
subsidiary of such trust or to any person
described in paragraph (2)(B).
``(vi) Correction period.--If there is an
increase referred to in clause (v) during any
calendar quarter with respect to any property,
the requirements of clause (iii) shall be
treated as met during the quarter and the
succeeding quarter if such requirements are met
at the close of such succeeding quarter.''.
(c) Deletion of Customary Services Exception.--Subparagraph (B) of
section 857(b)(7) (relating to redetermined rents) is amended by
striking clause (ii) and by redesignating clauses (iii), (iv), (v),
(vi), and (vii) as clauses (ii), (iii), (iv), (v), and (vi),
respectively.
(d) Conformity With General Hedging Definition.--Subparagraph (G) of
section 856(c)(5) (relating to treatment of certain hedging
instruments) is amended to read as follows:
``(G) Treatment of certain hedging instruments.--
Except to the extent provided by regulations, any
income of a real estate investment trust from a hedging
transaction (as defined in clause (ii) or (iii) of
section 1221(b)(2)(A)) which is clearly identified
pursuant to section 1221(a)(7), including gain from the
sale or disposition of such a transaction, shall not
constitute gross income under paragraph (2) to the
extent that the transaction hedges any indebtedness
incurred or to be incurred by the trust to acquire or
carry real estate assets.''.
(e) Conformity With Regulated Investment Company Rules.--Clause (i)
of section 857(b)(5)(A) (relating to imposition of tax in case of
failure to meet certain requirements) is amended by striking ``90
percent'' and inserting ``95 percent''.
(f) Savings Provisions.--
(1) Rules of application for failure to satisfy section
856(c)(4).--Section 856(c) (relating to definition of real
estate investment trust) is amended by inserting after
paragraph (6) the following new paragraph:
``(7) Rules of application for failure to satisfy paragraph
(4).--
``(A) De minimis failure.--A corporation, trust, or
association that fails to meet the requirements of
paragraph (4)(B)(iii) for a particular quarter shall
nevertheless be considered to have satisfied the
requirements of such paragraph for such quarter if--
``(i) such failure is due to the ownership of
assets the total value of which does not exceed
the lesser of--
``(I) 1 percent of the total value of
the trust's assets at the end of the
quarter for which such measurement is
done, and
``(II) $10,000,000, and
``(ii)(I) the corporation, trust, or
association, following the identification of
such failure, disposes of assets in order to
meet the requirements of such paragraph within
6 months after the last day of the quarter in
which the corporation, trust or association's
identification of the failure to satisfy the
requirements of such paragraph occurred or such
other time period prescribed by the Secretary
and in the manner prescribed by the Secretary,
or
``(II) the requirements of such paragraph are
otherwise met within the time period specified
in subclause (I).
``(B) Failures exceeding de minimis amount.--A
corporation, trust, or association that fails to meet
the requirements of paragraph (4) for a particular
quarter shall nevertheless be considered to have
satisfied the requirements of such paragraph for such
quarter if--
``(i) such failure involves the ownership of
assets the total value of which exceeds the de
minimis standard described in subparagraph
(A)(i) at the end of the quarter for which such
measurement is done,
``(ii) following the corporation, trust, or
association's identification of the failure to
satisfy the requirements of such paragraph for
a particular quarter, a description of each
asset that causes the corporation, trust, or
association to fail to satisfy the requirements
of such paragraph at the close of such quarter
of any taxable year is set forth in a schedule
for such quarter filed in accordance with
regulations prescribed by the Secretary,
``(iii) the failure to meet the requirements
of such paragraph for a particular quarter is
due to reasonable cause and not due to willful
neglect,
``(iv) the corporation, trust, or association
pays a tax computed under subparagraph (C), and
``(v)(I) the corporation, trust, or
association disposes of the assets set forth on
the schedule specified in clause (ii) within 6
months after the last day of the quarter in
which the corporation, trust or association's
identification of the failure to satisfy the
requirements of such paragraph occurred or such
other time period prescribed by the Secretary
and in the manner prescribed by the Secretary,
or
``(II) the requirements of such paragraph are
otherwise met within the time period specified
in subclause (I).
``(C) Tax.--For purposes of subparagraph (B)(iv)--
``(i) Tax imposed.--If a corporation, trust,
or association elects the application of this
subparagraph, there is hereby imposed a tax on
the failure described in subparagraph (B) of
such corporation, trust, or association. Such
tax shall be paid by the corporation, trust, or
association.
``(ii) Tax computed.--The amount of the tax
imposed by clause (i) shall be the greater of--
``(I) $50,000, or
``(II) the amount determined
(pursuant to regulations promulgated by
the Secretary) by multiplying the net
income generated by the assets
described in the schedule specified in
subparagraph (B)(ii) for the period
specified in clause (iii) by the
highest rate of tax specified in
section 11.
``(iii) Period.--For purposes of clause
(ii)(II), the period described in this clause
is the period beginning on the first date that
the failure to satisfy the requirements of such
paragraph (4) occurs as a result of the
ownership of such assets and ending on the
earlier of the date on which the trust disposes
of such assets or the end of the first quarter
when there is no longer a failure to satisfy
such paragraph (4).
``(iv) Administrative provisions.--For
purposes of subtitle F, the taxes imposed by
this subparagraph shall be treated as excise
taxes with respect to which the deficiency
procedures of such subtitle apply.''.
(2) Modification of rules of application for failure to
satisfy sections 856(c)(2) or 856(c)(3).--Paragraph (6) of
section 856(c) (relating to definition of real estate
investment trust) is amended by striking subparagraphs (A) and
(B), by redesignating subparagraph (C) as subparagraph (B), and
by inserting before subparagraph (B) (as so redesignated) the
following new subparagraph:
``(A) following the corporation, trust, or
association's identification of the failure to meet the
requirements of paragraph (2) or (3), or of both such
paragraphs, for any taxable year, a description of each
item of its gross income described in such paragraphs
is set forth in a schedule for such taxable year filed
in accordance with regulations prescribed by the
Secretary, and''.
(3) Reasonable cause exception to loss of reit status if
failure to satisfy requirements.--Subsection (g) of section 856
(relating to termination of election) is amended--
(A) in paragraph (1) by inserting before the period
at the end of the first sentence the following:
``unless paragraph (5) applies'', and
(B) by adding at the end the following new paragraph:
``(5) Entities to which paragraph applies.--This paragraph
applies to a corporation, trust, or association--
``(A) which is not a real estate investment trust to
which the provisions of this part apply for the taxable
year due to one or more failures to comply with one or
more of the provisions of this part (other than
subsection (c)(6) or (c)(7) of section 856),
``(B) such failures are due to reasonable cause and
not due to willful neglect, and
``(C) if such corporation, trust, or association pays
(as prescribed by the Secretary in regulations and in
the same manner as tax) a penalty of $50,000 for each
failure to satisfy a provision of this part due to
reasonable cause and not willful neglect.''.
(4) Deduction of tax paid from amount required to be
distributed.--Subparagraph (E) of section 857(b)(2) is amended
by striking ``(7)'' and inserting ``(7) of this subsection,
section 856(c)(7)(B)(iii), and section 856(g)(1).''.
(5) Expansion of deficiency dividend procedure.--Subsection
(e) of section 860 is amended by striking ``or'' at the end of
paragraph (2), by striking the period at the end of paragraph
(3) and inserting ``; or'', and by adding at the end the
following new paragraph:
``(4) a statement by the taxpayer attached to its amendment
or supplement to a return of tax for the relevant tax year.''.
(g) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years
beginning after December 31, 2000.
(2) Subsections (c) through (f).--The amendments made by
subsections (c), (d), (e), and (f) shall apply to taxable years
beginning after the date of the enactment of this Act.
SEC. 286. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED INVESTMENT
COMPANIES.
(a) Treatment of Certain Dividends.--
(1) Nonresident alien individuals.--Section 871 (relating to
tax on nonresident alien individuals) is amended by
redesignating subsection (k) as subsection (l) and by inserting
after subsection (j) the following new subsection:
``(k) Exemption for Certain Dividends of Regulated Investment
Companies.--
``(1) Interest-related dividends.--
``(A) In general.--Except as provided in subparagraph
(B), no tax shall be imposed under paragraph (1)(A) of
subsection (a) on any interest-related dividend
received from a regulated investment company.
``(B) Exceptions.--Subparagraph (A) shall not apply--
``(i) to any interest-related dividend
received from a regulated investment company by
a person to the extent such dividend is
attributable to interest (other than interest
described in subparagraph (E) (i) or (iii))
received by such company on indebtedness issued
by such person or by any corporation or
partnership with respect to which such person
is a 10-percent shareholder,
``(ii) to any interest-related dividend with
respect to stock of a regulated investment
company unless the person who would otherwise
be required to deduct and withhold tax from
such dividend under chapter 3 receives a
statement (which meets requirements similar to
the requirements of subsection (h)(5)) that the
beneficial owner of such stock is not a United
States person, and
``(iii) to any interest-related dividend paid
to any person within a foreign country (or any
interest-related dividend payment addressed to,
or for the account of, persons within such
foreign country) during any period described in
subsection (h)(6) with respect to such country.
Clause (iii) shall not apply to any dividend with
respect to any stock which was acquired on or before
the date of the publication of the Secretary's
determination under subsection (h)(6).
``(C) Interest-related dividend.--For purposes of
this paragraph, an interest-related dividend is any
dividend (or part thereof) which is designated by the
regulated investment company as an interest-related
dividend in a written notice mailed to its shareholders
not later than 60 days after the close of its taxable
year. If the aggregate amount so designated with
respect to a taxable year of the company (including
amounts so designated with respect to dividends paid
after the close of the taxable year described in
section 855) is greater than the qualified net interest
income of the company for such taxable year, the
portion of each distribution which shall be an
interest-related dividend shall be only that portion of
the amounts so designated which such qualified net
interest income bears to the aggregate amount so
designated.
``(D) Qualified net interest income.--For purposes of
subparagraph (C), the term `qualified net interest
income' means the qualified interest income of the
regulated investment company reduced by the deductions
properly allocable to such income.
``(E) Qualified interest income.--For purposes of
subparagraph (D), the term `qualified interest income'
means the sum of the following amounts derived by the
regulated investment company from sources within the
United States:
``(i) Any amount includible in gross income
as original issue discount (within the meaning
of section 1273) on an obligation payable 183
days or less from the date of original issue
(without regard to the period held by the
company).
``(ii) Any interest includible in gross
income (including amounts recognized as
ordinary income in respect of original issue
discount or market discount or acquisition
discount under part V of subchapter P and such
other amounts as regulations may provide) on an
obligation which is in registered form; except
that this clause shall not apply to--
``(I) any interest on an obligation
issued by a corporation or partnership
if the regulated investment company is
a 10-percent shareholder in such
corporation or partnership, and
``(II) any interest which is treated
as not being portfolio interest under
the rules of subsection (h)(4).
``(iii) Any interest referred to in
subsection (i)(2)(A) (without regard to the
trade or business of the regulated investment
company).
``(iv) Any interest-related dividend
includable in gross income with respect to
stock of another regulated investment company.
``(F) 10-percent shareholder.--For purposes of this
paragraph, the term `10-percent shareholder' has the
meaning given such term by subsection (h)(3)(B).
``(2) Short-term capital gain dividends.--
``(A) In general.--Except as provided in subparagraph
(B), no tax shall be imposed under paragraph (1)(A) of
subsection (a) on any short-term capital gain dividend
received from a regulated investment company.
``(B) Exception for aliens taxable under subsection
(a)(2).--Subparagraph (A) shall not apply in the case
of any nonresident alien individual subject to tax
under subsection (a)(2).
``(C) Short-term capital gain dividend.--For purposes
of this paragraph, a short-term capital gain dividend
is any dividend (or part thereof) which is designated
by the regulated investment company as a short-term
capital gain dividend in a written notice mailed to its
shareholders not later than 60 days after the close of
its taxable year. If the aggregate amount so designated
with respect to a taxable year of the company
(including amounts so designated with respect to
dividends paid after the close of the taxable year
described in section 855) is greater than the qualified
short-term gain of the company for such taxable year,
the portion of each distribution which shall be a
short-term capital gain dividend shall be only that
portion of the amounts so designated which such
qualified short-term gain bears to the aggregate amount
so designated.
``(D) Qualified short-term gain.--For purposes of
subparagraph (C), the term `qualified short-term gain'
means the excess of the net short-term capital gain of
the regulated investment company for the taxable year
over the net long-term capital loss (if any) of such
company for such taxable year. For purposes of this
subparagraph--
``(i) the net short-term capital gain of the
regulated investment company shall be computed
by treating any short-term capital gain
dividend includible in gross income with
respect to stock of another regulated
investment company as a short-term capital
gain, and
``(ii) the excess of the net short-term
capital gain for a taxable year over the net
long-term capital loss for a taxable year (to
which an election under section 4982(e)(4) does
not apply) shall be determined without regard
to any net capital loss or net short-term
capital loss attributable to transactions after
October 31 of such year, and any such net
capital loss or net short-term capital loss
shall be treated as arising on the 1st day of
the next taxable year.
To the extent provided in regulations, clause (ii)
shall apply also for purposes of computing the taxable
income of the regulated investment company.''
(2) Foreign corporations.--Section 881 (relating to tax on
income of foreign corporations not connected with United States
business) is amended by redesignating subsection (e) as
subsection (f) and by inserting after subsection (d) the
following new subsection:
``(e) Tax Not To Apply to Certain Dividends of Regulated Investment
Companies.--
``(1) Interest-related dividends.--
``(A) In general.--Except as provided in subparagraph
(B), no tax shall be imposed under paragraph (1) of
subsection (a) on any interest-related dividend (as
defined in section 871(k)(1)) received from a regulated
investment company.
``(B) Exception.--Subparagraph (A) shall not apply--
``(i) to any dividend referred to in section
871(k)(1)(B), and
``(ii) to any interest-related dividend
received by a controlled foreign corporation
(within the meaning of section 957(a)) to the
extent such dividend is attributable to
interest received by the regulated investment
company from a person who is a related person
(within the meaning of section 864(d)(4)) with
respect to such controlled foreign corporation.
``(C) Treatment of dividends received by controlled
foreign corporations.--The rules of subsection
(c)(5)(A) shall apply to any interest-related dividend
received by a controlled foreign corporation (within
the meaning of section 957(a)) to the extent such
dividend is attributable to interest received by the
regulated investment company which is described in
clause (ii) of section 871(k)(1)(E) (and not described
in clause (i) or (iii) of such section).
``(2) Short-term capital gain dividends.--No tax shall be
imposed under paragraph (1) of subsection (a) on any short-term
capital gain dividend (as defined in section 871(k)(2))
received from a regulated investment company.''.
(3) Withholding taxes.--
(A) Section 1441(c) (relating to exceptions) is
amended by adding at the end the following new
paragraph:
``(12) Certain dividends received from regulated investment
companies.--
``(A) In general.--No tax shall be required to be
deducted and withheld under subsection (a) from any
amount exempt from the tax imposed by section
871(a)(1)(A) by reason of section 871(k).
``(B) Special rule.--For purposes of subparagraph
(A), clause (i) of section 871(k)(1)(B) shall not apply
to any dividend unless the regulated investment company
knows that such dividend is a dividend referred to in
such clause. A similar rule shall apply with respect to
the exception contained in section 871(k)(2)(B).''.
(B) Section 1442(a) (relating to withholding of tax
on foreign corporations) is amended--
(i) by striking ``and the reference in
section 1441(c)(10)'' and inserting ``the
reference in section 1441(c)(10)'', and
(ii) by inserting before the period at the
end the following: ``, and the references in
section 1441(c)(12) to sections 871(a) and
871(k) shall be treated as referring to
sections 881(a) and 881(e) (except that for
purposes of applying subparagraph (A) of
section 1441(c)(12), as so modified, clause
(ii) of section 881(e)(1)(B) shall not apply to
any dividend unless the regulated investment
company knows that such dividend is a dividend
referred to in such clause)''.
(b) Estate Tax Treatment of Interest in Certain Regulated Investment
Companies.--Section 2105 (relating to property without the United
States for estate tax purposes) is amended by adding at the end the
following new subsection:
``(d) Stock in a RIC.--
``(1) In general.--For purposes of this subchapter, stock in
a regulated investment company (as defined in section 851)
owned by a nonresident not a citizen of the United States shall
not be deemed property within the United States in the
proportion that, at the end of the quarter of such investment
company's taxable year immediately preceding a decedent's date
of death (or at such other time as the Secretary may designate
in regulations), the assets of the investment company that were
qualifying assets with respect to the decedent bore to the
total assets of the investment company.
``(2) Qualifying assets.--For purposes of this subsection,
qualifying assets with respect to a decedent are assets that,
if owned directly by the decedent, would have been--
``(A) amounts, deposits, or debt obligations
described in subsection (b) of this section,
``(B) debt obligations described in the last sentence
of section 2104(c), or
``(C) other property not within the United States.''
(c) Treatment of Regulated Investment Companies Under Section 897.--
(1) Paragraph (1) of section 897(h) is amended by striking
``REIT'' each place it appears and inserting ``qualified
investment entity''.
(2) Paragraphs (2) and (3) of section 897(h) are amended to
read as follows:
``(2) Sale of stock in domestically controlled entity not
taxed.--The term `United States real property interest' does
not include any interest in a domestically controlled qualified
investment entity.
``(3) Distributions by domestically controlled qualified
investment entities.--In the case of a domestically controlled
qualified investment entity, rules similar to the rules of
subsection (d) shall apply to the foreign ownership percentage
of any gain.''
(3) Subparagraphs (A) and (B) of section 897(h)(4) are
amended to read as follows:
``(A) Qualified investment entity.--The term
`qualified investment entity' means any real estate
investment trust and any regulated investment company.
``(B) Domestically controlled.--The term
`domestically controlled qualified investment entity'
means any qualified investment entity in which at all
times during the testing period less than 50 percent in
value of the stock was held directly or indirectly by
foreign persons.''
(4) Subparagraphs (C) and (D) of section 897(h)(4) are each
amended by striking ``REIT'' and inserting ``qualified
investment entity''.
(5) The subsection heading for subsection (h) of section 897
is amended by striking ``REITS'' and inserting ``Certain
Investment Entities''.
(d) Effective Date.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall apply to
dividends with respect to taxable years of regulated investment
companies beginning after December 31, 2004.
(2) Estate tax treatment.--The amendment made by subsection
(b) shall apply to estates of decedents dying after December
31, 2004.
(3) Certain other provisions.--The amendments made by
subsection (c) (other than paragraph (1) thereof) shall take
effect after December 31, 2004.
SEC. 287. TAXATION OF CERTAIN SETTLEMENT FUNDS.
(a) In General.--Subsection (g) of section 468B (relating to
clarification of taxation of certain funds) is amended to read as
follows:
``(g) Clarification of Taxation of Certain Funds.--
``(1) In general.--Except as provided in paragraph (2),
nothing in any provision of law shall be construed as providing
that an escrow account, settlement fund, or similar fund is not
subject to current income tax. The Secretary shall prescribe
regulations providing for the taxation of any such account or
fund whether as a grantor trust or otherwise.
``(2) Exemption from tax for certain settlement funds.--An
escrow account, settlement fund, or similar fund shall be
treated as beneficially owned by the United States and shall be
exempt from taxation under this subtitle if--
``(A) it is established pursuant to a consent decree
entered by a judge of a United States District Court,
``(B) it is created for the receipt of settlement
payments as directed by a government entity for the
sole purpose of resolving or satisfying one or more
claims asserting liability under the Comprehensive
Environmental Response, Compensation, and Liability Act
of 1980,
``(C) the authority and control over the expenditure
of funds therein (including the expenditure of
contributions thereto and any net earnings thereon) is
with such government entity, and
``(D) upon termination, any remaining funds will be
disbursed to such government entity for use in
accordance with applicable law.
For purposes of this paragraph, the term `government entity'
means the United States, any State or political subdivision
thereof, the District of Columbia, any possession of the United
States, and any agency or instrumentality of any of the
foregoing.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 288. EXPANSION OF HUMAN CLINICAL TRIALS QUALIFYING FOR ORPHAN DRUG
CREDIT.
(a) In General.--Paragraph (2) of section 45C(b) (relating to
qualified clinical testing expenses) is amended by adding at the end
the following new subparagraph:
``(C) Treatment of certain expenses incurred before
designation.--For purposes of subparagraph (A)(ii)(I),
if a drug is designated under section 526 of the
Federal Food, Drug, and Cosmetic Act not later than the
due date (including extensions) for filing the return
of tax under this subtitle for the taxable year in
which the application for such designation of such drug
was filed, such drug shall be treated as having been
designated on the date that such application was
filed.''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to expenses incurred after the date of the enactment of this Act.
SEC. 289. SIMPLIFICATION OF EXCISE TAX IMPOSED ON BOWS AND ARROWS.
(a) Bows.--Paragraph (1) of section 4161(b) (relating to bows) is
amended to read as follows:
``(1) Bows.--
``(A) In general.--There is hereby imposed on the
sale by the manufacturer, producer, or importer of any
bow which has a peak draw weight of 30 pounds or more,
a tax equal to 11 percent of the price for which so
sold.
``(B) Archery equipment.--There is hereby imposed on
the sale by the manufacturer, producer, or importer--
``(i) of any part or accessory suitable for
inclusion in or attachment to a bow described
in subparagraph (A), and
``(ii) of any quiver or broadhead suitable
for use with an arrow described in paragraph
(2),
a tax equal to 11 percent of the price for which so
sold.''.
(b) Arrows.--Subsection (b) of section 4161 (relating to bows and
arrows, etc.) is amended by redesignating paragraph (3) as paragraph
(4) and inserting after paragraph (2) the following:
``(3) Arrows.--
``(A) In general.--There is hereby imposed on the
sale by the manufacturer, producer, or importer of any
arrow, a tax equal to 12 percent of the price for which
so sold.
``(B) Exception.--In the case of any arrow of which
the shaft or any other component has been previously
taxed under paragraph (1) or (2)--
``(i) section 6416(b)(3) shall not apply, and
``(ii) the tax imposed by subparagraph (A)
shall be an amount equal to the excess (if any)
of--
``(I) the amount of tax imposed by
this paragraph (determined without
regard to this subparagraph), over
``(II) the amount of tax paid with
respect to the tax imposed under
paragraph (1) or (2) on such shaft or
component.
``(C) Arrow.--For purposes of this paragraph, the
term `arrow' means any shaft described in paragraph (2)
to which additional components are attached.''.
(c) Conforming Amendments.--Section 4161(b)(2) is amended--
(1) by inserting ``(other than broadheads)'' after ``point'',
and
(2) by striking ``Arrows.--'' in the heading and inserting
``Arrow components.--''.
(d) Effective Date.--The amendments made by this section shall apply
to articles sold by the manufacturer, producer, or importer after
December 31, 2004.
SEC. 290. REPEAL OF EXCISE TAX ON FISHING TACKLE BOXES.
(a) Repeal.--Paragraph (6) of section 4162(a) (defining sport fishing
equipment) is amended by striking subparagraph (C) and by redesignating
subparagraphs (D) through (J) as subparagraphs (C) through (I),
respectively.
(b) Effective Date.--The amendments made this section shall apply to
articles sold by the manufacturer, producer, or importer after December
31, 2004.
SEC. 291. SONAR DEVICES SUITABLE FOR FINDING FISH.
(a) Not Treated as Sport Fishing Equipment.--Subsection (a) of
section 4162 (relating to sport fishing equipment defined) is amended
by inserting ``and'' at the end of paragraph (8), by striking ``, and''
at the end of paragraph (9) and inserting a period, and by striking
paragraph (10).
(b) Conforming Amendment.--Section 4162 is amended by striking
subsection (b) and by redesignating subsection (c) as subsection (b).
(c) Effective Date.--The amendments made this section shall apply to
articles sold by the manufacturer, producer, or importer after December
31, 2004.
SEC. 292. INCOME TAX CREDIT TO DISTILLED SPIRITS WHOLESALERS FOR COST
OF CARRYING FEDERAL EXCISE TAXES ON BOTTLED
DISTILLED SPIRITS.
(a) In General.--Subpart A of part I of subchapter A of chapter 51
(relating to gallonage and occupational taxes) is amended by adding at
the end the following new section:
``SEC. 5011. INCOME TAX CREDIT FOR WHOLESALER'S AVERAGE COST OF
CARRYING EXCISE TAX.
``(a) In General.--For purposes of section 38, in the case of an
eligible wholesaler, the amount of the distilled spirits wholesalers
credit for any taxable year is the amount equal to the product of--
``(1) the number of cases of bottled distilled spirits--
``(A) which were bottled in the United States, and
``(B) which are purchased by such wholesaler during
the taxable year directly from the bottler of such
spirits, and
``(2) the average tax-financing cost per case for the most
recent calendar year ending before the beginning of such
taxable year.
``(b) Eligible Wholesaler.--For purposes of this section, the term
`eligible wholesaler' means any person who holds a permit under the
Federal Alcohol Administration Act as a wholesaler of distilled
spirits.
``(c) Average Tax-Financing Cost.--
``(1) In general.--For purposes of this section, the average
tax-financing cost per case for any calendar year is the amount
of interest which would accrue at the deemed financing rate
during a 60-day period on an amount equal to the deemed Federal
excise per case.
``(2) Deemed financing rate.--For purposes of paragraph (1),
the deemed financing rate for any calendar year is the average
of the corporate overpayment rates under paragraph (1) of
section 6621(a) (determined without regard to the last sentence
of such paragraph) for calendar quarters of such year.
``(3) Deemed federal excise tax based on case.--For purposes
of paragraph (1), the deemed Federal excise tax per case of 12
80-proof 750ml bottles is $22.83.
``(4) Number of cases in lot.--For purposes of this section,
the number of cases in any lot of distilled spirits shall be
determined by dividing the number of liters in such lot by 9.''
(b) Conforming Amendments.--
(1) Subsection (b) of section 38 is amended by striking
``plus'' at the end of paragraph (14), by striking the period
at the end of paragraph (15) and inserting ``, plus'', and by
adding at the end the following new paragraph:
``(16) in the case of an eligible wholesaler (as defined in
section 5011(b)), the distilled spirits wholesalers credit
determined under section 5011(a).''
(2) Subsection (d) of section 39 (relating to carryback and
carryforward of unused credits) is amended by adding at the end
the following new paragraph:
``(11) No carryback of section 5011 credit before january 1,
2005.--No portion of the unused business credit for any taxable
year which is attributable to the credit determined under
section 5011(a) may be carried back to a taxable year beginning
before January 1, 2005.''.
(3) The table of sections for subpart A of part I of
subchapter A of chapter 51 is amended by adding at the end the
following new item:
``Sec. 5011. Income tax credit for
wholesaler's average cost of
carrying excise tax.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 293. SUSPENSION OF OCCUPATIONAL TAXES RELATING TO DISTILLED
SPIRITS, WINE, AND BEER.
(a) In General.--Subpart G of part II of subchapter A of chapter 51
is amended by redesignating section 5148 as section 5149 and by
inserting after section 5147 the following new section:
``SEC. 5148. SUSPENSION OF OCCUPATIONAL TAX.
``(a) In General.--Notwithstanding sections 5081, 5091, 5111, 5121,
and 5131, the rate of tax imposed under such sections for the
suspension period shall be zero. During such period, persons engaged in
or carrying on a trade or business covered by such sections shall
register under section 5141 and shall comply with the recordkeeping
requirements under this part.
``(b) Suspension Period.--For purposes of subsection (a), the
suspension period is the period beginning on July 1, 2004, and ending
on June 30, 2007.''.
(b) Conforming Amendment.--Section 5117 is amended by adding at the
end the following new subsection:
``(d) Special Rule During Suspension Period.--Except as provided in
subsection (b) or by the Secretary, during the suspension period (as
defined in section 5148) it shall be unlawful for any dealer to
purchase distilled spirits for resale from any person other than a
wholesale dealer in liquors who is required to keep records under
section 5114.''.
(c) Clerical Amendment.--The table of sections for subpart G of part
II of subchapter A of chapter 51 is amended by striking the last item
and inserting the following new items:
``Sec. 5148. Suspension of occupational
tax.
``Sec. 5149. Cross references.''.
(d) Effective Date.--The amendments made by this section shall take
effect on the date of the enactment of this Act.
SEC. 294. MODIFICATION OF UNRELATED BUSINESS INCOME LIMITATION ON
INVESTMENT IN CERTAIN SMALL BUSINESS INVESTMENT
COMPANIES.
(a) In General.--Paragraph (6) of section 514(c) (relating to
acquisition indebtedness) is amended to read as follows:
``(6) Certain federal financing.--
``(A) In general.--For purposes of this section, the
term `acquisition indebtedness' does not include--
``(i) an obligation, to the extent that it is
insured by the Federal Housing Administration,
to finance the purchase, rehabilitation, or
construction of housing for low and moderate
income persons, or
``(ii) indebtedness incurred by a small
business investment company licensed under the
Small Business Investment Act of 1958 and
formed after the date of the enactment of the
American Jobs Creation Act of 2004, if such
indebtedness is evidenced by a debenture--
``(I) issued by such company under
section 303(a) of such Act, and
``(II) held or guaranteed by the
Small Business Administration.
``(B) Limitation.--Subparagraph (A)(ii) shall not
apply with respect to any small business investment
company during any period that--
``(i) any organization which is exempt from
tax under this title (other than a governmental
unit) owns more than 25 percent of the capital
or profits interest in such company, or
``(ii) organizations which are exempt from
tax under this title (including governmental
units other than any agency or instrumentality
of the United States) own, in the aggregate, 50
percent or more of the capital or profits
interest in such company.''.
(b) Effective Date.--The amendment made by this section shall apply
to indebtedness incurred by small business investment companies formed
after the date of the enactment of the American Jobs Creation Act of
2004.
SEC. 295. ELECTION TO DETERMINE TAXABLE INCOME FROM CERTAIN
INTERNATIONAL SHIPPING ACTIVITIES USING PER TON
RATE.
(a) In General.--Chapter 1 of the Internal Revenue Code of 1986 is
amended by inserting after subchapter Q the following new subchapter:
``Subchapter R--Election To Determine Taxable Income From Certain
International Shipping Activities Using per Ton Rate
``Sec. 1352. Alternative tax on
qualifying shipping activities.
``Sec. 1353. Taxable income from
qualifying shipping activities.
``Sec. 1354. Qualifying shipping tax
election; revocation;
termination.
``Sec. 1355. Definitions and special
rules.
``Sec. 1356. Qualifying shipping
activities.
``Sec. 1357. Items not subject to regular
tax; depreciation; interest.
``Sec. 1358. Allocation of credits,
income, and deductions.
``Sec. 1359. Disposition of qualifying
shipping assets.
``SEC. 1352. ALTERNATIVE TAX ON QUALIFYING SHIPPING ACTIVITIES.
``(a) In General.--The taxable income of an electing corporation from
qualifying shipping activities shall be the amount determined under
this subchapter, and the corporate percentages of the items of income,
gain, loss, deduction, or credit of an electing corporation and of
other members of the electing group of such corporation which would
otherwise be taken into account by reason of its qualifying shipping
activities shall be taken into account to the extent provided in
section 1357.
``(b) Alternative Tax.--The taxable income of an electing corporation
from qualifying shipping activities, if otherwise taxable under section
11, 55, 882, 887, or 1201(a) shall be subject to tax only under this
section at the maximum rate specified in section 11(b). The income of a
foreign corporation shall not be subject to tax under this subchapter
to the extent its income is excludible from gross income under section
883(a)(1).
``SEC. 1353. TAXABLE INCOME FROM QUALIFYING SHIPPING ACTIVITIES.
``(a) In General.--For purposes of this subchapter, the taxable
income of an electing corporation from qualifying shipping activities
shall be its corporate income percentage of the sum of the amounts
determined under subsection (b) for each qualifying vessel operated by
such electing corporation or other electing entity.
``(b) Amounts.--For purposes of subsection (a), the amount of taxable
income of an electing entity for each qualifying vessel shall equal the
product of--
``(1) the daily notional taxable income from the operation of
the qualifying vessel in United States foreign trade, and
``(2) the number of days during the taxable year that the
electing entity operated such vessel as a qualifying vessel in
United States foreign trade.
``(c) Daily Notional Taxable Income.--For purposes of subsection (b),
the daily notional taxable income from the operation of a qualifying
vessel is 40 cents for each 100 tons of the net tonnage of the vessel,
up to 25,000 net tons, and 20 cents for each 100 tons of the net
tonnage of the vessel, in excess of 25,000 net tons.
``(d) Multiple Operators of Vessel.--If 2 or more persons have a
joint interest in a qualifying vessel and are treated as operators of
that vessel, the taxable income from the operation of such vessel for
that time (as determined under this section) shall be allocated among
such persons on the basis of their ownership and charter interests in
such vessel or on such other basis as the Secretary may prescribe by
regulations.
``(e) Noncorporate Percentage.--Notwithstanding any contrary
provision of this subchapter, the noncorporate percentage of any item
of income, gain, loss, deduction, or credit of any member of an
electing group shall be taken into account for all purposes of this
subtitle as if this subchapter were not in effect.
``SEC. 1354. QUALIFYING SHIPPING TAX ELECTION; REVOCATION; TERMINATION.
``(a) In General.--Except as provided in subsections (b) and (f), a
qualifying shipping tax election may be made in respect of any
qualifying entity.
``(b) Condition of Election.--An election may be made by a member of
a controlled group under this subsection for any taxable year only if
all qualifying entities that are members of the controlled group join
in the election.
``(c) When Made.--An election under subsection (a) may be made by a
qualifying entity in such form as prescribed by the Secretary. Such
election shall be filed with the qualifying entity's return for the
first taxable year to which the election shall apply, by the due date
for such return (including any applicable extensions).
``(d) Years for Which Effective.--An election under subsection (a)
shall be effective for the taxable year of the qualifying entity for
which it is made and for all succeeding taxable years of the entity,
until such election is terminated under subsection (e).
``(e) Termination.--
``(1) By revocation.--
``(A) In general.--An election under subsection (a)
may be terminated by revocation.
``(B) When effective.--Except as provided in
subparagraph (C)--
``(i) a revocation made during the taxable
year and on or before the 15th day of the 3rd
month thereof shall be effective on the 1st day
of such taxable year, and
``(ii) a revocation made during the taxable
year but after such 15th day shall be effective
on the 1st day of the following taxable year.
``(C) Revocation may specify prospective date.--If
the revocation specifies a date for revocation which is
on or after the day on which the revocation is made,
the revocation shall be effective on and after the date
so specified.
``(2) By entity ceasing to be qualifying entity.--
``(A) In general.--An election under subsection (a)
shall be terminated whenever (at any time on or after
the 1st day of the 1st taxable year for which the
entity is an electing entity) such entity ceases to be
a qualifying entity.
``(B) When effective.--Any termination under this
paragraph shall be effective on and after the date of
cessation.
``(f) Election After Termination.--If a qualifying entity has made an
election under subsection (a) and if such election has been terminated
under subsection (e), such entity (and any successor entity) shall not
be eligible to make an election under subsection (a) for any taxable
year before its 5th taxable year which begins after the 1st taxable
year for which such termination is effective, unless the Secretary
consents to such election.
``SEC. 1355. DEFINITIONS AND SPECIAL RULES.
``(a) Definitions.--For purposes of this subchapter:
``(1) The term `controlled group' means any group of trusts
and business entities whose members would be treated as a
single employer under the rules of section 52(a) (without
regard to paragraphs (1) and (2) thereof) and section 52(b)(1).
``(2) The term `corporate income percentage' means the least
aggregate share, expressed as a percentage, of any item of
income or gain of an electing corporation or electing group of
which such corporation is a member from qualifying shipping
activities that would, but for an election in effect under this
subchapter, be required to be reported on the Federal income
tax return of an electing corporation during any taxable
period. In the case of an electing group which includes two or
more electing corporations, the corporate income percentage of
each such corporation shall be determined on the basis of such
corporations' direct and indirect ownership and charter
interests in qualifying vessels of the electing group or on
such other basis as the Secretary may prescribe by regulations.
``(3) The term `corporate loss percentage' means the greatest
aggregate share, expressed as a percentage, of any item of
loss, deduction or credit of an electing corporation or
electing group of which such corporation is a member from
qualifying shipping activities that would, but for an election
in effect under this subchapter, be required to be reported on
the Federal income tax return of an electing corporation during
any taxable period.
``(4) The term `corporate percentages' means the corporate
income percentage and the corporate loss percentage.
``(5) The term `electing corporation' means any C corporation
that is an electing entity or that would, but for an election
in effect under this subchapter, be required to report any item
of income, gain, loss, deduction, or credit of an electing
entity on its Federal income tax return.
``(6) The term `electing entity' means any qualifying entity
for which an election is in effect under this subchapter.
``(7) The term `electing group' means a controlled group of
which one or more members is an electing entity.
``(8) The term `noncorporate percentage' means the difference
between one hundred percent and the corporate income percentage
or corporate loss percentage, as applicable.
``(9) The term `qualifying entity' means a trust or business
entity that--
``(A) operates one or more qualifying vessels, and
``(B) meets the shipping activity requirement in
subsection (c).
``(10) The term `qualifying shipping assets' means any
qualifying vessel and other assets which are used in core
qualifying activities as described in section 1356(b).
``(11) The term `qualifying vessel' means a self-propelled
(or a combination self-propelled and non-self-propelled) United
States flag vessel of not less than 10,000 deadweight tons used
in the United States foreign trade.
``(12) The term `United States domestic trade' means the
transportation of goods or passengers between places in the
United States.
``(13) The term `United States flag vessel' means any vessel
documented under the laws of the United States.
``(14) The term `United States foreign trade' means the
transportation of goods or passengers between a place in the
United States and a foreign place or between foreign places.
``(b) Operating a Vessel.--For purposes of this subchapter:
``(1) Except as provided in paragraph (2), an entity is
treated as operating any vessel owned by, or chartered
(including a time charter) to, the entity.
``(2) An entity is treated as operating a vessel that it has
chartered out on bareboat charter terms only if--
``(A) the vessel is temporarily surplus to the
entity's requirements and the term of the charter does
not exceed three years; or
``(B) the vessel is bareboat chartered to a member of
a controlled group which includes such entity or to an
unrelated third party that sub-bareboats or time
charters the vessel to a member of such controlled
group (including the owner).
``(c) Shipping Activity Requirement.--For purposes of this section,
the shipping activity requirement is met for a taxable year only by an
entity described in paragraph (1), (2), or (3).
``(1) An entity in the first taxable year of its qualifying
shipping tax election if, for the preceding taxable year, the
test in paragraph (4) is met.
``(2) An entity in the second or any subsequent taxable year
of its qualifying shipping tax election if, for each of the two
preceding taxable years, the test in paragraph (4) is met.
``(3) An entity that would be described in paragraph (1) or
(2) if the test in paragraph (4) were applied on an aggregate
basis to the controlled group of which such entity is a member,
and vessel charters between members of the controlled group
were disregarded.
``(4) The test in this paragraph is met if on average at
least 25 percent of the aggregate tonnage of qualifying vessels
operated by the entity were owned by the entity or chartered to
the entity on bareboat charter terms. For purposes of the
preceding sentence, vessels chartered (including time
chartered) to an entity by a member of a controlled group which
includes the entity, or by a third party that bareboat charters
the vessels from the entity or a member of the entity's
controlled group, shall be treated as chartered to the entity
on bareboat charter terms.
``(d) Effect of Temporarily Ceasing To Operate a Qualifying Vessel.--
``(1) A temporary cessation by an electing entity in
operation of a qualifying vessel shall be disregarded for
purposes of subsections (b) and (c) if the electing entity
gives timely notice to the Secretary stating--
``(A) that it has temporarily ceased to operate the
qualifying vessel, and
``(B) its intention to resume operating the
qualifying vessel.
``(2) Notice shall be deemed timely if given not later than
the due date (including extensions) for the electing entity's
tax return (as set forth in section 6072(b)) for the taxable
year in which the temporary cessation begins.
``(3) The treatment provided by paragraph (1) shall continue
until the earlier of--
``(A) the electing entity abandoning its intention to
resume operation of the qualifying vessel, or
``(B) the electing entity resuming operation of the
qualifying vessel.
``(e) Effect of Temporarily Operating a Qualifying Vessel in the
United States Domestic Trade.--
``(1) The temporary operation in the United States domestic
trade of any qualifying vessel which had been used in the
United States foreign trade shall be disregarded for purposes
of this subchapter if the electing entity gives timely notice
to the Secretary stating--
``(A) that it temporarily operates or has operated in
the United States domestic trade a qualifying vessel
which had been used in the United States foreign trade,
and
``(B) its intention to resume operation of the vessel
in the United States foreign trade.
``(2) Notice shall be deemed timely if given not later than
the due date (including extensions) for the electing entity's
tax return (as set forth in section 6072(b)) for the taxable
year in which the temporary cessation begins.
``(3) The treatment provided by paragraph (1) shall continue
until the earlier of--
``(A) the electing entity abandoning its intention to
resume operations of the vessel in the United States
foreign trade, or
``(B) the electing entity resuming operation of the
vessel in the United States foreign trade.
``(f) Effect of Change in Use.--
``(1) Except as provided in subsection (e), a vessel that is
used other than for operations in the United States foreign
trade on other than a temporary basis ceases to be a qualifying
vessel when such use begins.
``(2) For purposes of this subsection, a change in use of a
vessel, other than a commencement of operation in the United
States domestic trade, is taken to be permanent unless there
are circumstances indicating that it is temporary.
``(g) Regulations.--The Secretary shall prescribe such regulations as
may be necessary or appropriate to carry out the purposes of this
section.
``SEC. 1356. QUALIFYING SHIPPING ACTIVITIES.
``(a) Qualifying Shipping Activities.--For purposes of this
subchapter the `qualifying shipping activities' of an electing entity
consist of--
``(1) core qualifying activities,
``(2) qualifying secondary activities, and
``(3) qualifying incidental activities.
``(b) Core Qualifying Activities.--
``(1) The `core qualifying activities' of an electing entity
are--
``(A) its activities in operating qualifying vessels
in United States foreign trade, and
``(B) other activities of the electing entity and
other members of its electing group that are an
integral part of its business of operating qualifying
vessels in United States foreign trade, including
ownership or operation of barges, containers, chassis,
and other equipment that are the complement of, or used
in connection with, a qualifying vessel in United
States foreign trade, the inland haulage of cargo
shipped, or to be shipped, on qualifying vessels in
United States foreign trade, and the provision of
terminal, maintenance, repair, logistical, or other
vessel, container, or cargo-related services that are
an integral part of operating qualifying vessels in
United States foreign trade.
``(2) `Core qualifying activities' do not include the
provision by an entity of facilities or services to any person,
other than--
``(A) another member of such entity's electing group,
``(B) a consignor, consignee, or other customer of
such entity's business of operating qualifying vessels
in United States foreign trade, or
``(C) a member of an alliance, joint venture, pool,
partnership or similar undertaking involving the
operation of qualifying vessels in United States
foreign trade of which such entity is a member.
``(c) Qualifying Secondary Activities.--For purposes of this
subsection--
``(1) the term `secondary activities' means activities that
are not core qualifying activities, and--
``(A) are the active management or operation of
vessels in the United States foreign trade,
``(B) the provision of vessel, container, or cargo-
related facilities or services to any person, or
``(C) such other activities as may be prescribed by
the Secretary pursuant to regulations, and
``(2) the `qualified secondary activities' of an electing
entity are its secondary activities and the secondary
activities of other members of its electing group, but only to
the extent that, without regard to this subchapter, the
aggregate gross income derived by the electing entity and the
other members of its electing group from such activities does
not exceed 20 percent of the aggregate gross income derived by
the electing entity and the other members of its electing group
from their core qualifying activities.
``(d) Qualifying Incidental Activities.--Shipping-related activities
carried on by an electing entity or another member of its electing
group are qualified incidental activities of the electing entity if--
``(1) incidental to its core qualifying activities,
``(2) not qualifying secondary activities, and
``(3) without regard to this subchapter, the aggregate gross
income derived by the electing entity and other members of its
electing group from such activities does not exceed 0.1 percent
of such entities' aggregate gross income from their core
qualifying activities.
``SEC. 1357. ITEMS NOT SUBJECT TO REGULAR TAX; DEPRECIATION; INTEREST.
``(a) Exclusion From Gross Income.--Gross income of an electing
entity shall not include the corporate income percentage of--
``(1) income from qualifying shipping activities in the
United States foreign trade,
``(2) income from money, bank deposits and other temporary
investments which are reasonably necessary to meet the working
capital requirements of qualifying shipping activities, and
``(3) income from money or other intangible assets
accumulated pursuant to a plan to purchase qualifying shipping
assets.
``(b) Electing Group Member.--Gross income of a member of an electing
group that is not an electing entity shall not include the corporate
income percentage of its income from qualifying shipping activities
that are taken into account under this subchapter as qualifying
shipping activities of an electing entity.
``(c) Denial of Losses, Deductions, and Credits.--
``(1) General rule.--Subject to paragraph (2), the corporate
loss percentage of each item of loss, deduction (other than for
interest expense), or credit of any taxpayer with respect to
any activity the income from which is excluded from gross
income under this section shall be disallowed.
``(2) Depreciation.--Notwithstanding paragraph (1), the
deduction for depreciation of a qualifying shipping asset shall
be allowed in determining the adjusted basis of such asset for
purposes of determining gain from its disposition.
``(A) Except as provided in subparagraph (B), the
straight line method of depreciation shall apply to the
corporate income percentage of qualifying shipping
assets the income from operation of which is excluded
from gross income under this section.
``(B) Subparagraph (A) shall not apply to any
qualifying shipping asset which is subject to a charter
entered into prior to the effective date of this
subchapter.
``(3) Interest.--The corporate loss percentage of an electing
entity's interest expense shall be disallowed in the ratio that
the fair market value of its qualifying vessel assets bears to
the fair market value of its total assets.
``(d) Section Inapplicable to Unrelated Persons.--This section shall
not apply to a taxpayer that is not a member of an electing group.
``SEC. 1358. ALLOCATION OF CREDITS, INCOME, AND DEDUCTIONS.
``(a) Qualifying Shipping Activities.--For purposes of this chapter,
the qualifying shipping activities of an electing entity shall be
treated as a separate trade or business activity from all other
activities conducted by the entity.
``(b) Exclusion of Credits or Deductions.--
``(1) No deduction shall be allowed against the taxable
income of an electing corporation from qualifying shipping
activities, and no credit shall be allowed against the tax
imposed by section 1352(b).
``(2) No deduction shall be allowed for any net operating
loss attributable to the qualifying shipping activities of a
corporation to the extent that such loss is carried forward by
the corporation from a taxable year preceding the first taxable
year for which such corporation was an electing corporation.
``(c) Transactions Not at Arm's Length.--Section 482 shall apply in
accordance with this subsection to a transaction or series of
transactions--
``(1) as between an electing entity and another person, or
``(2) as between an entity's qualifying shipping activities
and other activities carried on by it.
``SEC. 1359. DISPOSITION OF QUALIFYING SHIPPING ASSETS.
``(a) In General.--If an electing entity sells or disposes of
qualifying shipping assets (as defined in subsection (c)) in an
otherwise taxable transaction, at the election of the entity no gain
shall be recognized if replacement qualifying shipping assets are
acquired during the period specified in subsection (b), except to the
extent that the amount realized upon such sale or disposition exceeds
the cost of the replacement qualifying shipping assets.
``(b) Period Within Which Property Must Be Replaced.--The period
referred to in subsection (a) shall be the period beginning one year
prior to the disposition of the qualifying shipping assets and ending--
``(1) 3 years after the close of the first taxable year in
which the gain is realized, or
``(2) subject to such terms and conditions as may be
specified by the Secretary, on such later date as the Secretary
may designate on application by the taxpayer. Such application
shall be made at such time and in such manner as the Secretary
may by regulations prescribe.
``(c) Time for Assessment of Deficiency Attributable to Gain.--If an
electing entity has made the election provided in subsection (a),
then--
``(1) the statutory period for the assessment of any
deficiency, for any taxable year in which any part of the gain
is realized, attributable to such gain shall not expire prior
to the expiration of 3 years from the date the Secretary is
notified by the entity (in such manner as the Secretary may by
regulations prescribe) of the replacement tonnage tax property
or of an intention not to replace, and
``(2) such deficiency may be assessed before the expiration
of such 3-year period notwithstanding the provisions of section
6212(c) or the provisions of any other law or rule of law which
would otherwise prevent such assessment.
``(d) Basis of Replacement Qualifying Shipping Assets.--In the case
of replacement qualifying shipping assets purchased by an electing
entity which resulted in the nonrecognition of any part of the gain
realized as the result of a sale or other disposition of qualifying
shipping assets, the basis shall be the cost of such property decreased
in the amount of the gain not so recognized; and if the property
purchased consists of more than one piece of property, the basis
determined under this sentence shall be allocated to the purchased
properties in proportion to their respective costs.
``(e) Replacement Qualifying Shipping Assets Must Be Acquired From
Unrelated Person in Certain Cases.--
``(1) In general.--Subsection (a) shall not apply if the
replacement qualifying shipping assets are acquired from a
related person except to the extent that the related person
acquired the replacement qualifying shipping assets from an
unrelated person during the period applicable under subsection
(b).
``(2) Related person.--For purposes of this subsection, a
person is related to another person if the person bears a
relationship to the other person described in section 267(b) or
707(b)(1).''
(b) Technical and Conforming Amendment.--The second sentence of
section 56(g)(4)(B)(i), as amended by this Act, is further amended by
inserting ``or 1357'' after ``section 139A''.
(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. 296. CHARITABLE CONTRIBUTION DEDUCTION FOR CERTAIN EXPENSES
INCURRED IN SUPPORT OF NATIVE ALASKAN SUBSISTENCE
WHALING.
(a) In General.--Section 170 (relating to charitable, etc.,
contributions and gifts), as amended by this Act, is amended by
redesignating subsection (n) as subsection (o) and by inserting after
subsection (m) the following new subsection:
``(n) Expenses Paid by Certain Whaling Captains in Support of Native
Alaskan Subsistence Whaling.--
``(1) In general.--In the case of an individual who is
recognized by the Alaska Eskimo Whaling Commission as a whaling
captain charged with the responsibility of maintaining and
carrying out sanctioned whaling activities and who engages in
such activities during the taxable year, the amount described
in paragraph (2) (to the extent such amount does not exceed
$10,000 for the taxable year) shall be treated for purposes of
this section as a charitable contribution.
``(2) Amount described.--
``(A) In general.--The amount described in this
paragraph is the aggregate of the reasonable and
necessary whaling expenses paid by the taxpayer during
the taxable year in carrying out sanctioned whaling
activities.
``(B) Whaling expenses.--For purposes of subparagraph
(A), the term `whaling expenses' includes expenses
for--
``(i) the acquisition and maintenance of
whaling boats, weapons, and gear used in
sanctioned whaling activities,
``(ii) the supplying of food for the crew and
other provisions for carrying out such
activities, and
``(iii) storage and distribution of the catch
from such activities.
``(3) Sanctioned whaling activities.--For purposes of this
subsection, the term `sanctioned whaling activities' means
subsistence bowhead whale hunting activities conducted pursuant
to the management plan of the Alaska Eskimo Whaling
Commission.''.
(b) Effective Date.--The amendments made by subsection (a) shall
apply to contributions made after December 31, 2004.
TITLE III--TAX REFORM AND SIMPLIFICATION FOR UNITED STATES BUSINESSES
SEC. 301. INTEREST EXPENSE ALLOCATION RULES.
(a) Election To Allocate on Worldwide Basis.--Section 864 is amended
by redesignating subsection (f) as subsection (g) and by inserting
after subsection (e) the following new subsection:
``(f) Election To Allocate Interest, etc. on Worldwide Basis.--For
purposes of this subchapter, at the election of the worldwide
affiliated group--
``(1) Allocation and apportionment of interest expense.--
``(A) In general.--The taxable income of each
domestic corporation which is a member of a worldwide
affiliated group shall be determined by allocating and
apportioning interest expense of each member as if all
members of such group were a single corporation.
``(B) Treatment of worldwide affiliated group.--The
taxable income of the domestic members of a worldwide
affiliated group from sources outside the United States
shall be determined by allocating and apportioning the
interest expense of such domestic members to such
income in an amount equal to the excess (if any) of--
``(i) the total interest expense of the
worldwide affiliated group multiplied by the
ratio which the foreign assets of the worldwide
affiliated group bears to all the assets of the
worldwide affiliated group, over
``(ii) the interest expense of all foreign
corporations which are members of the worldwide
affiliated group to the extent such interest
expense of such foreign corporations would have
been allocated and apportioned to foreign
source income if this subsection were applied
to a group consisting of all the foreign
corporations in such worldwide affiliated
group.
``(C) Worldwide affiliated group.--For purposes of
this paragraph, the term `worldwide affiliated group'
means a group consisting of--
``(i) the includible members of an affiliated
group (as defined in section 1504(a),
determined without regard to paragraphs (2) and
(4) of section 1504(b)), and
``(ii) all controlled foreign corporations in
which such members in the aggregate meet the
ownership requirements of section 1504(a)(2)
either directly or indirectly through applying
paragraph (2) of section 958(a) or through
applying rules similar to the rules of such
paragraph to stock owned directly or indirectly
by domestic partnerships, trusts, or estates.
``(2) Allocation and apportionment of other expenses.--
Expenses other than interest which are not directly allocable
or apportioned to any specific income producing activity shall
be allocated and apportioned as if all members of the
affiliated group were a single corporation. For purposes of the
preceding sentence, the term `affiliated group' has the meaning
given such term by section 1504 (determined without regard to
paragraph (4) of section 1504(b)).
``(3) Treatment of tax-exempt assets; basis of stock in
nonaffiliated 10-percent owned corporations.--The rules of
paragraphs (3) and (4) of subsection (e) shall apply for
purposes of this subsection, except that paragraph (4) shall be
applied on a worldwide affiliated group basis.
``(4) Treatment of certain financial institutions.--
``(A) In general.--For purposes of paragraph (1), any
corporation described in subparagraph (B) shall be
treated as an includible corporation for purposes of
section 1504 only for purposes of applying this
subsection separately to corporations so described.
``(B) Description.--A corporation is described in
this subparagraph if--
``(i) such corporation is a financial
institution described in section 581 or 591,
``(ii) the business of such financial
institution is predominantly with persons other
than related persons (within the meaning of
subsection (d)(4)) or their customers, and
``(iii) such financial institution is
required by State or Federal law to be operated
separately from any other entity which is not
such an institution.
``(C) Treatment of bank and financial holding
companies.--To the extent provided in regulations--
``(i) a bank holding company (within the
meaning of section 2(a) of the Bank Holding
Company Act of 1956 (12 U.S.C. 1841(a)),
``(ii) a financial holding company (within
the meaning of section 2(p) of the Bank Holding
Company Act of 1956 (12 U.S.C. 1841(p)), and
``(iii) any subsidiary of a financial
institution described in section 581 or 591, or
of any such bank or financial holding company,
if such subsidiary is predominantly engaged
(directly or indirectly) in the active conduct
of a banking, financing, or similar business,
shall be treated as a corporation described in
subparagraph (B).
``(5) Election to expand financial institution group of
worldwide group.--
``(A) In general.--If a worldwide affiliated group
elects the application of this subsection, all
financial corporations which--
``(i) are members of such worldwide
affiliated group, but
``(ii) are not corporations described in
paragraph (4)(B),
shall be treated as described in paragraph (4)(B) for
purposes of applying paragraph (4)(A). This subsection
(other than this paragraph) shall apply to any such
group in the same manner as this subsection (other than
this paragraph) applies to the pre-election worldwide
affiliated group of which such group is a part.
``(B) Financial corporation.--For purposes of this
paragraph, the term `financial corporation' means any
corporation if at least 80 percent of its gross income
is income described in section 904(d)(2)(C)(ii) and the
regulations thereunder which is derived from
transactions with persons who are not related (within
the meaning of section 267(b) or 707(b)(1)) to the
corporation. For purposes of the preceding sentence,
there shall be disregarded any item of income or gain
from a transaction or series of transactions a
principal purpose of which is the qualification of any
corporation as a financial corporation.
``(C) Antiabuse rules.--In the case of a corporation
which is a member of an electing financial institution
group, to the extent that such corporation--
``(i) distributes dividends or makes other
distributions with respect to its stock after
the date of the enactment of this paragraph to
any member of the pre-election worldwide
affiliated group (other than to a member of the
electing financial institution group) in excess
of the greater of--
``(I) its average annual dividend
(expressed as a percentage of current
earnings and profits) during the 5-
taxable-year period ending with the
taxable year preceding the taxable
year, or
``(II) 25 percent of its average
annual earnings and profits for such 5-
taxable-year period, or
``(ii) deals with any person in any manner
not clearly reflecting the income of the
corporation (as determined under principles
similar to the principles of section 482),
an amount of indebtedness of the electing financial
institution group equal to the excess distribution or
the understatement or overstatement of income, as the
case may be, shall be recharacterized (for the taxable
year and subsequent taxable years) for purposes of this
paragraph as indebtedness of the worldwide affiliated
group (excluding the electing financial institution
group). If a corporation has not been in existence for
5 taxable years, this subparagraph shall be applied
with respect to the period it was in existence.
``(D) Election.--An election under this paragraph
with respect to any financial institution group may be
made only by the common parent of the pre-election
worldwide affiliated group and may be made only for the
first taxable year beginning after December 31, 2008,
in which such affiliated group includes 1 or more
financial corporations. Such an election, once made,
shall apply to all financial corporations which are
members of the electing financial institution group for
such taxable year and all subsequent years unless
revoked with the consent of the Secretary.
``(E) Definitions relating to groups.--For purposes
of this paragraph--
``(i) Pre-election worldwide affiliated
group.--The term `pre-election worldwide
affiliated group' means, with respect to a
corporation, the worldwide affiliated group of
which such corporation would (but for an
election under this paragraph) be a member for
purposes of applying paragraph (1).
``(ii) Electing financial institution
group.--The term `electing financial
institution group' means the group of
corporations to which this subsection applies
separately by reason of the application of
paragraph (4)(A) and which includes financial
corporations by reason of an election under
subparagraph (A).
``(F) Regulations.--The Secretary shall prescribe
such regulations as may be appropriate to carry out
this subsection, including regulations--
``(i) providing for the direct allocation of
interest expense in other circumstances where
such allocation would be appropriate to carry
out the purposes of this subsection,
``(ii) preventing assets or interest expense
from being taken into account more than once,
and
``(iii) dealing with changes in members of
any group (through acquisitions or otherwise)
treated under this paragraph as an affiliated
group for purposes of this subsection.
``(6) Election.--An election to have this subsection apply
with respect to any worldwide affiliated group may be made only
by the common parent of the domestic affiliated group referred
to in paragraph (1)(C) and may be made only for the first
taxable year beginning after December 31, 2008, in which a
worldwide affiliated group exists which includes such
affiliated group and at least 1 foreign corporation. Such an
election, once made, shall apply to such common parent and all
other corporations which are members of such worldwide
affiliated group for such taxable year and all subsequent years
unless revoked with the consent of the Secretary.''.
(b) Expansion of Regulatory Authority.--Paragraph (7) of section
864(e) is amended--
(1) by inserting before the comma at the end of subparagraph
(B) ``and in other circumstances where such allocation would be
appropriate to carry out the purposes of this subsection'', and
(2) by striking ``and'' at the end of subparagraph (E), by
redesignating subparagraph (F) as subparagraph (G), and by
inserting after subparagraph (E) the following new
subparagraph:
``(F) preventing assets or interest expense from
being taken into account more than once, and''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2008.
SEC. 302. RECHARACTERIZATION OF OVERALL DOMESTIC LOSS.
(a) General Rule.--Section 904 is amended by redesignating
subsections (g), (h), (i), (j), and (k) as subsections (h), (i), (j),
(k), and (l) respectively, and by inserting after subsection (f) the
following new subsection:
``(g) Recharacterization of Overall Domestic Loss.--
``(1) General rule.--For purposes of this subpart and section
936, in the case of any taxpayer who sustains an overall
domestic loss for any taxable year beginning after December 31,
2006, that portion of the taxpayer's taxable income from
sources within the United States for each succeeding taxable
year which is equal to the lesser of--
``(A) the amount of such loss (to the extent not used
under this paragraph in prior taxable years), or
``(B) 50 percent of the taxpayer's taxable income
from sources within the United States for such
succeeding taxable year,
shall be treated as income from sources without the United
States (and not as income from sources within the United
States).
``(2) Overall domestic loss defined.--For purposes of this
subsection--
``(A) In general.--The term `overall domestic loss'
means any domestic loss to the extent such loss offsets
taxable income from sources without the United States
for the taxable year or for any preceding taxable year
by reason of a carryback. For purposes of the preceding
sentence, the term `domestic loss' means the amount by
which the gross income for the taxable year from
sources within the United States is exceeded by the sum
of the deductions properly apportioned or allocated
thereto (determined without regard to any carryback
from a subsequent taxable year).
``(B) Taxpayer must have elected foreign tax credit
for year of loss.--The term `overall domestic loss'
shall not include any loss for any taxable year unless
the taxpayer chose the benefits of this subpart for
such taxable year.
``(3) Characterization of subsequent income.--
``(A) In general.--Any income from sources within the
United States that is treated as income from sources
without the United States under paragraph (1) shall be
allocated among and increase the income categories in
proportion to the loss from sources within the United
States previously allocated to those income categories.
``(B) Income category.--For purposes of this
paragraph, the term `income category' has the meaning
given such term by subsection (f)(5)(E)(i).
``(4) Coordination with subsection (f).--The Secretary shall
prescribe such regulations as may be necessary to coordinate
the provisions of this subsection with the provisions of
subsection (f).''.
(b) Conforming Amendments.--
(1) Section 535(d)(2) is amended by striking ``section
904(g)(6)'' and inserting ``section 904(h)(6)''.
(2) Subparagraph (A) of section 936(a)(2) is amended by
striking ``section 904(f)'' and inserting ``subsections (f) and
(g) of section 904''.
(c) Effective Date.--The amendments made by this section shall apply
to losses for taxable years beginning after December 31, 2006.
SEC. 303. REDUCTION TO 2 FOREIGN TAX CREDIT BASKETS.
(a) In General.--Paragraph (1) of section 904(d) (relating to
separate application of section with respect to certain categories of
income) is amended to read as follows:
``(1) In general.--The provisions of subsections (a), (b),
and (c) and sections 902, 907, and 960 shall be applied
separately with respect to--
``(A) passive category income, and
``(B) general category income.''
(b) Categories.--Paragraph (2) of section 904(d) is amended by
striking subparagraph (B), by redesignating subparagraph (A) as
subparagraph (B), and by inserting before subparagraph (B) (as so
redesignated) the following new subparagraph:
``(A) Categories.--
``(i) Passive category income.--The term
`passive category income' means passive income
and specified passive category income.
``(ii) General category income.--The term
`general category income' means income other
than passive category income.''
(c) Specified Passive Category Income.--Subparagraph (B) of section
904(d)(2), as so redesignated, is amended by adding at the end the
following new clause:
``(v) Specified passive category income.--The
term `specified passive category income'
means--
``(I) dividends from a DISC or former
DISC (as defined in section 992(a)) to
the extent such dividends are treated
as income from sources without the
United States,
``(II) taxable income attributable to
foreign trade income (within the
meaning of section 923(b)), and
``(III) distributions from a FSC (or
a former FSC) out of earnings and
profits attributable to foreign trade
income (within the meaning of section
923(b)) or interest or carrying charges
(as defined in section 927(d)(1))
derived from a transaction which
results in foreign trade income (as
defined in section 923(b)).''
(d) Treatment of Financial Services.--Paragraph (2) of section 904(d)
is amended by striking subparagraph (D), by redesignating subparagraph
(C) as subparagraph (D), and by inserting before subparagraph (D) (as
so redesignated) the following new subparagraph:
``(C) Treatment of financial services income and
companies.--
``(i) In general.--Financial services income
shall be treated as general category income in
the case of--
``(I) a member of a financial
services group, and
``(II) any other person if such
person is predominantly engaged in the
active conduct of a banking, insurance,
financing, or similar business.
``(ii) Financial services group.--The term
`financial services group' means any affiliated
group (as defined in section 1504(a) without
regard to paragraphs (2) and (3) of section
1504(b)) which is predominantly engaged in the
active conduct of a banking, insurance,
financing, or similar business. In determining
whether such a group is so engaged, there shall
be taken into account only the income of
members of the group that are--
``(I) United States corporations, or
``(II) controlled foreign
corporations in which such United
States corporations own, directly or
indirectly, at least 80 percent of the
total voting power and value of the
stock.
``(iii) Pass-thru entities.--The Secretary
shall by regulation specify for purposes of
this subparagraph the treatment of financial
services income received or accrued by
partnerships and by other pass-thru entities
which are not members of a financial services
group.''
(e) Conforming Amendments.--
(1) Clause (iii) of section 904(d)(2)(B) (relating to
exceptions from passive income), as so redesignated, is amended
by striking subclause (I) and by redesignating subclauses (II)
and (III) as subclauses (I) and (II), respectively.
(2) Clause (i) of section 904(d)(2)(D) (defining financial
services income), as so redesignated, is amended by adding
``or'' at the end of subclause (I) and by striking subclauses
(II) and (III) and inserting the following new subclause:
``(II) passive income (determined
without regard to subparagraph
(B)(iii)(II)).''
(3) Section 904(d)(2)(D) (defining financial services
income), as so redesignated, is amended by striking clause
(iii).
(4) Paragraph (3) of section 904(d) is amended to read as
follows:
``(3) Look-thru in case of controlled foreign corporations.--
``(A) In general.--Except as otherwise provided in
this paragraph, dividends, interest, rents, and
royalties received or accrued by the taxpayer from a
controlled foreign corporation in which the taxpayer is
a United States shareholder shall not be treated as
passive category income.
``(B) Subpart f inclusions.--Any amount included in
gross income under section 951(a)(1)(A) shall be
treated as passive category income to the extent the
amount so included is attributable to passive category
income.
``(C) Interest, rents, and royalties.--Any interest,
rent, or royalty which is received or accrued from a
controlled foreign corporation in which the taxpayer is
a United States shareholder shall be treated as passive
category income to the extent it is properly allocable
(under regulations prescribed by the Secretary) to
passive category income of the controlled foreign
corporation.
``(D) Dividends.--Any dividend paid out of the
earnings and profits of any controlled foreign
corporation in which the taxpayer is a United States
shareholder shall be treated as passive category income
in proportion to the ratio of--
``(i) the portion of the earnings and profits
attributable to passive category income, to
``(ii) the total amount of earnings and
profits.
``(E) Look-thru applies only where subpart f
applies.--If a controlled foreign corporation meets the
requirements of section 954(b)(3)(A) (relating to de
minimis rule) for any taxable year, for purposes of
this paragraph, none of its foreign base company income
(as defined in section 954(a) without regard to section
954(b)(5)) and none of its gross insurance income (as
defined in section 954(b)(3)(C)) for such taxable year
shall be treated as passive category income, except
that this sentence shall not apply to any income which
(without regard to this sentence) would be treated as
financial services income. Solely for purposes of
applying subparagraph (D), passive income of a
controlled foreign corporation shall not be treated as
passive category income if the requirements of section
954(b)(4) are met with respect to such income.
``(F) Coordination with high-taxed income
provisions.--
``(i) In determining whether any income of a
controlled foreign corporation is passive
category income, subclause (II) of paragraph
(2)(B)(iii) shall not apply.
``(ii) Any income of the taxpayer which is
treated as passive category income under this
paragraph shall be so treated notwithstanding
any provision of paragraph (2); except that the
determination of whether any amount is high-
taxed income shall be made after the
application of this paragraph.
``(G) Dividend.--For purposes of this paragraph, the
term `dividend' includes any amount included in gross
income in section 951(a)(1)(B). Any amount included in
gross income under section 78 to the extent
attributable to amounts included in gross income in
section 951(a)(1)(A) shall not be treated as a dividend
but shall be treated as included in gross income under
section 951(a)(1)(A).
``(H) Look-thru applies to passive foreign investment
company inclusion.--If--
``(i) a passive foreign investment company is
a controlled foreign corporation, and
``(ii) the taxpayer is a United States
shareholder in such controlled foreign
corporation,
any amount included in gross income under section 1293
shall be treated as income in a separate category to
the extent such amount is attributable to income in
such category.''
(5) Treatment of income tax base differences.--Paragraph (2)
of section 904(d) is amended by redesignating subparagraphs (H)
and (I) as subparagraphs (I) and (J), respectively, and by
inserting after subparagraph (G) the following new
subparagraph:
``(H) Treatment of income tax base differences.--Tax
imposed under the law of a foreign country or
possession of the United States on an amount which does
not constitute income under United States tax
principles shall be treated as imposed on income
described in paragraph (1)(B).''
(6) Paragraph (2) of section 904(d) is amended by adding at
the end the following new subparagraph:
``(K) Transitional rules for 2007 changes.--For
purposes of paragraph (1)--
``(i) taxes carried from any taxable year
beginning before January 1, 2007, to any
taxable year beginning on or after such date,
with respect to any item of income, shall be
treated as described in the subparagraph of
paragraph (1) in which such income would be
described were such taxes paid or accrued in a
taxable year beginning on or after such date,
and
``(ii) the Secretary may by regulations
provide for the allocation of any carryback of
taxes with respect to income to such a taxable
year for purposes of allocating such income
among the separate categories in effect for
such taxable year.''.
(7) Section 904(j)(3)(A)(i) is amended by striking
``subsection (d)(2)(A)'' and inserting ``subsection
(d)(2)(B)''.
(f) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2006.
SEC. 304. LOOK-THRU RULES TO APPLY TO DIVIDENDS FROM NONCONTROLLED
SECTION 902 CORPORATIONS.
(a) In General.--Section 904(d)(4) (relating to look-thru rules apply
to dividends from noncontrolled section 902 corporations) is amended to
read as follows:
``(4) Look-thru applies to dividends from noncontrolled
section 902 corporations.--
``(A) In general.--For purposes of this subsection,
any dividend from a noncontrolled section 902
corporation with respect to the taxpayer shall be
treated as income described in a subparagraph of
paragraph (1) in proportion to the ratio of--
``(i) the portion of earnings and profits
attributable to income described in such
subparagraph, to
``(ii) the total amount of earnings and
profits.
``(B) Earnings and profits of controlled foreign
corporations.--In the case of any distribution from a
controlled foreign corporation to a United States
shareholder, rules similar to the rules of subparagraph
(A) shall apply in determining the extent to which
earnings and profits of the controlled foreign
corporation which are attributable to dividends
received from a noncontrolled section 902 corporation
may be treated as income in a separate category.
``(C) Special rules.--For purposes of this
paragraph--
``(i) Earnings and profits.--
``(I) In general.--The rules of
section 316 shall apply.
``(II) Regulations.--The Secretary
may prescribe regulations regarding the
treatment of distributions out of
earnings and profits for periods before
the taxpayer's acquisition of the stock
to which the distributions relate.
``(ii) Inadequate substantiation.--If the
Secretary determines that the proper
subparagraph of paragraph (1) in which a
dividend is described has not been
substantiated, such dividend shall be treated
as income described in paragraph (1)(A).
``(iii) Coordination with high-taxed income
provisions.--Rules similar to the rules of
paragraph (3)(F) shall apply for purposes of
this paragraph.
``(iv) Look-thru with respect to carryover of
credit.--Rules similar to subparagraph (A) also
shall apply to any carryforward under
subsection (c) from a taxable year beginning
before January 1, 2003, of tax allocable to a
dividend from a noncontrolled section 902
corporation with respect to the taxpayer. The
Secretary may by regulations provide for the
allocation of any carryback of tax allocable to
a dividend from a noncontrolled section 902
corporation to such a taxable year for purposes
of allocating such dividend among the separate
categories in effect for such taxable year.''.
(b) Conforming Amendments.--
(1) Subparagraph (E) of section 904(d)(1) is hereby repealed.
(2) Section 904(d)(2)(C)(iii) is amended by adding ``and'' at
the end of subclause (I), by striking subclause (II), and by
redesignating subclause (III) as subclause (II).
(3) The last sentence of section 904(d)(2)(D) is amended to
read as follows: ``Such term does not include any financial
services income.''.
(4) Section 904(d)(2)(E) is amended--
(A) by inserting ``or (4)'' after ``paragraph (3)''
in clause (i), and
(B) by striking clauses (ii) and (iv) and by
redesignating clause (iii) as clause (ii).
(5) Section 904(d)(3)(F) is amended by striking ``(D), or
(E)'' and inserting ``or (D)''.
(6) Section 864(d)(5)(A)(i) is amended by striking
``(C)(iii)(III)'' and inserting ``(C)(iii)(II)''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2002.
SEC. 305. ATTRIBUTION OF STOCK OWNERSHIP THROUGH PARTNERSHIPS TO APPLY
IN DETERMINING SECTION 902 AND 960 CREDITS.
(a) In General.--Subsection (c) of section 902 is amended by
redesignating paragraph (7) as paragraph (8) and by inserting after
paragraph (6) the following new paragraph:
``(7) Constructive ownership through partnerships.--Stock
owned, directly or indirectly, by or for a partnership shall be
considered as being owned proportionately by its partners.
Stock considered to be owned by a person by reason of the
preceding sentence shall, for purposes of applying such
sentence, be treated as actually owned by such person. The
Secretary may prescribe such regulations as may be necessary to
carry out the purposes of this paragraph, including rules to
account for special partnership allocations of dividends,
credits, and other incidents of ownership of stock in
determining proportionate ownership.''.
(b) Clarification of Comparable Attribution Under Section
901(b)(5).--Paragraph (5) of section 901(b) is amended by striking
``any individual'' and inserting ``any person''.
(c) Effective Date.--The amendments made by this section shall apply
to taxes of foreign corporations for taxable years of such corporations
beginning after the date of the enactment of this Act.
SEC. 306. CLARIFICATION OF TREATMENT OF CERTAIN TRANSFERS OF INTANGIBLE
PROPERTY.
(a) In General.--Subparagraph (C) of section 367(d)(2) is amended by
adding at the end the following new sentence: ``For purposes of
applying section 904(d), any such amount shall be treated in the same
manner as if such amount were a royalty.''.
(b) Effective Date.--The amendment made by this section shall apply
to amounts treated as received pursuant to section 367(d)(2) of the
Internal Revenue Code of 1986 on or after August 5, 1997.
SEC. 307. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN ASSETS OF
CONTROLLED FOREIGN CORPORATION.
(a) In General.--Section 956(c)(2) (relating to exceptions from
property treated as United States property) is amended by striking
``and'' at the end of subparagraph (J), by striking the period at the
end of subparagraph (K) and inserting a semicolon, and by adding at the
end the following new subparagraphs:
``(L) securities acquired and held by a controlled
foreign corporation in the ordinary course of its
business as a dealer in securities if--
``(i) the dealer accounts for the securities
as securities held primarily for sale to
customers in the ordinary course of business,
and
``(ii) the dealer disposes of the securities
(or such securities mature while held by the
dealer) within a period consistent with the
holding of securities for sale to customers in
the ordinary course of business; and
``(M) an obligation of a United States person which--
``(i) is not a domestic corporation, and
``(ii) is not--
``(I) a United States shareholder (as
defined in section 951(b)) of the
controlled foreign corporation, or
``(II) a partnership, estate, or
trust in which the controlled foreign
corporation, or any related person (as
defined in section 954(d)(3)), is a
partner, beneficiary, or trustee
immediately after the acquisition of
any obligation of such partnership,
estate, or trust by the controlled
foreign corporation.''.
(b) Conforming Amendment.--Section 956(c)(2) is amended by striking
``and (K)'' in the last sentence and inserting ``, (K), and (L)''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2004, and to taxable years of United States shareholders with or within
which such taxable years of foreign corporations end.
SEC. 308. ELECTION NOT TO USE AVERAGE EXCHANGE RATE FOR FOREIGN TAX
PAID OTHER THAN IN FUNCTIONAL CURRENCY.
(a) In General.--Paragraph (1) of section 986(a) (relating to
determination of foreign taxes and foreign corporation's earnings and
profits) is amended by redesignating subparagraph (D) as subparagraph
(E) and by inserting after subparagraph (C) the following new
subparagraph:
``(D) Elective exception for taxes paid other than in
functional currency.--
``(i) In general.--At the election of the
taxpayer, subparagraph (A) shall not apply to
any foreign income taxes the liability for
which is denominated in any currency other than
in the taxpayer's functional currency.
``(ii) Application to qualified business
units.--An election under this subparagraph may
apply to foreign income taxes attributable to a
qualified business unit in accordance with
regulations prescribed by the Secretary.
``(iii) Election.--Any such election shall
apply to the taxable year for which made and
all subsequent taxable years unless revoked
with the consent of the Secretary.''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2004.
SEC. 309. REPEAL OF WITHHOLDING TAX ON DIVIDENDS FROM CERTAIN FOREIGN
CORPORATIONS.
(a) In General.--Paragraph (2) of section 871(i) (relating to tax not
to apply to certain interest and dividends) is amended by adding at the
end the following new subparagraph:
``(D) Dividends paid by a foreign corporation which
are treated under section 861(a)(2)(B) as income from
sources within the United States.''.
(b) Effective Date.--The amendment made by this section shall apply
to payments made after December 31, 2004.
SEC. 310. PROVIDE EQUAL TREATMENT FOR INTEREST PAID BY FOREIGN
PARTNERSHIPS AND FOREIGN CORPORATIONS.
(a) In General.--Paragraph (1) of section 861(a) 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) in the case of a foreign partnership, which is
predominantly engaged in the active conduct of a trade
or business outside the United States, any interest not
paid by a trade or business engaged in by the
partnership in the United States and not allocable to
income which is effectively connected (or treated as
effectively connected) with the conduct of a trade or
business in the United States.''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2003.
SEC. 311. LOOK-THRU TREATMENT OF PAYMENTS BETWEEN RELATED CONTROLLED
FOREIGN CORPORATIONS UNDER FOREIGN PERSONAL HOLDING
COMPANY INCOME RULES.
(a) In General.--Subsection (c) of section 954, as amended by this
Act, is amended by adding after paragraph (4) the following new
paragraph:
``(5) Look-thru in the case of related controlled foreign
corporations.--For purposes of this subsection, dividends,
interest, rents, and royalties received or accrued from a
controlled foreign corporation which is a related person (as
defined in subsection (b)(9)) shall not be treated as foreign
personal holding company income to the extent attributable or
properly allocable (determined under rules similar to the rules
of subparagraphs (C) and (D) of section 904(d)(3)) to income of
the related person which is not subpart F income (as defined in
section 952). For purposes of this paragraph, interest shall
include factoring income which is treated as income equivalent
to interest for purposes of paragraph (1)(E). The Secretary
shall prescribe such regulations as may be appropriate to
prevent the abuse of the purposes of this paragraph.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2004, and to taxable years of United States shareholders with or within
which such taxable years of foreign corporations end.
SEC. 312. LOOK-THRU TREATMENT FOR SALES OF PARTNERSHIP INTERESTS.
(a) In General.--Section 954(c) (defining foreign personal holding
company income), as amended by this Act, is amended by adding after
paragraph (5) the following new paragraph:
``(6) Look-thru rule for certain partnership sales.--
``(A) In general.--In the case of any sale by a
controlled foreign corporation of an interest in a
partnership with respect to which such corporation is a
25-percent owner, such corporation shall be treated for
purposes of this subsection as selling the
proportionate share of the assets of the partnership
attributable to such interest. The Secretary shall
prescribe such regulations as may be appropriate to
prevent abuse of the purposes of this paragraph,
including regulations providing for coordination of
this paragraph with the provisions of subchapter K.
``(B) 25-percent owner.--For purposes of this
paragraph, the term `25-percent owner' means a
controlled foreign corporation which owns directly 25
percent or more of the capital or profits interest in a
partnership. For purposes of the preceding sentence, if
a controlled foreign corporation is a shareholder or
partner of a corporation or partnership, the controlled
foreign corporation shall be treated as owning directly
its proportionate share of any such capital or profits
interest held directly or indirectly by such
corporation or partnership.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2004, and to taxable years of United States shareholders with or within
which such taxable years of foreign corporations end.
SEC. 313. REPEAL OF FOREIGN PERSONAL HOLDING COMPANY RULES AND FOREIGN
INVESTMENT COMPANY RULES.
(a) General Rule.--The following provisions are hereby repealed:
(1) Part III of subchapter G of chapter 1 (relating to
foreign personal holding companies).
(2) Section 1246 (relating to gain on foreign investment
company stock).
(3) Section 1247 (relating to election by foreign investment
companies to distribute income currently).
(b) Exemption of Foreign Corporations From Personal Holding Company
Rules.--
(1) In general.--Subsection (c) of section 542 (relating to
exceptions) is amended--
(A) by striking paragraph (5) and inserting the
following:
``(5) a foreign corporation,'',
(B) by striking paragraphs (7) and (10) and by
redesignating paragraphs (8) and (9) as paragraphs (7)
and (8), respectively,
(C) by inserting ``and'' at the end of paragraph (7)
(as so redesignated), and
(D) by striking ``; and'' at the end of paragraph (8)
(as so redesignated) and inserting a period.
(2) Treatment of income from personal service contracts.--
Paragraph (1) of section 954(c) is amended by adding at the end
the following new subparagraph:
``(I) Personal service contracts.--
``(i) Amounts received under a contract under
which the corporation is to furnish personal
services if--
``(I) some person other than the
corporation has the right to designate
(by name or by description) the
individual who is to perform the
services, or
``(II) the individual who is to
perform the services is designated (by
name or by description) in the
contract, and
``(ii) amounts received from the sale or
other disposition of such a contract.
This subparagraph shall apply with respect to amounts
received for services under a particular contract only
if at some time during the taxable year 25 percent or
more in value of the outstanding stock of the
corporation is owned, directly or indirectly, by or for
the individual who has performed, is to perform, or may
be designated (by name or by description) as the one to
perform, such services.''.
(c) Conforming Amendments.--
(1) Section 1(h) is amended--
(A) in paragraph (10), by inserting ``and'' at the
end of subparagraph (F), by striking subparagraph (G),
and by redesignating subparagraph (H) as subparagraph
(G), and
(B) by striking ``a foreign personal holding company
(as defined in section 552), a foreign investment
company (as defined in section 1246(b)), or'' in
paragraph (11)(C)(iii).
(2) Section 163(e)(3)(B), as amended by section 642(a) of
this Act, is amended by striking ``which is a foreign personal
holding company (as defined in section 552), a controlled
foreign corporation (as defined in section 957), or'' and
inserting ``which is a controlled foreign corporation (as
defined in section 957) or''.
(3) Paragraph (2) of section 171(c) is amended--
(A) by striking ``, or by a foreign personal holding
company, as defined in section 552'', and
(B) by striking ``, or foreign personal holding
company''.
(4) Paragraph (2) of section 245(a) is amended by striking
``foreign personal holding company or''.
(5) Section 267(a)(3)(B), as amended by section 642(b) of
this Act, is amended by striking ``to a foreign personal
holding company (as defined in section 552), a controlled
foreign corporation (as defined in section 957), or'' and
inserting ``to a controlled foreign corporation (as defined in
section 957) or''.
(6) Section 312 is amended by striking subsection (j).
(7) Subsection (m) of section 312 is amended by striking ``,
a foreign investment company (within the meaning of section
1246(b)), or a foreign personal holding company (within the
meaning of section 552)''.
(8) Subsection (e) of section 443 is amended by striking
paragraph (3) and by redesignating paragraphs (4) and (5) as
paragraphs (3) and (4), respectively.
(9) Subparagraph (B) of section 465(c)(7) is amended by
adding ``or'' at the end of clause (i), by striking clause
(ii), and by redesignating clause (iii) as clause (ii).
(10) Paragraph (1) of section 543(b) is amended by inserting
``and'' at the end of subparagraph (A), by striking ``, and''
at the end of subparagraph (B) and inserting a period, and by
striking subparagraph (C).
(11) Paragraph (1) of section 562(b) is amended by striking
``or a foreign personal holding company described in section
552''.
(12) Section 563 is amended--
(A) by striking subsection (c),
(B) by redesignating subsection (d) as subsection
(c), and
(C) by striking ``subsection (a), (b), or (c)'' in
subsection (c) (as so redesignated) and inserting
``subsection (a) or (b)''.
(13) Subsection (d) of section 751 is amended by adding
``and'' at the end of paragraph (2), by striking paragraph (3),
by redesignating paragraph (4) as paragraph (3), and by
striking ``paragraph (1), (2), or (3)'' in paragraph (3) (as so
redesignated) and inserting ``paragraph (1) or (2)''.
(14) Paragraph (2) of section 864(d) is amended by striking
subparagraph (A) and by redesignating subparagraphs (B) and (C)
as subparagraphs (A) and (B), respectively.
(15)(A) Subparagraph (A) of section 898(b)(1) is amended to
read as follows:
``(A) which is treated as a controlled foreign
corporation for any purpose under subpart F of part III
of this subchapter, and''.
(B) Subparagraph (B) of section 898(b)(2) is amended by
striking ``and sections 551(f) and 554, whichever are
applicable,''.
(C) Paragraph (3) of section 898(b) is amended to read as
follows:
``(3) United states shareholder.--The term `United States
shareholder' has the meaning given to such term by section
951(b), except that, in the case of a foreign corporation
having related person insurance income (as defined in section
953(c)(2)), the Secretary may treat any person as a United
States shareholder for purposes of this section if such person
is treated as a United States shareholder under section
953(c)(1).''.
(D) Subsection (c) of section 898 is amended to read as
follows:
``(c) Determination of Required Year.--
``(1) In general.--The required year is--
``(A) the majority U.S. shareholder year, or
``(B) if there is no majority U.S. shareholder year,
the taxable year prescribed under regulations.
``(2) 1-month deferral allowed.--A specified foreign
corporation may elect, in lieu of the taxable year under
paragraph (1)(A), a taxable year beginning 1 month earlier than
the majority U.S. shareholder year.
``(3) Majority u.s. shareholder year.--
``(A) In general.--For purposes of this subsection,
the term `majority U.S. shareholder year' means the
taxable year (if any) which, on each testing day,
constituted the taxable year of--
``(i) each United States shareholder
described in subsection (b)(2)(A), and
``(ii) each United States shareholder not
described in clause (i) whose stock was treated
as owned under subsection (b)(2)(B) by any
shareholder described in such clause.
``(B) Testing day.--The testing days shall be--
``(i) the first day of the corporation's
taxable year (determined without regard to this
section), or
``(ii) the days during such representative
period as the Secretary may prescribe.''.
(16) Clause (ii) of section 904(d)(2)(A) is amended to read
as follows:
``(ii) Certain amounts included.--Except as
provided in clause (iii), the term `passive
income' includes, except as provided in
subparagraph (E)(iii) or paragraph (3)(I), any
amount includible in gross income under section
1293 (relating to certain passive foreign
investment companies).''.
(17)(A) Subparagraph (A) of section 904(h)(1), as
redesignated by section 302, is amended by adding ``or'' at the
end of clause (i), by striking clause (ii), and by
redesignating clause (iii) as clause (ii).
(B) The paragraph heading of paragraph (2) of section 904(h),
as so redesignated, is amended by striking ``foreign personal
holding or''.
(18) Section 951 is amended by striking subsections (c) and
(d) and by redesignating subsections (e) and (f) as subsections
(c) and (d), respectively.
(19) Paragraph (3) of section 989(b) is amended by striking
``, 551(a),''.
(20) Paragraph (5) of section 1014(b) is amended by inserting
``and before January 1, 2005,'' after ``August 26, 1937,''.
(21) Subsection (a) of section 1016 is amended by striking
paragraph (13).
(22)(A) Paragraph (3) of section 1212(a) is amended to read
as follows:
``(3) Special rules on carrybacks.--A net capital loss of a
corporation shall not be carried back under paragraph (1)(A) to
a taxable year--
``(A) for which it is a regulated investment company
(as defined in section 851), or
``(B) for which it is a real estate investment trust
(as defined in section 856).''.
(B) The amendment made by subparagraph (A) shall apply to
taxable years beginning after December 31, 2004.
(23) Section 1223 is amended by striking paragraph (10) and
by redesignating the following paragraphs accordingly.
(24) Subsection (d) of section 1248 is amended by striking
paragraph (5) and by redesignating paragraphs (6) and (7) as
paragraphs (5) and (6), respectively.
(25) Paragraph (2) of section 1260(c) is amended by striking
subparagraphs (H) and (I) and by redesignating subparagraph (J)
as subparagraph (H).
(26)(A) Subparagraph (F) of section 1291(b)(3) is amended by
striking ``551(d), 959(a),'' and inserting ``959(a)''.
(B) Subsection (e) of section 1291 is amended by inserting
``(as in effect on the day before the date of the enactment of
the American Jobs Creation Act of 2004)'' after ``section
1246''.
(27) Paragraph (2) of section 1294(a) is amended to read as
follows:
``(2) Election not permitted where amounts otherwise
includible under section 951.--The taxpayer may not make an
election under paragraph (1) with respect to the undistributed
PFIC earnings tax liability attributable to a qualified
electing fund for the taxable year if any amount is includible
in the gross income of the taxpayer under section 951 with
respect to such fund for such taxable year.''.
(28) Section 6035 is hereby repealed.
(29) Subparagraph (D) of section 6103(e)(1) is amended by
striking clause (iv) and redesignating clauses (v) and (vi) as
clauses (iv) and (v), respectively.
(30) Subparagraph (B) of section 6501(e)(1) is amended to
read as follows:
``(B) Constructive dividends.--If the taxpayer omits
from gross income an amount properly includible therein
under section 951(a), the tax may be assessed, or a
proceeding in court for the collection of such tax may
be done without assessing, at any time within 6 years
after the return was filed.''.
(31) Subsection (a) of section 6679 is amended--
(A) by striking ``6035, 6046, and 6046A'' in
paragraph (1) and inserting ``6046 and 6046A'', and
(B) by striking paragraph (3).
(32) Sections 170(f)(10)(A), 508(d), 4947, and 4948(c)(4) are
each amended by striking ``556(b)(2),'' each place it appears.
(33) The table of parts for subchapter G of chapter 1 is
amended by striking the item relating to part III.
(34) The table of sections for part IV of subchapter P of
chapter 1 is amended by striking the items relating to sections
1246 and 1247.
(35) The table of sections for subpart A of part III of
subchapter A of chapter 61 is amended by striking the item
relating to section 6035.
(d) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to taxable years of
foreign corporations beginning after December 31, 2004, and to
taxable years of United States shareholders with or within
which such taxable years of foreign corporations end.
(2) Subsection (c)(29).--The amendments made by subsection
(c)(29) shall apply to disclosures of return or return
information with respect to taxable years beginning after
December 31, 2004.
SEC. 314. DETERMINATION OF FOREIGN PERSONAL HOLDING COMPANY INCOME WITH
RESPECT TO TRANSACTIONS IN COMMODITIES.
(a) In General.--Clauses (i) and (ii) of section 954(c)(1)(C)
(relating to commodity transactions) are amended to read as follows:
``(i) arise out of commodity hedging
transactions (as defined in paragraph (4)(A)),
``(ii) are active business gains or losses
from the sale of commodities, but only if
substantially all of the controlled foreign
corporation's commodities are property
described in paragraph (1), (2), or (8) of
section 1221(a), or''.
(b) Definition and Special Rules.--Subsection (c) of section 954 is
amended by adding after paragraph (3) the following new paragraph:
``(4) Definition and special rules relating to commodity
transactions.--
``(A) Commodity hedging transactions.--For purposes
of paragraph (1)(C)(i), the term `commodity hedging
transaction' means any transaction with respect to a
commodity if such transaction--
``(i) is a hedging transaction as defined in
section 1221(b)(2), determined--
``(I) without regard to subparagraph
(A)(ii) thereof,
``(II) by applying subparagraph
(A)(i) thereof by substituting
`ordinary property or property
described in section 1231(b)' for
`ordinary property', and
``(III) by substituting `controlled
foreign corporation' for `taxpayer'
each place it appears, and
``(ii) is clearly identified as such in
accordance with section 1221(a)(7).
``(B) Treatment of dealer activities under paragraph
(1)(C).--Commodities with respect to which gains and
losses are not taken into account under paragraph
(2)(C) in computing a controlled foreign corporation's
foreign personal holding company income shall not be
taken into account in applying the substantially all
test under paragraph (1)(C)(ii) to such corporation.
``(C) Regulations.--The Secretary shall prescribe
such regulations as are appropriate to carry out the
purposes of paragraph (1)(C) in the case of
transactions involving related parties.''.
(c) Modification of Exception for Dealers.--Clause (i) of section
954(c)(2)(C) is amended by inserting ``and transactions involving
physical settlement'' after ``(including hedging transactions''.
(d) Effective Date.--The amendments made by this section shall apply
to transactions entered into after December 31, 2004.
SEC. 315. MODIFICATIONS TO TREATMENT OF AIRCRAFT LEASING AND SHIPPING
INCOME.
(a) Elimination of Foreign Base Company Shipping Income.--Section 954
(relating to foreign base company income) is amended--
(1) by striking paragraph (4) of subsection (a) (relating to
foreign base company shipping income), and
(2) by striking subsection (f) (relating to foreign base
company shipping income).
(b) Safe Harbor for Certain Leasing Activities.--Subparagraph (A) of
section 954(c)(2) is amended by adding at the end the following new
sentence: ``For purposes of the preceding sentence, rents derived from
leasing an aircraft or vessel in foreign commerce shall not fail to be
treated as derived in the active conduct of a trade or business if, as
determined under regulations prescribed by the Secretary, the active
leasing expenses are not less than 10 percent of the profit on the
lease.''
(c) Conforming Amendments.--
(1) Section 952(c)(1)(B)(iii) is amended by striking
subclause (I) and redesignating subclauses (II) through (VI) as
subclauses (I) through (V), respectively.
(2) Subsection (b) of section 954 is amended--
(A) by striking ``the foreign base company shipping
income,'' in paragraph (5),
(B) by striking paragraphs (6) and (7), and
(C) by redesignating paragraph (8) as paragraph (6).
(d) Effective Date.--The amendments made by this section shall apply
to taxable years of foreign corporations beginning after December 31,
2004, and to taxable years of United States shareholders with or within
which such taxable years of foreign corporations end.
SEC. 316. MODIFICATION OF EXCEPTIONS UNDER SUBPART F FOR ACTIVE
FINANCING.
(a) In General.--Section 954(h)(3) is amended by adding at the end
the following:
``(E) Direct conduct of activities.--For purposes of
subparagraph (A)(ii)(II), an activity shall be treated
as conducted directly by an eligible controlled foreign
corporation or qualified business unit in its home
country if the activity is performed by employees of a
related person and--
``(i) the related person is an eligible
controlled foreign corporation the home country
of which is the same as the home country of the
corporation or unit to which subparagraph
(A)(ii)(II) is being applied,
``(ii) the activity is performed in the home
country of the related person, and
``(iii) the related person is compensated on
an arm's-length basis for the performance of
the activity by its employees and such
compensation is treated as earned by such
person in its home country for purposes of the
home country's tax laws.''.
(b) Effective Date.--The amendment made by this section shall apply
to taxable years of such foreign corporations beginning after December
31, 2004, and to taxable years of United States shareholders with or
within which such taxable years of such foreign corporations end.
TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS
SEC. 401. ALLOWANCE OF NONREFUNDABLE PERSONAL CREDITS AGAINST REGULAR
AND MINIMUM TAX LIABILITY.
(a) In General.--Paragraph (2) of section 26(a) is amended--
(1) by striking ``rule for 2000, 2001, 2002, and 2003.--''
and inserting ``rule for taxable years 2000 through 2005.--'',
and
(2) by striking ``or 2003,'' and inserting ``2003, 2004, or
2005,''.
(b) Conforming Provisions.--
(1) Section 904(h) is amended by striking ``or 2003'' and
inserting ``2003, 2004, or 2005''.
(2) The amendments made by sections 201(b), 202(f), and
618(b) of the Economic Growth and Tax Relief Reconciliation Act
of 2001 shall not apply to taxable years beginning during 2004
or 2005.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2003.
SEC. 402. EXTENSION OF RESEARCH CREDIT.
(a) Extension.--
(1) In general.--Section 41(h)(1)(B) (relating to
termination) is amended by striking ``June 30, 2004'' and
inserting ``December 31, 2005''.
(2) Conforming amendment.--Section 45C(b)(1)(D) is amended by
striking ``June 30, 2004'' and inserting ``December 31, 2005''.
(b) Effective Date.--The amendments made by subsection (a) shall
apply to amounts paid or incurred after June 30, 2004.
SEC. 403. EXTENSION OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN
RENEWABLE RESOURCES.
(a) In General.--Subparagraphs (A) and (B) of section 45(c)(3)
(defining qualified facility) are both amended by striking ``2004'' and
inserting ``2006''.
(b) Effective Date.--The amendments made by this section shall apply
to facilities placed in service after December 31, 2003.
SEC. 404. INDIAN EMPLOYMENT TAX CREDIT.
Section 45A(f) (relating to termination) is amended by striking
``December 31, 2004'' and inserting ``December 31, 2005''.
SEC. 405. WORK OPPORTUNITY CREDIT.
(a) In General.--Subparagraph (B) of section 51(c)(4) is amended by
striking ``December 31, 2003'' and inserting ``December 31, 2005''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to individuals who begin work for the employer after December 31, 2003.
SEC. 406. WELFARE-TO-WORK CREDIT.
(a) In General.--Subsection (f) of section 51A is amended by striking
``December 31, 2003'' and inserting ``December 31, 2005''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to individuals who begin work for the employer after December 31, 2003.
SEC. 407. CERTAIN EXPENSES OF ELEMENTARY AND SECONDARY SCHOOL TEACHERS.
(a) In General.--Subparagraph (D) of section 62(a)(2) (relating to
certain trade and business deductions of employees) is amended by
striking ``or 2003'' and inserting ``, 2003, 2004, or 2005''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 2003.
SEC. 408. EXTENSION OF ACCELERATED DEPRECIATION BENEFIT FOR PROPERTY ON
INDIAN RESERVATIONS.
Paragraph (8) of section 168(j) (relating to termination) is amended
by striking ``December 31, 2004'' and inserting ``December 31, 2005''.
SEC. 409. CHARITABLE CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND EQUIPMENT
USED FOR EDUCATIONAL PURPOSES.
(a) In General.--Subparagraph (G) of section 170(e)(6) (relating to
special rule for contributions of computer technology and equipment for
educational purposes) is amended by striking ``December 31, 2003'' and
inserting ``December 31, 2005''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 2003.
SEC. 410. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.
(a) In General.--Subsection (h) of section 198 (relating to
termination) is amended by striking ``December 31, 2003'' and inserting
``December 31, 2005''.
(b) Effective Date.--The amendments made by subsection (a) shall
apply to expenditures paid or incurred after December 31, 2003.
SEC. 411. AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS.
(a) In General.--Paragraphs (2) and (3)(B) of section 220(i)
(defining cut-off year) are each amended by striking ``2003'' each
place it appears in the text and headings and inserting ``2005''.
(b) Conforming Amendments.--
(1) Paragraph (2) of section 220(j) is amended--
(A) in the text by striking ``or 2002'' each place it
appears and inserting ``2002, or 2004'', and
(B) in the heading by striking ``or 2002'' and
inserting ``2002, or 2004''.
(2) Subparagraph (A) of section 220(j)(4) is amended by
striking ``and 2002'' and inserting ``2002, and 2004''.
(3) Subparagraph (C) of section 220(j)(2) is amended to read
as follows:
``(C) No limitation for 2000 or 2003.--The numerical
limitation shall not apply for 2000 or 2003.''.
(c) Effective Date.--The amendments made by this section shall take
effect on January 1, 2004.
(d) Time for Filing Reports, Etc.--
(1) The report required by section 220(j)(4) of the Internal
Revenue Code of 1986 to be made on August 1, 2004, shall be
treated as timely if made before the close of the 90-day period
beginning on the date of the enactment of this Act.
(2) The determination and publication required by section
220(j)(5) of such Code with respect to calendar year 2004 shall
be treated as timely if made before the close of the 120-day
period beginning on the date of the enactment of this Act. If
the determination under the preceding sentence is that 2004 is
a cut-off year under section 220(i) of such Code, the cut-off
date under such section 220(i) shall be the last day of such
120-day period.
SEC. 412. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLETION FOR OIL AND
NATURAL GAS PRODUCED FROM MARGINAL PROPERTIES.
(a) In General.--Subparagraph (H) of section 613A(c)(6) is amended by
striking ``January 1, 2004'' and inserting ``January 1, 2006''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 2003.
SEC. 413. QUALIFIED ZONE ACADEMY BONDS.
(a) In General.--Paragraph (1) of section 1397E(e) is amended by
striking ``and 2003'' and inserting ``2003, 2004, and 2005''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to obligations issued after the date of the enactment of this Act.
SEC. 414. DISTRICT OF COLUMBIA.
(a) District of Columbia Enterprise Zone.--Subsection (f) of section
1400 is amended by striking ``December 31, 2003'' both places it
appears and inserting ``December 31, 2005''.
(b) Tax-Exempt Economic Development Bonds.--Subsection (b) of
section 1400A is amended by striking ``December 31, 2003'' and
inserting ``December 31, 2005''.
(c) Zero Percent Capital Gains Rate.--
(1) Section 1400B is amended by striking ``January 1, 2004''
each place it appears and inserting ``January 1, 2006''.
(2) Subsections (e)(2) and (g)(2) of section 1400B are each
amended by striking ``2008'' each place it appears in the
headings and text and inserting ``2010''.
(3) Subsection (d) of section 1400F is amended by striking
``December 31, 2008'' and inserting ``December 31, 2010''.
(d) First-Time Homebuyer Credit.--Subsection (i) of section 1400C is
amended by striking ``January 1, 2004'' and inserting ``January 1,
2006''.
(e) Effective Dates.--
(1) In general.--Except as otherwise provided in this
subsection, the amendments made by this section shall take
effect on the date of the enactment of this Act.
(2) Tax-exempt economic development bonds.--The amendment
made by subsection (b) shall apply to obligations issued after
December 31, 2003.
SEC. 415. EXTENSION OF CERTAIN NEW YORK LIBERTY ZONE BOND FINANCING.
Subparagraph (D) of section 1400L(d)(2) is amended by striking
``2005'' and inserting ``2010''.
SEC. 416. DISCLOSURES RELATING TO TERRORIST ACTIVITIES.
(a) In General.--Clause (iv) of section 6103(i)(3)(C) and
subparagraph (E) of section 6103(i)(7) are both amended by striking
``December 31, 2003'' and inserting ``December 31, 2005''.
(b) Disclosure of taxpayer identity to law enforcement agencies
investigating terrorism.--Subparagraph (A) of section 6103(i)(7) is
amended by adding at the end the following new clause:
``(v) Taxpayer identity.--For purposes of
this subparagraph, a taxpayer's identity shall
not be treated as taxpayer return
information.''.
(c) Effective Dates.--
(1) In general.--The amendments made by subsection (a) shall
apply to disclosures on or after the date of the enactment of
this Act.
(2) Subsection (b).--The amendment made by subsection (b)
shall take effect as if included in section 201 of the Victims
of Terrorism Tax Relief Act of 2001.
SEC. 417. DISCLOSURE OF RETURN INFORMATION RELATING TO STUDENT LOANS.
Section 6103(l)(13)(D) (relating to termination) is amended by
striking ``December 31, 2004'' and inserting ``December 31, 2005''.
SEC. 418. COVER OVER OF TAX ON DISTILLED SPIRITS.
(a) In General.--Paragraph (1) of section 7652(f) is amended by
striking ``January 1, 2004'' and inserting ``January 1, 2006''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to articles brought into the United States after December 31, 2003.
SEC. 419. JOINT REVIEW OF STRATEGIC PLANS AND BUDGET FOR THE INTERNAL
REVENUE SERVICE.
(a) In General.--Paragraph (2) of section 8021(f) (relating to joint
reviews) is amended by striking ``2004'' and inserting ``2005''.
(b) Report.--Subparagraph (C) of section 8022(3) (regarding reports)
is amended--
(1) by striking ``2004'' and inserting ``2005'', and
(2) by striking ``with respect to--'' and all that follows
and inserting ``with respect to the matters addressed in the
joint review referred to in section 8021(f)(2).''.
(c) Time for Joint Review.--The joint review required by section
8021(f)(2) of the Internal Revenue Code of 1986 to be made before June
1, 2004, shall be treated as timely if made before June 1, 2005.
SEC. 420. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL HEALTH
BENEFITS.
(a) In General.--Subsection (f) of section 9812 is amended by
striking ``and'' at the end of paragraph (1), by striking paragraph
(2), and by inserting after paragraph (1) the following new paragraphs:
``(2) on or after January 1, 2004, and before the date of the
enactment of American Jobs Creation Act of 2004, and
``(3) after December 31, 2005.''.
(b) Effective Date.--The amendments made by this section shall apply
to benefits for services furnished on or after December 31, 2003.
SEC. 421. COMBINED EMPLOYMENT TAX REPORTING PROJECT.
(a) In General.--Paragraph (1) of section 976(b) of the Taxpayer
Relief Act of 1997 (111 Stat. 898) is amended by striking ``for a
period ending with the date which is 5 years after the date of the
enactment of this Act'' and inserting ``during the period ending on
December 31, 2005''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to disclosures on or after the date of the enactment of this Act.
SEC. 422. CLEAN-FUEL VEHICLES.
(a) Credit for Qualified Electric Vehicles.--Paragraph (2) of section
30(b) (relating to phaseout) is amended to read as follows:
``(2) Phaseout.--In the case of any qualified electric
vehicle placed in service after December 31, 2005, the credit
otherwise allowable under subsection (a) (determined after the
application of paragraph (1)) shall be reduced by 75
percent.''.
(b) Deduction for Qualified Clean-fuel Vehicle Property.--
Subparagraph (B) of section 179A(b)(1) (relating to phaseout) is
amended to read as follows:
``(B) Phaseout.--In the case of any qualified clean-
fuel vehicle property placed in service after December
31, 2005, the limit otherwise applicable under
subparagraph (A) shall be reduced by 75 percent.''.
(c) Effective Date.--The amendments made by this section shall apply
to property placed in service after December 31, 2003.
TITLE V--DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES
SEC. 501. DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES IN LIEU OF
STATE AND LOCAL INCOME TAXES.
(a) In General.--Subsection (b) of section 164 (relating to
definitions and special rules) is amended by adding at the end the
following:
``(5) General sales taxes.--For purposes of subsection (a)--
``(A) Election to deduct state and local sales taxes
in lieu of state and local income taxes.--
``(i) In general.--At the election of the
taxpayer for the taxable year, subsection (a)
shall be applied--
``(I) without regard to the reference
to State and local income taxes, and
``(II) as if State and local general
sales taxes were referred to in a
paragraph thereof.
``(B) Definition of general sales tax.--The term
`general sales tax' means a tax imposed at one rate
with respect to the sale at retail of a broad range of
classes of items.
``(C) Special rules for food, etc.--In the case of
items of food, clothing, medical supplies, and motor
vehicles--
``(i) the fact that the tax does not apply
with respect to some or all of such items shall
not be taken into account in determining
whether the tax applies with respect to a broad
range of classes of items, and
``(ii) the fact that the rate of tax
applicable with respect to some or all of such
items is lower than the general rate of tax
shall not be taken into account in determining
whether the tax is imposed at one rate.
``(D) Items taxed at different rates.--Except in the
case of a lower rate of tax applicable with respect to
an item described in subparagraph (C), no deduction
shall be allowed under this paragraph for any general
sales tax imposed with respect to an item at a rate
other than the general rate of tax.
``(E) Compensating use taxes.--A compensating use tax
with respect to an item shall be treated as a general
sales tax. For purposes of the preceding sentence, the
term `compensating use tax' means, with respect to any
item, a tax which--
``(i) is imposed on the use, storage, or
consumption of such item, and
``(ii) is complementary to a general sales
tax, but only if a deduction is allowable under
this paragraph with respect to items sold at
retail in the taxing jurisdiction which are
similar to such item.
``(F) Special rule for motor vehicles.--In the case
of motor vehicles, if the rate of tax exceeds the
general rate, such excess shall be disregarded and the
general rate shall be treated as the rate of tax.
``(G) Separately stated general sales taxes.--If the
amount of any general sales tax is separately stated,
then, to the extent that the amount so stated is paid
by the consumer (other than in connection with the
consumer's trade or business) to the seller, such
amount shall be treated as a tax imposed on, and paid
by, such consumer.
``(H) Amount of deduction to be determined under
tables.--
``(i) In general.--The amount of the
deduction allowed under this paragraph shall be
determined under tables prescribed by the
Secretary.
``(ii) Requirements for tables.--The tables
prescribed under clause (i)--
``(I) shall reflect the provisions of
this paragraph,
``(II) shall be based on the average
consumption by taxpayers on a State-by-
State basis, as determined by the
Secretary, taking into account filing
status, number of dependents, adjusted
gross income, and rates of State and
local general sales taxation, and
``(III) need only be determined with
respect to adjusted gross incomes up to
the applicable amount (as determined
under section 68(b)).
``(I) Application of paragraph.--This paragraph shall
apply to taxable years beginning after December 31,
2003, and before January 1, 2006.''.
(b) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2003.
TITLE VI--REVENUE PROVISIONS
Subtitle A--Provisions to Reduce Tax Avoidance Through Individual and
Corporate Expatriation
SEC. 601. TAX TREATMENT OF EXPATRIATED ENTITIES AND THEIR FOREIGN
PARENTS.
(a) In General.--Subchapter C of chapter 80 (relating to provisions
affecting more than one subtitle) is amended by adding at the end the
following new section:
``SEC. 7874. RULES RELATING TO EXPATRIATED ENTITIES AND THEIR FOREIGN
PARENTS.
``(a) Tax on Inversion Gain of Expatriated Entities.--
``(1) In general.--The taxable income of an expatriated
entity for any taxable year which includes any portion of the
applicable period shall in no event be less than the inversion
gain of the entity for the taxable year.
``(2) Expatriated entity.--For purposes of this subsection--
``(A) In general.--The term `expatriated entity'
means--
``(i) the domestic corporation or partnership
referred to in subparagraph (B)(i) with respect
to which a foreign corporation is a surrogate
foreign corporation, and
``(ii) any United States person who is
related (within the meaning of section 267(b)
or 707(b)(1)) to a domestic corporation or
partnership described in clause (i).
``(B) Surrogate foreign corporation.--A foreign
corporation shall be treated as a surrogate foreign
corporation if, pursuant to a plan (or a series of
related transactions)--
``(i) the entity completes after March 4,
2003, the direct or indirect acquisition of
substantially all of the properties held
directly or indirectly by a domestic
corporation or substantially all of the
properties constituting a trade or business of
a domestic partnership,
``(ii) after the acquisition at least 60
percent of the stock (by vote or value) of the
entity is held--
``(I) in the case of an acquisition
with respect to a domestic corporation,
by former shareholders of the domestic
corporation by reason of holding stock
in the domestic corporation, or
``(II) in the case of an acquisition
with respect to a domestic partnership,
by former partners of the domestic
partnership by reason of holding a
capital or profits interest in the
domestic partnership, and
``(iii) after the acquisition the expanded
affiliated group which includes the entity does
not have substantial business activities in the
foreign country in which, or under the law of
which, the entity is created or organized, when
compared to the total business activities of
such expanded affiliated group.
An entity otherwise described in clause (i) with
respect to any domestic corporation or partnership
trade or business shall be treated as not so described
if, on or before March 4, 2003, such entity acquired
directly or indirectly more than half of the properties
held directly or indirectly by such corporation or more
than half of the properties constituting such
partnership trade or business, as the case may be.
``(b) Definitions and Special Rules.--
``(1) Expanded affiliated group.--The term `expanded
affiliated group' means an affiliated group as defined in
section 1504(a) but without regard to section 1504(b)(3),
except that section 1504(a) shall be applied by substituting
`more than 50 percent' for `at least 80 percent' each place it
appears.
``(2) Certain stock disregarded.--There shall not be taken
into account in determining ownership under subsection
(a)(2)(B)(ii)--
``(A) stock held by members of the expanded
affiliated group which includes the foreign
corporation, or
``(B) stock of such foreign corporation which is sold
in a public offering related to the acquisition
described in subsection (a)(2)(B)(i).
``(3) Plan deemed in certain cases.--If a foreign corporation
acquires directly or indirectly substantially all of the
properties of a domestic corporation or partnership during the
4-year period beginning on the date which is 2 years before the
ownership requirements of subsection (a)(2)(B)(ii) are met,
such actions shall be treated as pursuant to a plan.
``(4) Certain transfers disregarded.--The transfer of
properties or liabilities (including by contribution or
distribution) shall be disregarded if such transfers are part
of a plan a principal purpose of which is to avoid the purposes
of this section.
``(5) Special rule for related partnerships.--For purposes of
applying subsection (a)(2)(B)(ii) to the acquisition of a trade
or business of a domestic partnership, except as provided in
regulations, all partnerships which are under common control
(within the meaning of section 482) shall be treated as 1
partnership.
``(6) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to determine whether a
corporation is a surrogate foreign corporation, including
regulations--
``(A) to treat warrants, options, contracts to
acquire stock, convertible debt interests, and other
similar interests as stock, and
``(B) to treat stock as not stock.
``(c) Other Definitions.--For purposes of this section--
``(1) Applicable period.--The term `applicable period' means
the period--
``(A) beginning on the first date properties are
acquired as part of the acquisition described in
subsection (a)(2)(B)(i), and
``(B) ending on the date which is 10 years after the
last date properties are acquired as part of such
acquisition.
``(2) Inversion gain.--The term `inversion gain' means the
income or gain recognized by reason of the transfer during the
applicable period of stock or other properties by an
expatriated entity, and any income received or accrued during
the applicable period by reason of a license of any property by
an expatriated entity--
``(A) as part of the acquisition described in
subsection (a)(2)(B)(i), or
``(B) after such acquisition if the transfer or
license is to a foreign related person.
Subparagraph (B) shall not apply to property described in
section 1221(a)(1) in the hands of the expatriated entity.
``(3) Foreign related person.--The term `foreign related
person' means, with respect to any expatriated entity, a
foreign person which--
``(A) is related (within the meaning of section
267(b) or 707(b)(1)) to such entity, or
``(B) is under the same common control (within the
meaning of section 482) as such entity.
``(d) Special Rules.--
``(1) Credits not allowed against tax on inversion gain.--
Credits (other than the credit allowed by section 901) shall be
allowed against the tax imposed by this chapter on an
expatriated entity for any taxable year described in subsection
(a) only to the extent such tax exceeds the product of--
``(A) the amount of the inversion gain for the
taxable year, and
``(B) the highest rate of tax specified in section
11(b)(1).
For purposes of determining the credit allowed by section 901,
inversion gain shall be treated as from sources within the
United States.
``(2) Special rules for partnerships.--In the case of an
expatriated entity which is a partnership--
``(A) subsection (a)(1) shall apply at the partner
rather than the partnership level,
``(B) the inversion gain of any partner for any
taxable year shall be equal to the sum of--
``(i) the partner's distributive share of
inversion gain of the partnership for such
taxable year, plus
``(ii) gain recognized for the taxable year
by the partner by reason of the transfer during
the applicable period of any partnership
interest of the partner in such partnership to
the surrogate foreign corporation, and
``(C) the highest rate of tax specified in the rate
schedule applicable to the partner under this chapter
shall be substituted for the rate of tax referred to in
paragraph (1).
``(3) Coordination with section 172 and minimum tax.--Rules
similar to the rules of paragraphs (3) and (4) of section
860E(a) shall apply for purposes of subsection (a).
``(4) Statute of limitations.--
``(A) In general.--The statutory period for the
assessment of any deficiency attributable to the
inversion gain of any taxpayer for any pre-inversion
year shall not expire before the expiration of 3 years
from the date the Secretary is notified by the taxpayer
(in such manner as the Secretary may prescribe) of the
acquisition described in subsection (a)(2)(B)(i) to
which such gain relates and such deficiency may be
assessed before the expiration of such 3-year period
notwithstanding the provisions of any other law or rule
of law which would otherwise prevent such assessment.
``(B) Pre-inversion year.--For purposes of
subparagraph (A), the term `pre-inversion year' means
any taxable year if--
``(i) any portion of the applicable period is
included in such taxable year, and
``(ii) such year ends before the taxable year
in which the acquisition described in
subsection (a)(2)(B)(i) is completed.
``(e) Special Rule for Treaties.--Nothing in section 894 or 7852(d)
or in any other provision of law shall be construed as permitting an
exemption, by reason of any treaty obligation of the United States
heretofore or hereafter entered into, from the provisions of this
section.
``(f) Regulations.--The Secretary shall provide such regulations as
are necessary to carry out this section, including regulations
providing for such adjustments to the application of this section as
are necessary to prevent the avoidance of the purposes of this section,
including the avoidance of such purposes through--
``(1) the use of related persons, pass-through or other
noncorporate entities, or other intermediaries, or
``(2) transactions designed to have persons cease to be (or
not become) members of expanded affiliated groups or related
persons.''.
(b) Conforming Amendment.--The table of sections for subchapter C of
chapter 80 is amended by adding at the end the following new item:
``Sec. 7874. Rules relating to
expatriated entities and their
foreign parents.''
(c) Effective Date.--The amendments made by this section shall apply
to taxable years ending after March 4, 2003.
SEC. 602. EXCISE TAX ON STOCK COMPENSATION OF INSIDERS IN EXPATRIATED
CORPORATIONS.
(a) In General.--Subtitle D is amended by inserting after chapter 44
end the following new chapter:
``CHAPTER 45--PROVISIONS RELATING TO EXPATRIATED ENTITIES
``Sec. 4985. Stock compensation of
insiders in expatriated
corporations.
``SEC. 4985. STOCK COMPENSATION OF INSIDERS IN EXPATRIATED
CORPORATIONS.
``(a) Imposition of Tax.--In the case of an individual who is a
disqualified individual with respect to any expatriated corporation,
there is hereby imposed on such person a tax equal to 15 percent of the
value (determined under subsection (b)) of the specified stock
compensation held (directly or indirectly) by or for the benefit of
such individual or a member of such individual's family (as defined in
section 267) at any time during the 12-month period beginning on the
date which is 6 months before the expatriation date.
``(b) Value.--For purposes of subsection (a)--
``(1) In general.--The value of specified stock compensation
shall be--
``(A) in the case of a stock option (or other similar
right) or a stock appreciation right, the fair value of
such option or right, and
``(B) in any other case, the fair market value of
such compensation.
``(2) Date for determining value.--The determination of value
shall be made--
``(A) in the case of specified stock compensation
held on the expatriation date, on such date,
``(B) in the case of such compensation which is
canceled during the 6 months before the expatriation
date, on the day before such cancellation, and
``(C) in the case of such compensation which is
granted after the expatriation date, on the date such
compensation is granted.
``(c) Tax To Apply Only if Shareholder Gain Recognized.--Subsection
(a) shall apply to any disqualified individual with respect to an
expatriated corporation only if gain (if any) on any stock in such
corporation is recognized in whole or part by any shareholder by reason
of the acquisition referred to in section 7874(a)(2)(B)(i) with respect
to such corporation.
``(d) Exception Where Gain Recognized on Compensation.--Subsection
(a) shall not apply to--
``(1) any stock option which is exercised on the expatriation
date or during the 6-month period before such date and to the
stock acquired in 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, and
``(2) any other specified stock compensation which 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.
``(e) Definitions.--For purposes of this section--
``(1) Disqualified individual.--The term `disqualified
individual' means, with respect to a corporation, any
individual who, at any time during the 12-month period
beginning on the date which is 6 months before the expatriation
date--
``(A) is subject to the requirements of section 16(a)
of the Securities Exchange Act of 1934 with respect to
such corporation or any member of the expanded
affiliated group which includes such corporation, or
``(B) would be subject to such requirements if such
corporation or member were an issuer of equity
securities referred to in such section.
``(2) Expatriated corporation; expatriation date.--
``(A) Expatriated corporation.--The term `expatriated
corporation' means any corporation which is an
expatriated entity (as defined in section 7874(a)(2)).
Such term includes any predecessor or successor of such
a corporation.
``(B) Expatriation date.--The term `expatriation
date' means, with respect to a corporation, the date on
which the corporation first becomes an expatriated
corporation.
``(3) Specified stock compensation.--
``(A) In general.--The term `specified stock
compensation' means payment (or right to payment)
granted by the expatriated corporation (or by any
member of the expanded affiliated group which includes
such corporation) to any person in connection with the
performance of services by a disqualified individual
for such corporation or member if the value of such
payment or right is based on (or determined by
reference to) the value (or change in value) of stock
in such corporation (or any such member).
``(B) Exceptions.--Such term shall not include--
``(i) any option to which part II of
subchapter D of chapter 1 applies, or
``(ii) any payment or right to payment from a
plan referred to in section 280G(b)(6).
``(4) Expanded affiliated group.--The term `expanded
affiliated group' means an affiliated group (as defined in
section 1504(a) without regard to section 1504(b)(3)); except
that section 1504(a) shall be applied by substituting `more
than 50 percent' for `at least 80 percent' each place it
appears.
``(f) Special Rules.--For purposes of this section--
``(1) Cancellation of restriction.--The cancellation of a
restriction which by its terms will never lapse shall be
treated as a grant.
``(2) Payment or reimbursement of tax by corporation treated
as specified stock compensation.--Any payment of the tax
imposed by this section directly or indirectly by the
expatriated corporation or by any member of the expanded
affiliated group which includes such corporation--
``(A) shall be treated as specified stock
compensation, and
``(B) shall not be allowed as a deduction under any
provision of chapter 1.
``(3) Certain restrictions ignored.--Whether there is
specified stock compensation, and the value thereof, shall be
determined without regard to any restriction other than a
restriction which by its terms will never lapse.
``(4) Property transfers.--Any transfer of property shall be
treated as a payment and any right to a transfer of property
shall be treated as a right to a payment.
``(5) Other administrative provisions.--For purposes of
subtitle F, any tax imposed by this section shall be treated as
a tax imposed by subtitle A.
``(g) Regulations.--The Secretary shall prescribe such regulations as
may be necessary or appropriate to carry out the purposes of this
section.''
(b) Denial of Deduction.--
(1) In general.--Paragraph (6) of section 275(a) is amended
by inserting ``45,'' before ``46,''.
(2) $1,000,000 limit on deductible compensation reduced by
payment of excise tax on specified stock compensation.--
Paragraph (4) of section 162(m) is amended by adding at the end
the following new subparagraph:
``(G) Coordination with excise tax on specified stock
compensation.--The dollar limitation contained in
paragraph (1) with respect to any covered employee
shall be reduced (but not below zero) by the amount of
any payment (with respect to such employee) of the tax
imposed by section 4985 directly or indirectly by the
expatriated corporation (as defined in such section) or
by any member of the expanded affiliated group (as
defined in such section) which includes such
corporation.''
(c) Conforming Amendments.--
(1) The last sentence of section 3121(v)(2)(A) is amended by
inserting before the period ``or to any specified stock
compensation (as defined in section 4985) on which tax is
imposed by section 4985''.
(2) The table of chapters for subtitle D is amended by
inserting after the item relating to chapter 44 the following
new item:
``Chapter 45. Provisions relating to
expatriated entities.''
(d) Effective Date.--The amendments made by this section shall take
effect on March 4, 2003; except that periods before such date shall not
be taken into account in applying the periods in subsections (a) and
(e)(1) of section 4985 of the Internal Revenue Code of 1986, as added
by this section.
SEC. 603. REINSURANCE OF UNITED STATES RISKS IN FOREIGN JURISDICTIONS.
(a) In General.--Section 845(a) (relating to allocation in case of
reinsurance agreement involving tax avoidance or evasion) is amended by
striking ``source and character'' and inserting ``amount, source, or
character''.
(b) Effective Date.--The amendments made by this section shall apply
to any risk reinsured after the date of the enactment of this Act.
SEC. 604. REVISION OF TAX RULES ON EXPATRIATION OF INDIVIDUALS.
(a) Expatriation To Avoid Tax.--
(1) In general.--Subsection (a) of section 877 (relating to
treatment of expatriates) is amended to read as follows:
``(a) Treatment of Expatriates.--
``(1) In general.--Every nonresident alien individual to whom
this section applies and who, within the 10-year period
immediately preceding the close of the taxable year, lost
United States citizenship shall be taxable for such taxable
year in the manner provided in subsection (b) if the tax
imposed pursuant to such subsection (after any reduction in
such tax under the last sentence of such subsection) exceeds
the tax which, without regard to this section, is imposed
pursuant to section 871.
``(2) Individuals subject to this section.--This section
shall apply to any individual if--
``(A) the average annual net income tax (as defined
in section 38(c)(1)) of such individual for the period
of 5 taxable years ending before the date of the loss
of United States citizenship is greater than $124,000,
``(B) the net worth of the individual as of such date
is $2,000,000 or more, or
``(C) such individual fails to certify under penalty
of perjury that he has met the requirements of this
title for the 5 preceding taxable years or fails to
submit such evidence of such compliance as the
Secretary may require.
In the case of the loss of United States citizenship in any
calendar year after 2004, such $124,000 amount shall be
increased by an amount equal to such dollar amount multiplied
by the cost-of-living adjustment determined under section
1(f)(3) for such calendar year by substituting `2003' for
`1992' in subparagraph (B) thereof. Any increase under the
preceding sentence shall be rounded to the nearest multiple of
$1,000.''.
(2) Revision of exceptions from alternative tax.--Subsection
(c) of section 877 (relating to tax avoidance not presumed in
certain cases) is amended to read as follows:
``(c) Exceptions.--
``(1) In general.--Subparagraphs (A) and (B) of subsection
(a)(2) shall not apply to an individual described in paragraph
(2) or (3).
``(2) Dual citizens.--
``(A) In general.--An individual is described in this
paragraph if--
``(i) the individual became at birth a
citizen of the United States and a citizen of
another country and continues to be a citizen
of such other country, and
``(ii) the individual has had no substantial
contacts with the United States.
``(B) Substantial contacts.--An individual shall be
treated as having no substantial contacts with the
United States only if the individual--
``(i) was never a resident of the United
States (as defined in section 7701(b)),
``(ii) has never held a United States
passport, and
``(iii) was not present in the United States
for more than 30 days during any calendar year
which is 1 of the 10 calendar years preceding
the individual's loss of United States
citizenship.
``(3) Certain minors.--An individual is described in this
paragraph if--
``(A) the individual became at birth a citizen of the
United States,
``(B) neither parent of such individual was a citizen
of the United States at the time of such birth,
``(C) the individual's loss of United States
citizenship occurs before such individual attains age
18\1/2\, and
``(D) the individual was not present in the United
States for more than 30 days during any calendar year
which is 1 of the 10 calendar years preceding the
individual's loss of United States citizenship.''.
(3) Conforming amendment.--Section 2107(a) is amended to read
as follows:
``(a) Treatment of Expatriates.--A tax computed in accordance with
the table contained in section 2001 is hereby imposed on the transfer
of the taxable estate, determined as provided in section 2106, of every
decedent nonresident not a citizen of the United States if the date of
death occurs during a taxable year with respect to which the decedent
is subject to tax under section 877(b).''.
(b) Special Rules for Determining When an Individual Is No Longer a
United States Citizen or Long-Term Resident.--Section 7701 (relating to
definitions) is amended by redesignating subsection (n) as subsection
(o) and by inserting after subsection (m) the following new subsection:
``(n) Special Rules for Determining When an Individual Is No Longer a
United States Citizen or Long-Term Resident.--An individual who would
(but for this subsection) cease to be treated as a citizen or resident
of the United States shall continue to be treated as a citizen or
resident of the United States, as the case may be, until such
individual--
``(1) gives notice of an expatriating act or termination of
residency (with the requisite intent to relinquish citizenship
or terminate residency) to the Secretary of State or the
Secretary of Homeland Security, and
``(2) provides a statement in accordance with section
6039G.''.
(c) Physical Presence in the United States for More Than 30 Days.--
Section 877 (relating to expatriation to avoid tax) is amended by
adding at the end the following new subsection:
``(g) Physical Presence.--
``(1) In general.--This section shall not apply to any
individual to whom this section would otherwise apply for any
taxable year during the 10-year period referred to in
subsection (a) in which such individual is physically present
in the United States at any time on more than 30 days in the
calendar year ending in such taxable year, and such individual
shall be treated for purposes of this title as a citizen or
resident of the United States, as the case may be, for such
taxable year.
``(2) Exception.--
``(A) In general.--In the case of an individual
described in any of the following subparagraphs of this
paragraph, a day of physical presence in the United
States shall be disregarded if the individual is
performing services in the United States on such day
for an employer. The preceding sentence shall not apply
if--
``(i) such employer is related (within the
meaning of section 267 and 707) to such
individual, or
``(ii) such employer fails to meet such
requirements as the Secretary may prescribe by
regulations to prevent the avoidance of the
purposes of this paragraph.
Not more than 30 days during any calendar year may be
disregarded under this subparagraph.
``(B) Individuals with ties to other countries.--An
individual is described in this subparagraph if--
``(i) the individual becomes (not later than
the close of a reasonable period after loss of
United States citizenship or termination of
residency) a citizen or resident of the country
in which--
``(I) such individual was born,
``(II) if such individual is married,
such individual's spouse was born, or
``(III) either of such individual's
parents were born, and
``(ii) the individual becomes fully liable
for income tax in such country.
``(C) Minimal prior physical presence in the united
states.--An individual is described in this
subparagraph if, for each year in the 10-year period
ending on the date of loss of United States citizenship
or termination of residency, the individual was
physically present in the United States for 30 days or
less. The rule of section 7701(b)(3)(D)(ii) shall apply
for purposes of this subparagraph.''.
(d) Transfers Subject to Gift Tax.--
(1) In general.--Subsection (a) of section 2501 (relating to
taxable transfers) is amended by striking paragraph (4), by
redesignating paragraph (5) as paragraph (4), and by striking
paragraph (3) and inserting the following new paragraph:
``(3) Exception.--
``(A) Certain individuals.--Paragraph (2) shall not
apply in the case of a donor to whom section 877(b)
applies for the taxable year which includes the date of
the transfer.
``(B) Credit for foreign gift taxes.--The tax imposed
by this section solely by reason of this paragraph
shall be credited with the amount of any gift tax
actually paid to any foreign country in respect of any
gift which is taxable under this section solely by
reason of this paragraph.''
(2) Transfers of certain stock.--Subsection (a) of section
2501 is amended by adding at the end the following new
paragraph:
``(5) Transfers of certain stock.--
``(A) In general.--In the case of a transfer of stock
in a foreign corporation described in subparagraph (B)
by a donor to whom section 877(b) applies for the
taxable year which includes the date of the transfer--
``(i) section 2511(a) shall be applied
without regard to whether such stock is
situated within the United States, and
``(ii) the value of such stock for purposes
of this chapter shall be its U.S.-asset value
determined under subparagraph (C).
``(B) Foreign corporation described.--A foreign
corporation is described in this subparagraph with
respect to a donor if--
``(i) the donor owned (within the meaning of
section 958(a)) at the time of such transfer 10
percent or more of the total combined voting
power of all classes of stock entitled to vote
of the foreign corporation, and
``(ii) such donor owned (within the meaning
of section 958(a)), or is considered to have
owned (by applying the ownership rules of
section 958(b)), at the time of such transfer,
more than 50 percent of--
``(I) the total combined voting power
of all classes of stock entitled to
vote of such corporation, or
``(II) the total value of the stock
of such corporation.
``(C) U.S.-asset value.--For purposes of subparagraph
(A), the U.S.-asset value of stock shall be the amount
which bears the same ratio to the fair market value of
such stock at the time of transfer as--
``(i) the fair market value (at such time) of
the assets owned by such foreign corporation
and situated in the United States, bears to
``(ii) the total fair market value (at such
time) of all assets owned by such foreign
corporation.''
(e) Enhanced Information Reporting From Individuals Losing United
States Citizenship.--
(1) In general.--Subsection (a) of section 6039G is amended
to read as follows:
``(a) In General.--Notwithstanding any other provision of law, any
individual to whom section 877(b) applies for any taxable year shall
provide a statement for such taxable year which includes the
information described in subsection (b).''.
(2) Information to be provided.--Subsection (b) of section
6039G is amended to read as follows:
``(b) Information To Be Provided.--Information required under
subsection (a) shall include--
``(1) the taxpayer's TIN,
``(2) the mailing address of such individual's principal
foreign residence,
``(3) the foreign country in which such individual is
residing,
``(4) the foreign country of which such individual is a
citizen,
``(5) information detailing the income, assets, and
liabilities of such individual,
``(6) the number of days during any portion of which that the
individual was physically present in the United States during
the taxable year, and
``(7) such other information as the Secretary may
prescribe.''.
(3) Increase in penalty.--Subsection (d) of section 6039G is
amended to read as follows:
``(d) Penalty.--If--
``(1) an individual is required to file a statement under
subsection (a) for any taxable year, and
``(2) fails to file such a statement with the Secretary on or
before the date such statement is required to be filed or fails
to include all the information required to be shown on the
statement or includes incorrect information,
such individual shall pay a penalty of $10,000 unless it is shown that
such failure is due to reasonable cause and not to willful neglect.''.
(4) Conforming amendment.--Section 6039G is amended by
striking subsections (c), (f), and (g) and by redesignating
subsections (d) and (e) as subsection (c) and (d),
respectively.
(f) Effective Date.--The amendments made by this section shall apply
to individuals who expatriate after June 3, 2004.
SEC. 605. REPORTING OF TAXABLE MERGERS AND ACQUISITIONS.
(a) In General.--Subpart B of part III of subchapter A of chapter 61
is amended by inserting after section 6043 the following new section:
``SEC. 6043A. RETURNS RELATING TO TAXABLE MERGERS AND ACQUISITIONS.
``(a) In General.--According to the forms or regulations prescribed
by the Secretary, the acquiring corporation in any taxable acquisition
shall make a return setting forth--
``(1) a description of the acquisition,
``(2) the name and address of each shareholder of the
acquired corporation who is required to recognize gain (if any)
as a result of the acquisition,
``(3) the amount of money and the fair market value of other
property transferred to each such shareholder as part of such
acquisition, and
``(4) such other information as the Secretary may prescribe.
To the extent provided by the Secretary, the requirements of this
section applicable to the acquiring corporation shall be applicable to
the acquired corporation and not to the acquiring corporation.
``(b) Nominees.--According to the forms or regulations prescribed by
the Secretary--
``(1) Reporting.--Any person who holds stock as a nominee for
another person shall furnish in the manner prescribed by the
Secretary to such other person the information provided by the
corporation under subsection (d).
``(2) Reporting to nominees.--In the case of stock held by
any person as a nominee, references in this section (other than
in subsection (c)) to a shareholder shall be treated as a
reference to the nominee.
``(c) Taxable Acquisition.--For purposes of this section, the term
`taxable acquisition' means any acquisition by a corporation of stock
in or property of another corporation if any shareholder of the
acquired corporation is required to recognize gain (if any) as a result
of such acquisition.
``(d) Statements To Be Furnished to Shareholders.--According to the
forms or regulations prescribed by the Secretary, every person required
to make a return under subsection (a) shall furnish to each shareholder
whose name is required to be set forth in such return a written
statement showing--
``(1) the name, address, and phone number of the information
contact of the person required to make such return,
``(2) the information required to be shown on such return
with respect to such shareholder, and
``(3) such other information as the Secretary may prescribe.
The written statement required under the preceding sentence shall be
furnished to the shareholder on or before January 31 of the year
following the calendar year during which the taxable acquisition
occurred.''
(b) Assessable Penalties.--
(1) Subparagraph (B) of section 6724(d)(1) (relating to
definitions) is amended by redesignating clauses (ii) through
(xviii) as clauses (iii) through (xix), respectively, and by
inserting after clause (i) the following new clause:
``(ii) section 6043A(a) (relating to returns
relating to taxable mergers and
acquisitions),''.
(2) Paragraph (2) of section 6724(d) is amended by
redesignating subparagraphs (F) through (BB) as subparagraphs
(G) through (CC), respectively, and by inserting after
subparagraph (E) the following new subparagraph:
``(F) subsections (b) and (d) of section 6043A
(relating to returns relating to taxable mergers and
acquisitions).''.
(c) Clerical 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 6043 the following new item:
``Sec. 6043A. Returns relating to taxable
mergers and acquisitions.''.
(d) Effective Date.--The amendments made by this section shall apply
to acquisitions after the date of the enactment of this Act.
SEC. 606. STUDIES.
(a) Transfer Pricing Rules.--The Secretary of the Treasury or the
Secretary's delegate shall conduct a study regarding the effectiveness
of current transfer pricing rules and compliance efforts in ensuring
that cross-border transfers and other related-party transactions,
particularly transactions involving intangible assets, service
contracts, or leases cannot be used improperly to shift income out of
the United States. The study shall include a review of the
contemporaneous documentation and penalty rules under section 6662 of
the Internal Revenue Code of 1986, a review of the regulatory and
administrative guidance implementing the principles of section 482 of
such Code to transactions involving intangible property and services
and to cost-sharing arrangements, and an examination of whether
increased disclosure of cross-border transactions should be required.
The study shall set forth specific recommendations to address all
abuses identified in the study. Not later than June 30, 2005, such
Secretary or delegate shall submit to the Congress a report of such
study.
(b) Income Tax Treaties.--The Secretary of the Treasury or the
Secretary's delegate shall conduct a study of United States income tax
treaties to identify any inappropriate reductions in United States
withholding tax that provide opportunities for shifting income out of
the United States, and to evaluate whether existing anti-abuse
mechanisms are operating properly. The study shall include specific
recommendations to address all inappropriate uses of tax treaties. Not
later than June 30, 2005, such Secretary or delegate shall submit to
the Congress a report of such study.
(c) Impact of Corporate Expatriation Provisions.--The Secretary of
the Treasury or the Secretary's delegate shall conduct a study of the
impact of the provisions of this title on corporate expatriation. The
study shall include such recommendations as such Secretary or delegate
may have to improve the impact of such provisions in carrying out the
purposes of this title. Not later than December 31, 2005, such
Secretary or delegate shall submit to the Congress a report of such
study.
Subtitle B--Provisions Relating to Tax Shelters
Part I--Taxpayer-Related Provisions
SEC. 611. PENALTY FOR FAILING TO DISCLOSE REPORTABLE TRANSACTIONS.
(a) In General.--Part I of subchapter B of chapter 68 (relating to
assessable penalties) is amended by inserting after section 6707 the
following new section:
``SEC. 6707A. PENALTY FOR FAILURE TO INCLUDE REPORTABLE TRANSACTION
INFORMATION WITH RETURN.
``(a) Imposition of Penalty.--Any person who fails to include on any
return or statement any information with respect to a reportable
transaction which is required under section 6011 to be included with
such return or statement shall pay a penalty in the amount determined
under subsection (b).
``(b) Amount of Penalty.--
``(1) In general.--Except as provided in paragraph (2), the
amount of the penalty under subsection (a) shall be--
``(A) $10,000 in the case of a natural person, and
``(B) $50,000 in any other case.
``(2) Listed transaction.--The amount of the penalty under
subsection (a) with respect to a listed transaction shall be--
``(A) $100,000 in the case of a natural person, and
``(B) $200,000 in any other case.
``(c) Definitions.--For purposes of this section--
``(1) Reportable transaction.--The term `reportable
transaction' means any transaction with respect to which
information is required to be included with a return or
statement because, as determined under regulations prescribed
under section 6011, such transaction is of a type which the
Secretary determines as having a potential for tax avoidance or
evasion.
``(2) Listed transaction.--The term `listed transaction'
means a reportable transaction which is the same as, or
substantially similar to, a transaction specifically identified
by the Secretary as a tax avoidance transaction for purposes of
section 6011.
``(d) Authority To Rescind Penalty.--
``(1) In general.--The Commissioner of Internal Revenue may
rescind all or any portion of any penalty imposed by this
section with respect to any violation if--
``(A) the violation is with respect to a reportable
transaction other than a listed transaction, and
``(B) rescinding the penalty would promote compliance
with the requirements of this title and effective tax
administration.
``(2) No judicial appeal.--Notwithstanding any other
provision of law, any determination under this subsection may
not be reviewed in any judicial proceeding.
``(3) Records.--If a penalty is rescinded under paragraph
(1), the Commissioner shall place in the file in the Office of
the Commissioner the opinion of the Commissioner or the head of
the Office of Tax Shelter Analysis with respect to the
determination, including--
``(A) a statement of the facts and circumstances
relating to the violation,
``(B) the reasons for the rescission, and
``(C) the amount of the penalty rescinded.
``(e) Coordination With Other Penalties.--The penalty imposed by this
section shall be in addition to any other penalty imposed by this
title.''
(b) Conforming Amendment.--The table of sections for part I of
subchapter B of chapter 68 is amended by inserting after the item
relating to section 6707 the following:
``Sec. 6707A. Penalty for failure to
include reportable transaction
information with return.''
(c) Effective Date.--The amendments made by this section shall apply
to returns and statements the due date for which is after the date of
the enactment of this Act.
(d) Report.--The Commissioner of Internal Revenue shall annually
report to the Committee on Ways and Means of the House of
Representatives and the Committee on Finance of the Senate--
(1) a summary of the total number and aggregate amount of
penalties imposed, and rescinded, under section 6707A of the
Internal Revenue Code of 1986, and
(2) a description of each penalty rescinded under section
6707(c) of such Code and the reasons therefor.
SEC. 612. ACCURACY-RELATED PENALTY FOR LISTED TRANSACTIONS, OTHER
REPORTABLE TRANSACTIONS HAVING A SIGNIFICANT TAX
AVOIDANCE PURPOSE, ETC.
(a) In General.--Subchapter A of chapter 68 is amended by inserting
after section 6662 the following new section:
``SEC. 6662A. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERSTATEMENTS
WITH RESPECT TO REPORTABLE TRANSACTIONS.
``(a) Imposition of Penalty.--If a taxpayer has a reportable
transaction understatement for any taxable year, there shall be added
to the tax an amount equal to 20 percent of the amount of such
understatement.
``(b) Reportable Transaction Understatement.--For purposes of this
section--
``(1) In general.--The term `reportable transaction
understatement' means the sum of--
``(A) the product of--
``(i) the amount of the increase (if any) in
taxable income which results from a difference
between the proper tax treatment of an item to
which this section applies and the taxpayer's
treatment of such item (as shown on the
taxpayer's return of tax), and
``(ii) the highest rate of tax imposed by
section 1 (section 11 in the case of a taxpayer
which is a corporation), and
``(B) the amount of the decrease (if any) in the
aggregate amount of credits determined under subtitle A
which results from a difference between the taxpayer's
treatment of an item to which this section applies (as
shown on the taxpayer's return of tax) and the proper
tax treatment of such item.
For purposes of subparagraph (A), any reduction of the excess
of deductions allowed for the taxable year over gross income
for such year, and any reduction in the amount of capital
losses which would (without regard to section 1211) be allowed
for such year, shall be treated as an increase in taxable
income.
``(2) Items to which section applies.--This section shall
apply to any item which is attributable to--
``(A) any listed transaction, and
``(B) any reportable transaction (other than a listed
transaction) if a significant purpose of such
transaction is the avoidance or evasion of Federal
income tax.
``(c) Higher Penalty for Nondisclosed Transactions.--Subsection (a)
shall be applied by substituting `30 percent' for `20 percent' with
respect to the portion of any reportable transaction understatement
with respect to which the requirement of section 6664(d)(2)(A) is not
met.
``(d) Definitions of Reportable and Listed Transactions.--For
purposes of this section, the terms `reportable transaction' and
`listed transaction' have the respective meanings given to such terms
by section 6707A(c).
``(e) Special Rules.--
``(1) Coordination with penalties, etc., on other
understatements.--In the case of an understatement (as defined
in section 6662(d)(2))--
``(A) the amount of such understatement (determined
without regard to this paragraph) shall be increased by
the aggregate amount of reportable transaction
understatements for purposes of determining whether
such understatement is a substantial understatement
under section 6662(d)(1), and
``(B) the addition to tax under section 6662(a) shall
apply only to the excess of the amount of the
substantial understatement (if any) after the
application of subparagraph (A) over the aggregate
amount of reportable transaction understatements.
``(2) Coordination with other penalties.--
``(A) Application of fraud penalty.--References to an
underpayment in section 6663 shall be treated as
including references to a reportable transaction
understatement.
``(B) No double penalty.--This section shall not
apply to any portion of an understatement on which a
penalty is imposed under section 6663.
``(3) Special rule for amended returns.--Except as provided
in regulations, in no event shall any tax treatment included
with an amendment or supplement to a return of tax be taken
into account in determining the amount of any reportable
transaction understatement if the amendment or supplement is
filed after the earlier of the date the taxpayer is first
contacted by the Secretary regarding the examination of the
return or such other date as is specified by the Secretary.''
(b) Determination of Other Understatements.--Subparagraph (A) of
section 6662(d)(2) is amended by adding at the end the following flush
sentence:
``The excess under the preceding sentence shall be
determined without regard to items to which section
6662A applies.''
(c) Reasonable Cause Exception.--
(1) In general.--Section 6664 is amended by adding at the end
the following new subsection:
``(d) Reasonable Cause Exception for Reportable Transaction
Understatements.--
``(1) In general.--No penalty shall be imposed under section
6662A with respect to any portion of a reportable transaction
understatement if it is shown that there was a reasonable cause
for such portion and that the taxpayer acted in good faith with
respect to such portion.
``(2) Special rules.--Paragraph (1) shall not apply to any
reportable transaction understatement unless--
``(A) the relevant facts affecting the tax treatment
of the item are adequately disclosed in accordance with
the regulations prescribed under section 6011,
``(B) there is or was substantial authority for such
treatment, and
``(C) the taxpayer reasonably believed that such
treatment was more likely than not the proper
treatment.
A taxpayer failing to adequately disclose in accordance with
section 6011 shall be treated as meeting the requirements of
subparagraph (A) if the penalty for such failure was rescinded
under section 6707A(d).
``(3) Rules relating to reasonable belief.--For purposes of
paragraph (2)(C)--
``(A) In general.--A taxpayer shall be treated as
having a reasonable belief with respect to the tax
treatment of an item only if such belief--
``(i) is based on the facts and law that
exist at the time the return of tax which
includes such tax treatment is filed, and
``(ii) relates solely to the taxpayer's
chances of success on the merits of such
treatment and does not take into account the
possibility that a return will not be audited,
such treatment will not be raised on audit, or
such treatment will be resolved through
settlement if it is raised.
``(B) Certain opinions may not be relied upon.--
``(i) In general.--An opinion of a tax
advisor may not be relied upon to establish the
reasonable belief of a taxpayer if--
``(I) the tax advisor is described in
clause (ii), or
``(II) the opinion is described in
clause (iii).
``(ii) Disqualified tax advisors.--A tax
advisor is described in this clause if the tax
advisor--
``(I) is a material advisor (within
the meaning of section 6111(b)(1)) and
participates in the organization,
management, promotion, or sale of the
transaction or is related (within the
meaning of section 267(b) or 707(b)(1))
to any person who so participates,
``(II) is compensated directly or
indirectly by a material advisor with
respect to the transaction,
``(III) has a fee arrangement with
respect to the transaction which is
contingent on all or part of the
intended tax benefits from the
transaction being sustained, or
``(IV) as determined under
regulations prescribed by the
Secretary, has a disqualifying
financial interest with respect to the
transaction.
``(iii) Disqualified opinions.--For purposes
of clause (i), an opinion is disqualified if
the opinion--
``(I) is based on unreasonable
factual or legal assumptions (including
assumptions as to future events),
``(II) unreasonably relies on
representations, statements, findings,
or agreements of the taxpayer or any
other person,
``(III) does not identify and
consider all relevant facts, or
``(IV) fails to meet any other
requirement as the Secretary may
prescribe.''
(2) Conforming amendments.--
(A) Paragraph (1) of section 6664(c) is amended by
striking ``this part'' and inserting ``section 6662 or
6663''.
(B) The heading for subsection (c) of section 6664 is
amended by inserting ``for Underpayments'' after
``Exception''.
(d) Reduction in Penalty for Substantial Understatement of Income Tax
Not To Apply to Tax Shelters.--Subparagraph (C) of section 6662(d)(2)
(relating to substantial understatement of income tax) is amended to
read as follows:
``(C) Reduction not to apply to tax shelters.--
``(i) In general.--Subparagraph (B) shall not
apply to any item attributable to a tax
shelter.
``(ii) Tax shelter.--For purposes of clause
(i), the term `tax shelter' means--
``(I) a partnership or other entity,
``(II) any investment plan or
arrangement, or
``(III) any other plan or
arrangement,
if a significant purpose of such partnership,
entity, plan, or arrangement is the avoidance
or evasion of Federal income tax.''
(e) Conforming Amendments.--
(1) Sections 461(i)(3)(C), 1274(b)(3), and 7525(b) are each
amended by striking ``section 6662(d)(2)(C)(iii)'' and
inserting ``section 6662(d)(2)(C)(ii)''.
(2) The heading for section 6662 is amended to read as
follows:
``SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON UNDERPAYMENTS.''
(3) The table of sections for part II of subchapter A of
chapter 68 is amended by striking the item relating to section
6662 and inserting the following new items:
``Sec. 6662. Imposition of accuracy-
related penalty on
underpayments.
``Sec. 6662A. Imposition of accuracy-
related penalty on
understatements with respect to
reportable transactions.''
(f) Effective Date.--The amendments made by this section shall apply
to taxable years ending after the date of the enactment of this Act.
SEC. 613. TAX SHELTER EXCEPTION TO CONFIDENTIALITY PRIVILEGES RELATING
TO TAXPAYER COMMUNICATIONS.
(a) In General.--Section 7525(b) (relating to section not to apply to
communications regarding corporate tax shelters) is amended to read as
follows:
``(b) Section Not To Apply to Communications Regarding Tax
Shelters.--The privilege under subsection (a) shall not apply to any
written communication which is--
``(1) between a federally authorized tax practitioner and--
``(A) any person,
``(B) any director, officer, employee, agent, or
representative of the person, or
``(C) any other person holding a capital or profits
interest in the person, and
``(2) in connection with the promotion of the direct or
indirect participation of the person in any tax shelter (as
defined in section 6662(d)(2)(C)(ii)).''
(b) Effective Date.--The amendment made by this section shall apply
to communications made on or after the date of the enactment of this
Act.
SEC. 614. STATUTE OF LIMITATIONS FOR TAXABLE YEARS FOR WHICH REQUIRED
LISTED TRANSACTIONS NOT REPORTED.
(a) In General.--Section 6501(c) (relating to exceptions) is amended
by adding at the end the following new paragraph:
``(10) Listed transactions.--If a taxpayer fails to include
on any return or statement for any taxable year any information
with respect to a listed transaction (as defined in section
6707A(c)(2)) which is required under section 6011 to be
included with such return or statement, the time for assessment
of any tax imposed by this title with respect to such
transaction shall not expire before the date which is 1 year
after the earlier of--
``(A) the date on which the Secretary is furnished
the information so required, or
``(B) the date that a material advisor (as defined in
section 6111) meets the requirements of section 6112
with respect to a request by the Secretary under
section 6112(b) relating to such transaction with
respect to such taxpayer.''
(b) Effective Date.--The amendment made by this section shall apply
to taxable years with respect to which the period for assessing a
deficiency did not expire before the date of the enactment of this Act.
SEC. 615. DISCLOSURE OF REPORTABLE TRANSACTIONS.
(a) In General.--Section 6111 (relating to registration of tax
shelters) is amended to read as follows:
``SEC. 6111. DISCLOSURE OF REPORTABLE TRANSACTIONS.
``(a) In General.--Each material advisor with respect to any
reportable transaction shall make a return (in such form as the
Secretary may prescribe) setting forth--
``(1) information identifying and describing the transaction,
``(2) information describing any potential tax benefits
expected to result from the transaction, and
``(3) such other information as the Secretary may prescribe.
Such return shall be filed not later than the date specified by the
Secretary.
``(b) Definitions.--For purposes of this section--
``(1) Material advisor.--
``(A) In general.--The term `material advisor' means
any person--
``(i) who provides any material aid,
assistance, or advice with respect to
organizing, managing, promoting, selling,
implementing, or carrying out any reportable
transaction, and
``(ii) who directly or indirectly derives
gross income in excess of the threshold amount
(or such other amount as may be prescribed by
the Secretary) for such advice or assistance.
``(B) Threshold amount.--For purposes of subparagraph
(A), the threshold amount is--
``(i) $50,000 in the case of a reportable
transaction substantially all of the tax
benefits from which are provided to natural
persons, and
``(ii) $250,000 in any other case.
``(2) Reportable transaction.--The term `reportable
transaction' has the meaning given to such term by section
6707A(c).
``(c) Regulations.--The Secretary may prescribe regulations which
provide--
``(1) that only 1 person shall be required to meet the
requirements of subsection (a) in cases in which 2 or more
persons would otherwise be required to meet such requirements,
``(2) exemptions from the requirements of this section, and
``(3) such rules as may be necessary or appropriate to carry
out the purposes of this section.''
(b) Conforming Amendments.--
(1) The item relating to section 6111 in the table of
sections for subchapter B of chapter 61 is amended to read as
follows:
``Sec. 6111. Disclosure of reportable
transactions.''
(2) So much of section 6112 as precedes subsection (c)
thereof is amended to read as follows:
``SEC. 6112. MATERIAL ADVISORS OF REPORTABLE TRANSACTIONS MUST KEEP
LISTS OF ADVISEES, ETC.
``(a) In General.--Each material advisor (as defined in section 6111)
with respect to any reportable transaction (as defined in section
6707A(c)) shall (whether or not required to file a return under section
6111 with respect to such transaction) maintain (in such manner as the
Secretary may by regulations prescribe) a list--
``(1) identifying each person with respect to whom such
advisor acted as a material advisor with respect to such
transaction, and
``(2) containing such other information as the Secretary may
by regulations require.''
(3) Section 6112 is amended--
(A) by redesignating subsection (c) as subsection
(b),
(B) by inserting ``written'' before ``request'' in
subsection (b)(1) (as so redesignated), and
(C) by striking ``shall prescribe'' in subsection
(b)(2) (as so redesignated) and inserting ``may
prescribe''.
(4) The item relating to section 6112 in the table of
sections for subchapter B of chapter 61 is amended to read as
follows:
``Sec. 6112. Material advisors of
reportable transactions must
keep lists of advisees, etc.''
(5)(A) The heading for section 6708 is amended to read as
follows:
``SEC. 6708. FAILURE TO MAINTAIN LISTS OF ADVISEES WITH RESPECT TO
REPORTABLE TRANSACTIONS.''
(B) The item relating to section 6708 in the table of
sections for part I of subchapter B of chapter 68 is amended to
read as follows:
``Sec. 6708. Failure to maintain lists of
advisees with respect to
reportable transactions.''
(c) Required Disclosure Not Subject to Claim of Confidentiality.--
Paragraph (1) of section 6112(b), as redesignated by subsection (b), is
amended by adding at the end the following new flush sentence:
``For purposes of this section, the identity of any person on
such list shall not be privileged.''.
(d) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to transactions
with respect to which material aid, assistance, or advice
referred to in section 6111(b)(1)(A)(i) of the Internal Revenue
Code of 1986 (as added by this section) is provided after the
date of the enactment of this Act.
(2) No claim of confidentiality against disclosure.--The
amendment made by subsection (c) shall take effect as if
included in the amendments made by section 142 of the Deficit
Reduction Act of 1984.
SEC. 616. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE
TRANSACTIONS.
(a) In General.--Section 6707 (relating to failure to furnish
information regarding tax shelters) is amended to read as follows:
``SEC. 6707. FAILURE TO FURNISH INFORMATION REGARDING REPORTABLE
TRANSACTIONS.
``(a) In General.--If a person who is required to file a return under
section 6111(a) with respect to any reportable transaction--
``(1) fails to file such return on or before the date
prescribed therefor, or
``(2) files false or incomplete information with the
Secretary with respect to such transaction,
such person shall pay a penalty with respect to such return in the
amount determined under subsection (b).
``(b) Amount of Penalty.--
``(1) In general.--Except as provided in paragraph (2), the
penalty imposed under subsection (a) with respect to any
failure shall be $50,000.
``(2) Listed transactions.--The penalty imposed under
subsection (a) with respect to any listed transaction shall be
an amount equal to the greater of--
``(A) $200,000, or
``(B) 50 percent of the gross income derived by such
person with respect to aid, assistance, or advice which
is provided with respect to the listed transaction
before the date the return is filed under section 6111.
Subparagraph (B) shall be applied by substituting `75 percent'
for `50 percent' in the case of an intentional failure or act
described in subsection (a).
``(c) Rescission Authority.--The provisions of section 6707A(d)
(relating to authority of Commissioner to rescind penalty) shall apply
to any penalty imposed under this section.
``(d) Reportable and Listed Transactions.--For purposes of this
section, the terms `reportable transaction' and `listed transaction'
have the respective meanings given to such terms by section 6707A(c).''
(b) Clerical Amendment.--The item relating to section 6707 in the
table of sections for part I of subchapter B of chapter 68 is amended
by striking ``tax shelters'' and inserting ``reportable transactions''.
(c) Effective Date.--The amendments made by this section shall apply
to returns the due date for which is after the date of the enactment of
this Act.
SEC. 617. MODIFICATION OF PENALTY FOR FAILURE TO MAINTAIN LISTS OF
INVESTORS.
(a) In General.--Subsection (a) of section 6708 is amended to read as
follows:
``(a) Imposition of Penalty.--
``(1) In general.--If any person who is required to maintain
a list under section 6112(a) fails to make such list available
upon written request to the Secretary in accordance with
section 6112(b) within 20 business days after the date of such
request, such person shall pay a penalty of $10,000 for each
day of such failure after such 20th day.
``(2) Reasonable cause exception.--No penalty shall be
imposed by paragraph (1) with respect to the failure on any day
if such failure is due to reasonable cause.''.
(b) Effective Date.--The amendment made by this section shall apply
to requests made after the date of the enactment of this Act.
SEC. 618. PENALTY ON PROMOTERS OF TAX SHELTERS.
(a) Penalty on Promoting Abusive Tax Shelters.--Section 6700(a) is
amended by adding at the end the following new sentence:
``Notwithstanding the first sentence, if an activity with respect to
which a penalty imposed under this subsection involves a statement
described in paragraph (2)(A), the amount of the penalty shall be equal
to 50 percent of the gross income derived (or to be derived) from such
activity by the person on which the penalty is imposed.''
(b) Effective Date.--The amendment made by this section shall apply
to activities after the date of the enactment of this Act.
SEC. 619. MODIFICATIONS OF SUBSTANTIAL UNDERSTATEMENT PENALTY FOR
NONREPORTABLE TRANSACTIONS.
(a) Substantial Understatement of Corporations.--Section
6662(d)(1)(B) (relating to special rule for corporations) is amended to
read as follows:
``(B) Special rule for corporations.--In the case of
a corporation other than an S corporation or a personal
holding company (as defined in section 542), there is a
substantial understatement of income tax for any
taxable year if the amount of the understatement for
the taxable year exceeds the lesser of--
``(i) 10 percent of the tax required to be
shown on the return for the taxable year (or,
if greater, $10,000), or
``(ii) $10,000,000.''
(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. 620. MODIFICATION OF ACTIONS TO ENJOIN CERTAIN CONDUCT RELATED TO
TAX SHELTERS AND REPORTABLE TRANSACTIONS.
(a) In General.--Section 7408 (relating to action to enjoin promoters
of abusive tax shelters, etc.) is amended by redesignating subsection
(c) as subsection (d) and by striking subsections (a) and (b) and
inserting the following new subsections:
``(a) Authority To Seek Injunction.--A civil action in the name of
the United States to enjoin any person from further engaging in
specified conduct may be commenced at the request of the Secretary. Any
action under this section shall be brought in the district court of the
United States for the district in which such person resides, has his
principal place of business, or has engaged in specified conduct. The
court may exercise its jurisdiction over such action (as provided in
section 7402(a)) separate and apart from any other action brought by
the United States against such person.
``(b) Adjudication and Decree.--In any action under subsection (a),
if the court finds--
``(1) that the person has engaged in any specified conduct,
and
``(2) that injunctive relief is appropriate to prevent
recurrence of such conduct,
the court may enjoin such person from engaging in such conduct or in
any other activity subject to penalty under this title.
``(c) Specified Conduct.--For purposes of this section, the term
`specified conduct' means any action, or failure to take action,
subject to penalty under section 6700, 6701, 6707, or 6708.''
(b) Conforming Amendments.--
(1) The heading for section 7408 is amended to read as
follows:
``SEC. 7408. ACTIONS TO ENJOIN SPECIFIED CONDUCT RELATED TO TAX
SHELTERS AND REPORTABLE TRANSACTIONS.''
(2) The table of sections for subchapter A of chapter 76 is
amended by striking the item relating to section 7408 and
inserting the following new item:
``Sec. 7408. Actions to enjoin specified conduct related to tax
shelters and reportable transactions.''
(c) Effective Date.--The amendment made by this section shall take
effect on the day after the date of the enactment of this Act.
SEC. 621. PENALTY ON FAILURE TO REPORT INTERESTS IN FOREIGN FINANCIAL
ACCOUNTS.
(a) In General.--Section 5321(a)(5) of title 31, United States Code,
is amended to read as follows:
``(5) Foreign financial agency transaction violation.--
``(A) Penalty authorized.--The Secretary of the
Treasury may impose a civil money penalty on any person
who violates, or causes any violation of, any provision
of section 5314.
``(B) Amount of penalty.--
``(i) In general.--Except as provided in
subparagraph (C), the amount of any civil
penalty imposed under subparagraph (A) shall
not exceed $5,000.
``(ii) Reasonable cause exception.--No
penalty shall be imposed under subparagraph (A)
with respect to any violation if--
``(I) such violation was due to
reasonable cause, and
``(II) the amount of the transaction
or the balance in the account at the
time of the transaction was properly
reported.
``(C) Willful violations.--In the case of any person
willfully violating, or willfully causing any violation
of, any provision of section 5314--
``(i) the maximum penalty under subparagraph
(B)(i) shall be increased to the greater of--
``(I) $25,000, or
``(II) the amount (not exceeding
$100,000) determined under subparagraph
(D), and
``(ii) subparagraph (B)(ii) shall not apply.
``(D) Amount.--The amount determined under this
subparagraph is--
``(i) in the case of a violation involving a
transaction, the amount of the transaction, or
``(ii) in the case of a violation involving a
failure to report the existence of an account
or any identifying information required to be
provided with respect to an account, the
balance in the account at the time of the
violation.''
(b) Effective Date.--The amendment made by this section shall apply
to violations occurring after the date of the enactment of this Act.
SEC. 622. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE DEPARTMENT OF
THE TREASURY.
(a) Censure; Imposition of Penalty.--
(1) In general.--Section 330(b) of title 31, United States
Code, is amended--
(A) by inserting ``, or censure,'' after
``Department'', and
(B) by adding at the end the following new flush
sentence:
``The Secretary may impose a monetary penalty on any representative
described in the preceding sentence. If the representative was acting
on behalf of an employer or any firm or other entity in connection with
the conduct giving rise to such penalty, the Secretary may impose a
monetary penalty on such employer, firm, or entity if it knew, or
reasonably should have known, of such conduct. Such penalty shall not
exceed the gross income derived (or to be derived) from the conduct
giving rise to the penalty. Any such penalty imposed on an individual
may be in addition to, or in lieu of, any suspension, disbarment, or
censure of such individual.''
(2) Effective date.--The amendments made by this subsection
shall apply to actions taken after the date of the enactment of
this Act.
(b) Tax Shelter Opinions, etc.--Section 330 of such title 31 is
amended by adding at the end the following new subsection:
``(d) Nothing in this section or in any other provision of law shall
be construed to limit the authority of the Secretary of the Treasury to
impose standards applicable to the rendering of written advice with
respect to any entity, transaction plan or arrangement, or other plan
or arrangement, which is of a type which the Secretary determines as
having a potential for tax avoidance or evasion.''
Part II--Other Provisions
SEC. 631. TREATMENT OF STRIPPED INTERESTS IN BOND AND PREFERRED STOCK
FUNDS, ETC.
(a) In General.--Section 1286 (relating to tax treatment of stripped
bonds) is amended by redesignating subsection (f) as subsection (g) and
by inserting after subsection (e) the following new subsection:
``(f) Treatment of Stripped Interests in Bond and Preferred Stock
Funds, etc.--In the case of an account or entity substantially all of
the assets of which consist of bonds, preferred stock, or a combination
thereof, the Secretary may by regulations provide that rules similar to
the rules of this section and 305(e), as appropriate, shall apply to
interests in such account or entity to which (but for this subsection)
this section or section 305(e), as the case may be, would not apply.''
(b) Cross Reference.--Subsection (e) of section 305 is amended by
adding at the end the following new paragraph:
``(7) Cross reference.--
``For treatment of stripped interests in certain
accounts or entities holding preferred stock, see section 1286(f).''
(c) Effective Date.--The amendments made by this section shall apply
to purchases and dispositions after the date of the enactment of this
Act.
SEC. 632. MINIMUM HOLDING PERIOD FOR FOREIGN TAX CREDIT ON WITHHOLDING
TAXES ON INCOME OTHER THAN DIVIDENDS.
(a) In General.--Section 901 is amended by redesignating subsection
(l) as subsection (m) and by inserting after subsection (k) the
following new subsection:
``(l) Minimum Holding Period for Withholding Taxes on Gain and Income
Other Than Dividends etc.--
``(1) In general.--In no event shall a credit be allowed
under subsection (a) for any withholding tax (as defined in
subsection (k)) on any item of income or gain with respect to
any property if--
``(A) such property is held by the recipient of the
item for 15 days or less during the 30-day period
beginning on the date which is 15 days before the date
on which the right to receive payment of such item
arises, or
``(B) to the extent that the recipient of the item is
under an obligation (whether pursuant to a short sale
or otherwise) to make related payments with respect to
positions in substantially similar or related property.
This paragraph shall not apply to any dividend to which
subsection (k) applies.
``(2) Exception for taxes paid by dealers.--
``(A) In general.--Paragraph (1) shall not apply to
any qualified tax with respect to any property held in
the active conduct in a foreign country of a business
as a dealer in such property.
``(B) Qualified tax.--For purposes of subparagraph
(A), the term `qualified tax' means a tax paid to a
foreign country (other than the foreign country
referred to in subparagraph (A)) if--
``(i) the item to which such tax is
attributable is subject to taxation on a net
basis by the country referred to in
subparagraph (A), and
``(ii) such country allows a credit against
its net basis tax for the full amount of the
tax paid to such other foreign country.
``(C) Dealer.--For purposes of subparagraph (A), the
term `dealer' means--
``(i) with respect to a security, any person
to whom paragraphs (1) and (2) of subsection
(k) would not apply by reason of paragraph (4)
thereof if such security were stock, and
``(ii) with respect to any other property,
any person with respect to whom such property
is described in section 1221(a)(1).
``(D) Regulations.--The Secretary may prescribe such
regulations as may be appropriate to carry out this
paragraph, including regulations to prevent the abuse
of the exception provided by this paragraph and to
treat other taxes as qualified taxes.
``(3) Exceptions.--The Secretary may by regulation provide
that paragraph (1) shall not apply to property where the
Secretary determines that the application of paragraph (1) to
such property is not necessary to carry out the purposes of
this subsection.
``(4) Certain rules to apply.--Rules similar to the rules of
paragraphs (5), (6), and (7) of subsection (k) shall apply for
purposes of this subsection.
``(5) Determination of holding period.--Holding periods shall
be determined for purposes of this subsection without regard to
section 1235 or any similar rule.''
(b) Conforming Amendment.--The heading of subsection (k) of section
901 is amended by inserting ``on Dividends'' after ``Taxes''.
(c) Effective Date.--The amendments made by this section shall apply
to amounts paid or accrued more than 30 days after the date of the
enactment of this Act.
SEC. 633. DISALLOWANCE OF CERTAIN PARTNERSHIP LOSS TRANSFERS.
(a) Treatment of Contributed Property With Built-In Loss.--Paragraph
(1) of section 704(c) 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:
``(C) if any property so contributed has a built-in
loss--
``(i) such built-in loss shall be taken into
account only in determining the amount of items
allocated to the contributing partner, and
``(ii) except as provided in regulations, in
determining the amount of items allocated to
other partners, the basis of the contributed
property in the hands of the partnership shall
be treated as being equal to its fair market
value at the time of contribution.
For purposes of subparagraph (C), the term `built-in loss'
means the excess of the adjusted basis of the property
(determined without regard to subparagraph (C)(ii)) over its
fair market value at the time of contribution.''
(b) Special Rules for Transfers of Partnership Interest if There Is
Substantial Built-In Loss.--
(1) Adjustment of partnership basis required.--Subsection (a)
of section 743 (relating to optional adjustment to basis of
partnership property) is amended by inserting before the period
``or unless the partnership has a substantial built-in loss
immediately after such transfer''.
(2) Adjustment.--Subsection (b) of section 743 is amended by
inserting ``or which has a substantial built-in loss
immediately after such transfer'' after ``section 754 is in
effect''.
(3) Substantial built-in loss.--Section 743 is amended by
adding at the end the following new subsection:
``(d) Substantial Built-In Loss.--
``(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 a partnership if the partnership's
adjusted basis in the partnership property exceeds by more than
$250,000 the fair market value of such property.
``(2) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to carry out the purposes of
paragraph (1) and section 734(d), including regulations
aggregating related partnerships and disregarding property
acquired by the partnership in an attempt to avoid such
purposes.''
(4) Alternative rules for electing investment partnerships.--
(A) In general.--Section 743 is amended by adding at
the end the following new subsection:
``(e) Alternative rules for electing investment partnerships.--
``(1) No adjustment of partnership basis.--For purposes of
this section, an electing investment partnership shall not be
treated as having a substantial built-in loss with respect to
any transfer occurring while the election under paragraph
(6)(A) is in effect.
``(2) Loss deferral for transferee partner.--In the case of a
transfer of an interest in an electing investment partnership,
the transferee partner's distributive share of losses (without
regard to gains) from the sale or exchange of partnership
property shall not be allowed except to the extent that it is
established that such losses exceed the loss (if any)
recognized by the transferor (or any prior transferor to the
extent not fully offset by a prior disallowance under this
paragraph) on the transfer of the partnership interest.
``(3) No reduction in partnership basis.--Losses disallowed
under paragraph (2) shall not decrease the transferee partner's
basis in the partnership interest.
``(4) Effect of termination of partnership.--This subsection
shall be applied without regard to any termination of a
partnership under section 708(b)(1)(B).
``(5) Certain basis reductions treated as losses.--In the
case of a transferee partner whose basis in property
distributed by the partnership is reduced under section
732(a)(2), the amount of the loss recognized by the transferor
on the transfer of the partnership interest which is taken into
account under paragraph (2) shall be reduced by the amount of
such basis reduction.
``(6) Electing investment partnership.--For purposes of this
subsection, the term `electing investment partnership' means
any partnership if--
``(A) the partnership makes an election to have this
subsection apply,
``(B) the partnership would be an investment company
under section 3(a)(1)(A) of the Investment Company Act
of 1940 but for an exemption under paragraph (1) or (7)
of section 3(c) of such Act,
``(C) such partnership has never been engaged in a
trade or business,
``(D) substantially all of the assets of such
partnership are held for investment,
``(E) at least 95 percent of the assets contributed
to such partnership consist of money,
``(F) no assets contributed to such partnership had
an adjusted basis in excess of fair market value at the
time of contribution,
``(G) all partnership interests of such partnership
are issued by such partnership pursuant to a private
offering and during the 24-month period beginning on
the date of the first capital contribution to such
partnership,
``(H) the partnership agreement of such partnership
has substantive restrictions on each partner's ability
to cause a redemption of the partner's interest, and
``(I) the partnership agreement of such partnership
provides for a term that is not in excess of 15 years.
The election described in subparagraph (A), once made, shall be
irrevocable except with the consent of the Secretary.
``(7) Regulations.--The Secretary shall prescribe such
regulations as may be appropriate to carry out the purposes of
this subsection, including regulations for applying this
subsection to tiered partnerships.''.
(B) Information reporting.--Section 6031 is amended
by adding at the end the following new subsection:
``(f) Electing Investment Partnerships.--In the case of any electing
investment partnership (as defined in section 743(e)(6)), the
information required under subsection (b) to be furnished to any
partner to whom section 743(e)(2) applies shall include such
information as is necessary to enable the partner to compute the amount
of losses disallowed under section 743(e).''.
(5) Clerical amendments.--
(A) The section heading for section 743 is amended to
read as follows:
``SEC. 743. SPECIAL RULES WHERE SECTION 754 ELECTION OR SUBSTANTIAL
BUILT-IN LOSS.''
(B) The table of sections for subpart C of part II of
subchapter K of chapter 1 is amended by striking the
item relating to section 743 and inserting the
following new item:
``Sec. 743. Special rules where section
754 election or substantial
built-in loss.''
(c) Adjustment to Basis of Undistributed Partnership Property if
There Is Substantial Basis Reduction.--
(1) Adjustment required.--Subsection (a) of section 734
(relating to optional adjustment to basis of undistributed
partnership property) is amended by inserting before the period
``or unless there is a substantial basis reduction''.
(2) Adjustment.--Subsection (b) of section 734 is amended by
inserting ``or unless there is a substantial basis reduction''
after ``section 754 is in effect''.
(3) Substantial basis reduction.--Section 734 is amended by
adding at the end the following new subsection:
``(d) Substantial Basis Reduction.--
``(1) In general.--For purposes of this section, there is a
substantial basis reduction with respect to a distribution if
the sum of the amounts described in subparagraphs (A) and (B)
of subsection (b)(2) exceeds $250,000.
``(2) Regulations.--
``For regulations to carry out this subsection, see
section 743(d)(2).''
(4) Clerical amendments.--
(A) The section heading for section 734 is amended to
read as follows:
``SEC. 734. ADJUSTMENT TO BASIS OF UNDISTRIBUTED PARTNERSHIP PROPERTY
WHERE SECTION 754 ELECTION OR SUBSTANTIAL BASIS
REDUCTION.''
(B) The table of sections for subpart B of part II of
subchapter K of chapter 1 is amended by striking the
item relating to section 734 and inserting the
following new item:
``Sec. 734. Adjustment to basis of
undistributed partnership
property where section 754
election or substantial basis
reduction.''
(d) Effective Dates.--
(1) Subsection (a).--The amendment made by subsection (a)
shall apply to contributions made after the date of the
enactment of this Act.
(2) Subsection (b).--
(A) In general.--Except as provided in subparagraph
(B), the amendments made by subsection (b) shall apply
to transfers after the date of the enactment of this
Act.
(B) Transition rule.--In the case of an electing
investment partnership which is in existence on June 4,
2004, section 743(e)(6)(H) of the Internal Revenue Code
of 1986, as added by this section, shall not apply to
such partnership and section 743(e)(6)(I) of such Code,
as so added, shall be applied by substituting ``20
years'' for ``15 years''.
(3) Subsection (c).--The amendments made by subsection (c)
shall apply to distributions after the date of the enactment of
this Act.
SEC. 634. NO REDUCTION OF BASIS UNDER SECTION 734 IN STOCK HELD BY
PARTNERSHIP IN CORPORATE PARTNER.
(a) In General.--Section 755 is amended by adding at the end the
following new subsection:
``(c) No Allocation of Basis Decrease to Stock of Corporate
Partner.--In making an allocation under subsection (a) of any decrease
in the adjusted basis of partnership property under section 734(b)--
``(1) no allocation may be made to stock in a corporation (or
any person related (within the meaning of sections 267(b) and
707(b)(1)) to such corporation) which is a partner in the
partnership, and
``(2) any amount not allocable to stock by reason of
paragraph (1) shall be allocated under subsection (a) to other
partnership property.
Gain shall be recognized to the partnership to the extent that the
amount required to be allocated under paragraph (2) to other
partnership property exceeds the aggregate adjusted basis of such other
property immediately before the allocation required by paragraph (2).''
(b) Effective Date.--The amendment made by this section shall apply
to distributions after the date of the enactment of this Act.
SEC. 635. REPEAL OF SPECIAL RULES FOR FASITS.
(a) In General.--Part V of subchapter M of chapter 1 (relating to
financial asset securitization investment trusts) is hereby repealed.
(b) Conforming Amendments.--
(1) Paragraph (6) of section 56(g) is amended by striking
``REMIC, or FASIT'' and inserting ``or REMIC''.
(2) Clause (ii) of section 382(l)(4)(B) is amended by
striking ``a REMIC to which part IV of subchapter M applies, or
a FASIT to which part V of subchapter M applies,'' and
inserting ``or a REMIC to which part IV of subchapter M
applies,''.
(3) Paragraph (1) of section 582(c) is amended by striking
``, and any regular interest in a FASIT,''.
(4) Subparagraph (E) of section 856(c)(5) is amended by
striking the last sentence.
(5)(A) Section 860G(a)(1) is amended by adding at the end the
following new sentence: ``An interest shall not fail to qualify
as a regular interest solely because the specified principal
amount of the regular interest (or the amount of interest
accrued on the regular interest) can be reduced as a result of
the nonoccurrence of 1 or more contingent payments with respect
to any reverse mortgage loan held by the REMIC if, on the
startup day for the REMIC, the sponsor reasonably believes that
all principal and interest due under the regular interest will
be paid at or prior to the liquidation of the REMIC.''.
(B) The last sentence of section 860G(a)(3) is amended by
inserting ``, and any reverse mortgage loan (and each balance
increase on such loan meeting the requirements of subparagraph
(A)(iii)) shall be treated as an obligation secured by an
interest in real property'' before the period at the end.
(6) Paragraph (3) of section 860G(a) is amended by adding
``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).
(7) Section 860G(a)(3), as amended by paragraph (6), is
amended by adding at the end the following new sentence: ``For
purposes of subparagraph (A), if more than 50 percent of the
obligations transferred to, or purchased by, the REMIC are
originated by the United States or any State (or any political
subdivision, agency, or instrumentality of the United States or
any State) and are principally secured by an interest in real
property, then each obligation transferred to, or purchased by,
the REMIC shall be treated as secured by an interest in real
property.''.
(8)(A) Section 860G(a)(3)(A) is amended by striking ``or'' at
the end of clause (i), by inserting ``or'' at the end of clause
(ii), and by inserting after clause (ii) the following new
clause:
``(iii) represents an increase in the
principal amount under the original terms of an
obligation described in clause (i) or (ii) if
such increase--
``(I) is attributable to an advance
made to the obligor pursuant to the
original terms of the obligation,
``(II) occurs after the startup day,
and
``(III) is purchased by the REMIC
pursuant to a fixed price contract in
effect on the startup day.''.
(B) Section 860G(a)(7)(B) is amended to read as follows:
``(B) Qualified reserve fund.--For purposes of
subparagraph (A), the term `qualified reserve fund'
means any reasonably required reserve to--
``(i) provide for full payment of expenses of
the REMIC or amounts due on regular interests
in the event of defaults on qualified mortgages
or lower than expected returns on cash flow
investments, or
``(ii) provide a source of funds for the
purchase of obligations described in clause
(ii) or (iii) of paragraph (3)(A).
The aggregate fair market value of the assets held in
any such reserve shall not exceed 50 percent of the
aggregate fair market value of all of the assets of the
REMIC on the startup day, and the amount of any such
reserve shall be promptly and appropriately reduced to
the extent the amount held in such reserve is no longer
reasonably required for purposes specified in clause
(i) or (ii) of this subparagraph.''.
(9) Subparagraph (C) of section 1202(e)(4) is amended by
striking ``REMIC, or FASIT'' and inserting ``or REMIC''.
(10) Clause (xi) of section 7701(a)(19)(C) is amended--
(A) by striking ``and any regular interest in a
FASIT,'', and
(B) by striking ``or FASIT'' each place it appears.
(11) Subparagraph (A) of section 7701(i)(2) is amended by
striking ``or a FASIT''.
(12) The table of parts for subchapter M of chapter 1 is
amended by striking the item relating to part V.
(c) Effective Date.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall take effect on January 1,
2005.
(2) Exception for existing fasits.--Paragraph (1) shall not
apply to any FASIT in existence on the date of the enactment of
this Act to the extent that regular interests issued by the
FASIT before such date continue to remain outstanding in
accordance with the original terms of issuance.
SEC. 636. LIMITATION ON TRANSFER OF BUILT-IN LOSSES ON REMIC RESIDUALS.
(a) In General.--Section 362 (relating to basis to corporations) is
amended by adding at the end the following new subsection:
``(e) Limitation on Transfer of Built-in Losses on REMIC Residuals in
Section 351 Transactions.--If--
``(1) a residual interest (as defined in section 860G(a)(2))
in a REMIC is transferred in any transaction which is described
in subsection (a), and
``(2) the transferee's adjusted basis in such residual
interest would (but for this paragraph) exceed its fair market
value immediately after such transaction,
then, notwithstanding subsection (a), the transferee's adjusted basis
in such residual interest shall not exceed its fair market value
(whether or not greater than zero) immediately after such
transaction.''
(b) Effective Date.--The amendment made by this section shall apply
to transactions after the date of the enactment of this Act.
SEC. 637. CLARIFICATION OF BANKING BUSINESS FOR PURPOSES OF DETERMINING
INVESTMENT OF EARNINGS IN UNITED STATES PROPERTY.
(a) In General.--Subparagraph (A) of section 956(c)(2) is amended to
read as follows:
``(A) obligations of the United States, money, or
deposits with persons described in paragraph (4);''.
(b) Eligible Persons.--Section 956(c) (relating to exceptions to
definition of United States property) is amended by adding at the end
the following new paragraph:
``(4) Financial services providers.--
``(A) In general.--For purposes of paragraph (2)(A),
a person is described in this paragraph if at least 80
percent of the person's income is from the active
conduct of a banking business which is derived from
persons who are not related persons.
``(B) Special rules.--For purposes of subparagraph
(A) all related persons shall be treated as 1 person in
applying the 80-percent test.
``(C) Related person.--For purposes of this
paragraph, a person is a related person to another
person if--
``(i) the related person bears a relationship
to such person specified in section 267(b) or
707(b)(1), or
``(ii) such persons are members of the same
controlled group of corporations (as defined in
section 1563(a), except that `more than 50
percent' shall be substituted for `at least 80
percent' each place it appears therein).''.
(b) Effective Date.--The amendment made by this section shall take
effect on the date of the enactment of this Act.
SEC. 638. ALTERNATIVE TAX FOR CERTAIN SMALL INSURANCE COMPANIES.
(a) In General.--Clause (i) of section 831(b)(2)(A) is amended by
striking ``$1,200,000'' and inserting ``$1,890,000''.
(b) Inflation Adjustment.--Paragraph (2) of section 831(b) is amended
by adding at the end the following new subparagraph:
``(C) Inflation adjustment.--In the case of any
taxable year beginning in a calendar year after 2004,
the $1,890,000 amount in subparagraph (A) shall be
increased by an amount equal to--
``(i) $1,890,000, multiplied by
``(ii) the cost-of-living adjustment
determined under section 1(f)(3) for such
calendar year by substituting `calendar year
2003' for `calendar year 1992' in subparagraph
(B) thereof.
If the amount as adjusted under the preceding sentence
is not a multiple of $1,000, such amount shall be
rounded to the next lowest multiple of $1,000.''.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2003.
SEC. 639. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS
ATTRIBUTABLE TO NONDISCLOSED REPORTABLE
TRANSACTIONS.
(a) In General.--Section 163 (relating to deduction for interest) is
amended by redesignating subsection (m) as subsection (n) and by
inserting after subsection (l) the following new subsection:
``(m) Interest on Unpaid Taxes Attributable to Nondisclosed
Reportable Transactions.--No deduction shall be allowed under this
chapter for any interest paid or accrued under section 6601 on any
underpayment of tax which is attributable to the portion of any
reportable transaction understatement (as defined in section 6662A(b))
with respect to which the requirement of section 6664(d)(2)(A) is not
met.''.
(b) Effective Date.--The amendments made by this section shall apply
to transactions in taxable years beginning after the date of the
enactment of this Act.
SEC. 640. CLARIFICATION OF RULES FOR PAYMENT OF ESTIMATED TAX FOR
CERTAIN DEEMED ASSET SALES.
(a) In General.--Paragraph (13) of section 338(h) (relating to tax on
deemed sale not taken into account for estimated tax purposes) is
amended by adding at the end the following: ``The preceding sentence
shall not apply with respect to a qualified stock purchase for which an
election is made under paragraph (10).''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to transactions occurring after the date of the enactment of this Act.
SEC. 641. RECOGNITION OF GAIN FROM THE SALE OF A PRINCIPAL RESIDENCE
ACQUIRED IN A LIKE-KIND EXCHANGE WITHIN 5 YEARS OF
SALE.
(a) In General.--Section 121(d) (relating to special rules for
exclusion of gain from sale of principal residence) is amended by
adding at the end the following new paragraph:
``(10) Property acquired in like-kind exchange.--If a
taxpayer acquired property in an exchange to which section 1031
applied, subsection (a) shall not apply to the sale or exchange
of such property if it occurs during the 5-year period
beginning with the date of the acquisition of such property.''.
(b) Effective Date.--The amendment made by this section shall apply
to sales or exchanges after the date of the enactment of this Act.
SEC. 642. PREVENTION OF MISMATCHING OF INTEREST AND ORIGINAL ISSUE
DISCOUNT DEDUCTIONS AND INCOME INCLUSIONS IN
TRANSACTIONS WITH RELATED FOREIGN PERSONS.
(a) Original Issue Discount.--Section 163(e)(3) (relating to special
rule for original issue discount on obligation held by related foreign
person) is amended by redesignating subparagraph (B) as subparagraph
(C) and by inserting after subparagraph (A) the following new
subparagraph:
``(B) Special rule for certain foreign entities.--
``(i) In general.--In the case of any debt
instrument having original issue discount which
is held by a related foreign person which is a
foreign personal holding company (as defined in
section 552), a controlled foreign corporation
(as defined in section 957), or a passive
foreign investment company (as defined in
section 1297), a deduction shall be allowable
to the issuer with respect to such original
issue discount for any taxable year before the
taxable year in which paid only to the extent
such original issue discount (reduced by
properly allowable deductions and qualified
deficits under section 952(c)(1)(B)) is
includible during such prior taxable year in
the gross income of a United States person who
owns (within the meaning of section 958(a))
stock in such corporation.
``(ii) Secretarial authority.--The Secretary
may by regulation exempt transactions from the
application of clause (i), including any
transaction which is entered into by a payor in
the ordinary course of a trade or business in
which the payor is predominantly engaged.''.
(b) Interest and Other Deductible Amounts.--Section 267(a)(3) is
amended--
(1) by striking ``The Secretary'' and inserting:
``(A) In general.--The Secretary'', and
(2) by adding at the end the following new subparagraph:
``(B) Special rule for certain foreign entities.--
``(i) In general.--Notwithstanding
subparagraph (A), in the case of any item
payable to a foreign personal holding company
(as defined in section 552), a controlled
foreign corporation (as defined in section
957), or a passive foreign investment company
(as defined in section 1297), a deduction shall
be allowable to the payor with respect to such
amount for any taxable year before the taxable
year in which paid only to the extent that an
amount attributable to such item (reduced by
properly allowable deductions and qualified
deficits under section 952(c)(1)(B)) is
includible during such prior taxable year in
the gross income of a United States person who
owns (within the meaning of section 958(a))
stock in such corporation.
``(ii) Secretarial authority.--The Secretary
may by regulation exempt transactions from the
application of clause (i), including any
transaction which is entered into by a payor in
the ordinary course of a trade or business in
which the payor is predominantly engaged and in
which the payment of the accrued amounts occurs
within 8\1/2\ months after accrual or within
such other period as the Secretary may
prescribe.''.
(c) Effective Date.--The amendments made by this section shall apply
to payments accrued on or after the date of the enactment of this Act.
SEC. 643. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS OF
INCOME TAX BY INDIVIDUALS.
(a) In General.--Part III of subchapter B of chapter 1 (relating to
items specifically excluded from gross income) is amended by inserting
after section 139A the following new section:
``SEC. 139B. EXCLUSION FROM GROSS INCOME FOR INTEREST ON OVERPAYMENTS
OF INCOME TAX BY INDIVIDUALS.
``(a) In General.--In the case of an individual, gross income shall
not include interest paid under section 6611 on any overpayment of tax
imposed by this subtitle.
``(b) Exception.--Subsection (a) shall not apply in the case of a
failure to claim items resulting in the overpayment on the original
return if the Secretary determines that the principal purpose of such
failure is to take advantage of subsection (a).
``(c) Special Rule for Determining Modified Adjusted Gross Income.--
For purposes of this title, interest not included in gross income under
subsection (a) shall not be treated as interest which is exempt from
tax for purposes of sections 32(i)(2)(B) and 6012(d) or any computation
in which interest exempt from tax under this title is added to adjusted
gross income.''.
(b) Clerical Amendment.--The table of sections for part III of
subchapter B of chapter 1 is amended by inserting after the item
relating to section 139A the following new item:
``Sec. 139B. Exclusion from gross income
for interest on overpayments of
income tax by individuals.''.
(c) Effective Date.--The amendments made by this section shall apply
to interest received in calendar years beginning after the date of the
enactment of this Act.
SEC. 644. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL
UNDERPAYMENTS.
(a) In General.--Subchapter A of chapter 67 (relating to interest on
underpayments) is amended by adding at the end the following new
section:
``SEC. 6603. DEPOSITS MADE TO SUSPEND RUNNING OF INTEREST ON POTENTIAL
UNDERPAYMENTS, ETC.
``(a) Authority To Make Deposits Other Than As Payment of Tax.--A
taxpayer may make a cash deposit with the Secretary which may be used
by the Secretary to pay any tax imposed under subtitle A or B or
chapter 41, 42, 43, or 44 which has not been assessed at the time of
the deposit. Such a deposit shall be made in such manner as the
Secretary shall prescribe.
``(b) No Interest Imposed.--To the extent that such deposit is used
by the Secretary to pay tax, for purposes of section 6601 (relating to
interest on underpayments), the tax shall be treated as paid when the
deposit is made.
``(c) Return of Deposit.--Except in a case where the Secretary
determines that collection of tax is in jeopardy, the Secretary shall
return to the taxpayer any amount of the deposit (to the extent not
used for a payment of tax) which the taxpayer requests in writing.
``(d) Payment of Interest.--
``(1) In general.--For purposes of section 6611 (relating to
interest on overpayments), a deposit which is returned to a
taxpayer shall be treated as a payment of tax for any period to
the extent (and only to the extent) attributable to a
disputable tax for such period. Under regulations prescribed by
the Secretary, rules similar to the rules of section 6611(b)(2)
shall apply.
``(2) Disputable tax.--
``(A) In general.--For purposes of this section, the
term `disputable tax' means the amount of tax specified
at the time of the deposit as the taxpayer's reasonable
estimate of the maximum amount of any tax attributable
to disputable items.
``(B) Safe harbor based on 30-day letter.--In the
case of a taxpayer who has been issued a 30-day letter,
the maximum amount of tax under subparagraph (A) shall
not be less than the amount of the proposed deficiency
specified in such letter.
``(3) Other definitions.--For purposes of paragraph (2)--
``(A) Disputable item.--The term `disputable item'
means any item of income, gain, loss, deduction, or
credit if the taxpayer--
``(i) has a reasonable basis for its
treatment of such item, and
``(ii) reasonably believes that the Secretary
also has a reasonable basis for disallowing the
taxpayer's treatment of such item.
``(B) 30-day letter.--The term `30-day letter' means
the first letter of proposed deficiency which allows
the taxpayer an opportunity for administrative review
in the Internal Revenue Service Office of Appeals.
``(4) Rate of interest.--The rate of interest allowable under
this subsection shall be the Federal short-term rate determined
under section 6621(b), compounded daily.
``(e) Use of Deposits.--
``(1) Payment of tax.--Except as otherwise provided by the
taxpayer, deposits shall be treated as used for the payment of
tax in the order deposited.
``(2) Returns of deposits.--Deposits shall be treated as
returned to the taxpayer on a last-in, first-out basis.''.
(b) Clerical Amendment.--The table of sections for subchapter A of
chapter 67 is amended by adding at the end the following new item:
``Sec. 6603. Deposits made to suspend
running of interest on
potential underpayments,
etc.''.
(c) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to deposits made after the date of the enactment of this
Act.
(2) Coordination with deposits made under revenue procedure
84-58.--In the case of an amount held by the Secretary of the
Treasury or his delegate on the date of the enactment of this
Act as a deposit in the nature of a cash bond deposit pursuant
to Revenue Procedure 84-58, the date that the taxpayer
identifies such amount as a deposit made pursuant to section
6603 of the Internal Revenue Code (as added by this Act) shall
be treated as the date such amount is deposited for purposes of
such section 6603.
SEC. 645. PARTIAL PAYMENT OF TAX LIABILITY IN INSTALLMENT AGREEMENTS.
(a) In General.--
(1) Section 6159(a) (relating to authorization of agreements)
is amended--
(A) by striking ``satisfy liability for payment of''
and inserting ``make payment on'', and
(B) by inserting ``full or partial'' after
``facilitate''.
(2) Section 6159(c) (relating to Secretary required to enter
into installment agreements in certain cases) is amended in the
matter preceding paragraph (1) by inserting ``full'' before
``payment''.
(b) Requirement To Review Partial Payment Agreements Every Two
Years.--Section 6159 is amended by redesignating subsections (d) and
(e) as subsections (e) and (f), respectively, and inserting after
subsection (c) the following new subsection:
``(d) Secretary Required To Review Installment Agreements for Partial
Collection Every Two Years.--In the case of an agreement entered into
by the Secretary under subsection (a) for partial collection of a tax
liability, the Secretary shall review the agreement at least once every
2 years.''.
(c) Effective Date.--The amendments made by this section shall apply
to agreements entered into on or after the date of the enactment of
this Act.
SEC. 646. AFFIRMATION OF CONSOLIDATED RETURN REGULATION AUTHORITY.
(a) In General.--Section 1502 is amended by adding at the end the
following new sentence: ``In carrying out the preceding sentence, the
Secretary may prescribe rules that are different from the provisions of
chapter 1 that would apply if such corporations filed separate
returns.''.
(b) Result Not Overturned.--Notwithstanding the amendment made by
subsection (a), the Internal Revenue Code of 1986 shall be construed by
treating Treasury Regulation Sec. 1.1502-20(c)(1)(iii) (as in effect on
January 1, 2001) as being inapplicable to the factual situation in Rite
Aid Corporation and Subsidiary Corporations v. United States, 255 F.3d
1357 (Fed. Cir. 2001).
(c) Effective Date.--This section, and the amendment made by this
section, shall apply to taxable years beginning before, on, or after
the date of the enactment of this Act.
Part III--Leasing
SEC. 647. REFORM OF TAX TREATMENT OF CERTAIN LEASING ARRANGEMENTS.
(a) Clarification of Recovery Period for Tax-Exempt Use Property
Subject to Lease.--Subparagraph (A) of section 168(g)(3) (relating to
special rules for determining class life) is amended by inserting
``(notwithstanding any other subparagraph of this paragraph)'' after
``shall''.
(b) Limitation on Depreciation Period for Software Leased to Tax-
Exempt Entity.--Paragraph (1) of section 167(f) is amended by adding at
the end the following new subparagraph:
``(C) Tax-exempt use property subject to lease.--In
the case of computer software which would be tax-exempt
use property as defined in subsection (h) of section
168 if such section applied to computer software, the
useful life under subparagraph (A) shall not be less
than 125 percent of the lease term (within the meaning
of section 168(i)(3)).''.
(c) Lease Term To Include Related Service Contracts.--Subparagraph
(A) of section 168(i)(3) (relating to lease term) is amended by
striking ``and'' 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 term of a lease shall include the
term of any service contract or similar
arrangement (whether or not treated as a lease
under section 7701(e))--
``(I) which is part of the same
transaction (or series of related
transactions) which includes the lease,
and
``(II) which is with respect to the
property subject to the lease or
substantially similar property, and''.
(d) Expansion of Short-Term Lease Exemption for Qualified
Technological Equipment.--Subparagraph (A) of section 168(h)(3) is
amended by adding at the end the following new sentence:
``Notwithstanding subsection (i)(3)(A)(i), in determining a lease term
for purposes of the preceding sentence, there shall not be taken into
account any option of the lessee to renew at the fair market value rent
determined at the time of renewal; except that the aggregate period not
taken into account by reason of this sentence shall not exceed 24
months.''
SEC. 648. LIMITATION ON DEDUCTIONS ALLOCABLE TO PROPERTY USED BY
GOVERNMENTS OR OTHER TAX-EXEMPT ENTITIES.
(a) In General.--Subpart C of part II of subchapter E of chapter 1
(relating to taxable year for which deductions taken) is amended by
adding at the end the following new section:
``SEC. 470. LIMITATION ON DEDUCTIONS ALLOCABLE TO PROPERTY USED BY
GOVERNMENTS OR OTHER TAX-EXEMPT ENTITIES.
``(a) Limitation on Losses.--Except as otherwise provided in this
section, a tax-exempt use loss for any taxable year shall not be
allowed.
``(b) Disallowed Loss Carried to Next Year.--Any tax-exempt use loss
with respect to any tax-exempt use property which is disallowed under
subsection (a) for any taxable year shall be treated as a deduction
with respect to such property in the next taxable year.
``(c) Definitions.--For purposes of this section--
``(1) Tax-exempt use loss.--The term `tax-exempt use loss'
means, with respect to any taxable year, the amount (if any) by
which--
``(A) the sum of--
``(i) the aggregate deductions (other than
interest) directly allocable to a tax-exempt
use property, plus
``(ii) the aggregate deductions for interest
properly allocable to such property, exceed
``(B) the aggregate income from such property.
``(2) Tax-exempt use property.--The term `tax-exempt use
property' has the meaning given to such term by section 168(h)
(without regard to paragraphs (1)(C) and (3) thereof and
determined as if property described in section 167(f)(1)(B)
were tangible property). Such term shall not include property
which would (but for this sentence) be tax-exempt use property
solely by reason of section 168(h)(6) if any credit is
allowable under section 42 or 47 with respect to such property.
``(d) Exception for Certain Leases.--This section shall not apply to
any lease of property which meets the requirements of all of the
following paragraphs:
``(1) Availability of funds.--
``(A) In general.--A lease of property meets the
requirements of this paragraph if (at any time during
the lease term) not more than an allowable amount of
funds are--
``(i) subject to any arrangement referred to
in subparagraph (B), or
``(ii) set aside or expected to be set aside,
to or for the benefit of the lessor or any lender, or
to or for the benefit of the lessee to satisfy the
lessee's obligations or options under the lease. For
purposes of clause (ii), funds shall be treated as set
aside or expected to be set aside only if a reasonable
person would conclude, based on the facts and
circumstances, that such funds are set aside or
expected to be set aside.
``(B) Arrangements.--The arrangements referred to in
this subparagraph include a defeasance arrangement, a
loan by the lessee to the lessor or any lender, a
deposit arrangement, a letter of credit collateralized
with cash or cash equivalents, a payment undertaking
agreement, prepaid rent (within the meaning of the
regulations under section 467), a sinking fund
arrangement, a guaranteed investment contract,
financial guaranty insurance, and any similar
arrangement (whether or not such arrangement provides
credit support).
``(C) Allowable amount.--
``(i) In general.--Except as otherwise
provided in this subparagraph, the term
`allowable amount' means an amount equal to 20
percent of the lessor's adjusted basis in the
property at the time the lease is entered into.
``(ii) Higher amount permitted in certain
cases.--To the extent provided in regulations,
a higher percentage shall be permitted under
clause (i) where necessary because of the
credit-worthiness of the lessee. In no event
may such regulations permit a percentage of
more than 50 percent.
``(iii) Option to purchase other than at fair
market value.--If under the lease the lessee
has the option to purchase the property for a
fixed price or for other than the fair market
value of the property (determined at the time
of exercise), the allowable amount at the time
such option may be exercised may not exceed 50
percent of the price at which such option may
be exercised.
``(iv) No allowable amount for certain
arrangements.--The allowable amount shall be
zero with respect to any arrangement which
involves--
``(I) a loan from the lessee to the
lessor or a lender,
``(II) any deposit received, letter
of credit issued, or payment
undertaking agreement entered into by a
lender otherwise involved in the
transaction, or
``(III) in the case of a transaction
which involves a lender, any credit
support made available to the lessor in
which any such lender does not have a
claim that is senior to the lessor.
For purposes of subclause (I), the term `loan'
shall not include any amount treated as a loan
under section 467 with respect to a section 467
rental agreement.
``(2) Lessor must make substantial equity investment.--
``(A) In general.--A lease of property meets the
requirements of this paragraph if--
``(i) the lessor--
``(I) has at the time the lease is
entered into an unconditional at-risk
equity investment (as determined by the
Secretary) in the property of at least
20 percent of the lessor's adjusted
basis in the property as of that time,
and
``(II) maintains such investment
throughout the term of the lease, and
``(ii) the fair market value of the property
at the end of the lease term is reasonably
expected to be equal to at least 20 percent of
such basis.
``(B) Risk of loss.--For purposes of clause (ii), the
fair market value at the end of the lease term shall be
reduced to the extent that a person other than the
lessor bears a risk of loss in the value of the
property.
``(C) Paragraph not to apply to short-term leases.--
This paragraph shall not apply to any lease with a
lease term of 5 years or less.
``(3) Lessee may not bear more than minimal risk of loss.--
``(A) In general.--A lease of property meets the
requirements of this paragraph if there is no
arrangement under which the lessee bears--
``(i) any portion of the loss that would
occur if the fair market value of the leased
property were 25 percent less than its
reasonably expected fair market value at the
time the lease is terminated, or
``(ii) more than 50 percent of the loss that
would occur if the fair market value of the
leased property at the time the lease is
terminated were zero.
``(B) Exception.--The Secretary may by regulations
provide that the requirements of this paragraph are not
met where the lessee bears more than a minimal risk of
loss.
``(C) Paragraph not to apply to short-term leases.--
This paragraph shall not apply to any lease with a
lease term of 5 years or less.
``(e) Special Rules.--
``(1) Treatment of former tax-exempt use property.--
``(A) In general.--In the case of any former tax-
exempt use property--
``(i) any deduction allowable under
subsection (b) with respect to such property
for any taxable year shall be allowed only to
the extent of any net income (without regard to
such deduction) from such property for such
taxable year, and
``(ii) any portion of such unused deduction
remaining after application of clause (i) shall
be treated as a deduction allowable under
subsection (b) with respect to such property in
the next taxable year.
``(B) Former tax-exempt use property.--For purposes
of this subsection, the term `former tax-exempt use
property' means any property which--
``(i) is not tax-exempt use property for the
taxable year, but
``(ii) was tax-exempt use property for any
prior taxable year.
``(2) Disposition of entire interest in property.--If during
the taxable year a taxpayer disposes of the taxpayer's entire
interest in tax-exempt use property (or former tax-exempt use
property), rules similar to the rules of section 469(g) shall
apply for purposes of this section.
``(3) Coordination with section 469.--This section shall be
applied before the application of section 469.
``(4) Coordination with sections 1031 and 1033.--
``(A) In general.--Sections 1031(a) and 1033(a) shall
not apply if--
``(i) the exchanged or converted property is
tax-exempt use property subject to a lease
which was entered into before March 13, 2004,
and which would not have met the requirements
of subsection (d) had such requirements been in
effect when the lease was entered into, or
``(ii) the replacement property is tax-exempt
use property subject to a lease which does not
meet the requirements of subsection (d).
``(B) Adjusted basis.--In the case of property
acquired by the lessor in a transaction to which
section 1031 or 1033 applies, the adjusted basis of
such property for purposes of this section shall be
equal to the lesser of--
``(i) the fair market value of the property
as of the beginning of the lease term, or
``(ii) the amount which would be the lessor's
adjusted basis if such sections did not apply
to such transaction.
``(f) Other Definitions.--For purposes of this section--
``(1) Related parties.--The terms `lessor', `lessee', and
`lender' each include any related party (within the meaning of
section 197(f)(9)(C)(i)).
``(2) Lease term.--The term `lease term' has the meaning
given to such term by section 168(i)(3).
``(3) Lender.--The term `lender' means, with respect to any
lease, a person that makes a loan to the lessor which is
secured (or economically similar to being secured) by the lease
or the leased property.
``(4) Loan.--The term `loan' includes any similar
arrangement.
``(g) Regulations.--The Secretary shall prescribe such regulations as
may be necessary or appropriate to carry out the provisions of this
section, including regulations which--
``(1) allow in appropriate cases the aggregation of property
subject to the same lease, and
``(2) provide for the determination of the allocation of
interest expense for purposes of this section.''.
(b) Conforming Amendment.--The table of sections for subpart C of
part II of subchapter E of chapter 1 is amended by adding at the end
the following new item:
``Sec. 470. Limitation on deductions
allocable to property used by
governments or other tax-exempt
entities.''.
SEC. 649. EFFECTIVE DATE.
(a) In General.--Except as provided in this section, the amendments
made by this part shall apply to leases entered into after March 12,
2004.
(b) Exception.--
(1) In general.--The amendments made by this part shall not
apply to qualified transportation property.
(2) Qualified transportation property.--For purposes of
paragraph (1), the term ``qualified transportation property''
means domestic property subject to a lease with respect to
which a formal application--
(A) was submitted for approval to the Federal Transit
Administration (an agency of the Department of
Transportation) after June 30, 2003, and before March
13, 2004,
(B) is approved by the Federal Transit Administration
before January 1, 2005, and
(C) includes a description of such property and the
value of such property.
(3) Exchanges and conversion of tax-exempt use property.--
Section 470(e)(4) of the Internal Revenue Code of 1986, as
added by this section, shall apply to property exchanged or
converted after the date of the enactment of this Act.
Subtitle C--Reduction of Fuel Tax Evasion
SEC. 651. EXEMPTION FROM CERTAIN EXCISE TAXES FOR MOBILE MACHINERY.
(a) Exemption From Tax on Heavy Trucks and Trailers Sold at Retail.--
(1) In general.--Section 4053 (relating to exemptions) is
amended by adding at the end the following new paragraph:
``(8) Mobile machinery.--Any vehicle which consists of a
chassis--
``(A) to which there has been permanently mounted (by
welding, bolting, riveting, or other means) machinery
or equipment to perform a construction, manufacturing,
processing, farming, mining, drilling, timbering, or
similar operation if the operation of the machinery or
equipment is unrelated to transportation on or off the
public highways,
``(B) which has been specially designed to serve only
as a mobile carriage and mount (and a power source,
where applicable) for the particular machinery or
equipment involved, whether or not such machinery or
equipment is in operation, and
``(C) which, by reason of such special design, could
not, without substantial structural modification, be
used as a component of a vehicle designed to perform a
function of transporting any load other than that
particular machinery or equipment or similar machinery
or equipment requiring such a specially designed
chassis.''.
(2) Effective date.--The amendment made by this subsection
shall take effect on the day after the date of the enactment of
this Act.
(b) Exemption From Tax on Use of Certain Vehicles.--
(1) In general.--Section 4483 (relating to exemptions) is
amended by redesignating subsection (g) as subsection (h) and
by inserting after subsection (f) the following new subsection:
``(g) Exemption for Mobile Machinery.--No tax shall be imposed by
section 4481 on the use of any vehicle described in section 4053(8).''.
(2) Effective date.--The amendments made by this subsection
shall take effect on the day after the date of the enactment of
this Act.
(c) Exemption From Tax on Tires.--
(1) In General.--Section 4072(b)(2) is amended by adding at
the end the following flush sentence: ``Such term shall not
include tires of a type used exclusively on vehicles described
in section 4053(8).''.
(2) Effective date.--The amendment made by this subsection
shall take effect on the day after the date of the enactment of
this Act.
(d) Refund of Fuel Taxes.--
(1) In general.--Section 6421(e)(2) (defining off-highway
business use) is amended by adding at the end the following new
subparagraph:
``(C) Uses in mobile machinery.--
``(i) In general.--The term `off-highway
business use' shall include any use in a
vehicle which meets the requirements described
in clause (ii).
``(ii) Requirements for mobile machinery.--
The requirements described in this clause are--
``(I) the design-based test, and
``(II) the use-based test.
``(iii) Design-based test.--For purposes of
clause (ii)(I), the design-based test is met if
the vehicle consists of a chassis--
``(I) to which there has been
permanently mounted (by welding,
bolting, riveting, or other means)
machinery or equipment to perform a
construction, manufacturing,
processing, farming, mining, drilling,
timbering, or similar operation if the
operation of the machinery or equipment
is unrelated to transportation on or
off the public highways,
``(II) which has been specially
designed to serve only as a mobile
carriage and mount (and a power source,
where applicable) for the particular
machinery or equipment involved,
whether or not such machinery or
equipment is in operation, and
``(III) which, by reason of such
special design, could not, without
substantial structural modification, be
used as a component of a vehicle
designed to perform a function of
transporting any load other than that
particular machinery or equipment or
similar machinery or equipment
requiring such a specially designed
chassis.
``(iv) Use-based test.--For purposes of
clause (ii)(II), the use-based test is met if
the use of the vehicle on public highways was
less than 7,500 miles during the taxpayer's
taxable year.''.
(2) No tax-free sales.--Subsection (b) of section 4082, as
amended by section 652, is amended by inserting before the
period at the end ``and such term shall not include any use
described in section 6421(e)(2)(C)''.
(3) Annual refund of tax paid.--Section 6427(i)(2) (relating
to exceptions) is amended by adding at the end the following
new subparagraph:
``(C) Nonapplication of paragraph.--This paragraph
shall not apply to any fuel used solely in any off-
highway business use described in section
6421(e)(2)(C).''.
(4) Effective date.--The amendments made by this subsection
shall apply to taxable years beginning after the date of the
enactment of this Act.
SEC. 652. TAXATION OF AVIATION-GRADE KEROSENE.
(a) Rate of Tax.--
(1) In general.--Subparagraph (A) of section 4081(a)(2) is
amended by striking ``and'' at the end of clause (ii), by
striking the period at the end of clause (iii) and inserting
``, and'', and by adding at the end the following new clause:
``(iv) in the case of aviation-grade
kerosene, 21.8 cents per gallon.''.
(2) Commercial aviation.--Paragraph (2) of section 4081(a) is
amended by adding at the end the following new subparagraph:
``(C) Taxes imposed on fuel used in commercial
aviation.--In the case of aviation-grade kerosene which
is removed from any refinery or terminal directly into
the fuel tank of an aircraft for use in commercial
aviation, the rate of tax under subparagraph (A)(iv)
shall be 4.3 cents per gallon.''.
(3) Certain refueler trucks, tankers, and tank wagons treated
as terminal.--Subsection (a) of section 4081 is amended by
adding at the end the following new paragraph:
``(3) Certain refueler trucks, tankers, and tank wagons
treated as terminal.--
``(A) In general.--In the case of aviation-grade
kerosene which is removed from any terminal directly
into the fuel tank of an aircraft (determined without
regard to any refueler truck, tanker, or tank wagon
which meets the requirements of subparagraph (B)), a
refueler truck, tanker, or tank wagon shall be treated
as part of such terminal if--
``(i) such truck, tanker, or wagon meets the
requirements of subparagraph (B) with respect
to an airport, and
``(ii) except in the case of exigent
circumstances identified by the Secretary in
regulations, no vehicle registered for highway
use is loaded with aviation-grade kerosene at
such terminal.
``(B) Requirements.--A refueler truck, tanker, or
tank wagon meets the requirements of this subparagraph
with respect to an airport if such truck, tanker, or
wagon--
``(i) is loaded with aviation-grade kerosene
at such terminal located within such airport
and delivers such kerosene only into aircraft
at such airport,
``(ii) has storage tanks, hose, and coupling
equipment designed and used for the purposes of
fueling aircraft,
``(iii) is not registered for highway use,
and
``(iv) is operated by--
``(I) the terminal operator of such
terminal, or
``(II) a person that makes a daily
accounting to such terminal operator of
each delivery of fuel from such truck,
tanker, or wagon.
``(C) Reporting.--The Secretary shall require under
section 4101(d) reporting by such terminal operator
of--
``(i) any information obtained under
subparagraph (B)(iv)(II), and
``(ii) any similar information maintained by
such terminal operator with respect to
deliveries of fuel made by trucks, tankers, or
wagons operated by such terminal operator.''.
(4) Liability for tax on aviation-grade kerosene used in
commercial aviation.--Subsection (a) of section 4081 is amended
by adding at the end the following new paragraph:
``(4) Liability for tax on aviation-grade kerosene used in
commercial aviation.--For purposes of paragraph (2)(C), the
person who uses the fuel for commercial aviation shall pay the
tax imposed under such paragraph. For purposes of the preceding
sentence, fuel shall be treated as used when such fuel is
removed into the fuel tank.''.
(5) Nontaxable uses.--
(A) In general.--Section 4082 is amended by
redesignating subsections (e) and (f) as subsections
(f) and (g), respectively, and by inserting after
subsection (d) the following new subsection:
``(e) Aviation-Grade Kerosene.--In the case of aviation-grade
kerosene which is exempt from the tax imposed by section 4041(c) (other
than by reason of a prior imposition of tax) and which is removed from
any refinery or terminal directly into the fuel tank of an aircraft,
the rate of tax under section 4081(a)(2)(A)(iv) shall be zero.''.
(B) Conforming amendments.--
(i) Subsection (b) of section 4082 is amended
by adding at the end the following new flush
sentence:
``The term `nontaxable use' does not include the use of aviation-grade
kerosene in an aircraft.''.
(ii) Section 4082(d) is amended by striking
paragraph (1) and by redesignating paragraphs
(2) and (3) as paragraphs (1) and (2),
respectively.
(6) Nonaircraft use of aviation-grade kerosene.--
(A) In general.--Subparagraph (B) of section
4041(a)(1) is amended by adding at the end the
following new sentence: ``This subparagraph shall not
apply to aviation-grade kerosene.''.
(B) Conforming amendment.--The heading for paragraph
(1) of section 4041(a) is amended by inserting ``and
kerosene'' after ``diesel fuel''.
(b) Commercial Aviation.--Section 4083 is amended by redesignating
subsections (b) and (c) as subsections (c) and (d), respectively, and
by inserting after subsection (a) the following new subsection:
``(b) Commercial Aviation.--For purposes of this subpart, the term
`commercial aviation' means any use of an aircraft in a business of
transporting persons or property for compensation or hire by air,
unless properly allocable to any transportation exempt from the taxes
imposed by sections 4261 and 4271 by reason of section 4281 or 4282 or
by reason of section 4261(h).''.
(c) Refunds.--
(1) In general.--Paragraph (4) of section 6427(l) is amended
to read as follows:
``(4) Refunds for aviation-grade kerosene.--
``(A) No refund of certain taxes on fuel used in
commercial aviation.--In the case of aviation-grade
kerosene used in commercial aviation (as defined in
section 4083(b)) (other than supplies for vessels or
aircraft within the meaning of section 4221(d)(3)),
paragraph (1) shall not apply to so much of the tax
imposed by section 4081 as is attributable to--
``(i) the Leaking Underground Storage Tank
Trust Fund financing rate imposed by such
section, and
``(ii) so much of the rate of tax specified
in section 4081(a)(2)(A)(iv) as does not exceed
4.3 cents per gallon.
``(B) Payment to ultimate, registered vendor.--With
respect to aviation-grade kerosene, if the ultimate
purchaser of such kerosene waives (at such time and in
such form and manner as the Secretary shall prescribe)
the right to payment under paragraph (1) and assigns
such right to the ultimate vendor, then the Secretary
shall pay the amount which would be paid under
paragraph (1) to such ultimate vendor, but only if such
ultimate vendor--
``(i) is registered under section 4101, and
``(ii) meets the requirements of subparagraph
(A), (B), or (D) of section 6416(a)(1).''.
(2) Time for filing claims.--Subparagraph (A) of section
6427(i)(4) is amended--
(A) by striking ``subsection (l)(5)'' both places it
appears and inserting ``paragraph (4)(B) or (5) of
subsection (l)'', and
(B) by striking ``the preceding sentence'' and
inserting ``subsection (l)(5)''.
(3) Conforming amendment.--Subparagraph (B) of section
6427(l)(2) is amended to read as follows:
``(B) in the case of aviation-grade kerosene--
``(i) any use which is exempt from the tax
imposed by section 4041(c) other than by reason
of a prior imposition of tax, or
``(ii) any use in commercial aviation (within
the meaning of section 4083(b)).''.
(d) Repeal of Prior Taxation of Aviation Fuel.--
(1) In general.--Part III of subchapter A of chapter 32 is
amended by striking subpart B and by redesignating subpart C as
subpart B.
(2) Conforming amendments.--
(A) Section 4041(c) is amended to read as follows:
``(c) Aviation-Grade Kerosene.--
``(1) In general.--There is hereby imposed a tax upon
aviation-grade kerosene--
``(A) sold by any person to an owner, lessee, or
other operator of an aircraft for use in such aircraft,
or
``(B) used by any person in an aircraft unless there
was a taxable sale of such fuel under subparagraph (A).
``(2) Exemption for previously taxed fuel.--No tax shall be
imposed by this subsection on the sale or use of any aviation-
grade kerosene if tax was imposed on such liquid under section
4081 and the tax thereon was not credited or refunded.
``(3) Rate of tax.--The rate of tax imposed by this
subsection shall be the rate of tax specified in section
4081(a)(2)(A)(iv) which is in effect at the time of such sale
or use.''.
(B) Section 4041(d)(2) is amended by striking
``section 4091'' and inserting ``section 4081''.
(C) Section 4041 is amended by striking subsection
(e).
(D) Section 4041 is amended by striking subsection
(i).
(E) Sections 4101(a), 4103, 4221(a), and 6206 are
each amended by striking ``, 4081, or 4091'' and
inserting ``or 4081''.
(F) Section 6416(b)(2) is amended by striking ``4091
or''.
(G) Section 6416(b)(3) is amended by striking ``or
4091'' each place it appears.
(H) Section 6416(d) is amended by striking ``or to
the tax imposed by section 4091 in the case of refunds
described in section 4091(d)''.
(I) Section 6427(j)(1) is amended by striking ``,
4081, and 4091'' and inserting ``and 4081''.
(J)(i) Section 6427(l)(1) is amended to read as
follows:
``(1) In general.--Except as otherwise provided in this
subsection and in subsection (k), if any diesel fuel or
kerosene on which tax has been imposed by section 4041 or 4081
is used by any person in a nontaxable use, the Secretary shall
pay (without interest) to the ultimate purchaser of such fuel
an amount equal to the aggregate amount of tax imposed on such
fuel under section 4041 or 4081, as the case may be, reduced by
any payment made to the ultimate vendor under paragraph
(4)(B).''.
(ii) Paragraph (5)(B) of section 6427(l) is amended
by striking ``Paragraph (1)(A) shall not apply to
kerosene'' and inserting ``Paragraph (1) shall not
apply to kerosene (other than aviation-grade
kerosene)''.
(K) Subparagraph (B) of section 6724(d)(1) is amended
by striking clause (xv) and by redesignating the
succeeding clauses accordingly.
(L) Paragraph (2) of section 6724(d) is amended by
striking subparagraph (W) and by redesignating the
succeeding subparagraphs accordingly.
(M) Paragraph (1) of section 9502(b) is amended by
adding ``and'' at the end of subparagraph (B) and by
striking subparagraphs (C) and (D) and inserting the
following new subparagraph:
``(C) section 4081 with respect to aviation gasoline
and aviation-grade kerosene, and''.
(N) The last sentence of section 9502(b) is amended
to read as follows:
``There shall not be taken into account under paragraph (1) so much of
the taxes imposed by section 4081 as are determined at the rate
specified in section 4081(a)(2)(B).''.
(O) Subsection (b) of section 9508 is amended by
striking paragraph (3) and by redesignating paragraphs
(4) and (5) as paragraphs (3) and (4), respectively.
(P) Section 9508(c)(2)(A) is amended by striking
``sections 4081 and 4091'' and inserting ``section
4081''.
(Q) The table of subparts for part III of subchapter
A of chapter 32 is amended to read as follows:
``Subpart A. Motor and aviation fuels.
``Subpart B. Special provisions
applicable to fuels tax.''.
(R) The heading for subpart A of part III of
subchapter A of chapter 32 is amended to read as
follows:
``Subpart A--Motor and Aviation Fuels''.
(S) The heading for subpart B of part III of
subchapter A of chapter 32, as redesignated by
paragraph (1), is amended to read as follows:
``Subpart B--Special Provisions Applicable to Fuels Tax''.
(e) Effective Date.--The amendments made by this section shall apply
to aviation-grade kerosene removed, entered, or sold after September
30, 2004.
(f) Floor Stocks Tax.--
(1) In general.--There is hereby imposed on aviation-grade
kerosene held on October 1, 2004, by any person a tax equal
to--
(A) the tax which would have been imposed before such
date on such kerosene had the amendments made by this
section been in effect at all times before such date,
reduced by
(B) the tax imposed before such date under section
4091 of the Internal Revenue Code of 1986, as in effect
on the day before the date of the enactment of this
Act.
(2) Liability for tax and method of payment.--
(A) Liability for tax.--The person holding the
kerosene on October 1, 2004, to which the tax imposed
by paragraph (1) applies shall be liable for such tax.
(B) Method and time for payment.--The tax imposed by
paragraph (1) shall be paid at such time and in such
manner as the Secretary of the Treasury (or the
Secretary's delegate) shall prescribe, including the
nonapplication of such tax on de minimis amounts of
kerosene.
(3) Transfer of floor stock tax revenues to trust funds.--For
purposes of determining the amount transferred to any trust
fund, the tax imposed by this subsection shall be treated as
imposed by section 4081 of the Internal Revenue Code of 1986--
(A) at the Leaking Underground Storage Tank Trust
Fund financing rate under such section to the extent of
0.1 cents per gallon, and
(B) at the rate under section 4081(a)(2)(A)(iv) to
the extent of the remainder.
(4) Held by a person.--For purposes of this section, kerosene
shall be considered as held by a person if title thereto has
passed to such person (whether or not delivery to the person
has been made).
(5) Other laws applicable.--All provisions of law, including
penalties, applicable with respect to the tax imposed by
section 4081 of such Code shall, insofar as applicable and not
inconsistent with the provisions of this subsection, apply with
respect to the floor stock tax imposed by paragraph (1) to the
same extent as if such tax were imposed by such section.
SEC. 653. DYE INJECTION EQUIPMENT.
(a) In General.--Section 4082(a)(2) (relating to exemptions for
diesel fuel and kerosene) is amended by inserting ``by mechanical
injection'' after ``indelibly dyed''.
(b) Dye Injector Security.--Not later than 180 days after the date of
the enactment of this Act, the Secretary of the Treasury shall issue
regulations regarding mechanical dye injection systems described in the
amendment made by subsection (a), and such regulations shall include
standards for making such systems tamper resistant.
(c) Penalty for Tampering With or Failing To Maintain Security
Requirements for Mechanical Dye Injection Systems.--
(1) In general.--Part I of subchapter B of chapter 68
(relating to assessable penalties) is amended by adding after
section 6715 the following new section:
``SEC. 6715A. TAMPERING WITH OR FAILING TO MAINTAIN SECURITY
REQUIREMENTS FOR MECHANICAL DYE INJECTION SYSTEMS.
``(a) Imposition of Penalty--
``(1) Tampering.--If any person tampers with a mechanical dye
injection system used to indelibly dye fuel for purposes of
section 4082, such person shall pay a penalty in addition to
the tax (if any).
``(2) Failure to maintain security requirements.--If any
operator of a mechanical dye injection system used to indelibly
dye fuel for purposes of section 4082 fails to maintain the
security standards for such system as established by the
Secretary, then such operator shall pay a penalty in addition
to the tax (if any).
``(b) Amount of Penalty.--The amount of the penalty under subsection
(a) shall be--
``(1) for each violation described in paragraph (1), the
greater of--
``(A) $25,000, or
``(B) $10 for each gallon of fuel involved, and
``(2) for each--
``(A) failure to maintain security standards
described in paragraph (2), $1,000, and
``(B) failure to correct a violation described in
paragraph (2), $1,000 per day for each day after which
such violation was discovered or such person should
have reasonably known of such violation.
``(c) Joint and Several Liability.--
``(1) In general.--If a penalty is imposed under this section
on any business entity, each officer, employee, or agent of
such entity or other contracting party who willfully
participated in any act giving rise to such penalty shall be
jointly and severally liable with such entity for such penalty.
``(2) Affiliated groups.--If a business entity described in
paragraph (1) is part of an affiliated group (as defined in
section 1504(a)), the parent corporation of such entity shall
be jointly and severally liable with such entity for the
penalty imposed under this section.''.
(2) Clerical amendment.--The table of sections for part I of
subchapter B of chapter 68 is amended by adding after the item
related to section 6715 the following new item:
``Sec. 6715A. Tampering with or failing
to maintain security
requirements for mechanical dye
injection systems.''.
(d) Effective Date.--The amendments made by subsections (a) and (c)
shall take effect on the 180th day after the date on which the
Secretary issues the regulations described in subsection (b).
SEC. 654. AUTHORITY TO INSPECT ON-SITE RECORDS.
(a) In General.--Section 4083(d)(1)(A) (relating to administrative
authority), as previously amended by this Act, is amended by striking
``and'' at the end of clause (i) and by inserting after clause (ii) the
following new clause:
``(iii) inspecting any books and records and
any shipping papers pertaining to such fuel,
and''.
(b) Effective Date.--The amendments made by this section shall take
effect on the date of the enactment of this Act.
SEC. 655. REGISTRATION OF PIPELINE OR VESSEL OPERATORS REQUIRED FOR
EXEMPTION OF BULK TRANSFERS TO REGISTERED TERMINALS
OR REFINERIES.
(a) In General.--Section 4081(a)(1)(B) (relating to exemption for
bulk transfers to registered terminals or refineries) is amended--
(1) by inserting ``by pipeline or vessel'' after
``transferred in bulk'', and
(2) by inserting ``, the operator of such pipeline or
vessel,'' after ``the taxable fuel''.
(b) Effective Date.--The amendments made by this section shall take
effect on October 1, 2004.
(c) Publication of Registered Persons.--Beginning on July 1, 2004,
the Secretary of the Treasury (or the Secretary's delegate) shall
periodically publish a current list of persons registered under section
4101 of the Internal Revenue Code of 1986 who are required to register
under such section.
SEC. 656. DISPLAY OF REGISTRATION.
(a) In General.--Subsection (a) of section 4101 (relating to
registration) is amended--
(1) by striking ``Every'' and inserting the following:
``(1) In general.--Every'', and
(2) by adding at the end the following new paragraph:
``(2) Display of registration.--Every operator of a vessel
required by the Secretary to register under this section shall
display proof of registration through an electronic
identification device prescribed by the Secretary on each
vessel used by such operator to transport any taxable fuel.''.
(b) Civil Penalty for Failure To Display Registration.--
(1) In general.--Part I of subchapter B of chapter 68
(relating to assessable penalties) is amended by inserting
after section 6716 the following new section:
``SEC. 6717. FAILURE TO DISPLAY TAX REGISTRATION ON VESSELS.
``(a) Failure To Display Registration.--Every operator of a vessel
who fails to display proof of registration pursuant to section
4101(a)(2) shall pay a penalty of $500 for each such failure. With
respect to any vessel, only one penalty shall be imposed by this
section during any calendar month.
``(b) Multiple Violations.--In determining the penalty under
subsection (a) on any person, subsection (a) shall be applied by
increasing the amount in subsection (a) by the product of such amount
and the aggregate number of penalties (if any) imposed with respect to
prior months by this section on such person (or a related person or any
predecessor of such person or related person).
``(c) Reasonable Cause Exception.--No penalty shall be imposed under
this section with respect to any failure if it is shown that such
failure is due to reasonable cause.''.
(2) Clerical amendment.--The table of sections for part I of
subchapter B of chapter 68 is amended by inserting after the
item relating to section 6716 the following new item:
``Sec. 6717. Failure to display tax
registration on vessels.''.
(c) Effective Dates.--
(1) Subsection (a).--The amendments made by subsection (a)
shall take effect on October 1, 2004.
(2) Subsection (b).--The amendments made by subsection (b)
shall apply to penalties imposed after September 30, 2004.
SEC. 657. PENALTIES FOR FAILURE TO REGISTER AND FAILURE TO REPORT.
(a) Increased Penalty.--Subsection (a) of section 7272 (relating to
penalty for failure to register) is amended by inserting ``($10,000 in
the case of a failure to register under section 4101)'' after ``$50''.
(b) Increased Criminal Penalty.--Section 7232 (relating to failure to
register under section 4101, false representations of registration
status, etc.) is amended by striking ``$5,000'' and inserting
``$10,000''.
(c) Assessable Penalty for Failure To Register.--
(1) In general.--Part I of subchapter B of chapter 68
(relating to assessable penalties) is amended by inserting
after section 6717 the following new section:
``SEC. 6718. FAILURE TO REGISTER.
``(a) Failure To Register.--Every person who is required to register
under section 4101 and fails to do so shall pay a penalty in addition
to the tax (if any).
``(b) Amount of Penalty.--The amount of the penalty under subsection
(a) shall be--
``(1) $10,000 for each initial failure to register, and
``(2) $1,000 for each day thereafter such person fails to
register.
``(c) Reasonable Cause Exception.--No penalty shall be imposed under
this section with respect to any failure if it is shown that such
failure is due to reasonable cause.''.
(2) Clerical amendment.--The table of sections for part I of
subchapter B of chapter 68 is amended by inserting after the
item relating to section 6717 the following new item:
``Sec. 6718. Failure to register.''.
(d) Assessable Penalty for Failure To Report.--
(1) In general.--Part II of subchapter B of chapter 68
(relating to assessable penalties) is amended by adding at the
end the following new section:
``SEC. 6725. FAILURE TO REPORT INFORMATION UNDER SECTION 4101.
``(a) In General.--In the case of each failure described in
subsection (b) by any person with respect to a vessel or facility, such
person shall pay a penalty of $10,000 in addition to the tax (if any).
``(b) Failures Subject to Penalty.--For purposes of subsection (a),
the failures described in this subsection are--
``(1) any failure to make a report under section 4101(d) on
or before the date prescribed therefor, and
``(2) any failure to include all of the information required
to be shown on such report or the inclusion of incorrect
information.
``(c) Reasonable Cause Exception.--No penalty shall be imposed under
this section with respect to any failure if it is shown that such
failure is due to reasonable cause.''.
(2) Clerical amendment.--The table of sections for part II of
subchapter B of chapter 68 is amended by adding at the end the
following new item:
``Sec. 6725. Failure to report
information under section
4101.''.
(e) Effective Date.--The amendments made by this section shall apply
to penalties imposed after September 30, 2004.
SEC. 658. COLLECTION FROM CUSTOMS BOND WHERE IMPORTER NOT REGISTERED.
(a) Tax at Point of Entry Where Importer Not Registered.--Subpart B
of part III of subchapter A of chapter 32, as redesignated by section
652(d), is amended by adding after section 4103 the following new
section:
``SEC. 4104. COLLECTION FROM CUSTOMS BOND WHERE IMPORTER NOT
REGISTERED.
``(a) In General.--The importer of record shall be jointly and
severally liable for the tax imposed by section 4081(a)(1)(A)(iii) if,
under regulations prescribed by the Secretary, any other person that is
not a person who is registered under section 4101 is liable for such
tax.
``(b) Collection From Customs Bond.--If any tax for which any
importer of record is liable under subsection (a), or for which any
importer of record that is not a person registered under section 4101
is otherwise liable, is not paid on or before the last date prescribed
for payment, the Secretary may collect such tax from the Customs bond
posted with respect to the importation of the taxable fuel to which the
tax relates. For purposes of determining the jurisdiction of any court
of the United States or any agency of the United States, any action by
the Secretary described in the preceding sentence shall be treated as
an action to collect the tax from a bond described in section
4101(b)(1) and not as an action to collect from a bond relating to the
importation of merchandise.''.
(b) Conforming Amendment.--The table of sections for subpart B of
part III of subchapter A of chapter 32, as redesignated by section
652(d), is amended by adding after the item related to section 4103 the
following new item:
``Sec. 4104. Collection from Customs bond
where importer not
registered.''.
(c) Effective Date.--The amendments made by this section shall apply
with respect to fuel entered after September 30, 2004.
SEC. 659. MODIFICATIONS OF TAX ON USE OF CERTAIN VEHICLES.
(a) Proration of Tax Where Vehicle Sold.--
(1) In general.--Subparagraph (A) of section 4481(c)(2)
(relating to where vehicle destroyed or stolen) is amended by
striking ``destroyed or stolen'' both places it appears and
inserting ``sold, destroyed, or stolen''.
(2) Conforming amendment.--The heading for section 4481(c)(2)
is amended by striking ``destroyed or stolen'' and inserting
``sold, destroyed, or stolen''.
(b) Repeal of Installment Payment.--
(1) Section 6156 (relating to installment payment of tax on
use of highway motor vehicles) is repealed.
(2) The table of sections for subchapter A of chapter 62 is
amended by striking the item relating to section 6156.
(c) Electronic Filing.--Section 4481 is amended by redesignating
subsection (e) as subsection (f) and by inserting after subsection (d)
the following new subsection:
``(e) Electronic Filing.--Any taxpayer who files a return under this
section with respect to 25 or more vehicles for any taxable period
shall file such return electronically.''.
(d) Repeal of Reduction in Tax for Certain Trucks.--Section 4483 is
amended by striking subsection (f).
(e) Effective Date.--The amendments made by this section shall apply
to taxable periods beginning after the date of the enactment of this
Act.
SEC. 660. MODIFICATION OF ULTIMATE VENDOR REFUND CLAIMS WITH RESPECT TO
FARMING.
(a) In General.--
(1) Refunds.--Section 6427(l) is amended by adding at the end
the following new paragraph:
``(6) Registered vendors permitted to administer certain
claims for refund of diesel fuel and kerosene sold to
farmers.--
``(A) In general.--In the case of diesel fuel or
kerosene used on a farm for farming purposes (within
the meaning of section 6420(c)), paragraph (1) shall
not apply to the aggregate amount of such diesel fuel
or kerosene if such amount does not exceed 250 gallons
(as determined under subsection (i)(5)(A)(iii)).
``(B) Payment to ultimate vendor.--The amount which
would (but for subparagraph (A)) have been paid under
paragraph (1) with respect to any fuel shall be paid to
the ultimate vendor of such fuel, if such vendor--
``(i) is registered under section 4101, and
``(ii) meets the requirements of subparagraph
(A), (B), or (D) of section 6416(a)(1).''.
(2) Filing of claims.--Section 6427(i) is amended by
inserting at the end the following new paragraph:
``(5) Special rule for vendor refunds with respect to
farmers.--
``(A) In general.--A claim may be filed under
subsection (l)(6) by any person with respect to fuel
sold by such person for any period--
``(i) for which $200 or more ($100 or more in
the case of kerosene) is payable under
subsection (l)(6),
``(ii) which is not less than 1 week, and
``(iii) which is for not more than 250
gallons for each farmer for which there is a
claim.
Notwithstanding subsection (l)(1), paragraph (3)(B)
shall apply to claims filed under the preceding
sentence.
``(B) Time for filing claim.--No claim filed under
this paragraph shall be allowed unless filed on or
before the last day of the first quarter following the
earliest quarter included in the claim.''.
(3) Conforming amendments.--
(A) Section 6427(l)(5)(A) is amended to read as
follows:
``(A) In general.--Paragraph (1) shall not apply to
diesel fuel or kerosene used by a State or local
government.''.
(B) The heading for section 6427(l)(5) is amended by
striking ``farmers and''.
(b) Effective Date.--The amendment made by this section shall apply
to fuels sold for nontaxable use after the date of the enactment of
this Act.
SEC. 661. DEDICATION OF REVENUES FROM CERTAIN PENALTIES TO THE HIGHWAY
TRUST FUND.
(a) In General.--Subsection (b) of section 9503 (relating to transfer
to Highway Trust Fund of amounts equivalent to certain taxes) is
amended by redesignating paragraph (5) as paragraph (6) and inserting
after paragraph (4) the following new paragraph:
``(5) Certain penalties.--There are hereby appropriated to
the Highway Trust Fund amounts equivalent to the penalties paid
under sections 6715, 6715A, 6717, 6718, 6725, 7232, and 7272
(but only with regard to penalties under such section related
to failure to register under section 4101).''.
(b) Conforming Amendments.--
(1) The heading of subsection (b) of section 9503 is amended
by inserting ``and Penalties'' after ``Taxes''.
(2) The heading of paragraph (1) of section 9503(b) is
amended by striking ``In general'' and inserting ``Certain
taxes''.
(c) Effective Date.--The amendments made by this section shall apply
to penalties assessed after October 1, 2004.
SEC. 662. TAXABLE FUEL REFUNDS FOR CERTAIN ULTIMATE VENDORS.
(a) In General.--Paragraph (4) of section 6416(a) (relating to
abatements, credits, and refunds) is amended to read as follows:
``(4) Registered ultimate vendor to administer credits and
refunds of gasoline tax.--
``(A) In general.--For purposes of this subsection,
if an ultimate vendor purchases any gasoline on which
tax imposed by section 4081 has been paid and sells
such gasoline to an ultimate purchaser described in
subparagraph (C) or (D) of subsection (b)(2) (and such
gasoline is for a use described in such subparagraph),
such ultimate vendor shall be treated as the person
(and the only person) who paid such tax, but only if
such ultimate vendor is registered under section 4101.
For purposes of this subparagraph, if the sale of
gasoline is made by means of a credit card, the person
extending the credit to the ultimate purchaser shall be
deemed to be the ultimate vendor.
``(B) Timing of claims.--The procedure and timing of
any claim under subparagraph (A) shall be the same as
for claims under section 6427(i)(4), except that the
rules of section 6427(i)(3)(B) regarding electronic
claims shall not apply unless the ultimate vendor has
certified to the Secretary for the most recent quarter
of the taxable year that all ultimate purchasers of the
vendor covered by such claim are certified and entitled
to a refund under subparagraph (C) or (D) of subsection
(b)(2).''.
(b) Credit Card Purchases of Diesel Fuel or Kerosene by State and
Local Governments.--Section 6427(l)(5)(C) (relating to nontaxable uses
of diesel fuel, kerosene, and aviation fuel) is amended by adding at
the end the following new flush sentence: ``For purposes of this
subparagraph, if the sale of diesel fuel or kerosene is made by means
of a credit card, the person extending the credit to the ultimate
purchaser shall be deemed to be the ultimate vendor.''.
(c) Effective Date.--The amendments made by this section shall take
effect on October 1, 2004.
SEC. 663. TWO-PARTY EXCHANGES.
(a) In General.--Subpart B of part III of subchapter A of chapter 32,
as amended by this Act, is amended by adding after section 4104 the
following new section:
``SEC. 4105. TWO-PARTY EXCHANGES.
``(a) In General.--In a two-party exchange, the delivering person
shall not be liable for the tax imposed under section
4081(a)(1)(A)(ii).
``(b) Two-Party Exchange.--The term `two-party exchange' means a
transaction, other than a sale, in which taxable fuel is transferred
from a delivering person registered under section 4101 as a taxable
fuel registrant fuel to a receiving person who is so registered where
all of the following occur:
``(1) The transaction includes a transfer from the delivering
person, who holds the inventory position for taxable fuel in
the terminal as reflected in the records of the terminal
operator.
``(2) The exchange transaction occurs before or
contemporaneous with completion of removal across the rack from
the terminal by the receiving person.
``(3) The terminal operator in its books and records treats
the receiving person as the person that removes the taxable
fuel across the terminal rack for purposes of reporting the
transaction to the Secretary.
``(4) The transaction is the subject of a written
contract.''.
(b) Conforming Amendment.--The table of sections for subpart B of
part III of subchapter A of chapter 32, as amended by this Act, is
amended by adding after the item relating to section 4104 the following
new item:
``Sec. 4105. Two-party exchanges.''.
(c) Effective Date.--The amendment made by this section shall take
effect on the date of the enactment of this Act.
SEC. 664. SIMPLIFICATION OF TAX ON TIRES.
(a) In General.--Subsection (a) of section 4071 is amended to read as
follows:
``(a) Imposition and Rate of Tax.--There is hereby imposed on taxable
tires sold by the manufacturer, producer, or importer thereof a tax at
the rate of 9.4 cents (4.7 cents in the case of a biasply tire) for
each 10 pounds so much of the maximum rated load capacity thereof as
exceeds 3,500 pounds.''
(b) Taxable Tire.--Section 4072 is amended by redesignating
subsections (a) and (b) as subsections (b) and (c), respectively, and
by inserting before subsection (b) (as so redesignated) the following
new subsection:
``(a) Taxable Tire.--For purposes of this chapter, the term `taxable
tire' means any tire of the type used on highway vehicles if wholly or
in part made of rubber and if marked pursuant to Federal regulations
for highway use.''
(c) Exemption for Tires Sold to Department of Defense.--Section 4073
is amended to read as follows:
``SEC. 4073. EXEMPTIONS.
``The tax imposed by section 4071 shall not apply to tires sold for
the exclusive use of the Department of Defense or the Coast Guard.''
(d) Conforming Amendments.--
(1) Section 4071 is amended by striking subsection (c) and by
moving subsection (e) after subsection (b) and redesignating
subsection (e) as subsection (c).
(2) The item relating to section 4073 in the table of
sections for part II of subchapter A of chapter 32 is amended
to read as follows:
``Sec. 4073. Exemptions.''
(e) Effective Date.--The amendments made by this section shall apply
to sales in calendar years beginning more than 30 days after the date
of the enactment of this Act.
Subtitle D--Nonqualified Deferred Compensation Plans
SEC. 671. TREATMENT OF NONQUALIFIED DEFERRED COMPENSATION PLANS.
(a) In General.--Subpart A of part I of subchapter D of chapter 1 is
amended by adding at the end the following new section:
``SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED COMPENSATION UNDER
NONQUALIFIED DEFERRED COMPENSATION PLANS.
``(a) Rules Relating to Constructive Receipt.--
``(1) In general.--
``(A) Gross income inclusion.--In the case of a
nonqualified deferred compensation plan, all
compensation deferred under the plan for all taxable
years (to the extent not subject to a substantial risk
of forfeiture and not previously included in gross
income) shall be includible in gross income for the
taxable year unless at all times during the taxable
year the plan meets the requirements of paragraphs (2),
(3), and (4) and is operated in accordance with such
requirements.
``(B) Interest on tax liability payable with respect
to previously deferred compensation.--
``(i) In general.--If compensation is
required to be included in gross income under
subparagraph (A) for a taxable year, the tax
imposed by this chapter for such taxable year
shall be increased by the amount of interest
determined under clause (ii).
``(ii) Interest.--For purposes of clause (i),
the interest determined under this clause for
any taxable year is the amount of interest at
the underpayment rate plus 1 percentage point
on the underpayments that would have occurred
had the deferred compensation been includible
in gross income for the taxable year in which
first deferred or, if later, the first taxable
year in which such deferred compensation is not
subject to a substantial risk of forfeiture.
``(2) Distributions.--
``(A) In general.--The requirements of this paragraph
are met if the plan provides that compensation deferred
under the plan may not be distributed earlier than--
``(i) separation from service as determined
by the Secretary (except as provided in
subparagraph (B)(i)),
``(ii) the date the participant becomes
disabled (within the meaning of subparagraph
(C)),
``(iii) death,
``(iv) a specified time (or pursuant to a
fixed schedule) specified under the plan at the
date of the deferral of such compensation,
``(v) to the extent provided by the
Secretary, a change in the ownership or
effective control of the corporation, or in the
ownership of a substantial portion of the
assets of the corporation, or
``(vi) the occurrence of an unforeseeable
emergency.
``(B) Special rules.--
``(i) Specified employees.--In the case of
specified employees, the requirement of
subparagraph (A)(i) is met only if
distributions may not be made earlier than 6
months after the date of separation from
service. For purposes of the preceding
sentence, a specified employee is a key
employee (as defined in section 416(i)) of a
corporation the stock in which is publicly
traded on an established securities market or
otherwise.
``(ii) Unforeseeable emergency.--For purposes
of subparagraph (A)(vi)--
``(I) In general.--The term
`unforeseeable emergency' means a
severe financial hardship to the
participant resulting from a sudden and
unexpected illness or accident of the
participant, the participant's spouse,
or a dependent (as defined in section
152(a)) of the participant, loss of the
participant's property due to casualty,
or other similar extraordinary and
unforeseeable circumstances arising as
a result of events beyond the control
of the participant.
``(II) Limitation on distributions.--
The requirement of subparagraph (A)(vi)
is met only if, as determined under
regulations of the Secretary, the
amounts distributed with respect to an
emergency do not exceed the amounts
necessary to satisfy such emergency
plus amounts necessary to pay taxes
reasonably anticipated as a result of
the distribution, after taking into
account the extent to which such
hardship is or may be relieved through
reimbursement or compensation by
insurance or otherwise or by
liquidation of the participant's assets
(to the extent the liquidation of such
assets would not itself cause severe
financial hardship).
``(C) Disabled.--For purposes of subparagraph
(A)(ii), a participant shall be considered disabled if
the participant--
``(i) is unable to engage in any substantial
gainful activity by reason of any medically
determinable physical or mental impairment
which can be expected to result in death or can
be expected to last for a continuous period of
not less than 12 months, or
``(ii) is, by reason of any medically
determinable physical or mental impairment
which can be expected to result in death or can
be expected to last for a continuous period of
not less than 12 months, receiving income
replacement benefits for a period of not less
than 3 months under an accident and health plan
covering employees of the participant's
employer.
``(3) Acceleration of benefits.--The requirements of this
paragraph are met if the plan does not permit the acceleration
of the time or schedule of any payment under the plan, except
as provided in regulations by the Secretary.
``(4) Elections.--
``(A) In general.--The requirements of this paragraph
are met if the requirements of subparagraphs (B) and
(C) are met.
``(B) Initial deferral decision.--The requirements of
this subparagraph are met if the plan provides that
compensation for services performed during a taxable
year may be deferred at the participant's election only
if the election to defer such compensation is made not
later than the close of the preceding taxable year or
at such other time as provided in regulations. In the
case of the first year in which a participant becomes
eligible to participate in the plan, such election may
be made with respect to services to be performed
subsequent to the election within 30 days after the
date the participant becomes eligible to participate in
such plan.
``(C) Changes in time and form of distribution.--The
requirements of this subparagraph are met if, in the
case of a plan which permits under a subsequent
election a delay in a payment or a change in the form
of payment--
``(i) the plan requires that such election
may not take effect until at least 12 months
after the date on which the election is made,
``(ii) in the case an election related to a
payment not described in clause (ii), (iii), or
(vi) of paragraph (2)(A), the plan requires
that the first payment with respect to which
such election is made be deferred for a period
of not less than 5 years from the date such
payment would otherwise have been made, and
``(iii) the plan requires that any election
related to a payment described in paragraph
(2)(A)(iv) may not be made less than 12 months
prior to the date of the first scheduled
payment under such paragraph.
``(b) Rules Relating to Funding.--
``(1) Offshore property in a trust.--In the case of assets
set aside (directly or indirectly) in a trust (or other
arrangement determined by the Secretary) for purposes of paying
deferred compensation under a nonqualified deferred
compensation plan, for purposes of section 83 such assets shall
be treated as property transferred in connection with the
performance of services whether or not such assets are
available to satisfy claims of general creditors--
``(A) at the time set aside if such assets are
located outside of the United States, or
``(B) at the time transferred if such assets are
subsequently transferred outside of the United States.
``(2) Employer's financial health.--In the case of
compensation deferred under a nonqualified deferred
compensation plan, there is a transfer of property within the
meaning of section 83 with respect to such compensation as of
the earlier of--
``(A) the date on which the plan first provides that
assets will become restricted to the provision of
benefits under the plan in connection with a change in
the employer's financial health, or
``(B) the date on which assets are so restricted.
``(3) Income inclusion for offshore trusts and employer's
financial health.--For each taxable year that assets treated as
transferred under this subsection remain set aside in a trust
or other arrangement subject to paragraph (1) or (2), any
increase in value in, or earnings with respect to, such assets
shall be treated as an additional transfer of property under
this subsection (to the extent not previously included in
income).
``(4) Interest on tax liability payable with respect to
transferred property.--
``(A) In general.--If amounts are required to be
included in gross income by reason of paragraph (1) or
(2) for a taxable year, the tax imposed by this chapter
for such taxable year shall be increased by the amount
of interest determined under subparagraph (B).
``(B) Interest.--The interest determined under this
subparagraph for any taxable year is the amount of
interest at the underpayment rate plus 1 percentage
point on the underpayments that would have occurred had
the amounts so required to be included in gross income
by paragraph (1) or (2) been includible in gross income
for the taxable year in which first deferred or, if
later, the first taxable year in which such deferred
compensation is not subject to a substantial risk of
forfeiture.
``(c) No Inference on Earlier Income Inclusion or Requirement of
Later Inclusion.--Nothing in this section shall be construed to prevent
the inclusion of amounts in gross income under any other provision of
this chapter or any other rule of law earlier than the time provided in
this section. Any amount included in gross income under this section
shall not be required to be included in gross income under any other
provision of this chapter or any other rule of law later than the time
provided in this section.
``(d) Other Definitions and Special Rules.--For purposes of this
section--
``(1) Nonqualified deferred compensation plan.--The term
`nonqualified deferred compensation plan' means any plan that
provides for the deferral of compensation, other than--
``(A) a qualified employer plan, and
``(B) any bona fide vacation leave, sick leave,
compensatory time, disability pay, or death benefit
plan.
``(2) Qualified employer plan.--The term `qualified employer
plan' means--
``(A) any plan, contract, pension, account, or trust
described in subparagraph (A) or (B) of section
219(g)(5), and
``(B) any eligible deferred compensation plan (within
the meaning of section 457(b)) of an employer described
in section 457(e)(1)(A).
``(3) Plan includes arrangements, etc.--The term `plan'
includes any agreement or arrangement, including an agreement
or arrangement that includes one person.
``(4) Substantial risk of forfeiture.--The rights of a person
to compensation are subject to a substantial risk of forfeiture
if such person's rights to such compensation are conditioned
upon the future performance of substantial services by any
individual.
``(5) Treatment of earnings.--References to deferred
compensation shall be treated as including references to income
(whether actual or notional) attributable to such compensation
or such income.
``(e) Regulations.--The Secretary shall prescribe such regulations as
may be necessary or appropriate to carry out the purposes of this
section, including regulations--
``(1) providing for the determination of amounts of deferral
in the case of a nonqualified deferred compensation plan which
is a defined benefit plan,
``(2) relating to changes in the ownership and control of a
corporation or assets of a corporation for purposes of
subsection (a)(2)(A)(v),
``(3) exempting arrangements from the application of
subsection (b) if such arrangements will not result in an
improper deferral of United States tax and will not result in
assets being effectively beyond the reach of creditors,
``(4) defining financial health for purposes of subsection
(b)(2), and
``(5) disregarding a substantial risk of forfeiture in cases
where necessary to carry out the purposes of this section.''.
(b) W-2 Forms.--
(1) In general.--Subsection (a) of section 6051 (relating to
receipts for employees) is amended by striking ``and'' at the
end of paragraph (11), by striking the period at the end of
paragraph (12) and inserting ``, and'', and by inserting after
paragraph (12) the following new paragraph:
``(13) the total amount of deferrals under a nonqualified
deferred compensation plan (within the meaning of section
409A(d)).''.
(2) Threshold.--Subsection (a) of section 6051 is amended by
adding at the end the following: ``In the case of the amounts
required to be shown by paragraph (13), the Secretary (by
regulation) may establish a minimum amount of deferrals below
which paragraph (13) does not apply and may provide that
paragraph (13) does not apply with respect to amounts of
deferrals which are not reasonably ascertainable.''.
(c) Conforming and Clerical Amendments.--
(1) Section 414(b) is amended by inserting ``409A,'' after
``408(p),''.
(2) Section 414(c) is amended by inserting ``409A,'' after
``408(p),''.
(3) The table of sections for such subpart A of part I of
subchapter D of chapter 1 is amended by adding at the end the
following new item:
``Sec. 409A. Inclusion in gross income of
deferred compensation under
nonqualified deferred
compensation plans.''.
(d) Effective Date.--
(1) In general.--The amendments made by this section shall
apply to amounts deferred after June 3, 2004.
(2) Certain amounts deferred in 2004 under certain
irrevocable elections and binding arrangements.--The amendments
made by this section shall not apply to amounts deferred after
June 3, 2004, and before January 1, 2005, pursuant to an
irrevocable election or binding arrangement made before June 4,
2004.
(3) Earnings attributable to amount previously deferred.--The
amendments made by this section shall apply to earnings on
deferred compensation only to the extent that such amendments
apply to such compensation.
(e) Guidance Relating to Change of Ownership or Control.--Not later
than 90 days after the date of the enactment of this Act, the Secretary
of the Treasury shall issue guidance on what constitutes a change in
ownership or effective control for purposes of section 409A of the
Internal Revenue Code of 1986, as added by this section.
(f) Guidance Relating to Termination of Certain Existing
Arrangements.--Not later than 90 days after the date of the enactment
of this Act, the Secretary of the Treasury shall issue guidance
providing a limited period during which an individual participating in
a nonqualified deferred compensation plan adopted before June 4, 2004,
may, without violating the requirements of paragraphs (2), (3), and (4)
of section 409A(a)(2) of the Internal Revenue Code of 1986 (as added by
this section), terminate participation or cancel an outstanding
deferral election with regard to amounts earned after June 3, 2004, if
such amounts are includible in income as earned.
Subtitle E--Other Revenue Provisions
SEC. 681. QUALIFIED TAX COLLECTION CONTRACTS.
(a) Contract Requirements.--
(1) In general.--Subchapter A of chapter 64 (relating to
collection) is amended by adding at the end the following new
section:
``SEC. 6306. QUALIFIED TAX COLLECTION CONTRACTS.
``(a) In General.--Nothing in any provision of law shall be construed
to prevent the Secretary from entering into a qualified tax collection
contract.
``(b) Qualified Tax Collection Contract.--For purposes of this
section, the term `qualified tax collection contract' means any
contract which--
``(1) is for the services of any person (other than an
officer or employee of the Treasury Department)--
``(A) to locate and contact any taxpayer specified by
the Secretary,
``(B) to request full payment from such taxpayer of
an amount of Federal tax specified by the Secretary
and, if such request cannot be met by the taxpayer, to
offer the taxpayer an installment agreement providing
for full payment of such amount during a period not to
exceed 5 years, and
``(C) to obtain financial information specified by
the Secretary with respect to such taxpayer,
``(2) prohibits each person providing such services under
such contract from committing any act or omission which
employees of the Internal Revenue Service are prohibited from
committing in the performance of similar services,
``(3) prohibits subcontractors from--
``(A) having contacts with taxpayers,
``(B) providing quality assurance services, and
``(C) composing debt collection notices, and
``(4) permits subcontractors to perform other services only
with the approval of the Secretary.
``(c) Fees.--The Secretary may retain and use an amount not in excess
of 25 percent of the amount collected under any qualified tax
collection contract for the costs of services performed under such
contract. The Secretary shall keep adequate records regarding amounts
so retained and used. The amount credited as paid by any taxpayer shall
be determined without regard to this subsection.
``(d) No Federal Liability.--The United States shall not be liable
for any act or omission of any person performing services under a
qualified tax collection contract.
``(e) Application of Fair Debt Collection Practices Act.--The
provisions of the Fair Debt Collection Practices Act (15 U.S.C. 1692 et
seq.) shall apply to any qualified tax collection contract, except to
the extent superseded by section 6304, section 7602(c), or by any other
provision of this title.
``(f) Cross References.--
``(1) For damages for certain unauthorized collection
actions by persons performing services under a qualified tax collection
contract, see section 7433A.
``(2) For application of Taxpayer Assistance Orders
to persons performing services under a qualified tax collection
contract, see section 7811(a)(4).''.
(2) Conforming amendments.--
(A) Section 7809(a) is amended by inserting ``6306,''
before ``7651''.
(B) The table of sections for subchapter A of chapter
64 is amended by adding at the end the following new
item:
``Sec. 6306. Qualified Tax Collection
Contracts.''.
(b) Civil Damages for Certain Unauthorized Collection Actions by
Persons Performing Services Under Qualified Tax Collection Contracts.--
(1) In general.--Subchapter B of chapter 76 (relating to
proceedings by taxpayers and third parties) is amended by
inserting after section 7433 the following new section:
``SEC. 7433A. CIVIL DAMAGES FOR CERTAIN UNAUTHORIZED COLLECTION ACTIONS
BY PERSONS PERFORMING SERVICES UNDER QUALIFIED TAX
COLLECTION CONTRACTS.
``(a) In General.--Subject to the modifications provided by
subsection (b), section 7433 shall apply to the acts and omissions of
any person performing services under a qualified tax collection
contract (as defined in section 6306(b)) to the same extent and in the
same manner as if such person were an employee of the Internal Revenue
Service.
``(b) Modifications.--For purposes of subsection (a)--
``(1) Any civil action brought under section 7433 by reason
of this section shall be brought against the person who entered
into the qualified tax collection contract with the Secretary
and shall not be brought against the United States.
``(2) Such person and not the United States shall be liable
for any damages and costs determined in such civil action.
``(3) Such civil action shall not be an exclusive remedy with
respect to such person.
``(4) Subsections (c), (d)(1), and (e) of section 7433 shall
not apply.''.
(2) Clerical amendment.--The table of sections for subchapter
B of chapter 76 is amended by inserting after the item relating
to section 7433 the following new item:
``Sec. 7433A. Civil damages for certain unauthorized collection
actions by persons performing services under qualified
tax collection contracts.''.
(c) Application of Taxpayer Assistance Orders to Persons Performing
Services Under a Qualified Tax Collection Contract.--Section 7811
(relating to taxpayer assistance orders) is amended by adding at the
end the following new subsection:
``(g) Application to Persons Performing Services Under a Qualified
Tax Collection Contract.--Any order issued or action taken by the
National Taxpayer Advocate pursuant to this section shall apply to
persons performing services under a qualified tax collection contract
(as defined in section 6306(b)) to the same extent and in the same
manner as such order or action applies to the Secretary.''.
(d) Ineligibility of Individuals Who Commit Misconduct to Perform
Under Contract.--Section 1203 of the Internal Revenue Service
Restructuring Act of 1998 (relating to termination of employment for
misconduct) is amended by adding at the end the following new
subsection:
``(e) Individuals Performing Services Under a Qualified Tax
Collection Contract.--An individual shall cease to be permitted to
perform any services under any qualified tax collection contract (as
defined in section 6306(b) of the Internal Revenue Code of 1986) if
there is a final determination by the Secretary of the Treasury under
such contract that such individual committed any act or omission
described under subsection (b) in connection with the performance of
such services.''.
(e) Effective Date.--The amendments made to this section shall take
effect on the date of the enactment of this Act.
SEC. 682. TREATMENT OF CHARITABLE CONTRIBUTIONS OF PATENTS AND SIMILAR
PROPERTY.
(a) In General.--Subparagraph (B) of section 170(e)(1) is amended by
striking ``or'' at the end of clause (i), by adding ``or'' at the end
of clause (ii), and by inserting after clause (ii) the following new
clause:
``(iii) of any patent, copyright (other than
a copyright described in section 1221(a)(3) or
1231(b)(1)(C)), trademark, trade name, trade
secret, know-how, software (other than software
described in section 197(e)(3)(A)(i)), or
similar property, or applications or
registrations of such property,''.
(b) Certain Donee Income From Intellectual Property Treated as an
Additional Charitable Contribution.--Section 170 is amended by
redesignating subsection (m) as subsection (n) and by inserting after
subsection (l) the following new subsection:
``(m) Certain Donee Income From Intellectual Property Treated as an
Additional Charitable Contribution.--
``(1) Treatment as additional contribution.--In the case of a
taxpayer who makes a qualified intellectual property
contribution, the deduction allowed under subsection (a) for
each taxable year of the taxpayer ending on or after the date
of such contribution shall be increased (subject to the
limitations under subsection (b)) by the applicable percentage
of qualified donee income with respect to such contribution
which is properly allocable to such year under this subsection.
``(2) Reduction in additional deductions to extent of initial
deduction.--With respect to any qualified intellectual property
contribution, the deduction allowed under subsection (a) shall
be increased under paragraph (1) only to the extent that the
aggregate amount of such increases with respect to such
contribution exceed the amount allowed as a deduction under
subsection (a) with respect to such contribution determined
without regard to this subsection.
``(3) Qualified donee income.--For purposes of this
subsection, the term `qualified donee income' means any net
income received by or accrued to the donee which is properly
allocable to the qualified intellectual property.
``(4) Allocation of qualified donee income to taxable years
of donor.--For purposes of this subsection, qualified donee
income shall be treated as properly allocable to a taxable year
of the donor if such income is received by or accrued to the
donee for the taxable year of the donee which ends within or
with such taxable year of the donor.
``(5) 10-year limitation.--Income shall not be treated as
properly allocable to qualified intellectual property for
purposes of this subsection if such income is received by or
accrued to the donee after the 10-year period beginning on the
date of the contribution of such property.
``(6) Benefit limited to life of intellectual property.--
Income shall not be treated as properly allocable to qualified
intellectual property for purposes of this subsection if such
income is received by or accrued to the donee after the
expiration of the legal life of such property.
``(7) Applicable percentage.--For purposes of this
subsection, the term `applicable percentage' means the
percentage determined under the following table which
corresponds to a taxable year of the donor ending on or after
the date of the qualified intellectual property contribution:
``Taxable Year of Donor
Ending on or After Applicable
Date of Contribution: Percentage:
1st.................................................... 100
2nd.................................................... 100
3rd.................................................... 90
4th.................................................... 80
5th.................................................... 70
6th.................................................... 60
7th.................................................... 50
8th.................................................... 40
9th.................................................... 30
10th................................................... 20
11th................................................... 10
12th................................................... 10.
``(8) Qualified intellectual property contribution.--For
purposes of this subsection, the term `qualified intellectual
property contribution' means any charitable contribution of
qualified intellectual property--
``(A) the amount of which taken into account under
this section is reduced by reason of subsection (e)(1),
and
``(B) with respect to which the donor informs the
donee at the time of such contribution that the donor
intends to treat such contribution as a qualified
intellectual property contribution for purposes of this
subsection and section 6050L.
``(9) Qualified intellectual property.--For purposes of this
subsection, the term `qualified intellectual property' means
property described in subsection (e)(1)(B)(iii) (other than
property contributed to or for the use of an organization
described in subsection (e)(1)(B)(ii)).
``(10) Other special rules.--
``(A) Application of limitations on charitable
contributions.--Any increase under this subsection of
the deduction provided under subsection (a) shall be
treated for purposes of subsection (b) as a deduction
which is attributable to a charitable contribution to
the donee to which such increase relates.
``(B) Net income determined by donee.--The net income
taken into account under paragraph (3) shall not exceed
the amount of such income reported under section
6050L(b)(1).
``(C) Deduction limited to 12 taxable years.--Except
as may be provided under subparagraph (D)(i), this
subsection shall not apply with respect to any
qualified intellectual property contribution for any
taxable year of the donor after the 12th taxable year
of the donor which ends on or after the date of such
contribution.
``(D) Regulations.--The Secretary may issue
regulations or other guidance to carry out the purposes
of this subsection, including regulations or guidance--
``(i) modifying the application of this
subsection in the case of a donor or donee with
a short taxable year, and
``(ii) providing for the determination of an
amount to be treated as net income of the donee
which is properly allocable to qualified
intellectual property in the case of a donee
who uses such property to further a purpose or
function constituting the basis of the donee's
exemption under section 501 (or, in the case of
a governmental unit, any purpose described in
section 170(c)) and does not possess a right to
receive any payment from a third party with
respect to such property.''.
(c) Reporting Requirements.--
(1) In general.--Section 6050L (relating to returns relating
to certain dispositions of donated property) is amended to read
as follows:
``SEC. 6050L. RETURNS RELATING TO CERTAIN DONATED PROPERTY.
``(a) Dispositions of Donated Property.--
``(1) In general.--If the donee of any charitable deduction
property sells, exchanges, or otherwise disposes of such
property within 2 years after its receipt, the donee shall make
a return (in accordance with forms and regulations prescribed
by the Secretary) showing--
``(A) the name, address, and TIN of the donor,
``(B) a description of the property,
``(C) the date of the contribution,
``(D) the amount received on the disposition, and
``(E) the date of such disposition.
``(2) Definitions.--For purposes of this subsection--
``(A) Charitable deduction property.--The term
`charitable deduction property' means any property
(other than publicly traded securities) contributed in
a contribution for which a deduction was claimed under
section 170 if the claimed value of such property (plus
the claimed value of all similar items of property
donated by the donor to 1 or more donees) exceeds
$5,000.
``(B) Publicly traded securities.--The term `publicly
traded securities' means securities for which (as of
the date of the contribution) market quotations are
readily available on an established securities market.
``(b) Qualified Intellectual Property Contributions.--
``(1) In general.--Each donee with respect to a qualified
intellectual property contribution shall make a return (at such
time and in such form and manner as the Secretary may by
regulations prescribe) with respect to each specified taxable
year of the donee showing--
``(A) the name, address, and TIN of the donor,
``(B) a description of the qualified intellectual
property contributed,
``(C) the date of the contribution, and
``(D) the amount of net income of the donee for the
taxable year which is properly allocable to the
qualified intellectual property (determined without
regard to paragraph (10)(B) of section 170(m) and with
the modifications described in paragraphs (5) and (6)
of such section).
``(2) Definitions.--For purposes of this subsection--
``(A) In general.--Terms used in this subsection
which are also used in section 170(m) have the
respective meanings given such terms in such section.
``(B) Specified taxable year.--The term `specified
taxable year' means, with respect to any qualified
intellectual property contribution, any taxable year of
the donee any portion of which is part of the 10-year
period beginning on the date of such contribution.
``(c) Statement To Be Furnished to Donors.--Every person making a
return under subsection (a) or (b) shall furnish a copy of such return
to the donor at such time and in such manner as the Secretary may by
regulations prescribe.''.
(2) Clerical amendment.--The table of sections for subpart A
of part II of subchapter A of chapter 61 is amended by striking
the item relating to section 6050L and inserting the following
new item:
``Sec. 6050L. Returns relating to certain
donated property.''.
(d) Coordination With Appraisal Requirements.--Subclause (I) of
section 170(f)(11)(A)(ii), as added by section 683, is amended by
inserting ``subsection (e)(1)(B)(iii) or'' before ``section
1221(a)(1)''.
(e) Anti-Abuse Rules.--The Secretary of the Treasury may prescribe
such regulations or other guidance as may be necessary or appropriate
to prevent the avoidance of the purposes of section 170(e)(1)(B)(iii)
of the Internal Revenue Code of 1986 (as added by subsection (a)),
including preventing--
(1) the circumvention of the reduction of the charitable
deduction by embedding or bundling the patent or similar
property as part of a charitable contribution of property that
includes the patent or similar property,
(2) the manipulation of the basis of the property to increase
the amount of the charitable deduction through the use of
related persons, pass-thru entities, or other intermediaries,
or through the use of any provision of law or regulation
(including the consolidated return regulations), and
(3) a donor from changing the form of the patent or similar
property to property of a form for which different deduction
rules would apply.
(f) Effective Date.--The amendments made by this section shall apply
to contributions made after June 3, 2004.
SEC. 683. INCREASED REPORTING FOR NONCASH CHARITABLE CONTRIBUTIONS.
(a) In General.--Subsection (f) of section 170 (relating to
disallowance of deduction in certain cases and special rules) is
amended by adding after paragraph (10) the following new paragraph:
``(11) Qualified appraisal and other documentation for
certain contributions.--
``(A) In general.--
``(i) Denial of deduction.--In the case of an
individual, partnership, or corporation, no
deduction shall be allowed under subsection (a)
for any contribution of property for which a
deduction of more than $500 is claimed unless
such person meets the requirements of
subparagraphs (B), (C), and (D), as the case
may be, with respect to such contribution.
``(ii) Exceptions.--
``(I) Readily valued property.--
Subparagraphs (C) and (D) shall not
apply to cash, property described in
section 1221(a)(1), and publicly traded
securities (as defined in section
6050L(a)(2)(B)).
``(II) Reasonable cause.--Clause (i)
shall not apply if it is shown that the
failure to meet such requirements is
due to reasonable cause and not to
willful neglect.
``(B) Property description for contributions of more
than $500.--In the case of contributions of property
for which a deduction of more than $500 is claimed, the
requirements of this subparagraph are met if the
individual, partnership or corporation includes with
the return for the taxable year in which the
contribution is made a description of such property and
such other information as the Secretary may require.
The requirements of this subparagraph shall not apply
to a C corporation which is not a personal service
corporation or a closely held C corporation.
``(C) Qualified appraisal for contributions of more
than $5,000.--In the case of contributions of property
for which a deduction of more than $5,000 is claimed,
the requirements of this subparagraph are met if the
individual, partnership, or corporation obtains a
qualified appraisal of such property and attaches to
the return for the taxable year in which such
contribution is made such information regarding such
property and such appraisal as the Secretary may
require.
``(D) Substantiation for contributions of more than
$500,000.--In the case of contributions of property for
which a deduction of more than $500,000 is claimed, the
requirements of this subparagraph are met if the
individual, partnership, or corporation attaches to the
return for the taxable year a qualified appraisal of
such property.
``(E) Qualified appraisal.--For purposes of this
paragraph, the term `qualified appraisal' means, with
respect to any property, an appraisal of such property
which is treated for purposes of this paragraph as a
qualified appraisal under regulations or other guidance
prescribed by the Secretary.
``(F) Aggregation of similar items of property.--For
purposes of determining thresholds under this
paragraph, property and all similar items of property
donated to 1 or more donees shall be treated as 1
property.
``(G) Special rule for pass-thru entities.--In the
case of a partnership or S corporation, this paragraph
shall be applied at the entity level, except that the
deduction shall be denied at the partner or shareholder
level.
``(H) Regulations.--The Secretary may prescribe such
regulations as may be necessary or appropriate to carry
out the purposes of this paragraph, including
regulations that may provide that some or all of the
requirements of this paragraph do not apply in
appropriate cases.''.
(b) Effective Date.--The amendment made by this section shall apply
to contributions made after June 3, 2004.
SEC. 684. DONATIONS OF MOTOR VEHICLES, BOATS, AND AIRCRAFT.
(a) In General.--Subsection (f) of section 170 (relating to
disallowance of deduction in certain cases and special rules) is
amended by adding after paragraph (11) the following new paragraph:
``(12) Contributions of motor vehicles, boats, and
aircraft.--
``(A) In general.--Except as provided in regulations
or other guidance, in the case of a contribution of a
specified vehicle to which paragraph (8) applies, no
deduction shall be allowed under subsection (a) for
such contribution unless the taxpayer obtains a
qualified appraisal of the specified vehicle on or
before the date of such contribution.
``(B) Exception for inventory property.--Subparagraph
(A) shall not apply to property which is described in
section 1221(a)(1).
``(C) Specified vehicle.--For purposes of this
paragraph, the term `specified vehicle' means any--
``(i) motor vehicle manufactured primarily
for use on public streets, roads, and highways,
``(ii) boat, or
``(iii) aircraft.
``(D) Qualified appraisal.--For purposes of this
paragraph, the term `qualified appraisal' means any
appraisal which is treated for purposes of this
paragraph as a qualified appraisal under regulations or
other guidance prescribed by the Secretary.
``(E) Regulations or other guidance.--The Secretary
shall prescribe such regulations or other guidance as
may be necessary to carry out the purposes of this
paragraph.''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to contributions made after June 3, 2004.
SEC. 685. EXTENSION OF AMORTIZATION OF INTANGIBLES TO SPORTS
FRANCHISES.
(a) In General.--Section 197(e) (relating to exceptions to definition
of section 197 intangible) is amended by striking paragraph (6) and by
redesignating paragraphs (7) and (8) as paragraphs (6) and (7),
respectively.
(b) Conforming Amendments.--
(1)(A) Section 1056 (relating to basis limitation for player
contracts transferred in connection with the sale of a
franchise) is repealed.
(B) The table of sections for part IV of subchapter O of
chapter 1 is amended by striking the item relating to section
1056.
(2) Section 1245(a) (relating to gain from disposition of
certain depreciable property) is amended by striking paragraph
(4).
(3) Section 1253 (relating to transfers of franchises,
trademarks, and trade names) is amended by striking subsection
(e).
(c) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to property
acquired after the date of the enactment of this Act.
(2) Section 1245.--The amendment made by subsection (b)(2)
shall apply to franchises acquired after the date of the
enactment of this Act.
SEC. 686. MODIFICATION OF CONTINUING LEVY ON PAYMENTS TO FEDERAL
VENDERS.
(a) In General.--Section 6331(h) (relating to continuing levy on
certain payments) is amended by adding at the end the following new
paragraph:
``(3) Increase in levy for certain payments.--Paragraph (1)
shall be applied by substituting `100 percent' for `15 percent'
in the case of any specified payment due to a vendor of goods
or services sold or leased to the Federal Government.''.
(b) Effective Date.--The amendment made by this section shall take
effect on the date of the enactment of this Act.
SEC. 687. MODIFICATION OF STRADDLE RULES.
(a) Rules Relating to Identified Straddles.--
(1) In general.--Subparagraph (A) of section 1092(a)(2)
(relating to special rule for identified straddles) is amended
to read as follows:
``(A) In general.--In the case of any straddle which
is an identified straddle--
``(i) paragraph (1) shall not apply with
respect to identified positions comprising the
identified straddle,
``(ii) if there is any loss with respect to
any identified position of the identified
straddle, the basis of each of the identified
offsetting positions in the identified straddle
shall be increased by an amount which bears the
same ratio to the loss as the unrecognized gain
with respect to such offsetting position bears
to the aggregate unrecognized gain with respect
to all such offsetting positions, and
``(iii) any loss described in clause (ii)
shall not otherwise be taken into account for
purposes of this title.''.
(2) Identified straddle.--Section 1092(a)(2)(B) (defining
identified straddle) is amended--
(A) by striking clause (ii) and inserting the
following:
``(ii) to the extent provided by regulations,
the value of each position of which (in the
hands of the taxpayer immediately before the
creation of the straddle) is not less than the
basis of such position in the hands of the
taxpayer at the time the straddle is created,
and'', and
(B) by adding at the end the following new flush
sentence:
``The Secretary shall prescribe regulations which
specify the proper methods for clearly identifying a
straddle as an identified straddle (and the positions
comprising such straddle), which specify the rules for
the application of this section for a taxpayer which
fails to properly identify the positions of an
identified straddle, and which specify the ordering
rules in cases where a taxpayer disposes of less than
an entire position which is part of an identified
straddle.''.
(3) Unrecognized gain.--Section 1092(a)(3) (defining
unrecognized gain) is amended by redesignating subparagraph (B)
as subparagraph (C) and by inserting after subparagraph (A) the
following new subparagraph:
``(B) Special rule for identified straddles.--For
purposes of paragraph (2)(A)(ii), the unrecognized gain
with respect to any identified offsetting position
shall be the excess of the fair market value of the
position at the time of the determination over the fair
market value of the position at the time the taxpayer
identified the position as a position in an identified
straddle.''.
(4) Conforming amendment.--Section 1092(c)(2) is amended by
striking subparagraph (B) and by redesignating subparagraph (C)
as subparagraph (B).
(b) Physically Settled Positions.--Section 1092(d) (relating to
definitions and special rules) is amended by adding at the end the
following new paragraph:
``(8) Special rules for physically settled positions.--For
purposes of subsection (a), if a taxpayer settles a position
which is part of a straddle by delivering property to which the
position relates (and such position, if terminated, would
result in a realization of a loss), then such taxpayer shall be
treated as if such taxpayer--
``(A) terminated the position for its fair market
value immediately before the settlement, and
``(B) sold the property so delivered by the taxpayer
at its fair market value.''.
(c) Repeal of Stock Exception.--
(1) In general.--Paragraph (3) of section 1092(d) (relating
to definitions and special rules) is amended to read as
follows:
``(3) Special rules for stock.--For purposes of paragraph
(1)--
``(A) In general.--The term `personal property'
includes--
``(i) any stock which is a part of a straddle
at least 1 of the offsetting positions of which
is a position with respect to such stock or
substantially similar or related property, or
``(ii) any stock of a corporation formed or
availed of to take positions in personal
property which offset positions taken by any
shareholder.
``(B) Rule for application.--For purposes of
determining whether subsection (e) applies to any
transaction with respect to stock described in
subparagraph (A)(ii), all includible corporations of an
affiliated group (within the meaning of section
1504(a)) shall be treated as 1 taxpayer.''.
(2) Conforming amendment.--Section 1258(d)(1) is amended by
striking ``; except that the term `personal property' shall
include stock''.
(d) Holding period for dividend exclusion.--The last sentence of
section 246(c) is amended by inserting: ``, other than a qualified
covered call option to which section 1092(f) applies'' before the
period at the end.
(e) Effective Date.--The amendments made by this section shall apply
to positions established on or after the date of the enactment of this
Act.
SEC. 688. ADDITION OF VACCINES AGAINST HEPATITIS A TO LIST OF TAXABLE
VACCINES.
(a) In General.--Paragraph (1) of section 4132(a) (defining taxable
vaccine) is amended by redesignating subparagraphs (I), (J), (K), and
(L) as subparagraphs (J), (K), (L), and (M), respectively, and by
inserting after subparagraph (H) the following new subparagraph:
``(I) Any vaccine against hepatitis A.''
(b) Effective Date.--
(1) Sales, etc.--The amendments made by subsection (a) shall
apply to sales and uses on or after the first day of the first
month which begins more than 4 weeks after the date of the
enactment of this Act.
(2) Deliveries.--For purposes of paragraph (1) and section
4131 of the Internal Revenue Code of 1986, in the case of sales
on or before the effective date described in such paragraph for
which delivery is made after such date, the delivery date shall
be considered the sale date.
SEC. 689. ADDITION OF VACCINES AGAINST INFLUENZA TO LIST OF TAXABLE
VACCINES.
(a) In General.--Section 4132(a)(1) (defining taxable vaccine), as
amended by this Act, is amended by adding at the end the following new
subparagraph:
``(N) Any trivalent vaccine against influenza.''.
(b) Effective Date.--
(1) Sales, etc.--The amendment made by this section shall
apply to sales and uses on or after the later of--
(A) the first day of the first month which begins
more than 4 weeks after the date of the enactment of
this Act, or
(B) the date on which the Secretary of Health and
Human Services lists any vaccine against influenza for
purposes of compensation for any vaccine-related injury
or death through the Vaccine Injury Compensation Trust
Fund.
(2) Deliveries.--For purposes of paragraph (1) and section
4131 of the Internal Revenue Code of 1986, in the case of sales
on or before the effective date described in such paragraph for
which delivery is made after such date, the delivery date shall
be considered the sale date.
SEC. 690. EXTENSION OF IRS USER FEES.
(a) In General.--Section 7528(c) (relating to termination) is amended
by striking ``December 31, 2004'' and inserting ``September 30, 2014''.
(b) Effective Date.--The amendment made by this section shall apply
to requests after the date of the enactment of this Act.
SEC. 691. COBRA FEES.
(a) Use of Merchandise Processing Fee.--Section 13031(f) of the
Consolidated Omnibus Budget Reconciliation Act of 1985 (19 U.S.C.
58c(f)) is amended--
(1) in paragraph (1), by aligning subparagraph (B) with
subparagraph (A); and
(2) in paragraph (2), by striking ``commercial operations''
and all that follows through ``processing.'' and inserting
``customs revenue functions as defined in section 415 of the
Homeland Security Act of 2002 (other than functions performed
by the Office of International Affairs referred to in section
415(8) of that Act), and for automation (including the
Automation Commercial Environment computer system), and for no
other purpose. To the extent that funds in the Customs User Fee
Account are insufficient to pay the costs of such customs
revenue functions, customs duties in an amount equal to the
amount of such insufficiency shall be available, to the extent
provided for in appropriations Acts, to pay the costs of such
customs revenue functions in the amount of such insufficiency,
and shall be available for no other purpose. The provisions of
the first and second sentences of this paragraph specifying the
purposes for which amounts in the Customs User Fee Account may
be made available shall not be superseded except by a provision
of law which specifically modifies or supersedes such
provisions.''.
(b) Reimbursement of Appropriations From COBRA Fees.--Section
13031(f)(3) of the Consolidated Omnibus Budget Reconciliation Act of
1985 (19 U.S.C. 58c(f)(3)) is amended by adding at the end the
following:
``(E) Nothing in this paragraph shall be construed to preclude the
use of appropriated funds, from sources other than the fees collected
under subsection (a), to pay the costs set forth in clauses (i), (ii),
and (iii) of subparagraph (A).''.
(c) Sense of Congress; Effective Period for Collecting Fees; Standard
for Setting Fees.--
(1) Sense of congress.--The Congress finds that--
(A) the fees set forth in paragraphs (1) through (8)
of subsection (a) of section 13031 of the Consolidated
Omnibus Budget Reconciliation Act of 1985 have been
reasonably related to the costs of providing customs
services in connection with the activities or items for
which the fees have been charged under such paragraphs;
and
(B) the fees collected under such paragraphs have not
exceeded, in the aggregate, the amounts paid for the
costs described in subsection (f)(3)(A) incurred in
providing customs services in connection with the
activities or items for which the fees were charged
under such paragraphs.
(2) Effective period; standard for setting fees.--Section
13031(j)(3) of the Consolidated Omnibus Budget Reconciliation
Act of 1985 is amended to read as follows:
``(3)(A) Fees may not be charged under paragraphs (9) and (10) of
subsection (a) after September 30, 2014.
``(B)(i) Subject to clause (ii), Fees may not be charged under
paragraphs (1) through (8) of subsection (a) after September 30, 2014.
``(ii) In fiscal year 2006 and in each succeeding fiscal year for
which fees under paragraphs (1) through (8) of subsection (a) are
authorized--
``(I) the Secretary of the Treasury shall charge fees under
each such paragraph in amounts that are reasonably related to
the costs of providing customs services in connection with the
activity or item for which the fee is charged under such
paragraph, except that in no case may the fee charged under any
such paragraph exceed by more than 10 percent the amount
otherwise prescribed by such paragraph;
``(II) the amount of fees collected under such paragraphs may
not exceed, in the aggregate, the amounts paid in that fiscal
year for the costs described in subsection (f)(3)(A) incurred
in providing customs services in connection with the activity
or item for which the fees are charged under such paragraphs;
``(III) a fee may not be collected under any such paragraph
except to the extent such fee will be expended to pay the costs
described in subsection (f)(3)(A) incurred in providing customs
services in connection with the activity or item for which the
fee is charged under such paragraph; and
``(IV) any fee collected under any such paragraph shall be
available for expenditure only to pay the costs described in
subsection (f)(3)(A) incurred in providing customs services in
connection with the activity or item for which the fee is
charged under such paragraph.''.
(d) Clerical Amendments.--Section 13031 of the Consolidated Omnibus
Budget Reconciliation Act of 1985 is amended--
(1) in subsection (a)(5)(B), by striking ``$1.75'' and
inserting ``$1.75.'';
(2) in subsection (b)--
(A) in paragraph (1)(A), by aligning clause (iii)
with clause (ii);
(B) in paragraph (7), by striking ``paragraphs'' and
inserting ``paragraph''; and
(C) in paragraph (9), by aligning subparagraph (B)
with subparagraph (A); and
(3) in subsection (e)(2), by aligning subparagraph (B) with
subparagraph (A).
(e) Study of All Fees Collected by Department of Homeland Security.--
The Secretary of the Treasury shall conduct a study of all the fees
collected by the Department of Homeland Security, and shall submit to
the Congress, not later than September 30, 2005, a report containing
the recommendations of the Secretary on--
(1) what fees should be eliminated;
(2) what the rate of fees retained should be; and
(3) any other recommendations with respect to the fees that
the Secretary considers appropriate.
TITLE VII--MARKET REFORM FOR TOBACCO GROWERS
SEC. 701. SHORT TITLE.
This title may be cited as the ``Fair and Equitable Tobacco Reform
Act of 2004''.
SEC. 702. EFFECTIVE DATE.
This title and the amendments made by this title shall apply
beginning with the 2005 marketing year of each kind of tobacco.
Subtitle A--Termination of Federal Tobacco Quota and Price Support
Programs
SEC. 711. TERMINATION OF TOBACCO QUOTA PROGRAM AND RELATED PROVISIONS.
(a) Marketing Quotas.--Part I of subtitle B of title III of the
Agricultural Adjustment Act of 1938 (7 U.S.C. 1311 et seq.) is
repealed.
(b) Processing.--Section 9(b) of the Agricultural Adjustment Act (7
U.S.C. 609(b)), reenacted with amendments by the Agricultural Marketing
Agreement Act of 1937, is amended--
(1) in paragraph (2), by striking ``tobacco,''; and
(2) in paragraph (6)(B)(i), by striking ``, or, in the case
of tobacco, is less than the fair exchange value by not more
than 10 per centum,''.
(c) Declaration of Policy.--Section 2 of the Agricultural Adjustment
Act of 1938 (7 U.S.C. 1282) is amended by striking ``tobacco,''.
(d) Definitions.--Section 301(b) of the Agricultural Adjustment Act
of 1938 (7 U.S.C. 1301(b)) is amended--
(1) in paragraph (3)--
(A) by striking subparagraph (C); and
(B) by redesignating subparagraph (D) as subparagraph
(C);
(2) in paragraph (6)(A), by striking ``tobacco,'';
(3) in paragraph (10)--
(A) by striking subparagraph (B); and
(B) by redesignating subparagraph (C) as subparagraph
(B);
(4) in paragraph (11)(B), by striking ``and tobacco'';
(5) in paragraph (12), by striking ``tobacco,'';
(6) in paragraph (14)--
(A) in subparagraph (A), by striking ``(A)''; and
(B) by striking subparagraphs (B), (C), and (D);
(7) by striking paragraph (15);
(8) in paragraph (16)--
(A) by striking subparagraph (B); and
(B) by redesignating subparagraph (C) as subparagraph
(B);
(9) by striking paragraph (17); and
(10) by redesignating paragraph (16) as paragraph (15).
(e) Parity Payments.--Section 303 of the Agricultural Adjustment Act
of 1938 (7 U.S.C. 1303) is amended in the first sentence by striking
``rice, or tobacco,'' and inserting ``or rice,''.
(f) Administrative Provisions.--Section 361 of the Agricultural
Adjustment Act of 1938 (7 U.S.C. 1361) is amended by striking
``tobacco,''.
(g) Adjustment of Quotas.--Section 371 of the Agricultural Adjustment
Act of 1938 (7 U.S.C. 1371) is amended--
(1) in the first sentence of subsection (a), by striking
``rice, or tobacco'' and inserting ``or rice''; and
(2) in the first sentence of subsection (b), by striking
``rice, or tobacco'' and inserting ``or rice''.
(h) Regulations.--Section 375 of the Agricultural Adjustment Act of
1938 (7 U.S.C. 1375) is amended--
(1) in subsection (a), by striking ``peanuts, or tobacco''
and inserting ``or peanuts''; and
(2) by striking subsection (c).
(i) Eminent Domain.--Section 378 of the Agricultural Adjustment Act
of 1938 (7 U.S.C. 1378) is amended--
(1) in the first sentence of subsection (c), by striking
``cotton, and tobacco'' and inserting ``and cotton''; and
(2) by striking subsections (d), (e), and (f).
(j) Burley Tobacco Farm Reconstitution.--Section 379 of the
Agricultural Adjustment Act of 1938 (7 U.S.C. 1379) is amended--
(1) in subsection (a)--
(A) by striking ``(a)''; and
(B) in paragraph (6), by striking ``, but this clause
(6) shall not be applicable in the case of burley
tobacco''; and
(2) by striking subsections (b) and (c).
(k) Acreage-Poundage Quotas.--Section 4 of the Act of April 16, 1955
(Public Law 89-12; 7 U.S.C. 1314c note), is repealed.
(l) Burley Tobacco Acreage Allotments.--The Act of July 12, 1952 (7
U.S.C. 1315), is repealed.
(m) Transfer of Allotments.--Section 703 of the Food and Agriculture
Act of 1965 (7 U.S.C. 1316) is repealed.
(n) Advance Recourse Loans.--Section 13(a)(2)(B) of the Food Security
Improvements Act of 1986 (7 U.S.C. 1433c-1(a)(2)(B)) is amended by
striking ``tobacco and''.
(o) Tobacco Field Measurement.--Section 1112 of the Omnibus Budget
Reconciliation Act of 1987 (Public Law 100-203) is amended by striking
subsection (c).
SEC. 712. TERMINATION OF TOBACCO PRICE SUPPORT PROGRAM AND RELATED
PROVISIONS.
(a) Termination of Tobacco Price Support and No Net Cost
Provisions.--Sections 106, 106A, and 106B of the Agricultural Act of
1949 (7 U.S.C. 1445, 1445-1, 1445-2) are repealed.
(b) Parity Price Support.--Section 101 of the Agricultural Act of
1949 (7 U.S.C. 1441) is amended--
(1) in the first sentence of subsection (a), by striking
``tobacco (except as otherwise provided herein), corn,'' and
inserting ``corn'';
(2) by striking subsections (c), (g), (h), and (i);
(3) in subsection (d)(3)--
(A) by striking ``, except tobacco,''; and
(B) by striking ``and no price support shall be made
available for any crop of tobacco for which marketing
quotas have been disapproved by producers;''; and
(4) by redesignating subsections (d) and (e) as subsections
(c) and (d), respectively.
(c) Definition of Basic Agricultural Commodity.--Section 408(c) of
the Agricultural Act of 1949 (7 U.S.C. 1428(c)) is amended by striking
``tobacco,''.
(d) Powers of Commodity Credit Corporation.--Section 5 of the
Commodity Credit Corporation Charter Act (15 U.S.C. 714c) is amended by
inserting ``(other than tobacco)'' after ``agricultural commodities''
each place it appears.
SEC. 713. LIABILITY.
The amendments made by this subtitle shall not affect the liability
of any person under any provision of law so amended with respect to any
crop of tobacco planted before the effective date of this Act.
Subtitle B--Transitional Payments to Tobacco Quota Holders and Active
Producers of Tobacco
SEC. 721. DEFINITIONS OF ACTIVE TOBACCO PRODUCER AND QUOTA HOLDER.
In this subtitle:
(1) Active tobacco producer.--The term ``active tobacco
producer'' means an owner, operator, landlord, tenant, or
sharecropper who--
(A) shared in the risk of producing tobacco on a farm
where tobacco was produced or considered planted
pursuant to a tobacco farm marketing quota or farm
acreage allotment established under part I of subtitle
B of title III of the Agricultural Adjustment Act of
1938 (7 U.S.C. 1311 et seq.) for the 2004 marketing
year; and
(B) was actively engaged on that farm.
(2) Considered planted.--The term ``considered planted''
means tobacco that was planted, but failed to be produced as a
result of a natural disaster, as determined by the Secretary.
(3) Tobacco quota holder.--The term ``tobacco quota holder''
means a person that was an owner of a farm, as of July 1, 2004,
for which a basic tobacco farm marketing quota or farm acreage
allotment for quota tobacco was established for the 2004
tobacco marketing year.
(4) Secretary.--The term ``Secretary'' means the Secretary of
Agriculture.
SEC. 722. PAYMENTS TO TOBACCO QUOTA HOLDERS.
(a) Payment Required.--The Secretary shall make payments to each
eligible tobacco quota holder for the termination of tobacco marketing
quotas and related price support under subtitle A, which shall
constitute full and fair compensation for any losses relating to such
termination.
(b) Eligibility.--To be eligible to receive a payment under this
section, a person shall submit to the Secretary an application
containing such information as the Secretary may require to demonstrate
to the satisfaction of the Secretary that the person satisfies the
definition of tobacco quota holder. The application shall be submitted
within such time, in such form, and in such manner as the Secretary may
require.
(c) Individual Base Quota Level.--
(1) In general.--The Secretary shall establish a base quota
level applicable to each eligible tobacco quota holder
identified under subsection (b).
(2) Poundage quotas.--Subject to adjustment under subsection
(d), for each kind of tobacco for which the marketing quota is
expressed in pounds, the base quota level for each tobacco
quota holder shall be equal to the basic tobacco marketing
quota under the Agriculture Adjustment Act of 1938 for the
marketing year in effect on the date of the enactment of this
Act for quota tobacco on the farm owned by the tobacco quota
holder.
(3) Marketing quotas other than poundage quotas.--Subject to
adjustment under subsection (d), for each kind of tobacco for
which there is marketing quota or allotment on an acreage
basis, the base quota level for each tobacco quota holder shall
be the amount equal to the product obtained by multiplying--
(A) the basic tobacco farm marketing quota or
allotment for the marketing year in effect on the date
of the enactment of this Act, as established by the
Secretary for quota tobacco on the farm owned by the
tobacco quota holder; by
(B) the average county production yield per acre for
the county in which the farm is located for the kind of
tobacco for that marketing year.
(d) Treatment of Certain Contracts and Agreements.--
(1) Effect of purchase contract.--If there was an agreement
for the purchase of all or part of a farm described in
subsection (c) as of the date of the enactment of this Act, and
the parties to the sale are unable to agree to the disposition
of eligibility for payments under this section, the Secretary,
taking into account any transfer of quota that has been agreed
to, shall provide for the equitable division of the payments
among the parties by adjusting the determination of who is the
tobacco quota holder with respect to particular pounds of the
quota.
(2) Effect of agreement for permanent quota transfer.--If the
Secretary determines that there was in existence, as of the day
before the date of the enactment of this Act, an agreement for
the permanent transfer of quota, but that the transfer was not
completed by that date, the Secretary shall consider the
tobacco quota holder to be the party to the agreement that, as
of that date, was the owner of the farm to which the quota was
to be transferred.
(e) Total Payment Amounts Based on 2002 Marketing Year.--
(1) Calculation of annual payment amount.--During fiscal
years 2005 through 2009, the Secretary shall make payments to
all eligible tobacco quota holders identified under subsection
(b) in an annual amount equal to the product obtained by
multiplying, for each kind of tobacco--
(A) $1.40 per pound; by
(B) the total national basic marketing quota
established under the Agriculture Adjustment Act of
1938 for the 2002 marketing year for that kind of
tobacco.
(2) Marketing quotas other than poundage quotas.--For each
kind of tobacco for which there is a marketing quota or
allotment on an acreage basis, the Secretary shall convert the
tobacco farm marketing quotas or allotments established under
the Agriculture Adjustment Act of 1938 for the 2002 marketing
year for that kind of tobacco as the Secretary considers
appropriate.
(f) Individual Payment Amounts.--The annual payment amount for each
eligible tobacco quota holder with respect to a kind of tobacco under
this section shall bear the same ratio to the amount determined by the
Secretary under subsection (e) with respect to that kind of tobacco as
the individual base quota level of that eligible tobacco quota holder
under subsection (c) with respect to that kind of tobacco bears to the
total base quota levels of all eligible tobacco quota holders with
respect to that kind of tobacco.
(g) Death of Tobacco Quota Holder.--If a tobacco quota holder who is
entitled to payments under this section dies and is survived by a
spouse or one or more dependents, the right to receive the payments
shall transfer to the surviving spouse or, if there is no surviving
spouse, to the estate of the tobacco quota holder.
SEC. 723. TRANSITION PAYMENTS FOR ACTIVE PRODUCERS OF QUOTA TOBACCO.
(a) Transition Payments Required.--The Secretary shall make
transition payments under this section to eligible active producers of
quota tobacco.
(b) Eligibility.--To be eligible to receive a transition payment
under this section, a person shall submit to the Secretary an
application containing such information as the Secretary may require to
demonstrate to the satisfaction of the Secretary that the person
satisfies the definition of active producer of quota tobacco. The
application shall be submitted within such time, in such form, and in
such manner as the Secretary may require.
(c) Current Production Base.--The Secretary shall establish a
production base applicable to each eligible active producer of quota
tobacco identified under subsection (b). A producer's production base
shall be equal to the quantity, in pounds, of quota tobacco subject to
the basic marketing quota marketed or considered planted by the
producer under the Agriculture Adjustment Act of 1938 for the marketing
year in effect on the date of the enactment of this Act.
(d) Total Payment Amounts Based on 2002 Marketing Year.--
(1) Calculation of annual payment amount.--During fiscal
years 2005 through 2009, the Secretary shall make payments to
all eligible active producers of quota tobacco identified under
subsection (b) in an annual amount equal to the product
obtained by multiplying, for each kind of tobacco--
(A) $0.60 per pound; by
(B) the total national effective marketing quota
established under the Agriculture Adjustment Act of
1938 for the 2002 marketing year for that kind of
tobacco.
(2) Marketing quotas other than poundage quotas.--For each
kind of tobacco for which there is a marketing quota or
allotment on an acreage basis, the Secretary shall convert the
tobacco farm marketing quotas or allotments established under
the Agriculture Adjustment Act of 1938 for the 2002 marketing
year for that kind of tobacco to a poundage basis before
executing the mathematical equation specified in paragraph (1).
(e) Individual Payment Amounts.--The annual payment amount for each
eligible active producer of quota tobacco identified under subsection
(b) with respect to a kind of tobacco under this section shall bear the
same ratio to the amount determined by the Secretary under subsection
(d) with respect to that kind of tobacco as the individual production
base of that eligible active producer under subsection (c) with respect
to that kind of tobacco bears to the total production bases determined
under that subsection for all eligible active producers of that kind of
tobacco.
(f) Death of Tobacco Producer.--If a tobacco producer who is entitled
to payments under this section dies and is survived by a spouse or one
or more dependents, the right to receive the payments shall transfer to
the surviving spouse or, if there is no surviving spouse, to the estate
of the tobacco producer.
SEC. 724. RESOLUTION OF DISPUTES.
Any dispute regarding the eligibility of a person to receive a
payment under this subtitle, or the amount of the payment, shall be
resolved by the county committee established under section 8 of the
Soil Conservation and Domestic Allotment Act (16 U.S.C. 590h) for the
county or other area in which the farming operation of the person is
located.
SEC. 725. SOURCE OF FUNDS FOR PAYMENTS.
There is hereby appropriated to the Secretary, from amounts in the
general fund of the Treasury, such amounts as the Secretary needs in
order to make the payments required by sections 722 and 723, except
that such amounts shall not exceed the lesser of--
(1) amounts received in the Treasury under chapter 52 of the
Internal Revenue Code of 1986 (relating to tobacco products and
cigarette papers and tubes), or
(2) $9,600,000,000.
TITLE VIII--TRADE PROVISIONS
SEC. 801. CEILING FANS.
(a) In General.--Subchapter II of chapter 99 of the Harmonized Tariff
Schedule of the United States is amended by inserting in numerical
sequence the following new heading:
`` 9902.84.14 Ceiling fans Free No change No change On or before
for permanent 12/31/2006 ''.
installation
(provided for
in subheading
8414.51.00)...
(b) Effective Date.--The amendment made by this section applies to
goods entered, or withdrawn from warehouse, for consumption on or after
the 15th day after the date of enactment of this Act.
SEC. 802. CERTAIN STEAM GENERATORS, AND CERTAIN REACTOR VESSEL HEADS,
USED IN NUCLEAR FACILITIES.
(a) Certain Steam Generators.--Heading 9902.84.02 of the Harmonized
Tariff Schedule of the United States is amended by striking ``12/31/
2006'' and inserting ``12/31/2008''.
(b) Certain Reactor Vessel Heads.--Subchapter II of chapter 99 of the
Harmonized Tariff Schedule of the United States is amended by inserting
in numerical sequence the following new heading:
`` 9902.84.03 Reactor vessel Free No change No change On or before 12/31/
heads for nuclear 2008 ''.
reactors (provided
for in subheading
8401.40.00).......
(c) Effective Date.--
(1) Subsection (a).--The amendment made by subsection (a)
shall take effect on the date of the enactment of this Act.
(2) Subsection (b).--The amendment made by subsection (b)
shall apply to goods entered, or withdrawn from warehouse, for
consumption on or after the 15th day after the date of the
enactment of this Act.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
The bill, H.R. 4520, as amended, (the ``American Jobs
Creation Act of 2004'') repeals the exclusion for
extraterritorial income (the ``ETI'' regime) and provides a
reduced corporate income tax rate for domestic production
activities and other corporate reform and growth incentives.
The bill provides net tax reductions of over $21.136
billion over fiscal years 2004-2008.
B. Background and Need for Legislation
The provisions approved by the Committee comply with the
World Trade Organization holding that the ETI regime
constitutes a prohibited export subsidy under the relevant
trade agreements. The provisions approved by the Committee
provide other corporate reform and growth incentives. The
estimated revenue effects of the provisions comply with the
most recent Congressional Budget Office revisions of budget
projections.
C. Legislative History
The Committee on Ways and Means marked up the American Jobs
Creation Act of 2004 on June 14, 2004, and ordered the bill, as
amended, favorably reported by a roll call vote of 27 yeas and
9 nays (with a quorum being present).
TITLE I--END SANCTIONS AND REDUCE CORPORATE TAX RATES FOR DOMESTIC
MANUFACTURING AND SMALL CORPORATIONS
A. Repeal of Exclusion for Extraterritorial Income
(Sec. 101 of the bill and secs. 114 and 941-943 of the Code) \1\
PRESENT LAW
The United States has long provided export-related benefits
under a series of tax regimes, including the domestic
international sales corporation (``DISC'') regime, the foreign
sales corporation (``FSC'') regime, and the extraterritorial
income (``ETI'') regime. Each of these regimes has been found
to violate U.S. obligations under international trade
agreements. In 2000, the European Union (``EU'') succeeded in
having the FSC regime declared a prohibited export subsidy by
the WTO. In response to this WTO ruling, the United States
repealed the FSC rules and enacted a new regime under the FSC
Repeal and Extraterritorial Income Exclusion Act of 2000. The
EU immediately challenged the ETI regime in the WTO, and in
January of 2002 a WTO Appellate Body held that the ETI regime
also constituted a prohibited export subsidy under the relevant
trade agreements.
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\1\ Section references are to the Internal Revenue Code of 1986, as
amended (the ``Code''), unless otherwise indicated.
---------------------------------------------------------------------------
Under the ETI regime, an exclusion from gross income
applies with respect to ``extraterritorial income,'' which is a
taxpayer's gross income attributable to ``foreign trading gross
receipts.'' This income is eligible for the exclusion to the
extent that it is ``qualifying foreign trade income.''
Qualifying foreign trade income is the amount of gross income
that, if excluded, would result in a reduction of taxable
income by the greatest of: (1) 1.2 percent of the foreign
trading gross receipts derived by the taxpayer from the
transaction; (2) 15 percent of the ``foreign trade income''
derived by the taxpayer from the transaction \2\; or (3) 30
percent of the ``foreign sale and leasing income'' derived by
the taxpayer from the transaction.\3\
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\2\ ``Foreign trade income'' is the taxable income of the taxpayer
(determined without regard to the exclusion of qualifying foreign trade
income) attributable to foreign trading gross receipts.
\3\ ``Foreign sale and leasing income'' is the amount of the
taxpayer's foreign trade income (with respect to a transaction) that is
properly allocable to activities that constitute foreign economic
processes. Foreign sale and leasing income also includes foreign trade
income derived by the taxpayer in connection with the lease or rental
of qualifying foreign trade property for use by the lessee outside the
United States.
---------------------------------------------------------------------------
Foreign trading gross receipts are gross receipts derived
from certain activities in connection with ``qualifying foreign
trade property'' with respect to which certain economic
processes take place outside of the United States.
Specifically, the gross receipts must be: (1) from the sale,
exchange, or other disposition of qualifying foreign trade
property; (2) from the lease or rental of qualifying foreign
trade property for use by the lessee outside the United States;
(3) for services which are related and subsidiary to the sale,
exchange, disposition, lease, or rental of qualifying foreign
trade property (as described above); (4) for engineering or
architectural services for construction projects located
outside the United States; or (5) for the performance of
certain managerial services for unrelated persons. A taxpayer
may elect to treat gross receipts from a transaction as not
foreign trading gross receipts. As a result of such an
election, a taxpayer may use any related foreign tax credits in
lieu of the exclusion.
Qualifying foreign trade property generally is property
manufactured, produced, grown, or extracted within or outside
the United States that is held primarily for sale, lease, or
rental in the ordinary course of a trade or business for direct
use, consumption, or disposition outside the United States. No
more than 50 percent of the fair market value of such property
can be attributable to the sum of: (1) the fair market value of
articles manufactured outside the United States; and (2) the
direct costs of labor performed outside the United States. With
respect to property that is manufactured outside the United
States, certain rules are provided to ensure consistent U.S.
tax treatment with respect to manufacturers.
REASONS FOR CHANGE
The Committee believes it is important that the United
States, and all members of the WTO, comply with WTO decisions
and honor their obligations under WTO agreements. Therefore,
the Committee believes that the ETI regime should be repealed.
The Committee believes that it is necessary and appropriate to
provide transition relief comparable to that which has been
included in the past in measures taken by WTO members to bring
their laws into compliance with WTO decisions and obligations.
The Committee also believes that it is important to use the
opportunity afforded by the repeal of the ETI regime to reform
the U.S. tax system in a manner that makes U.S. businesses and
workers more productive and competitive than they are today. To
this end, the Committee believes that it is important to
provide tax cuts to U.S. domestic manufacturers and to update
the U.S. international tax rules, which are over 40 years old
and make U.S. companies uncompetitive in the United States and
abroad.
EXPLANATION OF PROVISION
The provision repeals the ETI exclusion. For transactions
prior to 2005, taxpayers retain 100 percent of their ETI
benefits. For transactions after 2004, the provision provides
taxpayers with 80 percent of their otherwise-applicable ETI
benefits for transactions during 2005 and 60 percent of their
otherwise-applicable ETI benefits for transactions during 2006.
However, the provision provides that the ETI exclusion
provisions remain in effect for transactions in the ordinary
course of a trade or business if such transactions are pursuant
to a binding contract \4\ between the taxpayer and an unrelated
person and such contract is in effect on January 14, 2002, and
at all times thereafter.
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\4\ This rule also applies to a purchase option, renewal option, or
replacement option that is included in such contract and that is
enforceable against the sellor or lessor. For this purpose, a
replacement option will be considered enforceable against a lessor
notwithstanding the fact that a lessor retained approval of the
replacement lessee.
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In addition, foreign corporations that elected to be
treated for all Federal tax purposes as domestic corporations
in order to facilitate the claiming of ETI benefits are allowed
to revoke such elections within one year of the date of
enactment of the provision without recognition of gain or loss,
subject to anti-abuse rules.
EFFECTIVE DATE
The provision is effective for transactions after December
31, 2004.
B. Reduced Corporate Income Tax Rate for Domestic Production Activities
Income
(Sec. 102 of the bill and sec. 11 of the Code)
PRESENT LAW
A corporation's regular income tax liability is determined
by applying the following tax rate schedule to its taxable
income.
TABLE 1.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2004
[Percent of taxable income]
------------------------------------------------------------------------
Income
Taxable income tax rate
------------------------------------------------------------------------
$0-$50,000.................................................... 15
$50,001-$75,000............................................... 25
$75,001-$10,000,000........................................... 34
Over $10,000,000.............................................. 35
------------------------------------------------------------------------
The benefit of the first two graduated rates described
above is phased out by a five-percent surcharge for
corporations with taxable income between $100,000 and $335,000.
Also, the benefit of the 34-percent rate is phased out by a
three-percent surcharge for corporations with taxable income
between $15 million and $18,333,333; a corporation with taxable
income of $18,333,333 or more effectively is subject to a flat
rate of 35 percent.
Under present law, there is no provision that reduces the
corporate income tax for taxable income attributable to
domestic production activities.
REASONS FOR CHANGE
The Committee believes that creating new jobs is an
essential element of economic recovery and expansion, and that
tax policies designed to foster economic strength also will
contribute to the continuation of the recent increases in
employment levels. To accomplish this objective, the Committee
believes that Congress should enact tax laws that enhance the
ability of domestic businesses, and domestic manufacturing
firms in particular, to compete in the global marketplace.
The Committee believes that a reduced tax burden on
domestic manufacturers will improve the cash flow of domestic
manufacturers and make investments in domestic manufacturing
facilities more attractive. Such investment will create and
preserve U.S. manufacturing jobs.
EXPLANATION OF PROVISION
In general
The bill provides that the corporate tax rate applicable to
qualified production activities income may not exceed 32
percent (34 percent for taxable years beginning before 2007) of
the qualified production activities income.
Qualified production activities income
``Qualified production activities income'' is the income
attributable to domestic production gross receipts, reduced by
the sum of: (1) the costs of goods sold that are allocable to
such receipts; (2) other deductions, expenses, or losses that
are directly allocable to such receipts; and (3) a proper share
of other deductions, expenses, and losses that are not directly
allocable to such receipts or another class of income.\5\
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\5\ The Secretary shall prescribe rules for the proper allocation
of items of income, deduction, expense, and loss for purposes of
determining income attributable to domestic production activities.
Where appropriate, such rules shall be similar to and consistent with
relevant present-law rules (e.g., secs. 263A and 861).
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Domestic production gross receipts
``Domestic production gross receipts'' generally are gross
receipts of a corporation that are derived from: (1) any sale,
exchange or other disposition, or any lease, rental or license,
of qualifying production property that was manufactured,
produced, grown or extracted (in whole or in significant part)
by the corporation within the United States; \6\ (2) any sale,
exchange or other disposition, or any lease, rental or license,
of qualified film produced by the taxpayer; or (3)
construction, engineering or architectural services performed
in the United States for construction projects located in the
United States. However, domestic production gross receipts do
not include any gross receipts of the taxpayer derived from
property that is leased, licensed or rented by the taxpayer for
use by any related person.\7\
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\6\ Domestic production gross receipts include gross receipts of a
taxpayer derived from any sale, exchange or other disposition of
agricultural products with respect to which the taxpayer performs
storage, handling or other processing activities (other than
transportation activities) within the United States, provided such
products are consumed in connection with, or incorporated into, the
manufacturing, production, growth or extraction of qualifying
production property (whether or not by the taxpayer). Domestic
production gross receipts also include gross receipts of a taxpayer
derived from any sale, exchange or other disposition of food products
with respect to which the taxpayer performs processing activities (in
whole or in significant part) within the United States.
\7\ It is intended that principles similar to those under the
present-law extraterritorial income regime apply for this purpose. See
Temp. Treas. Reg. sec. 1.927(a)-1T(f)(2)(i). For example, this
exclusion generally does not apply to property leased by the taxpayer
to a related person if the property is held for sublease, or is
subleased, by the related person to an unrelated person for the
ultimate use of such unrelated person. Similarly, the license of
computer software to a related person for reproduction and sale,
exchange, lease, rental or sublicense to an unrelated person for the
ultimate use of such unrelated person is not treated as excluded
property by reason of the license to the related person.
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``Qualifying production property'' generally is any
tangible personal property, computer software, or property
described in section 168(f)(4) of the Code. ``Qualified film''
is any property described in section 168(f)(3) of the Code
(other than certain sexually explicit productions) if 50
percent or more of the total compensation relating to the
production of such film (other than compensation in the form of
residuals and participations) constitutes compensation for
services performed in the United States by actors, production
personnel, directors, and producers.
Under the bill, an election under section 631(a) made by a
corporate taxpayer for a taxable year ending on or before the
date of enactment to treat the cutting of timber as a sale or
exchange, may be revoked by the taxpayer without the consent of
the IRS for any taxable year ending after that date. The prior
election (and revocation) is disregarded for purposes of making
a subsequent election.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2004.
C. Reduced Corporate Income Tax Rate for Small Corporations
(Sec. 103 of the bill and sec. 11 of the Code)
PRESENT LAW
A corporation's regular income tax liability is determined
by applying the following tax rate schedule to its taxable
income.
Table 1.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2004
[Percent of taxable income]
------------------------------------------------------------------------
Income
Taxable income tax rate
------------------------------------------------------------------------
$0-$50,000.................................................... 15
$50,001-$75,000............................................... 25
$75,001-$10,000,000........................................... 34
Over $10,000,000.............................................. 35
------------------------------------------------------------------------
The benefit of the first two graduated rates described
above is phased out by a five-percent surcharge for
corporations with taxable income between $100,000 and $335,000.
Also, benefit of the 34-percent rate is phased out by a three-
percent surcharge for corporations with taxable income between
$15 million and $18,333,333; a corporation with taxable income
of $18,333,333 or more effectively is subject to a flat rate of
35 percent.
REASONS FOR CHANGE
The Committee believes that reducing the tax burden on
small and medium sized businesses will enable them to continue
to create and maintain new jobs in the United States. A reduced
tax burden on smaller businesses simultaneously makes
investments by small businesses more attractive and improves
the cash flow of such businesses, thus facilitating the
financing of investments. New investment by small business is
responsible for substantial job creation in the economy and
provides the foundation for new industries, new technology, and
the future of the U. S. economy.
EXPLANATION OF PROVISION
Under the provision, a corporation's regular income tax
liability is determined by applying the following tax rate
schedules to its taxable income.
TABLE 2.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2013 AND
THEREAFTER
[Percent of taxable income]
------------------------------------------------------------------------
Income
Taxable income tax rate
------------------------------------------------------------------------
$0-$50,000.................................................... 15
$50,001-$75,000............................................... 25
$75,001-$20,000,000........................................... 32
Over $20,000,000.............................................. 35
------------------------------------------------------------------------
The benefit of the graduated rates described above is
phased out by a three-percent surcharge for corporations with
taxable income between $20 million and $40,341,667; a
corporation with taxable income of $40,341,667 or more
effectively is subject to a flat rate of 35 percent.
TABLE 3.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2011-2012
[Percent of taxable income]
------------------------------------------------------------------------
Income
Taxable income tax rate
------------------------------------------------------------------------
$0-$50,000.................................................... 15
$50,001-$75,000............................................... 25
$75,001-$5,000,000............................................ 32
$5,000,001-$10,000,000........................................ 34
Over $10,000,000.............................................. 35
------------------------------------------------------------------------
The benefit of the first three graduated rates described
above is phased out by a five-percent surcharge for
corporations with taxable income between $5,000,000 and
$7,205,000. Also, the benefit of the 34-percent rate is phased
out by a three-percent surcharge for corporations with taxable
income between $15 million and $18,333,333; a corporation with
taxable income of $18,333,333 or more effectively is subject to
a flat rate of 35 percent.
TABLE 4.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2008-2010
[Percent of taxable income]
------------------------------------------------------------------------
Income
Taxable income tax rate
------------------------------------------------------------------------
$0-$50,000.................................................... 15
$50,001-$75,000............................................... 25
$75,001-$1,000,000............................................ 32
$1,000,001-$10,000,000........................................ 34
Over $10,000,000.............................................. 35
------------------------------------------------------------------------
The benefit of the first three graduated rates described
above is phased out by a five-percent surcharge for
corporations with taxable income between $1,000,000 and
$1,605,000. Also, the benefit of the 34-percent rate is phased
out by a three-percent surcharge for corporations with taxable
income between $15 million and $18,333,333; a corporation with
taxable income of $18,333,333 or more effectively is subject to
a flat rate of 35 percent.
TABLE 5.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES FOR 2005-2007
[Percent of taxable income]
------------------------------------------------------------------------
Income
Taxable income tax rate
------------------------------------------------------------------------
$0-$50,000.................................................... 15
$50,001-$75,000............................................... 25
$75,001-$1,000,000............................................ 33
$1,000,001-$10,000,000........................................ 34
Over $10,000,000.............................................. 35
------------------------------------------------------------------------
The benefit of the first three graduated rates described
above is phased out by a five-percent surcharge for
corporations with taxable income between $1,000,000 and
$1,420,000. Also, the benefit of the 34-percent rate is phased
out by a three-percent surcharge for corporations with taxable
income between $15 million and $18,333,333; a corporation with
taxable income of $18,333,333 or more effectively is subject to
a flat rate of 35 percent.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2004.
TITLE II--CORPORATE REFORM AND GROWTH INCENTIVES FOR MANUFACTURERS,
SMALL BUSINESSES, AND FARMERS
A. Small Business Expensing
1. Extension of increased section 179 expensing (sec. 201 of the bill
and sec. 179 of the Code)
PRESENT LAW
Present law provides that, in lieu of depreciation, a
taxpayer with a sufficiently small amount of annual investment
may elect to deduct such costs. The Jobs and Growth Tax Relief
Reconciliation Act (JGTRRA) of 2003 \8\ increased the amount a
taxpayer may deduct, for taxable years beginning in 2003
through 2005, to $100,000 of the cost of qualifying property
placed in service for the taxable year.\9\ In general,
qualifying property is defined as depreciable tangible personal
property (and certain computer software) that is purchased for
use in the active conduct of a trade or business. The $100,000
amount is reduced (but not below zero) by the amount by which
the cost of qualifying property placed in service during the
taxable year exceeds $400,000. The $100,000 and $400,000
amounts are indexed for inflation.
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\8\ Pub. L. No. 108-27, sec. 202 (2003).
\9\ Additional section 179 incentives are provided with respect to
a qualified property used by a business in the New York Liberty Zone
(sec. 1400L(f)), an empowerment zone (sec. 1397A), or a renewal
community (sec. 1400J).
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Prior to the enactment of JGTRRA (and for taxable years
beginning in 2006 and thereafter) a taxpayer with a
sufficiently small amount of annual investment could elect to
deduct up to $25,000 of the cost of qualifying property placed
in service for the taxable year. The $25,000 amount was reduced
(but not below zero) by the amount by which the cost of
qualifying property placed in service during the taxable year
exceeds $200,000. In general, qualifying property is defined as
depreciable tangible personal property that is purchased for
use in the active conduct of a trade or business.
The amount eligible to be expensed for a taxable year may
not exceed the taxable income for a taxable year that is
derived from the active conduct of a trade or business
(determined without regard to this provision). Any amount that
is not allowed as a deduction because of the taxable income
limitation may be carried forward to succeeding taxable years
(subject to similar limitations). No general business credit
under section 38 is allowed with respect to any amount for
which a deduction is allowed under section 179.
Under present law, an expensing election is made under
rules prescribed by the Secretary.\10\ Applicable Treasury
regulations provide that an expensing election generally is
made on the taxpayer's original return for the taxable year to
which the election relates.\11\
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\10\ Sec. 179(c)(1).
\11\ Treas. Reg. sec. 1.179-5. Under these regulations, a taxpayer
may make the election on the original return (whether or not the return
is timely), or on an amended return filed by the due date (including
extensions) for filing the return for the tax year the property was
placed in service. If the taxpayer timely filed an original return
without making the election, the taxpayer may still make the election
by filing an amended return within six months of the due date of the
return (excluding extensions).
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Prior to the enactment of JGTRRA (and for taxable years
beginning in 2006 and thereafter), an expensing election may be
revoked only with consent of the Commissioner.\12\ JGTRRA
permits taxpayers to revoke expensing elections on amended
returns without the consent of the Commissioner with respect to
a taxable year beginning after 2002 and before 2006.\13\
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\12\ Sec. 179(c)(2).
\13\ Id.
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REASONS FOR CHANGE
The Committee believes that section 179 expensing provides
two important benefits for small businesses. First, it lowers
the cost of capital for property used in a trade or business.
With a lower cost of capital, the Committee believes small
businesses will invest in more equipment and employ more
workers. Second, it eliminates depreciation recordkeeping
requirements with respect to expensed property. In JGTRRA,
Congress acted to increase the value of these benefits and to
increase the number of taxpayers eligible for taxable years
through 2005. The Committee believes that these changes to
section 179 expensing will continue to provide important
benefits if extended, and the bill therefore extends these
changes for an additional two years.
EXPLANATION OF PROVISION
The provision extends the increased amount that a taxpayer
may deduct, and other changes that were made by JGTRRA, for an
additional two years. Thus, the provision provides that the
maximum dollar amount that may be deducted under section 179 is
$100,000 for property placed in service in taxable years
beginning before 2008 ($25,000 for taxable years beginning in
2008 and thereafter). In addition, the $400,000 amount applies
for property placed in service in taxable years beginning
before 2008 ($200,000 for taxable years beginning in 2008 and
thereafter). The provision extends, through 2007 (from 2005),
the indexing for inflation of both the maximum dollar amount
that may be deducted and the $400,000 amount. The provision
also includes off-the-shelf computer software placed in service
in taxable years beginning before 2008 as qualifying property.
The provision permits taxpayers to revoke expensing elections
on amended returns without the consent of the Commissioner with
respect to a taxable year beginning before 2008. The Committee
expects that the Secretary will prescribe regulations to permit
a taxpayer to make an expensing election on an amended return
without the consent of the Commissioner.
EFFECTIVE DATE
The provision is effective on the date of enactment.
B. Depreciation
1. Recovery period for depreciation of certain leasehold improvements
and restaurant property (sec. 211 of the bill and sec. 168 of
the Code)
PRESENT LAW
A taxpayer generally must capitalize the cost of property
used in a trade or business and recover such cost over time
through annual deductions for depreciation or amortization.
Tangible property generally is depreciated under the modified
accelerated cost recovery system (``MACRS''), which determines
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of
various types of depreciable property (sec. 168). The cost of
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years.
Nonresidential real property is subject to the mid-month
placed-in-service convention. Under the mid-month convention,
the depreciation allowance for the first year property is
placed in service is based on the number of months the property
was in service, and property placed in service at any time
during a month is treated as having been placed in service in
the middle of the month.
Depreciation of leasehold improvements
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 (sec. 168(i)(8)).\14\ This rule applies regardless of
whether the lessor or the lessee places the leasehold
improvements in service.\15\ If a leasehold improvement
constitutes an addition or improvement to nonresidential real
property already placed in service, the improvement 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 (secs. 168(b)(3), (c),
(d)(2), and (i)(6)).\16\
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\14\ The Tax Reform Act of 1986 modified the Accelerated Cost
Recovery System (``ACRS'') to institute MACRS. Prior to the adoption of
ACRS by the Economic Recovery Tax Act of 1981, taxpayers were allowed
to depreciate the various components of a building as separate assets
with separate useful lives. The use of component depreciation was
repealed upon the adoption of ACRS. The Tax Reform Act of 1986 also
denied the use of component depreciation under MACRS.
\15\ Former sections 168(f)(6) and 178 provided that, in certain
circumstances, a lessee could recover the cost of leasehold
improvements made over the remaining term of the lease. The Tax Reform
Act of 1986 repealed these provisions.
\16\ If the improvement is characterized as tangible personal
property, ACRS or MACRS depreciation is calculated using the shorter
recovery periods, accelerated methods, and conventions applicable to
such property. The determination of whether improvements are
characterized as tangible personal property or as nonresidential real
property often depends on whether or not the improvements constitute a
``structural component'' of a building (as defined by Treas. Reg. sec.
1.48-1(e)(1)). See, e.g., Metro National Corp v. Commissioner, 52 TCM
(CCH) 1440 (1987); King Radio Corp Inc. v. U.S., 486 F.2d 1091 (10th
Cir. 1973); Mallinckrodt, Inc. v. Commissioner, 778 F.2d 402 (8th Cir.
1985) (with respect to various leasehold improvements).
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Qualified leasehold improvement property
The Job Creation and Worker Assistance Act of 2002 \17\
(``JCWAA''), as amended by JGTRRA, generally provides an
additional first-year depreciation deduction equal to either 30
percent or 50 percent of the adjusted basis of qualified
property placed in service before January 1, 2005. Qualified
property includes qualified leasehold improvement property. For
this purpose, qualified leasehold improvement property is any
improvement to an interior portion of a building that is
nonresidential real property, provided certain requirements are
met. The improvement must be made under or pursuant to a lease
either by the lessee (or sublessee), or by the lessor, of that
portion of the building to be occupied exclusively by the
lessee (or sublessee). The improvement must be placed in
service more than three years after the date the building was
first placed in service. Qualified leasehold improvement
property does not include any improvement for which the
expenditure is attributable to the enlargement of the building,
any elevator or escalator, any structural component benefiting
a common area, or the internal structural framework of the
building.
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\17\ Pub. L. No. 107-147, sec. 101 (2002), as amended by Pub. L.
No. 108-27, sec. 201 (2003).
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Treatment of dispositions of leasehold improvements
A lessor of leased property that disposes of a leasehold
improvement that was made by the lessor for the lessee of the
property may take the adjusted basis of the improvement into
account for purposes of determining gain or loss if the
improvement is irrevocably disposed of or abandoned by the
lessor at the termination of the lease. This rule conforms the
treatment of lessors and lessees with respect to leasehold
improvements disposed of at the end of a term of lease.
REASONS FOR CHANGE
The Committee believes that taxpayers should not be
required to recover the costs of certain leasehold improvements
beyond the useful life of the investment. The present law 39-
year recovery period for leasehold improvements extends well
beyond the useful life of such investments. Although lease
terms differ, the Committee believes that lease terms for
commercial real estate typically are shorter than the present-
law 39-year recovery period. In the interests of simplicity and
administrability, a uniform period for recovery of leasehold
improvements is desirable. The Committee bill therefore
shortens the recovery period for leasehold improvements to a
more realistic 15 years.
The Committee also believes that unlike other commercial
buildings, restaurant buildings generally are more specialized
structures. Restaurants also experience considerably more
traffic, and remain open longer than most retail properties.
This daily assault causes rapid deterioration of restaurant
properties and forces restaurateurs to constantly repair and
upgrade their facilities. As such, restaurant facilities have a
much shorter life span than other commercial establishments.
The Committee bill reduces the 39-year recovery period for
improvements made to restaurant buildings and more accurately
reflects the true economic life of the properties by reducing
the recovery period to 15 years.
EXPLANATION OF PROVISION
The provision provides a statutory 15-year recovery period
for qualified leasehold improvement property placed in service
before January 1, 2006.\18\ The provision requires that
qualified leasehold improvement property be recovered using the
straight-line method.
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\18\ Qualified leasehold improvement property continues to be
eligible for the additional first-year depreciation deduction under
sec. 168(k).
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Qualified leasehold improvement property is defined as
under present law for purposes of the additional first-year
depreciation deduction (sec. 168(k)), with the following
modification. If a lessor makes an improvement that qualifies
as qualified leasehold improvement property such improvement
shall 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.
The provision also provides a statutory 15-year recovery
period for qualified restaurant property placed in service
before January 1, 2006.\19\ For purposes of the provision,
qualified restaurant property means any improvement to a
building if such improvement is placed in service more than
three years after the date such building was first placed in
service and more than 50 percent of the building's square
footage is devoted to the preparation of, and seating for, on-
premises consumption of prepared meals. The provision requires
that qualified restaurant property be recovered using the
straight-line method.
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\19\ Qualified restaurant property would become eligible for the
additional first-year depreciation deduction under sec. 168(k) by
virtue of the assigned 15-year recovery period.
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EFFECTIVE DATE
The provision is effective for property placed in service
after the date of enactment.
2. Modification of depreciation allowance for aircraft (sec. 212 of the
bill and sec. 168 of the Code)
PRESENT LAW
In general
A taxpayer is allowed to recover, through annual
depreciation deductions, the cost of certain property used in a
trade or business or for the production of income. The amount
of the depreciation deduction allowed with respect to tangible
property for a taxable year is determined under the modified
accelerated cost recovery system (``MACRS''). Under MACRS,
different types of property generally are assigned applicable
recovery periods and depreciation methods. The recovery periods
applicable to most tangible personal property range from 3 to
25 years. The depreciation methods generally applicable to
tangible personal property are the 200-percent and 150-percent
declining balance methods, switching to the straight-line
method for the taxable year in which the depreciation deduction
would be maximized.
Thirty-percent additional first year depreciation deduction
JCWAA allows an additional first-year depreciation
deduction equal to 30 percent of the adjusted basis of
qualified property.\20\ The amount of the additional first-year
depreciation deduction is not affected by a short taxable year.
The additional first-year depreciation deduction is allowed for
both regular tax and alternative minimum tax purposes for the
taxable year in which the property is placed in service.\21\
The basis of the property and the depreciation allowances in
the year of purchase and later years are appropriately adjusted
to reflect the additional first-year depreciation deduction. In
addition, there are generally no adjustments to the allowable
amount of depreciation for purposes of computing a taxpayer's
alternative minimum taxable income with respect to property to
which the provision applies. A taxpayer is allowed to elect out
of the additional first-year depreciation for any class of
property for any taxable year.\22\
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\20\ The additional first-year depreciation deduction is subject to
the general rules regarding whether an item is deductible under section
162 or subject to capitalization under section 263 or section 263A.
\21\ However, the additional first-year depreciation deduction is
not allowed for purposes of computing earnings and profits.
\22\ A taxpayer may elect out of the 50-percent additional first-
year depreciation (discussed below) for any class of property and still
be eligible for the 30-percent additional first-year depreciation.
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In order for property to qualify for the additional first-
year depreciation deduction, it must meet all of the following
requirements. First, the property must be (1) property to which
MACRS applies with an applicable recovery period of 20 years or
less, (2) water utility property (as defined in section
168(e)(5)), (3) computer software other than computer software
covered by section 197, or (4) qualified leasehold improvement
property (as defined in section 168(k)(3)).\23\ Second, the
original use \24\ of the property must commence with the
taxpayer on or after September 11, 2001. Third, the taxpayer
must acquire the property within the applicable time period.
Finally, the property must be placed in service before January
1, 2005.
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\23\ A special rule precludes the additional first-year
depreciation deduction for any property that is required to be
depreciated under the alternative depreciation system of MACRS.
\24\ 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).
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An extension of the placed-in-service date of one year
(i.e., January 1, 2006) is provided for certain property with a
recovery period of ten years or longer and certain
transportation property.\25\ Transportation property is defined
as tangible personal property used in the trade or business of
transporting persons or property.
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\25\ In order for property to qualify for the extended placed-in-
service date, the property must be subject to section 263A by reason of
having a production period exceeding two years or an estimated
production period exceeding one year and a cost exceeding $1 million.
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The applicable time period for acquired property is (1)
after September 10, 2001 and before January 1, 2005, but only
if no binding written contract for the acquisition is in effect
before September 11, 2001, or (2) pursuant to a binding written
contract which was entered into after September 10, 2001, and
before January 1, 2005.\26\ For property eligible for the
extended placed-in-service date, a special rule limits the
amount of costs eligible for the additional first year
depreciation. With respect to such property, only the portion
of the basis that is properly attributable to the costs
incurred before January 1, 2005 (``progress expenditures'') is
eligible for the additional first-year depreciation.\27\
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\26\ Property does not fail to qualify for the additional first-
year depreciation merely because a binding written contract to acquire
a component of the property is in effect prior to September 11, 2001.
\27\ For purposes of determining the amount of eligible progress
expenditures, it is intended that rules similar to sec. 46(d)(3) as in
effect prior to the Tax Reform Act of 1986 shall apply.
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Fifty-percent additional first year depreciation
JGTRRA provides an additional first-year depreciation
deduction equal to 50 percent of the adjusted basis of
qualified property. Qualified property is defined in the same
manner as for purposes of the 30-percent additional first-year
depreciation deduction provided by the JCWAA except that the
applicable time period for acquisition (or self construction)
of the property is modified. Property eligible for the 50-
percent additional first-year depreciation deduction is not
eligible for the 30-percent additional first-year depreciation
deduction.
In order to qualify, the property must be acquired after
May 5, 2003, and before January 1, 2005, and no binding written
contract for the acquisition can be in effect before May 6,
2003.\28\ With respect to property that is manufactured,
constructed, or produced by the taxpayer for use by the
taxpayer, the taxpayer must begin the manufacture,
construction, or production of the property after May 5, 2003.
For property eligible for the extended placed-in-service date
(i.e., certain property with a recovery period of ten years or
longer and certain transportation property), a special rule
limits the amount of costs eligible for the additional first-
year depreciation. With respect to such property, only progress
expenditures properly attributable to the costs incurred before
January 1, 2005 are eligible for the additional first-year
depreciation.\29\
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\28\ Property does not fail to qualify for the additional first-
year depreciation merely because a binding written contract to acquire
a component of the property is in effect prior to May 6, 2003. However,
no 50-percent additional first-year depreciation is permitted on any
such component. No inference is intended as to the proper treatment of
components placed in service under the 30-percent additional first-year
depreciation provided by the JCWAA.
\29\ For purposes of determining the amount of eligible progress
expenditures, it is intended that rules similar to sec. 46(d)(3) as in
effect prior to the Tax Reform Act of 1986 shall apply.
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REASONS FOR CHANGE
The Committee believes that certain non-commercial aircraft
represent property having characteristics that should qualify
for the extended placed-in-service date accorded under present
law for property having long production periods. This treatment
should be available only if the purchaser makes a substantial
deposit, the expected cost exceeds certain thresholds, and the
production period is sufficiently long.
EXPLANATION OF PROVISION
Due to the extended production period, the provision
provides criteria under which certain non-commercial aircraft
can qualify for the extended placed-in-service date. Qualifying
aircraft would be eligible for the additional first-year
depreciation deduction if placed in service before January 1,
2006. In order to qualify, the aircraft must:
(a) Be acquired by the taxpayer during the applicable
time period as under present law;
(b) Meet the appropriate placed-in-service date
requirements;
(c) Not be tangible personal property used in the
trade or business of transporting persons or property
(except for agricultural or firefighting purposes);
(d) Be purchased \30\ by a purchaser who, at the time
of the contract for purchase, has made a nonrefundable
deposit of the lesser of ten percent of the cost or
$100,000; and
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\30\ For this purpose, the Committee intends that the term
``purchase'' be interpreted as it is defined in sec. 179(d)(2).
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(e) Have an estimated production period exceeding
four months and a cost exceeding $200,000.
EFFECTIVE DATE
The provision is effective as if included in the amendments
made by section 101 of JCWAA, which applies to property placed
in service after September 10, 2001. However, because the
property described by the provision qualifies for the
additional first-year depreciation deduction under present law
if placed in service prior to January 1, 2005, the provision
will modify the treatment only of property placed in service
during calendar year 2005.
3. Modification of placed in service rule for bonus depreciation
property (sec. 213 of the bill and sec. 168 of the Code)
PRESENT LAW
Section 101 of JCWAA provides generally for 30-percent
additional first-year depreciation, and provides a binding
contract rule in determining property that qualifies for it.
The requirements that must be satisfied in order for property
to qualify include that (1) the original use of the property
must commence with the taxpayer on or after September 11, 2001,
(2) the taxpayer must acquire the property after September 10,
2001 and before September 11, 2004, and (3) no binding written
contract for the acquisition of the property is in effect
before September 11, 2001 (or, in the case of self-constructed
property, manufacture, construction, or production of the
property does not begin before September 11, 2001). In
addition, JCWAA provides a special rule 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 is treated as originally placed in service by the
taxpayer not earlier than the date that the property is used
under the leaseback. JCWAA did not specifically address the
syndication of a lease by the lessor.
JGTRRA provides an additional first-year depreciation
deduction equal to 50 percent of the adjusted basis of
qualified property. Qualified property is defined in the same
manner as for purposes of the 30-percent additional first-year
depreciation deduction provided by the JCWAA except that the
applicable time period for acquisition (or self construction)
of the property is modified. Property with respect to which the
50-percent additional first-year depreciation deduction is
claimed is not also eligible for the 30-percent additional
first-year depreciation deduction. In order to qualify, the
property must be acquired after May 5, 2003 and before January
1, 2005, and no binding written contract for the acquisition
can be in effect before May 6, 2003. With respect to property
that is manufactured, constructed, or produced by the taxpayer
for use by the taxpayer, the taxpayer must begin the
manufacture, construction, or production of the property after
May 5, 2003.
REASONS FOR CHANGE
The Committee believes that the rules relating to 30-
percent additional first-year depreciation should be clarified
to reflect the legislative intent that syndicated property, if
sold within three months of the date it was originally placed
in service, be eligible for the additional first-year
depreciation deduction. Further, the Committee is aware that
certain syndication arrangements are entered into with respect
to multiple units of property (such as rail cars) that, for
logistical reasons, must be placed in service over a period of
time that exceeds three months. In such cases, it would be
impractical for the sale of the earlier produced units to occur
within three months of its placed-in-service date. Thus, the
Committee deems it appropriate to provide a special rule with
respect to the syndication of multiple units of property that
will be placed in service over a period of up to twelve months.
EXPLANATION OF PROVISION
The provision provides that if property is originally
placed in service by a lessor (including by operation of the
special rule for self-constructed property), 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.
The provision also provides a special rule in the case of
multiple units of property subject to the same lease. In such
cases, property will qualify as placed in service on the date
of sale if it is sold within three months after the final unit
is placed in service, so long as the period between the time
the first and last units are placed in service does not exceed
12 months.
EFFECTIVE DATE
The provision is generally effective as if included in the
amendments made by section 101 of JCWAA (i.e., generally for
property placed in service after September 10, 2001, in taxable
years ending after that date). However, the special rule in the
case of multiple units of property subject to the same lease
applies to property sold after June 4, 2004.
C. S Corporation Reform and Simplification
(Secs. 221-231 of the bill and secs. 1361-1379 and 4975 of the Code)
OVERVIEW
In general, an S corporation is not subject to corporate-
level income tax on its items of income and loss. Instead, an S
corporation passes through its items of income and loss to its
shareholders. The shareholders take into account separately
their shares of these items on their individual income tax
returns. To prevent double taxation of these items when the
stock is later disposed of, each shareholder's basis in the
stock of the S corporation is increased by the amount included
in income (including tax-exempt income) and is decreased by the
amount of any losses (including nondeductible losses) taken
into account. A shareholder's loss may be deducted only to the
extent of his or her basis in the stock or debt of the S
corporation. To the extent a loss is not allowed due to this
limitation, the loss generally is carried forward with respect
to the shareholder.
REASONS FOR CHANGE
The bill contains a number of general provisions relating
to S corporations. The Committee adopted these provisions that
modernize the S corporation rules and eliminate undue
restrictions on S corporations in order to expand the
application of the S corporation provisions so that more
corporations and their shareholders will be able to enjoy the
benefits of subchapter S status.
The Committee is aware of obstacles that have prevented
banks from electing subchapter S status.\31\ The bill contains
provisions that apply specifically to banks in order to remove
these obstacles and make S corporation status more readily
available to banks.
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\31\ See, for example, GAO/GGD-00-159, Banking Taxation,
Implications of Proposed Revisions Governing S-Corporations on
Community Banks (June 23, 2000).
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The bill also revises the prohibited transaction rules
applicable to employee stock ownership plans (``ESOPs'')
maintained by S corporations in order to expand the ability to
use distributions made with respect to S corporation stock held
by an ESOP to repay a loan used to purchase the stock, subject
to the same conditions that apply to C corporation dividends
used to repay such a loan.
1. Members of family treated as one shareholder; increase in number of
eligible shareholders to 100
PRESENT LAW
A small business corporation may elect to be an S
corporation with the consent of all its shareholders, and may
terminate its election with the consent of shareholders holding
more than 50 percent of the stock. A ``small business
corporation'' is defined as a domestic corporation which is not
an ineligible corporation and which has (1) no more than 75
shareholders, all of whom are individuals (and certain trusts,
estates, charities, and qualified retirement plans)\32\ who are
citizens or residents of the United States, and (2) only one
class of stock. For purposes of the 75-shareholder limitation,
a husband and wife are treated as one shareholder. An
``ineligible corporation'' means a corporation that is a
financial institution using the reserve method of accounting
for bad debts, an insurance company, a corporation electing the
benefits of the Puerto Rico and possessions tax credit, or a
Domestic International Sales Corporation (``DISC'') or former
DISC.
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\32\ If a qualified retirement plan (other than an employee stock
ownership plan) or a charity holds stock in an S corporation, the
interest held is treated as an interest in an unrelated trade or
business, and the plan or charity's share of the S corporation's items
of income, loss, or deduction, and gain or loss on the disposition of
the S corporation stock, are taken into account in computing unrelated
business taxable income.
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EXPLANATION OF PROVISION
The bill provides that all family members can elect to be
treated as one shareholder for purposes of determining the
number of shareholders in the corporation. A family is defined
as the lineal descendants (and their spouses) of a common
ancestor. The common ancestor cannot be more than three
generations removed from the youngest generation of shareholder
at the time the S election is made (or the effective date of
this provision, if later). Except as provided by Treasury
regulations, the election may be made by any family member and
the election remains in effect until terminated.
The bill increases the maximum number of eligible
shareholders from 75 to 100.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2004.
2. Expansion of bank S corporation eligible shareholders to include
IRAs
PRESENT LAW
An individual retirement account (``IRA'') is a trust or
account established for the exclusive benefit of an individual
and his or her beneficiaries. There are two general types of
IRAs: traditional IRAs, to which both deductible and
nondeductible contributions may be made, and Roth IRAs,
contributions to which are not deductible. Amounts held in a
traditional IRA are includible in income when withdrawn (except
to the extent the withdrawal is a return of nondeductible
contributions). Amounts held in a Roth IRA that are withdrawn
as a qualified distribution are not includible in income;
distributions from a Roth IRA that are not qualified
distributions are includible in income to the extent
attributable to earnings. 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 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.
Under present law, an IRA cannot be a shareholder of an S
corporation.
Certain transactions are prohibited between an IRA and the
individual for whose benefit the IRA is established, including
a sale of property by the IRA to the individual. If a
prohibited transaction occurs between an IRA and the IRA
beneficiary, the account ceases to be an IRA, and an amount
equal to the fair market value of the assets held in the IRA is
deemed distributed to the beneficiary.
EXPLANATION OF PROVISION
The bill allows an IRA (including a Roth IRA) to be a
shareholder of a bank that is an S corporation, but only to the
extent of bank stock held by the IRA on the date of enactment
of the provision.\33\
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\33\ Under the bill, the present-law rules treating S corporation
stock held by a qualified retirement plan (other than an employee stock
ownership plan) or a charity as an interest in an unrelated trade or
business apply to an IRA holding S corporation stock of a bank.
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The bill also provides an exemption from prohibited
transaction treatment for the sale by an IRA to the IRA
beneficiary of bank stock held by the IRA on the date of
enactment of the provision. Under the bill, a sale is not a
prohibited transaction if: (1) the sale is pursuant to an S
corporation election by the bank; (2) the sale is for fair
market value (as established by an independent appraiser) and
is on terms at least as favorable to the IRA as the terms would
be on a sale to an unrelated party; (3) the IRA incurs no
commissions, costs, or other expenses in connection with the
sale; and (4) the stock is sold in a single transaction for
cash not later than 120 days after the S corporation election
is made.
EFFECTIVE DATE
The provision takes effect on the date of enactment of the
bill.
3. Disregard of unexercised powers of appointment in determining
potential current beneficiaries of ESBT
PRESENT LAW
An electing small business trust (``ESBT'') holding stock
in an S corporation is taxed at the maximum individual tax rate
on its ratable share of items of income, deduction, gain, or
loss passing through from the S corporation. An ESBT generally
is an electing trust all of whose beneficiaries are eligible S
corporation shareholders. For purposes of determining the
maximum number of shareholders, each person who is entitled to
receive a distribution from the trust (``potential current
beneficiary'') is treated as a shareholder during the period
the person may receive a distribution from the trust.
An ESBT has 60 days to dispose of the S corporation stock
after an ineligible shareholder becomes a potential current
beneficiary to avoid disqualification.
EXPLANATION OF PROVISION
Under the bill, powers of appointment to the extent not
exercised are disregarded in determining the potential current
beneficiaries of an electing small business trust.
The bill increases the period during which an ESBT can
dispose of S corporation stock, after an ineligible shareholder
becomes a potential current beneficiary, from 60 days to one
year.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2004.
4. Transfers of suspended losses incident to divorce, etc.
PRESENT LAW
Under present law, any loss or deduction that is not
allowed to a shareholder of an S corporation, because the loss
exceeds the shareholder's basis in stock and debt of the
corporation, is treated as incurred by the S corporation with
respect to that shareholder in the subsequent taxable year.
EXPLANATION OF PROVISION
Under the bill, if a shareholder's stock in an S
corporation is transferred to a spouse, or to a former spouse
incident to a divorce, any suspended loss or deduction with
respect to that stock is treated as incurred by the corporation
with respect to the transferee in the subsequent taxable year.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2004.
5. Use of passive activity loss and at-risk amounts by qualified
subchapter S trust income beneficiaries
PRESENT LAW
Under present law, the share of income of an S corporation
whose stock is held by a qualified subchapter S trust
(``QSST''), with respect to which the beneficiary makes an
election, is taxed to the beneficiary. However, the trust, and
not the beneficiary, is treated as the owner of the S
corporation stock for purposes of determining the tax
consequences of the disposition of the S corporation stock by
the trust. A QSST generally is a trust with one individual
income beneficiary for the life of the beneficiary.
EXPLANATION OF PROVISION
Under the bill, the beneficiary of a qualified subchapter S
trust is generally allowed to deduct suspended losses under the
at-risk rules and the passive loss rules when the trust
disposes of the S corporation stock.
EFFECTIVE DATE
The provision applies to transfers made after December 31,
2004.
6. Exclusion of investment securities income from passive investment
income test for bank S corporations
PRESENT LAW
An S corporation is subject to corporate-level tax, at the
highest corporate tax rate, on its excess net passive income if
the corporation has (1) accumulated earnings and profits at the
close of the taxable year and (2) gross receipts more than 25
percent of which are passive investment income.
Excess net passive income is the net passive income for a
taxable year multiplied by a fraction, the numerator of which
is the amount of passive investment income in excess of 25
percent of gross receipts and the denominator of which is the
passive investment income for the year. Net passive income is
defined as passive investment income reduced by the allowable
deductions that are directly connected with the production of
that income. Passive investment income generally means gross
receipts derived from royalties, rents, dividends, interest,
annuities, and sales or exchanges of stock or securities (to
the extent of gains). Passive investment income generally does
not include interest on accounts receivable, gross receipts
that are derived directly from the active and regular conduct
of a lending or finance business, gross receipts from certain
liquidations, or gain or loss from any section 1256 contract
(or related property) of an options or commodities dealer.\34\
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\34\ Notice 97-5, 1997-1 C.B. 352, sets forth guidance relating to
passive investment income on banking assets.
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In addition, an S corporation election is terminated
whenever the S corporation has accumulated earnings and profits
at the close of each of three consecutive taxable years and has
gross receipts for each of those years more than 25 percent of
which are passive investment income.
EXPLANATION OF PROVISION
The bill provides that, in the case of a bank (as defined
in section 581), a bank holding company (as defined in section
2(a) of the Bank Holding Company Act of 1956), or a financial
holding company (as defined in section 2(p) of that Act),
interest income and dividends on assets required to be held by
the bank or holding company are not treated as passive
investment income for purposes of the S corporation passive
investment income rules.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2004.
7. Treatment of bank director shares
PRESENT LAW
An S corporation may have no more than 75 shareholders and
may have only one outstanding class of stock.\35\
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\35\ Another provision of the bill increases the maximum number of
shareholders to 100.
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An S corporation has one class of stock if all outstanding
shares of stock confer identical rights to distribution and
liquidation proceeds. Differences in voting rights are
disregarded.\36\
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\36\ Sec. 1361(c)(4). Treasury regulations provide that buy-sell
and redemption agreements are disregarded in determining whether a
corporation's outstanding shares confer identical distribution and
liquidation rights unless (1) a principal purpose of the agreement is
to circumvent the one class of stock requirement and (2) the agreement
establishes a purchase price that, at the time the agreement is entered
into, is significantly in excess of, or below, the fair market value of
the stock. Treas. Reg. sec. 1.1361-1(l).
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National banking law requires that a director of a national
bank own stock in the bank and that a bank have at least five
directors.\37\ A number of States have similar requirements for
State-chartered banks. Apparently, it is common practice for a
bank director to enter into an agreement under which the bank
(or a holding company) will reacquire the stock upon the
director's ceasing to hold the office of director, at the price
paid by the director for the stock.\38\
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\37\ 12 U.S.C. secs. 71-72.
\38\ See Private Letter Ruling 200217048 (January 24, 2002)
describing such an agreement and holding that it creates a second class
of stock. Nonetheless, the ruling concluded that the election to be an
S corporation was inadvertently invalid and that an amended agreement
did not create a second class of stock so that the corporation's
election was validated.
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EXPLANATION OF PROVISION
Under the bill, restricted bank director stock is not taken
into account as outstanding stock in applying the provisions of
subchapter S.\39\ Thus, the stock is not treated as a second
class of stock; a director is not treated as a shareholder of
the S corporation by reason of the stock; the stock is
disregarded in allocating items of income, loss, etc. among the
shareholders; and the stock is not treated as outstanding for
purposes of determining whether an S corporation holds 100
percent of the stock of a qualified subchapter S subsidiary.
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\39\ No inference is intended as to the proper tax treatment under
present law.
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Restricted bank director stock is stock in a bank (as
defined in section 581), a bank holding company (within the
meaning of section 2(a) of the Bank Holding Company Act of
1956), or a financial holding company (as defined in section
2(p) of that Act), registered with the Federal Reserve System,
if the stock is required to be held by an individual under
applicable Federal or State law in order to permit the
individual to serve as a director of the bank or holding
company and which is subject to an agreement with the bank or
holding company (or corporation in control of the bank or
company) pursuant to which the holder is required to sell the
stock back upon ceasing to be a director at the same price the
individual acquired the stock.
A distribution (other than a payment in exchange for the
stock) with respect to the restricted stock is includible in
the gross income of the director and is deductible by the S
corporation for the taxable year that includes the last day of
the director's taxable year in which the distribution is
included in income.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2004.
8. Relief from inadvertently invalid qualified subchapter S subsidiary
elections and terminations
PRESENT LAW
Under present law, inadvertent invalid subchapter S
elections and terminations may be waived.
EXPLANATION OF PROVISION
The bill allows inadvertent invalid qualified subchapter S
subsidiary elections and terminations to be waived by the IRS.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2004.
9. Information returns for qualified subchapter S subsidiaries
PRESENT LAW
Under present law, a corporation all of whose stock is held
by an S corporation is treated as a qualified subchapter S
subsidiary if the S corporation so elects. The assets,
liabilities, and items of income, deduction, and credit of the
subsidiary are treated as assets, liabilities, and items of the
parent S corporation.
EXPLANATION OF PROVISION
The bill provides authority to the Secretary to provide
guidance regarding information returns of qualified subchapter
S subsidiaries.
EFFECTIVE DATE
The provision applies to taxable years beginning after
December 31, 2004.
10. Repayment of loans for qualifying employer securities
PRESENT LAW
An employee stock ownership plan (an ``ESOP'') is a defined
contribution plan that is designated as an ESOP and is designed
to invest primarily in qualifying employer securities. For
purposes of ESOP investments, a ``qualifying employer
security'' is defined as: (1) publicly traded common stock of
the employer or a member of the same controlled group; (2) if
there is no such publicly traded common stock, common stock of
the employer (or member of the same controlled group) that has
both voting power and dividend rights at least as great as any
other class of common stock; or (3) noncallable preferred stock
that is convertible into common stock described in (1) or (2)
and that meets certain requirements. In some cases, an employer
may design a class of preferred stock that meets these
requirements and that is held only by the ESOP. Special rules
apply to ESOPs that do not apply to other types of qualified
retirement plans, including a special exemption from the
prohibited transaction rules.
Certain transactions between an employee benefit plan and a
disqualified person, including the employer maintaining the
plan, are prohibited transactions that result in the imposition
of an excise tax.\40\ Prohibited transactions include, among
other transactions, (1) the sale, exchange or leasing of
property between a plan and a disqualified person, (2) the
lending of money or other extension of credit between a plan
and a disqualified person, and (3) the transfer to, or use by
or for the benefit of, a disqualified person of the income or
assets of the plan. However, certain transactions are exempt
from prohibited transaction treatment, including certain loans
to enable an ESOP to purchase qualifying employer
securities.\41\ In such a case, the employer securities
purchased with the loan proceeds are generally pledged as
security for the loan. Contributions to the ESOP and dividends
paid on employer securities held by the ESOP are used to repay
the loan. The employer securities are held in a suspense
account and released for allocation to participants' accounts
as the loan is repaid.
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\40\ Sec. 4975.
\41\ Sec. 4975(d)(3). An ESOP that borrows money to purchase
employer stock is referred to as a ``leveraged'' ESOP.
---------------------------------------------------------------------------
A loan to an ESOP is exempt from prohibited transaction
treatment if the loan is primarily for the benefit of the
participants and their beneficiaries, the loan is at a
reasonable rate of interest, and the collateral given to a
disqualified person consists of only qualifying employer
securities. No person entitled to payments under the loan can
have the right to any assets of the ESOP other than (1)
collateral given for the loan, (2) contributions made to the
ESOP to meet its obligations on the loan, and (3) earnings
attributable to the collateral and the investment of
contributions described in (2).\42\ In addition, the payments
made on the loan by the ESOP during a plan year cannot exceed
the sum of those contributions and earnings during the current
and prior years, less loan payments made in prior years.
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\42\ Treas. Reg. sec. 54.4975-7(b)(5).
---------------------------------------------------------------------------
An ESOP of a C corporation is not treated as violating the
qualification requirements of the Code or as engaging in a
prohibited transaction merely because, in accordance with plan
provisions, a dividend paid with respect to qualifying employer
securities held by the ESOP is used to make payments on a loan
(including payments of interest as well as principal) that was
used to acquire the employer securities (whether or not
allocated to participants).\43\ In the case of a dividend paid
with respect to any employer security that is allocated to a
participant, this relief does not apply unless the plan
provides that employer securities with a fair market value of
not less than the amount of the dividend is allocated to the
participant for the year which the dividend would have been
allocated to the participant.\44\
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\43\ Sec. 404(k)(5)(B).
\44\ Sec. 404(k)(2)(B).
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EXPLANATION OF PROVISION
Under the provision, an ESOP maintained by an S corporation
is not treated as violating the qualification requirements of
the Code or as engaging in a prohibited transaction merely
because, in accordance with plan provisions, a distribution
made with respect to S corporation stock that constitutes
qualifying employer securities held by the ESOP is used to
repay a loan that was used to acquire the securities (whether
or not allocated to participants). This relief does not apply
in the case of a distribution with respect to S corporation
stock that is allocated to a participant unless the plan
provides that stock with a fair market value of not less than
the amount of such distribution is allocated to the participant
for the year which the distribution would have been allocated
to the participant.
EFFECTIVE DATE
The provision is effective for distributions made with
respect to S corporation stock after December 31, 2004.
D. Alternative Minimum Tax Relief
1. Foreign tax credit under alternative minimum tax; expansion of
exemption from alternative minimum tax for small corporations;
income averaging for farmers not to increase alternative
minimum tax (secs. 241-243 of the bill and secs. 55-59 of the
Code)
PRESENT LAW
In general
Under present law, taxpayers are subject to an alternative
minimum tax (``AMT''), which is payable, in addition to all
other tax liabilities, to the extent that it exceeds the
taxpayer's regular income tax liability. The tax is imposed at
a flat rate of 20 percent, in the case of corporate taxpayers,
on alternative minimum taxable income (``AMTI'') in excess of a
phased-out exemption amount. AMTI is the taxpayer's taxable
income increased for certain tax preferences and adjusted by
determining the tax treatment of certain items in a manner that
limits the tax benefits resulting from the regular tax
treatment of such items.
Foreign tax credit
Taxpayers are permitted to reduce their AMT liability by an
AMT foreign tax credit. The AMT foreign tax credit for a
taxable year is determined under principles similar to those
used in computing the regular tax foreign tax credit, except
that (1) the numerator of the AMT foreign tax credit limitation
fraction is foreign source AMTI and (2) the denominator of that
fraction is total AMTI. Taxpayers may elect to use as their AMT
foreign tax credit limitation fraction the ratio of foreign
source regular taxable income to total AMTI.
The AMT foreign tax credit for any taxable year generally
may not offset a taxpayer's entire pre-credit AMT. Rather, the
AMT foreign tax credit is limited to 90 percent of AMT computed
without any AMT net operating loss deduction and the AMT
foreign tax credit. For example, assume that a corporation has
$10 million of AMTI, has no AMT net operating loss deduction,
and has no regular tax liability. In the absence of the AMT
foreign tax credit, the corporation's tax liability would be $2
million. Accordingly, the AMT foreign tax credit cannot be
applied to reduce the taxpayer's tax liability below $200,000.
Any unused AMT foreign tax credit may be carried back two years
and carried forward five years for use against AMT in those
years under the principles of the foreign tax credit carryback
and carryover rules set forth in section 904(c).
Small corporation exemption
Corporations with average gross receipts of less than $7.5
million for the prior three taxable years are exempt from the
corporate AMT. The $7.5 million threshold is reduced to $5
million for the corporation's first 3-taxable year period.
Farmer income averaging
An individual taxpayer engaged in a farming business (as
defined by section 263A(e)(4)) may elect to compute his or her
current year regular tax liability by averaging, over the prior
three-year period, all or portion of his or her taxable income
from the trade or business of farming. Because farmer income
averaging reduces the regular tax liability, the AMT may be
increased. Thus, the benefits of farmer income averaging may be
reduced or eliminated for farmers subject to the AMT.
REASONS FOR CHANGE
The Committee believes that the AMT is merely a prepayment
of tax. The corporate AMT requires businesses to prepay their
taxes when they can least afford it, during a business
downturn. The Committee believes that increasing the gross
receipts cap for companies exempt from corporate AMT from $7.5
million of gross receipts to $20 million of gross receipts will
relieve many taxpayers of the financial burden of having to
prepay their tax when they can least afford it. The provision
also will relieve many taxpayers of the administrative cost and
compliance burden of having to calculate their taxes under two
separate income tax systems. The Committee also believes that
taxpayers should be permitted full use of foreign tax credits
in computing the AMT. The Committee believes that farmers
should be allowed the full benefits of income averaging without
incurring liability under the AMT.
EXPLANATION OF PROVISION
The provision repeals the 90-percent limitation on the
utilization of the AMT foreign tax credit.
The provision increases the amount of average gross
receipts that an exempt corporation may receive from $7.5
million to $20 million.
The provision provides that, in computing AMT, a farmer's
regular tax liability is determined without regard to farmer
income averaging. Thus, a farmer receives the full benefit of
income averaging because averaging reduces the regular tax
while the AMT (if any) remains unchanged.
EFFECTIVE DATE
The provision relating to the foreign tax credit applies to
taxable years beginning after December 31, 2004.
The provision relating to the small corporation exemption
applies to taxable years beginning after December 31, 2005.
The provision relating to farmers' income averaging applies
to taxable years beginning after December 31, 2003.
E. Restructuring of Incentives for Alcohol Fuels, Etc.
1. Reduced rates of tax on alcohol fuel mixtures replaced with an
excise tax credit, etc. (secs. 251 and 252 of the bill and
secs. 4041, 4081, 4091, 6427 and 9503 of the Code)
PRESENT LAW
Alcohol fuels income tax credit
The alcohol fuels credit is the sum of three credits: the
alcohol mixture credit, the alcohol credit, and the small
ethanol producer credit. Generally, the alcohol fuels credit
expires after December 31, 2007.\45\
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\45\ The alcohol fuels credit is unavailable when, for any period
before January 1, 2008, the tax rates for gasoline and diesel fuels
drop to 4.3 cents per gallon.
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A taxpayer (generally a petroleum refiner, distributor, or
marketer) who mixes ethanol with gasoline (or a special fuel
\46\ ) is an ``ethanol blender.'' Ethanol blenders are eligible
for an income tax credit of 52 cents per gallon of ethanol used
in the production of a qualified mixture (the ``alcohol mixture
credit''). A qualified mixture means a mixture of alcohol and
gasoline, (or of alcohol and a special fuel) sold by the
blender as fuel, or used as fuel by the blender in producing
the mixture. The term alcohol includes methanol and ethanol but
does not include (1) alcohol produced from petroleum, natural
gas, or coal (including peat), or (2) alcohol with a proof of
less than 150. Businesses also may reduce their income taxes by
52 cents for each gallon of ethanol (not mixed with gasoline or
other special fuel) that they sell at the retail level as
vehicle fuel or use themselves as a fuel in their trade or
business (``the alcohol credit''). The 52-cents-per-gallon
income tax credit rate is scheduled to decline to 51 cents per
gallon during the period 2005 through 2007. For blenders using
an alcohol other than ethanol, the rate is 60 cents per
gallon.\47\
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\46\ A special fuel includes any liquid (other than gasoline) that
is suitable for use in an internal combustion engine.
\47\ In the case of any alcohol (other than ethanol) with a proof
that is at least 150 but less than 190, the credit is 45 cents per
gallon (the ``low-proof blender amount''). For ethanol with a proof
that is at least 150 but less than 190, the low-proof blender amount is
38.52 cents for sales or uses during calendar year 2004, and 37.78
cents for calendar years 2005, 2006, and 2007.
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A separate income tax credit is available for small ethanol
producers (the ``small ethanol producer credit''). A small
ethanol producer is defined as a person whose ethanol
production capacity does not exceed 30 million gallons per
year. The small ethanol producer credit is 10 cents per gallon
of ethanol produced during the taxable year for up to a maximum
of 15 million gallons.
The credits that comprise the alcohol fuels tax credit are
includible in income. The credit may not be used to offset
alternative minimum tax liability. The credit is treated as a
general business credit, subject to the ordering rules and
carryforward/carryback rules that apply to business credits
generally.
Excise tax reductions for alcohol mixture fuels
Generally, motor fuels tax rates are as follows: \48\
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\48\ These fuels are also subject to an additional 0.1 cent-per-
gallon excise tax to fund the Leaking Underground Storage Tank Trust
Fund. See secs. 4041(d) and 4081(a)(2)(B). In addition, the basic fuel
tax rate will drop to 4.3 cents per gallon beginning on October 1,
2005.
Gasoline.................................... 18.3 cents per gallon.
Diesel fuel and kerosene.................... 24.3 cents per gallon.
Special motor fuels......................... 18.3 cents per gallon generally.
Alcohol-blended fuels are subject to a reduced rate of tax.
The benefits provided by the alcohol fuels income tax credit
and the excise tax reduction are integrated such that the
alcohol fuels credit is reduced to take into account the
benefit of any excise tax reduction.
Gasohol
Registered ethanol blenders may forgo the full income tax
credit and instead pay reduced rates of excise tax on gasoline
that they purchase for blending with ethanol. Most of the
benefit of the alcohol fuels credit is claimed through the
excise tax system.
The reduced excise tax rates apply to gasohol upon its
removal or entry. Gasohol is defined as a gasoline/ethanol
blend that contains 5.7 percent ethanol, 7.7 percent ethanol,
or 10 percent ethanol. For the calendar year 2004, the
following reduced rates apply to gasohol: \49\
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\49\ These rates include the additional 0.1 cent-per-gallon excise
tax to fund the Leaking Underground Storage Tank Trust Fund. These
special rates will terminate after September 30, 2007 (sec.
4081(c)(8)).
5.7 percent ethanol......................... 15.436 cents per gallon.
7.7 percent ethanol......................... 14.396 cents per gallon.
10.0 percent ethanol........................ 13.200 cents per gallon.
Reduced excise tax rates also apply when gasoline is
purchased for the production of ``gasohol.'' When gasoline is
purchased for blending into gasohol, the rates above are
multiplied by a fraction (e.g., 10/9 for 10-percent gasohol) so
that the increased volume of motor fuel will be subject to tax.
The reduced tax rates apply if the person liable for the tax is
registered with the IRS and (1) produces gasohol with gasoline
within 24 hours of removing or entering the gasoline or (2)
gasoline is sold upon its removal or entry and such person has
an unexpired certificate from the buyer and has no reason to
believe the certificate is false.\50\
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\50\ Treas. Reg. sec. 48.4081-6(c). A certificate from the buyer
assures that the gasoline will be used to produce gasohol within 24
hours after purchase. A copy of the registrant's letter of registration
cannot be used as a gasohol blender's certificate.
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Qualified methanol and ethanol fuels
Qualified methanol or ethanol fuel is any liquid that
contains at least 85 percent methanol or ethanol or other
alcohol produced from a substance other than petroleum or
natural gas. These fuels are taxed at reduced rates.\51\ The
rate of tax on qualified methanol is 12.35 cents per gallon.
The rate on qualified ethanol in 2004 is 13.15 cents. From
January 1, 2005 through September 30, 2007, the rate of tax on
qualified ethanol is 13.25 cents.
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\51\ These reduced rates terminate after September 30, 2007.
Included in these rates is the 0.05-cent-per-gallon Leaking Underground
Storage Tank Trust Fund tax imposed on such fuel. (sec. 4041(b)(2)).
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Alcohol produced from natural gas
A mixture of methanol, ethanol, or other alcohol produced
from natural gas that consists of at least 85 percent alcohol
is also taxed at reduced rates.\52\ For mixtures not containing
ethanol, the applicable rate of tax is 9.25 cents per gallon
before October 1, 2005. In all other cases, the rate is 11.4
cents per gallon. After September 30, 2005, the rate is reduced
to 2.15 cents per gallon when the mixture does not contain
ethanol and 4.3 cents per gallon in all other cases.
---------------------------------------------------------------------------
\52\ These rates include the additional 0.1 cent-per-gallon excise
tax to fund the Leaking Underground Storage Tank Trust Fund (sec.
4041(d)(1)).
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Blends of alcohol and diesel fuel or special motor fuels
A reduced rate of tax applies to diesel fuel or kerosene
that is combined with alcohol as long as at least 10 percent of
the finished mixture is alcohol. If none of the alcohol in the
mixture is ethanol, the rate of tax is 18.4 cents per gallon.
For alcohol mixtures containing ethanol, the rate of tax in
2004 is 19.2 cents per gallon and 19.3 cents per gallon for
2005 through September 30, 2007. Fuel removed or entered for
use in producing a 10 percent diesel-alcohol fuel mixture
(without ethanol), is subject to a tax of 20.44 cents per
gallon. The rate of tax for fuel removed or entered for use to
produce a 10 percent diesel-ethanol fuel mixture is 21.333
cents per gallon for 2004 and 21.444 cents per gallon for the
period January 1, 2005 through September 30, 2007.\53\
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\53\ These rates include the additional 0.1 cent-per-gallon excise
tax to fund the Leaking Underground Storage Tank Trust Fund.
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Special motor fuel (nongasoline) mixtures with alcohol also
are taxed at reduced rates.
Aviation fuel
Noncommercial aviation fuel is subject to a tax of 21.9
cents per gallon.\54\ Fuel mixtures containing at least 10
percent alcohol are taxed at lower rates.\55\ In the case of 10
percent ethanol mixtures, for any sale or use during 2004, the
21.9 cents is reduced by 13.2 cents (for a tax of 8.7 cents per
gallon), for 2005, 2006, and 2007 the reduction is 13.1 cents
(for a tax of 8.8 cents per gallon) and is reduced by 13.4
cents in the case of any sale during 2008 or thereafter. For
mixtures not containing ethanol, the 21.9 cents is reduced by
14 cents for a tax of 7.9 cents. These reduced rates expire
after September 30, 2007.\56\
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\54\ This rate includes the additional 0.1 cent-per-gallon tax for
the Leaking Underground Storage Tank Trust fund.
\55\ Secs. 4041(k)(1) and 4091(c).
\56\ Sec. 4091(c)(1).
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When aviation fuel is purchased for blending with alcohol,
the rates above are multiplied by a fraction (10/9) so that the
increased volume of aviation fuel will be subject to tax.
Refunds and payments
If fully taxed gasoline (or other taxable fuel) is used to
produce a qualified alcohol mixture, the Code permits the
blender to file a claim for a quick excise tax refund. The
refund is equal to the difference between the gasoline (or
other taxable fuel) excise tax that was paid and the tax that
would have been paid by a registered blender on the alcohol
fuel mixture being produced. Generally, the IRS pays these
quick refunds within 20 days. Interest accrues if the refund is
paid more than 20 days after filing. A claim may be filed by
any person with respect to gasoline, diesel fuel, or kerosene
used to produce a qualified alcohol fuel mixture for any period
for which $200 or more is payable and which is not less than
one week.
Ethyl tertiary butyl ether (ETBE)
Ethyl tertiary butyl ether (``ETBE'') is an ether that is
manufactured using ethanol. Unlike ethanol, ETBE can be blended
with gasoline before the gasoline enters a pipeline because
ETBE does not result in contamination of fuel with water while
in transport. Treasury regulations provide that gasohol
blenders may claim the income tax credit and excise tax rate
reductions for ethanol used in the production of ETBE. The
regulations also provide a special election allowing refiners
to claim the benefit of the excise tax rate reduction even
though the fuel being removed from terminals does not contain
the requisite percentages of ethanol for claiming the excise
tax rate reduction.
Highway Trust Fund
With certain exceptions, the taxes imposed by section 4041
(relating to retail taxes on diesel fuels and special motor
fuels) and section 4081 (relating to tax on gasoline, diesel
fuel and kerosene) are credited to the Highway Trust Fund. In
the case of alcohol fuels, 2.5 cents per gallon of the tax
imposed is retained in the General Fund.\57\ In the case of a
taxable fuel taxed at a reduced rate upon removal or entry
prior to mixing with alcohol, 2.8 cents of the reduced rate is
retained in the General Fund.\58\
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\57\ Sec. 9503(b)(4)(E).
\58\ Sec. 9503(b)(4)(F).
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Taxes from gasoline and special motor fuels used in motorboats and
gasoline used in the nonbusiness use of small-engine outdoor
power equipment
The Aquatic Resources Trust Fund is funded by a portion of
the receipts from the excise tax imposed on motorboat gasoline
and special motor fuels, as well as small-engine fuel taxes,
that are first deposited into the Highway Trust Fund. As a
result, transfers to the Aquatic Resources Trust Fund are
governed in part by Highway Trust Fund provisions.\59\
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\59\ Sec. 9503(c)(4) and 9503(c)(5).
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A total tax rate of 18.4 cents per gallon is imposed on
gasoline and special motor fuels used in motorboats. Of this
rate, 0.1 cent per gallon is dedicated to the Leaking
Underground Storage Tank Trust Fund. Of the remaining 18.3
cents per gallon, the Code currently transfers 13.5 cents per
gallon from the Highway Trust Fund to the Aquatics Resources
Trust Fund and Land and Water Conservation Fund. The remainder,
4.8 cents per gallon, is retained in the General Fund. In
addition, the Sport Fish Restoration Account of the Aquatics
Resources Trust Fund receives 13.5 cents per gallon of the
revenues from the tax imposed on gasoline used as a fuel in the
nonbusiness use of small-engine outdoor power equipment. The
balance of 4.8 cents per gallon is retained in the General
Fund.\60\
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\60\ The Sport Fish Restoration Account also is funded with
receipts from an ad valorem manufacturer's excise tax on sport fishing
equipment.
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REASONS FOR CHANGE
Highway vehicles using alcohol-blended fuels contribute to
the wear and tear of the same highway system used by gasoline
or diesel vehicles. Therefore, the Committee believes that
alcohol-blended fuels should be taxed at rates equal to
gasoline or diesel. The Committee believes that present law
provides opportunities for fraud because individuals can buy
gasoline at reduced tax rates for blending with alcohol, but
never actually use the gasoline to make an alcohol fuel blend.
The Committee believes that eliminating the reduced tax rate on
gasoline prior to blending with alcohol will reduce such
opportunities for fraud. The Committee also believes that
providing a tax credit based on the gallons of alcohol used to
make an alcohol fuel and eliminating the various blend tiers
associated with reduced tax rates for alcohol-blended fuels
will simplify present law.
EXPLANATION OF PROVISION
Overview
The provision eliminates reduced rates of excise tax for
alcohol-blended fuels and imposes the full rate of excise tax
on alcohol-blended fuels (18.4 cents per gallon on gasoline
blends and 24.4 cents per gallon of diesel blended fuel). In
place of reduced rates, the provision permits the section 40
alcohol mixture credit, with certain modifications, to be
applied against excise tax liability. The credit may be taken
against the tax imposed on taxable fuels (by section 4081). To
the extent a person does not have section 4081 liability, the
provision allows taxpayers to file a claim for payment equal to
the amount of the credit for the alcohol used to produce an
eligible mixture. Under certain circumstances, a tax is imposed
if an alcohol fuel mixture credit is claimed with respect to
alcohol used in the production of any alcohol mixture, which is
subsequently used for a purpose for which the credit is not
allowed or changed into a substance that does not qualify for
the credit. The provision eliminates the General Fund retention
of certain taxes on alcohol fuels, and credits these taxes to
the Highway Trust Fund.
Alcohol fuel mixture excise tax credit and payment
provisions
ALCOHOL FUEL MIXTURE EXCISE TAX CREDIT
The provision eliminates the reduced rates of excise tax
for alcohol-blended fuels and taxable fuels used to produce an
alcohol fuel mixture. Under the provision, the full rate of tax
for taxable fuels is imposed on both alcohol fuel mixtures and
the taxable fuel used to produce an alcohol fuel mixture.
In lieu of the reduced excise tax rates, the provision
provides that the alcohol mixture credit provided under section
40 may be applied against section 4081 excise tax liability
(hereinafter referred to as ``the alcohol fuel mixture
credit''). The credit is treated as a payment of the taxpayer's
tax liability received at the time of the taxable event. The
alcohol fuel mixture credit is 52 cents for each gallon of
alcohol used by a person in producing an alcohol fuel mixture
for sale or use in a trade or business of the taxpayer. The
credit declines to 51 cents per gallon after calendar year
2004. For mixtures not containing ethanol (renewable source
methanol), the credit is 60 cents per gallon. As discussed
further below, the excise tax credit is refundable in order to
provide a benefit equivalent to the reduced tax rates, which
are being repealed under the provision.
For purposes of the alcohol fuel mixture credit, an
``alcohol fuel mixture'' is a mixture of alcohol and gasoline
or alcohol and a special fuel which is sold for use or used as
a fuel by the taxpayer producing the mixture. Alcohol for this
purpose includes methanol, ethanol, and alcohol gallon
equivalents of ETBE or other ethers produced from such alcohol.
It does not include alcohol produced from petroleum, natural
gas, or coal (including peat), or alcohol with a proof of less
than 190 (determined without regard to any added denaturants).
Special fuel is any liquid fuel (other than gasoline) which is
suitable for use in an internal combustion engine. The benefit
obtained from the excise tax credit is coordinated with the
alcohol fuels income tax credit. For refiners making an alcohol
fuel mixture with ETBE, the mixture is treated as sold to
another person for use as a fuel only upon removal from the
refinery. The excise tax credit is available through December
31, 2010.
Payments with respect to qualified alcohol fuel mixtures
To the extent the alcohol fuel mixture credit exceeds any
section 4081 liability of a person, the Secretary is to pay
such person an amount equal to the alcohol fuel mixture credit
with respect to such mixture. These payments are intended to
provide an equivalent benefit to replace the partial exemption
for fuels to be blended with alcohol and alcohol fuels being
repealed by the provision. If claims for payment are not paid
within 45 days, the claim is to be paid with interest. The
provision also provides that in the case of an electronic
claim, if such claim is not paid within 20 days, the claim is
to be paid with interest. If claims are filed electronically,
the claimant may make a claim for less than $200.
The provision does not apply with respect to alcohol fuel
mixtures sold after December 31, 2010.
Alcohol fuel subsidies borne by General Fund
The provision eliminates the requirement that 2.5 and 2.8
cents per gallon of excise taxes be retained in the General
Fund with the result that the full amount of tax on alcohol
fuels is credited to the Highway Trust Fund. The provision also
authorizes the full amount of fuel taxes to be appropriated to
the Highway Trust Fund without reduction for amounts equivalent
to the excise tax credits allowed for alcohol fuel mixtures,
and the Trust Fund is not required to reimburse any payments
with respect to qualified alcohol fuel mixtures.
Motorboat and small engine fuel taxes
The provision eliminates the General Fund retention of the
4.8 cents per gallon of the taxes imposed on gasoline and
special motor fuels used in motorboats and gasoline used as a
fuel in the nonbusiness use of small-engine outdoor power
equipment.
EFFECTIVE DATES
The provisions generally are effective for fuel sold or
used after September 30, 2004. The repeal of the General Fund
retention of the 2.5/2.8 cents per gallon of tax regarding
alcohol fuels and the repeal of the 4.8 cents per gallon
General Fund retention of the taxes imposed on fuels used in
motorboats and small engine equipment is effective for taxes
imposed after September 30, 2003. The provision regarding the
crediting of the full amount of tax to the Highway Trust Fund
without regard to credits and payments is effective for taxes
received after September 30, 2004, and payments made after
September 30, 2004.
F. Stock Options and Employee Stock Purchase Plan Stock Options
1. Exclusion of incentive stock options and employee stock purchase
plan stock options from wages (sec. 261 of the bill and secs.
421(b), 423(c), 3121(a), 3231, and 3306(b) of the Code)
PRESENT LAW
Generally, when an employee exercises a compensatory option
on employer stock, the difference between the option price and
the fair market value of the stock (i.e., the ``spread'') is
includible in income as compensation. In the case of an
incentive stock option or an option to purchase stock under an
employee stock purchase plan (collectively referred to as
``statutory stock options''), the spread is not included in
income at the time of exercise.\61\
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\61\ Sec. 421. For purposes of the individual alternative minimum
tax, the transfer of stock pursuant to an incentive stock option is
generally treated as the transfer of stock pursuant to a nonstatutory
option. Sec. 56(b)(3).
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If the statutory holding period requirements are satisfied
with respect to stock acquired through the exercise of a
statutory stock option, the spread, and any additional
appreciation, will be taxed as capital gain upon disposition of
such stock. Compensation income is recognized, however, if
there is a disqualifying disposition (i.e., if the statutory
holding period is not satisfied) of stock acquired pursuant to
the exercise of a statutory stock option.
Federal Insurance Contribution Act (``FICA'') and Federal
Unemployment Tax Act (``FUTA'') taxes (collectively referred to
as ``employment taxes'') are generally imposed in an amount
equal to a percentage of wages paid by the employer with
respect to employment.\62\ The applicable Code provisions \63\
do not provide an exception from FICA and FUTA taxes for wages
paid to an employee arising from the exercise of a statutory
stock option.
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\62\ Secs. 3101, 3111 and 3301.
\63\ Secs. 3121 and 3306.
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There has been uncertainty in the past as to employer
withholding obligations upon the exercise of statutory stock
options. On June 25, 2002, the IRS announced that until further
guidance is issued, it would not assess FICA or FUTA taxes, or
impose Federal income tax withholding obligations, upon either
the exercise of a statutory stock option or the disposition of
stock acquired pursuant to the exercise of a statutory stock
option.\64\
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\64\ Notice 2002-47, 2002-28 I.R.B. 97.
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REASONS FOR CHANGE
To provide taxpayers certainty, the Committee believes that
it is appropriate to clarify the treatment of statutory stock
options for employment tax and income tax withholding purposes.
The Committee believes that in the past, the IRS has been
inconsistent in its treatment of taxpayers with respect to this
issue and did not uniformly challenge taxpayers who did not
collect employment taxes and withhold income taxes on statutory
stock options.
Until January 2001, the IRS had not published guidance with
respect to the imposition of employment taxes and income tax
withholding on statutory stock options. Many taxpayers relied
on guidance published with respect to qualified stock options
(the predecessor to incentive stock options) to take the
position that no employment taxes or income tax withholding
were required with respect to statutory stock options. It is
the Committee's belief that a majority of taxpayers did not
withhold employment and income taxes with respect to statutory
stock options. Thus, proposed IRS regulations, if implemented,
would have altered the treatment of statutory stock options for
most employers.
Because there is a specific income tax exclusion with
respect to statutory stock options, the Committee believes it
is appropriate to clarify that there is a conforming exclusion
for employment taxes and income tax withholding. Statutory
stock options are required to meet certain Code requirements
that do not apply to nonqualified stock options. The Committee
believes that such requirements are intended to make statutory
stock options a tool of employee ownership rather than a form
of compensation subject to employment taxes. Furthermore, this
clarification will ensure that, if further IRS guidance is
issued, employees will not be faced with a tax increase that
will reduce their net paychecks even though their total
compensation has not changed.
The clarification will also eliminate the administrative
burden and cost to employers who, in the absence of the
Committee bill, could be required to modify their payroll
systems to provide for the withholding of income and employment
taxes on statutory stock options that they are not currently
required to withhold.
EXPLANATION OF PROVISION
The provision provides specific exclusions from FICA and
FUTA wages for remuneration on account of the transfer of stock
pursuant to the exercise of an incentive stock option or under
an employee stock purchase plan, or any disposition of such
stock. Thus, under the provision, FICA and FUTA taxes do not
apply upon the exercise of a statutory stock option.\65\ The
provision also provides that such remuneration is not taken
into account for purposes of determining Social Security
benefits.
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\65\ The provision also provides a similar exclusion under the
Railroad Retirement Tax Act.
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Additionally, the provision provides that Federal income
tax withholding is not required on a disqualifying disposition,
nor when compensation is recognized in connection with an
employee stock purchase plan discount. Present law reporting
requirements continue to apply.
EFFECTIVE DATE
The provision is effective for stock acquired pursuant to
options exercised after the date of enactment.
G. Incentives to Reinvest Foreign Earnings in the United States
(Sec. 271 of the bill and new sec. 965 of the Code)
PRESENT LAW
The United States employs a ``worldwide'' tax system, under
which domestic corporations generally are taxed on all income,
whether derived in the United States or abroad. Income earned
by a domestic parent corporation from foreign operations
conducted by foreign corporate subsidiaries generally is
subject to U.S. tax when the income is distributed as a
dividend to the domestic corporation. Until such repatriation,
the U.S. tax on such income generally is deferred, and U.S. tax
is imposed on such income when repatriated. However, under
anti-deferral rules, the domestic parent corporation may be
taxed on a current basis in the United States with respect to
certain categories of passive or highly mobile income earned by
its foreign subsidiaries, regardless of whether the income has
been distributed as a dividend to the domestic parent
corporation. The main anti-deferral provisions in this context
are the controlled foreign corporation rules of subpart F \66\
and the passive foreign investment company rules.\67\ A foreign
tax credit generally is available to offset, in whole or in
part, the U.S. tax owed on foreign-source income, whether
earned directly by the domestic corporation, repatriated as a
dividend from a foreign subsidiary, or included in income under
the anti-deferral rules.\68\
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\66\ Secs. 951-964.
\67\ Secs. 1291-1298.
\68\ Secs. 901, 902, 960, 1291(g).
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REASONS FOR CHANGE
The Committee observes that the residual U.S. tax imposed
on the repatriation of foreign earnings can serve as a
disincentive to repatriate these earnings. The Committee
believes that a temporary reduction in the U.S. tax on
repatriated dividends will stimulate the U.S. domestic economy
by triggering the repatriation of foreign earnings that
otherwise would have remained abroad. The Committee emphasizes
that this is a temporary economic stimulus measure.
EXPLANATION OF PROVISION
Under the provision, certain dividends received by a U.S.
corporation from a controlled foreign corporation are eligible
for an 85-percent dividends-received deduction. At the
taxpayer's election, this deduction is available for dividends
received either: (1) during the first six months of the
taxpayer's first taxable year beginning on or after the date of
enactment of the bill; or (2) during any six-month or shorter
period after the date of enactment of the bill, during the
taxpayer's last taxable year beginning before such date.
Dividends received after the election period will be taxed in
the normal manner under present law.
The deduction applies only to dividends and other amounts
included in gross income as dividends (e.g., amounts described
in section 1248(a)). The deduction does not apply to items that
are not included in gross income as dividends, such as subpart
F inclusions or deemed repatriations under section 956.
Similarly, the deduction does not apply to distributions of
earnings previously taxed under subpart F, except to the extent
that the subpart F inclusions result from the payment of a
dividend by one controlled foreign corporation to another
controlled foreign corporation within a certain chain of
ownership during the election period. This exception enables
multinational corporate groups to qualify for the deduction in
connection with the repatriation of earnings from lower-tier
controlled foreign corporations.
The deduction is subject to a number of limitations. First,
it applies only to repatriations in excess of the taxpayer's
average repatriation level over three of the five most recent
taxable years ending on or before March 31, 2003, determined by
disregarding the highest-repatriation year and the lowest-
repatriation year among such five years (the ``base-period
average''). In addition to actual dividends, deemed
repatriations under section 956 and distributions of earnings
previously taxed under subpart F are included in the base-
period average.
Second, the amount of dividends eligible for the deduction
is limited to the greatest of: (1) $500 million; (2) the amount
of earnings shown as permanently invested outside the United
States on the taxpayer's most recent audited financial
statement which is certified on or before March 31, 2003; or
(3) in the case of an applicable financial statement that fails
to show a specific amount of such earnings, but that does show
a specific amount of tax liability attributable to such
earnings, the amount of such earnings determined in such manner
as the Treasury Secretary may prescribe.
Third, dividends qualifying for the deduction must be
invested in the United States pursuant to a plan approved by
the senior management and board of directors of the corporation
claiming the deduction.
No foreign tax credit (or deduction) is allowed for foreign
taxes attributable to the deductible portion of any dividend
received during the taxable year for which an election under
the provision is in effect. For this purpose, the taxpayer may
specifically identify which dividends are treated as carrying
the deduction and which are not; in the absence of such
identification, a pro rata amount of foreign tax credits will
be disallowed with respect to every dividend received during
the taxable year.
In addition, the income attributable to the nondeductible
portion of a qualifying dividend may not be offset by net
operating losses, and the tax attributable to such income
generally may not be offset by credits (other than foreign tax
credits and AMT credits) and may not reduce the alternative
minimum tax otherwise owed by the taxpayer. No deduction under
sections 243 or 245 is allowed for any dividend for which a
deduction is allowed under the provision.
EFFECTIVE DATE
The provision is effective for a taxpayer's first taxable
year beginning on or after the date of enactment of the bill,
or the taxpayer's last taxable year beginning before such date,
at the taxpayer's election.
H. Other Provisions
1. Special rules for livestock sold on account of weather-related
conditions (sec. 281 of the bill and secs. 1033 and 451 of the
Code)
PRESENT LAW
Generally, a taxpayer realizes gain to the extent the sales
price (and any other consideration received) exceeds the
taxpayer's basis in the property. The realized gain is subject
to current income tax unless the gain is deferred or not
recognized under a special tax provision.
Under section 1033, gain realized by a taxpayer from an
involuntary conversion of property is deferred to the extent
the taxpayer purchases property similar or related in service
or use to the converted property within the applicable period.
The taxpayer's basis in the replacement property generally is
the same as the taxpayer's basis in the converted property,
decreased by the amount of any money or loss recognized on the
conversion, and increased by the amount of any gain recognized
on the conversion.
The applicable period for the taxpayer to replace the
converted property begins with the date of the disposition of
the converted property (or if earlier, the earliest date of the
threat or imminence of requisition or condemnation of the
converted property) and ends two years after the close of the
first taxable year in which any part of the gain upon
conversion is realized (the ``replacement period''). Special
rules extend the replacement period for certain real property
and principle residences damaged by a Presidentially declared
disaster to three years and four years, respectively, after the
close of the first taxable year in which gain is realized.
Section 1033(e) provides that the sale of livestock (other
than poultry) that is held for draft, breeding, or dairy
purposes in excess of the number of livestock that would have
been sold but for drought, flood, or other weather-related
conditions is treated as an involuntary conversion.
Consequently, gain from the sale of such livestock could be
deferred by reinvesting the proceeds of the sale in similar
property within a two-year period.
In general, cash-method taxpayers report income in the year
it is actually or constructively received. However, section
451(e) provides that a cash-method taxpayer whose principal
trade or business is farming who is forced to sell livestock
due to drought, flood, or other weather-related conditions may
elect to include income from the sale of the livestock in the
taxable year following the taxable year of the sale. This
elective deferral of income is available only if the taxpayer
establishes that, under the taxpayer's usual business
practices, the sale would not have occurred but for drought,
flood, or weather-related conditions that resulted in the area
being designated as eligible for Federal assistance. This
exception is generally intended to put taxpayers who receive an
unusually high amount of income in one year in the position
they would have been in absent the weather-related condition.
REASONS FOR CHANGE
The Committee is aware of situations in which cattlemen
sold livestock in excess of their usual business practice as a
result of weather-related conditions, but have been unable to
purchase replacement property because the weather-related
conditions have continued. The Committee believes it is
appropriate to extend the time period for cattlemen to purchase
replacement property in such situations.
EXPLANATION OF PROVISION
The provision extends the applicable period for a taxpayer
to replace livestock sold on account of drought, flood, or
other weather-related conditions from two years to four years
after the close of the first taxable year in which any part of
the gain on conversion is realized. The extension is only
available if the taxpayer establishes that, under the
taxpayer's usual business practices, the sale would not have
occurred but for drought, flood, or weather-related conditions
that resulted in the area being designated as eligible for
Federal assistance. In addition, the Secretary of the Treasury
is granted authority to further extend the replacement period
on a regional basis should the weather-related conditions
continue longer than three years. Also, for property eligible
for the provision's extended replacement period, the provision
provides that the taxpayer can make an election under section
451(e) until the period for reinvestment of such property under
section 1033 expires.
EFFECTIVE DATE
The provision is effective for any taxable year with
respect to which the due date (without regard to extensions)
for the return is after December 31, 2002.
2. Payment of dividends on stock of cooperatives without reducing
patronage dividends (sec. 282 of the bill and sec. 1388 of the
Code)
PRESENT LAW
Under present law, cooperatives generally are entitled to
deduct or exclude amounts distributed as patronage dividends in
accordance with Subchapter T of the Code. In general, patronage
dividends are comprised of amounts that are paid to patrons (1)
on the basis of the quantity or value of business done with or
for patrons, (2) under a valid and enforceable obligation to
pay such amounts that was in existence before the cooperative
received the amounts paid, and (3) which are determined by
reference to the net earnings of the cooperative from business
done with or for patrons.
Treasury Regulations provide that net earnings are reduced
by dividends paid on capital stock or other proprietary capital
interests (referred to as the ``dividend allocation
rule'').\69\ The dividend allocation rule has been interpreted
to require that such dividends be allocated between a
cooperative's patronage and nonpatronage operations, with the
amount allocated to the patronage operations reducing the net
earnings available for the payment of patronage dividends.
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\69\ Treas. Reg. sec. 1.1388-1(a)(1).
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REASONS FOR CHANGE
The Committee believes that the dividend allocation rule
should not apply to the extent that the organizational
documents of a cooperative provide that capital stock dividends
do not reduce the amounts owed to patrons as patronage
dividends. To the extent that capital stock dividends are in
addition to amounts paid under the cooperative's organizational
documents to patrons as patronage dividends, the Committee
believes that those capital stock dividends are not being paid
from earnings from patronage business.
In addition, the Committee believes cooperatives should be
able to raise needed equity capital by issuing capital stock
without dividends paid on such stock causing the cooperative to
be taxed on a portion of its patronage income, and without
preventing the cooperative from being treated as operating on a
cooperative basis.
EXPLANATION OF PROVISION
The provision provides a special rule for dividends on
capital stock of a cooperative. To the extent provided in
organizational documents of the cooperative, dividends on
capital stock do not reduce patronage income and do not prevent
the cooperative from being treated as operating on a
cooperative basis.
EFFECTIVE DATE
The provision is effective for distributions made in
taxable years ending after the date of enactment.
3. Capital gains treatment to apply to outright sales of timber by
landowner (sec. 283 of the bill and sec. 631(b) of the Code)
PRESENT LAW
Under present law, a taxpayer disposing of timber held for
more than one year is eligible for capital gains treatment in
three situations. First, if the taxpayer sells or exchanges
timber that is a capital asset (sec. 1221) or property used in
the trade or business (sec. 1231), the gain generally is long-
term capital gain; however, if the timber is held for sale to
customers in the taxpayer's business, the gain will be ordinary
income. Second, if the taxpayer disposes of the timber with a
retained economic interest, the gain is eligible for capital
gain treatment (sec. 631(b)). Third, if the taxpayer cuts
standing timber, the taxpayer may elect to treat the cutting as
a sale or exchange eligible for capital gains treatment (sec.
631(a)).
REASONS FOR CHANGE
The Committee believes that the requirement that the owner
of timber retain an economic interest in the timber in order to
obtain capital gain treatment under section 631(b) results in
poor timber management. Under present law, the buyer, when
cutting and removing timber, has no incentive to protect young
or other uncut trees because the buyer only pays for the timber
that is cut and removed. Therefore, the Committee bill
eliminates this requirement and provides for capital gain
treatment under section 631(b) in the case of outright sales of
timber.
EXPLANATION OF PROVISION
Under the provision, in the case of a sale of timber by the
owner of the land from which the timber is cut, the requirement
that a taxpayer retain an economic interest in the timber in
order to treat gains as capital gain under section 631(b) does
not apply. Outright sales of timber by the landowner will
qualify for capital gains treatment in the same manner as sales
with a retained economic interest qualify under present law,
except that the usual tax rules relating to the timing of the
income from the sale of the timber will apply (rather than the
special rule of section 631(b) treating the disposal as
occurring on the date the timber is cut).
EFFECTIVE DATE
The provision is effective for sales of timber after
December 31, 2004.
4. Distributions from publicly traded partnerships treated as
qualifying income of regulated investment company (sec. 284 of
the bill and secs. 851 and 469(k) of the Code)
PRESENT LAW
Treatment of RICs
A regulated investment company (``RIC'') generally is
treated as a conduit for Federal income tax purposes. In
computing its taxable income, a RIC deducts dividends paid to
its shareholders to achieve conduit treatment (sec. 852(b)). In
order to qualify for conduit treatment, a RIC must be a
domestic corporation that, at all times during the taxable
year, is registered under the Investment Company Act of 1940 as
a management company or as a unit investment trust, or has
elected to be treated as a business development company under
that Act (sec. 851(a)). In addition, the corporation must elect
RIC status, and must satisfy certain other requirements (sec.
851(b)).
One of the RIC qualification requirements is that at least
90 percent of the RIC's gross income is derived from dividends,
interest, payments with respect to securities loans, and gains
from the sale or other disposition of stock or securities or
foreign currencies, or other income (including but not limited
to gains from options, futures, or forward contracts) derived
with respect to its business of investing in such stock,
securities, or currencies (sec. 851(b)(2)). Income derived from
a partnership is treated as meeting this requirement only to
the extent such income is attributable to items of income of
the partnership that would meet the requirement if realized by
the RIC in the same manner as realized by the partnership (the
``look-through'' rule for partnership income) (sec. 851(b)).
Under present law, no distinction is made under this rule
between a publicly traded partnership and any other
partnership.
The RIC qualification rules include limitations on the
ownership of assets and on the composition of the RIC's assets
(sec. 851(b)(3)). Under the ownership limitation, at least 50
percent of the value of the RIC's total assets must be
represented by cash, government securities and securities of
other RICs, and other securities; however, in the case of such
other securities, the RIC may invest no more than five percent
of the value of the total assets of the RIC in the securities
of any one issuer, and may hold no more than 10 percent of the
outstanding voting securities of any one issuer. Under the
limitation on the composition of the RIC's assets, no more than
25 percent of the value of the RIC's total assets may be
invested in the securities of any one issuer (other than
Government securities), or in securities of two or more
controlled issuers in the same or similar trades or businesses.
These limitations generally are applied at the end of each
quarter (sec. 851(d)).
Treatment of publicly traded partnerships
Present law provides that a publicly traded partnership
means a partnership, interests in which are traded on an
established securities market, or are readily tradable on a
secondary market (or the substantial equivalent thereof). In
general, a publicly traded partnership is treated as a
corporation (sec. 7704(a)), but an exception to corporate
treatment is provided if 90 percent or more of its gross income
is interest, dividends, real property rents, or certain other
types of qualifying income (sec. 7704(c) and (d)).
A special rule for publicly traded partnerships applies
under the passive loss rules. The passive loss rules limit
deductions and credits from passive trade or business
activities (sec. 469). 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 disposes
of his entire interest in the passive activity to an unrelated
person. The special rule for publicly traded partnerships
provides that the passive loss rules are applied separately
with respect to items attributable to each publicly traded
partnership (sec. 469(k)). Thus, income or loss from the
publicly traded partnership is treated as separate from income
or loss from other passive activities.
REASONS FOR CHANGE
The Committee understands that publicly traded partnerships
generally are treated as corporations under rules enacted to
address Congress' view that publicly traded partnerships
resemble corporations in important respects.\70\ Publicly
traded partnerships with specified types of income are not
treated as corporations, however, for the reason that if the
income is from sources that are commonly considered to be
passive investments, then there is less reason to treat the
publicly traded partnership as a corporation.\71\ The Committee
understands that these types of publicly traded partnerships
may have improved access to capital markets if their interests
were permitted investments of mutual funds. Therefore, the bill
treats publicly traded partnership interests as permitted
investments for mutual funds (``RICs'').
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\70\ H.R. Rep. No. 100-391, pt. 2 of 2, at 1066 (1987).
\71\ Id.
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Nevertheless, the Committee believes that permitting mutual
funds to hold interests in a publicly traded partnership should
not give rise to avoidance of unrelated business income tax or
withholding of income tax that would apply if tax-exempt
organizations or foreign persons held publicly traded
partnership interests directly rather than through a mutual
fund. Therefore, the Committee bill requires that present-law
limitations on ownership and composition of assets of mutual
funds apply to any investment in a publicly traded partnership
by a mutual fund. The Committee believes that these limitations
will serve to limit the use of mutual funds as conduits for
avoidance of unrelated business income tax or withholding rules
that would otherwise apply with respect to publicly traded
partnership income.
EXPLANATION OF PROVISION
The provision modifies the 90-percent test with respect to
income of a RIC to include income derived from an interest in a
publicly traded partnership. The provision also modifies the
lookthrough rule for partnership income of a RIC so that it
applies only to income from a partnership other than a publicly
traded partnership.
The provision provides that the limitation on ownership and
the limitation on composition of assets that apply to other
investments of a RIC also apply to RIC investments in publicly
traded partnership interests.
The provision provides that the special rule for publicly
traded partnerships under the passive loss rules (requiring
separate treatment) applies to a RIC holding an interest in a
publicly traded partnership, with respect to items attributable
to the interest in the publicly traded partnership.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after the date of enactment.
5. Improvements related to real estate investment trusts (sec. 285 of
the bill and secs. 856, 857 and 860 of the Code)
PRESENT LAW
In general
Real estate investment trusts (``REITs'') are treated, in
substance, as pass-through entities under present law. Pass-
through status is achieved by allowing the REIT a deduction for
dividends paid to its shareholders. REITs are generally
restricted to investing in passive investments primarily in
real estate and securities.
A REIT must satisfy four tests on a year-by-year basis:
organizational structure, source of income, nature of assets,
and distribution of income. Whether the REIT meets the asset
tests is generally measured each quarter.
Organizational structure requirements
To qualify as a REIT, an entity must be for its entire
taxable year a corporation or an unincorporated trust or
association that would be taxable as a domestic corporation but
for the REIT provisions, and must be managed by one or more
trustees. The beneficial ownership of the entity must be
evidenced by transferable shares or certificates of ownership.
Except for the first taxable year for which an entity elects to
be a REIT, the beneficial ownership of the entity must be held
by 100 or more persons, and the entity may not be so closely
held by individuals that it would be treated as a personal
holding company if all its adjusted gross income constituted
personal holding company income. A REIT is required to comply
with regulations to ascertain the actual ownership of the
REIT's outstanding shares.
Income requirements
In order for an entity to qualify as a REIT, at least 95
percent of its gross income generally must be derived from
certain passive sources (the ``95-percent income test''). In
addition, at least 75 percent of its income generally must be
from certain real estate sources (the ``75-percent income
test''), including rents from real property (as defined) and
gain from the sale or other disposition of real property.
Qualified rental income
Amounts received as impermissible ``tenant services
income'' are not treated as rents from real property.\72\ In
general, such amounts are for services rendered to tenants that
are not ``customarily furnished'' in connection with the rental
of real property.\73\ Special rules also permit amounts to be
received from certain ``foreclosure property'' treated as such
for three years after the property is acquired by the REIT in
foreclosure after a default (or imminent default) on a lease of
such property or an indebtedness which such property secured.
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\72\ A REIT is not treated as providing services that produce
impermissible tenant services income if such services are provided by
an independent contractor from whom the REIT does not derive or receive
any income. An independent contractor is defined as a person who does
not own, directly or indirectly, more than 35 percent of the shares of
the REIT. Also, no more than 35 percent of the total shares of stock of
an independent contractor (or of the interests in net assets or net
profits, if not a corporation) can be owned directly or indirectly by
persons owning 35 percent or more of the interests in the REIT.
\73\ Rents for certain personal property leased in connection with
the rental of real property are treated as rents from real property if
the fair market value of the personal property does not exceed 15
percent of the aggregate fair market values of the real and personal
property.
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Rents from real property, for purposes of the 95-percent
and 75-percent income tests, generally do not include any
amount received or accrued from any person in which the REIT
owns, directly or indirectly, 10 percent or more of the vote or
value.\74\ An exception applies to rents received from a
taxable REIT subsidiary (``TRS'') (described further below) if
at least 90 percent of the leased space of the property is
rented to persons other than a TRS or certain related persons,
and if the rents from the TRS are substantially comparable to
unrelated party rents.\75\
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\74\ Sec. 856(d)(2)(B).
\75\ Sec. 856(d)(8).
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Certain hedging instruments
Except as provided in regulations, a payment to a REIT
under an interest rate swap or cap agreement, option, futures
contract, forward rate agreement, or any similar financial
instrument, entered into by the trust in a transaction to
reduce the interest rate risks with respect to any indebtedness
incurred or to be incurred by the REIT to acquire or carry real
estate assets, and any gain from the sale or disposition of any
such investment, is treated as income qualifying for the 95-
percent income test.
Tax if qualified income tests not met
If a REIT fails to meet the 95-percent or 75-percent income
tests but has set out the income it did receive in a schedule
and any error in the schedule is due to reasonable cause and
not willful neglect, then the REIT does not lose its REIT
status but instead pays a tax measured by the greater of the
amount by which 90 percent \76\ of the REIT's gross income
exceeds the amount of items subject to the 95-percent test, or
the amount by which 75 percent of the REIT's gross income
exceeds the amount of items subject to the 75-percent test.\77\
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\76\ Prior to 1999, the rule had applied to the amount by which 95
percent of the income exceeded the items subject to the 95 percent
test.
\77\ The ratio of the REIT's net to gross income is applied to the
excess amount, to determine the amount of tax (disregarding certain
items otherwise subject to a 100-percent tax). In effect, the formula
seeks to require that all of the REIT net income attributable to the
failure of the income tests will be paid as tax. Sec. 857(b)(5).
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Asset requirements
75-percent asset test
To satisfy the asset requirements to qualify for treatment
as a REIT, at the close of each quarter of its taxable year, an
entity must have at least 75 percent of the value of its assets
invested in real estate assets, cash and cash items, and
government securities (the ``75-percent asset test''). The term
real estate asset is defined to mean real property (including
interests in real property and mortgages on real property) and
interests in REITs.
Limitation on investment in other entities
A REIT is limited in the amount that it can own in other
corporations. Specifically, a REIT cannot own securities (other
than Government securities and certain real estate assets) in
an amount greater than 25 percent of the value of REIT assets.
In addition, it cannot own such securities of any one issuer
representing more than 5 percent of the total value of REIT
assets or more than 10 percent of the voting securities or 10
percent of the value of the outstanding securities of any one
issuer. Securities for purposes of these rules are defined by
reference to the Investment Company Act of 1940.
``Straight debt'' exception
Securities of an issuer that are within a safe-harbor
definition of ``straight debt'' (as defined for purposes of
subchapter S) \78\ are not taken into account in applying the
limitation that a REIT may not hold more than 10 percent of the
value of outstanding securities of a single issuer, if: (1) the
issuer is an individual, (2) the only securities of such issuer
held by the REIT or a taxable REIT subsidiary of the REIT are
straight debt, or (3) the issuer is a partnership and the trust
holds at least a 20 percent profits interest in the
partnership.
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\78\ Sec. 1361(c)(5), without regard to paragraph (B)(iii) thereof.
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Straight debt for purposes of the REIT provision \79\ is
defined as a written or unconditional promise to pay on demand
or on a specified date a sum certain in money if (i) the
interest rate (and interest payment dates) are not contingent
on profits, the borrower's discretion, or similar factors, and
(ii) there is no convertibility (directly or indirectly) into
stock.
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\79\ Sec. 856(c)(7).
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Certain subsidiary ownership permitted with income treated
as income of the REIT
Under one exception to the rule limiting a REIT's
securities holdings to no more than 10 percent of the vote or
value of a single issuer, a REIT can own 100 percent of the
stock of a corporation, but in that case the income and assets
of such corporation are treated as income and assets of the
REIT.
Special rules for Taxable REIT subsidiaries
Under another exception to the general rule limiting REIT
securities ownership of other entities, a REIT can own stock of
a taxable REIT subsidiary (``TRS''), generally, a corporation
other than a real estate investment trust \80\ with which the
REIT makes a joint election to be subject to special rules. A
TRS can engage in active business operations that would produce
income that would not be qualified income for purposes of the
95-percent or 75-percent income tests for a REIT, and that
income is not attributed to the REIT. For example a TRS could
provide noncustomary services to REIT tenants, or it could
engage directly in the active operation and management of real
estate (without use of an independent contractor); and the
income the TRS derived from these nonqualified activities would
not be treated as disqualified REIT income. Transactions
between a TRS and a REIT are subject to a number of specified
rules that are intended to prevent the TRS (taxable as a
separate corporate entity) from shifting taxable income from
its activities to the pass-through entity REIT or from
absorbing more than its share of expenses. Under one rule, a
100-percent excise tax is imposed on rents, deductions, or
interest paid by the TRS to the REIT to the extent such items
would exceed an arm's length amount as determined under section
482.\81\
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\80\ Certain corporations are not eligible to be a TRS, such as a
corporation which directly or indirectly operates or manages a lodging
facility or a health care facility, or directly or indirectly provides
to any other person rights to a brand name under which any lodging
facility or health care facility is operated. Sec. 856(l)(3).
\81\ If the excise tax applies, then the item is not reallocated
back to the TRS under section 482.
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Rents subject to the 100 percent excise tax do not include
rents for services of a TRS that are for services customarily
furnished or rendered in connection with the rental of real
property.
They also do not include rents from a TRS that are for real
property or from incidental personal property provided with
such real property.
Income distribution requirements
A REIT is generally required to distribute 90 percent of
its income before the end of its taxable year, as deductible
dividends paid to shareholders. This rule is similar to a rule
for regulated investment companies (``RICs'') that requires
distribution of 90 percent of income. If a REIT declares
certain dividends after the end of its taxable year but before
the time prescribed for filing its return for that year and
distributes those amounts to shareholders within the 12 months
following the close of that taxable year, such distributions
are treated as made during such taxable year for this purpose.
As described further below, a REIT can also make certain
``deficiency dividends'' after the close of the taxable year
after a determination that it has not distributed the correct
amount for qualification as a REIT.
Consequences of failure to meet requirements
A REIT loses its status as a REIT, and becomes subject to
tax as a C corporation, if it fails to meet specified tests
regarding the sources of its income, the nature and amount of
its assets, its structure, and the amount of its income
distributed to shareholders.
In the case of a failure to meet the source of income
requirements, if the failure is due to reasonable cause and not
to willful neglect, the REIT may continue its REIT status if it
pays the disallowed income as a tax to the Treasury.\82\
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\82\ Secs. 856(c)(6) and 857(b)(5).
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There is no similar provision that allows a REIT to pay a
penalty and avoid disqualification in the case of other
qualification failures.
A REIT may make a deficiency dividend after a determination
is made that it has not distributed the correct amount of its
income, and avoid disqualification. The Code provides only for
determinations involving a controversy with the IRS and does
not provide for a REIT to make such a distribution on its own
initiative. Deficiency dividends may be declared on or after
the date of ``determination''. A determination is defined to
include only (i) a final decision by the Tax Court or other
court of competent jurisdiction, (ii) a closing agreement under
section 7121, or (iii) under Treasury regulations, an agreement
signed by the Secretary and the REIT.
REASONS FOR CHANGE
The Committee believes that a number of simplifying and
conforming changes should be made to the ``straight debt''
provisions that exempt certain securities from the rule that a
REIT may not hold more than 10 percent of the value of
securities of a single issuer, as well as to the TRS rules, the
rules relating to certain hedging arrangements, and the
computation of tax liability when the 95-percent gross income
test is not met.
The Committee also believes it is desirable to provide
rules under which a REIT that inadvertently fails to meet
certain REIT qualification requirements can correct such
failure without losing REIT status.
EXPLANATION OF PROVISION
The provision makes a number of modifications to the REIT
rules.
Straight debt modification
The provision modifies the definition of ``straight debt''
for purposes of the limitation that a REIT may not hold more
than 10 percent of the value of the outstanding securities of a
single issuer, to provide more flexibility than the present law
rule. In addition, except as provided in regulations, neither
such straight debt nor certain other types of securities are
considered ``securities'' for purposes of this rule.
Straight debt securities
As under present law, ``straight-debt'' is still defined by
reference to section 1361(c)(5), without regard to subparagraph
(B)(iii) thereof (limiting the nature of the creditor).
Special rules are provided permitting certain contingencies
for purposes of the REIT provision. Any interest or principal
shall not be treated as failing to satisfy section
1361(c)(5)(B)(i) solely by reason of the fact that the time of
payment of such interest or principal is subject to a
contingency, but only if one of several factors applies. The
first type of contingency that is permitted is one that does
not have the effect of changing the effective yield to
maturity, as determined under section 1272, other than a change
in the annual yield to maturity, but only if (i) any such
contingency does not exceed the greater of \1/4\ of one percent
or five percent of the annual yield to maturity, or (ii)
neither the aggregate issue price nor the aggregate face amount
of the debt instruments held by the REIT exceeds $1,000,000 and
not more than 12 months of unaccrued interest can be required
to be prepaid thereunder.
Also, the time or amount of any payment is permitted to be
subject to a contingency upon a default or the exercise of a
prepayment right by the issuer of the debt, provided that such
contingency is consistent with customary commercial
practice.\83\
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\83\ The present law rules that limit qualified interest income to
amounts the determination of which do not depend, in whole or in part,
on the income or profits of any person, continue to apply to such
contingent interest. See, e.g., secs. 856(c)(2)(G), 856(c)(3)(G) and
856(f).
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The provision eliminates the present law rule requiring a
REIT to own a 20 percent equity interest in a partnership in
order for debt to qualify as ``straight debt''. The bill
instead provides new ``look-through'' rules determining a REIT
partner's share of partnership securities, generally treating
debt to the REIT as part of the REIT's partnership interest for
this purpose, except in the case of otherwise qualifying debt
of the partnership.
Certain corporate or partnership issues that otherwise
would be permitted to be held without limitation under the
special straight debt rules described above will not be so
permitted if the REIT holding such securities, and any of its
taxable REIT subsidiaries, holds any securities of the issuer
which are not permitted securities (prior to the application of
this rule) and have an aggregate value greater than one percent
of the issuer's outstanding securities.
Other securities
Except as provided in regulations, the following also are
not considered ``securities'' for purposes of the rule that a
REIT cannot own more than 10 percent of the value of the
outstanding securities of a single issuer: (i) any loan to an
individual or an estate, (ii) any section 467 rental agreement,
(as defined in section 467(d)), other than with a person
described in section 856(d)(2)(B), (iii) any obligation to pay
rents from real property, (iv) any security issued by a State
or any political subdivision thereof, the District of Columbia,
a foreign government, or any political subdivision thereof, or
the Commonwealth of Puerto Rico, but only if the determination
of any payment received or accrued under such security does not
depend in whole or in part on the profits of any entity not
described in this category, or payments on any obligation
issued by such an entity, (v) any security issued by a real
estate investment trust; and (vi) any other arrangement that,
as determined by the Secretary, is excepted from the definition
of a security.
Safe harbor testing date for certain rents
The provision provides specific safe-harbor rules regarding
the dates for testing whether 90 percent of a REIT property is
rented to unrelated persons and whether the rents paid by
related persons are substantially comparable to unrelated party
rents. These testing rules are provided solely for purposes of
the special provision permitting rents received from a TRS to
be treated as qualified rental income for purposes of the
income tests.\84\
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\84\ The provision does not modify any of the standards of section
482 as they apply to REITs and to TRSs.
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Customary services exception
The provision prospectively eliminates the safe harbor
allowing rents received by a REIT to be exempt from the 100
percent excise tax if the rents are for customary services
performed by the TRS \85\ or are from a TRS and are for the
provision of certain incidental personal property. Instead,
such payments are free of the excise tax if they satisfy the
present law safe-harbor that applies if the REIT pays the TRS
at least 150 percent of the cost to the TRS of providing any
services.
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\85\ Although a REIT could itself provide such service and receive
the income without receiving any disqualified income, in that case the
REIT itself would be bearing the cost of providing the service. Under
the present law exception for a TRS providing such service, there is no
explicit requirement that the TRS be reimbursed for the full cost of
the service.
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Hedging rules
The rules governing the tax treatment of arrangements
engaged in by a REIT to reduce certain interest rate risks are
prospectively generally conformed to the rules included in
section 1221. Also, the defined income of a REIT from such a
hedging transaction is excluded from gross income for purposes
of the 95-percent of gross income requirement.
95-percent of gross income requirement
The provision prospectively amends the tax liability owed
by the REIT when it fails to meet the 95-percent of gross
income test by applying a taxable fraction based on 95 percent,
rather than 90 percent, of the REIT's gross income.
Consequences of failure to meet REIT requirements
Under the provision, a REIT may avoid disqualification in
the event of certain failures of the requirements for REIT
status, provided that (1) the failure was due to reasonable
cause and not willful neglect, (2) the failure is corrected,
and (3) except for certain failures not exceeding a specified
de minimis amount, a penalty amount is paid.
Certain de minimis asset failures of 5-percent or 10-
percent tests
One requirement of present law is that, with certain
exceptions, (i) not more than 5 percent of the value of total
REIT assets may be represented by securities of one issuer, and
(ii) a REIT may not hold securities possessing more than 10
percent of the total voting power or 10 percent of the total
value of the outstanding securities of any one issuer.\86\ The
requirements must be satisfied each quarter.
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\86\ Sec. 856(c)(4)(B)(iii). These rules do not apply to securities
of a TRS, or to securities that qualify for the 75 percent asset test
of section 856(c)(4)(A), such as real estate assets, cash items
(including receivables), or Government securities.
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The provision provides that a REIT will not lose its REIT
status for failing to satisfy these requirements in a quarter
if the failure is due to the ownership of assets the total
value of which does not exceed the lesser of (i) one percent of
the total value of the REIT's assets at the end of the quarter
for which such measurement is done or (ii) 10 million dollars;
provided in either case that the REIT either disposes of the
assets within six months after the last day of the quarter in
which the REIT identifies the failure (or such other time
period prescribed by the Treasury), or otherwise meets the
requirements of those rules by the end of such time period.\87\
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\87\ A REIT might satisfy the requirements without a disposition,
for example, by increasing its other assets in the case of the 5
percent rule; or by the issuer modifying the amount or value of its
total securities outstanding in the case of the 10 percent rule.
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Larger asset test failures (whether of 5-percent or 10-
percent tests, or of 75-percent or other asset
tests)
Under the provision, if a REIT fails to meet any of the
asset test requirements for a particular quarter and the
failure exceeds the de minimis threshold described above, then
the REIT still will be deemed to have satisfied the
requirements if: (i) following the REIT's identification of the
failure, the REIT files a schedule with a description of each
asset that caused the failure, in accordance with regulations
prescribed by the Treasury; (ii) the failure was due to
reasonable cause and not to willful neglect, (iii) the REIT
disposes of the assets within 6 months after the last day of
the quarter in which the identification occurred or such other
time period as is prescribed by the Treasury (or the
requirements of the rules are otherwise met within such
period), and (iv) the REIT pays a tax on the failure.
The tax that the REIT must pay on the failure is the
greater of (i) $50,000, or (ii) an amount determined (pursuant
to regulations) by multiplying the highest rate of tax for
corporations under section 11, times the net income generated
by the assets for the period beginning on the first date of the
failure and ending on the date the REIT has disposed of the
assets (or otherwise satisfies the requirements).
Such taxes are treated as excise taxes, for which the
deficiency provisions of the excise tax subtitle of the Code
(subtitle F) apply.
Conforming reasonable cause and reporting standard for
failures of income tests
The provision conforms the reporting and reasonable cause
standards for failure to meet the income tests to the new asset
test standards. However, the provision does not change the rule
under section 857(b)(5) that for income test failures, all of
the net income attributed to the disqualified gross income is
paid as tax.
Other failures
The bill adds a provision under which, if a REIT fails to
satisfy one or more requirements for REIT qualification, other
than the 95-percent and 75-percent gross income tests and other
than the new rules provided for failures of the asset tests,
the REIT may retain its REIT qualification if the failures are
due to reasonable cause and not willful neglect, and if the
REIT pays a penalty of $50,000 for each such failure.
Taxes and penalties paid deducted from amount required to
be distributed
Any taxes or penalties paid under the provision are
deducted from the net income of the REIT in determining the
amount the REIT must distribute under the 90-percent
distribution requirement.
Expansion of deficiency dividend procedure
The provision expands the circumstances in which a REIT may
declare a deficiency dividend, by allowing such a declaration
to occur after the REIT unilaterally has identified a failure
to pay the relevant amount. Thus, the declaration need not
await a decision of the Tax Court, a closing agreement, or an
agreement signed by the Secretary of the Treasury.
EFFECTIVE DATE
The provision is generally effective for taxable years
beginning after December 31, 2000.
However, some of the provisions are effective for taxable
years beginning after the date of enactment. These are: the new
``look through'' rules determining a REIT partner's share of
partnership securities for purposes of the ``straight debt''
rules; the provision changing the 90-percent of gross income
reference to 95 percent, for purposes of the tax liability if a
REIT fails to meet the 95-percent of gross income test; the new
hedging definition; the rule modifying the treatment of rents
with respect to customary services; and the new rules for
correction of certain failures to satisfy the REIT
requirements.
6. Treatment of certain dividends of regulated investment companies
(sec. 286 of the bill and secs. 871 and 881 of the Code)
PRESENT LAW
Regulated investment companies
A regulated investment company (``RIC'') is a domestic
corporation that, at all times during the taxable year, is
registered under the Investment Company Act of 1940 as a
management company or as a unit investment trust, or has
elected to be treated as a business development company under
that Act (sec. 851(a)).
In addition, to qualify as a RIC, a corporation must elect
such status and must satisfy certain tests (sec. 851(b)). These
tests include a requirement that the corporation derive at
least 90 percent of its gross income from dividends, interest,
payments with respect to certain securities loans, and gains on
the sale or other disposition of stock or securities or foreign
currencies, or other income derived with respect to its
business of investment in such stock, securities, or
currencies.
Generally, a RIC pays no income tax because it is permitted
to deduct dividends paid to its shareholders in computing its
taxable income. The amount of any distribution generally is not
considered as a dividend for purposes of computing the
dividends paid deduction unless the distribution is pro rata,
with no preference to any share of stock as compared with other
shares of the same class (sec. 562(c)). For distributions by
RICs to shareholders who made initial investments of at least
$10,000,000, however, the distribution is not treated as non-
pro rata or preferential solely by reason of an increase in the
distribution due to reductions in administrative expenses of
the company.
A RIC generally may pass through to its shareholders the
character of its long-term capital gains. It does this by
designating a dividend it pays as a capital gain dividend to
the extent that the RIC has net capital gain (i.e., net long-
term capital gain over net short-term capital loss). These
capital gain dividends are treated as long-term capital gain by
the shareholders. A RIC generally also can pass through to its
shareholders the character of tax-exempt interest from State
and local bonds, but only if, at the close of each quarter of
its taxable year, at least 50 percent of the value of the total
assets of the RIC consists of these obligations. In this case,
the RIC generally may designate a dividend it pays as an
exempt-interest dividend to the extent that the RIC has tax-
exempt interest income. These exempt-interest dividends are
treated as interest excludable from gross income by the
shareholders.
U.S. source investment income of foreign persons
In general
The United States generally imposes a flat 30-percent tax,
collected by withholding, on the gross amount of U.S.-source
investment income payments, such as interest, dividends, rents,
royalties or similar types of income, to nonresident alien
individuals and foreign corporations (``foreign persons'')
(secs. 871(a), 881, 1441, and 1442). Under treaties, the United
States may reduce or eliminate such taxes. Even taking into
account U.S. treaties, however, the tax on a dividend generally
is not entirely eliminated. Instead, U.S.-source portfolio
investment dividends received by foreign persons generally are
subject to U.S. withholding tax at a rate of at least 15
percent.
Interest
Although payments of U.S.-source interest that is not
effectively connected with a U.S. trade or business generally
are subject to the 30-percent withholding tax, there are
exceptions to that rule. For example, interest from certain
deposits with banks and other financial institutions is exempt
from tax (secs. 871(i)(2)(A) and 881(d)). Original issue
discount on obligations maturing in 183 days or less from the
date of original issue (without regard to the period held by
the taxpayer) is also exempt from tax (sec. 871(g)). An
additional exception is provided for certain interest paid on
portfolio obligations (secs. 871(h) and 881(c)). ``Portfolio
interest'' generally is defined as any U.S.-source interest
(including original issue discount), not effectively connected
with the conduct of a U.S. trade or business, (i) on an
obligation that satisfies certain registration requirements or
specified exceptions thereto (i.e., the obligation is ``foreign
targeted''), and (ii) that is not received by a 10-percent
shareholder (secs. 871(h)(3) and 881(c)(3)). With respect to a
registered obligation, a statement that the beneficial owner is
not a U.S. person is required (secs. 871(h)(2), (5) and
881(c)(2)). This exception is not available for any interest
received either by a bank on a loan extended in the ordinary
course of its business (except in the case of interest paid on
an obligation of the United States), or by a controlled foreign
corporation from a related person (sec. 881(c)(3)). Moreover,
this exception is not available for certain contingent interest
payments (secs. 871(h)(4) and 881(c)(4)).
Capital gains
Foreign persons generally are not subject to U.S. tax on
gain realized on the disposition of stock or securities issued
by a U.S. person (other than a ``U.S. real property holding
corporation,'' as described below), unless the gain is
effectively connected with the conduct of a trade or business
in the United States. This exemption does not apply, however,
if the foreign person is a nonresident alien individual present
in the United States for a period or periods aggregating 183
days or more during the taxable year (sec. 871(a)(2)). A RIC
may elect not to withhold on a distribution to a foreign person
representing a capital gain dividend. (Treas. Reg. sec. 1.1441-
3(c)(2)(D)).
Gain or loss of a foreign person from the disposition of a
U.S. real property interest is subject to net basis tax as if
the taxpayer were engaged in a trade or business within the
United States and the gain or loss were effectively connected
with such trade or business (sec. 897). In addition to an
interest in real property located in the United States or the
Virgin Islands, U.S. real property interests include (among
other things) any interest in a domestic corporation unless the
taxpayer establishes that the corporation was not, during a 5-
year period ending on the date of the disposition of the
interest, a U.S. real property holding corporation (which is
defined generally to mean a corporation the fair market value
of whose U.S. real property interests equals or exceeds 50
percent of the sum of the fair market values of its real
property interests and any other of its assets used or held for
use in a trade or business).
Estate taxation
Decedents who were citizens or residents of the United
States are generally subject to Federal estate tax on all
property, wherever situated.\88\ Nonresidents who are not U.S.
citizens, however, are subject to estate tax only on their
property which is within the United States. Property within the
United States generally includes debt obligations of U.S.
persons, including the Federal government and State and local
governments (sec. 2104(c)), but does not include either bank
deposits or portfolio obligations, the interest on which would
be exempt from U.S. income tax under section 871 (sec.
2105(b)). Stock owned and held by a nonresident who is not a
U.S. citizen is treated as property within the United States
only if the stock was issued by a domestic corporation (sec.
2104(a); Treas. Reg. sec. 20.2104-1(a)(5)).
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\88\ The Economic Growth and Tax Relief Reconciliation Act of 2001
(``EGTRRA'') repealed the estate tax for estates of decedents dying
after December 31, 2009. However, EGTRRA included a ``sunset''
provision, pursuant to which EGTRRA's provisions (including estate tax
repeal) do not apply to estates of decedents dying after December 31,
2010.
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Treaties may reduce U.S. taxation on transfers by estates
of nonresident decedents who are not U.S. citizens. Under
recent treaties, for example, U.S. tax may generally be
eliminated except insofar as the property transferred includes
U.S. real property or business property of a U.S. permanent
establishment.
REASONS FOR CHANGE
Under present law, a disparity exists between foreign
persons who invest directly in certain interest-bearing and
other securities and a foreign person who invests in such
securities indirectly through U.S. mutual funds. In general,
certain amounts received by the direct foreign investor (or a
foreign investor through a foreign fund) may be exempt from the
U.S. gross-basis withholding tax. In contrast, distributions
from a RIC generally are treated as dividends subject to the
withholding tax, notwithstanding that the distributions may be
attributable to amounts that otherwise could qualify for an
exemption from withholding tax. U.S. financial institutions
often respond to this disparate treatment by forming ``mirror
funds'' outside the United States. The Committee believes that
such disparate treatment should be eliminated so that U.S.
financial institutions will be encouraged to form and operate
their mutual funds within the United States rather than outside
the United States.
Therefore, the Committee believes that, to the extent a RIC
distributes to a foreign person a dividend attributable to
amounts that would have been exempt from U.S. withholding tax
had the foreign person received it directly (such as portfolio
interest and capital gains, including short-term capital
gains), such dividend similarly should be exempt from the U.S.
gross-basis withholding tax. The Committee also believes that
comparable treatment should be afforded for estate tax purposes
to foreign persons who invest in certain assets through a RIC
to the extent that such assets would not be subject to the
estate tax if held directly.
EXPLANATION OF PROVISION
In general
Under the bill, a RIC that earns certain interest income
that would not be subject to U.S. tax if earned by a foreign
person directly may, to the extent of such income, designate a
dividend it pays as derived from such interest income. A
foreign person who is a shareholder in the RIC generally would
treat such a dividend as exempt from gross-basis U.S. tax, as
if the foreign person had earned the interest directly.
Similarly, a RIC that earns an excess of net short-term capital
gains over net long-term capital losses, which excess would not
be subject to U.S. tax if earned by a foreign person, generally
may, to the extent of such excess, designate a dividend it pays
as derived from such excess. A foreign person who is a
shareholder in the RIC generally would treat such a dividend as
exempt from gross-basis U.S. tax, as if the foreign person had
realized the excess directly. The bill also provides that the
estate of a foreign decedent is exempt from U.S. estate tax on
a transfer of stock in the RIC in the proportion that the
assets held by the RIC are debt obligations, deposits, or other
property that would generally be treated as situated outside
the United States if held directly by the estate.
Interest-related dividends
Under the bill, a RIC may, under certain circumstances,
designate all or a portion of a dividend as an ``interest-
related dividend,'' by written notice mailed to its
shareholders not later than 60 days after the close of its
taxable year. In addition, an interest-related dividend
received by a foreign person generally is exempt from U.S.
gross-basis tax under sections 871(a), 881, 1441 and 1442.
However, this exemption does not apply to a dividend on
shares of RIC stock if the withholding agent does not receive a
statement, similar to that required under the portfolio
interest rules, that the beneficial owner of the shares is not
a U.S. person. The exemption does not apply to a dividend paid
to any person within a foreign country (or dividends addressed
to, or for the account of, persons within such foreign country)
with respect to which the Treasury Secretary has determined,
under the portfolio interest rules, that exchange of
information is inadequate to prevent evasion of U.S. income tax
by U.S. persons.
In addition, the exemption generally does not apply to
dividends paid to a controlled foreign corporation to the
extent such dividends are attributable to income received by
the RIC on a debt obligation of a person with respect to which
the recipient of the dividend (i.e., the controlled foreign
corporation) is a related person. Nor does the exemption
generally apply to dividends to the extent such dividends are
attributable to income (other than short-term original issue
discount or bank deposit interest) received by the RIC on
indebtedness issued by the RIC-dividend recipient or by any
corporation or partnership with respect to which the recipient
of the RIC dividend is a 10-percent shareholder. However, in
these two circumstances the RIC remains exempt from its
withholding obligation unless the RIC knows that the dividend
recipient is such a controlled foreign corporation or 10-
percent shareholder. To the extent that an interest-related
dividend received by a controlled foreign corporation is
attributable to interest income of the RIC that would be
portfolio interest if received by a foreign corporation, the
dividend is treated as portfolio interest for purposes of the
de minimis rules, the high-tax exception, and the same country
exceptions of subpart F (see sec. 881(c)(5)(A)).
The aggregate amount designated as interest-related
dividends for the RIC's taxable year (including dividends so
designated that are paid after the close of the taxable year
but treated as paid during that year as described in section
855) generally is limited to the qualified net interest income
of the RIC for the taxable year. The qualified net interest
income of the RIC equals the excess of: (1) the amount of
qualified interest income of the RIC; over (2) the amount of
expenses of the RIC properly allocable to such interest income.
Qualified interest income of the RIC is equal to the sum of
its U.S.-source income with respect to: (1) bank deposit
interest; (2) short term original issue discount that is
currently exempt from the gross-basis tax under section 871;
(3) any interest (including amounts recognized as ordinary
income in respect of original issue discount, market discount,
or acquisition discount under the provisions of sections 1271-
1288, and such other amounts as regulations may provide) on an
obligation which is in registered form, unless it is earned on
an obligation issued by a corporation or partnership in which
the RIC is a 10-percent shareholder or is contingent interest
not treated as portfolio interest under section 871(h)(4); and
(4) any interest-related dividend from another RIC.
If the amount designated as an interest-related dividend is
greater than the qualified net interest income described above,
the portion of the distribution so designated which constitutes
an interest-related dividend will be only that proportion of
the amount so designated as the amount of the qualified net
interest income bears to the amount so designated.
Short-term capital gain dividends
Under the bill, a RIC also may, under certain
circumstances, designate all or a portion of a dividend as a
``short-term capital gain dividend,'' by written notice mailed
to its shareholders not later than 60 days after the close of
its taxable year. For purposes of the U.S. gross-basis tax, a
short-term capital gain dividend received by a foreign person
generally is exempt from U.S. gross-basis tax under sections
871(a), 881, 1441 and 1442. This exemption does not apply to
the extent that the foreign person is a nonresident alien
individual present in the United States for a period or periods
aggregating 183 days or more during the taxable year. However,
in this circumstance the RIC remains exempt from its
withholding obligation unless the RIC knows that the dividend
recipient has been present in the United States for such
period.
The aggregate amount qualified to be designated as short-
term capital gain dividends for the RIC's taxable year
(including dividends so designated that are paid after the
close of the taxable year but treated as paid during that year
as described in sec. 855) is equal to the excess of the RIC's
net short-term capital gains over net long-term capital losses.
The short-term capital gain includes short-term capital gain
dividends from another RIC. As provided under present law for
purposes of computing the amount of a capital gain dividend,
the amount is determined (except in the case where an election
under sec. 4982(e)(4) applies) without regard to any net
capital loss or net short-term capital loss attributable to
transactions after October 31 of the year. Instead, that loss
is treated as arising on the first day of the next taxable
year. To the extent provided in regulations, this rule also
applies for purposes of computing the taxable income of the
RIC.
In computing the amount of short-term capital gain
dividends for the year, no reduction is made for the amount of
expenses of the RIC allocable to such net gains. In addition,
if the amount designated as short-term capital gain dividends
is greater than the amount of qualified short-term capital
gain, the portion of the distribution so designated which
constitutes a short-term capital gain dividend is only that
proportion of the amount so designated as the amount of the
excess bears to the amount so designated.
As under present law for distributions from REITs, the bill
provides that any distribution by a RIC to a foreign person
shall, to the extent attributable to gains from sales or
exchanges by the RIC of an asset that is considered a U.S. real
property interest, be treated as gain recognized by the foreign
person from the sale or exchange of a U.S. real property
interest. The bill also extends the special rules for
domestically-controlled REITs to domestically-controlled RICs.
Estate tax treatment
Under the bill, a portion of the stock in a RIC held by the
estate of a nonresident decedent who is not a U.S. citizen is
treated as property without the United States. The portion so
treated is based upon the proportion of the assets held by the
RIC at the end of the quarter immediately preceding the
decedent's death (or such other time as the Secretary may
designate in regulations) that are ``qualifying assets''.
Qualifying assets for this purpose are bank deposits of the
type that are exempt from gross-basis income tax, portfolio
debt obligations, certain original issue discount obligations,
debt obligations of a domestic corporation that are treated as
giving rise to foreign source income, and other property not
within the United States.
EFFECTIVE DATE
The provision generally applies to dividends with respect
to taxable years of RICs beginning after December 31, 2004.
With respect to the treatment of a RIC for estate tax purposes,
the provision applies to estates of decedents dying after
December 31, 2004. With respect to the treatment of RICs under
section 897 (relating to U.S. real property interests), the
provision is effective after December 31, 2004.
7. Taxation of certain settlement funds (sec. 287 of the bill and sec.
468B of the Code)
PRESENT LAW
In general, section 468B provides that a payment to a
designated settlement fund that extinguishes a tort liability
of the taxpayer will result in a deduction to the taxpayer. A
designated settlement fund means a fund which is established
pursuant to a court order, extinguishes the taxpayer's tort
liability, is managed and controlled by persons unrelated to
the taxpayer, and in which the taxpayer does not have a
beneficial interest in the trust.
Generally, a designated or qualified settlement fund is
taxed as a separate entity at the maximum trust rate on its
modified income. Modified income is generally gross income less
deductions for administrative costs and other incidental
expenses incurred in connection with the operation of the
settlement fund.
The cleanup of hazardous waste sites is sometimes funded by
environmental ``settlement funds'' or escrow accounts. These
escrow accounts are established in consent decrees between the
Environmental Protection Agency (``EPA'') and the settling
parties under the jurisdiction of a Federal district court. The
EPA uses these accounts to resolve claims against private
parties under Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (``CERCLA'').
Present law provides that nothing in any provision of law
is to be construed as providing that an escrow account,
settlement fund, or similar fund is not subject to current
income tax.
REASONS FOR CHANGE
The Committee believes that these environmental escrow
accounts, established under court consent decrees, are
essential for the EPA to resolve or satisfy claims under the
Comprehensive Environmental Response, Compensation and
Liability Act of 1980. The tax treatment of these settlement
funds may prevent taxpayers from entering into prompt
settlements with the EPA for the cleanup of Superfund hazardous
waste sites and reduce the ultimate amount of funds available
for the sites' cleanup. As these settlement funds are
controlled by the government, the Committee believes it is
appropriate to establish that these funds are to be treated as
beneficially owned by the United States.
EXPLANATION OF PROVISION
The provision provides that certain settlement funds
established in consent decrees for the sole purpose of
resolving claims under CERCLA are to be treated as beneficially
owned by the United States government and therefore, not
subject to Federal income tax.
To qualify the settlement fund must be: (1) established
pursuant to a consent decree entered by a judge of a United
States District Court; (2) created for the receipt of
settlement payments for the sole purpose of resolving claims
under CERCLA; (3) controlled (in terms of expenditures of
contributions and earnings thereon) by the government or an
agency or instrumentality thereof; and (4) upon termination,
any remaining funds will be disbursed to such government entity
and used in accordance with applicable law. For purposes of the
provision, a government entity means the United States, any
State of political subdivision thereof, the District of
Columbia, any possession of the United States, and any agency
or instrumentality of the foregoing.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2004.
8. Expand human clinical trials expenses qualifying for the orphan drug
tax credit (sec. 288 of the bill and sec. 45C of the Code)
PRESENT LAW
Taxpayers may claim a 50-percent credit for expenses
related to human clinical testing of drugs for the treatment of
certain rare diseases and conditions, generally those that
afflict less than 200,000 persons in the United States.
Qualifying expenses are those paid or incurred by the taxpayer
after the date on which the drug is designated as a potential
treatment for a rare disease or disorder by the Food and Drug
Administration (``FDA'') in accordance with section 526 of the
Federal Food, Drug, and Cosmetic Act.
REASONS FOR CHANGE
The Committee observes that approval for human clinical
testing, and designation as a potential treatment for a rare
disease or disorder, require separate reviews within the FDA.
As a result, in some cases, a taxpayer may be permitted to
begin human clinical testing prior to a drug being designated
as a potential treatment for a rare disease or disorder. If the
taxpayer delays human clinical testing in order to obtain the
benefits of the orphan drug tax credit, which currently may be
claimed only for expenses incurred after the drug is designated
as a potential treatment for a rare disease or disorder,
valuable testing and research time will have been lost and
Congress's original intent in enacting the orphan drug tax
credit will have been partially thwarted.
By submitting an application with the FDA for designation
as a treatment of certain rare diseases and conditions, the
taxpayer is indicating that he or she intends to examine the
drug as a potential treatment for a qualifying disease or
condition in approved clinical trials. The FDA is required to
approve drugs for human clinical testing before testing can
commence. The Committee believes the application for
designation as a potential treatment for a rare disease or
disorder can create a starting point from which human clinical
testing expenses can be measured for purposes of the credit.
For those cases where the process of filing an application and
receiving designation as a potential treatment for a rare
disease or disorder occurs sufficiently expeditiously to fall
entirely within the taxpayer's taxable year plus permitted
return filing extension period, the Committee finds it
appropriate to eliminate the potential financial incentive to
delaying clinical testing by permitting testing expenses paid
or incurred prior to designation to qualify for the credit. The
Committee recognizes that while such an outcome may well
describe most applications, in some cases, particularly for
applications filed near the close of a taxpayer's taxable year,
in other cases the application and designation of the drug will
not be made within the requisite period. The Committee chooses
not to expand qualifying expenses to include those expenses
paid or incurred after the date on which the taxpayer files an
application with FDA for designation of the drug as a potential
treatment for a rare disease or disorder, in the case when the
designation is approved with respect to a taxable year
subsequent to the year in which the application is filed,
because to do so may create the additional taxpayer burden of
requiring the taxpayer to file an amended return to claim
credit for qualifying costs related to expenses incurred in a
taxable year prior to designation.
EXPLANATION OF PROVISION
The provision expands qualifying expenses to include those
expenses related to human clinical testing paid or incurred
after the date on which the taxpayer files an application with
the FDA for designation of the drug under section 526 of the
Federal Food, Drug, and Cosmetic Act as a potential treatment
for a rare disease or disorder, if certain conditions are met.
Under the provision, qualifying expenses include those expenses
paid or incurred after the date on which the taxpayer files an
application with the FDA for designation as a potential
treatment for a rare disease or disorder if the drug receives
FDA designation before the due date (including extensions) for
filing the tax return for the taxable year in which the
application was filed with the FDA. As under present law, the
credit may only be claimed for such expenses related to drugs
designated as a potential treatment for a rare disease or
disorder by the FDA in accordance with section 526 of such Act.
EFFECTIVE DATE
The provision is effective for expenditures paid or
incurred after the date of enactment.
9. Simplification of excise tax imposed on bows and arrows (sec. 289 of
the bill and sec. 4161 of the Code)
PRESENT LAW
The Code imposes an excise tax of 11 percent on the sale by
a manufacturer, producer or importer of any bow with a draw
weight of 10 pounds or more.\89\ An excise tax of 12.4 percent
is imposed on the sale by a manufacturer or importer of any
shaft, point, nock, or vane designed for use as part of an
arrow which after its assembly (1) is over 18 inches long, or
(2) is designed for use with a taxable bow (if shorter than 18
inches).\90\ No tax is imposed on finished arrows. An 11-
percent excise tax also is imposed on any part of an accessory
for taxable bows and on quivers for use with arrows (1) over 18
inches long or (2) designed for use with a taxable bow (if
shorter than 18 inches).\91\
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\89\ Sec. 4161(b)(1)(A).
\90\ Sec. 4161(b)(2).
\91\ Sec. 4161(b)(1)(B).
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REASONS FOR CHANGE
Under present law, foreign manufacturers and importers of
arrows avoid the 12.4 percent excise tax paid by domestic
manufacturers because the tax is placed on arrow components
rather than finished arrows. As a result, arrows assembled
outside of the United States have a price advantage over
domestically manufactured arrows. The Committee believes it is
appropriate to close this loophole. The Committee also believes
that adjusting the minimum draw weight for taxable bows from 10
pounds to 30 pounds will better target the excise tax to actual
hunting use by eliminating the excise tax on instructional
(``youth'') bows.
EXPLANATION OF PROVISION
The provision increases the draw weight for a taxable bow
from 10 pounds or more to a peak draw weight of 30 pounds or
more.\92\ The provision also imposes an excise tax of 12
percent on arrows generally. An arrow for this purpose is
defined as a taxable arrow shaft to which additional components
are attached. The present law 12.4-percent excise tax on
certain arrow components is unchanged by the bill. In the case
of any arrow comprised of a shaft or any other component upon
which tax has been imposed, the amount of the arrow tax is
equal to the excess of (1) the arrow tax that would have been
imposed but for this exception, over (2) the amount of tax paid
with respect to such components.\93\ Finally, the provision
subjects certain broadheads (a type of arrow point) to an
excise tax equal to 11 percent of the sales price instead of
12.4 percent.
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\92\ Draw weight is the maximum force required to bring the
bowstring to a full-draw position not less than 26\1/4\-inches,
measured from the pressure point of the hand grip to the nocking
position on the bowstring.
\93\ A credit or refund may be obtained when an item was taxed and
it is used in the manufacture or production of another taxable item.
Sec. 6416(b)(3). As arrow components and finished arrows are both
taxable, in lieu of a refund of the tax paid on components, the
provision suspends the application of sec. 6416(b)(3) and permits the
taxpayer to reduce the tax due on the finished arrow by the amount of
the previous tax paid on the components used in the manufacture of such
arrow.
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EFFECTIVE DATE
The provision is effective for articles sold by the
manufacturer, producer, or importer after December 31, 2004.
10. Repeal excise tax on fishing tackle boxes (sec. 290 of the bill and
sec. 4162 of the Code)
PRESENT LAW
Under present law, a 10-percent manufacturer's excise tax
is imposed on specified sport fishing equipment. Examples of
taxable equipment include fishing rods and poles, fishing
reels, artificial bait, fishing lures, line and hooks, and
fishing tackle boxes. Revenues from the excise tax on sport
fishing equipment are deposited in the Sport Fishing Account of
the Aquatic Resources Trust Fund. Monies in the fund are spent,
subject to an existing permanent appropriation, to support
Federal-State sport fish enhancement and safety programs.
REASONS FOR CHANGE
The Committee observes that fishing ``tackle boxes'' are
little different in design and appearance from ``tool boxes,''
yet the former are subject to a Federal excise tax at a rate of
10-percent, while the latter are not subject to Federal excise
tax. This excise tax can create a sufficiently large price
difference that some fishermen will choose to use a ``tool
box'' to hold their hooks and lures rather than a traditional
``tackle box.'' The Committee finds that such a distortion of
consumer choice places an inappropriate burden on the
manufacturers and purchasers of traditional tackle boxes,
particularly in comparison to the modest amount of revenue
raised by the present-law provision, and that this burden
warrants repeal of the tax. The excise tax also adds
unwarranted complexity to the Code, by requiring taxpayers and
the IRS to make highly factual determinations as to which
similar-use items are subject to tax and which are not.\94\
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\94\ The Joint Committee on Taxation has cited the tackle box issue
as an example of the complexity of the sport fishing excise tax, and
has recommended the elimination of the sport fishing equipment excise
tax. See Joint Committee on Taxation, Study of the Overall State of the
Federal Tax System and Recommendations for Simplification, Pursuant to
Section 8022(3)(B) of the Internal Revenue Code of 1986, (JCS-3-01),
Vol. II, Recommendations of the Staff of the Joint Committee on
Taxation to Simplify the Federal Tax System, at 499-500, April 2001.
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EXPLANATION OF PROVISION
The provision repeals the excise tax on fishing tackle
boxes.
EFFECTIVE DATE
The provision is effective for articles sold by the
manufacturer, producer, or importer after December 31, 2004.
11. Repeal of excise tax on sonar devices suitable for finding fish
(sec. 291 of the bill and secs. 4161 and 4162 of the Code)
PRESENT LAW
In general, the Code imposes a 10 percent tax on the sale
by the manufacturer, producer, or importer of specified sport
fishing equipment.\95\ A three percent rate, however, applies
to the sale of electric outboard motors and sonar devices
suitable for finding fish.\96\ Further, the tax imposed on the
sale of sonar devices suitable for finding fish is limited to
$30. A sonar device suitable for finding fish does not include
any device that is a graph recorder, a digital type, a meter
readout, a combination graph recorder or combination meter
readout.\97\
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\95\ Sec. 4161(a)(1).
\96\ Sec. 4161(a)(2).
\97\ Sec. 4162(b).
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Revenues from the excise tax on sport fishing equipment are
deposited in the Sport Fishing Account of the Aquatic Resources
Trust Fund. Monies in the fund are spent, subject to an
existing permanent appropriation, to support Federal-State
sport fish enhancement and safety programs.
REASONS FOR CHANGE
The Committee observes that the current exemption for
certain forms of sonar devices has the effect of exempting
almost all of the devices currently on the market. The
Committee understands that only one form of sonar device is not
exempt from the tax, those units utilizing light-emitting diode
(``LED'') display technology. The Committee understands that
LED devices are currently not exempt from the tax because the
technology was developed after the exemption for the other
technologies was enacted. In the Committee's view, the
application of the tax to LED display devices, and not to
devices performing the same function with a different
technology, creates an unfair advantage for the exempt devices.
Because most of the devices on the market already are exempt,
the Committee believes it is appropriate to level the playing
field by repealing the tax imposed on all sonar devices
suitable for finding fish. The Committee believes this is a
more suitable solution than exempting a device from the tax
based on the type of technology used.
EXPLANATION OF PROVISION
The provision repeals the excise tax on all sonar devices
suitable for finding fish.
EFFECTIVE DATE
The provision is effective for articles sold by the
manufacturer, producer, or importer after December 31, 2004.
12. Income tax credit for cost of carrying tax-paid distilled spirits
in wholesale inventories (sec. 292 of the bill and new sec.
5011 of the Code)
PRESENT LAW
As is true of most major Federal excise taxes, the excise
tax on distilled spirits is imposed at a point in the chain of
distribution before the product reaches the retail (consumer)
level. Tax on domestically produced and/or bottled distilled
spirits arises upon production (receipt) in a bonded distillery
and is collected based on removals from the distillery during
each semi-monthly period. Distilled spirits that are bottled
before importation into the United States are taxed on removal
from the first U.S. warehouse where they are landed (including
a warehouse located in a foreign trade zone).
No tax credits are allowed under present law for business
costs associated with having tax-paid products in inventory.
Rather, excise tax that is included in the purchase price of a
product is treated the same as the other components of the
product cost, i.e., deductible as a cost of goods sold.
REASONS FOR CHANGE
Under current law, wholesale importers of distilled spirits
are not required to pay the Federal excise tax on imported
spirits until after the product is removed from a bonded
warehouse for sale to a retailer. In contrast, the tax on
domestically produced spirits is included as part of the
purchase price and passed on from the supplier to wholesaler.
It is the Committee's understanding that in some instances,
wholesalers can carry this tax-paid inventory for an average of
60 days before selling it to a retailer. To provide equivalent
tax treatment of domestic and imported product, the Committee
believes it is appropriate to provide an income tax credit to
approximate the interest charge--more commonly referred to as
float--that results from carrying tax-paid distilled spirits in
inventory.
EXPLANATION OF PROVISION
The provision creates a new income tax credit for eligible
wholesale distributors of distilled spirits. An eligible
wholesaler is any person who holds a permit under the Federal
Alcohol Administration Act as a wholesaler of distilled
spirits.
The credit is calculated by multiplying the number of cases
of bottled distilled spirits by the average tax-financing cost
per case for the most recent calendar year ending before the
beginning of such taxable year. A case is 12 80-proof 750-
milliliter bottles. The average tax-financing cost per case is
the amount of interest that would accrue at corporate
overpayment rates during an assumed 60-day holding period on an
assumed tax rate of $22.83 per case of 12 750-milliliter
bottles.
The credit only applies to domestically bottled distilled
spirits \98\ purchased directly from the bottler of such
spirits. The credit is in addition to present-law rules
allowing tax included in inventory costs to be deducted as a
cost of goods sold.
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\98\ Distilled spirits that are imported in bulk and then bottled
domestically qualify as domestically bottled distilled spirits.
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The credit cannot be carried back to a taxable year
beginning before January 1, 2005.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2004.
13. Suspension of occupational taxes relating to distilled spirits,
wine, and beer (sec. 293 of the bill and new sec. 5148 of the
Code)
PRESENT LAW
Under present law, special occupational taxes are imposed
on producers and others engaged in the marketing of distilled
spirits, wine, and beer. These excise taxes are imposed as part
of a broader Federal tax and regulatory engine governing the
production and marketing of alcoholic beverages. The special
occupational taxes are payable annually, on July 1 of each
year. The present tax rates are as follows:
Producers: \99\
Distilled spirits and $1,000 per year, per premise.
wines (sec. 5081).
Brewers (sec. 5091)...... $1,000 per year, per premise.
Wholesale dealers (sec.
5111):
Liquors, wines, or beer.. $500 per year.
Retail dealers (sec. 5121):
Liquors, wines, or beer.. $250 per year.
Nonbeverage use of distilled $500 per year.
spirits (sec. 5131).
Industrial use of distilled $250 per year.
spirits (sec. 5276).
The Code requires every wholesale or retail dealer in
liquors, wine or beer to keep records of their
transactions.\100\ A delegate of the Secretary of the Treasury
is authorized to inspect the records of any dealer during
business hours.\101\ There are penalties for failing to comply
with the recordkeeping requirements.\102\
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\99\ A reduced rate of tax in the amount of $500 is imposed on
small proprietors. Secs. 5081(b), 5091(b).
\100\ Secs. 5114, 5124.
\101\ Sec. 5146.
\102\ Sec. 5603.
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The Code limits the persons from whom dealers may purchase
their liquor stock intended for resale. Under the Code, a
dealer may only purchase from:
(1) a wholesale dealer in liquors who has paid the
special occupational tax as such dealer to cover the
place where such purchase is made; or
(2) a wholesale dealer in liquors who is exempt, at
the place where such purchase is made, from payment of
such tax under any provision chapter 51 of the Code; or
(3) a person who is not required to pay special
occupational tax as a wholesale dealer in liquors.\103\
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\103\ Sec. 5117. For example, purchases from a proprietor of a
distilled spirits plant at his principal business office would be
covered under item (2) since such a proprietor is not subject to the
special occupational tax on account of sales at his principal business
office. Sec. 5113(a). Purchases from a State-operated liquor store
would be covered under item (3). Sec. 5113(b).
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In addition, a limited retail dealer (such as a charitable
organization selling liquor at a picnic) may lawfully purchase
distilled spirits for resale from a retail dealer in
liquors.\104\
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\104\ Sec. 5117(b).
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Violation of this restriction is punishable by $1,000 fine,
imprisonment of one year, or both.\105\ A violation also makes
the alcohol subject to seizure and forfeiture.\106\
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\105\ Sec. 5687.
\106\ Sec. 7302.
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REASONS FOR CHANGE
The special occupational tax is not a tax on alcoholic
products but rather operates as a license fee on businesses.
The Committee believes that this tax places an unfair burden on
business owners. However, the Committee recognizes that the
recordkeeping and registration authorities applicable to
wholesalers and retailers engaged in such businesses are
necessary enforcement tools to ensure the protection of the
revenue arising from the excise taxes on these products. Thus,
the Committee believes it appropriate to suspend the tax for a
three-year period, while retaining present-law recordkeeping
and registration requirements.
EXPLANATION OF PROVISION
Under the provision, the special occupational taxes on
producers and marketers of alcoholic beverages are suspended
for a three-year period, July 1, 2004 through June 30, 2007.
Present law recordkeeping and registration requirements will
continue to apply, notwithstanding the suspension of the
special occupation taxes. In addition, during the suspension
period, it shall be unlawful for any dealer to purchase
distilled spirits for resale from any person other than a
wholesale dealer in liquors who is subject to the recordkeeping
requirements, except that a limited retail dealer may purchase
distilled spirits for resale from a retail dealer in liquors,
as permitted under present law.
EFFECTIVE DATE
The provision is effective on the date of enactment.
14. Exclusion of certain indebtedness of small business investment
companies from acquisition indebtedness (sec. 294 of the bill
and sec. 514 of the Code)
PRESENT LAW
In general, an organization that is otherwise exempt from
Federal income tax is taxed on income from a trade or business
that is unrelated to the organization's exempt purposes.
Certain types of income, such as rents, royalties, dividends,
and interest, generally are excluded from unrelated business
taxable income except when such income is derived from ``debt-
financed property.'' Debt-financed property generally means any
property that is held to produce income and with respect to
which there is acquisition indebtedness at any time during the
taxable year.
In general, income of a tax-exempt organization that is
produced by debt-financed property is treated as unrelated
business income in proportion to the acquisition indebtedness
on the income-producing property. Acquisition indebtedness
generally means the amount of unpaid indebtedness incurred by
an organization to acquire or improve the property and
indebtedness that would not have been incurred but for the
acquisition or improvement of the property. Acquisition
indebtedness does not include, however, (1) certain
indebtedness incurred in the performance or exercise of a
purpose or function constituting the basis of the
organization's exemption, (2) obligations to pay certain types
of annuities, (3) an obligation, to the extent it is insured by
the Federal Housing Administration, to finance the purchase,
rehabilitation, or construction of housing for low and moderate
income persons, or (4) indebtedness incurred by certain
qualified organizations to acquire or improve real property. An
extension, renewal, or refinancing of an obligation evidencing
a pre-existing indebtedness is not treated as the creation of a
new indebtedness.
Special rules apply in the case of an exempt organization
that owns a partnership interest in a partnership that holds
debt-financed income-producing property. An exempt
organization's share of partnership income that is derived from
such debt-financed property generally is taxed as debt-financed
income unless an exception provides otherwise.
REASONS FOR CHANGE
Small business investment companies obtain financial
assistance from the Small Business Administration in the form
of equity or by incurring indebtedness that is held or
guaranteed by the Small Business Administration pursuant to the
Small Business Investment Act of 1958. Tax-exempt organizations
that invest in small business investment companies who are
treated as partnerships and who incur indebtedness that is held
or guaranteed by the Small Business Administration may be
subject to unrelated business income tax on their distributive
shares of income from the small business investment company.
The Committee believes that the imposition of unrelated
business income tax in such cases creates a disincentive for
tax-exempt organizations to invest in small business investment
companies, thereby reducing the amount of investment capital
that may be provided by small business investment companies to
the nation's small businesses. The Committee believes, however,
that ownership limitations on the percentage interests that may
be held by exempt organizations are appropriate to prevent all
or most of a small business investment company's income from
escaping Federal income tax.
EXPLANATION OF PROVISION
The provision modifies the debt-financed property
provisions by excluding from the definition of acquisition
indebtedness any indebtedness incurred by a small business
investment company licensed under the Small Business Investment
Act of 1958 that is evidenced by a debenture (1) issued by such
company under section 303(a) of said Act, and (2) held or
guaranteed by the Small Business Administration. The exclusion
shall not apply during any period that any exempt organization
(other than a governmental unit) owns more than 25 percent of
the capital or profits interest in the small business
investment company, or exempt organizations (including
governmental units other than any agency or instrumentality of
the United States) own, in the aggregate, 50 percent or more of
the capital or profits interest in such company.
EFFECTIVE DATE
The provision is effective for small business investment
companies formed after the date of enactment.
15. Election to determine taxable income from certain international
shipping activities using per ton rate (sec. 295 of the bill
and new secs. 1352-1359 of the Code)
PRESENT LAW
The United States employs a ``worldwide'' tax system, under
which domestic corporations generally are taxed on all income,
including income from shipping operations, whether derived in
the United States or abroad. In order to mitigate double
taxation, a foreign tax credit for income taxes paid to foreign
countries is provided to reduce or eliminate the U.S. tax owed
on such income, subject to certain limitations.
Generally, the United States taxes foreign corporations
only on income that has a sufficient nexus to the United
States. Thus, a foreign corporation is generally subject to
U.S. tax only on income, including income from shipping
operations, which is ``effectively connected'' with the conduct
of a trade or business in the United States (sec. 882). Such
``effectively connected income'' generally is taxed in the same
manner and at the same rates as the income of a U.S.
corporation.
The United States imposes a four percent tax on the amount
of a foreign corporation's U.S. gross transportation income
(sec. 887). Transportation income includes income from the use
(or hiring or leasing for use) of a vessel and income from
services directly related to the use of a vessel. Fifty percent
of the transportation income attributable to transportation
that either begins or ends (but not both) in the United States
is treated as U.S. source gross transportation income. The tax
does not apply, however, to U.S. gross transportation income
that is treated as income effectively connected with the
conduct of a U.S. trade or business. U.S. gross transportation
income is not treated as effectively connected income unless
(1) the taxpayer has a fixed place of business in the United
States involved in earning the income, and (2) substantially
all the income is attributable to regularly scheduled
transportation.
The taxes imposed by sections 882 and 887 on income from
shipping operations may be limited by an applicable U.S. income
tax treaty or by an exemption of a foreign corporation's
international shipping operations income in instances where a
foreign country grants an equivalent exemption (sec. 883).
Under present law, there is no provision that provides an
alternative to the corporate income tax for taxable income
attributable to international shipping activities.
REASONS FOR CHANGE
In general, operators of U.S.-flag vessels in international
trade are subject to higher taxes than their foreign-based
competition. The uncompetitive U.S. taxation of shipping income
has caused a steady and substantial decline of the U.S.
shipping industry. The Committee believes that this provision
will provide operators of U.S.-flag vessels in international
trade the opportunity to be competitive with their tax-
advantaged foreign competitors.
EXPLANATION OF PROVISION
In general
The provision generally allows corporations to elect a
``tonnage tax'' on their taxable income from certain shipping
activities in lieu of the U.S. corporate income tax.
Accordingly, a corporation's income from qualifying shipping
activities is no longer taxable under sections 11, 55, 882, 887
or 1201(a) under the regime, and electing entities are only
subject to tax at the maximum corporate income tax rate on a
notional amount based on the net tonnage of a corporation's
qualifying vessels. However, a foreign corporation is not
subject to tax under the tonnage tax regime to the extent its
income from qualifying shipping activities is subject to an
exclusion for certain shipping operations by foreign
corporations pursuant to section 883(a)(1) or pursuant to a
treaty obligation of the United States.
Taxable income from qualifying shipping activities
Generally, the taxable income of an electing corporation
from qualifying shipping activities is the corporate income
percentage \107\ of the sum of the taxable income from each of
its qualifying vessels. The taxable income from each qualifying
vessel is the product of (1) the daily notional taxable income
\108\ from the operation of the qualifying vessel in United
States foreign trade,\109\ and (2) the number of days during
the taxable year that the electing entity operated such vessel
as a qualifying vessel in U.S. foreign trade.\110\ A
``qualifying vessel'' is described as a self-propelled U.S.-
flag vessel of not less than 10,000 deadweight tons used in
U.S. foreign trade.
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\107\ The ``corporate income percentage'' is the least aggregate
share, expressed as a percentage, of any item of income or gain of an
electing corporation, or an electing group (i.e., a controlled group of
which one or more members is an electing entity) of which such
corporation is a member from qualifying shipping activities that would
otherwise be required to be reported on the U.S. Federal income tax
return of an electing corporation during any taxable period. A
``controlled group'' is any group of trusts and business entities whose
members would be treated as a single employer under the rules of
section 52(a) (without regard to paragraphs (1) and (2) and section
52(b)(1)).
\108\ The ``daily notional taxable income'' from the operation of a
qualifying vessel is 40 cents for each 100 tons of the net tonnage of
the vessel (up to 25,000 net tons), and 20 cents for each 100 tons of
the net tonnage of the vessel, in excess of 25,000 net tons.
\109\ ``U.S. foreign trade'' means the transportation of goods or
passengers between a place in the United States and a foreign place or
between foreign places. As a general rule, the temporary operation in
the U.S. domestic trade (i.e., the transportation of goods or
passengers between places in the United States) of any qualifying
vessel is disregarded. However, a vessel that is no longer used for
operations in U.S. foreign trade (unless such non-use is on a temporary
basis) ceases to be a qualifying vessel when such non-use begins.
\110\ If there are multiple operators of a vessel, the taxable
income of such vessel must be allocated among such persons on the basis
of their ownership and charter interests or another basis that Treasury
may prescribe in regulations.
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An entity's qualifying shipping activities consist of its
(1) core qualifying activities, (2) qualifying secondary
activities, and (3) qualifying incidental activities.
Generally, core qualifying activities are activities from
operating vessels in U.S. foreign trade and other activities of
an electing entity and an electing group that are an integral
part of the business of operating qualifying vessels in U.S.
foreign trade. Qualifying secondary activities generally
consist of the active management or operation of vessels in
U.S. foreign trade and provisions for vessel, container and
cargo-related facilities or such other activities as may be
prescribed by the Secretary (which are not core activities),
and may not exceed 20 percent of the aggregate gross income
derived from electing entities and other members of its
electing group from their core qualifying activities.
Qualifying incidental activities are activities that are
incidental to core qualifying activities and are not qualifying
secondary activities. The aggregate gross income from
qualifying incidental activities cannot exceed one-tenth of one
percent of the aggregate gross income from the core qualifying
activities of the electing entities and other members of its
electing group.
Items not subject to corporate income tax
Generally, gross income from an electing entity does not
include the corporate income percentage of an entity's (1)
income from qualifying shipping activities in U.S. foreign
trade, (2) income from money, bank deposits and other temporary
investments which are reasonably necessary to meet the working
capital requirements of its qualifying shipping activities, and
(3) income from money or other intangible assets accumulated
pursuant to a plan to purchase qualifying shipping assets.\111\
Generally, the corporate loss percentage \112\ of each item of
loss, deduction, or credit is disallowed with respect to any
activity the income from which is excluded from gross income
under the provision. The corporate loss percentage of an
electing entity's interest expense is disallowed in the ratio
that the fair market value of its qualifying shipping assets
bears to the fair market value of its total assets.
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\111\ ``Qualifying shipping assets'' means any qualifying vessel
and other assets which are used in core qualifying activities.
\112\ ``Corporate loss percentage'' means the greatest aggregate
share, expressed as a percentage, of any item of loss, deduction or
credit of an electing corporation or electing group of which such
corporation is a member from qualifying shipping activities that would
otherwise be required to be reported on the U.S. Federal income tax
return of an electing corporation during any taxable period.
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Allocation of credits, income and deductions
No deductions are allowed against the taxable income of an
electing corporation from qualifying shipping activities, and
no credit is allowed against the tax imposed under the tonnage
tax regime. No deduction is allowed for any net operating loss
attributable to the qualifying shipping activities of a
corporation to the extent that such loss is carried forward by
the corporation from a taxable year preceding the first taxable
year for which such corporation was an electing corporation.
For purposes of the provision, section 482 applies to a
transaction or series of transactions between an electing
entity and another person or between an entity's qualifying
shipping activities and other activities carried on by it. The
qualifying shipping activities of an electing entity shall be
treated as a separate trade or business activity from all other
activities conducted by the entity.
Qualifying shipping assets
If an electing entity sells or disposes of qualifying
shipping assets in an otherwise taxable transaction, at the
election of the entity no gain is recognized if replacement
qualifying shipping assets are acquired during a limited
replacement period except to the extent that the amount
realized upon such sale or disposition exceeds the cost of the
replacement qualifying shipping assets. In the case of
replacement qualifying shipping assets purchased by an electing
entity which results in the nonrecognition of any part of the
gain realized as the result of a sale or other disposition of
qualifying shipping assets, the basis is the cost of such
replacement property decreased in the amount of gain not
recognized. If the property purchased consists of more than one
piece of property, the basis is allocated to the purchased
properties in proportion to their respective costs.
The election not to recognize gain on the disposition and
replacement of qualifying shipping assets is not available if
the replacement qualifying shipping assets are acquired from a
related person except to the extent that the related person (as
defined under section 267(b) or 707(b)(1)) acquired the
replacement qualifying shipping assets from an unrelated person
during a limited replacement period.
Election
Generally, any qualifying entity may elect into the tonnage
tax regime by filing an election with the qualifying entity's
income tax return for the first taxable year to which the
election applies. However, a qualifying entity, which is a
member of a controlled group, may only make an election into
the tonnage tax regime if all qualifying entities that are
members of the controlled group make such an election. Once
made, an election is effective for the taxable year in which it
was made and for all succeeding taxable years of the entity
until the election is terminated. An election may be terminated
if the entity ceases to be a qualifying entity or if the
election is revoked. In the event that a qualifying entity
elects into the tonnage tax regime and subsequently revokes the
election, such entity is barred from electing back into the
regime until the fifth taxable year after the termination is
effective, unless the Secretary of the Treasury consents to the
election.
A qualifying entity means a trust or business entity that
(1) operates one or more qualifying vessels and (2) meets the
``shipping activity requirement.'' \113\ The shipping activity
requirement is met for a taxable year only by an entity that
meets one of the following requirements: (1) in the first
taxable year of its election into the tonnage tax regime, for
the preceding taxable year on average at least 25 percent of
the aggregate tonnage of the qualifying vessels which were
operated by the entity were owned by the entity or bareboat
chartered to the entity; (2) in the second or any subsequent
taxable year of its election into the tonnage tax regime, in
each of the two preceding taxable years on average at least 25
percent of the aggregate tonnage of the qualifying vessels
which were operated by the entity were owned by the entity or
bareboat chartered to the entity; or (3) requirements (1) or
(2) above would be met if the 25 percent average tonnage
requirement was applied on an aggregate basis to the controlled
group of which such entity is a member, and vessel charters
between members of the controlled group were disregarded.
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\113\ An entity is generally treated as operating any vessel owned
by or chartered to the entity. However, an entity is treated as
operating a vessel that it has chartered out on bareboat basis only if:
(1) the vessel is temporarily surplus to the entity's requirements and
the term of the charter does not exceed three years or (2) the vessel
is bareboat chartered to a member of a controlled group which includes
such entity or to an unrelated third party that sub-bareboats or time
charters the vessel to a member of such controlled group (including the
owner). Special rules apply in an instance in which an electing entity
temporarily ceases to operate a qualifying vessel.
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EFFECTIVE DATE
The provision is effective for taxable years beginning
after the date of enactment.
16. Charitable contribution deduction for certain expenses in support
of native Alaskan subsistence whaling (sec. 296 of the bill and
sec. 170 of the Code)
PRESENT LAW
In computing taxable income, individuals who do not elect
the standard deduction may claim itemized deductions, including
a deduction (subject to certain limitations) for charitable
contributions or gifts made during the taxable year to a
qualified charitable organization or governmental entity.
Individuals who elect the standard deduction may not claim a
deduction for charitable contributions made during the taxable
year.
No charitable contribution deduction is allowed for a
contribution of services. However, unreimbursed expenditures
made incident to the rendition of services to an organization,
contributions to which are deductible, may constitute a
deductible contribution.\114\ Specifically, section 170(j)
provides that no charitable contribution deduction is allowed
for traveling expenses (including amounts expended 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.
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\114\ Treas. Reg. sec. 1.170A-1(g).
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REASONS FOR CHANGE
The Committee believes that subsistence bowhead whale
hunting activities are important to certain native peoples of
Alaska and further charitable purposes. The Committee believes
that certain expenses paid by individuals recognized as whaling
captains by the Alaska Eskimo Whaling Commission in the conduct
of sanctioned whaling activities conducted pursuant to the
management plan of that Commission should be deductible
expenses.
EXPLANATION OF PROVISION
The provision allows individuals to claim a deduction under
section 170 not exceeding $10,000 per taxable year for certain
expenses incurred in carrying out sanctioned whaling
activities. The deduction is available only to an individual
who is recognized by the Alaska Eskimo Whaling Commission as a
whaling captain charged with the responsibility of maintaining
and carrying out sanctioned whaling activities. The deduction
is available for reasonable and necessary expenses paid by the
taxpayer during the taxable year for: (1) the acquisition and
maintenance of whaling boats, weapons, and gear used in
sanctioned whaling activities; (2) the supplying of food for
the crew and other provisions for carrying out such activities;
and (3) the storage and distribution of the catch from such
activities. The Committee intends that the Secretary shall
require that the taxpayer substantiate deductible expenses by
maintaining appropriate written records that show, for example,
the time, place, date, amount, and nature of the expense, as
well as the taxpayer's eligibility for the deduction, and that
such substantiation be provided as part of the taxpayer's
income tax return, to the extent provided by the Secretary.
For purposes of the provision, the term ``sanctioned
whaling activities'' means subsistence bowhead whale hunting
activities conducted pursuant to the management plan of the
Alaska Eskimo Whaling Commission.
EFFECTIVE DATE
The provision is effective for contributions made after
December 31, 2004.
TITLE III--TAX REFORM AND SIMPLIFICATION FOR UNITED STATES BUSINESSES
A. Interest Expense Allocation Rules
(Sec. 301 of the bill and sec. 864 of the Code)
PRESENT LAW
In general
In order to compute the foreign tax credit limitation, a
taxpayer must determine the amount of its taxable income from
foreign sources. Thus, the taxpayer must allocate and apportion
deductions between items of U.S.-source gross income, on the
one hand, and items of foreign-source gross income, on the
other.
In the case of interest expense, the rules generally are
based on the approach that money is fungible and that interest
expense is properly attributable to all business activities and
property of a taxpayer, regardless of any specific purpose for
incurring an obligation on which interest is paid.\115\ For
interest allocation purposes, the Code provides that all
members of an affiliated group of corporations generally are
treated as a single corporation (the so-called ``one-taxpayer
rule'') and allocation must be made on the basis of assets
rather than gross income.
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\115\ However, exceptions to the fungibility principle are provided
in particular cases, some of which are described below.
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Affiliated group
In general
The term ``affiliated group'' in this context generally is
defined by reference to the rules for determining whether
corporations are eligible to file consolidated returns.
However, some groups of corporations are eligible to file
consolidated returns yet are not treated as affiliated for
interest allocation purposes, and other groups of corporations
are treated as affiliated for interest allocation purposes even
though they are not eligible to file consolidated returns.
Thus, under the one-taxpayer rule, the factors affecting the
allocation of interest expense of one corporation may affect
the sourcing of taxable income of another, related corporation
even if the two corporations do not elect to file, or are
ineligible to file, consolidated returns.
Definition of affiliated group--consolidated return rules
For consolidation purposes, the term ``affiliated group''
means one or more chains of includible corporations connected
through stock ownership with a common parent corporation which
is an includible corporation, but only if: (1) the common
parent owns directly stock possessing at least 80 percent of
the total voting power and at least 80 percent of the total
value of at least one other includible corporation; and (2)
stock meeting the same voting power and value standards with
respect to each includible corporation (excluding the common
parent) is directly owned by one or more other includible
corporations.
Generally, the term ``includible corporation'' means any
domestic corporation except certain corporations exempt from
tax under section 501 (for example, corporations organized and
operated exclusively for charitable or educational purposes),
certain life insurance companies, corporations electing
application of the possession tax credit, regulated investment
companies, real estate investment trusts, and domestic
international sales corporations. A foreign corporation
generally is not an includible corporation.
Definition of affiliated group--special interest allocation
rules
Subject to exceptions, the consolidated return and interest
allocation definitions of affiliation generally are consistent
with each other.\116\ For example, both definitions generally
exclude all foreign corporations from the affiliated group.
Thus, while debt generally is considered fungible among the
assets of a group of domestic affiliated corporations, the same
rules do not apply as between the domestic and foreign members
of a group with the same degree of common control as the
domestic affiliated group.
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\116\ One such exception is that the affiliated group for interest
allocation purposes includes section 936 corporations that are excluded
from the consolidated group.
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Banks, savings institutions, and other financial affiliates
The affiliated group for interest allocation purposes
generally excludes what are referred to in the Treasury
regulations as ``financial corporations'' (Treas. Reg. sec.
1.861-11T(d)(4)). These include any corporation, otherwise a
member of the affiliated group for consolidation purposes, that
is a financial institution (described in section 581 or section
591), the business of which is predominantly with persons other
than related persons or their customers, and which is required
by State or Federal law to be operated separately from any
other entity which is not a financial institution (sec.
864(e)(5)(C)). The category of financial corporations also
includes, to the extent provided in regulations, bank holding
companies (including financial holding companies), subsidiaries
of banks and bank holding companies (including financial
holding companies), and savings institutions predominantly
engaged in the active conduct of a banking, financing, or
similar business (sec. 864(e)(5)(D)).
A financial corporation is not treated as a member of the
regular affiliated group for purposes of applying the one-
taxpayer rule to other non-financial members of that group.
Instead, all such financial corporations that would be so
affiliated are treated as a separate single corporation for
interest allocation purposes.
REASONS FOR CHANGE
The Committee observes that the United States is the only
country that currently imposes harsh and anti-competitive
interest expense allocation rules on its businesses and
workers. The present-law interest expense allocation rules
result in U.S. companies allocating a portion of their U.S.
interest expense against foreign-source income, even when the
foreign operation has its own debt. The tax effect of this rule
is that U.S. companies end up paying double tax. The practical
effect is that the cost for U.S. companies to borrow in the
United States is increased and it becomes more expensive to
invest in the United States. The Committee believes that these
rules should be modified so that U.S. companies are not
discouraged from investing in the United States. To this end,
U.S. companies should not be required to allocate U.S. interest
expense against foreign-source income (and thereby incur double
taxation) unless their debt-to-asset ratio is higher in the
United States than in foreign countries.
EXPLANATION OF PROVISION
In general
The provision modifies the present-law interest expense
allocation rules (which generally apply for purposes of
computing the foreign tax credit limitation) by providing a
one-time election under which the taxable income of the
domestic members of an affiliated group from sources outside
the United States generally is determined by allocating and
apportioning interest expense of the domestic members of a
worldwide affiliated group on a worldwide-group basis (i.e., as
if all members of the worldwide group were a single
corporation). If a group makes this election, the taxable
income of the domestic members of a worldwide affiliated group
from sources outside the United States is determined by
allocating and apportioning the third-party interest expense of
those domestic members to foreign-source income in an amount
equal to the excess (if any) of (1) the worldwide affiliated
group's worldwide third-party interest expense multiplied by
the ratio which the foreign assets of the worldwide affiliated
group bears to the total assets of the worldwide affiliated
group,\117\ over (2) the third-party interest expense incurred
by foreign members of the group to the extent such interest
would be allocated to foreign sources if the provision's
principles were applied separately to the foreign members of
the group.\118\
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\117\ For purposes of determining the assets of the worldwide
affiliated group, neither stock in corporations within the group nor
indebtedness (including receivables) between members of the group is
taken into account. It is anticipated that the Treasury Secretary will
adopt regulations addressing the allocation and apportionment of
interest expense on such indebtedness that follow principles analogous
to those of existing regulations. Income from holding stock or
indebtedness of another group member is taken into account for all
purposes under the present-law rules of the Code, including the foreign
tax credit provisions.
\118\ Although the interest expense of a foreign subsidiary is
taken into account for purposes of allocating the interest expense of
the domestic members of the electing worldwide affiliated group for
foreign tax credit limitation purposes, the interest expense incurred
by a foreign subsidiary is not deductible on a U.S. return.
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For purposes of the new elective rules based on worldwide
fungibility, the worldwide affiliated group means all
corporations in an affiliated group (as that term is defined
under present law for interest allocation purposes) \119\ as
well as all controlled foreign corporations that, in the
aggregate, either directly or indirectly,\120\ would be members
of such an affiliated group if section 1504(b)(3) did not apply
(i.e., in which at least 80 percent of the vote and value of
the stock of such corporations is owned by one or more other
corporations included in the affiliated group). Thus, if an
affiliated group makes this election, the taxable income from
sources outside the United States of domestic group members
generally is determined by allocating and apportioning interest
expense of the domestic members of the worldwide affiliated
group as if all of the interest expense and assets of 80-
percent or greater owned domestic corporations (i.e.,
corporations that are part of the affiliated group under
present-law section 864(e)(5)(A) as modified to include
insurance companies) and certain controlled foreign
corporations were attributable to a single corporation.
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\119\ The provision expands the definition of an affiliated group
for interest expense allocation purposes to include certain insurance
companies that are generally excluded from an affiliated group under
section 1504(b)(2) (without regard to whether such companies are
covered by an election under section 1504(c)(2)).
\120\ Indirect ownership is determined under the rules of section
958(a)(2) or through applying rules similar to those of section
958(a)(2) to stock owned directly or indirectly by domestic
partnerships, trusts, or estates.
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In addition, if an affiliated group elects to apply the new
elective rules based on worldwide fungibility, the present-law
rules regarding the treatment of tax-exempt assets and the
basis of stock in nonaffiliated ten-percent owned corporations
apply on a worldwide affiliated group basis.
The common parent of the domestic affiliated group must
make the worldwide affiliated group election. It must be made
for the first taxable year beginning after December 31, 2008,
in which a worldwide affiliated group exists that includes at
least one foreign corporation that meets the requirements for
inclusion in a worldwide affiliated group. Once made, the
election applies to the common parent and all other members of
the worldwide affiliated group for the taxable year for which
the election was made and all subsequent taxable years, unless
revoked with the consent of the Secretary of the Treasury.
Financial institution group election
The provision allows taxpayers to apply the present-law
bank group rules to exclude certain financial institutions from
the affiliated group for interest allocation purposes under the
worldwide fungibility approach. The provision also provides a
one-time ``financial institution group'' election that expands
the present-law bank group. Under the provision, at the
election of the common parent of the pre-election worldwide
affiliated group, the interest expense allocation rules are
applied separately to a subgroup of the worldwide affiliated
group that consists of (1) all corporations that are part of
the present-law bank group, and (2) all ``financial
corporations.'' For this purpose, a corporation is a financial
corporation if at least 80 percent of its gross income is
financial services income (as described in section
904(d)(2)(C)(i) and the regulations thereunder) that is derived
from transactions with unrelated persons.\121\ For these
purposes, items of income or gain from a transaction or series
of transactions are disregarded if a principal purpose for the
transaction or transactions is to qualify any corporation as a
financial corporation.
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\121\ See Treas. Reg. sec. 1.904-4(e)(2).
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The common parent of the pre-election worldwide affiliated
group must make the election for the first taxable year
beginning after December 31, 2008, in which a worldwide
affiliated group includes a financial corporation. Once made,
the election applies to the financial institution group for the
taxable year and all subsequent taxable years. In addition, the
provision provides anti-abuse rules under which certain
transfers from one member of a financial institution group to a
member of the worldwide affiliated group outside of the
financial institution group are treated as reducing the amount
of indebtedness of the separate financial institution group.
The provision provides regulatory authority with respect to the
election to provide for the direct allocation of interest
expense in circumstances in which such allocation is
appropriate to carry out the purposes of the provision, prevent
assets or interest expense from being taken into account more
than once, or address changes in members of any group (through
acquisitions or otherwise) treated as affiliated under this
provision.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2008.
B. Recharacterization of Overall Domestic Loss
(Sec. 302 of the bill and sec. 904 of the Code)
PRESENT LAW
The United States provides a credit for foreign income
taxes paid or accrued. The foreign tax credit generally is
limited to the U.S. tax liability on a taxpayer's foreign-
source income, in order to ensure that the credit serves the
purpose of mitigating double taxation of foreign-source income
without offsetting the U.S. tax on U.S.-source income. This
overall limitation is calculated by prorating a taxpayer's pre-
credit U.S. tax on its worldwide income between its U.S.-source
and foreign-source taxable income. The ratio (not exceeding 100
percent) of the taxpayer's foreign-source taxable income to
worldwide taxable income is multiplied by its pre-credit U.S.
tax to establish the amount of U.S. tax allocable to the
taxpayer's foreign-source income and, thus, the upper limit on
the foreign tax credit for the year.
In addition, this limitation is calculated separately for
various categories of income, generally referred to as
``separate limitation categories.'' The total amount of the
foreign tax credit used to offset the U.S. tax on income in
each separate limitation category may not exceed the proportion
of the taxpayer's U.S. tax which the taxpayer's foreign-source
taxable income in that category bears to its worldwide taxable
income.
If a taxpayer's losses from foreign sources exceed its
foreign-source income, the excess (``overall foreign loss,'' or
``OFL'') may offset U.S.-source income. Such an offset reduces
the effective rate of U.S. tax on U.S.-source income.
In order to eliminate a double benefit (that is, the
reduction of U.S. tax previously noted and, later, full
allowance of a foreign tax credit with respect to foreign-
source income), present law includes an OFL recapture rule.
Under this rule, a portion of foreign-source taxable income
earned after an OFL year is recharacterized as U.S.-source
taxable income for foreign tax credit purposes (and for
purposes of the possessions tax credit). Unless a taxpayer
elects a higher percentage, however, generally no more than 50
percent of the foreign-source taxable income earned in any
particular taxable year is recharacterized as U.S.-source
taxable income. The effect of the recapture is to reduce the
foreign tax credit limitation in one or more years following an
OFL year and, therefore, the amount of U.S. tax that can be
offset by foreign tax credits in the later year or years.
Losses for any taxable year in separate foreign limitation
categories (to the extent that they do not exceed foreign
income for the year) are apportioned on a proportionate basis
among (and operate to reduce) the foreign income categories in
which the entity earns income in the loss year. A separate
limitation loss recharacterization rule applies to foreign
losses apportioned to foreign income pursuant to the above
rule. If a separate limitation loss was apportioned to income
subject to another separate limitation category and the loss
category has income for a subsequent taxable year, then that
income (to the extent that it does not exceed the aggregate
separate limitation losses in the loss category not previously
recharacterized) must be recharacterized as income in the
separate limitation category that was previously offset by the
loss. Such recharacterization must be made in proportion to the
prior loss apportionment not previously taken into account.
A U.S.-source loss reduces pre-credit U.S. tax on worldwide
income to an amount less than the hypothetical tax that would
apply to the taxpayer's foreign-source income if viewed in
isolation. The existence of foreign-source taxable income in
the year of the U.S.-source loss reduces or eliminates any net
operating loss carryover that the U.S.-source loss would
otherwise have generated absent the foreign income. In
addition, as the pre-credit U.S. tax on worldwide income is
reduced, so is the foreign tax credit limitation. Moreover, any
U.S.-source loss for any taxable year is apportioned among (and
operates to reduce) foreign income in the separate limitation
categories on a proportionate basis. As a result, some foreign
tax credits in the year of the U.S.-source loss must be
credited, if at all, in a carryover year. Tax on U.S.-source
taxable income in a subsequent year may be offset by a net
operating loss carryforward, but not by a foreign tax credit
carryforward. There is currently no mechanism for
recharacterizing such subsequent U.S.-source income as foreign-
source income.
For example, suppose a taxpayer generates a $100 U.S.-
source loss and earns $100 of foreign-source income in Year 1,
and pays $30 of foreign tax on the $100 of foreign-source
income. Because the taxpayer has no net taxable income in Year
1, no foreign tax credit can be claimed in Year 1 with respect
to the $30 of foreign taxes. If the taxpayer then earns $100 of
U.S.-source income and $100 of foreign-source income in Year 2,
present law does not recharacterize any portion of the $100 of
U.S.-source income as foreign-source income to reflect the fact
that the previous year's $100 U.S.-source loss reduced the
taxpayer's ability to claim foreign tax credits.
REASONS FOR CHANGE
The Committee believes that it is important to create
parity in the treatment of overall foreign losses and overall
domestic losses in order to prevent the double taxation of
income. The Committee believes that preventing double taxation
will make U.S. businesses more competitive and will lead to
increased export sales. The Committee believes that this
increase in export sales will increase production in the United
States and increase jobs in the United States to support the
increased exports.
EXPLANATION OF PROVISION
The provision applies a re-sourcing rule to U.S.-source
income in cases in which a taxpayer's foreign tax credit
limitation has been reduced as a result of an overall domestic
loss. Under the provision, a portion of the taxpayer's U.S.-
source income for each succeeding taxable year is
recharacterized as foreign-source income in an amount equal to
the lesser of: (1) the amount of the unrecharacterized overall
domestic losses for years prior to such succeeding taxable
year, and (2) 50 percent of the taxpayer's U.S.-source income
for such succeeding taxable year.
The provision defines an overall domestic loss for this
purpose as any domestic loss to the extent it offsets foreign-
source taxable income for the current taxable year or for any
preceding taxable year by reason of a loss carryback. For this
purpose, a domestic loss means the amount by which the U.S.-
source gross income for the taxable year is exceeded by the sum
of the deductions properly apportioned or allocated thereto,
determined without regard to any loss carried back from a
subsequent taxable year. Under the provision, an overall
domestic loss does not include any loss for any taxable year
unless the taxpayer elected the use of the foreign tax credit
for such taxable year.
Any U.S.-source income recharacterized under the provision
is allocated among and increases the various foreign tax credit
separate limitation categories in the same proportion that
those categories were reduced by the prior overall domestic
losses, in a manner similar to the recharacterization rules for
separate limitation losses.
It is anticipated that situations may arise in which a
taxpayer generates an overall domestic loss in a year following
a year in which it had an overall foreign loss, or vice versa.
In such a case, it would be necessary for ordering and other
coordination rules to be developed for purposes of computing
the foreign tax credit limitation in subsequent taxable years.
The provision grants the Secretary of the Treasury authority to
prescribe such regulations as may be necessary to coordinate
the operation of the OFL recapture rules with the operation of
the overall domestic loss recapture rules added by the
provision.
EFFECTIVE DATE
The provision applies to losses incurred in taxable years
beginning after December 31, 2006.
C. Reduction to Two Foreign Tax Credit Baskets
(Sec. 303 of the bill and sec. 904 of the Code)
PRESENT LAW
In general
The United States taxes its citizens and residents on their
worldwide income. Because the countries in which income is
earned also may assert their jurisdiction to tax the same
income on the basis of source, foreign-source income earned by
U.S. persons may be subject to double taxation. In order to
mitigate this possibility, the United States provides a credit
against U.S. tax liability for foreign income taxes paid,
subject to a number of limitations. The foreign tax credit
generally is limited to the U.S. tax liability on a taxpayer's
foreign-source income, in order to ensure that the credit
serves its purpose of mitigating double taxation of cross-
border income without offsetting the U.S. tax on U.S.-source
income.
The foreign tax credit limitation is 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 (``10/50
companies''),\122\ (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). In addition, a number of other provisions of
the Code and U.S. tax treaties effectively create additional
separate limitations in certain circumstances.\123\
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\122\ Subject to certain exceptions, dividends paid by a 10/50
company in taxable years beginning after December 31, 2002 are subject
to either a look-through approach in which the dividend is attributed
to a particular limitation category based on the underlying earnings
which gave rise to the dividend (for post-2002 earnings and profits),
or a single-basket limitation approach for dividends from all 10/50
companies that are not passive foreign investment companies (for pre-
2003 earnings and profits). Under section 304 of the bill, these
dividends are subject to a look-through approach, irrespective of when
the underlying earnings and profits arose.
\123\ See, e.g., sec. 56(g)(4)(C)(iii)(IV) (relating to certain
dividends from corporations eligible for the sec. 936 credit); sec.
245(a)(10) (relating to certain dividends treated as foreign source
under treaties); sec. 865(h)(1)(B) (relating to certain gains from
stock and intangibles treated as foreign source under treaties); sec.
901(j)(1)(B) (relating to income from certain specified countries); and
sec. 904(g)(10)(A) (relating to interest, dividends, and certain other
amounts derived from U.S.-owned foreign corporations and treated as
foreign source under treaties).
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Financial services income
In general, the term ``financial services income'' includes
income received or accrued by a person predominantly engaged in
the active conduct of a banking, insurance, financing, or
similar business, if the income is derived in the active
conduct of a banking, financing or similar business, or is
derived from the investment by an insurance company of its
unearned premiums or reserves ordinary and necessary for the
proper conduct of its insurance business (sec. 904(d)(2)(C)).
The Code also provides that financial services income includes
income, received or accrued by a person predominantly engaged
in the active conduct of a banking, insurance, financing, or
similar business, of a kind which would generally be insurance
income (as defined in section 953(a)), among other items.
Treasury regulations provide that a person is predominantly
engaged in the active conduct of a banking, insurance,
financing, or similar business for any year if for that year at
least 80 percent of its gross income is ``active financing
income.'' \124\ The regulations further provide that a
corporation that is not predominantly engaged in the active
conduct of a banking, insurance, financing, or similar business
under the preceding definition can derive financial services
income if the corporation is a member of an affiliated group
(as defined in section 1504(a), but expanded to include foreign
corporations) that, as a whole, meets the regulatory test of
being ``predominantly engaged.'' \125\ In determining whether
an affiliated group is ``predominantly engaged,'' only the
income of members of the group that are U.S. corporations, or
controlled foreign corporations in which such U.S. corporations
own (directly or indirectly) at least 80 percent of the total
voting power and value of the stock, are counted.
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\124\ Treas. Reg. sec. 1.904-4(e)(3)(i) and (2)(i).
\125\ Treas. Reg. sec. 1.904-4(e)(3)(ii).
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``Base difference'' items
Under Treasury regulations, foreign taxes are allocated and
apportioned to the same limitation categories as the income to
which they relate.\126\ In cases in which foreign law imposes
tax on an item of income that does not constitute income under
U.S. tax principles (a ``base difference'' item), the tax is
treated as imposed on income in the general limitation
category.\127\
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\126\ Treas. Reg. sec. 1.904-6.
\127\ Treas. Reg. sec. 1.904-6(a)(1)(iv).
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REASONS FOR CHANGE
The Committee believes that requiring taxpayers to separate
income and tax credits into nine separate tax baskets creates
some of the most complex tax reporting and compliance issues in
the Code. Reducing the number of foreign tax credit baskets to
two will greatly simplify the Code and undo much of the
complexity created by the Tax Reform Act of 1986. The Committee
believes that simplifying these rules will reduce double
taxation, make U.S. businesses more competitive, and create
jobs in the United States.
EXPLANATION OF PROVISION
In general
The provision generally reduces the number of foreign tax
credit limitation categories to two: passive category income
and general category income. Other income is included in one of
the two categories, as appropriate. For example, shipping
income generally falls into the general limitation category,
whereas high withholding tax interest generally could fall into
the passive income or the general limitation category,
depending on the circumstances. Dividends from a domestic
international sales corporation or former domestic
international sales corporation, income attributable to certain
foreign trade income, and certain distributions from a foreign
sales corporation or former foreign sales corporation all are
assigned to the passive income limitation category. The
provision does not affect the separate computation of foreign
tax credit limitations under special provisions of the Code
relating to, for example, treaty-based sourcing rules or
specified countries under section 901(j).
Financial services income
In the case of a member of a financial services group or
any other person predominantly engaged in the active conduct of
a banking, insurance, financing or similar business, the
provision treats income meeting the definition of financial
services income as general category income. Under the
provision, a financial services group is an affiliated group
that is predominantly engaged in the active conduct of a
banking, insurance, financing or similar business. For this
purpose, the definition of an affiliated group under section
1504(a) is applied, but expanded to include certain insurance
companies (without regard to whether such companies are covered
by an election under section 1504(c)(2)) and foreign
corporations. In determining whether such a group is
predominantly engaged in the active conduct of a banking,
insurance, financing, or similar business, only the income of
members of the group that are U.S. corporations or controlled
foreign corporations in which such U.S. corporations own
(directly or indirectly) at least 80 percent of total voting
power and value of the stock are taken into account.
The provision does not alter the present law interpretation
of what it means to be a ``person predominantly engaged in the
active conduct of a banking, insurance, financing, or similar
business.'' \128\ Thus, other provisions of the Code that rely
on this same concept of a ``person predominantly engaged in the
active conduct of a banking, insurance, financing, or similar
business'' are not affected by the provision. For example,
under the ``accumulated deficit rule'' of section 952(c)(1)(B),
subpart F income inclusions of a U.S. shareholder attributable
to a ``qualified activity'' of a controlled foreign corporation
may be reduced by the amount of the U.S. shareholder's pro rata
share of certain prior year deficits attributable to the same
qualified activity. In the case of a qualified financial
institution, qualified activity consists of any activity giving
rise to foreign personal holding company income, but only if
the controlled foreign corporation was predominantly engaged in
the active conduct of a banking, financing, or similar business
in both the year in which the corporation earned the income and
the year in which the corporation incurred the deficit.
Similarly, in the case of a qualified insurance company,
qualified activity consists of activity giving rise to
insurance income or foreign personal holding company income,
but only if the controlled foreign corporation was
predominantly engaged in the active conduct of an insurance
business in both the year in which the corporation earned the
income and the year in which the corporation incurred the
deficit. For this purpose, ``predominantly engaged in the
active conduct of a banking, insurance, financing, or similar
business'' is defined under present law by reference to the use
of the term for purposes of the separate foreign tax credit
limitations.\129\ The present-law meaning of ``predominantly
engaged'' for purposes of section 952(c)(1)(B) remains
unchanged under the provision.
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\128\ See Treas. Reg. sec. 1.904-4(e).
\129\ See H.R. Rep. No. 99-841, 99th Cong., 2d Sess. II-621 (1986);
Staff of the Joint Committee on Taxation, 100th Cong., 1st Sess.,
General Explanation of the Tax Reform Act of 1986, at 984 (1987).
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The provision requires the Treasury Secretary to specify
the treatment of financial services income received or accrued
by pass-through entities that are not members of a financial
services group. The Committee expects these regulations to be
generally consistent with regulations currently in effect.
``Base difference'' items
Creditable foreign taxes that are imposed on amounts that
do not constitute income under U.S. tax principles are treated
as imposed on general limitation income.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2006.
Taxes paid or accrued in a taxable year beginning before
January 1, 2007, and carried to any subsequent taxable year are
treated as if this provision were in effect on the date such
taxes were paid or accrued. Thus, such taxes are assigned to
one of the two foreign tax credit limitation categories, as
appropriate.
The Treasury Secretary is given authority to provide by
regulations for the allocation of income with respect to taxes
carried back to pre-effective-date years (in which more than
two limitation categories are in effect).
D. Look-Through Rules To Apply to Dividends From Noncontrolled Section
902 Corporations
(Sec. 304 of the bill and sec. 904 of the Code)
PRESENT LAW
U.S. persons may credit foreign taxes against U.S. tax on
foreign-source income. In general, the amount of foreign tax
credits that may be claimed in a year is subject to a
limitation that prevents taxpayers from using foreign tax
credits to offset U.S. tax on U.S.-source income. Separate
limitations are also applied to specific categories of income.
Special foreign tax credit limitations apply in the case of
dividends received from a foreign corporation in which the
taxpayer owns at least 10 percent of the stock by vote and
which is not a controlled foreign corporation (a so-called
``10/50 company''). Dividends paid by a 10/50 company that is
not a passive foreign investment company out of earnings and
profits accumulated in taxable years beginning before January
1, 2003 are subject to a single foreign tax credit limitation
for all 10/50 companies (other than passive foreign investment
companies).\130\ Dividends paid by a 10/50 company that is a
passive foreign investment company out of earnings and profits
accumulated in taxable years beginning before January 1, 2003,
continue to be subject to a separate foreign tax credit
limitation for each such 10/50 company. Dividends paid by a 10/
50 company out of earnings and profits accumulated in taxable
years after December 31, 2002 are treated as income in a
foreign tax credit limitation category in proportion to the
ratio of the 10/50 company's earnings and profits attributable
to income in such foreign tax credit limitation category to its
total earnings and profits (a ``look-through'' approach).
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\130\ Dividends paid by a 10/50 company in taxable years beginning
before January 1, 2003 are subject to a separate foreign tax credit
limitation for each 10/50 company.
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For these purposes, distributions are treated as made from
the most recently accumulated earnings and profits. Regulatory
authority is granted to provide rules regarding the treatment
of distributions out of earnings and profits for periods prior
to the taxpayer's acquisition of such stock.
REASONS FOR CHANGE
The Committee believes that significant simplification can
be achieved by eliminating the requirement that taxpayers
segregate the earnings and profits of 10/50 companies on the
basis of when such earnings and profits arose.
EXPLANATION OF PROVISION
The provision generally applies the look-through approach
to dividends paid by a 10/50 company regardless of the year in
which the earnings and profits out of which the dividend is
paid were accumulated.\131\ If the Treasury Secretary
determines that a taxpayer has inadequately substantiated that
it assigned a dividend from a 10/50 company to the proper
foreign tax credit limitation category, the dividend is treated
as passive category income for foreign tax credit basketing
purposes.\132\
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\131\ This look-through treatment also applies to dividends that a
controlled foreign corporation receives from a 10/50 company and then
distributes to a U.S. shareholder.
\132\ It is anticipated that the Treasury Secretary will reconsider
the operation of the foreign tax credit regulations to ensure that the
high-tax income rules apply appropriately to dividends treated as
passive category income because of inadequate substantiation.
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EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2002.
The provision also provides transition rules regarding the
use of pre-effective-date foreign tax credits associated with a
10/50 company separate limitation category in post-effective-
date years. Look-through principles similar to those applicable
to post-effective-date dividends from a 10/50 company apply to
determine the appropriate foreign tax credit limitation
category or categories with respect to carrying forward foreign
tax credits into future years. The provision allows the
Treasury Secretary to issue regulations addressing the
carryback of foreign tax credits associated with a dividend
from a 10/50 company to pre-effective-date years.
E. Attribution of Stock Ownership Through Partnerships To Apply in
Determining Section 902 and 960 Credits
(Sec. 305 of the bill and secs. 901, 902, and 960 of the Code)
PRESENT LAW
Under section 902, a domestic corporation that receives a
dividend from a foreign corporation in which it owns ten
percent or more of the voting stock is deemed to have paid a
portion of the foreign taxes paid by such foreign corporation.
Thus, such a domestic corporation is eligible to claim a
foreign tax credit with respect to such deemed-paid taxes. The
domestic corporation that receives a dividend is deemed to have
paid a portion of the foreign corporation's post-1986 foreign
income taxes based on the ratio of the amount of the dividend
to the foreign corporation's post-1986 undistributed earnings
and profits.
Foreign income taxes paid or accrued by lower-tier foreign
corporations also are eligible for the deemed-paid credit if
the foreign corporation falls within a qualified group (sec.
902(b)). A ``qualified group'' includes certain foreign
corporations within the first six tiers of a chain of foreign
corporations if, among other things, the product of the
percentage ownership of voting stock at each level of the chain
(beginning from the domestic corporation) equals at least five
percent. In addition, in order to claim indirect credits for
foreign taxes paid by certain fourth-, fifth-, and sixth-tier
corporations, such corporations must be controlled foreign
corporations (within the meaning of sec. 957) and the
shareholder claiming the indirect credit must be a U.S.
shareholder (as defined in sec. 951(b)) with respect to the
controlled foreign corporations. The application of the
indirect foreign tax credit below the third tier is limited to
taxes paid in taxable years during which the payor is a
controlled foreign corporation. Foreign taxes paid below the
sixth tier of foreign corporations are ineligible for the
indirect foreign tax credit.
Section 960 similarly permits a domestic corporation with
subpart F inclusions from a controlled foreign corporation to
claim deemed-paid foreign tax credits with respect to foreign
taxes paid or accrued by the controlled foreign corporation on
its subpart F income.
The foreign tax credit provisions in the Code do not
specifically address whether a domestic corporation owning ten
percent or more of the voting stock of a foreign corporation
through a partnership is entitled to a deemed-paid foreign tax
credit.\133\ In Rev. Rul. 71-141,\134\ the IRS held that a
foreign corporation's stock held indirectly by two domestic
corporations through their interests in a domestic general
partnership is attributed to such domestic corporations for
purposes of determining the domestic corporations' eligibility
to claim a deemed-paid foreign tax credit with respect to the
foreign taxes paid by such foreign corporation. Accordingly, a
general partner of a domestic general partnership is permitted
to claim deemed-paid foreign tax credits with respect to a
dividend distribution from the foreign corporation to the
partnership.
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\133\ Under section 901(b)(5), an individual member of a
partnership or a beneficiary of an estate or trust generally may claim
a direct foreign tax credit with respect to the amount of his or her
proportionate share of the foreign taxes paid or accrued by the
partnership, estate, or trust. This rule does not specifically apply to
corporations that are either members of a partnership or beneficiaries
of an estate or trust. However, section 702(a)(6) provides that each
partner (including individuals or corporations) of a partnership must
take into account separately its distributive share of the
partnership's foreign taxes paid or accrued. In addition, under section
703(b)(3), the election under section 901 (whether to credit the
foreign taxes) is made by each partner separately.
\134\ 1971-1 C.B. 211.
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However, in 1997, the Treasury Department issued final
regulations under section 902, and the preamble to the
regulations states that ``[t]he final regulations do not
resolve under what circumstances a domestic corporate partner
may compute an amount of foreign taxes deemed paid with respect
to dividends received from a foreign corporation by a
partnership or other pass-through entity.'' \135\ In
recognition of the holding in Rev. Rul. 71-141, the preamble to
the final regulations under section 902 states that a
``domestic shareholder'' for purposes of section 902 is a
domestic corporation that ``owns'' the requisite voting stock
in a foreign corporation rather than one that ``owns directly''
the voting stock. At the same time, the preamble states that
the IRS is still considering under what other circumstances
Rev. Rul. 71-141 should apply. Consequently, uncertainty
remains regarding whether a domestic corporation owning ten
percent or more of the voting stock of a foreign corporation
through a partnership is entitled to a deemed-paid foreign tax
credit (other than through a domestic general partnership).
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\135\ T.D. 8708, 1997-1 C.B. 137.
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REASONS FOR CHANGE
The Committee believes that a clarification is appropriate
regarding the ability of a domestic corporation owning ten
percent or more of the voting stock of a foreign corporation
through a partnership to claim a deemed-paid foreign tax
credit.
EXPLANATION OF PROVISION
The provision clarifies that a domestic corporation is
entitled to claim deemed-paid foreign tax credits with respect
to a foreign corporation that is held indirectly through a
foreign or domestic partnership, provided that the domestic
corporation owns (indirectly through the partnership) ten
percent or more of the foreign corporation's voting stock. No
inference is intended as to the treatment of such deemed-paid
foreign tax credits under present law. The provision also
clarifies that both individual and corporate partners (or
estate or trust beneficiaries) may claim direct foreign tax
credits with respect to their proportionate shares of taxes
paid or accrued by a partnership (or estate or trust).
EFFECTIVE DATE
The provision applies to taxes of foreign corporations for
taxable years of such corporations beginning after the date of
enactment.
F. Foreign Tax Credit Treatment of Deemed Payments Under Section 367(d)
(Sec. 306 of the bill and sec. 367 of the Code)
PRESENT LAW
In the case of transfers of intangible property to foreign
corporations by means of contributions and certain other
nonrecognition transactions, special rules apply that are
designed to mitigate the tax avoidance that may arise from
shifting the income attributable to intangible property
offshore. Under section 367(d), the outbound transfer of
intangible property is treated as a sale of the intangible for
a stream of contingent payments. The amounts of these deemed
payments must be commensurate with the income attributable to
the intangible. The deemed payments are included in gross
income of the U.S. transferor as ordinary income, and the
earnings and profits of the foreign corporation to which the
intangible was transferred are reduced by such amounts.
The Taxpayer Relief Act of 1997 (the ``1997 Act'') repealed
a rule that treated all such deemed payments as giving rise to
U.S.-source income. Because the foreign tax credit is generally
limited to the U.S. tax imposed on foreign-source income, the
prior-law rule reduced the taxpayer's ability to claim foreign
tax credits. As a result of the repeal of the rule, the source
of payments deemed received under section 367(d) is determined
under general sourcing rules. These rules treat income from
sales of intangible property for contingent payments the same
as royalties, with the result that the deemed payments may give
rise to foreign-source income.\136\
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\136\ Secs. 865(d), 862(a).
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The 1997 Act did not address the characterization of the
deemed payments for purposes of applying the foreign tax credit
separate limitation categories.\137\ If the deemed payments are
treated like proceeds of a sale, then they could fall into the
passive category; if the deemed payments are treated like
royalties, then in many cases they could fall into the general
category (under look-through rules applicable to payments of
dividends, interest, rents, and royalties received from
controlled foreign corporations).\138\
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\137\ Sec. 904(d).
\138\ Sec. 904(d)(3).
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REASONS FOR CHANGE
The Committee believes that it is appropriate to
characterize deemed payments under section 367(d) as royalties
for purposes of applying the separate limitation categories of
the foreign tax credit, and that this treatment should be
effective for all transactions subject to the underlying
provision of the 1997 Act.
EXPLANATION OF PROVISION
The provision specifies that deemed payments under section
367(d) are treated as royalties for purposes of applying the
separate limitation categories of the foreign tax credit.
EFFECTIVE DATE
The provision is effective for amounts treated as received
on or after August 5, 1997 (the effective date of the relevant
provision of the 1997 Act).
G. United States Property Not To Include Certain Assets of Controlled
Foreign Corporation
(Sec. 307 of the bill and sec. 956 of the Code)
PRESENT LAW
In general, the subpart F rules \139\ require U.S.
shareholders with a 10-percent or greater interest in a
controlled foreign corporation (``U.S. 10-percent
shareholders'') to include in taxable income their pro rata
shares of certain income of the controlled foreign corporation
(referred to as ``subpart F income'') when such income is
earned, whether or not the earnings are distributed currently
to the shareholders. In addition, the U.S. 10-percent
shareholders of a controlled foreign corporation are subject to
U.S. tax on their pro rata shares of the controlled foreign
corporation's earnings to the extent invested by the controlled
foreign corporation in certain U.S. property in a taxable
year.\140\
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\139\ Secs. 951-964.
\140\ Sec. 951(a)(1)(B).
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A shareholder's income inclusion with respect to a
controlled foreign corporation's investment in U.S. property
for a taxable year is based on the controlled foreign
corporation's average investment in U.S. property for such
year. For this purpose, the U.S. property held (directly or
indirectly) by the controlled foreign corporation must be
measured as of the close of each quarter in the taxable
year.\141\ The amount taken into account with respect to any
property is the property's adjusted basis as determined for
purposes of reporting the controlled foreign corporation's
earnings and profits, reduced by any liability to which the
property is subject. The amount determined for inclusion in
each taxable year is the shareholder's pro rata share of an
amount equal to the lesser of: (1) the controlled foreign
corporation's average investment in U.S. property as of the end
of each quarter of such taxable year, to the extent that such
investment exceeds the foreign corporation's earnings and
profits that were previously taxed on that basis; or (2) the
controlled foreign corporation's current or accumulated
earnings and profits (but not including a deficit), reduced by
distributions during the year and by earnings that have been
taxed previously as earnings invested in U.S. property.\142\ An
income inclusion is required only to the extent that the amount
so calculated exceeds the amount of the controlled foreign
corporation's earnings that have been previously taxed as
subpart F income.\143\
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\141\ Sec. 956(a).
\142\ Secs. 956 and 959.
\143\ Secs. 951(a)(1)(B) and 959.
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For purposes of section 956, U.S. property generally is
defined to include tangible property located in the United
States, stock of a U.S. corporation, an obligation of a U.S.
person, and certain intangible assets including a patent or
copyright, an invention, model or design, a secret formula or
process or similar property right which is acquired or
developed by the controlled foreign corporation for use in the
United States.\144\
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\144\ Sec. 956(c)(1).
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Specified exceptions from the definition of U.S. property
are provided for: (1) obligations of the United States, money,
or deposits with persons carrying on the banking business; (2)
certain export property; (3) certain trade or business
obligations; (4) aircraft, railroad rolling stock, vessels,
motor vehicles or containers used in transportation in foreign
commerce and used predominantly outside of the United States;
(5) certain insurance company reserves and unearned premiums
related to insurance of foreign risks; (6) stock or debt of
certain unrelated U.S. corporations; (7) moveable property
(other than a vessel or aircraft) used for the purpose of
exploring, developing, or certain other activities in
connection with the ocean waters of the U.S. Continental Shelf;
(8) an amount of assets equal to the controlled foreign
corporation's accumulated earnings and profits attributable to
income effectively connected with a U.S. trade or business; (9)
property (to the extent provided in regulations) held by a
foreign sales corporation and related to its export activities;
(10) certain deposits or receipts of collateral or margin by a
securities or commodities dealer, if such deposit is made or
received on commercial terms in the ordinary course of the
dealer's business as a securities or commodities dealer; and
(11) certain repurchase and reverse repurchase agreement
transactions entered into by or with a dealer in securities or
commodities in the ordinary course of its business as a
securities or commodities dealer.\145\
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\145\ Sec. 956(c)(2).
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee believes that the acquisition of securities
by a controlled foreign corporation in the ordinary course of
its business as a securities dealer generally should not give
rise to an income inclusion as an investment in U.S. property
under the provisions of subpart F. Similarly, the Committee
believes that the acquisition by a controlled foreign
corporation of obligations issued by unrelated U.S.
noncorporate persons generally should not give rise to an
income inclusion as an investment in U.S. property.
EXPLANATION OF PROVISION
The provision adds two new exceptions from the definition
of U.S. property for determining current income inclusion by a
U.S. 10-percent shareholder with respect to an investment in
U.S. property by a controlled foreign corporation.
The first exception generally applies to securities
acquired and held by a controlled foreign corporation in the
ordinary course of its trade or business as a dealer in
securities. The exception applies only if the controlled
foreign corporation dealer: (1) accounts for the securities as
securities held primarily for sale to customers in the ordinary
course of business; and (2) disposes of such securities (or
such securities mature while being held by the dealer) within a
period consistent with the holding of securities for sale to
customers in the ordinary course of business.
The second exception generally applies to the acquisition
by a controlled foreign corporation of obligations issued by a
U.S. person that is not a domestic corporation and that is not
(1) a U.S. 10-percent shareholder of the controlled foreign
corporation, or (2) a partnership, estate or trust in which the
controlled foreign corporation or any related person is a
partner, beneficiary or trustee immediately after the
acquisition by the controlled foreign corporation of such
obligation.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2004, and for taxable
years of United States shareholders with or within which such
taxable years of such foreign corporations end.
H. Election Not To Use Average Exchange Rate for Foreign Tax Paid Other
Than in Functional Currency
(Sec. 308 of the bill and sec. 986 of the Code)
PRESENT LAW
For taxpayers that take foreign income taxes into account
when accrued, present law provides that the amount of the
foreign tax credit generally is determined by translating the
amount of foreign taxes paid in foreign currencies into a U.S.
dollar amount at the average exchange rate for the taxable year
to which such taxes relate.\146\ This rule applies to foreign
taxes paid directly by U.S. taxpayers, which taxes are
creditable in the year paid or accrued, and to foreign taxes
paid by foreign corporations that are deemed paid by a U.S.
corporation that is a shareholder of the foreign corporation,
and hence creditable in the year that the U.S. corporation
receives a dividend or has an income inclusion from the foreign
corporation. This rule does not apply to any foreign income
tax: (1) that is paid after the date that is two years after
the close of the taxable year to which such taxes relate; (2)
of an accrual-basis taxpayer that is actually paid in a taxable
year prior to the year to which the tax relates; or (3) that is
denominated in an inflationary currency (as defined by
regulations).
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\146\ Sec. 986(a)(1).
---------------------------------------------------------------------------
Foreign taxes that are not eligible for translation at the
average exchange rate generally are translated into U.S. dollar
amounts using the exchange rates as of the time such taxes are
paid. However, the Secretary is authorized to issue regulations
that would allow foreign tax payments to be translated into
U.S. dollar amounts using an average exchange rate for a
specified period.\147\
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\147\ Sec. 986(a)(2).
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REASONS FOR CHANGE
The Committee believes that taxpayers generally should be
permitted to elect whether to translate foreign income tax
payments using an average exchange rate for the taxable year or
the exchange rate when the taxes are paid, provided the elected
method continues to be applied consistently unless revoked with
the consent of the Treasury Secretary.
EXPLANATION OF PROVISION
For taxpayers that are required under present law to
translate foreign income tax payments at the average exchange
rate, the provision provides an election to translate such
taxes into U.S. dollar amounts using the exchange rates as of
the time such taxes are paid, provided the foreign income taxes
are denominated in a currency other than the taxpayer's
functional currency.\148\ Any election under the provision
applies to the taxable year for which the election is made and
to all subsequent taxable years unless revoked with the consent
of the Secretary. The provision authorizes the Secretary to
issue regulations that apply the election to foreign income
taxes attributable to a qualified business unit.
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\148\ Electing taxpayers translate foreign income tax payments
pursuant to the same present-law rules that apply to taxpayers that are
required to translate foreign income taxes using the exchange rates as
of the time such taxes are paid.
---------------------------------------------------------------------------
EFFECTIVE DATE
The provision is effective with respect to taxable years
beginning after December 31, 2004.
I. Repeal of Withholding Tax on Dividends From Certain Foreign
Corporations
(Sec. 309 of the bill and sec. 871 of the Code)
PRESENT LAW
Nonresident individuals who are not U.S. citizens and
foreign corporations (collectively, foreign persons) are
subject to U.S. tax on income that is effectively connected
with the conduct of a U.S. trade or business; the U.S. tax on
such income is calculated in the same manner and at the same
graduated rates as the tax on U.S. persons (secs. 871(b) and
882). Foreign persons also are subject to a 30-percent gross
basis tax, collected by withholding, on certain U.S.-source
passive income (e.g., interest and dividends) that is not
effectively connected with a U.S. trade or business. This 30-
percent withholding tax may be reduced or eliminated pursuant
to an applicable tax treaty. Foreign persons generally are not
subject to U.S. tax on foreign-source income that is not
effectively connected with a U.S. trade or business.
In general, dividends paid by a domestic corporation are
treated as being from U.S. sources and dividends paid by a
foreign corporation are treated as being from foreign sources.
Thus, dividends paid by foreign corporations to foreign persons
generally are not subject to withholding tax because such
income generally is treated as foreign-source income.
An exception from this general rule applies in the case of
dividends paid by certain foreign corporations. If a foreign
corporation derives 25 percent or more of its gross income as
income effectively connected with a U.S. trade or business for
the three-year period ending with the close of the taxable year
preceding the declaration of a dividend, then a portion of any
dividend paid by the foreign corporation to its shareholders
will be treated as U.S.-source income and, in the case of
dividends paid to foreign shareholders, will be subject to the
30-percent withholding tax (sec. 861(a)(2)(B)). This rule is
sometimes referred to as the ``secondary withholding tax.'' The
portion of the dividend treated as U.S.-source income is equal
to the ratio of the gross income of the foreign corporation
that was effectively connected with its U.S. trade or business
over the total gross income of the foreign corporation during
the three-year period ending with the close of the preceding
taxable year. The U.S.-source portion of the dividend paid by
the foreign corporation to its foreign shareholders is subject
to the 30-percent withholding tax.
Under the branch profits tax provisions, the United States
taxes foreign corporations engaged in a U.S. trade or business
on amounts of U.S. earnings and profits that are shifted out of
the U.S. branch of the foreign corporation. The branch profits
tax is comparable to the second-level taxes imposed on
dividends paid by a domestic corporation to its foreign
shareholders. The branch profits tax is 30 percent of the
foreign corporation's ``dividend equivalent amount,'' which
generally is the earnings and profits of a U.S. branch of a
foreign corporation attributable to its income effectively
connected with a U.S. trade or business (secs. 884(a) and (b)).
If a foreign corporation is subject to the branch profits
tax, then no secondary withholding tax is imposed on dividends
paid by the foreign corporation to its shareholders (sec.
884(e)(3)(A)). If a foreign corporation is a qualified resident
of a tax treaty country and claims an exemption from the branch
profits tax pursuant to the treaty, the secondary withholding
tax could apply with respect to dividends it pays to its
shareholders. Several tax treaties (including treaties that
prevent imposition of the branch profits tax), however, exempt
dividends paid by the foreign corporation from the secondary
withholding tax.
REASONS FOR CHANGE
The Committee observes that the secondary withholding tax
with respect to dividends paid by certain foreign corporations
has been largely superseded by the branch profits tax and
applicable income tax treaties. Accordingly, the Committee
believes that the tax should be repealed in the interest of
simplification.
EXPLANATION OF PROVISION
The provision eliminates the secondary withholding tax with
respect to dividends paid by certain foreign corporations.
EFFECTIVE DATE
The provision is effective for payments made after December
31, 2004.
J. Provide Equal Treatment for Interest Paid by Foreign Partnerships
and Foreign Corporations
(Sec. 310 of the bill and sec. 861 of the Code)
PRESENT LAW
In general, interest income from bonds, notes or other
interest-bearing obligations of noncorporate U.S. residents or
domestic corporations is treated as U.S.-source income.\149\
Other interest (e.g., interest on obligations of foreign
corporations and foreign partnerships) generally is treated as
foreign-source income. However, Treasury regulations provide
that a foreign partnership is a U.S. resident for purposes of
this rule if at any time during its taxable year it is engaged
in a trade or business in the United States.\150\ Therefore,
any interest received from such a foreign partnership is U.S.-
source income.
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\149\ Sec. 861(a)(1).
\150\ Treas. Reg. sec. 1.861-2(a)(2).
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Notwithstanding the general rule described above, in the
case of a foreign corporation engaged in a U.S. trade or
business (or having gross income that is treated as effectively
connected with the conduct of a U.S. trade or business),
interest paid by such U.S. trade or business is treated as if
it were paid by a domestic corporation (i.e., such interest is
treated as U.S.-source income).\151\
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\151\ Sec. 884(f)(1).
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REASONS FOR CHANGE
The Committee believes that the source of interest income
received from a foreign partnership or foreign corporation
should be consistent. The Committee believes that interest
payments from a foreign partnership engaged in a trade or
business in the United States should be sourced in the same
manner as interest payments from a foreign corporation engaged
in a trade or business in the United States.
EXPLANATION OF PROVISION
The provision treats interest paid by foreign partnerships
in a manner similar to the treatment of interest paid by
foreign corporations. Thus, interest paid by a foreign
partnership is treated as U.S.-source income only if the
interest is paid by a U.S. trade or business conducted by the
partnership or is allocable to income that is treated as
effectively connected with the conduct of a U.S. trade or
business. The provision applies only to foreign partnerships
that are predominantly engaged in the active conduct of a trade
or business outside the United States.
EFFECTIVE DATE
This provision is effective for taxable years beginning
after December 31, 2003.
K. Look-Through Treatment of Payments Between Related Controlled
Foreign Corporations Under Foreign Personal Holding Company Income
Rules
(Sec. 311 of the bill and sec. 954 of the Code)
PRESENT LAW
In general, the rules of subpart F (secs. 951-964) require
U.S. shareholders with a 10-percent or greater interest in a
controlled foreign corporation to include certain income of the
controlled foreign corporation (referred to as ``subpart F
income'') on a current basis for U.S. tax purposes, regardless
of whether the income is distributed to the shareholders.
Subpart F income includes foreign base company income. One
category of foreign base company income is foreign personal
holding company income. For subpart F purposes, foreign
personal holding company income generally includes dividends,
interest, rents and royalties, among other types of income.
However, foreign personal holding company income does not
include dividends and interest received by a controlled foreign
corporation from a related corporation organized and operating
in the same foreign country in which the controlled foreign
corporation is organized, or rents and royalties received by a
controlled foreign corporation from a related corporation for
the use of property within the country in which the controlled
foreign corporation is organized. Interest, rent, and royalty
payments do not qualify for this exclusion to the extent that
such payments reduce the subpart F income of the payor.
REASONS FOR CHANGE
Most countries allow their companies to redeploy active
foreign earnings with no additional tax burden. The Committee
believes that this provision will make U.S. companies and U.S.
workers more competitive with respect to such countries. By
allowing U.S. companies to reinvest their active foreign
earnings where they are most needed without incurring the
immediate additional tax that companies based in many other
countries never incur, the Committee believes that the
provision will enable U.S. companies to make more sales
overseas, and thus produce more goods in the United States.
EXPLANATION OF PROVISION
Under the provision, dividends, interest, rents, and
royalties received by one controlled foreign corporation from a
related controlled foreign corporation are not treated as
foreign personal holding company income to the extent
attributable or properly allocable to non-subpart-F income of
the payor. For these purposes, a related controlled foreign
corporation is a controlled foreign corporation that controls
or is controlled by the other controlled foreign corporation,
or a controlled foreign corporation that is controlled by the
same person or persons that control the other controlled
foreign corporation. Ownership of more than 50 percent of the
controlled foreign corporation's stock (by vote or value)
constitutes control for these purposes.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2004, and taxable
years of U.S. shareholders with or within which such taxable
years of such foreign corporations end.
L. Look-Through Treatment Under Subpart F for Sales of Partnership
Interests
(Sec. 312 of the bill and sec. 954 of the Code)
PRESENT LAW
In general, the subpart F rules (secs. 951-964) require
U.S. shareholders with a 10-percent or greater interest in a
controlled foreign corporation to include in income currently
for U.S. tax purposes certain types of income of the controlled
foreign corporation, whether or not such income is actually
distributed currently to the shareholders (referred to as
``subpart F income''). Subpart F income includes foreign
personal holding company income. Foreign personal holding
company income generally consists of the following: (1)
dividends, interest, royalties, rents, and annuities; (2) net
gains from the sale or exchange of (a) property that gives rise
to the preceding types of income, (b) property that does not
give rise to income, and (c) interests in trusts, partnerships,
and REMICs; (3) net gains from commodities transactions; (4)
net gains from foreign currency transactions; (5) income that
is equivalent to interest; (6) income from notional principal
contracts; and (7) payments in lieu of dividends. Thus, if a
controlled foreign corporation sells a partnership interest at
a gain, the gain generally constitutes foreign personal holding
company income and is included in the income of 10-percent U.S.
shareholders of the controlled foreign corporation as subpart F
income.
REASONS FOR CHANGE
The Committee believes that the sale of a partnership
interest by a controlled foreign corporation that owns a
significant interest in the partnership should constitute
subpart F income only to the extent that a proportionate sale
of the underlying partnership assets attributable to the
partnership interest would constitute subpart F income.
EXPLANATION OF PROVISION
The provision treats the sale by a controlled foreign
corporation of a partnership interest as a sale of the
proportionate share of partnership assets attributable to such
interest for purposes of determining subpart F foreign personal
holding company income. This rule applies only to partners
owning directly, indirectly, or constructively at least 25
percent of a capital or profits interest in the partnership.
Thus, the sale of a partnership interest by a controlled
foreign corporation that meets this ownership threshold
constitutes subpart F income under the provision only to the
extent that a proportionate sale of the underlying partnership
assets attributable to the partnership interest would
constitute subpart F income. The Treasury Secretary is directed
to prescribe such regulations as may be appropriate to prevent
the abuse of this provision.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2004, and taxable
years of U.S. shareholders with or within which such taxable
years of such foreign corporations end.
M. Repeal of Foreign Personal Holding Company Rules and Foreign
Investment Company Rules
(Sec. 313 of the bill and secs. 542, 551-558, 954, 1246, and 1247 of
the Code)
PRESENT LAW
Income earned by a foreign corporation from its foreign
operations generally is subject to U.S. tax only when such
income is distributed to any U.S. persons that hold stock in
such corporation. Accordingly, a U.S. person that conducts
foreign operations through a foreign corporation generally is
subject to U.S. tax on the income from those operations when
the income is repatriated to the United States through a
dividend distribution to the U.S. person. The income is
reported on the U.S. person's tax return for the year the
distribution is received, and the United States imposes tax on
such income at that time. The foreign tax credit may reduce the
U.S. tax imposed on such income.
Several sets of anti-deferral rules impose current U.S. tax
on certain income earned by a U.S. person through a foreign
corporation. Detailed rules for coordination among the anti-
deferral rules are provided to prevent the U.S. person from
being subject to U.S. tax on the same item of income under
multiple rules.
The Code sets forth the following anti-deferral rules: the
controlled foreign corporation rules of subpart F (secs. 951-
964); the passive foreign investment company rules (secs. 1291-
1298); the foreign personal holding company rules (secs. 551-
558); the personal holding company rules (secs. 541-547); the
accumulated earnings tax rules (secs. 531-537); and the foreign
investment company rules (secs. 1246-1247).
REASONS FOR CHANGE
The Committee believes that the overlap among the various
anti-deferral regimes results in significant complexity usually
with little or no ultimate tax consequences. These overlaps
require the application of specific rules of priority for
income inclusions among the regimes, as well as additional
coordination provisions pertaining to other operational
differences among the various regimes. The Committee believes
that significant simplification will be achieved by
streamlining these rules.
EXPLANATION OF PROVISION
The provision: (1) eliminates the rules applicable to
foreign personal holding companies and foreign investment
companies; (2) excludes foreign corporations from the
application of the personal holding company rules; and (3)
includes as subpart F foreign personal holding company income
personal services contract income that is subject to the
present-law foreign personal holding company rules.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2004, and taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
N. Determination of Foreign Personal Holding Company Income With
Respect to Transactions in Commodities
(Sec. 314 of the bill and sec. 954 of the Code)
PRESENT LAW
Subpart F foreign personal holding company income
Under the subpart F rules, U.S. shareholders with a 10-
percent or greater interest in a controlled foreign corporation
(``U.S. 10-percent shareholders'') are subject to U.S. tax
currently on certain income earned by the controlled foreign
corporation, whether or not such income is distributed to the
shareholders. The income subject to current inclusion under the
subpart F rules includes, among other things, ``foreign
personal holding company income.''
Foreign personal holding company income generally consists
of the following: dividends, interest, royalties, rents and
annuities; net gains from sales or exchanges of (1) property
that gives rise to the foregoing types of income, (2) property
that does not give rise to income, and (3) interests in trusts,
partnerships, and real estate mortgage investment conduits
(``REMICs''); net gains from commodities transactions; net
gains from foreign currency transactions; income that is
equivalent to interest; income from notional principal
contracts; and payments in lieu of dividends.
With respect to transactions in commodities, foreign
personal holding company income does not consist of gains or
losses which arise out of bona fide hedging transactions that
are reasonably necessary to the conduct of any business by a
producer, processor, merchant, or handler of a commodity in the
manner in which such business is customarily and usually
conducted by others.\152\ In addition, foreign personal holding
company income does not consist of gains or losses which are
comprised of active business gains or losses from the sale of
commodities, but only if substantially all of the controlled
foreign corporation's business is as an active producer,
processor, merchant, or handler of commodities.\153\
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\152\ For hedging transactions entered into on or after January 31,
2003, Treasury regulations provide that gains or losses from a
commodities hedging transaction generally are excluded from the
definition of foreign personal holding company income if the
transaction is with respect to the controlled foreign corporation's
business as a producer, processor, merchant or handler of commodities,
regardless of whether the transaction is a hedge with respect to a sale
of commodities in the active conduct of a commodities business by the
controlled foreign corporation. The regulations also provide that, for
purposes of satisfying the requirements for exclusion from the
definition of foreign personal holding company income, a producer,
processor, merchant or handler of commodities includes a controlled
foreign corporation that regularly uses commodities in a manufacturing,
construction, utilities, or transportation business (Treas. Reg. sec.
1.954-2(f)(2)(v)). However, the regulations provide that a controlled
foreign corporation is not a producer, processor, merchant or handler
of commodities (and therefore would not satisfy the requirements for
exclusion) if its business is primarily financial (Treas. Reg. sec.
1.954-2(f)(2)(v)).
\153\ Treasury regulations provide that substantially all of a
controlled foreign corporation's business is as an active producer,
processor, merchant or handler of commodities if: (1) the sum of its
gross receipts from all of its active sales of commodities in such
capacity and its gross receipts from all of its commodities hedging
transactions that qualify for exclusion from the definition of foreign
personal holding company income, equals or exceeds (2) 85 percent of
its total receipts for the taxable year (computed as though the
controlled foreign corporation was a domestic corporation) (Treas. Reg.
sec. 1.954-2(f)(2)(iii)(C)).
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Hedging transactions
Under present law, the term ``capital asset'' does not
include any hedging transaction which is clearly identified as
such before the close of the day on which it was acquired,
originated, or entered into (or such other time as the
Secretary may by regulations prescribe).\154\ The term
``hedging transaction'' means any transaction entered into by
the taxpayer in the normal course of the taxpayer's trade or
business primarily: (1) to manage risk of price changes or
currency fluctuations with respect to ordinary property which
is held or to be held by the taxpayer; (2) to manage risk of
interest rate or price changes or currency fluctuations with
respect to borrowings made or to be made, or ordinary
obligations incurred or to be incurred, by the taxpayer; or (3)
to manage such other risks as the Secretary may prescribe in
regulations.\155\
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\154\ Sec. 1221(a)(7).
\155\ Sec. 1221(b)(2)(A).
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REASONS FOR CHANGE
The Committee believes that exceptions from subpart F
foreign personal holding company income for commodities hedging
transactions and active business sales of commodities should be
modified to better reflect current active business practices
and, in the case of hedging transactions, to conform to recent
tax law changes concerning hedging transactions generally.
EXPLANATION OF PROVISION
The provision modifies the requirements that must be
satisfied for gains or losses from a commodities hedging
transaction to qualify for exclusion from the definition of
subpart F foreign personal holding company income. Under the
provision, gains or losses from a transaction with respect to a
commodity are not treated as foreign personal holding company
income if the transaction satisfies the general definition of a
hedging transaction under section 1221(b)(2). For purposes of
this provision, the general definition of a hedging transaction
under section 1221(b)(2) is modified to include any transaction
with respect to a commodity entered into by a controlled
foreign corporation in the normal course of the controlled
foreign corporation's trade or business primarily: (1) to
manage risk of price changes or currency fluctuations with
respect to ordinary property or property described in section
1231(b) which is held or to be held by the controlled foreign
corporation; or (2) to manage such other risks as the Secretary
may prescribe in regulations. Gains or losses from a
transaction that satisfies the modified definition of a hedging
transaction are excluded from the definition of foreign
personal holding company income only if the transaction is
clearly identified as a hedging transaction in accordance with
the hedge identification requirements that apply generally to
hedging transactions under section 1221(b)(2).\156\
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\156\ Sec. 1221(a)(7) and (b)(2)(B).
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The provision also changes the requirements that must be
satisfied for active business gains or losses from the sale of
commodities to qualify for exclusion from the definition of
foreign personal holding company income. Under the provision,
such gains or losses are not treated as foreign personal
holding company income if substantially all of the controlled
foreign corporation's commodities are comprised of: (1) stock
in trade of the controlled foreign corporation or other
property of a kind which would properly be included in the
inventory of the controlled foreign corporation if on hand at
the close of the taxable year, or property held by the
controlled foreign corporation primarily for sale to customers
in the ordinary course of the controlled foreign corporation's
trade or business; (2) property that is used in the trade or
business of the controlled foreign corporation and is of a
character which is subject to the allowance for depreciation
under section 167; or (3) supplies of a type regularly used or
consumed by the controlled foreign corporation in the ordinary
course of a trade or business of the controlled foreign
corporation.\157\
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\157\ For purposes of determining whether substantially all of the
controlled foreign corporation's commodities are comprised of such
property, it is intended that the 85-percent requirement provided in
the current Treasury regulations (as modified to reflect the changes
made by the provision) continue to apply.
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For purposes of applying the requirements for active
business gains or losses from commodities sales to qualify for
exclusion from the definition of foreign personal holding
company income, the provision also provides that commodities
with respect to which gains or losses are not taken into
account as foreign personal holding company income by a regular
dealer in commodities (or financial instruments referenced to
commodities) are not taken into account in determining whether
substantially all of the dealer's commodities are comprised of
the property described above.
EFFECTIVE DATE
The provision is effective with respect to transactions
entered into after December 31, 2004.
O. Modifications to Treatment of Aircraft Leasing and Shipping Income
(Sec. 315 of the bill and sec. 954 of the Code)
PRESENT LAW
In general, the subpart F rules (secs. 951-964) require
U.S. shareholders with a 10-percent or greater interest in a
controlled foreign corporation (``CFC'') to include currently
in income for U.S. tax purposes certain income of the CFC
(referred to as ``subpart F income''), without regard to
whether the income is distributed to the shareholders (sec.
951(a)(1)(A)). In effect, the Code treats the U.S. 10-percent
shareholders of a CFC as having received a current distribution
of their pro rata shares of the CFC's subpart F income. The
amounts included in income by the CFC's U.S. 10-percent
shareholders under these rules are subject to U.S. tax
currently. The U.S. tax on such amounts may be reduced through
foreign tax credits.
Subpart F income includes foreign base company shipping
income (sec. 954(f)). Foreign base company shipping income
generally includes income derived from the use of an aircraft
or vessel in foreign commerce, the performance of services
directly related to the use of any such aircraft or vessel, the
sale or other disposition of any such aircraft or vessel, and
certain space or ocean activities (e.g., leasing of satellites
for use in space). Foreign commerce generally involves the
transportation of property or passengers between a port (or
airport) in the U.S. and a port (or airport) in a foreign
country, two ports (or airports) within the same foreign
country, or two ports (or airports) in different foreign
countries. In addition, foreign base company shipping income
includes dividends and interest that a CFC receives from
certain foreign corporations and any gains from the disposition
of stock in certain foreign corporations, to the extent the
dividends, interest, or gains are attributable to foreign base
company shipping income. Foreign base company shipping income
also includes incidental income derived in the course of active
foreign base company shipping operations (e.g., income from
temporary investments in or sales of related shipping assets),
foreign exchange gain or loss attributable to foreign base
company shipping operations, and a CFC's distributive share of
gross income of any partnership and gross income received from
certain trusts to the extent that the income would have been
foreign base company shipping income had it been realized
directly by the corporation.
Subpart F income also includes foreign personal holding
company income (sec. 954(c)). For subpart F purposes, foreign
personal holding company income generally consists of the
following: (1) dividends, interest, royalties, rents and
annuities; (2) net gains from the sale or exchange of (a)
property that gives rise to the preceding types of income, (b)
property that does not give rise to income, and (c) interests
in trusts, partnerships, and REMICS; (3) net gains from
commodities transactions; (4) net gains from foreign currency
transactions; (5) income that is equivalent to interest; (6)
income from notional principal contracts; and (7) payments in
lieu of dividends.
Subpart F foreign personal holding company income does not
include rents and royalties received by a CFC in the active
conduct of a trade or business from unrelated persons (sec.
954(c)(2)(A)). The determination of whether rents or royalties
are derived in the active conduct of a trade or business is
based on all the facts and circumstances. However, the Treasury
regulations provide certain types of rents are treated as
derived in the active conduct of a trade or business. These
include rents derived from property that is leased as a result
of the performance of marketing functions by the lessor if the
lessor (through its own officers or employees located in a
foreign country) maintains and operates an organization in such
country that regularly engages in the business of marketing, or
marketing and servicing, the leased property and that is
substantial in relation to the amount of rents derived from the
leasing of such property. An organization in a foreign country
is substantial in relation to rents if the active leasing
expenses \158\ equal at least 25 percent of the adjusted
leasing profit.\159\
Also generally excluded from subpart F foreign personal
holding company income are rents and royalties received by the
CFC from a related corporation for the use of property within
the country in which the CFC was organized (sec. 954(c)(3)).
However, rent, and royalty payments do not qualify for this
exclusion to the extent that such payments reduce subpart F
income of the payor.
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\158\ ``Active-leasing expenses'' are section 162 expenses properly
allocable to rental income other than (1) deductions for compensation
for personal services rendered by the lessor's shareholders or a
related person, (2) deductions for rents, (3) section 167 and 168
expenses, and (4) deductions for payments to independent contractors
with respect to leased property. Treas. Reg. sec. 1.954-2(c)(2)(iii).
\159\ Generally, ``adjusted leasing profit'' is rental income less
the sum of (1) rents paid or incurred by the CFC with respect to such
rental income; (2) section 167 and 168 expenses with respect to such
rental income; and (3) payments to independent contractors with respect
to such rental income. Treas. Reg. sec. 1.954-2(c)(2)(iv).
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REASONS FOR CHANGE
In general, other countries do not tax foreign shipping
income, whereas the United States imposes immediate U.S. tax on
such income. The uncompetitive U.S. taxation of shipping income
has directly caused a steady and substantial decline of the
U.S. shipping industry. The Committee believes that this
provision will provide U.S. shippers the opportunity to be
competitive with their tax-advantaged foreign competitors.
In addition, the Committee believes that the current-law
exception from foreign base company income for rents and
royalties received by a CFC in the active conduct of a trade or
business from unrelated persons is too narrow in the context of
the leasing of an aircraft or vessel in foreign commerce. The
Committee believes the provision of the safe harbor under the
bill will improve the competitiveness of U.S.-based
multinationals engaging in these activities.
EXPLANATION OF PROVISION
The provision repeals the subpart F rules relating to
foreign base company shipping income. The bill also amends the
exception from foreign personal holding company income
applicable to rents or royalties derived from unrelated persons
in an active trade or business, by providing a safe harbor for
rents derived from leasing an aircraft or vessel in foreign
commerce. Such rents are excluded from foreign personal holding
company income if the active leasing expenses comprise at least
10 percent of the profit on the lease. This provision is to be
applied in accordance with existing regulations under sec.
954(c)(2)(A) by comparing the lessor's ``active leasing
expenses'' for its pool of leased assets to its ``adjusted
leasing profit.''
The safe harbor will not prevent a lessor from otherwise
showing that it actively carries on a trade or business. In
this regard, the requirements of section 954(c)(2)(A) will be
met if a lessor regularly and directly performs active and
substantial marketing, remarketing, management and operational
functions with respect to the leasing of an aircraft or vessel
(or component engines). This will be the case regardless of
whether the lessor engages in marketing of the lease as a form
of financing (versus marketing the property as such) or whether
the lease is classified as a finance lease or operating lease
for financial accounting purposes. If a lessor acquires, from
an unrelated or related party, a ship or aircraft subject to an
existing FSC or ETI lease, the requirements of section
954(c)(2)(A) will be satisfied if, following the acquisition,
the lessor performs active and substantial management,
operational, and remarketing functions with respect to the
leased property. If such a lease is transferred to a CFC
lessor, it will no longer be eligible for FSC or ETI benefits.
An aircraft or vessel will be considered to be leased in
foreign commerce if it is used for the transportation of
property or passengers between a port (or airport) in the
United States and one in a foreign country or between foreign
ports (or airports), provided the aircraft or vessel is used
predominantly outside the United States. An aircraft or vessel
will be considered used predominantly outside the United States
if more than 50 percent of the miles during the taxable year
are traversed outside the United States or the aircraft or
vessel is located outside the United States more than 50
percent of the time during such taxable year.
The Committee expects that the Secretary of the Treasury
will issue timely guidance to make conforming changes to
existing regulations, including guidance that aircraft or
vessel leasing activity that satisfies the requirements of
section 954(c)(2)(A) shall also satisfy the requirements for
avoiding income inclusion under section 956 and section 367(a).
The Committee anticipates that taxpayers now eligible for
the benefits of the ETI exclusion (or the FSC provisions
pursuant to the FSC Repeal and Extraterritorial Income
Exclusion Act of 2000), will find it appropriate, as a matter
of sound business judgment, to restructure their business
operations to take into account the tax law changes brought
about by the bill. The Committee notes that courts have
recognized the validity of structuring operations for the
purpose of obtaining the benefit of tax regimes expressly
intended by Congress. The Committee intends that structuring or
restructuring of operations for the purposes of adapting to the
repeal of the ETI exclusion (or the FSC regime) will be
considered to serve a valid business purpose and will not
constitute tax avoidance, where the restructured operations
conform to the requirements expressly mandated by Congress for
obtaining tax benefits that remain available. For example, the
Committee intends that a restructuring undertaken to transfer
aircraft subject to existing FSC or ETI leases to a CFC lessor,
to take advantange of the amendments made by this bill, would
serve as a valid business purpose and would not constitute tax
avoidance, for purposes of determining whether a particular tax
treatment (such as nonrecognition of gain) applies to such
restructuring. The Committee intends, for example, that if such
a restructuring meets the other requirements necessary to
qualify as a ``reorganization'' under section 368, the
transaction will also be deemed to meet the ``business
purpose'' requirements under section 368, and thus, qualify as
a reorganization under that section.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2004, and taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
P. Modification of Exceptions Under Subpart F for Active Financing
(Sec. 316 of the bill and sec. 954 of the Code)
PRESENT LAW
Under the subpart F rules, U.S. shareholders with a 10-
percent or greater interest in a controlled foreign corporation
(``CFC'') are subject to U.S. tax currently on certain income
earned by the CFC, whether or not such income is distributed to
the shareholders. The income subject to current inclusion under
the subpart F rules includes, among other things, foreign
personal holding company income and insurance income. In
addition, 10-percent U.S. shareholders of a CFC are subject to
current inclusion with respect to their shares of the CFC's
foreign base company services income (i.e., income derived from
services performed for a related person outside the country in
which the CFC is organized).
Foreign personal holding company income generally consists
of the following: (1) dividends, interest, royalties, rents,
and annuities; (2) net gains from the sale or exchange of (a)
property that gives rise to the preceding types of income, (b)
property that does not give rise to income, and (c) interests
in trusts, partnerships, and REMICs; (3) net gains from
commodities transactions; (4) net gains from foreign currency
transactions; (5) income that is equivalent to interest; (6)
income from notional principal contracts; and (7) payments in
lieu of dividends.
Insurance income subject to current inclusion under the
subpart F rules includes any income of a CFC attributable to
the issuing or reinsuring of any insurance or annuity contract
in connection with risks located in a country other than the
CFC's country of organization. Subpart F insurance income also
includes income attributable to an insurance contract in
connection with risks located within the CFC's country of
organization, as the result of an arrangement under which
another corporation receives a substantially equal amount of
consideration for insurance of other country risks. Investment
income of a CFC that is allocable to any insurance or annuity
contract related to risks located outside the CFC's country of
organization is taxable as subpart F insurance income (Treas.
Reg. sec. 1.953-1(a)).
Temporary exceptions from foreign personal holding company
income, foreign base company services income, and insurance
income apply for subpart F purposes for certain income that is
derived in the active conduct of a banking, financing, or
similar business, or in the conduct of an insurance business
(so-called ``active financing income'').\160\
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\160\ Temporary exceptions from the subpart F provisions for
certain active financing income applied only for taxable years
beginning in 1998. Those exceptions were modified and extended for one
year, applicable only for taxable years beginning in 1999. The Tax
Relief Extension Act of 1999 (Pub.L. No. 106-170) clarified and
extended the temporary exceptions for two years, applicable only for
taxable years beginning after 1999 and before 2002. The Job Creation
and Worker Assistance Act of 2002 (Pub.L. No. 107-147) extended the
temporary exceptions for five years, applicable only for taxable years
beginning after 2001 and before 2007, with a modification relating to
insurance reserves.
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With respect to income derived in the active conduct of a
banking, financing, or similar business, a CFC is required to
be predominantly engaged in such business and to conduct
substantial activity with respect to such business in order to
qualify for the exceptions. In addition, certain nexus
requirements apply, which provide that income derived by a CFC
or a qualified business unit (``QBU'') of a CFC from
transactions with customers is eligible for the exceptions if,
among other things, substantially all of the activities in
connection with such transactions are conducted directly by the
CFC or QBU in its home country, and such income is treated as
earned by the CFC or QBU in its home country for purposes of
such country's tax laws. Moreover, the exceptions apply to
income derived from certain cross border transactions, provided
that certain requirements are met. Additional exceptions from
foreign personal holding company income apply for certain
income derived by a securities dealer within the meaning of
section 475 and for gain from the sale of active financing
assets.
In the case of insurance, in addition to temporary
exceptions from insurance income and from foreign personal
holding company income for certain income of a qualifying
insurance company with respect to risks located within the
CFC's country of creation or organization, temporary exceptions
from insurance income and from foreign personal holding company
income apply for certain income of a qualifying branch of a
qualifying insurance company with respect to risks located
within the home country of the branch, provided certain
requirements are met under each of the exceptions. Further,
additional temporary exceptions from insurance income and from
foreign personal holding company income apply for certain
income of certain CFCs or branches with respect to risks
located in a country other than the United States, provided
that the requirements for these exceptions are met.
REASONS FOR CHANGE
The Committee believes that the rules for determining
whether income earned by an eligible CFC or QBU is active
financing income should be more consistent with the rules for
determining whether a CFC or QBU is eligible to earn active
financing income.
EXPLANATION OF PROVISION
The provision modifies the present-law temporary exceptions
from subpart F foreign personal holding company income and
foreign base company services income for income derived in the
active conduct of a banking, financing, or similar business.
For purposes of determining whether a CFC or QBU has conducted
directly in its home country substantially all of the
activities in connection with transactions with customers, the
provision provides that an activity is treated as conducted
directly by the CFC or QBU in its home country if the activity
is performed by employees of a related person and: (1) the
related person is itself an eligible CFC the home country of
which is the same as that of the CFC or QBU; (2) the activity
is performed in the home country of the related person; and (3)
the related person is compensated on an arm's length basis for
the performance of the activity by its employees and such
compensation is treated as earned by such person in its home
country for purposes of the tax laws of such country. For
purposes of determining whether a CFC or QBU is eligible to
earn active financing income, such activity may not be taken
into account by any CFC or QBU (including the employer of the
employees performing the activity) other than the CFC or QBU
for which the activities are performed.
EFFECTIVE DATE
The provision is effective for taxable years of foreign
corporations beginning after December 31, 2004, and taxable
years of U.S. shareholders with or within which such taxable
years of foreign corporations end.
TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS
A. Extend Alternative Minimum Tax Relief for Individuals
(Sec. 401 of the bill and sec. 26 of the Code)
PRESENT LAW
Present law provides for certain nonrefundable personal tax
credits (i.e., the dependent care credit, the credit for the
elderly and disabled, the adoption credit, the child tax
credit,\161\ the credit for interest on certain home mortgages,
the HOPE Scholarship and Lifetime Learning credits, the IRA
credit, and the D.C. homebuyer's credit).
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\161\ A portion of the child credit may be refundable.
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For taxable years beginning in 2003, all the nonrefundable
personal credits are allowed to the extent of the full amount
of the individual's regular tax and alternative minimum tax.
For taxable years beginning after 2003, the credits (other
than the adoption credit, child credit and IRA credit) are
allowed only to the extent that the individual's regular income
tax liability exceeds the individual's tentative minimum tax,
determined without regard to the minimum tax foreign tax
credit. The adoption credit, child credit, and IRA credit are
allowed to the full extent of the individual's regular tax and
alternative minimum tax.
The alternative minimum tax is the amount by which the
tentative minimum tax exceeds the regular income tax. An
individual's tentative minimum tax is an amount equal to (1) 26
percent of the first $175,000 ($87,500 in the case of a married
individual filing a separate return) of alternative minimum
taxable income (``AMTI'') in excess of an exemption amount that
phases out and (2) 28 percent of the remaining AMTI. The
maximum tax rates on net capital gain used in computing the
tentative minimum tax are the same as under the regular tax.
AMTI is the individual's taxable income adjusted to take
account of specified preferences and adjustments. The exemption
amounts are: (1) $58,000 ($45,000 in taxable years beginning
after 2004) in the case of married individuals filing a joint
return and surviving spouses; (2) $40,250 ($33,750 in taxable
years beginning after 2004) in the case of other unmarried
individuals; (3) $29,000 ($22,500 in taxable years beginning
after 2004) in the case of married individuals filing a
separate return; and (4) $22,500 in the case of an estate or
trust. The exemption amounts are phased out by an amount equal
to 25 percent of the amount by which the individual's AMTI
exceeds (1) $150,000 in the case of married individuals filing
a joint return and surviving spouses, (2) $112,500 in the case
of other unmarried individuals, and (3) $75,000 in the case of
married individuals filing separate returns or an estate or a
trust. These amounts are not indexed for inflation.
REASONS FOR CHANGE
The Committee believes that the nonrefundable personal
credits should be useable without limitation by reason of the
alternative minimum tax. This will result in significant
simplification and will enable individuals to fully benefit
from the credits.
EXPLANATION OF PROVISION
The bill extends the provision allowing an individual to
offset the entire regular tax liability and alternative minimum
tax liability by the personal nonrefundable credits for taxable
years beginning in 2004 and 2005.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2003.
B. Extension of the Research Credit
(Sec. 402 of the bill and sec. 41 of the Code)
PRESENT LAW
General rule
Section 41 provides for a research tax credit equal to 20
percent of the amount by which a taxpayer's qualified research
expenses for a taxable year exceed its base amount for that
year. The research tax credit is scheduled to expire and
generally will not apply to amounts paid or incurred after June
30, 2004.
A 20-percent research tax credit also applies to the excess
of (1) 100 percent of corporate cash expenses (including grants
or contributions) paid for basic research conducted by
universities (and certain nonprofit scientific research
organizations) over (2) the sum of (a) the greater of two
minimum basic research floors plus (b) an amount reflecting any
decrease in nonresearch giving to universities by the
corporation as compared to such giving during a fixed-base
period, as adjusted for inflation. This separate credit
computation is commonly referred to as the university basic
research credit (see sec. 41(e)).
Computation of allowable credit
Except for certain university basic research payments made
by corporations, the research tax credit applies only to the
extent that the taxpayer's qualified research expenses for the
current taxable year exceed its base amount. The base amount
for the current year generally is computed by multiplying the
taxpayer's fixed-base percentage by the average amount of the
taxpayer's gross receipts for the four preceding years. If a
taxpayer both incurred qualified research expenses and had
gross receipts during each of at least three years from 1984
through 1988, then its fixed-base percentage is the ratio that
its total qualified research expenses for the 1984-1988 period
bears to its total gross receipts for that period (subject to a
maximum fixed-base percentage of 16 percent). All other
taxpayers (so-called start-up firms) are assigned a fixed-base
percentage of three percent. In computing the credit, a
taxpayer's base amount may not be less than 50 percent of its
current-year qualified research expenses.
Alternative incremental research credit regime
Taxpayers are allowed to elect an alternative incremental
research credit regime.\162\ If a taxpayer elects to be subject
to this alternative regime, the taxpayer is assigned a three-
tiered fixed-base percentage (that is lower than the fixed-base
percentage otherwise applicable under present law) and the
credit rate likewise is reduced. Under the alternative credit
regime, a credit rate of 2.65 percent applies to the extent
that a taxpayer's current-year research expenses exceed a base
amount computed by using a fixed-base percentage of one percent
(i.e., the base amount equals one percent of the taxpayer's
average gross receipts for the four preceding years) but do not
exceed a base amount computed by using a fixed-base percentage
of 1.5 percent. A credit rate of 3.2 percent applies to the
extent that a taxpayer's current-year research expenses exceed
a base amount computed by using a fixed-base percentage of 1.5
percent but do not exceed a base amount computed by using a
fixed-base percentage of two percent. A credit rate of 3.75
percent applies to the extent that a taxpayer's current-year
research expenses exceed a base amount computed by using a
fixed-base percentage of two percent. An election to be subject
to this alternative incremental credit regime may be made for
any taxable year beginning after June 30, 1996, and such an
election applies to that taxable year and all subsequent years
unless revoked with the consent of the Secretary of the
Treasury.
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\162\ Sec. 41(c)(4).
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Eligible expenses
Qualified research expenses eligible for the research tax
credit consist of: (1) in-house expenses of the taxpayer for
wages and supplies attributable to qualified research; (2)
certain time-sharing costs for computer use in qualified
research; and (3) 65 percent of amounts paid or incurred by the
taxpayer to certain other persons for qualified research
conducted on the taxpayer's behalf (so-called contract research
expenses).\163\
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\163\ Under a special rule enacted as part of the Small Business
Job Protection Act of 1996, 75 percent of amounts paid to a research
consortium for qualified research is treated as qualified research
expenses eligible for the research credit (rather than 65 percent under
the general rule under section 41(b)(3) governing contract research
expenses) if (1) such research consortium is a tax-exempt organization
that is described in section 501(c)(3) (other than a private
foundation) or section 501(c)(6) and is organized and operated
primarily to conduct scientific research, and (2) such qualified
research is conducted by the consortium on behalf of the taxpayer and
one or more persons not related to the taxpayer. Sec. 41(b)(3)(C).
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To be eligible for the credit, the research must not only
satisfy the requirements of present-law section 174 (described
below) but must be undertaken for the purpose of discovering
information that is technological in nature, the application of
which is intended to be useful in the development of a new or
improved business component of the taxpayer, and substantially
all of the activities of which must constitute elements of a
process of experimentation for functional aspects, performance,
reliability, or quality of a business component. Research does
not qualify for the credit if substantially all of the
activities relate to style, taste, cosmetic, or seasonal design
factors (sec. 41(d)(3)). In addition, research does not qualify
for the credit: (1) if conducted after the beginning of
commercial production of the business component; (2) if related
to the adaptation of an existing business component to a
particular customer's requirements; (3) if related to the
duplication of an existing business component from a physical
examination of the component itself or certain other
information; or (4) if related to certain efficiency surveys,
management function or technique, market research, market
testing, or market development, routine data collection or
routine quality control (sec. 41(d)(4)). Research does not
qualify for the credit if it is conducted outside the United
States, Puerto Rico, or any U.S. possession.
Relation to deduction
Under section 174, taxpayers may elect to deduct currently
the amount of certain research or experimental expenditures
paid or incurred in connection with a trade or business,
notwithstanding the general rule that business expenses to
develop or create an asset that has a useful life extending
beyond the current year must be capitalized.\164\ However,
deductions allowed to a taxpayer under section 174 (or any
other section) are reduced by an amount equal to 100 percent of
the taxpayer's research tax credit determined for the taxable
year (Sec. 280C(c)). Taxpayers may alternatively elect to claim
a reduced research tax credit amount under section 41 in lieu
of reducing deductions otherwise allowed (sec. 280C(c)(3)).
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\164\ Taxpayers may elect 10-year amortization of certain research
expenditures allowable as a deduction under section 174(a). Secs.
174(f)(2) and 59(e).
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REASONS FOR CHANGE
The Committee acknowledges that research is important to
the economy. Research is the basis of new products, new
services, new industries, and new jobs for the domestic
economy. Therefore the Committee believes it is appropriate to
extend the present-law research credit.
EXPLANATION OF PROVISION
The provision extends the present-law research credit to
qualified amounts paid or incurred before January 1, 2006.
EFFECTIVE DATE
The provision is effective for amounts paid or incurred
after June 30, 2004.
C. Extension and Modification of the Section 45 Electricity Production
Credit
(Sec. 403 of the bill and sec. 45 of the Code)
PRESENT LAW
An income tax credit is allowed for the production of
electricity from either qualified wind energy, qualified
``closed-loop'' biomass, or qualified poultry waste facilities
(sec. 45). The amount of the credit is 1.5 cents per kilowatt
hour (indexed for inflation) of electricity produced. The
amount of the credit is 1.8 cents per kilowatt hour for 2004.
The credit is reduced for grants, tax-exempt bonds, subsidized
energy financing, and other credits.
The credit applies to electricity produced by a wind energy
facility placed in service after December 31, 1993, and before
January 1, 2004, to electricity produced by a closed-loop
biomass facility placed in service after December 31, 1992, and
before January 1, 2004, and to a poultry waste facility placed
in service after December 31, 1999, and before January 1, 2004.
The credit is allowable for production during the 10-year
period after a facility is originally placed in service. In
order to claim the credit, a taxpayer must own the facility and
sell the electricity produced by the facility to an unrelated
party. In the case of a poultry waste facility, the taxpayer
may claim the credit as a lessee/operator of a facility owned
by a governmental unit.
Closed-loop biomass is plant matter, where the plants are
grown for the sole purpose of being used to generate
electricity. It does not include waste materials (including,
but not limited to, scrap wood, manure, and municipal or
agricultural waste). The credit also is not available to
taxpayers who use standing timber to produce electricity.
Poultry waste means poultry manure and litter, including wood
shavings, straw, rice hulls, and other bedding material for the
disposition of manure.
The credit for electricity produced from wind, closed-loop
biomass, or poultry waste is a component of the general
business credit (sec. 38(b)(8)). The credit, when combined with
all other components of the general business credit, generally
may not exceed for any taxable year the excess of the
taxpayer's net income tax over the greater of (1) 25 percent of
net regular tax liability above $25,000, or (2) the tentative
minimum tax. For credits arising in taxable years beginning
after December 31, 1997, an unused general business credit
generally may be carried back one year and carried forward 20
years (sec. 39). To coordinate the carryback with the period of
application for this credit, the credit for electricity
produced from closed-loop biomass facilities may not be carried
back to a tax year ending before 1993 and the credit for
electricity produced from wind energy may not be carried back
to a tax year ending before 1994 (sec. 39).
REASONS FOR CHANGE
The Committee recognizes that the section 45 production
credit has fostered additional electricity generation capacity
in the form of non-polluting wind power. The Committee believes
it is important to continue this tax credit by extending the
placed in service date for such facilities to bring more wind
energy to the U. S. electric grid. The Committee further
believes that, to encourage entrepreneurial exploration of
alternative sources for electricity generation, it is
appropriate to extend the present-law provision relating to
facilities that use closed-loop biomass as an energy source.
EXPLANATION OF PROVISION
The provision extends the placed in service date for wind
facilities and closed-loop biomass facilities to facilities
placed in service after December 31, 1993 (December 31, 1992 in
the case of closed-loop biomass facilities) and before January
1, 2006. The provision does not extend the placed in service
date for poultry waste facilities.
EFFECTIVE DATE
The provision is effective for facilities placed in service
after December 31, 2003.
D. Indian Employment Tax Credit
(Sec. 404 of the bill and sec. 45A of the Code)
PRESENT LAW
In general, a credit against income tax liability is
allowed to employers for the first $20,000 of qualified wages
and qualified employee health insurance costs paid or incurred
by the employer with respect to certain employees (sec. 45A).
The credit is equal to 20 percent of the excess of eligible
employee qualified wages and health insurance costs during the
current year over the amount of such wages and costs incurred
by the employer during 1993. The credit is an incremental
credit, such that an employer's current-year qualified wages
and qualified employee health insurance costs (up to $20,000
per employee) are eligible for the credit only to the extent
that the sum of such costs exceeds the sum of comparable costs
paid during 1993. No deduction is allowed for the portion of
the wages equal to the amount of the credit.
Qualified wages means wages paid or incurred by an employer
for services performed by a qualified employee. A qualified
employee means any employee who is an enrolled member of an
Indian tribe or the spouse of an enrolled member of an Indian
tribe, who performs substantially all of the services within an
Indian reservation, and whose principal place of abode while
performing such services is on or near the reservation in which
the services are performed. An employee will not be treated as
a qualified employee for any taxable year of the employer if
the total amount of wages paid or incurred by the employer with
respect to such employee during the taxable year exceeds an
amount determined at an annual rate of $30,000 (adjusted for
inflation after 1993).
The wage credit is available for wages paid or incurred on
or after January 1, 1994, in taxable years that begin before
January 1, 2005.
REASONS FOR CHANGE
The Committee believes that extending the wage credit tax
incentive will expand employment opportunities for members of
Indian tribes.
EXPLANATION OF PROVISION
The provision extends the Indian employment credit
incentive for one year (to taxable years beginning before
January 1, 2006).
EFFECTIVE DATE
The provision is effective on the date of enactment.
E. Extend the Work Opportunity Tax Credit
(Sec. 405 of the bill and sec. 51 of the Code)
PRESENT LAW
In general
The work opportunity tax credit (``WOTC'') is available on
an elective basis for employers hiring individuals from one or
more of eight targeted groups. The credit equals 40 percent (25
percent for employment of 400 hours or less) of qualified
wages. Generally, qualified wages are wages attributable to
service rendered by a member of a targeted group during the
one-year period beginning with the day the individual began
work for the employer.
The maximum credit per employee is $2,400 (40 percent of
the first $6,000 of qualified first-year wages). With respect
to qualified summer youth employees, the maximum credit is
$1,200 (40 percent of the first $3,000 of qualified first-year
wages).
For purposes of the credit, wages are generally defined as
under the Federal Unemployment Tax Act, without regard to the
dollar cap.
Targeted groups eligible for the credit
The eight targeted groups are: (1) families eligible to
receive benefits under the Temporary Assistance for Needy
Families (``TANF'') Program; (2) high-risk youth; (3) qualified
ex-felons; (4) vocational rehabilitation referrals; (5)
qualified summer youth employees; (6) qualified veterans; (7)
families receiving food stamps; and (8) persons receiving
certain Supplemental Security Income (``SSI'') benefits.
The employer's deduction for wages is reduced by the amount
of the credit.
Expiration date
The credit is effective for wages paid or incurred to a
qualified individual who begins work for an employer before
January 1, 2004.
REASONS FOR CHANGE
The Committee believes that a temporary extension of this
credit will allow the Congress and the Treasury and Labor
Departments to continue to examine the effectiveness of the
credit in expanding employment opportunities among the eight
targeted groups.
EXPLANATION OF PROVISION
The bill extends the work opportunity tax credit for two
years (through December 31, 2005).
EFFECTIVE DATE
The provision is effective for wages paid or incurred to a
qualified individual who begins work for an employer on or
after January 1, 2004, and before January 1, 2006.
F. Extend the Welfare-To-Work Tax Credit
(Sec. 406 of the bill and sec. 51A of the Code)
PRESENT LAW
In general
The welfare-to-work tax credit is available on an elective
basis for employers for the first $20,000 of eligible wages
paid to qualified long-term family assistance recipients during
the first two years of employment. The credit is 35 percent of
the first $10,000 of eligible wages in the first year of
employment and 50 percent of the first $10,000 of eligible
wages in the second year of employment. The maximum credit is
$8,500 per qualified employee.
Qualified long-term family assistance recipients are: (1)
members of a family that has received family assistance for at
least 18 consecutive months ending on the hiring date; (2)
members of a family that has received family assistance for a
total of at least 18 months (whether or not consecutive) after
the date of enactment of this credit if they are hired within 2
years after the date that the 18-month total is reached; and
(3) members of a family who are no longer eligible for family
assistance because of either Federal or State time limits, if
they are hired within two years after the Federal or State time
limits made the family ineligible for family assistance. Family
assistance means benefits under the Temporary Assistance to
Needy Families (``TANF'') program.
For purposes of the credit, wages are generally defined
under the Federal Unemployment Tax Act, without regard to the
dollar amount. In addition, wages include the following: (1)
educational assistance excludable under a section 127 program;
(2) the value of excludable health plan coverage but not more
than the applicable premium defined under section 4980B(f)(4);
and (3) dependent care assistance excludable under section 129.
The employer's deduction for wages is reduced by the amount
of the credit.
Expiration date
The welfare to work credit is effective for wages paid or
incurred to a qualified individual who begins work for an
employer before January 1, 2004.
REASONS FOR CHANGE
The Committee believes that the welfare-to-work credit
should be temporarily extended to provide the Congress and
Treasury and Labor Departments a better opportunity to continue
to assess the operation and effectiveness of the credit in
meeting its goals. These goals are: (1) to provide an incentive
to hire long-term welfare recipients; (2) to promote the
transition from welfare to work by increasing access to
employment for these individuals; and (3) to encourage
employers to provide these individuals with training, health
coverage, dependent care and ultimately better job attachment.
EXPLANATION OF PROVISION
The bill extends the welfare to work credit for two years
(through December 31, 2005).
EFFECTIVE DATE
The provision is effective for wages paid or incurred to a
qualified individual who begins work for an employer on or
after January 1, 2004, and before January 1, 2006.
G. Extension of the Above-the-line Deduction for Certain Expenses of
Elementary and Secondary School Teachers
(Sec. 407 of the bill and sec. 62 of the Code)
PRESENT LAW
In general, ordinary and necessary business expenses are
deductible (sec. 162). However, in general, unreimbursed
employee business expenses are deductible only as an itemized
deduction and only to the extent that the individual's total
miscellaneous deductions (including employee business expenses)
exceed two percent of adjusted gross income. An individual's
otherwise allowable itemized deductions may be further limited
by the overall limitation on itemized deductions, which reduces
itemized deductions for taxpayers with adjusted gross income in
excess of $142,700 (for 2004). In addition, miscellaneous
itemized deductions are not allowable under the alternative
minimum tax.
Certain expenses of eligible educators are allowed as an
above-the-line deduction. Specifically, for taxable years
beginning in 2002 and 2003, an above-the-line deduction is
allowed for up to $250 annually of expenses paid or incurred by
an eligible educator for books, supplies (other than
nonathletic supplies for courses of instruction in health or
physical education), computer equipment (including related
software and services) and other equipment, and supplementary
materials used by the eligible educator in the classroom. To be
eligible for this deduction, the expenses must be otherwise
deductible under section 162 as a trade or business expense. A
deduction is allowed only to the extent the amount of expenses
exceeds the amount excludable from income under section 135
(relating to education savings bonds), 529(c)(1) (relating to
qualified tuition programs), and section 530(d)(2) (relating to
Coverdell education savings accounts).
An eligible educator is a kindergarten through grade 12
teacher, instructor, counselor, principal, or aide in a school
for at least 900 hours during a school year. A school means any
school that provides elementary education or secondary
education, as determined under State law.
The above-the-line deduction for eligible educators is not
allowed for taxable years beginning after December 31, 2003.
REASONS FOR CHANGE
The Committee recognizes that elementary and secondary
educators often incur substantial unreimbursed expenses in the
course of their teaching duties, and believes that an extension
of the deduction of such expenses is warranted to continue to
provide tax relief to educators who incur such expenses on
behalf of their students.
EXPLANATION OF PROVISION
The provision extends the availability of the above-the-
line deduction for two years, i.e., for taxable years beginning
during 2004 and 2005.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2003.
H. Extension of Accelerated Depreciation Benefit for Property on Indian
Reservations
(Sec. 408 of the bill and sec. 168(j) of the Code)
PRESENT LAW
With respect to certain property used in connection with
the conduct of a trade or business within an Indian
reservation, depreciation deductions under section 168(j) will
be determined using the following recovery periods:
Years
3-year property................................................... 2
5-year property................................................... 3
7-year property................................................... 4
10-year property.................................................. 6
15-year property.................................................. 9
20-year property.................................................. 12
Nonresidential real property...................................... 22
``Qualified Indian reservation property'' eligible for
accelerated depreciation includes property which is (1) used by
the taxpayer predominantly in the active conduct of a trade or
business within an Indian reservation, (2) not used or located
outside the reservation on a regular basis, (3) not acquired
(directly or indirectly) by the taxpayer from a person who is
related to the taxpayer (within the meaning of section
465(b)(3)(C)), and (4) described in the recovery-period table
above. In addition, property is not ``qualified Indian
reservation property'' if it is placed in service for purposes
of conducting gaming activities. Certain ``qualified
infrastructure property'' may be eligible for the accelerated
depreciation even if located outside an Indian reservation,
provided that the purpose of such property is to connect with
qualified infrastructure property located within the
reservation (e.g., roads, power lines, water systems, railroad
spurs, and communications facilities).
The depreciation deduction allowed for regular tax purposes
is also allowed for purposes of the alternative minimum tax.
The accelerated depreciation for Indian reservations is
available with respect to property placed in service on or
after January 1, 1994, and before January 1, 2005.
REASONS FOR CHANGE
The Committee believes that extending the depreciation
incentive will encourage economic development within Indian
reservations and expand employment opportunities on such
reservations.
EXPLANATION OF PROVISION
The provision extends the accelerated depreciation
incentive for one year (to property placed in service before
January 1, 2006).
EFFECTIVE DATE
The provision is effective on the date of enactment.
I. Extend Enhanced Charitable Deduction for Computer Technology and
Equipment
(Sec. 409 of the bill and sec. 170 of the Code)
PRESENT LAW
Under present law, a taxpayer's deduction for charitable
contributions of computer technology and equipment generally is
limited to the taxpayer's basis (typically, cost) in the
property. However, certain corporations may claim a deduction
in excess of basis for a qualified computer contribution.\165\
This enhanced deduction is equal to the lesser of (1) basis
plus one-half of the item's appreciated value (i.e., basis plus
one half of fair market value minus basis) or (2) two times
basis. The enhanced deduction for qualified computer
contributions expires for any contribution made during any
taxable year beginning after December 31, 2003.
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\165\ Sec. 170(e)(6).
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A qualified computer contribution means a charitable
contribution of any computer technology or equipment that meets
standards of functionality and suitability as established by
the Secretary of the Treasury. The contribution must be to
certain educational organizations or public libraries and made
not later than three years after the taxpayer acquired the
property or, if the taxpayer constructed the property, not
later than the date construction of the property is
substantially completed.\166\ The original use of the property
must be by the donor or the donee,\167\ and in the case of the
donee, must be used substantially for educational purposes
related to the function or purpose of the donee. The property
must fit productively into the donee's education plan. The
donee may not transfer the property in exchange for money,
other property, or services, except for shipping, installation,
and transfer costs. Property is considered constructed by the
taxpayer only if the cost of the parts used in the construction
of the property (other than parts manufactured by the taxpayer
or a related person) does not exceed 50 percent of the
taxpayer's basis in the property. Contributions may be made to
private foundations under certain conditions.
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\166\ If the taxpayer constructed the property and reacquired such
property, the contribution must be within three years of the date the
original construction was substantially completed. Sec.
170(e)(6)(D)(i).
\167\ This requirement does not apply if the property was
reacquired by the manufacturer and contributed. Sec. 170(e)(6)(D)(ii).
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REASONS FOR CHANGE
The Committee believes that educational organizations and
public libraries continue to have a need for computer equipment
and that it is appropriate to extend the enhanced deduction for
contributions of such equipment to such institutions.
EXPLANATION OF PROVISION
The provision extends the enhanced deduction for qualified
computer contributions to contributions made during any taxable
year beginning before January 1, 2005.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2003.
J. Extension of Expensing of Certain Environmental Remediation Costs
(Sec. 410 of the bill and sec. 198 of the Code)
PRESENT LAW
Taxpayers can elect to treat certain environmental
remediation expenditures that would otherwise be chargeable to
capital account as deductible in the year paid or incurred
(sec. 198). The deduction applies for both regular and
alternative minimum tax purposes. The expenditure must be
incurred in connection with the abatement or control of
hazardous substances at a qualified contaminated site.
A ``qualified contaminated site'' generally is any property
that (1) is held for use in a trade or business, for the
production of income, or as inventory and (2) is at a site on
which there has been a release (or threat of release) or
disposal of certain hazardous substances as certified by the
appropriate State environmental agency (so called
``brownfields''). However, sites that are identified on the
national priorities list under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 cannot
qualify as targeted areas.
Eligible expenditures are those paid or incurred before
January 1, 2004.
REASONS FOR CHANGE
The Committee observes that by lowering the net capital
cost of a development project the expensing of brownfields
remediation costs promotes the goal of environmental
remediation and promotes new investment and employment
opportunities. In addition, the Committee believes that the
increased investment in the qualifying areas has spillover
effects that are beneficial to the neighboring communities.
Therefore, the Committee believes it is appropriate to extend
the present-law provision permitting the expensing of
environmental remediation costs.
EXPLANATION OF PROVISION
The provision extends the present law expensing provision
for two years (through December 31, 2005).
EFFECTIVE DATE
The provision is effective for expenses paid or incurred
after December 31, 2003, and before January 1, 2006.
K. Extension of Archer Medical Savings Accounts (``MSAs'')
(Sec. 411 of the bill and sec. 220 of the Code)
PRESENT LAW
In general
Within limits, contributions to an Archer MSA are
deductible in determining adjusted gross income if made by an
eligible individual and are excludable from gross income and
wages for employment tax purposes if made by the employer of an
eligible individual. Earnings on amounts in an Archer MSA are
not currently taxable. Distributions from an Archer MSA for
medical expenses are not includible in gross income.
Distributions not used for medical expenses are includible in
gross income. In addition, distributions not used for medical
expenses are subject to an additional 15-percent tax unless the
distribution is made after age 65, death, or disability.
Eligible individuals
Archer MSAs are available to employees covered under an
employer-sponsored high deductible plan of a small employer and
self-employed individuals covered under a high deductible
health plan.\168\ An employer is a small employer if it
employed, on average, no more than 50 employees on business
days during either the preceding or the second preceding year.
An individual is not eligible for an Archer MSA if he or she is
covered under any other health plan in addition to the high
deductible plan.
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\168\ Self-employed individuals include more than two-perent
shareholders of S corporations who are treated as partners for purposes
of fringe benefit rules pursuant to section 1372.
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Tax treatment of and limits on contributions
Individual contributions to an Archer MSA are deductible
(within limits) in determining adjusted gross income (i.e.,
``above-the-line''). In addition, employer contributions are
excludable from gross income and wages for employment tax
purposes (within the same limits), except that this exclusion
does not apply to contributions made through a cafeteria plan.
In the case of an employee, contributions can be made to an
Archer MSA either by the individual or by the individual's
employer.
The maximum annual contribution that can be made to an
Archer MSA for a year is 65 percent of the deductible under the
high deductible plan in the case of individual coverage and 75
percent of the deductible in the case of family coverage.
Definition of high deductible plan
A high deductible plan is a health plan with an annual
deductible of at least $1,700 and no more than $2,600 in the
case of individual coverage and at least $3,450 and no more
than $5,150 in the case of family coverage. In addition, the
maximum out-of-pocket expenses with respect to allowed costs
(including the deductible) must be no more than $3,450 in the
case of individual coverage and no more than $6,300 in the case
of family coverage.\169\ A plan does not fail to qualify as a
high deductible plan merely because it does not have a
deductible for preventive care as required by State law. A plan
does not qualify as a high deductible health plan if
substantially all of the coverage under the plan is for
permitted coverage (as described above). In the case of a self-
insured plan, the plan must in fact be insurance (e.g., there
must be appropriate risk shifting) and not merely a
reimbursement arrangement.
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\169\ These dollar amounts are for 2004. These amounts are indexed
for inflation, rounded to the nearest $50.
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Cap on taxpayers utilizing Archer MSAs and expiration of pilot program
The number of taxpayers benefiting annually from an Archer
MSA contribution is limited to a threshold level (generally
750,000 taxpayers). The number of Archer MSAs established has
not exceeded the threshold level.
After 2003, no new contributions may be made to Archer MSAs
except by or on behalf of individuals who previously had Archer
MSA contributions and employees who are employed by a
participating employer.
Trustees of Archer MSAs are generally required to make
reports to the Treasury by August 1 regarding Archer MSAs
established by July 1 of that year. If any year is a cut-off
year, the Secretary is required to make and publish such
determination by October 1 of such year.
REASONS FOR CHANGE
The Committee believes that individuals should be
encouraged to save for future medical care expenses and that
individuals should be allowed to save for such expenses on a
tax-favored basis. The Committee believes that consumers who
spend their own savings on health care will make cost-conscious
decisions, thus reducing the rising cost of health care. The
Committee believes that Archer MSAs have been an important tool
in allowing certain individuals to save for future medical
expenses on a tax-favored basis.
The Committee is aware that recently enacted health savings
accounts offer more advantageous tax treatment than Archer MSAs
and that amounts can be rolled over into a health savings
account from an Archer MSA on a tax-free basis. Still, the
Committee believes that individuals should be allowed the
choice to continue the use of Archer MSAs. Thus, the Committee
believes that it is appropriate to extend Archer MSAs.
EXPLANATION OF PROVISION
The provision extends Archer MSAs through December 31,
2005. The provision also provides that the reports required by
MSA trustees for 2004 are treated as timely if made within 90
days after the date of enactment. In addition, the
determination of whether 2004 is a cut-off year and the
publication of such determination is to be made within 120 days
of the date of enactment. If 2004 is a cut-off year, the cut-
off date will be the last day of such 120-day period.
EFFECTIVE DATE
The provision is generally effective on January 1, 2004.
The provisions relating to reports and the determination by the
Secretary are effective on the date of enactment.
L. Taxable Income Limit on Percentage Depletion for Oil and Natural Gas
Produced From Marginal Properties
(Sec. 412 of the bill and sec. 613A of the Code)
PRESENT LAW
Overview of depletion
Depletion, like depreciation, is a form of capital cost
recovery. In both cases, the taxpayer is allowed a deduction in
recognition of the fact that an asset--in the case of depletion
for oil or gas interests, the mineral reserve itself--is being
expended in order to produce income. Certain costs incurred
prior to drilling an oil or gas property are recovered through
the depletion deduction. These include costs of acquiring the
lease or other interest in the property and geological and
geophysical costs (in advance of actual drilling).
Depletion is available to any person having an economic
interest in a producing property. An economic interest is
possessed in every case in which the taxpayer has acquired by
investment any interest in minerals in place, and secures, by
any form of legal relationship, income derived from the
extraction of the mineral, to which it must look for a return
of its capital.\170\ Thus, for example, both working interests
and royalty interests in an oil- or gas-producing property
constitute economic interests, thereby qualifying the interest
holders for depletion deductions with respect to the property.
A taxpayer who has no capital investment in the mineral deposit
does not possess an economic interest merely because it
possesses an economic or pecuniary advantage derived from
production through a contractual relation.
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\170\ Treas. Reg. sec. 1.611-1(b)(1).
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Cost depletion
Two methods of depletion are currently allowable under the
Code: (1) the cost depletion method, and (2) the percentage
depletion method.\171\ Under the cost depletion method, the
taxpayer deducts that portion of the adjusted basis of the
depletable property which is equal to the ratio of units sold
from that property during the taxable year to the number of
units remaining as of the end of taxable year plus the number
of units sold during the taxable year. Thus, the amount
recovered under cost depletion may never exceed the taxpayer's
basis in the property.
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\171\ Secs. 611-613.
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Percentage depletion and related income limitations
The Code generally limits the percentage depletion method
for oil and gas properties to independent producers and royalty
owners.\172\ Generally, under the percentage depletion method,
15 percent of the taxpayer's gross income from an oil- or gas-
producing property is allowed as a deduction in each taxable
year.\173\ The amount deducted generally may not exceed 100
percent of the net income from that property in any year (the
``net-income limitation'').\174\ The 100-percent net-income
limitation for marginal wells has been suspended for taxable
years beginning after December 31, 1997, and before January 1,
2004.
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\172\ Sec. 613A.
\173\ Sec. 613A(c).
\174\ Sec. 613(a).
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REASONS FOR CHANGE
Domestic production from marginal wells is an appropriate
part of establishing national energy security and reducing
dependence on foreign oil. The Committee believes the
suspension of the 100-percent net-income limitation for
marginal wells should be extended to encourage continued
operation of such wells.
EXPLANATION OF PROVISION
The suspension of the 100-percent net-income limitation for
marginal wells is extended an additional two years, through
taxable years beginning before January 1, 2006.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2003.
M. Qualified Zone Academy Bonds
(Sec. 413 of the bill and sec. 1397E of the Code)
PRESENT LAW
Tax-exempt bonds
Interest on State and local governmental bonds generally is
excluded from gross income for Federal income tax purposes if
the proceeds of the bonds are used to finance direct activities
of these governmental units or if the bonds are repaid with
revenues of the governmental units. Activities that can be
financed with these tax-exempt bonds include the financing of
public schools (sec. 103).
Qualified zone academy bonds
As an alternative to traditional tax-exempt bonds, States
and local governments are given the authority to issue
``qualified zone academy bonds'' (``QZABs'') (sec. 1397E). A
total of $400 million of qualified zone academy bonds may be
issued annually in calendar years 1998 through 2003. The $400
million aggregate bond cap is allocated each year to the States
according to their respective populations of individuals below
the poverty line. Each State, in turn, allocates the credit
authority to qualified zone academies within such State.
Financial institutions that hold qualified zone academy
bonds are entitled to a nonrefundable tax credit in an amount
equal to a credit rate multiplied by the face amount of the
bond. A taxpayer holding a qualified zone academy bond on the
credit allowance date is entitled to a credit. The credit is
includable in gross income (as if it were a taxable interest
payment on the bond), and may be claimed against regular income
tax and AMT liability.
The Treasury Department sets the credit rate at a rate
estimated to allow issuance of qualified zone academy bonds
without discount and without interest cost to the issuer. The
maximum term of the bond is determined by the Treasury
Department, so that the present value of the obligation to
repay the bond is 50 percent of the face value of the bond.
``Qualified zone academy bonds'' are defined as any bond
issued by a State or local government, provided that: (1) at
least 95 percent of the proceeds are used for the purpose of
renovating, providing equipment to, developing course materials
for use at, or training teachers and other school personnel in
a ``qualified zone academy'', and (2) private entities have
promised to contribute to the qualified zone academy certain
equipment, technical assistance or training, employee services,
or other property or services with a value equal to at least 10
percent of the bond proceeds.
A school is a ``qualified zone academy'' if: (1) the school
is a public school that provides education and training below
the college level, (2) the school operates a special academic
program in cooperation with businesses to enhance the academic
curriculum and increase graduation and employment rates, and
(3) either (a) the school is located in an empowerment zone or
enterprise community designated under the Code, or (b) it is
reasonably expected that at least 35 percent of the students at
the school will be eligible for free or reduced-cost lunches
under the school lunch program established under the National
School Lunch Act.
REASONS FOR CHANGE
The Committee believes that the extension of authority to
issue qualified zone academy bonds is appropriate in light of
the educational needs that exist today.
EXPLANATION OF PROVISION
The bill authorizes issuance of up to $400 million of
qualified zone academy bonds annually for calendar years 2004
and 2005.
EFFECTIVE DATE
The provision is effective for obligations issued after the
date of enactment.
N. Extension of Tax Incentives for Investment in the District of
Columbia
(Sec. 414 of the bill and secs. 1400, 1400A, 1400B, and 1400C of the
Code)
PRESENT LAW
DC Zone incentives
The Taxpayer Relief Act of 1997 designated certain
economically depressed census tracts within the District of
Columbia as the District of Columbia Enterprise Zone (the
``D.C. Zone''), within which businesses and individual
residents are eligible for special tax incentives. The D.C.
Zone designation is in effect for the period from January 1,
1998, through December 31, 2003. In addition to the tax
incentives generally available with respect to empowerment
zones, the D.C. Zone also has a zero-percent capital gains rate
that applies to gain from the sale of certain qualified D.C.
Zone assets acquired after December 31, 1997, and held for more
than five years.
With respect to the tax-exempt financing incentives, the
D.C. Zone generally is treated like a Round I empowerment zone;
therefore, the issuance of such tax-exempt bonds is subject to
the District of Columbia's annual private activity bond volume
limitation. However, the aggregate face amount of all
outstanding qualified D.C. zone facility bonds per qualified
D.C. Zone business may not exceed $15 million (rather than $3
million, as is the case for Round I empowerment zones).
Homebuyers tax credit
First-time homebuyers of a principal residence in the
District of Columbia are eligible for a nonrefundable tax
credit of up to $5,000 of the amount of the purchase price. The
$5,000 maximum credit applies both to individuals and married
couples. Married individuals filing separately can claim a
maximum credit of $2,500 each. The credit phases out for
individual taxpayers with adjusted gross income between $70,000
and $90,000 ($110,000-$130,000 for joint filers). For purposes
of eligibility, ``first-time homebuyer'' means any individual
if such individual did not have a present ownership interest in
a principal residence in the District of Columbia in the one-
year period ending on the date of the purchase of the residence
to which the credit applies. The credit is scheduled to expire
for property purchased after December 31, 2003.
REASONS FOR CHANGE
The Committee believes that the incentives should
temporarily be extended to provide the Congress and the
Treasury Department a better opportunity to continue to assess
the overall operation and effectiveness of the tax incentives
to revitalize the DC Zone and to promote homeownership therein.
EXPLANATION OF PROVISION
DC Zone incentives
The bill extends the D.C. Zone designation and tax-exempt
financing incentives for two years (through December 31, 2005).
The bill extends the date before which a DC Zone asset must be
acquired for purposes of utilizing the zero-percent capital
gains rate for two years (to January 1, 2006), and extends the
period within which gain is treated as qualified capital gain
for two years (through December 31, 2010).
Homebuyers tax credit
The bill extends the first-time homebuyer credit for two
years (through December 31, 2005).
EFFECTIVE DATE
The provisions are effective on the date of enactment,
except that the provision relating to tax-exempt financing
incentives applies to obligations issued after December 31,
2003.
O. Extend the Authority to Issue Liberty Zone Bonds
(Sec. 415 of the bill and sec. 1400L of the Code)
PRESENT LAW
In general
Interest on debt incurred by States or local governments is
excluded from income if the proceeds of the borrowing are used
to carry out governmental functions of those entities or the
debt is repaid with governmental funds (sec. 103). Interest on
bonds that nominally are issued by States or local governments,
but the proceeds of which are used (directly or indirectly) by
a private person and payment of which is derived from funds of
such a private person is taxable unless the purpose of the
borrowing is approved specifically in the Code or in a non-Code
provision of a revenue Act. These bonds are called ``private
activity bonds.'' The term ``private person'' includes the
Federal Government and all other individuals and entities other
than States or local governments.
In most cases, the aggregate volume of tax-exempt private
activity bonds that may be issued in a State is restricted by
annual volume limits. For calendar year 2004, these annual
volume limits are equal to the greater of $80 per resident of
the State or $234 million.
Tax-exempt private activity bonds
Interest on private activity bonds is tax-exempt only for
qualified bonds. Qualified bonds include: (1) exempt facility
bonds; (2) qualified mortgage bonds; (3) qualified veteran
mortgage bonds; (4) qualified small-issue bonds; (5) qualified
student loan bonds; (6) qualified redevelopment bonds; and (7)
qualified 501(c)(3) bonds. A further provision allows tax-
exempt financing for ``environmental enhancements of hydro-
electric generating facilities.'' Tax-exempt financing also is
authorized for capital expenditures for small manufacturing
facilities and land and equipment for first-time farmers
(``qualified small-issue bonds''), local redevelopment
activities (``qualified redevelopment bonds''), and eligible
empowerment zone and enterprise community businesses.
Tax-exempt financing is also allowed for qualified New York
Liberty Bonds issued during calendar years 2002, 2003, and
2004. An aggregate limit of $8 billion of tax-exempt private
activity bonds to finance the construction and rehabilitation
of nonresidential real property \175\ and residential rental
real property \176\ in a newly designated ``Liberty Zone'' (the
``Zone'') of New York City is allowed.\177\ Property eligible
for financing with these bonds includes buildings and their
structural components, fixed tenant improvements,\178\ and
public utility property (e.g., gas, water, electric and
telecommunication lines). All business addresses located on or
south of Canal Street, East Broadway (east of its intersection
with Canal Street), or Grand Street (east of its intersection
with East Broadway) in the Borough of Manhattan are considered
to be located within the Zone. Issuance of these bonds is
limited to projects approved by the Mayor of New York City or
the Governor of New York State, each of whom may designate up
to $4 billion of the bonds authorized under the bill.
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\175\ No more than $800 million of the authorized bond amount may
be used to finance property used for retail sales of tangible property
(e.g., department stores, restaurants, etc.) and functionally related
and subordinate property. The term nonresidential real property
includes structural components of such property if the taxpayer treats
such components as part of the real property structure for all Federal
income tax purposes (e.g., cost recovery). The $800 million limit is
divided equally between the Mayor and the Governor.
\176\ No more than $1.6 billion of the authorized bond amount may
be used to finance residential rental property. The $1.6 billion limit
is divided equally between the Mayor and the Governor.
\177\ Current refundings of outstanding New York Liberty Bonds
bonds do not count against the $8 billion volume limit to the extent
that the amount of the refunding bonds does not exceed the outstanding
amount of the bonds being refunded. In addition, qualified New York
Liberty Bonds may be issued after December 31, 2004 to refund (other
than advance refund) qualified New York Liberty Bonds originally issued
before January 1, 2005, to the extent the amount of the refunding bonds
does not exceed the outstanding amount of the refunded bonds. The bonds
may not be advance refunded.
\178\ Fixtures and equipment that could be removed from the
designated zone for use elsewhere are not eligible for financing with
these bonds.
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If the Mayor or the Governor determines that it is not
feasible to use all of the authorized bonds that he is
authorized to designate for property located in the Zone, up to
$1 billion of bonds may be designated by each to be used for
the acquisition, construction, and rehabilitation of
nonresidential real property (including fixed tenant
improvements) located outside the Zone and within New York
City.\179\ Bond-financed property located outside the Zone must
meet the additional requirement that the project have at least
100,000 square feet of usable office or other commercial space
in a single building or multiple adjacent buildings.
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\179\ Public utility property and residential property located
outside the Zone cannot be financed with the bonds.
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Subject to the following exceptions and modifications,
issuance of these tax-exempt bonds is subject to the general
rules applicable to issuance of exempt-facility private
activity bonds:
(1) Issuance of the bonds is not subject to the
aggregate annual State private activity bond volume
limits (sec. 146);
(2) The restriction on acquisition of existing
property is applied using a minimum requirement of 50
percent of the cost of acquiring the building being
devoted to rehabilitation (sec. 147(d));
(3) The special arbitrage expenditure rules for certain
construction bond proceeds apply to available construction
proceeds of the bonds (sec. 148(f)(4)(C));
(4) The tenant targeting rules applicable to exempt-
facility bonds for residential rental property (and the
corresponding change in use penalties for violations of those
rules) do not apply to such property financed with the bonds
(secs. 142(d) and 150(b)(2));
(5) Repayments of bond-financed loans may not be used to
make additional loans, but rather must be used to retire
outstanding bonds (with the first such retirement occurring 10
years after issuance of the bonds); \180\ and
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\180\ It is intended that redemptions will occur at least semi-
annually beginning at the end of 10 years after the bonds are issued;
however, amounts less than $250,000 are not required to be used to
redeem bonds at such intervals.
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(6) Interest on the bonds is not a preference item for
purposes of the alternative minimum tax preference for private
activity bond interest (sec. 57(a)(5)).
REASONS FOR CHANGE
The Committee is committed to aiding the City of New York's
economic recovery from the terrorist attacks of September 11,
2001. Therefore, the Committee believes that an extension of
the authority to issue New York Liberty Bonds is appropriate.
EXPLANATION OF PROVISION
The bill extends authority to issue New York Liberty Bonds
through December 31, 2009.
EFFECTIVE DATE
The provision is effective for bonds issued after the date
of enactment and before January 1, 2010.
P. Disclosure to Law Enforcement Agencies Regarding Terrorist
Activities
(Sec. 416 of the bill and sec. 6103 of the Code)
PRESENT LAW
Return information includes a taxpayer's identity.\181\ The
IRS may disclose return information, other than taxpayer return
information, to officers and employees of Federal law
enforcement upon a written request. The request must be made by
the head of the Federal law enforcement agency (or his
delegate) involved in the response to or investigation of
terrorist incidents, threats, or activities, and set forth the
specific reason or reasons why such disclosure may be relevant
to a terrorist incident, threat, or activity. The information
is to be disclosed to officers and employees of the Federal law
enforcement agency who would be personally and directly
involved in the response to or investigation of terrorist
incidents, threats, or activities. The information is to be
used by such officers and employees solely for such response or
investigation.\182\
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\181\ Sec. 6103(b)(2)(A).
\182\ Sec. 6103(i)(7)(A).
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The Federal law enforcement agency may redisclose the
information to officers and employees of State and local law
enforcement personally and directly engaged in the response to
or investigation of the terrorist incident, threat, or
activity. The State or local law enforcement agency must be
part of an investigative or response team with the Federal law
enforcement agency for these disclosures to be made.\183\
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\183\ Sec. 6103(i)(7)(A)(ii).
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If a taxpayer's identity is taken from a return or other
information filed with or furnished to the IRS by or on behalf
of the taxpayer, it is taxpayer return information. Since
taxpayer return information is not covered by this disclosure
authorization, taxpayer identity so obtained cannot be
disclosed and thus associated with the other information being
provided.
The Code also allows the IRS to disclose return information
(other than taxpayer return information) upon the written
request of an officer or employee of the Department of Justice
or Treasury who is appointed by the President with the advice
and consent of the Senate, or who is the Director of the U.S.
Secret Service, if such individual is responsible for the
collection and analysis of intelligence and counterintelligence
concerning any terrorist incident, threat, or activity.\184\
Taxpayer identity information for this purpose is not
considered taxpayer return information. Such written request
must set forth the specific reason or reasons why such
disclosure may be relevant to a terrorist incident, threat, or
activity. Disclosures under this authority may be made to those
officers and employees of the Department of Justice, Treasury,
and Federal intelligence agencies who are personally and
directly engaged in the collection or analysis of intelligence
and counterintelligence information or investigation concerning
any terrorist incident, threat, or activity. Such disclosures
may be made solely for the use of such officers and employees
in such investigation, collection, or analysis.
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\184\ Sec. 6103(i)(7)(B).
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The IRS, on its own initiative, may disclose in writing
return information (other than taxpayer return information)
that may be related to a terrorist incident, threat, or
activity to the extent necessary to apprise the head of the
appropriate investigating Federal law enforcement agency.\185\
Taxpayer identity information for this purpose is not
considered taxpayer return information. The head of the agency
may redisclose such information to officers and employees of
such agency to the extent necessary to investigate or respond
to the terrorist incident, threat, or activity.
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\185\ Sec. 6103(i)(3)(C).
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If taxpayer return information is sought, the disclosure
must be made pursuant to the ex parte order of a Federal
district court judge or magistrate.
No disclosures may be made under these provisions after
December 31, 2003.
REASONS FOR CHANGE
The Committee believes that a renewal of this disclosure
authority will provide additional time to evaluate the
effectiveness of the provision and whether any modifications
need to be implemented to enhance the provision.
EXPLANATION OF PROVISION
The provision extends the disclosure authority relating to
terrorist activities. Under the provision, no disclosures can
be made after December 31, 2005.
The provision also makes a technical change to clarify that
a taxpayer's identity is not treated as taxpayer return
information for purposes of disclosures to law enforcement
agencies regarding terrorist activities.
EFFECTIVE DATE
The provision extending authority is effective for
disclosures made on or after the date of enactment. The
technical change is effective as if included in section 201 of
the Victims of Terrorism Tax Relief Act of 2001.
Q. Disclosure of Return Information Relating to Student Loans
(Sec. 417 of the bill and sec. 6103(l) of the Code)
Present Law
Present law prohibits the disclosure of returns and return
information, except to the extent specifically authorized by
the Code.\186\ An exception is provided for disclosure to the
Department of Education (but not to contractors thereof) of a
taxpayer's filing status, adjusted gross income and identity
information (i.e., name, mailing address, taxpayer identifying
number) to establish an appropriate repayment amount for an
applicable student loan.\187\ The Department of Education
disclosure authority is scheduled to expire after December 31,
2004.\188\
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\186\ Sec. 6103.
\187\ Sec. 6103(l)(13).
\188\ Pub. L. No. 108-89, sec. 201 (2003).
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An exception to the general rule prohibiting disclosure is
also provided for the disclosure of returns and return
information to a designee of the taxpayer.\189\ Unlike the
specific Department of Education exception, section 6103(c)
disclosures are not subject to use restrictions nor are they
subject to statutory safeguards. Because the Department of
Education utilizes contractors for the income-contingent loan
verification program, the Department of Education obtains
taxpayer information by consent under section 6103(c), rather
than under the specific exception.\190\ The Department of
Treasury has reported that the Internal Revenue Service
processes approximately 100,000 consents per year for this
purpose.\191\
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\189\ Sec. 6103(c).
\190\ Department of Treasury, Report to the Congress on Scope and
Use of Taxpayer Confidentiality and Disclosure Provisions, Volume I:
Study of General Provisions (October 2000) at 91.
\191\ Department of Treasury, General Explanations of the
Administration's Fiscal Year 2004 Revenue Proposals (February 2003) at
133.
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REASONS FOR CHANGE
The Committee believes that the Department of Education
should be provided with access to tax return information to
assist it in carrying out the income-contingent repayment
program. Thus, the Committee believes that it is appropriate to
provide a further extension of this disclosure authority.
EXPLANATION OF PROVISION
The bill extends the disclosure authority relating to the
disclosure of return information to carry out income-contingent
repayment of student loans. Under the bill, no disclosures can
be made after December 31, 2005.
EFFECTIVE DATE
The provision is effective with respect to disclosures made
after the date of enactment.
R. Extension of Cover Over of Excise Tax on Distilled Spirits to Puerto
Rico and Virgin Islands
(Sec. 418 of the bill and sec. 7652 of the Code)
PRESENT LAW
A $13.50 per proof gallon \192\ excise tax is imposed on
distilled spirits produced in or imported (or brought) into the
United States.\193\ 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 Virgin
Islands).\194\
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\192\ A proof gallon is a liquid gallon consisting of 50 percent
alcohol. See sec. 5002(a)(10), (11).
\193\ Sec. 5001(a)(1).
\194\ Secs. 5062(b), 7653(b) and (c).
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The Code provides for cover over (payment) to Puerto Rico
and the Virgin Islands of the excise tax imposed on rum
imported (or brought) into the United States, without regard to
the country of origin.\195\ The amount of the cover over is
limited under section 7652(f) to $10.50 per proof gallon
($13.25 per proof gallon during the period July 1, 1999 through
December 31, 2003).
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\195\ Sec. 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 Virgin Islands is retained by the United
States under section 7652(b)(3).
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Thus, 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 Virgin Islands are covered
over to the Virgin Islands. Tax amounts attributable to
shipments to the United States of rum produced in neither
Puerto Rico nor the Virgin Islands are divided and covered over
to the two possessions under a formula.\196\ Amounts covered
over to Puerto Rico and the Virgin Islands are deposited into
the treasuries of the two possessions for use as those
possessions determine.\197\ All of the amounts covered over are
subject to the limitation.
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\196\ Sec. 7652(e)(2).
\197\ Sec. 7652(a)(3), (b)(3), and (e)(1).
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REASONS FOR CHANGE
The Committee believes that the needs of Puerto Rico and
the Virgin Islands justify the extension of the cover over
amount of $13.25 per proof gallon through December 31, 2005.
EXPLANATION OF PROVISION
The provision temporarily suspends the $10.50 per proof
gallon limitation on the amount of excise taxes on rum covered
over to Puerto Rico and the Virgin Islands. Under the
provision, the cover over amount of $13.25 per proof gallon is
extended for rum brought into the United States after December
31, 2003 and before January 1, 2006. After December 31, 2005,
the cover over amount reverts to $10.50 per proof gallon.
EFFECTIVE DATE
The provision is effective for articles brought into the
United States after December 31, 2003.
S. Extension of Joint Review
(Sec. 419 of the bill and secs. 8021 and 8022 of the Code)
PRESENT LAW
The Code required the Joint Committee on Taxation to
conduct a joint review \198\ of the strategic plans and budget
of the IRS from 1999 through 2003.\199\ The Code also required
the Joint Committee to provide an annual report \200\ from 1999
through 2003 with respect to:
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\198\ The joint review was required to include two members of the
majority and one member of the minority of the Senate Committees on
Finance, Appropriations, and Governmental Affairs, and of the House
Committees on Ways and Means, Appropriations, and Government Reform and
Oversight.
\199\ Sec. 8021(f).
\200\ Sec. 8022(3)(C).
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Strategic and business plans for the IRS;
Progress of the IRS in meeting its
objectives;
The budget for the IRS and whether it
supports its objectives;
Progress of the IRS in improving taxpayer
service and compliance;
Progress of the IRS on technology
modernization; and
The annual filing season.
REASONS FOR CHANGE
The Committee believes that a joint review of the IRS
should be held for one additional year and that the report
provided by the Joint Committee on Taxation should be tailored
to the specific issues addressed in the joint review.
EXPLANATION OF PROVISION
The provision requires that the Joint Committee conduct a
joint review before June 1, 2005. The provision requires the
Joint Committee to provide an annual report before June 1,
2005, but specifies that the content of the annual report is
the matters addressed in the joint review.\201\
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\201\ Accordingly, the provision deletes the specific list of
matters required to be covered in the annual report.
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EFFECTIVE DATE
The provision is effective on the date of enactment.
T. Parity in the Application of Certain Limits to Mental Health
Benefits
(Sec. 420 of the bill and sec. 9812 of the Code)
PRESENT LAW
The Mental Health Parity Act of 1996 amended the Employee
Retirement Income Security Act of 1974 (``ERISA'') and the
Public Health Service Act (``PHSA'') to provide that group
health plans that provide both medical and surgical benefits
and mental health benefits cannot impose aggregate lifetime or
annual dollar limits on mental health benefits that are not
imposed on substantially all medical and surgical benefits. The
provisions of the Mental Health Parity Act were initially
effective with respect to plan years beginning on or after
January 1, 1998, for a temporary period. Since enactment, the
mental health parity requirements in ERISA and the PHSA have
been extended on more than one occasion and currently are
scheduled to expire with respect to benefits for services
furnished on or after December 31, 2004.
The Taxpayer Relief Act of 1997 added to the Code the
requirements imposed under the Mental Health Parity Act, and
imposed an excise tax on group health plans that fail to meet
the requirements. The excise tax is equal to $100 per day
during the period of noncompliance and is generally imposed on
the employer sponsoring the plan if the plan fails to meet the
requirements. The maximum tax that can be imposed during a
taxable year cannot exceed the lesser of 10 percent of the
employer's group health plan expenses for the prior year or
$500,000. No tax is imposed if the Secretary determines that
the employer did not know, and exercising reasonable diligence
would not have known, that the failure existed.
The Code provisions were initially effective with respect
to plan years beginning on or after January 1, 1998, for a
temporary period.\202\ The Code provisions have been extended
on a number of occasions, and expired with respect to benefits
for services furnished after December 31, 2003.
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\202\ The excise tax does not apply to benefits for services
furnished on or after September 30, 2001, and before January 10, 2002.
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REASONS FOR CHANGE
The provisions of the Mental Health Parity Act in ERISA and
the PHSA have been extended to December 31, 2004, while the
Code provisions have expired. The Committee recognizes that the
Code provisions relating to mental health parity are important
to carrying out the purposes of the Mental Health Parity Act.
Thus, the Committee believes that extending the Code provisions
relating to mental health parity is warranted.
EXPLANATION OF PROVISION
The provision extends the Code provisions relating to
mental health parity to benefits for services furnished after
the date of enactment and before January 1, 2006. Thus, the
excise tax on failures to meet the requirements imposed by the
Code provisions does not apply after December 31, 2003, and
before the date of enactment.
EFFECTIVE DATE
The provision is effective for benefits for services
furnished after the date of enactment.
U. Disclosure of Tax Information To Facilitate Combined Employment Tax
Reporting
(Sec. 421 of the bill)
PRESENT LAW
Traditionally, Federal tax forms are filed with the Federal
government and State tax forms are filed with individual
States. This necessitates duplication of items common to both
returns.
The Taxpayer Relief Act of 1997 \203\ permitted
implementation of a demonstration project to assess the
feasibility and desirability of expanding combined Federal and
State reporting. There were several limitations on the
demonstration project. First, it was limited to the sharing of
information between the State of Montana and the IRS. Second,
it was limited to employment tax reporting. Third, it was
limited to disclosure of the name, address, TIN, and signature
of the taxpayer, which is information common to both the
Montana and Federal portions of the combined form. Fourth, it
was limited to a period of five years.
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\203\ Pub. L. No. 105-34, sec. 976.
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The authority for the demonstration project expired on the
date five years after the date of enactment (August 5, 2002).
REASONS FOR CHANGE
The Committee believes that authorizing this pilot project
for an additional year will provide the Congress with
information to assess the usefulness of the program and whether
further expansions are warranted.
EXPLANATION OF PROVISION
The provision renews authority for the demonstration
project through December 31, 2005.
EFFECTIVE DATE
The provision is effective on the date of enactment.
V. Extension of Tax Credit for Electric Vehicles and Tax Deduction for
Clean-Fuel Vehicles
(Sec. 422 of the bill and secs. 30 and 179A of the Code)
PRESENT LAW
Electric vehicles
A 10-percent tax credit is provided for the cost of a
qualified electric vehicle, up to a maximum credit of $4,000
(sec. 30). A qualified electric vehicle is a motor vehicle that
is powered primarily by an electric motor drawing current from
rechargeable batteries, fuel cells, or other portable sources
of electrical current, the original use of which commences with
the taxpayer, and that is acquired for the use by the taxpayer
and not for resale. The full amount of the credit is available
for purchases prior to 2002. The credit phases down in the
years 2004 through 2006, and is unavailable for purchases after
December 31, 2006.
Clean-fuel vehicles
Certain costs of qualified clean-fuel vehicle may be
expensed and deducted when such property is placed in service
(sec. 179A). Qualified clean-fuel vehicle property includes
motor vehicles that use certain clean-burning fuels (natural
gas, liquefied natural gas, liquefied petroleum gas, hydrogen,
electricity and any other fuel at least 85 percent of which is
methanol, ethanol, any other alcohol or ether). The maximum
amount of the deduction is $50,000 for a truck or van with a
gross vehicle weight over 26,000 pounds or a bus with seating
capacities of at least 20 adults; $5,000 in the case of a truck
or van with a gross vehicle weight between 10,000 and 26,000
pounds; and $2,000 in the case of any other motor vehicle.
Qualified electric vehicles do not qualify for the clean-fuel
vehicle deduction. The deduction phases down in the years 2004
through 2006, and is unavailable for purchases after December
31, 2006.
REASONS FOR CHANGE
The Committee believes it is necessary to continue to
provide the full benefit of the tax subsidy to the purchase of
these innovative vehicles to enable such vehicles to
demonstrate their road-worthiness to the consumer.
EXPLANATION OF PROVISION
The provision suspends the phase down of allowable tax
credit for electric vehicles and the deduction for clean-fuel
vehicles in 2004 and 2005. Thus, a taxpayer who purchases a
qualifying vehicle may claim 100 percent of the otherwise
allowable credit or deduction for vehicles purchased in 2004
and 2005. For vehicles purchased in 2006 the credit or
deduction remains at 25 percent of the otherwise allowable
amount as under present law.
EFFECTIVE DATE
The provision is effective for vehicles placed in service
after December 31, 2003.
TITLE V--DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES
A. Deduction of State and Local General Sales Taxes
(Sec. 501 of the bill and sec. 164 of the Code)
PRESENT LAW
An itemized deduction is permitted for certain taxes paid,
including individual income taxes, real property taxes, and
personal property taxes. No itemized deduction is permitted for
State or local general sales taxes.
REASONS FOR CHANGE
The Committee recognizes that not all States rely on income
taxes as a primary source of revenue, and that allowing a
deduction for State and local income taxes, but not sales
taxes, may create inequities across States and may also create
bias in the types of taxes that States and localities choose to
impose. The Committee believes that the provision of an
itemized deduction for State and local general sales taxes in
lieu of the deduction for State and local income taxes provides
more equitable Federal tax treatment across States, and will
cause the Federal tax laws to have a more neutral effect on the
types of taxes that State and local governments utilize.
EXPLANATION OF PROVISION
The provision provides that, at the election of the
taxpayer, an itemized deduction may be taken for State and
local general sales taxes in lieu of the itemized deduction
provided under present law for State and local income taxes.
The term ``general sales tax'' means a tax imposed at one
rate with respect to the sale at retail of a broad range of
classes of items. However, in the case of items of food,
clothing, medical supplies, and motor vehicles, the fact that
the tax does not apply with respect to some or all of such
items is not taken into account in determining whether the tax
applies with respect to a broad range of classes of items, and
the fact that the rate of tax applicable with respect to some
or all of such items is lower than the general rate of tax is
not taken into account in determining whether the tax is
imposed at one rate. Except in the case of a lower rate of tax
applicable with respect to food, clothing, medical supplies, or
motor vehicles, no deduction is allowed for any general sales
tax imposed with respect to an item at a rate other than the
general rate of tax. However, in the case of motor vehicles, if
the rate of tax exceeds the general rate, such excess shall be
disregarded and the general rate is treated as the rate of tax.
A compensating use tax with respect to an item is treated
as a general sales tax, provided such tax is complimentary to a
general sales tax and a deduction for sales taxes is allowable
with respect to items sold at retail in the taxing jurisdiction
that are similar to such item.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2003, and prior to January 1, 2006.
TITLE VI--REVENUE PROVISIONS
A. Provisions To Reduce Tax Avoidance Through Individual and Corporate
Expatriation
1. Tax treatment of expatriated entities and their foreign parents
(sec. 601 of the bill and new sec. 7874 of the Code)
PRESENT LAW
Determination of corporate residence
The U.S. tax treatment of a multinational corporate group
depends significantly on whether the parent corporation of the
group is domestic or foreign. For purposes of U.S. tax law, a
corporation is treated as domestic if it is incorporated under
the law of the United States or of any State. All other
corporations (i.e., those incorporated under the laws of
foreign countries) are treated as foreign.
U.S. taxation of domestic corporations
The United States employs a ``worldwide'' tax system, under
which domestic corporations generally are taxed on all income,
whether derived in the United States or abroad. In order to
mitigate the double taxation that may arise from taxing the
foreign-source income of a domestic corporation, a foreign tax
credit for income taxes paid to foreign countries is provided
to reduce or eliminate the U.S. tax owed on such income,
subject to certain limitations.
Income earned by a domestic parent corporation from foreign
operations conducted by foreign corporate subsidiaries
generally is subject to U.S. tax when the income is distributed
as a dividend to the domestic corporation. Until such
repatriation, the U.S. tax on such income generally is
deferred, and U.S. tax is imposed on such income when
repatriated. However, certain anti-deferral regimes may cause
the domestic parent corporation to be taxed on a current basis
in the United States with respect to certain categories of
passive or highly mobile income earned by its foreign
subsidiaries, regardless of whether the income has been
distributed as a dividend to the domestic parent corporation.
The main anti-deferral regimes in this context are the
controlled foreign corporation rules of subpart F (secs. 951-
964) and the passive foreign investment company rules (secs.
1291-1298). A foreign tax credit is generally available to
offset, in whole or in part, the U.S. tax owed on this foreign-
source income, whether repatriated as an actual dividend or
included under one of the anti-deferral regimes.
U.S. taxation of foreign corporations
The United States taxes foreign corporations only on income
that has a sufficient nexus to the United States. Thus, a
foreign corporation is generally subject to U.S. tax only on
income that is ``effectively connected'' with the conduct of a
trade or business in the United States. Such ``effectively
connected income'' generally is taxed in the same manner and at
the same rates as the income of a U.S. corporation. An
applicable tax treaty may limit the imposition of U.S. tax on
business operations of a foreign corporation to cases in which
the business is conducted through a ``permanent establishment''
in the United States.
In addition, foreign corporations generally are subject to
a gross-basis U.S. tax at a flat 30-percent rate on the receipt
of interest, dividends, rents, royalties, and certain similar
types of income derived from U.S. sources, subject to certain
exceptions. The tax generally is collected by means of
withholding by the person making the payment. This tax may be
reduced or eliminated under an applicable tax treaty.
U.S. tax treatment of inversion transactions
Under present law, a U.S. corporation may reincorporate in
a foreign jurisdiction and thereby replace the U.S. parent
corporation of a multinational corporate group with a foreign
parent corporation. These transactions are commonly referred to
as inversion transactions. Inversion transactions may take many
different forms, including stock inversions, asset inversions,
and various combinations of and variations on the two. Most of
the known transactions to date have been stock inversions. In
one example of a stock inversion, a U.S. corporation forms a
foreign corporation, which in turn forms a domestic merger
subsidiary. The domestic merger subsidiary then merges into the
U.S. corporation, with the U.S. corporation surviving, now as a
subsidiary of the new foreign corporation. The U.S.
corporation's shareholders receive shares of the foreign
corporation and are treated as having exchanged their U.S.
corporation shares for the foreign corporation shares. An asset
inversion reaches a similar result, but through a direct merger
of the top-tier U.S. corporation into a new foreign
corporation, among other possible forms. An inversion
transaction may be accompanied or followed by further
restructuring of the corporate group. For example, in the case
of a stock inversion, in order to remove income from foreign
operations from the U.S. taxing jurisdiction, the U.S.
corporation may transfer some or all of its foreign
subsidiaries directly to the new foreign parent corporation or
other related foreign corporations.
In addition to removing foreign operations from the U.S.
taxing jurisdiction, the corporate group may derive further
advantage from the inverted structure by reducing U.S. tax on
U.S.-source income through various earnings stripping or other
transactions. This may include earnings stripping through
payment by a U.S. corporation of deductible amounts such as
interest, royalties, rents, or management service fees to the
new foreign parent or other foreign affiliates. In this
respect, the post-inversion structure enables the group to
employ the same tax-reduction strategies that are available to
other multinational corporate groups with foreign parents and
U.S. subsidiaries, subject to the same limitations (e.g., secs.
163(j) and 482).
Inversion transactions may give rise to immediate U.S. tax
consequences at the shareholder and/or the corporate level,
depending on the type of inversion. In stock inversions, the
U.S. shareholders generally recognize gain (but not loss) under
section 367(a), based on the difference between the fair market
value of the foreign corporation shares received and the
adjusted basis of the domestic corporation stock exchanged. To
the extent that a corporation's share value has declined, and/
or it has many foreign or tax-exempt shareholders, the impact
of this section 367(a) ``toll charge'' is reduced. The transfer
of foreign subsidiaries or other assets to the foreign parent
corporation also may give rise to U.S. tax consequences at the
corporate level (e.g., gain recognition and earnings and
profits inclusions under secs. 1001, 311(b), 304, 367, 1248 or
other provisions). The tax on any income recognized as a result
of these restructurings may be reduced or eliminated through
the use of net operating losses, foreign tax credits, and other
tax attributes.
In asset inversions, the U.S. corporation generally
recognizes gain (but not loss) under section 367(a) as though
it had sold all of its assets, but the shareholders generally
do not recognize gain or loss, assuming the transaction meets
the requirements of a reorganization under section 368.
REASONS FOR CHANGE
The Committee believes that corporate inversion
transactions are a symptom of larger problems with our current
uncompetitive system for taxing U.S.-based global businesses
and are also indicative of the unfair advantages that our tax
laws convey to foreign ownership. The bill addresses the
underlying problems with the U.S. system of taxing U.S.-based
global businesses and contains provisions to remove the
incentives for entering into inversion transactions. Imposing
full U.S. tax on gains of companies undertaking an inversion
transaction is one such provision that helps to remove the
incentive to enter into an inversion transaction.
EXPLANATION OF PROVISION
The bill applies special tax rules to corporations that
undertake certain defined inversion transactions. For this
purpose, an inversion is a transaction in which, pursuant to a
plan or a series of related transactions: (1) a U.S.
corporation becomes a subsidiary of a foreign-incorporated
entity or otherwise transfers substantially all of its
properties to such an entity after March 4, 2003; (2) the
former shareholders of the U.S. corporation hold (by reason of
holding stock in the U.S. corporation) 60 percent or more (by
vote or value) of the stock of the foreign-incorporated entity
after the transaction; and (3) the foreign-incorporated entity,
considered together with all companies connected to it by a
chain of greater than 50-percent ownership (i.e., the
``expanded affiliated group'') does not conduct substantial
business activities in the entity's country of incorporation
compared to the total worldwide business activities of the
expanded affiliated group.
In such a case, any applicable corporate-level ``toll
charges'' for establishing the inverted structure are not
offset by tax attributes such as net operating losses or
foreign tax credits. Specifically, any applicable corporate-
level income or gain required to be recognized under sections
304, 311(b), 367, 1001, 1248, or any other provision with
respect to the transfer of controlled foreign corporation stock
or the transfer or license of other assets by a U.S.
corporation as part of the inversion transaction or after such
transaction to a related foreign person is taxable, without
offset by any tax attributes (e.g., net operating losses or
foreign tax credits). This rule does not apply to certain
transfers of inventory and similar property. These measures
generally apply for a 10-year period following the inversion
transaction.
In determining whether a transaction meets the definition
of an inversion under the provision, stock held by members of
the expanded affiliated group that includes the foreign
incorporated entity is disregarded. For example, if the former
top-tier U.S. corporation receives stock of the foreign
incorporated entity (e.g., so-called ``hook'' stock), the stock
would not be considered in determining whether the transaction
meets the definition. Similarly, if a U.S. parent corporation
converts an existing wholly owned U.S. subsidiary into a new
wholly owned controlled foreign corporation, the stock of the
new foreign corporation would be disregarded. Stock sold in a
public offering related to the transaction also is disregarded
for these purposes.
Transfers of properties or liabilities as part of a plan a
principal purpose of which is to avoid the purposes of the
provision are disregarded. In addition, the Treasury Secretary
is granted authority to prevent the avoidance of the purposes
of the provision, including avoidance through the use of
related persons, pass-through or other noncorporate entities,
or other intermediaries, and through transactions designed to
qualify or disqualify a person as a related person or a member
of an expanded affiliated group. Similarly, the Treasury
Secretary is granted authority to treat certain non-stock
instruments as stock, and certain stock as not stock, where
necessary, to carry out the purposes of the provision.
Under the provision, inversion transactions include certain
partnership transactions. Specifically, the provision applies
to transactions in which a foreign-incorporated entity acquires
substantially all of the properties constituting a trade or
business of a domestic partnership, if after the acquisition at
least 60 percent of the stock of the entity is held by former
partners of the partnership (by reason of holding their
partnership interests), provided that the other terms of the
basic definition are met. For purposes of applying this test,
all partnerships that are under common control within the
meaning of section 482 are treated as one partnership, except
as provided otherwise in regulations. In addition, the modified
``toll charge'' provisions apply at the partner level.
A transaction otherwise meeting the definition of an
inversion transaction is not treated as an inversion
transaction if, on or before March 4, 2003, the foreign-
incorporated entity had acquired directly or indirectly more
than half of the properties held directly or indirectly by the
domestic corporation, or more than half of the properties
constituting the partnership trade or business, as the case may
be.
EFFECTIVE DATE
The provision applies to taxable years ending after March
4, 2003.
2. Excise tax on stock compensation of insiders in expatriated
corporations (sec. 602 of the bill and secs. 162(m), 275(a),
and new sec. 4985 of the Code)
PRESENT LAW
The income taxation of a nonstatutory \204\ compensatory
stock option is determined under the rules that apply to
property transferred in connection with the performance of
services (sec. 83). If a nonstatutory stock option does not
have a readily ascertainable fair market value at the time of
grant, which is generally the case unless the option is
actively traded on an established market, no amount is included
in the gross income of the recipient with respect to the option
until the recipient exercises the option.\205\ Upon exercise of
such an option, the excess of the fair market value of the
stock purchased over the option price is generally included in
the recipient's gross income as ordinary income in such taxable
year.\206\
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\204\ Nonstatutory stock options refer to stock options other than
incentive stock options and employee stock purchase plans, the taxation
of which is determined under sections 421-424.
\205\ If an individual receives a grant of a nonstatutory option
that has a readily ascertainable fair market value at the time the
option is granted, the excess of the fair market value of the option
over the amount paid for the option is included in the recipient's
gross income as ordinary income in the first taxable year in which the
option is either transferable or not subject to a substantial risk of
forfeiture.
\206\ Under section 83, such amount is includable in gross income
in the first taxable year in which the rights to the stock are
transferable or are not subject to substantial risk of forfeiture.
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The tax treatment of other forms of stock-based
compensation (e.g., restricted stock and stock appreciation
rights) is also determined under section 83. The excess of the
fair market value over the amount paid (if any) for such
property is generally includable in gross income in the first
taxable year in which the rights to the property are
transferable or are not subject to substantial risk of
forfeiture.
Shareholders are generally required to recognize gain upon
stock inversion transactions. An inversion transaction is
generally not a taxable event for holders of stock options and
other stock-based compensation.
REASONS FOR CHANGE
The Committee believes that certain inversion transactions
are a means of avoiding U.S. tax and should be curtailed. The
Committee is concerned that, while shareholders are generally
required to recognize gain upon stock inversion transactions,
executives holding stock options and certain stock-based
compensation are not taxed upon such transactions. Since such
executives are often instrumental in deciding whether to engage
in inversion transactions, the Committee believes that, upon
certain inversion transactions, it is appropriate to impose an
excise tax on certain executives holding stock options and
stock-based compensation. Because shareholders are taxed at the
capital gains rate upon inversion transactions, the Committee
believes that it is appropriate to impose the excise tax at an
equivalent rate.
EXPLANATION OF PROVISION
Under the provision, specified holders of stock options and
other stock-based compensation are subject to an excise tax
upon certain inversion transactions. The provision imposes a
15-percent excise tax on the value of specified stock
compensation held (directly or indirectly) by or for the
benefit of a disqualified individual, or a member of such
individual's family, at any time during the 12-month period
beginning six months before the corporation's 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.
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,\207\ 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)),\208\ directors, and 10-percent-or-greater owners of
private and publicly-held corporations.
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\207\ An expanded affiliated group is an affiliated group (under
section 1504) except that such group is determined without regard to
the exceptions for certain corporations and is determined applying a
greater than 50 percent threshold, in lieu of the 80 percent test.
\208\ 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.
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The excise tax is imposed on a disqualified individual of
an expatriated corporation (as previously defined in the bill)
only if gain (if any) is recognized in whole or part by any
shareholder by reason of a corporate inversion transaction
previously defined in the bill.
Specified stock compensation subject to the excise tax
includes any payment \209\ (or right to payment) 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 a non-lapse restriction, are ignored.
Thus, the excise tax applies, and the value subject to the tax
is determined, without regard to whether such specified stock
compensation is subject to a substantial risk of forfeiture or
is exercisable at the time of the inversion transaction.
Specified stock compensation includes compensatory stock and
restricted stock grants, compensatory stock options, and other
forms of stock-based compensation, including stock appreciation
rights, phantom stock, and phantom stock options. Specified
stock compensation also includes nonqualified deferred
compensation that is treated as though it were invested in
stock or stock options of the expatriating corporation (or
member). For example, the provision applies to a disqualified
individual's deferred compensation if company stock is one of
the actual or deemed investment options under the nonqualified
deferred compensation plan.
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\209\ 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.
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Specified stock compensation includes a compensation
arrangement that gives the disqualified individual an economic
stake substantially similar to that of a corporate shareholder.
Thus, the excise tax does not apply if a payment is simply
triggered by a target value of the corporation's stock or where
a payment depends on a performance measure other than the value
of the corporation's stock. Similarly, the tax does not apply
if the amount of the payment is not directly measured by the
value of the stock or an increase in the value of the stock.
For example, an arrangement under which a disqualified
individual would be paid a cash bonus of $500,000 if the
corporation's stock increased in value by 25 percent over two
years or $1,000,000 if the stock increased by 33 percent over
two years is not specified stock compensation, even though the
amount of the bonus generally is keyed to an increase in the
value of the stock. By contrast, an arrangement under which a
disqualified individual would be paid a cash bonus equal to
$10,000 for every $1 increase in the share price of the
corporation's stock is subject to the provision because the
direct connection between the compensation amount and the value
of the corporation's stock gives the disqualified individual an
economic stake substantially similar to that of a shareholder.
The excise tax applies to any such specified stock
compensation previously granted to a disqualified individual
but cancelled or cashed-out within the six-month period ending
with the 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. It is intended that the Secretary
issue guidance to avoid double counting with respect to
specified stock compensation that is cancelled and then
regranted during the applicable twelve-month period.
Specified stock compensation subject to the tax does not
include a statutory stock option or any payment or right from a
qualified retirement plan or annuity, tax-sheltered annuity,
simplified employee pension, or SIMPLE. 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 or 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 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). It is expected that the Secretary issue
guidance on valuation of specified stock compensation,
including guidance similar to the revenue procedures issued
under section 280G, except that the guidance would not permit
the use of a term other than the full remaining term and would
be modified as necessary or appropriate to carry out the
purposes of the provision. Pending the issuance of guidance, it
is intended that taxpayers can rely on the revenue procedure
issued under section 280G (except that the full remaining term
must be used and recalculation is not permitted).
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. It is expected that the
Secretary issue guidance on determining when a payment is made
in respect of the tax and that such guidance include certain
factors that give rise to a rebuttable presumption that a
payment is made in respect of the tax, including a rebuttable
presumption that if the payment is contingent on the inversion
transaction, it is made in respect to the tax. Any payment made
in respect of the tax is includible in the income of the
individual, but is not deductible by the corporation.
To the extent that a disqualified individual is also a
covered employee under section 162(m), the $1,000,000 limit on
the deduction allowed for employee remuneration for such
employee is reduced by the amount of any payment (including
reimbursements) made in respect of the tax under the provision.
As discussed above, this includes direct payments of the tax
and payments to reimburse the individual for payment of the
tax.
The payment of the excise tax has no effect on the
subsequent tax treatment of any specified stock compensation.
Thus, the payment of the tax has no effect on the individual's
basis in any specified stock compensation and no effect on the
tax treatment for the individual at the time of exercise of an
option or payment of any specified stock compensation, or at
the time of any lapse or forfeiture of such specified stock
compensation. The payment of the tax is not deductible and has
no effect on any deduction that might be allowed at the time of
any future exercise or payment.
Under the provision, the Secretary is authorized to issue
regulations as may be necessary or appropriate to carry out the
purposes of the provision.
EFFECTIVE DATE
The provision is effective as of March 4, 2003, except that
periods before March 4, 2003, are not taken into account in
applying the excise tax to specified stock compensation held or
cancelled during the six-month period before the expatriation
date.
3. Reinsurance of U.S. risks in foreign jurisdictions (sec. 603 of the
bill and sec. 845(a) of the Code)
PRESENT LAW
In the case of a reinsurance agreement between two or more
related persons, present law provides the Treasury Secretary
with authority to allocate among the parties or recharacterize
income (whether investment income, premium or otherwise),
deductions, assets, reserves, credits and any other items
related to the reinsurance agreement, or make any other
adjustment, in order to reflect the proper source and character
of the items for each party.\210\ For this purpose, related
persons are defined as in section 482. Thus, persons are
related if they are organizations, trades or businesses
(whether or not incorporated, whether or not organized in the
United States, and whether or not affiliated) that are owned or
controlled directly or indirectly by the same interests. The
provision may apply to a contract even if one of the related
parties is not a domestic company.\211\ In addition, the
provision also permits such allocation, recharacterization, or
other adjustments in a case in which one of the parties to a
reinsurance agreement is, with respect to any contract covered
by the agreement, in effect an agent of another party to the
agreement, or a conduit between related persons.
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\210\ Sec. 845(a).
\211\ See S. Rep. No. 97-494, 97th Cong., 2d Sess., 337 (1982)
(describing provisions relating to the repeal of modified coinsurance
provisions).
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REASONS FOR CHANGE
The Committee is concerned that reinsurance transactions
are being used to allocate income, deductions, or other items
inappropriately among U.S. and foreign related persons. The
Committee is concerned that foreign related party reinsurance
arrangements may be a technique for eroding the U.S. tax base.
The Committee believes that the provision of present law
permitting the Treasury Secretary to allocate or recharacterize
items related to a reinsurance agreement should be applied to
prevent misallocation, improper characterization, or to make
any other adjustment in the case of such reinsurance
transactions between U.S. and foreign related persons (or
agents or conduits). The Committee also wishes to clarify that,
in applying the authority with respect to reinsurance
agreements, the amount, source or character of the items may be
allocated, recharacterized or adjusted.
EXPLANATION OF PROVISION
The bill clarifies the rules of section 845, relating to
authority for the Treasury Secretary to allocate items among
the parties to a reinsurance agreement, recharacterize items,
or make any other adjustment, in order to reflect the proper
source and character of the items for each party. The bill
authorizes such allocation, recharacterization, or other
adjustment, in order to reflect the proper source, character or
amount of the item. It is intended that this authority \212\ be
exercised in a manner similar to the authority under section
482 for the Treasury Secretary to make adjustments between
related parties. It is intended that this authority be applied
in situations in which the related persons (or agents or
conduits) are engaged in cross-border transactions that require
allocation, recharacterization, or other adjustments in order
to reflect the proper source, character or amount of the item
or items. No inference is intended that present law does not
provide this authority with respect to reinsurance agreements.
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\212\ The authority to allocate, recharacterize or make other
adjustments was granted in connection with the repeal of provisions
relating to modified coinsurance transactions.
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No regulations have been issued under section 845(a). It is
expected that the Treasury Secretary will issue regulations
under section 845(a) to address effectively the allocation of
income (whether investment income, premium or otherwise) and
other items, the recharacterization of such items, or any other
adjustment necessary to reflect the proper amount, source or
character of the item.
EFFECTIVE DATE
The provision is effective for any risk reinsured after the
date of enactment of the provision.
4. Revision of tax rules on expatriation of individuals (sec. 604 of
the bill and secs. 877, 2107, 2501 and 6039G of the Code)
PRESENT LAW
In general
U.S. citizens and residents generally are subject to U.S
income taxation on their worldwide income. The U.S. tax may be
reduced or offset by a credit allowed for foreign income taxes
paid with respect to foreign source income. Nonresident aliens
are taxed at a flat rate of 30 percent (or a lower treaty rate)
on certain types of passive income derived from U.S. sources,
and at regular graduated rates on net profits derived from a
U.S. trade or business. The estates of nonresident aliens
generally are subject to estate tax on U.S.-situated property
(e.g., real estate and tangible property located within the
United States and stock in a U.S. corporation). Nonresident
aliens generally are subject to gift tax on transfers by gift
of U.S.-situated property (e.g., real estate and tangible
property located within the United States, but excluding
intangibles, such as stock, regardless of where they are
located).
Income tax rules with respect to expatriates
For the 10 taxable years after an individual relinquishes
his or her U.S. citizenship or terminates his or her U.S.
residency \213\ with a principal purpose of avoiding U.S.
taxes, the individual is subject to an alternative method of
income taxation than that generally applicable to nonresident
aliens (the ``alternative tax regime''). Generally, the
individual is subject to income tax only on U.S.-source income
\214\ at the rates applicable to U.S. citizens for the 10-year
period.
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\213\ Under present law, an individual's U.S. residency is
considered terminated for U.S. Federal tax purposes when the individual
ceases to be a lawful permanent resident under the immigration law (or
is treated as a resident of another country under a tax treaty and does
not waive the benefits of such treaty).
\214\ For this purpose, however, U.S.-source income has a broader
scope than it does typically in the Code.
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An individual who relinquishes citizenship or terminates
residency is treated as having done so with a principal purpose
of tax avoidance and is generally subject to the alternative
tax regime if: (1) the individual's average annual U.S. Federal
income tax liability for the five taxable years preceding
citizenship relinquishment or residency termination exceeds
$100,000; or (2) the individual's net worth on the date of
citizenship relinquishment or residency termination equals or
exceeds $500,000. These amounts are adjusted annually for
inflation.\215\ Certain categories of individuals (e.g., dual
residents) may avoid being deemed to have a tax avoidance
purpose for relinquishing citizenship or terminating residency
by submitting a ruling request to the IRS regarding whether the
individual relinquished citizenship or terminated residency
principally for tax reasons.
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\215\ The income tax liability and net worth thresholds under
section 877(a)(2) for 2004 are $124,000 and $622,000, respectively. See
Rev. Proc. 2003-85, 2003-49 I.R.B. 1184.
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Anti-abuse rules are provided to prevent the circumvention
of the alternative tax regime.
Estate tax rules with respect to expatriates
Special estate tax rules apply to individuals who
relinquish their citizenship or long-term residency within the
10 years prior to the date of death, unless he or she did not
have a tax avoidance purpose (as determined under the test
above). Under these special rules, certain closely-held foreign
stock owned by the former citizen or former long-term resident
is includible in his or her gross estate to the extent that the
foreign corporation owns U.S.-situated assets.
Gift tax rules with respect to expatriates
Special gift tax rules apply to individuals who relinquish
their citizenship or long-term residency within the 10 years
prior to the date of death, unless he or she did not have a tax
avoidance purpose (as determined under the rules above). The
individual is subject to gift tax on gifts of U.S.-situated
intangibles made during the 10 years following citizenship
relinquishment or residency termination.
Information reporting
Under present law, U.S. citizens who relinquish citizenship
and long-term residents who terminate residency generally are
required to provide information about their assets held at the
time of expatriation. However, this information is only
required once.
REASONS FOR CHANGE
The Committee believes there are several difficulties in
administering the present-law alternative tax regime. One such
difficulty is that the IRS is required to determine the
subjective intent of taxpayers who relinquish citizenship or
terminate residency. The present-law presumption of a tax-
avoidance purpose in cases in which objective income tax
liability or net worth thresholds are exceeded mitigates this
problem to some extent. However, the present-law rules still
require the IRS to make subjective determinations of intent in
cases involving taxpayers who fall below these thresholds, as
well for certain taxpayers who exceed these thresholds but are
nevertheless allowed to seek a ruling from the IRS to the
effect that they did not have a principal purpose of tax
avoidance. The Committee believes that the replacement of the
subjective determination of tax avoidance as a principal
purpose for citizenship relinquishment or residency termination
with objective rules will result in easier administration of
the tax regime for individuals who relinquish their citizenship
or terminate residency.
Similarly, present-law information-reporting and return-
filing provisions do not provide the IRS with the information
necessary to administer the alternative tax regime. Although
individuals are required to file tax information statements
upon the relinquishment of their citizenship or termination of
their residency, difficulties have been encountered in
enforcing this requirement. The Committee believes that the tax
benefits of citizenship relinquishment or residency termination
should be denied an individual until he or she provides the
information necessary for the IRS to enforce the alternative
tax regime. The Committee also believes an annual report
requirement and a penalty for the failure to comply with such
requirement are needed to provide the IRS with sufficient
information to monitor the compliance of former U.S. citizens
and long-term residents.
Individuals who relinquish citizenship or terminate
residency for tax reasons often do not want to fully sever
their ties with the United States; they hope to retain some of
the benefits of citizenship or residency without being subject
to the U.S. tax system as a U.S. citizen or resident. These
individuals generally may continue to spend significant amounts
of time in the United States following citizenship
relinquishment or residency termination--approximately four
months every year--without being treated as a U.S. resident.
The Committee believes that provisions in the bill that impose
full U.S. taxation if the individual is present in the United
States for more than 30 days in a calendar year will
substantially reduce the incentives to relinquish citizenship
or terminate residency for individuals who desire to maintain
significant ties to the United States.
With respect to the estate and gift tax rules, the
Committee is concerned that present-law does not adequately
address opportunities for the avoidance of tax on the value of
assets held by a foreign corporation whose stock the individual
transfers. Thus, the provision imposes gift tax under the
alternative tax regime in the case of gifts of certain stock of
a closely held foreign corporation.
EXPLANATION OF PROVISION
In general
The bill provides: (1) objective standards for determining
whether former citizens or former long-term residents are
subject to the alternative tax regime; (2) tax-based (instead
of immigration-based) rules for determining when an individual
is no longer a U.S. citizen or long-term resident for U.S.
Federal tax purposes; (3) the imposition of full U.S. taxation
for individuals who are subject to the alternative tax regime
and who return to the United States for extended periods; (4)
imposition of U.S. gift tax on gifts of stock of certain
closely-held foreign corporations that hold U.S.-situated
property; and (5) an annual return-filing requirement for
individuals who are subject to the alternative tax regime, for
each of the 10 years following citizenship relinquishment or
residency termination.\216\
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\216\ These provisions reflect recommendations contained in Joint
Committee on Taxation, Review of the Present Law Tax and Immigration
Treatment of Relinquishment of Citizenship and Termination of Long-Term
Residency, (JCS-2-03), February 2003.
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Objective rules for the alternative tax regime
The bill replaces the subjective determination of tax
avoidance as a principal purpose for citizenship relinquishment
or residency termination under present law with objective
rules. Under the bill, a former citizen or former long-term
resident would be subject to the alternative tax regime for a
10-year period following citizenship relinquishment or
residency termination, unless the former citizen or former
long-term resident: (1) establishes that his or her average
annual net income tax liability for the five preceding years
does not exceed $124,000 (adjusted for inflation after 2004)
and his or her net worth does not exceed $2 million, or
alternatively satisfies limited, objective exceptions for dual
citizens and minors who have had no substantial contact with
the United States; and (2) certifies under penalties of perjury
that he or she has complied with all U.S. Federal tax
obligations for the preceding five years and provides such
evidence of compliance as the Secretary of the Treasury may
require.
The monetary thresholds under the bill replace the present-
law inquiry into the taxpayer's intent. In addition, the bill
eliminates the present-law process of IRS ruling requests.
If a former citizen exceeds the monetary thresholds, that
person is excluded from the alternative tax regime if he or she
falls within the exceptions for certain dual citizens and
minors (provided that the requirement of certification and
proof of compliance with Federal tax obligations is met). These
exceptions provide relief to individuals who have never had
substantial connections with the United States, as measured by
certain objective criteria, and eliminate IRS inquiries as to
the subjective intent of such taxpayers.
In order to be excepted from the application of the
alternative tax regime under the bill, whether by reason of
falling below the net worth and income tax liability thresholds
or qualifying for the dual-citizen or minor exceptions, the
former citizen or former long-term resident also is required to
certify, under penalties of perjury, that he or she has
complied with all U.S. Federal tax obligations for the five
years preceding the relinquishment of citizenship or
termination of residency and to provide such documentation as
the Secretary of the Treasury may require evidencing such
compliance (e.g., tax returns, proof of tax payments). Until
such time, the individual remains subject to the alternative
tax regime. It is intended that the IRS will continue to verify
that the information submitted was accurate, and it is intended
that the IRS will randomly audit such persons to assess
compliance.
Termination of U.S. citizenship or long-term resident status for U.S.
Federal income tax purposes
Under the bill, an individual continues to be treated as a
U.S. citizen or long-term resident for U.S. Federal tax
purposes, including for purposes of section 7701(b)(10), until
the individual: (1) gives notice of an expatriating act or
termination of residency (with the requisite intent to
relinquish citizenship or terminate residency) to the Secretary
of State or the Secretary of Homeland Security, respectively;
and (2) provides a statement in accordance with section 6039G.
Sanction for individuals subject to the individual tax regime who
return to the United States for extended periods
The alternative tax regime does not apply to any individual
for any taxable year during the 10-year period following
citizenship relinquishment or residency termination if such
individual is present in the United States for more than 30
days in the calendar year ending in such taxable year. Such
individual is treated as a U.S. citizen or resident for such
taxable year and therefore is taxed on his or her worldwide
income.
Similarly, if an individual subject to the alternative tax
regime is present in the United States for more than 30 days in
any calendar year ending during the 10-year period following
citizenship relinquishment or residency termination, and the
individual dies during that year, he or she is treated as a
U.S. resident, and the individual's worldwide estate is subject
to U.S. estate tax. Likewise, if an individual subject to the
alternative tax regime is present in the United States for more
than 30 days in any year during the 10-year period following
citizenship relinquishment or residency termination, the
individual is subject to U.S. gift tax on any transfer of his
or her worldwide assets by gift during that taxable year.
For purposes of these rules, an individual is treated as
present in the United States on any day if such individual is
physically present in the United States at any time during that
day. The present-law exceptions from being treated as present
in the United States for residency purposes \217\ generally do
not apply for this purpose. However, for individuals with
certain ties to countries other than the United States \218\
and individuals with minimal prior physical presence in the
United States,\219\ a day of physical presence in the United
States is disregarded if the individual is performing services
in the United States on such day for an unrelated employer
(within the meaning of sections 267 and 707(b)), who meets the
requirements the Secretary of the Treasury may prescribe in
regulations. No more than 30 days may be disregarded during any
calendar year under this rule.
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\217\ Secs. 7701(b)(3)(D), 7701(b)(5) and 7701(b)(7)(B)-(D).
\218\ An individual has such a relationship to a foreign country if
the individual becomes a citizen or resident of the country in which
(1) the individual becomes fully liable for income tax or (2) the
individual was born, such individual's spouse was born, or either of
the individual's parents was born.
\219\ An individual has a minimal prior physical presence in the
United States if the individual was physically present for no more than
30 days during each year in the ten-year period ending on the date of
loss of United States citizenship or termination of residency. However,
an individual is not treated as being present in the United States on a
day if (1) the individual is a teacher or trainee, a student, a
professional athlete in certain circumstances, or a foreign government-
related individual or (2) the individual remained in the United States
because of a medical condition that arose while the individual was in
the United States. Sec. 7701(b)(3)(D)(ii).
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Imposition of gift tax with respect to stock of certain closely held
foreign corporations
Gifts of stock of certain closely-held foreign corporations
by a former citizen or former long-term resident who is subject
to the alternative tax regime are subject to gift tax under
this bill, if the gift is made within the 10-year period after
citizenship relinquishment or residency termination. The gift
tax rule applies if: (1) the former citizen or former long-term
resident, before making the gift, directly or indirectly owns
10 percent or more of the total combined voting power of all
classes of stock entitled to vote of the foreign corporation;
and (2) directly or indirectly, is considered to own more than
50 percent of (a) the total combined voting power of all
classes of stock entitled to vote in the foreign corporation,
or (b) the total value of the stock of such corporation. If
this stock ownership test is met, then taxable gifts of the
former citizen or former long-term resident include that
proportion of the fair market value of the foreign stock
transferred by the individual, at the time of the gift, which
the fair market value of any assets owned by such foreign
corporation and situated in the United States (at the time of
the gift) bears to the total fair market value of all assets
owned by such foreign corporation (at the time of the gift).
This gift tax rule applies to a former citizen or former
long-term resident who is subject to the alternative tax regime
and who owns stock in a foreign corporation at the time of the
gift, regardless of how such stock was acquired (e.g., whether
issued originally to the donor, purchased, or received as a
gift or bequest).
Annual return
The bill requires former citizens and former long-term
residents to file an annual return for each year following
citizenship relinquishment or residency termination in which
they are subject to the alternative tax regime. The annual
return is required even if no U.S. Federal income tax is due.
The annual return requires certain information, including
information on the permanent home of the individual, the
individual's country of residence, the number of days the
individual was present in the United States for the year, and
detailed information about the individual's income and assets
that are subject to the alternative tax regime. This
requirement includes information relating to foreign stock
potentially subject to the special estate tax rule of section
2107(b) and the gift tax rules of this bill.
If the individual fails to file the statement in a timely
manner or fails correctly to include all the required
information, the individual is required to pay a penalty of
$5,000. The $5,000 penalty does not apply if it is shown that
the failure is due to reasonable cause and not to willful
neglect.
EFFECTIVE DATE
The provision applies to individuals who relinquish
citizenship or terminate long-term residency after June 3,
2004.
5. Reporting of taxable mergers and acquisitions (sec. 605 of the bill
and new sec. 6043A of the Code)
PRESENT LAW
Under section 6045 and the regulations thereunder, brokers
(defined to include stock transfer agents) are required to make
information returns and to provide corresponding payee
statements as to sales made on behalf of their customers,
subject to the penalty provisions of sections 6721-6724. Under
the regulations issued under section 6045, this requirement
generally does not apply with respect to taxable transactions
other than exchanges for cash (e.g., stock inversion
transactions taxable to shareholders by reason of section
367(a)).\220\
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\220\ Recently issued temporary regulations under section 6043
(relating to information reporting with respect to liquidations,
recapitalizations, and changes in control) impose information reporting
requirements with respect to certain taxable inversion transactions,
and proposed regulations would expand these requirements more generally
to taxable transactions occurring after the proposed regulations are
finalized.
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REASONS FOR CHANGE
The Committee believes that administration of the tax laws
would be improved by greater information reporting with respect
to taxable non-cash transactions, and that the Treasury
Secretary's authority to require such enhanced reporting should
be made explicit in the Code.
EXPLANATION OF PROVISION
Under the bill, if gain or loss is recognized in whole or
in part by shareholders of a corporation by reason of a second
corporation's acquisition of the stock or assets of the first
corporation, then the acquiring corporation (or the acquired
corporation, if so prescribed by the Treasury Secretary) is
required to make a return containing:
(1) A description of the transaction;
(2) The name and address of each shareholder of the
acquired corporation that recognizes gain as a result
of the transaction (or would recognize gain, if there
was a built-in gain on the shareholder's shares);
(3) The amount of money and the value of stock or
other consideration paid to each shareholder described
above; and
(4) Such other information as the Treasury Secretary
may prescribe.
Alternatively, a stock transfer agent who records transfers
of stock in such transaction may make the return described
above in lieu of the second corporation.
In addition, every person required to make a return
described above is required to furnish to each shareholder (or
the shareholder's nominee \221\) whose name is required to be
set forth in such return a written statement showing:
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\221\ In the case of a nominee, the nominee must furnish the
information to the shareholder in the manner prescribed by the Treasury
Secretary.
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(1) The name, address, and phone number of the
information contact of the person required to make such
return;
(2) The information required to be shown on that
return; and
(3) Such other information as the Treasury Secretary
may prescribe.
This written statement is required to be furnished to the
shareholder on or before January 31 of the year following the
calendar year during which the transaction occurred.
The present-law penalties for failure to comply with
information reporting requirements are extended to failures to
comply with the requirements set forth under this bill.
EFFECTIVE DATE
The provision is effective for acquisitions after the date
of enactment.
6. Studies (sec. 606 of the bill)
PRESENT LAW
Due to the variation in tax rates and tax systems among
countries, a multinational enterprise, whether U.S.-based or
foreign-based, may have an incentive to shift income,
deductions, or tax credits in order to arrive at a reduced
overall tax burden. Such a shifting of items could be
accomplished by establishing artificial, non-arm's-length
prices for transactions between group members.
Under section 482, the Treasury Secretary is authorized to
reallocate income, deductions, or credits between or among two
or more organizations, trades, or businesses under common
control if he determines that such a reallocation is necessary
to prevent tax evasion or to clearly reflect income. Treasury
regulations adopt the arm's-length standard as the standard for
determining whether such reallocations are appropriate. Thus,
the regulations provide rules to identify the respective
amounts of taxable income of the related parties that would
have resulted if the parties had been uncontrolled parties
dealing at arm's length. Transactions involving intangible
property and certain services may present particular challenges
to the administration of the arm's-length standard, because the
nature of these transactions may make it difficult or
impossible to compare them with third-party transactions.
In addition to the statutory rules governing the taxation
of foreign income of U.S. persons and U.S. income of foreign
persons, bilateral income tax treaties limit the amount of
income tax that may be imposed by one treaty partner on
residents of the other treaty partner. For example, treaties
often reduce or eliminate withholding taxes imposed by a treaty
country on certain types of income (e.g., dividends, interest
and royalties) paid to residents of the other treaty country.
Treaties also contain provisions governing the creditability of
taxes imposed by the treaty country in which income was earned
in computing the amount of tax owed to the other country by its
residents with respect to such income. Treaties further provide
procedures under which inconsistent positions taken by the
treaty countries with respect to a single item of income or
deduction may be mutually resolved by the two countries.
REASONS FOR CHANGE
The Committee believes that it is important to evaluate the
effectiveness of the current transfer pricing rules and
compliance efforts with respect to related-party transactions
to ensure that income is not being shifted outside of the
United States. The Committee also believes that it is necessary
to review current U.S. income tax treaties to identify any
inappropriate reductions in withholding tax rates that may
create opportunities for shifting income outside the United
States. In addition, the Committee believes that the impact of
the provisions of this bill on inversion transactions should be
studied.
EXPLANATION OF PROVISION
The bill requires the Treasury Secretary to conduct and
submit to the Congress three studies. The first study will
examine the effectiveness of the transfer pricing rules of
section 482, with an emphasis on transactions involving
intangible property. The second study will examine income tax
treaties to which the United States is a party, with a view
toward identifying any inappropriate reductions in withholding
tax or opportunities for abuse that may exist. The third study
will examine the impact of the provisions of this bill on
inversion transactions.
EFFECTIVE DATE
The tax treaty study required under the provision is due no
later than June 30, 2005. The transfer pricing study required
under the provision is due no later than June 30, 2005. The
inversions study required under the provision is due no later
than December 31, 2005.
B. Provisions Relating to Tax Shelters
1. Penalty for failure to disclose reportable transactions (sec. 611 of
the bill and new sec. 6707A of the Code)
PRESENT LAW
Regulations under section 6011 require a taxpayer to
disclose with its tax return certain information with respect
to each ``reportable transaction'' in which the taxpayer
participates.\222\
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\222\ On February 27, 2003, the Treasury Department and the IRS
released final regulations regarding the disclosure of reportable
transactions. In general, the regulations are effective for
transactions entered into on or after February 28, 2003.
The discussion of present law refers to the new regulations. The
rules that apply with respect to transactions entered into on or before
February 28, 2003, are contained in Treas. Reg. sec. 1.6011-4T in
effect on the date the transaction was entered into.
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There are six categories of reportable transactions. The
first category is any transaction that is the same as (or
substantially similar to) \223\ a transaction that is specified
by the Treasury Department as a tax avoidance transaction whose
tax benefits are subject to disallowance under present law
(referred to as a ``listed transaction'').\224\
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\223\ The regulations clarify that the term ``substantially
similar'' includes any transaction that is expected to obtain the same
or similar types of tax consequences and that is either factually
similar or based on the same or similar tax strategy. Further, the term
must be broadly construed in favor of disclosure. Treas. Reg. sec.
1.6011-4(c)(4).
\224\ Treas. Reg. sec. 1.6011-4(b)(2).
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The second category is any transaction that is offered
under conditions of confidentiality. In general, a transaction
is considered to be offered to a taxpayer under conditions of
confidentiality if the advisor who is paid a minimum fee places
a limitation on disclosure by the taxpayer of the tax treatment
or tax structure of the transaction and the limitation on
disclosure protects the confidentiality of that advisor's tax
strategies (irrespective if such terms are legally
binding).\225\
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\225\ Treas. Reg. sec. 1.6011-4(b)(3).
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The third category of reportable transactions is any
transaction for which (1) the taxpayer has the right to a full
or partial refund of fees if the intended tax consequences from
the transaction are not sustained or, (2) the fees are
contingent on the intended tax consequences from the
transaction being sustained.\226\
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\226\ Treas. Reg. sec. 1.6011-4(b)(4).
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The fourth category of reportable transactions relates to
any transaction resulting in a taxpayer claiming a loss (under
section 165) of at least (1) $10 million in any single year or
$20 million in any combination of years by a corporate taxpayer
or a partnership with only corporate partners; (2) $2 million
in any single year or $4 million in any combination of years by
all other partnerships, S corporations, trusts, and
individuals; or (3) $50,000 in any single year for individuals
or trusts if the loss arises with respect to foreign currency
translation losses.\227\
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\227\ Treas. Reg. sec. 1.6011-4(b)(5). Rev. Proc. 2003-24, 2003-11
I.R.B. 599, exempts certain types of losses from this reportable
transaction category.
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The fifth category of reportable transactions refers to any
transaction done by certain taxpayers \228\ in which the tax
treatment of the transaction differs (or is expected to differ)
by more than $10 million from its treatment for book purposes
(using generally accepted accounting principles) in any
year.\229\
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\228\ The significant book-tax category applies only to taxpayers
that are reporting companies under the Securities Exchange Act of 1934
or business entities that have $250 million or more in gross assets.
\229\ Treas. Reg. sec. 1.6011-4(b)(6). Rev. Proc. 2003-25, 2003-11
I.R.B. 601, exempts certain types of transactions from this reportable
transaction category.
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The final category of reportable transactions is any
transaction that results in a tax credit exceeding $250,000
(including a foreign tax credit) if the taxpayer holds the
underlying asset for less than 45 days.\230\
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\230\ Treas. Reg. sec. 1.6011-4(b)(7).
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Under present law, there is no specific penalty for failing
to disclose a reportable transaction; however, such a failure
can jeopardize a taxpayer's ability to claim that any income
tax understatement attributable to such undisclosed transaction
is due to reasonable cause, and that the taxpayer acted in good
faith.\231\
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\231\ Section 6664(c) provides that a taxpayer can avoid the
imposition of a section 6662 accuracy-related penalty in cases where
the taxpayer can demonstrate that there was reasonable cause for the
underpayment and that the taxpayer acted in good faith. Regulations
under sections 6662 and 6664 provide that a taxpayer's failure to
disclose a reportable transaction is a strong indication that the
taxpayer failed to act in good faith, which would bar relief under
section 6664(c).
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REASONS FOR CHANGE
The Committee believes that the best way to combat tax
shelters is to be aware of them. The Treasury Department, using
the tools available, issued regulations requiring disclosure of
certain transactions and requiring organizers and promoters of
tax-engineered transactions to maintain customer lists and make
these lists available to the IRS. Nevertheless, the Committee
believes that additional legislation is needed to provide the
Treasury Department with additional tools to assist its efforts
to curtail abusive transactions. Moreover, the Committee
believes that a penalty for failing to make the required
disclosures, when the imposition of such penalty is not
dependent on the tax treatment of the underlying transaction
ultimately being sustained, will provide an additional
incentive for taxpayers to satisfy their reporting obligations
under the new disclosure provisions.
EXPLANATION OF PROVISION
In general
The provision creates a new penalty for any person who
fails to include with any return or statement any required
information with respect to a reportable transaction. The new
penalty applies without regard to whether the transaction
ultimately results in an understatement of tax, and applies in
addition to any accuracy-related penalty that may be imposed.
Transactions to be disclosed
The provision does not define the terms ``listed
transaction'' \232\ or ``reportable transaction,'' nor does the
provision explain the type of information that must be
disclosed in order to avoid the imposition of a penalty.
Rather, the provision authorizes the Treasury Department to
define a ``listed transaction'' and a ``reportable
transaction'' under section 6011.
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\232\ The provision states that, except as provided in regulations,
a listed transaction means a reportable transaction, which is the same
as, or substantially similar to, a transaction specifically identified
by the Secretary as a tax avoidance transaction for purposes of section
6011. For this purpose, it is expected that the definition of
``substantially similar'' will be the definition used in Treas. Reg.
sec. 1.6011-4(c)(4). However, the Secretary may modify this definition
(as well as the definitions of ``listed transaction'' and ``reportable
transactions'') as appropriate.
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Penalty rate
The penalty for failing to disclose a reportable
transaction is $10,000 in the case of a natural person and
$50,000 in any other case. The amount is increased to $100,000
and $200,000, respectively, if the failure is with respect to a
listed transaction. The penalty cannot be waived with respect
to a listed transaction. As to reportable transactions, the
penalty can be rescinded (or abated) only if rescinding the
penalty would promote compliance with the tax laws and
effective tax administration. The authority to rescind the
penalty can only be exercised by the IRS Commissioner
personally. Thus, a revenue agent, an Appeals officer, or any
other IRS personnel cannot rescind the penalty. The decision to
rescind a penalty must be accompanied by a record describing
the facts and reasons for the action and the amount rescinded.
There will be no taxpayer right to appeal a refusal to rescind
a penalty.\233\ The IRS also is required to submit an annual
report to Congress summarizing the application of the
disclosure penalties and providing a description of each
penalty rescinded under this provision and the reasons for the
rescission.
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\233\ This does not limit the ability of a taxpayer to challenge
whether a penalty is appropriate (e.g., a taxpayer may litigate the
issue of whether a transaction is a reportable transaction (and thus
subject to the penalty if not disclosed) or not a reportable
transaction (and thus not subject to the penalty)).
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EFFECTIVE DATE
The provision is effective for returns and statements the
due date for which is after the date of enactment.
2. Modifications to the accuracy-related penalties for listed
transactions and reportable transactions having a significant
tax avoidance purpose (sec. 612 of the bill and new sec. 6662A
of the Code)
PRESENT LAW
The accuracy-related penalty applies to the portion of any
underpayment that is attributable to (1) negligence, (2) any
substantial understatement of income tax, (3) any substantial
valuation misstatement, (4) any substantial overstatement of
pension liabilities, or (5) any substantial estate or gift tax
valuation understatement. If the correct income tax liability
exceeds that reported by the taxpayer by the greater of 10
percent of the correct tax or $5,000 ($10,000 in the case of
corporations), then a substantial understatement exists and a
penalty may be imposed equal to 20 percent of the underpayment
of tax attributable to the understatement.\234\ The amount of
any understatement generally is reduced by any portion
attributable to an item if (1) the treatment of the item is or
was supported by substantial authority, or (2) facts relevant
to the tax treatment of the item were adequately disclosed and
there was a reasonable basis for its tax treatment.\235\
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\234\ Sec. 6662.
\235\ Sec. 6662(d)(2)(B).
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Special rules apply with respect to tax shelters.\236\ For
understatements by non-corporate taxpayers attributable to tax
shelters, the penalty may be avoided only if the taxpayer
establishes that, in addition to having substantial authority
for the position, the taxpayer reasonably believed that the
treatment claimed was more likely than not the proper treatment
of the item. This reduction in the penalty is unavailable to
corporate tax shelters.
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\236\ Sec. 6662(d)(2)(C).
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The understatement penalty generally is abated (even with
respect to tax shelters) in cases in which the taxpayer can
demonstrate that there was ``reasonable cause'' for the
underpayment and that the taxpayer acted in good faith.\237\
The relevant regulations provide that reasonable cause exists
where the taxpayer ``reasonably relies in good faith on an
opinion based on a professional tax advisor's analysis of the
pertinent facts and authorities [that] * * * unambiguously
concludes that there is a greater than 50-percent likelihood
that the tax treatment of the item will be upheld if
challenged'' by the IRS.\238\
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\237\ Sec. 6664(c).
\238\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec.
1.6664-4(c).
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REASONS FOR CHANGE
Because disclosure is so vital to combating abusive tax
avoidance transactions, the Committee believes that taxpayers
should be subject to a strict liability penalty on an
understatement of tax that is attributable to non-disclosed
listed transactions or non-disclosed reportable transactions
that have a significant purpose of tax avoidance. Furthermore,
in order to deter taxpayers from entering into tax avoidance
transactions, the Committee believes that a more meaningful
(but not a strict liability) accuracy-related penalty should
apply to such transactions even when disclosed.
EXPLANATION OF PROVISION
In general
The provision modifies the present-law accuracy-related
penalty by replacing the rules applicable to tax shelters with
a new accuracy-related penalty that applies to listed
transactions and reportable transactions with a significant tax
avoidance purpose (hereinafter referred to as a ``reportable
avoidance transaction'').\239\ The penalty rate and defenses
available to avoid the penalty vary depending on whether the
transaction was adequately disclosed.
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\239\ The terms ``reportable transaction'' and ``listed
transaction'' have the same meanings as used for purposes of the
penalty for failing to disclose reportable transactions.
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Disclosed transactions
In general, a 20-percent accuracy-related penalty is
imposed on any understatement attributable to an adequately
disclosed listed transaction or reportable avoidance
transaction. The only exception to the penalty is if the
taxpayer satisfies a more stringent reasonable cause and good
faith exception (hereinafter referred to as the ``strengthened
reasonable cause exception''), which is described below. The
strengthened reasonable cause exception is available only if
the relevant facts affecting the tax treatment are adequately
disclosed, there is or was substantial authority for the
claimed tax treatment, and the taxpayer reasonably believed
that the claimed tax treatment was more likely than not the
proper treatment.
Undisclosed transactions
If the taxpayer does not adequately disclose the
transaction, the strengthened reasonable cause exception is not
available (i.e., a strict-liability penalty applies), and the
taxpayer is subject to an increased penalty rate equal to 30
percent of the understatement.
Determination of the understatement amount
The penalty is applied to the amount of any understatement
attributable to the listed or reportable avoidance transaction
without regard to other items on the tax return. For purposes
of this provision, the amount of the understatement is
determined as the sum of (1) the product of the highest
corporate or individual tax rate (as appropriate) and the
increase in taxable income resulting from the difference
between the taxpayer's treatment of the item and the proper
treatment of the item (without regard to other items on the tax
return),\240\ and (2) the amount of any decrease in the
aggregate amount of credits which results from a difference
between the taxpayer's treatment of an item and the proper tax
treatment of such item.
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\240\ For this purpose, any reduction in the excess of deductions
allowed for the taxable year over gross income for such year, and any
reduction in the amount of capital losses which would (without regard
to section 1211) be allowed for such year, shall be treated as an
increase in taxable income.
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Except as provided in regulations, a taxpayer's treatment
of an item shall not take into account any amendment or
supplement to a return if the amendment or supplement is filed
after the earlier of when the taxpayer is first contacted
regarding an examination of the return or such other date as
specified by the Secretary.
Strengthened reasonable cause exception
A penalty is not imposed under the provision with respect
to any portion of an understatement if it shown that there was
reasonable cause for such portion and the taxpayer acted in
good faith. Such a showing requires (1) adequate disclosure of
the facts affecting the transaction in accordance with the
regulations under section 6011,\241\ (2) that there is or was
substantial authority for such treatment, and (3) that the
taxpayer reasonably believed that such treatment was more
likely than not the proper treatment. For this purpose, a
taxpayer will be treated as having a reasonable belief with
respect to the tax treatment of an item only if such belief (1)
is based on the facts and law that exist at the time the tax
return (that includes the item) is filed, and (2) relates
solely to the taxpayer's chances of success on the merits and
does not take into account the possibility that (a) a return
will not be audited, (b) the treatment will not be raised on
audit, or (c) the treatment will be resolved through settlement
if raised.
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\241\ See the previous discussion regarding the penalty for failing
to disclose a reportable transaction.
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A taxpayer may (but is not required to) rely on an opinion
of a tax advisor in establishing its reasonable belief with
respect to the tax treatment of the item. However, a taxpayer
may not rely on an opinion of a tax advisor for this purpose if
the opinion (1) is provided by a ``disqualified tax advisor,''
or (2) is a ``disqualified opinion.''
Disqualified tax advisor
A disqualified tax advisor is any advisor who (1) is a
material advisor \242\ and who participates in the
organization, management, promotion or sale of the transaction
or is related (within the meaning of section 267(b) or
707(b)(1)) to any person who so participates, (2) is
compensated directly or indirectly \243\ by a material advisor
with respect to the transaction, (3) has a fee arrangement with
respect to the transaction that is contingent on all or part of
the intended tax benefits from the transaction being sustained,
or (4) as determined under regulations prescribed by the
Secretary, has a disqualifying financial interest with respect
to the transaction.
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\242\ The term ``material advisor'' (defined below in connection
with the new information filing requirements for material advisors)
means any person who provides any material aid, assistance, or advice
with respect to organizing, managing, promoting, selling, implementing,
or carrying out any reportable transaction, and who derives gross
income in excess of $50,000 in the case of a reportable transaction
substantially all of the tax benefits from which are provided to
natural persons ($250,000 in any other case).
\243\ This situation could arise, for example, when an advisor has
an arrangement or understanding (oral or written) with an organizer,
manager, or promoter of a reportable transaction that such party will
recommend or refer potential participants to the advisor for an opinion
regarding the tax treatment of the transaction.
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Organization, management, promotion or sale of a
transaction--A material advisor is considered as participating
in the ``organization'' of a transaction if the advisor
performs acts relating to the development of the transaction.
This may include, for example, preparing documents (1)
establishing a structure used in connection with the
transaction (such as a partnership agreement), (2) describing
the transaction (such as an offering memorandum or other
statement describing the transaction), or (3) relating to the
registration of the transaction with any federal, state or
local government body.\244\ Participation in the ``management''
of a transaction means involvement in the decision-making
process regarding any business activity with respect to the
transaction. Participation in the ``promotion or sale'' of a
transaction means involvement in the marketing or solicitation
of the transaction to others. Thus, an advisor who provides
information about the transaction to a potential participant is
involved in the promotion or sale of a transaction, as is any
advisor who recommends the transaction to a potential
participant.
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\244\ An advisor should not be treated as participating in the
organization of a transaction if the advisor's only involvement with
respect to the organization of the transaction is the rendering of an
opinion regarding the tax consequences of such transaction. However,
such an advisor may be a ``disqualified tax advisor'' with respect to
the transaction if the advisor participates in the management,
promotion or sale of the transaction (or if the advisor is compensated
by a material advisor, has a fee arrangement that is contingent on the
tax benefits of the transaction, or as determined by the Secretary, has
a continuing financial interest with respect to the transaction).
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Disqualified opinion
An opinion may not be relied upon if the opinion (1) is
based on unreasonable factual or legal assumptions (including
assumptions as to future events), (2) unreasonably relies upon
representations, statements, finding or agreements of the
taxpayer or any other person, (3) does not identify and
consider all relevant facts, or (4) fails to meet any other
requirement prescribed by the Secretary.
Coordination with other penalties
Any understatement upon which a penalty is imposed under
this provision is not subject to the accuracy-related penalty
under section 6662. However, such understatement is included
for purposes of determining whether any understatement (as
defined in sec. 6662(d)(2)) is a substantial understatement as
defined under section 6662(d)(1).
The penalty imposed under this provision shall not apply to
any portion of an understatement to which a fraud penalty is
applied under section 6663.
EFFECTIVE DATE
The provision is effective for taxable years ending after
the date of enactment.
3. Tax shelter exception to confidentiality privileges relating to
taxpayer communications (sec. 613 of the bill and sec. 7525 of
the Code)
PRESENT LAW
In general, a common law privilege of confidentiality
exists for communications between an attorney and client with
respect to the legal advice the attorney gives the client. The
Code provides that, with respect to tax advice, the same common
law protections of confidentiality that apply to a
communication between a taxpayer and an attorney also apply to
a communication between a taxpayer and a federally authorized
tax practitioner to the extent the communication would be
considered a privileged communication if it were between a
taxpayer and an attorney. This rule is inapplicable to
communications regarding corporate tax shelters.
REASONS FOR CHANGE
The Committee believes that the rule currently applicable
to corporate tax shelters should be applied to all tax
shelters, regardless of whether or not the participant is a
corporation.
EXPLANATION OF PROVISION
The provision modifies the rule relating to corporate tax
shelters by making it applicable to all tax shelters, whether
entered into by corporations, individuals, partnerships, tax-
exempt entities, or any other entity. Accordingly,
communications with respect to tax shelters are not subject to
the confidentiality provision of the Code that otherwise
applies to a communication between a taxpayer and a federally
authorized tax practitioner.
EFFECTIVE DATE
The provision is effective with respect to communications
made on or after the date of enactment.
4. Statute of limitations for unreported listed transactions (sec. 614
of the bill and sec. 6501 of the Code)
PRESENT LAW
In general, the Code requires that taxes be assessed within
three years \245\ after the date a return is filed.\246\ If
there has been a substantial omission of items of gross income
that totals more than 25 percent of the amount of gross income
shown on the return, the period during which an assessment must
be made is extended to six years.\247\ If an assessment is not
made within the required time periods, the tax generally cannot
be assessed or collected at any future time. Tax may be
assessed at any time if the taxpayer files a false or
fraudulent return with the intent to evade tax or if the
taxpayer does not file a tax return at all.\248\
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\245\ Sec. 6501(a).
\246\ For this purpose, a return that is filed before the date on
which it is due is considered to be filed on the required due date
(sec. 6501(b)(1)).
\247\ Sec. 6501(e).
\248\ Sec. 6501(c).
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REASONS FOR CHANGE
The Committee has noted that some taxpayers and their
advisors have been employing dilatory tactics and failing to
cooperate with the IRS in an attempt to avoid liability because
of the expiration of the statute of limitations. The Committee
accordingly believes that it is appropriate to extend the
statute of limitations for unreported listed transactions.
EXPLANATION OF PROVISION
The provision extends the statute of limitations with
respect to a listed transaction if a taxpayer fails to include
on any return or statement for any taxable year any information
with respect to a listed transaction \249\ which is required to
be included (under section 6011) with such return or statement.
The statute of limitations with respect to such a transaction
will not expire before the date which is one year after the
earlier of (1) the date on which the Secretary is furnished the
information so required, or (2) the date that a material
advisor (as defined in 6111) satisfies the list maintenance
requirements (as defined by section 6112) with respect to a
request by the Secretary. For example, if a taxpayer engaged in
a transaction in 2005 that becomes a listed transaction in 2007
and the taxpayer fails to disclose such transaction in the
manner required by Treasury regulations, then the transaction
is subject to the extended statute of limitations.\250\
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\249\ The term ``listed transaction'' has the same meaning as
described in a previous provision regarding the penalty for failure to
disclose reportable transactions.
\250\ If the Treasury Department lists a transaction in a year
subsequent to the year in which a taxpayer entered into such
transaction and the taxpayer's tax return for the year the transaction
was entered into is closed by the statute of limitations prior to the
date the transaction became a listed transaction, this provision does
not re-open the statute of limitations with respect to such transaction
for such year. However, if the purported tax benefits of the
transaction are recognized over multiple tax years, the provision's
extension of the statute of limitations shall apply to such tax
benefits in any subsequent tax year in which the statute of limitations
had not closed prior to the date the transaction became a listed
transaction.
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EFFECTIVE DATE
The provision is effective for taxable years with respect
to which the period for assessing a deficiency did not expire
before the date of enactment.
5. Disclosure of reportable transactions by material advisors (sec. 615
of the bill and secs. 6111 and 6707 of the Code)
PRESENT LAW
Registration of tax shelter arrangements
An organizer of a tax shelter is required to register the
shelter with the Secretary not later than the day on which the
shelter is first offered for sale.\251\ A ``tax shelter'' means
any investment with respect to which the tax shelter ratio
\252\ for any investor as of the close of any of the first five
years ending after the investment is offered for sale may be
greater than two to one and which is: (1) required to be
registered under Federal or State securities laws, (2) sold
pursuant to an exemption from registration requiring the filing
of a notice with a Federal or State securities agency, or (3) a
substantial investment (greater than $250,000 and involving at
least five investors).\253\
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\251\ Sec. 6111(a).
\252\ The tax shelter ratio is, with respect to any year, the ratio
that the aggregate amount of the deductions and 350 percent of the
credits, which are represented to be potentially allowable to any
investor, bears to the investment base (money plus basis of assets
contributed) as of the close of the tax year.
\253\ Sec. 6111(c).
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Other promoted arrangements are treated as tax shelters for
purposes of the registration requirement if: (1) a significant
purpose of the arrangement is the avoidance or evasion of
Federal income tax by a corporate participant; (2) the
arrangement is offered under conditions of confidentiality; and
(3) the promoter may receive fees in excess of $100,000 in the
aggregate.\254\
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\254\ Sec. 6111(d).
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In general, a transaction has a ``significant purpose of
avoiding or evading Federal income tax'' if the transaction:
(1) is the same as or substantially similar to a ``listed
transaction,'' \255\ or (2) is structured to produce tax
benefits that constitute an important part of the intended
results of the arrangement and the promoter reasonably expects
to present the arrangement to more than one taxpayer.\256\
Certain exceptions are provided with respect to the second
category of transactions.\257\
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\255\ Treas. Reg. sec. 301.6111-2(b)(2).
\256\ Treas. Reg. sec. 301.6111-2(b)(3).
\257\ Treas. Reg. sec. 301.6111-2(b)(4).
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An arrangement is offered under conditions of
confidentiality if: (1) an offeree has an understanding or
agreement to limit the disclosure of the transaction or any
significant tax features of the transaction; or (2) the
promoter knows, or has reason to know, that the offeree's use
or disclosure of information relating to the transaction is
limited in any other manner.\258\
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\258\ The regulations provide that the determination of whether an
arrangement is offered under conditions of confidentiality is based on
all the facts and circumstances surrounding the offer. If an offeree's
disclosure of the structure or tax aspects of the transaction are
limited in any way by an express or implied understanding or agreement
with or for the benefit of a tax shelter promoter, an offer is
considered made under conditions of confidentiality, whether or not
such understanding or agreement is legally binding. Treas. Reg. sec.
301.6111-2(c)(1).
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Failure to register tax shelter
The penalty for failing to timely register a tax shelter
(or for filing false or incomplete information with respect to
the tax shelter registration) generally is the greater of one
percent of the aggregate amount invested in the shelter or
$500.\259\ However, if the tax shelter involves an arrangement
offered to a corporation under conditions of confidentiality,
the penalty is the greater of $10,000 or 50 percent of the fees
payable to any promoter with respect to offerings prior to the
date of late registration. Intentional disregard of the
requirement to register increases the penalty to 75 percent of
the applicable fees.
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\259\ Sec. 6707.
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Section 6707 also imposes (1) a $100 penalty on the
promoter for each failure to furnish the investor with the
required tax shelter identification number, and (2) a $250
penalty on the investor for each failure to include the tax
shelter identification number on a return.
REASONS FOR CHANGE
The Committee believes that providing a single, clear
definition regarding the types of transactions that must be
disclosed by taxpayers and material advisors, coupled with more
meaningful penalties for failing to disclose such transactions,
are necessary tools if the effort to curb the use of abusive
tax avoidance transactions is to be effective.
EXPLANATION OF PROVISION
Disclosure of reportable transactions by material advisors
The provision repeals the present law rules with respect to
registration of tax shelters. Instead, the provision requires
each material advisor with respect to any reportable
transaction (including any listed transaction) \260\ to timely
file an information return with the Secretary (in such form and
manner as the Secretary may prescribe). The return must be
filed on such date as specified by the Secretary.
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\260\ The terms ``reportable transaction'' and ``listed
transaction'' have the same meaning as previously described in
connection with the taxpayer-related provisions.
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The information return will include (1) information
identifying and describing the transaction, (2) information
describing any potential tax benefits expected to result from
the transaction, and (3) such other information as the
Secretary may prescribe. It is expected that the Secretary may
seek from the material advisor the same type of information
that the Secretary may request from a taxpayer in connection
with a reportable transaction.\261\
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\261\ See the previous discussion regarding the disclosure
requirements under new section 6707A.
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A ``material advisor'' means any person (1) who provides
material aid, assistance, or advice with respect to organizing,
managing, promoting, selling, implementing, or carrying out any
reportable transaction, and (2) who directly or indirectly
derives gross income in excess of $250,000 ($50,000 in the case
of a reportable transaction substantially all of the tax
benefits from which are provided to natural persons) or such
other amount as may be prescribed by the Secretary for such
advice or assistance.
The Secretary may prescribe regulations which provide (1)
that only one material advisor has to file an information
return in cases in which two or more material advisors would
otherwise be required to file information returns with respect
to a particular reportable transaction, (2) exemptions from the
requirements of this section, and (3) other rules as may be
necessary or appropriate to carry out the purposes of this
section (including, for example, rules regarding the
aggregation of fees in appropriate circumstances).
Penalty for failing to furnish information regarding reportable
transactions
The provision repeals the present-law penalty for failure
to register tax shelters. Instead, the provision imposes a
penalty on any material advisor who fails to file an
information return, or who files a false or incomplete
information return, with respect to a reportable transaction
(including a listed transaction).\262\ The amount of the
penalty is $50,000. If the penalty is with respect to a listed
transaction, the amount of the penalty is increased to the
greater of (1) $200,000, or (2) 50 percent of the gross income
of such person with respect to aid, assistance, or advice which
is provided with respect to the transaction before the date the
information return that includes the transaction is filed.
Intentional disregard by a material advisor of the requirement
to disclose a listed transaction increases the penalty to 75
percent of the gross income.
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\262\ The terms ``reportable transaction'' and ``listed
transaction'' have the same meaning as previously described in
connection with the taxpayer-related provisions.
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The penalty cannot be waived with respect to a listed
transaction. As to reportable transactions, the penalty can be
rescinded (or abated) only in exceptional circumstances.\263\
All or part of the penalty may be rescinded only if rescinding
the penalty would promote compliance with the tax laws and
effective tax administration. The authority to rescind the
penalty can only be exercised by the Commissioner personally.
Thus, a revenue agent, an Appeals officer, or other IRS
personnel cannot rescind the penalty. The decision to rescind a
penalty must be accompanied by a record describing the facts
and reasons for the action and the amount rescinded. There will
be no right to appeal a refusal to rescind a penalty. The IRS
also is required to submit an annual report to Congress
summarizing the application of the disclosure penalties and
providing a description of each penalty rescinded under this
provision and the reasons for the rescission.
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\263\ The Secretary's present-law authority to postpone certain
tax-related deadlines because of Presidentially-declared disasters
(sec. 7508A) will also encompass the authority to postpone the
reporting deadlines established by the provision.
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EFFECTIVE DATE
The provision requiring disclosure of reportable
transactions by material advisors applies to transactions with
respect to which material aid, assistance or advice is provided
after the date of enactment.
The provision imposing a penalty for failing to disclose
reportable transactions applies to returns the due date for
which is after the date of enactment.
6. Investor lists and modification of penalty for failure to maintain
investor lists (secs. 616 and 617 of the bill and secs. 6112
and 6708 of the Code)
PRESENT LAW
Investor lists
Any organizer or seller of a potentially abusive tax
shelter must maintain a list identifying each person who was
sold an interest in any such tax shelter with respect to which
registration was required under section 6111 (even though the
particular party may not have been subject to confidentiality
restrictions).\264\ Recently issued regulations under section
6112 contain rules regarding the list maintenance
requirements.\265\ In general, the regulations apply to
transactions that are potentially abusive tax shelters entered
into, or acquired after, February 28, 2003.\266\
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\264\ Sec. 6112.
\265\ Treas. Reg. sec. 301.6112-1.
\266\ A special rule applies the list maintenance requirements to
transactions entered into after February 28, 2000 if the transaction
becomes a listed transaction (as defined in Treas. Reg. 1.6011-4) after
February 28, 2003.
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The regulations provide that a person is an organizer or
seller of a potentially abusive tax shelter if the person is a
material advisor with respect to that transaction.\267\ A
material advisor is defined as any person who is required to
register the transaction under section 6111, or expects to
receive a minimum fee of (1) $250,000 for a transaction that is
a potentially abusive tax shelter if all participants are
corporations, or (2) $50,000 for any other transaction that is
a potentially abusive tax shelter.\268\ For listed transactions
(as defined in the regulations under section 6011), the minimum
fees are reduced to $25,000 and $10,000, respectively.
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\267\ Treas. Reg. sec. 301.6112-1(c)(1).
\268\ Treas. Reg. sec. 301.6112-1(c)(2) and (3).
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A potentially abusive tax shelter is any transaction that
(1) is required to be registered under section 6111, (2) is a
listed transaction (as defined under the regulations under
section 6011), or (3) any transaction that a potential material
advisor, at the time the transaction is entered into, knows is
or reasonably expects will become a reportable transaction (as
defined under the new regulations under section 6011).\269\
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\269\ Treas. Reg. sec. 301.6112-1(b).
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The Secretary is required to prescribe regulations which
provide that, in cases in which two or more persons are
required to maintain the same list, only one person would be
required to maintain the list.\270\
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\270\ Sec. 6112(c)(2).
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Penalty for failing to maintain investor lists
Under section 6708, the penalty for failing to maintain the
list required under section 6112 is $50 for each name omitted
from the list (with a maximum penalty of $100,000 per year).
REASONS FOR CHANGE
The Committee has been advised that the present-law
penalties for failure to maintain customer lists are not
meaningful and that promoters often have refused to provide
requested information to the IRS. The Committee believes that
requiring material advisors to maintain a list of advisees with
respect to each reportable transaction, coupled with more
meaningful penalties for failing to maintain an investor list,
are important tools in the ongoing efforts to curb the use of
abusive tax avoidance transactions.
EXPLANATION OF PROVISION
Investor lists
Each material advisor \271\ with respect to a reportable
transaction (including a listed transaction) \272\ is required
to maintain a list that (1) identifies each person with respect
to whom the advisor acted as a material advisor with respect to
the reportable transaction, and (2) contains other information
as may be required by the Secretary. In addition, the provision
authorizes (but does not require) the Secretary to prescribe
regulations which provide that, in cases in which two or more
persons are required to maintain the same list, only one person
would be required to maintain the list.
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\271\ The term ``material advisor'' has the same meaning as when
used in connection with the requirement to file an information return
under section 6111.
\272\ The terms ``reportable transaction'' and ``listed
transaction'' have the same meaning as previously described in
connection with the taxpayer-related provisions.
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The provision also clarifies that, for purposes of section
6112, the identity of any person is not privileged under the
common law attorney-client privilege (or, consequently, the
section 7525 federally authorized tax practitioner
confidentiality provision).
Penalty for failing to maintain investor lists
The provision modifies the penalty for failing to maintain
the required list by making it a time-sensitive penalty. Thus,
a material advisor who is required to maintain an investor list
and who fails to make the list available upon written request
by the Secretary within 20 business days after the request will
be subject to a $10,000 per day penalty. The penalty applies to
a person who fails to maintain a list, maintains an incomplete
list, or has in fact maintained a list but does not make the
list available to the Secretary. The penalty can be waived if
the failure to make the list available is due to reasonable
cause.\273\
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\273\ In no event will failure to maintain a list be considered
reasonable cause for failing to make a list available to the Secretary.
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EFFECTIVE DATE
The provision requiring a material advisor to maintain an
investor list applies to transactions with respect to which
material aid, assistance or advice is provided after the date
of enactment.
The provision imposing a penalty for failing to maintain
investor lists applies to requests made after the date of
enactment.
The provision clarifying that the identity of any person is
not privileged for purposes of section 6112 is effective as if
included in the amendments made by section 142 of the Deficit
Reduction Act of 1984.
7. Penalty on promoters of tax shelters (sec. 618 of the bill and sec.
6700 of the Code)
PRESENT LAW
A penalty is imposed on any person who organizes, assists
in the organization of, or participates in the sale of any
interest in, a partnership or other entity, any investment plan
or arrangement, or any other plan or arrangement, if in
connection with such activity the person makes or furnishes a
qualifying false or fraudulent statement or a gross valuation
overstatement.\274\ A qualified false or fraudulent statement
is any statement with respect to the allowability of any
deduction or credit, the excludability of any income, or the
securing of any other tax benefit by reason of holding an
interest in the entity or participating in the plan or
arrangement which the person knows or has reason to know is
false or fraudulent as to any material matter. A ``gross
valuation overstatement'' means any statement as to the value
of any property or services if the stated value exceeds 200
percent of the correct valuation, and the value is directly
related to the amount of any allowable income tax deduction or
credit.
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\274\ Sec. 6700.
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The amount of the penalty is $1,000 (or, if the person
establishes that it is less, 100 percent of the gross income
derived or to be derived by the person from such activity). A
penalty attributable to a gross valuation misstatement can be
waived on a showing that there was a reasonable basis for the
valuation and it was made in good faith.
REASONS FOR CHANGE
The Committee believes that the present-law $1,000 penalty
for tax shelter promoters is insufficient to deter tax shelter
activities. The Committee believes that the increased penalties
for tax shelter promoters are meaningful and will help deter
the promotion of tax shelters.
EXPLANATION OF PROVISION
The provision modifies the penalty amount to equal 50
percent of the gross income derived by the person from the
activity for which the penalty is imposed. The new penalty rate
applies to any activity that involves a statement regarding the
tax benefits of participating in a plan or arrangement if the
person knows or has reason to know that such statement is false
or fraudulent as to any material matter. The enhanced penalty
does not apply to a gross valuation overstatement.
EFFECTIVE DATE
The provision is effective for activities after the date of
enactment.
8. Modifications of substantial understatement penalty for
nonreportable transactions (sec. 619 of the bill and sec. 6662
of the Code)
PRESENT LAW
An accuracy-related penalty equal to 20 percent applies to
any substantial understatement of tax. A ``substantial
understatement'' exists if the correct income tax liability for
a taxable year exceeds that reported by the taxpayer by the
greater of 10 percent of the correct tax or $5,000 ($10,000 in
the case of most corporations).\275\
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\275\ Sec. 6662(a) and (d)(1)(A).
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REASONS FOR CHANGE
The Committee believes that the present-law definition of
substantial understatement allows large corporate taxpayers to
avoid the accuracy-related penalty on questionable transactions
of a significant size. The Committee believes that an
understatement of more than $10 million is substantial in and
of itself, regardless of the proportion it represents of the
taxpayer's total tax liability.
EXPLANATION OF PROVISION
The provision modifies the definition of ``substantial''
for corporate taxpayers. Under the provision, a corporate
taxpayer has a substantial understatement if the amount of the
understatement for the taxable year exceeds the lesser of (1)
10 percent of the tax required to be shown on the return for
the taxable year (or, if greater, $10,000), or (2) $10 million.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after date of enactment.
9. Modification of actions to enjoin certain conduct related to tax
shelters and reportable transactions (sec. 620 of the bill and
sec. 7408 of the Code)
PRESENT LAW
The Code authorizes civil actions to enjoin any person from
promoting abusive tax shelters or aiding or abetting the
understatement of tax liability.\276\
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\276\ Sec. 7408.
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REASONS FOR CHANGE
The Committee believes that expanding the authority to
obtain injunctions against promoters and material advisors that
(1) fail to file an information return with respect to a
reportable transaction or (2) fail to maintain, or to timely
furnish upon written request by the Secretary, a list of
investors with respect to reportable transactions will
discourage tax shelter activity and encourage compliance with
the tax shelter disclosure requirements.
EXPLANATION OF PROVISION
The provision expands this rule so that injunctions may
also be sought with respect to the requirements relating to the
reporting of reportable transactions \277\ and the keeping of
lists of investors by material advisors.\278\ Thus, under the
provision, an injunction may be sought against a material
advisor to enjoin the advisor from (1) failing to file an
information return with respect to a reportable transaction, or
(2) failing to maintain, or to timely furnish upon written
request by the Secretary, a list of investors with respect to
each reportable transaction.
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\277\ Sec. 6707, as amended by other provisions of this bill.
\278\ Sec. 6708, as amended by other provisions of this bill.
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EFFECTIVE DATE
The provision is effective on the day after the date of
enactment.
10. Penalty on failure to report interests in foreign financial
accounts (sec. 621 of the bill and sec. 5321 of Title 31,
United States Code)
PRESENT LAW
The Secretary must require citizens, residents, or persons
doing business in the United States to keep records and file
reports when that person makes a transaction or maintains an
account with a foreign financial entity.\279\ In general,
individuals must fulfill this requirement by answering
questions regarding foreign accounts or foreign trusts that are
contained in Part III of Schedule B of the IRS Form 1040.
Taxpayers who answer ``yes'' in response to the question
regarding foreign accounts must then file Treasury Department
Form TD F 90-22.1. This form must be filed with the Department
of the Treasury, and not as part of the tax return that is
filed with the IRS.
---------------------------------------------------------------------------
\279\ 31 U.S.C. sec. 5314.
---------------------------------------------------------------------------
The Secretary may impose a civil penalty on any person who
willfully violates this reporting requirement. The civil
penalty is the amount of the transaction or the value of the
account, up to a maximum of $100,000; the minimum amount of the
penalty is $25,000.\280\ In addition, any person who willfully
violates this reporting requirement is subject to a criminal
penalty. The criminal penalty is a fine of not more than
$250,000 or imprisonment for not more than five years (or
both); if the violation is part of a pattern of illegal
activity, the maximum amount of the fine is increased to
$500,000 and the maximum length of imprisonment is increased to
10 years.\281\
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\280\ 31 U.S.C. sec. 5321(a)(5).
\281\ 31 U.S.C. sec. 5322.
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On April 26, 2002, the Secretary submitted to the Congress
a report on these reporting requirements.\282\ This report,
which was statutorily required,\283\ studies methods for
improving compliance with these reporting requirements. It
makes several administrative recommendations, but no
legislative recommendations. A further report was required to
be submitted by the Secretary to the Congress by October 26,
2002.
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\282\ A Report to Congress in Accordance with Sec. 361(b) of the
Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001, April 26,
2002.
\283\ Sec. 361(b) of the USA PATRIOT Act of 2001 (Pub. L. No. 107-
56).
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REASONS FOR CHANGE
The Committee believes that imposing a new civil penalty
for failure to report an interest in foreign financial accounts
that applies (without regard to willfulness) will increase the
reporting of foreign financial accounts.
EXPLANATION OF PROVISION
The provision adds an additional civil penalty that may be
imposed on any person who violates this reporting requirement
(without regard to willfulness). This new civil penalty is up
to $5,000. The penalty may be waived if any income from the
account was properly reported on the income tax return and
there was reasonable cause for the failure to report.
EFFECTIVE DATE
The provision is effective with respect to failures to
report occurring on or after the date of enactment.
11. Regulation of individuals practicing before the Department of the
Treasury (sec. 622 of the bill and sec. 330 of Title 31, United
States Code)
PRESENT LAW
The Secretary is authorized to regulate the practice of
representatives of persons before the Department of the
Treasury.\284\ The Secretary is also authorized to suspend or
disbar from practice before the Department a representative who
is incompetent, who is disreputable, who violates the rules
regulating practice before the Department, or who (with intent
to defraud) willfully and knowingly misleads or threatens the
person being represented (or a person who may be represented).
The rules promulgated by the Secretary pursuant to this
provision are contained in Circular 230.
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\284\ 31 U.S.C. sec. 330.
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee believes that it is critical that the
Secretary have the authority to censure tax advisors as well as
to impose monetary sanctions against tax advisors because of
the important role of tax advisors in our tax system. Use of
these sanctions is expected to curb the participation of tax
advisors in both tax shelter activity and any other activity
that is contrary to Circular 230 standards.
EXPLANATION OF PROVISION
The provision makes two modifications to expand the
sanctions that the Secretary may impose pursuant to these
statutory provisions. First, the provision expressly permits
censure as a sanction. Second, the provision permits the
imposition of a monetary penalty as a sanction. If the
representative is acting on behalf of an employer or other
entity, the Secretary may impose a monetary penalty on the
employer or other entity if it knew, or reasonably should have
known, of the conduct. This monetary penalty on the employer or
other entity may be imposed in addition to any monetary penalty
imposed directly on the representative. These monetary
penalties are not to exceed the gross income derived (or to be
derived) from the conduct giving rise to the penalty. These
monetary penalties may be in addition to, or in lieu of, any
suspension, disbarment, or censure of such individual.
The provision also confirms the present-law authority of
the Secretary to impose standards applicable to written advice
with respect to an entity, plan, or arrangement that is of a
type that the Secretary determines as having a potential for
tax avoidance or evasion.
EFFECTIVE DATE
The modifications to expand the sanctions that the
Secretary may impose are effective for actions taken after the
date of enactment.
12. Treatment of stripped interests in bond and preferred stock funds,
etc. (sec. 631 of the bill and secs. 305 and 1286 of the Code)
PRESENT LAW
Assignment of income in general
In general, an ``income stripping'' transaction involves a
transaction in which the right to receive future income from
income-producing property is separated from the property
itself. In such transactions, it may be possible to generate
artificial losses from the disposition of certain property or
to defer the recognition of taxable income associated with such
property.
Common law has developed a rule (referred to as the
``assignment of income'' doctrine) whereby income that is
transferred without an accompanying transfer of the underlying
property is not respected. A leading judicial decision relating
to the assignment of income doctrine involved a case in which a
taxpayer made a gift of detachable interest coupons before
their due date while retaining the bearer bond. The U.S.
Supreme Court ruled that the donor was taxable on the entire
amount of interest when paid to the donee on the grounds that
the transferor had ``assigned'' to the donee the right to
receive the income.\285\
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\285\ Helvering v. Horst, 311 U.S. 112 (1940).
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In addition to general common law assignment of income
principles, specific statutory rules have been enacted to
address certain specific types of stripping transactions, such
as transactions involving stripped bonds and stripped preferred
stock (which are discussed below).\286\ However, there are no
specific statutory rules that address stripping transactions
with respect to common stock or other equity interests (other
than preferred stock).\287\
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\286\ Depending on the facts, the IRS also could determine that a
variety of other Code-based and common law-based authorities could
apply to income stripping transactions, including: (1) sections 165,
269, 382, 446(b), 482, 701, or 704 and the regulations thereunder; (2)
authorities that recharacterize certain assignments or accelerations of
future payments as financings; (3) business purpose, economic
substance, and sham transaction doctrines; (4) the step transaction
doctrine; and (5) the substance-over-form doctrine. See Notice 2003-55,
2003-34 I.R.B. 395, modifying and superseding Notice 95-53, 1995-2 C.B.
334 (accounting for lease strips and other stripping transactions).
\287\ However, in Estate of Stranahan v. Commissioner, 472 F.2d 867
(6th Cir. 1973), the court held that where a taxpayer sold a carved-out
interest of stock dividends, with no personal obligation to produce the
income, the transaction was treated as a sale of an income interest.
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Stripped bonds
Special rules are provided with respect to the purchaser
and ``stripper'' of stripped bonds.\288\ A ``stripped bond'' is
defined as a debt instrument in which there has been a
separation in ownership between the underlying debt instrument
and any interest coupon that has not yet become payable.\289\
In general, upon the disposition of either the stripped bond or
the detached interest coupons each of the retained portion and
the portion that is disposed is treated as a new bond that is
purchased at a discount and is payable in a fixed amount on a
future date. Accordingly, section 1286 treats both the stripped
bond and the detached interest coupons as individual bonds that
are newly issued with original issue discount (``OID'') on the
date of disposition. Consequently, section 1286 effectively
subjects the stripped bond and the detached interest coupons to
the general OID periodic income inclusion rules.
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\288\ Sec. 1286.
\289\ Sec. 1286(e).
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A taxpayer who purchases a stripped bond or one or more
stripped coupons is treated as holding a new bond that is
issued on the purchase date with OID in an amount that is equal
to the excess of the stated redemption price at maturity (or in
the case of a coupon, the amount payable on the due date) over
the ratable share of the purchase price of the stripped bond or
coupon, determined on the basis of the respective fair market
values of the stripped bond and coupons on the purchase
date.\290\ The OID on the stripped bond or coupon is includible
in gross income under the general OID periodic income inclusion
rules.
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\290\ Sec. 1286(a).
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A taxpayer who strips a bond and disposes of either the
stripped bond or one or more stripped coupons must allocate his
basis, immediately before the disposition, in the bond (with
the coupons attached) between the retained and disposed
items.\291\ Special rules apply to require that interest or
market discount accrued on the bond prior to such disposition
must be included in the taxpayer's gross income (to the extent
that it had not been previously included in income) at the time
the stripping occurs, and the taxpayer increases his basis in
the bond by the amount of such accrued interest or market
discount. The adjusted basis (as increased by any accrued
interest or market discount) is then allocated between the
stripped bond and the stripped interest coupons in relation to
their respective fair market values. Amounts realized from the
sale of stripped coupons or bonds constitute income to the
taxpayer only to the extent such amounts exceed the basis
allocated to the stripped coupons or bond. With respect to
retained items (either the detached coupons or stripped bond),
to the extent that the price payable on maturity, or on the due
date of the coupons, exceeds the portion of the taxpayer's
basis allocable to such retained items, the difference is
treated as OID that is required to be included under the
general OID periodic income inclusion rules.\292\
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\291\ Sec. 1286(b). Similar rules apply in the case of any person
whose basis in any bond or coupon is determined by reference to the
basis in the hands of a person who strips the bond.
\292\ Special rules are provided with respect to stripping
transactions involving tax-exempt obligations that treat OID (computed
under the stripping rules) in excess of OID computed on the basis of
the bond's coupon rate (or higher rate if originally issued at a
discount) as income from a non-tax-exempt debt instrument (sec.
1286(d)).
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Stripped preferred stock
``Stripped preferred stock'' is defined as preferred stock
in which there has been a separation in ownership between such
stock and any dividend on such stock that has not become
payable.\293\ A taxpayer who purchases stripped preferred stock
is required to include in gross income, as ordinary income, the
amounts that would have been includible if the stripped
preferred stock was a bond issued on the purchase date with OID
equal to the excess of the redemption price of the stock over
the purchase price.\294\ This treatment is extended to any
taxpayer whose basis in the stock is determined by reference to
the basis in the hands of the purchaser. A taxpayer who strips
and disposes the future dividends is treated as having
purchased the stripped preferred stock on the date of such
disposition for a purchase price equal to the taxpayer's
adjusted basis in the stripped preferred stock.\295\
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\293\ Sec. 305(e)(5).
\294\ Sec. 305(e)(1).
\295\ Sec. 305(e)(3).
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REASONS FOR CHANGE
The Committee is concerned that taxpayers are entering into
tax avoidance transactions to generate artificial losses, or
defer the recognition of ordinary income and convert such
income into capital gains, by selling or purchasing stripped
interests that are not subject to the present-law rules
relating to stripped bonds and preferred stock but that
represent interests in bonds or preferred stock. Therefore, the
Committee believes that it is appropriate to provide Treasury
with regulatory authority to apply such rules to interests that
do not constitute bonds or preferred stock but nevertheless
derive their economic value and characteristics exclusively
from underlying bonds or preferred stock.
EXPLANATION OF PROVISION
The provision authorizes the Treasury Department to
promulgate regulations that, in appropriate cases, apply rules
that are similar to the present-law rules for stripped bonds
and stripped preferred stock to direct or indirect interests in
an entity or account substantially all of the assets of which
consist of bonds (as defined in section 1286(e)(1)), preferred
stock (as defined in section 305(e)(5)(B)), or any combination
thereof. The provision applies only to cases in which the
present-law rules for stripped bonds and stripped preferred
stock do not already apply to such interests.
For example, such Treasury regulations could apply to a
transaction in which a person effectively strips future
dividends from shares in a money market mutual fund (and
disposes either the stripped shares or stripped future
dividends) by contributing the shares (with the future
dividends) to a custodial account through which another person
purchases rights to either the stripped shares or the stripped
future dividends. However, it is intended that Treasury
regulations issued under this provision would not apply to
certain transactions involving direct or indirect interests in
an entity or account substantially all the assets of which
consist of tax-exempt obligations (as defined in section
1275(a)(3)), such as an eligible tax-exempt bond partnership
described in Rev. Proc. 2003-84,\296\ modifying and superseding
Rev. Proc. 2002-68 \297\ and Rev. Proc. 2002-16.\298\
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\296\ 2003-48 I.R.B. 1159.
\297\ 2002-43 I.R.B. 753.
\298\ 2002-9 I.R.B. 572.
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No inference is intended as to the treatment under the
present-law rules for stripped bonds and stripped preferred
stock, or under any other provisions or doctrines of present
law, of interests in an entity or account substantially all of
the assets of which consist of bonds, preferred stock, or any
combination thereof. The Treasury regulations, when issued,
would be applied prospectively, except in cases to prevent
abuse.
EFFECTIVE DATE
The provision is effective for purchases and dispositions
occurring after the date of enactment.
13. Minimum holding period for foreign tax credit on withholding taxes
on income other than dividends (sec. 632 of the bill and sec.
901 of the Code)
PRESENT LAW
In general, U.S. persons may credit foreign taxes against
U.S. tax on foreign-source income. The amount of foreign tax
credits that may be claimed in a year is subject to a
limitation that prevents taxpayers from using foreign tax
credits to offset U.S. tax on U.S.-source income. Separate
limitations are applied to specific categories of income.
As a consequence of the foreign tax credit limitations of
the Code, certain taxpayers are unable to utilize their
creditable foreign taxes to reduce their U.S. tax liability.
U.S. taxpayers that are tax-exempt receive no U.S. tax benefit
for foreign taxes paid on income that they receive.
Present law denies a U.S. shareholder the foreign tax
credits normally available with respect to a dividend from a
corporation or a regulated investment company (``RIC'') if the
shareholder has not held the stock for more than 15 days
(within a 30-day testing period) in the case of common stock or
more than 45 days (within a 90-day testing period) in the case
of preferred stock (sec. 901(k)). The disallowance applies both
to foreign tax credits for foreign withholding taxes that are
paid on the dividend where the dividend-paying stock is held
for less than these holding periods, and to indirect foreign
tax credits for taxes paid by a lower-tier foreign corporation
or a RIC where any of the required stock in the chain of
ownership is held for less than these holding periods. Periods
during which a taxpayer is protected from risk of loss (e.g.,
by purchasing a put option or entering into a short sale with
respect to the stock) generally are not counted toward the
holding period requirement. In the case of a bona fide contract
to sell stock, a special rule applies for purposes of indirect
foreign tax credits. The disallowance does not apply to foreign
tax credits with respect to certain dividends received by
active dealers in securities. If a taxpayer is denied foreign
tax credits because the applicable holding period is not
satisfied, the taxpayer is entitled to a deduction for the
foreign taxes for which the credit is disallowed.
REASONS FOR CHANGE
The Committee believes that the present-law holding period
requirement for claiming foreign tax credits with respect to
dividends is too narrow in scope and, in general, should be
extended to apply to items of income or gain other than
dividends, such as interest.
EXPLANATION OF PROVISION
The provision expands the present-law disallowance of
foreign tax credits to include credits for gross-basis foreign
withholding taxes with respect to any item of income or gain
from property if the taxpayer who receives the income or gain
has not held the property for more than 15 days (within a 30-
day testing period), exclusive of periods during which the
taxpayer is protected from risk of loss. The provision does not
apply to foreign tax credits that are subject to the present-
law disallowance with respect to dividends. The provision also
does not apply to certain income or gain that is received with
respect to property held by active dealers. Rules similar to
the present-law disallowance for foreign tax credits with
respect to dividends apply to foreign tax credits that are
subject to the provision. In addition, the provision authorizes
the Treasury Department to issue regulations providing that the
provision does not apply in appropriate cases.
EFFECTIVE DATE
The provision is effective for amounts that are paid or
accrued more than 30 days after the date of enactment.
14. Disallowance of certain partnership loss transfers (sec. 633 of the
bill and secs. 704, 734, and 743 of the Code)
PRESENT LAW
Contributions of property
Under present law, if a partner contributes property to a
partnership, generally no gain or loss is recognized to the
contributing partner at the time of contribution.\299\ The
partnership takes the property at an adjusted basis equal to
the contributing partner's adjusted basis in the property.\300\
The contributing partner increases its basis in its partnership
interest by the adjusted basis of the contributed
property.\301\ Any items of partnership income, gain, loss and
deduction with respect to the contributed property are
allocated among the partners to take into account any built-in
gain or loss at the time of the contribution.\302\ This rule is
intended to prevent the transfer of built-in gain or loss from
the contributing partner to the other partners by generally
allocating items to the noncontributing partners based on the
value of their contributions and by allocating to the
contributing partner the remainder of each item.\303\
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\299\ Sec. 721.
\300\ Sec. 723.
\301\ Sec. 722.
\302\ Sec. 704(c)(1)(A).
\303\ If there is an insufficient amount of an item to allocate to
the noncontributing partners, Treasury regulations allow for curative
or remedial allocations to remedy this insufficiency. Treas. Reg. sec.
1.704-3(c) and (d).
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If the contributing partner transfers its partnership
interest, the built-in gain or loss will be allocated to the
transferee partner as it would have been allocated to the
contributing partner.\304\ If the contributing partner's
interest is liquidated, there is no specific guidance
preventing the allocation of the built-in loss to the remaining
partners. Thus, it appears that losses can be ``transferred''
to other partners where the contributing partner no longer
remains a partner.
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\304\ Treas. Reg. 1.704-3(a)(7).
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Transfers of partnership interests
Under present law, a partnership does not adjust the basis
of partnership property following the transfer of a partnership
interest unless the partnership has made a one-time election
under section 754 to make basis adjustments.\305\ If an
election is in effect, adjustments are made with respect to the
transferee partner 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.\306\ These adjustments are intended to
adjust the basis of partnership property to approximate the
result of a direct purchase of the property by the transferee
partner. Under these rules, if a partner purchases an interest
in a partnership with an existing built-in loss and no election
under section 754 is in effect, the transferee partner may be
allocated a share of the loss when the partnership disposes of
the property (or depreciates the property).
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\305\ Sec. 743(a).
\306\ Sec. 743(b).
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Distributions of partnership property
With certain exceptions, partners may receive distributions
of partnership property without recognition of gain or loss by
either the partner or the partnership.\307\ In the case of a
distribution in liquidation of a partner's interest, the basis
of the property distributed in the liquidation is equal to the
partner's adjusted basis in its partnership interest (reduced
by any money distributed in the transaction).\308\ In a
distribution other than in liquidation of a partner's interest,
the distributee partner's basis in the distributed property is
equal to the partnership's adjusted basis in the property
immediately before the distribution, but not to exceed the
partner's adjusted basis in the partnership interest (reduced
by any money distributed in the same transaction).\309\
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\307\ Sec. 731(a) and (b).
\308\ Sec. 732(b).
\309\ Sec. 732(a).
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Adjustments to the basis of the partnership's undistributed
properties are not required unless the partnership has made the
election under section 754 to make basis adjustments.\310\ If
an election is in effect under section 754, adjustments are
made by a partnership to increase or decrease the remaining
partnership assets to reflect any increase or decrease in the
adjusted basis of the distributed properties in the hands of
the distributee partner (or gain or loss recognized by the
distributee partner).\311\ To the extent the adjusted basis of
the distributed properties increases (or loss is recognized)
the partnership's adjusted basis in its properties is decreased
by a like amount; likewise, to the extent the adjusted basis of
the distributed properties decrease (or gain is recognized),
the partnership's adjusted basis in its properties is increased
by a like amount. Under these rules, a partnership with no
election in effect under section 754 may distribute property
with an adjusted basis lower than the distributee partner's
proportionate share of the adjusted basis of all partnership
property and leave the remaining partners with a smaller net
built-in gain or a larger net built-in loss than before the
distribution.
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\310\ Sec. 734(a).
\311\ Sec. 734(b).
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REASONS FOR CHANGE
The Committee believes that the partnership rules currently
allow for the inappropriate transfer of losses among partners.
This has allowed partnerships to be created and used to aid
tax-shelter transactions. The bill limits the ability to
transfer losses among partners, while preserving the
simplification aspects of the current partnership rules for
transactions involving smaller amounts. The Committee was made
aware that certain types of investment partnerships would incur
administrative difficulties in making partnership-level basis
adjustments in the event of a transfer of a partnership
interest, as evidenced by the present practice of a number of
investment partnerships not to elect partnership basis
adjustments even when the adjustments would be upward
adjustments to the basis of partnership property. Accordingly,
the bill provides a partner-level loss limitation as an
alternative to the partnership basis adjustments otherwise
required under the bill in the case of transfers of interests
in certain investment partnerships that are engaged in
investment activities rather than in any trade or business
activity.
EXPLANATION OF PROVISION
Contributions of property
Under the provision, a built-in loss may be taken into
account only by the contributing partner and not by other
partners. Except as provided in regulations, in determining the
amount of items allocated to partners other than the
contributing partner, the basis of the contributed property is
treated as the fair market value at the time of contribution.
Thus, if the contributing partner's partnership interest is
transferred or liquidated, the partnership's adjusted basis in
the property is based on its fair market value at the time of
contribution, and the built-in loss is eliminated.\312\
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\312\ It is intended that a corporation succeeding to attributes of
the contributing corporate partner under section 381 shall be treated
in the same manner as the contributing partner.
---------------------------------------------------------------------------
Transfers of partnership interests
The provision provides generally that the basis adjustment
rules under section 743 are mandatory in the case of the
transfer of a partnership interest with respect to which there
is a substantial built-in loss (rather than being elective as
under present law). For this purpose, a substantial built-in
loss exists if the partnership's adjusted basis in its property
exceeds by more than $250,000 the fair market value of the
partnership property.
Thus, for example, assume that partner A sells his 25-
percent partnership interest to B for its fair market value of
$1 million. Also assume that, immediately after the transfer,
the fair market value of partnership assets is $4 million and
the partnership's adjusted basis in the partnership assets is
$4.3 million. Under the bill, section 743(b) applies, so that
an adjustment is required to the adjusted basis of the
partnership assets with respect to B. As a result, B would
recognize no gain or loss if the partnership immediately sold
all its assets for their fair market value.
The bill provides that an electing investment partnership
is not treated as having a substantial built-in loss, and thus
is not required to make basis adjustments to partnership
property, in the case of a transfer of a partnership interest.
In lieu of the partnership basis adjustments, a partner-level
loss limitation rule applies. Under this rule, the transferee
partner's distributive share of losses (determined without
regard to gains) from the sale or exchange of partnership
property is not allowed, except to the extent it is established
that the partner's share of such losses exceeds the loss
recognized by the transferor partner. In the event of
successive transfers, the transferee partner's distributive
share of such losses is not allowed, except to the extent that
it is established that such losses exceed the loss recognized
by the transferor (or any prior transferor to the extent not
fully offset by a prior disallowance under this rule). Losses
disallowed under this rule do not decrease the transferee
partner's basis in its partnership interest. Thus, on
subsequent disposition of its partnership interest, the
partner's gain is reduced (or loss increased) because the basis
of the partnership interest has not been reduced by such
losses. The provision is applied without regard to any
termination of a partnership under section 708(b)(1)(B). In the
case of a basis reduction to property distributed to the
transferee partner in a nonliquidating distribution, the amount
of the transferor's loss taken into account under this rule is
reduced by the amount of the basis reduction.
For this purpose, an electing investment partnership means
a partnership that satisfies the following requirements: (1) it
makes an election under the provision that is irrevocable
except with the consent of the Secretary; (2) it would be an
investment company under section 3(a)(1)(A) of the Investment
Company Act of 1940 \313\ but for an exemption under paragraph
(1) or (7) of section 3(c) of that Act; (3) it has never been
engaged in a trade or business; (4) substantially all of its
assets are held for investment; (5) at least 95 percent of the
assets contributed to it consist of money; (6) no assets
contributed to it had an adjusted basis in excess of fair
market value at the time of contribution; (7) all partnership
interests are issued by the partnership pursuant to a private
offering and during the 24-month period beginning on the date
of the first capital contribution to the partnership; (8) the
partnership agreement has substantive restrictions on each
partner's ability to cause a redemption of the partner's
interest, and (9) the partnership agreement provides for a term
that is not in excess of 15 years.
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\313\ Section 3(a)(1)(A) of the Act provides, ``when used in this
title, `investment company' means any issuer which is or hold itself
out as being engaged primarily, or proposes to engage primarily, in the
business of investing, reinvesting, or trading in securities.''
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The provision requires an electing investment partnership
to furnish to any transferee partner the information necessary
to enable the partner to compute the amount of losses
disallowed under this rule.
Distributions of partnership property
The provision provides that a basis adjustment under
section 734(b) is required in the case of a distribution with
respect to which there is a substantial basis reduction. A
substantial basis reduction means a downward adjustment of more
than $250,000 that would be made to the basis of partnership
assets if a section 754 election were in effect.
Thus, for example, assume that A and B each contributed
$2.5 million to a newly formed partnership and C contributed $5
million, and that the partnership purchased LMN stock for $3
million and XYZ stock for $7 million. Assume that the value of
each stock declined to $1 million. Assume LMN stock is
distributed to C in liquidation of its partnership interest.
Under present law, the basis of LMN stock in C's hands is $5
million. Under present law, C would recognize a loss of $4
million if the LMN stock were sold for $1 million.
Under the provision, there is a substantial basis
adjustment because the $2 million increase in the adjusted
basis of LMN stock (described in section 734(b)(2)(B)) is
greater than $250,000. Thus, the partnership is required to
decrease the basis of XYZ stock (under section 734(b)(2)) by $2
million (the amount by which the basis of LMN stock was
increased), leaving a basis of $5 million. If the XYZ stock
were then sold by the partnership for $1 million, A and B would
each recognize a loss of $2 million.
EFFECTIVE DATE
The provision applies to contributions, distributions and
transfers (as the case may be) after the date of enactment.
In the case of an electing investment partnership in
existence on June 4, 2004, the requirement that the partnership
agreement have substantive restrictions on redemptions does not
apply, and the requirement that the partnership agreement
provide for a term not exceeding 15 years is modified to permit
a term not exceeding 20 years.
15. No reduction of basis under section 734 in stock held by
partnership in corporate partner (sec. 634 of the bill and sec.
755 of the Code)
PRESENT LAW
In general
Generally, a partner and the partnership do not recognize
gain or loss on a contribution of property to the
partnership.\314\ Similarly, a partner and the partnership
generally do not recognize gain or loss on the distribution of
partnership property.\315\ This includes current distributions
and distributions in liquidation of a partner's interest.
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\314\ Sec. 721(a).
\315\ Sec. 731(a) and (b).
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Basis of property distributed in liquidation
The basis of property distributed in liquidation of a
partner's interest is equal to the partner's tax basis in its
partnership interest (reduced by any money distributed in the
same transaction).\316\ Thus, the partnership's tax basis in
the distributed property is adjusted (increased or decreased)
to reflect the partner's tax basis in the partnership interest.
---------------------------------------------------------------------------
\316\ Sec. 732(b).
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Election to adjust basis of partnership property
When a partnership distributes partnership property, the
basis of partnership property generally is not adjusted to
reflect the effects of the distribution or transfer. However,
the partnership is permitted to make an election (referred to
as a 754 election) to adjust the basis of partnership property
in the case of a distribution of partnership property.\317\ The
effect of the 754 election is that the partnership adjusts the
basis of its remaining property to reflect any change in basis
of the distributed property in the hands of the distributee
partner resulting from the distribution transaction. Such a
change could be a basis increase due to gain recognition, or a
basis decrease due to the partner's adjusted basis in its
partnership interest exceeding the adjusted basis of the
property received. If the 754 election is made, it applies to
the taxable year with respect to which such election was filed
and all subsequent taxable years.
---------------------------------------------------------------------------
\317\ Sec. 754.
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In the case of a distribution of partnership property to a
partner with respect to which the 754 election is in effect,
the partnership increases the basis of partnership property by
(1) any gain recognized by the distributee partner and (2) the
excess of the adjusted basis of the distributed property to the
partnership immediately before its distribution over the basis
of the property to the distributee partner, and decreases the
basis of partnership property by (1) any loss recognized by the
distributee partner and (2) the excess of the basis of the
property to the distributee partner over the adjusted basis of
the distributed property to the partnership immediately before
the distribution.
The allocation of the increase or decrease in basis of
partnership property is made in a manner that has the effect of
reducing the difference between the fair market value and the
adjusted basis of partnership properties.\318\ In addition, the
allocation rules require that any increase or decrease in basis
be allocated to partnership property of a like character to the
property distributed. For this purpose, the two categories of
assets are (1) capital assets and depreciable and real property
used in the trade or business held for more than one year, and
(2) any other property.\319\
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\318\ Sec. 755(a).
\319\ Sec. 755(b).
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REASONS FOR CHANGE
The Joint Committee on Taxation staff's investigative
report of Enron Corporation\320\ revealed that certain
transactions were being undertaken that purported to use the
interaction of the partnership basis adjustment rules and the
rules protecting a corporation from recognizing gain on its
stock to obtain unintended tax results. These transactions
generally purported to increase the tax basis of depreciable
assets and to decrease, by a corresponding amount, the tax
basis of the stock of a partner. Because the tax rules protect
a corporation from gain on the sale of its stock (including
through a partnership), the transactions enable taxpayers to
duplicate tax deductions at no economic cost. The provision
precludes the ability to reduce the basis of corporate stock of
a partner (or related party) in certain transactions.
---------------------------------------------------------------------------
\320\ See Joint Committee on Taxation, Report of Investigation of
Enron Corporation and Related Entities Regarding Federal Tax and
Compensation Issues, and Policy Recommendations (JCS-3-03), February
2003.
---------------------------------------------------------------------------
EXPLANATION OF PROVISION
The provision provides that in applying the basis
allocation rules to a distribution in liquidation of a
partner's interest, a partnership is precluded from decreasing
the basis of corporate stock of a partner or a related person.
Any decrease in basis that, absent the provision, would have
been allocated to the stock is allocated to other partnership
assets. If the decrease in basis exceeds the basis of the other
partnership assets, then gain is recognized by the partnership
in the amount of the excess.
EFFECTIVE DATE
The provision applies to distributions after the date of
enactment.
16. Repeal of special rules for FASITs, etc. (sec. 635 of the bill and
secs. 860H-860L of the Code)
PRESENT LAW
Financial asset securitization investment trusts
In 1996, Congress created a new type of statutory entity
called a ``financial asset securitization trust'' (``FASIT'')
that facilitates the securitization of debt obligations such as
credit card receivables, home equity loans, and auto
loans.\321\ A FASIT generally is not taxable. Instead, the
FASIT's taxable income or net loss flows through to the owner
of the FASIT. The ownership interest of a FASIT generally is
required to be held entirely by a single domestic C
corporation. In addition, a FASIT generally may hold only
qualified debt obligations, and certain other specified assets,
and is subject to certain restrictions on its activities. An
entity that qualifies as a FASIT can issue one or more classes
of instruments that meet certain specified requirements and
treat those instruments as debt for Federal income tax
purposes.
---------------------------------------------------------------------------
\321\ Sections 860H-860L.
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Qualification as a FASIT
To qualify as a FASIT, an entity must: (1) make an election
to be treated as a FASIT for the year of the election and all
subsequent years;\322\ (2) have assets substantially all of
which (including assets that the FASIT is treated as owning
because they support regular interests) are specified types
called ``permitted assets;'' (3) have non-ownership interests
be certain specified types of debt instruments called ``regular
interests''; (4) have a single ownership interest which is held
by an ``eligible holder''; and (5) not qualify as a regulated
investment company (``RIC''). Any entity, including a
corporation, partnership, or trust may be treated as a FASIT.
In addition, a segregated pool of assets may qualify as a
FASIT.
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\322\ Once an election to be a FASIT is made, the election applies
from the date specified in the election and all subsequent years until
the entity ceases to be a FASIT. If an election to be a FASIT is made
after the initial year of an entity, all of the assets in the entity at
the time of the FASIT election are deemed contributed to the FASIT at
that time and, accordingly, any gain (but not loss) on such assets will
be recognized at that time.
---------------------------------------------------------------------------
An entity ceases qualifying as a FASIT if the entity's
owner ceases being an eligible corporation. Loss of FASIT
status is treated as if all of the regular interests of the
FASIT were retired and then reissued without the application of
the rule that deems regular interests of a FASIT to be debt.
Permitted assets
For an entity or arrangement to qualify as a FASIT,
substantially all of its assets must consist of the following
``permitted assets'': (1) cash and cash equivalents; (2)
certain permitted debt instruments; (3) certain foreclosure
property; (4) certain instruments or contracts that represent a
hedge or guarantee of debt held or issued by the FASIT; (5)
contract rights to acquire permitted debt instruments or
hedges; and (6) a regular interest in another FASIT. Permitted
assets may be acquired at any time by a FASIT, including any
time after its formation.
``Regular interests'' of a FASIT
``Regular interests'' of a FASIT are treated as debt for
Federal income tax purposes, regardless of whether instruments
with similar terms issued by non-FASITs might be characterized
as equity under general tax principles. To be treated as a
``regular interest'', an instrument generally must have fixed
terms and must: (1) unconditionally entitle the holder to
receive a specified principal amount; (2) pay interest that is
based on (a) fixed rates, or (b) except as provided by
regulations issued by the Secretary, variable rates permitted
with respect to real estate mortgage investment conduit
interests under section 860G(a)(1)(B)(i); (3) have a term to
maturity of no more than 30 years, except as permitted by
Treasury regulations; (4) be issued to the public with a
premium of not more than 25 percent of its stated principal
amount; and (5) have a yield to maturity determined on the date
of issue of less than five percentage points above the
applicable Federal rate (``AFR'') for the calendar month in
which the instrument is issued. Instruments that do not satisfy
certain of these general requirements nevertheless may be
treated as regular interests if they are held by a domestic
taxable C corporation that is not a RIC, real estate investment
trust (``REIT''), FASIT, or cooperative.
Transfers to FASITs
In general, gain (but not loss) is recognized immediately
by the owner of the FASIT upon the transfer of assets to a
FASIT. Where property is acquired by a FASIT from someone other
than the FASIT's owner (or a person related to the FASIT's
owner), the property is treated as being first acquired by the
FASIT's owner for the FASIT's cost in acquiring the asset from
the non-owner and then transferred by the owner to the FASIT.
Valuation rules
In general, except in the case of debt instruments, the
value of FASIT assets is their fair market value. Similarly, in
the case of debt instruments that are traded on an established
securities market, the market price is used for purposes of
determining the amount of gain realized upon contribution of
such assets to a FASIT. However, in the case of debt
instruments that are not traded on an established securities
market, special valuation rules apply for purposes of computing
gain on the transfer of such debt instruments to a FASIT. Under
these rules, the value of such debt instruments is the sum of
the present values of the reasonably expected cash flows from
such obligations discounted over the weighted average life of
such assets. The discount rate is 120 percent of the AFR,
compounded semiannually, or such other rate that the Secretary
shall prescribe by regulations.
Taxation of a FASIT
A FASIT generally is not subject to tax. Instead, all of
the FASIT's assets and liabilities are treated as assets and
liabilities of the FASIT's owner and any income, gain,
deduction or loss of the FASIT is allocable directly to its
owner. Accordingly, income tax rules applicable to a FASIT
(e.g., related party rules, sec. 871(h), sec. 165(g)(2)) are to
be applied in the same manner as they apply to the FASIT's
owner. The taxable income of a FASIT is calculated using an
accrual method of accounting. The constant yield method and
principles that apply for purposes of determining original
issue discount (``OID'') accrual on debt obligations whose
principal is subject to acceleration apply to all debt
obligations held by a FASIT to calculate the FASIT's interest
and discount income and premium deductions or adjustments.
Taxation of holders of FASIT regular interests
In general, a holder of a regular interest is taxed in the
same manner as a holder of any other debt instrument, except
that the regular interest holder is required to account for
income relating to the interest on an accrual method of
accounting, regardless of the method of accounting otherwise
used by the holder.
Taxation of holders of FASIT ownership interests
Because all of the assets and liabilities of a FASIT are
treated as assets and liabilities of the holder of a FASIT
ownership interest, the ownership interest holder takes into
account all of the FASIT's income, gain, deduction, or loss in
computing its taxable income or net loss for the taxable year.
The character of the income to the holder of an ownership
interest is the same as its character to the FASIT, except tax-
exempt interest is included in the income of the holder as
ordinary income.
Although the recognition of losses on assets contributed to
the FASIT is not allowed upon contribution of the assets, such
losses may be allowed to the FASIT owner upon their disposition
by the FASIT. Furthermore, the holder of a FASIT ownership
interest is not permitted to offset taxable income from the
FASIT ownership interest (including gain or loss from the sale
of the ownership interest in the FASIT) with other losses of
the holder. In addition, any net operating loss carryover of
the FASIT owner shall be computed by disregarding any income
arising by reason of a disallowed loss. Where the holder of a
FASIT ownership interest is a member of a consolidated group,
this rule applies to the consolidated group of corporations of
which the holder is a member as if the group were a single
taxpayer.
Real estate mortgage investment conduits
In general, a real estate mortgage investment conduit
(``REMIC'') is a self-liquidating entity that holds a fixed
pool of mortgages and issues multiple classes of investor
interests. A REMIC is not treated as a separate taxable entity.
Rather, the income of the REMIC is allocated to, and taken into
account by, the holders of the interests in the REMIC under
detailed rules.\323\ In order to qualify as a REMIC,
substantially all of the assets of the entity must consist of
qualified mortgages and permitted investments as of the close
of the third month beginning after the startup day of the
entity. A ``qualified mortgage'' generally includes any
obligation which is principally secured by an interest in real
property, and which is either transferred to the REMIC on the
startup day of the REMIC in exchange for regular or residual
interests in the REMIC or purchased by the REMIC within three
months after the startup day pursuant to a fixed-price contract
in effect on the startup day. A ``permitted investment''
generally includes any intangible property that is held for
investment and is part of a reasonably required reserve to
provide for full payment of certain expenses of the REMIC or
amounts due on regular interests.
---------------------------------------------------------------------------
\323\ See sections 860A-860G.
---------------------------------------------------------------------------
All of the interests in the REMIC must consist of one or
more classes of regular interests and a single class of
residual interests. A ``regular interest'' is an interest in a
REMIC that is issued with a fixed term, designated as a regular
interest, and unconditionally entitles the holder to receive a
specified principal amount (or other similar amount) with
interest payments that are either based on a fixed rate (or, to
the extent provided in regulations, a variable rate) or consist
of a specified portion of the interest payments on qualified
mortgages that does not vary during the period such interest is
outstanding. In general, a ``residual interest'' is any
interest in the REMIC other than a regular interest, and which
is so designated by the REMIC, provided that there is only one
class of such interest and that all distributions (if any) with
respect to such interests are pro rata. Holders of residual
REMIC interests are subject to tax on the portion of the income
of the REMIC that is not allocated to the regular interest
holders.
REASONS FOR CHANGE
The Joint Committee on Taxation staff's investigative
report of Enron Corporation \324\ described two structured tax-
motivated transactions--Projects Apache and Renegade--that
Enron undertook in which the use of a FASIT was a key component
in the structure of the transactions. The Committee is aware
that FASITs are not being used widely in the manner envisioned
by the Congress and, consequently, the FASIT rules have not
served the purpose for which they originally were intended.
Moreover, the Joint Committee staff's report and other
information indicate that FASITs are particularly prone to
abuse and likely are being used primarily to facilitate tax
avoidance transactions.\325\ Therefore, the Committee believes
that the potential for abuse that is inherent in FASITs far
outweighs any beneficial purpose that the FASIT rules may
serve. Accordingly, the Committee believes that these rules
should be repealed, with appropriate transition relief for
existing FASITs and appropriate modifications to the present-
law REMIC rules to permit the use of REMICs by taxpayers that
have relied upon FASITs to securitize certain obligations
secured by interests in real property.
---------------------------------------------------------------------------
\324\ See Joint Committee on Taxation, Report of Investigation of
Enron Corporation and Related Entities Regarding Federal Tax and
Compensation Issues, and Policy Recommendations (JCS-3-03), February
2003.
\325\ For example, the Committee is aware that FASITs also have
been used to facilitate the issuance of certain tax-advantaged cross-
border hybrid instruments that are treated as indebtedness in the
United States but equity in the foreign country of the holder of the
instruments. Congress did not intend such use of FASITs when it enacted
the FASIT rules.
---------------------------------------------------------------------------
EXPLANATION OF PROVISION
The provision repeals the special rules for FASITs. The
provision provides a transition period for existing FASITs,
pursuant to which the repeal of the FASIT rules generally does
not apply to any FASIT in existence on the date of enactment to
the extent that regular interests issued by the FASIT prior to
such date continue to remain outstanding in accordance with
their original terms.
For purposes of the REMIC rules, the provision also
modifies the definitions of REMIC regular interests, qualified
mortgages, and permitted investments so that certain types of
real estate loans and loan pools can be transferred to, or
purchased by, a REMIC. Specifically, the provision modifies the
present-law definition of a REMIC ``regular interest'' to
provide that an interest in a REMIC does not fail to qualify as
a regular interest solely because the specified principal
amount of such interest or the amount of interest accrued on
such interest could be reduced as a result of the nonoccurrence
of one or more contingent payments with respect to one or more
reverse mortgages loans, as defined below, that are held by the
REMIC, provided that on the startup day for the REMIC, the
REMIC sponsor reasonably believes that all principal and
interest due under the interest will be paid at or prior to the
liquidation of the REMIC. For this purpose, a reasonable belief
concerning ultimate payment of all amounts due under an
interest is presumed to exist if, as of the startup day, the
interest receives an investment grade rating from at least one
nationally recognized statistical rating agency.
In addition, the provision makes three modifications to the
present-law definition of a ``qualified mortgage.'' First, the
provision modifies the definition to include an obligation
principally secured by real property which represents an
increase in the principal amount under the original terms of an
obligation, provided such increase: (1) is attributable to an
advance made to the obligor pursuant to the original terms of
the obligation; (2) occurs after the REMIC startup day; and (3)
is purchased by the REMIC pursuant to a fixed price contract in
effect on the startup day. Second, the provision modifies the
definition to generally include reverse mortgage loans and the
periodic advances made to obligors on such loans. For this
purpose, a ``reverse mortgage loan'' is defined as a loan that:
(1) is secured by an interest in real property; (2) provides
for one or more advances of principal to the obligor (each such
advance giving rise to a ``balance increase''), provided such
advances are principally secured by an interest in the same
real property as that which secures the loan; (3) may provide
for a contingent payment at maturity based upon the value or
appreciation in value of the real property securing the loan;
(4) provides for an amount due at maturity that cannot exceed
the value, or a specified fraction of the value, of the real
property securing the loan; (5) provides that all payments
under the loan are due only upon the maturity of the loan; and
(6) matures after a fixed term or at the time the obligor
ceases to use as a personal residence the real property
securing the loan. Third, the provision modifies the definition
to provide that, if more than 50 percent of the obligations
transferred to, or purchased by, the REMIC are (1) originated
by the United States or any State (or any political
subdivision, agency, or instrumentality of the United States or
any State) and (2) principally secured by an interest in real
property, then each obligation transferred to, or purchased by,
the REMIC shall be treated as secured by an interest in real
property.
In addition, the provision modifies the present-law
definition of a ``permitted investment'' to include intangible
investment property held as part of a reasonably required
reserve to provide a source of funds for the purchase of
obligations described above as part of the modified definition
of a ``qualified mortgage.''
EFFECTIVE DATE
Except as provided by the transition period for existing
FASITs, the provision is effective on January 1, 2005.
17. Limitation on transfer of built-in losses on REMIC residuals (sec.
636 of the bill and sec. 362 of the Code)
PRESENT LAW
Generally, no gain or loss is recognized when one or more
persons transfer property to a corporation in exchange for
stock and immediately after the exchange such person or persons
control the corporation.\326\ The transferor's basis in the
stock of the controlled corporation is the same as the basis of
the property contributed to the controlled corporation,
increased by the amount of any gain (or dividend) recognized by
the transferor on the exchange, and reduced by the amount of
any money or property received, and by the amount of any loss
recognized by the transferor.\327\ The basis of property
received by a controlled corporation in a tax-free transfer to
the corporation is the same as the adjusted basis in the hands
of the transferor, adjusted for gain or loss recognized by the
transferor.\328\
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\326\ Sec. 351.
\327\ Sec. 358.
\328\ Sec. 362(a).
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REASONS FOR CHANGE
The Joint Committee on Taxation staff's investigative
report of Enron Corporation \329\ revealed that Enron was using
REMIC residual interests in tax motivated transactions to
purportedly duplicate a single economic loss and deduct the
loss more than once. The Committee understands that, under the
statutory rules regarding the taxation of REMICS, phantom
income is allocated to REMIC residual interest holders. Because
of the associated basis increases in the REMIC residual
interests, the phantom income allocation inevitably creates
built-in losses to the holders of the REMIC residual interests,
thus making such interests a natural component of transactions
designed to duplicate a single economic loss. Congress did not
intend REMIC residual interests to be used in this manner.
Therefore, the Committee believes that a corporation's basis in
REMIC residual interests acquired in a tax-free transfer should
be limited to the fair market value of such interests.
---------------------------------------------------------------------------
\329\ See Joint Committee on Taxation, Report of Investigation of
Enron Corporation and Related Entities Regarding Federal Tax and
Compensation Issues, and Policy Recommendations (JCS-3-03), February
2003.
---------------------------------------------------------------------------
EXPLANATION OF PROVISION
The provision provides that if a residual interest (as
defined in section 860G(a)(2)) in a real estate mortgage
investment conduit (``REMIC'') is contributed to a corporation
and the transferee corporation's adjusted basis in the REMIC
residual interest would (but for the provision) exceed the fair
market value of the REMIC residual interest immediately after
the contribution, the transferee corporation's adjusted basis
in the REMIC residual interest is limited to the fair market
value of the REMIC residual interest immediately after the
contribution, regardless of whether the fair market value of
the REMIC residual interest is less than, equal to, or greater
than zero (i.e., the provision may result in the transferee
corporation having a negative adjusted basis in the REMIC
residual interest).
EFFECTIVE DATE
The provision applies to transactions after the date of
enactment.
18. Clarification of banking business for purposes of determining
investment of earnings in U.S. property (sec. 637 of the bill
and sec. 956 of the Code)
PRESENT LAW
In general, the subpart F rules \330\ require the U.S. 10-
percent shareholders of a controlled foreign corporation to
include in income currently their pro rata shares of certain
income of the controlled foreign corporation (referred to as
``subpart F income''), whether or not such earnings are
distributed currently to the shareholders. In addition, the
U.S. 10-percent shareholders of a controlled foreign
corporation are subject to U.S. tax currently on their pro rata
shares of the controlled foreign corporation's earnings to the
extent invested by the controlled foreign corporation in
certain U.S. property.\331\
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\330\ Secs. 951-964.
\331\ Sec. 951(a)(1)(B).
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A shareholder's current income inclusion with respect to a
controlled foreign corporation's investment in U.S. property
for a taxable year is based on the controlled foreign
corporation's average investment in U.S. property for such
year. For this purpose, the U.S. property held (directly or
indirectly) by the controlled foreign corporation must be
measured as of the close of each quarter in the taxable
year.\332\ The amount taken into account with respect to any
property is the property's adjusted basis as determined for
purposes of reporting the controlled foreign corporation's
earnings and profits, reduced by any liability to which the
property is subject. The amount determined for current
inclusion is the shareholder's pro rata share of an amount
equal to the lesser of: (1) the controlled foreign
corporation's average investment in U.S. property as of the end
of each quarter of such taxable year, to the extent that such
investment exceeds the foreign corporation's earnings and
profits that were previously taxed on that basis; or (2) the
controlled foreign corporation's current or accumulated
earnings and profits (but not including a deficit), reduced by
distributions during the year and by earnings that have been
taxed previously as earnings invested in U.S. property.\333\ An
income inclusion is required only to the extent that the amount
so calculated exceeds the amount of the controlled foreign
corporation's earnings that have been previously taxed as
subpart F income.\334\
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\332\ Sec. 956(a).
\333\ Secs. 956 and 959.
\334\ Secs. 951(a)(1)(B) and 959.
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For purposes of section 956, U.S. property generally is
defined to include tangible property located in the United
States, stock of a U.S. corporation, an obligation of a U.S.
person, and certain intangible assets including a patent or
copyright, an invention, model or design, a secret formula or
process or similar property right which is acquired or
developed by the controlled foreign corporation for use in the
United States.\335\
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\335\ Sec. 956(c)(1).
---------------------------------------------------------------------------
Specified exceptions from the definition of U.S. property
are provided for: (1) obligations of the United States, money,
or deposits with persons carrying on the banking business; (2)
certain export property; (3) certain trade or business
obligations; (4) aircraft, railroad rolling stock, vessels,
motor vehicles or containers used in transportation in foreign
commerce and used predominantly outside of the United States;
(5) certain insurance company reserves and unearned premiums
related to insurance of foreign risks; (6) stock or debt of
certain unrelated U.S. corporations; (7) moveable property
(other than a vessel or aircraft) used for the purpose of
exploring, developing, or certain other activities in
connection with the ocean waters of the U.S. Continental Shelf;
(8) an amount of assets equal to the controlled foreign
corporation's accumulated earnings and profits attributable to
income effectively connected with a U.S. trade or business; (9)
property (to the extent provided in regulations) held by a
foreign sales corporation and related to its export activities;
(10) certain deposits or receipts of collateral or margin by a
securities or commodities dealer, if such deposit is made or
received on commercial terms in the ordinary course of the
dealer's business as a securities or commodities dealer; and
(11) certain repurchase and reverse repurchase agreement
transactions entered into by or with a dealer in securities or
commodities in the ordinary course of its business as a
securities or commodities dealer.\336\
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\336\ Sec. 956(c)(2).
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With regard to the exception for deposits with persons
carrying on the banking business, the U.S. Court of Appeals for
the Sixth Circuit in The Limited, Inc. v. Commissioner \337\
concluded that a U.S. subsidiary of a U.S. shareholder was
``carrying on the banking business'' even though its operations
were limited to the administration of the private label credit
card program of the U.S. shareholder. Therefore, the court held
that a controlled foreign corporation of the U.S. shareholder
could make deposits with the subsidiary (e.g., through the
purchase of certificates of deposit) under this exception, and
avoid taxation of the deposits under section 956 as an
investment in U.S. property.
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\337\ 286 F.3d 324 (6th Cir. 2002), rev'g 113 T.C. 169 (1999).
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REASONS FOR CHANGE
The Committee believes that further guidance is necessary
under the U.S. property investment provisions of subpart F with
regard to the treatment of deposits with persons carrying on
the banking business. In particular, the Committee believes
that the transaction at issue in The Limited case was not
contemplated or intended by Congress when it excepted from the
definition of U.S. property deposits with persons carrying on
the banking business. Therefore, the Committee believes that it
is appropriate and necessary to clarify the scope of this
exception so that it applies only to deposits with genuine
banking businesses and their affiliates.
EXPLANATION OF PROVISION
The provision provides that the exception from the
definition of U.S. property under section 956 for deposits with
persons carrying on the banking business is limited to deposits
with persons at least 80 percent of the gross income of which
is derived in the active conduct of a banking business from
unrelated persons. For purposes of applying this provision, the
deposit recipient and all persons related to the deposit
recipient are treated as one person in applying the 80-percent
test.
No inference is intended as to the meaning of the phrase
``carrying on the banking business'' under present law.
EFFECTIVE DATE
This provision is effective on the date of enactment.
19. Alternative tax for certain small insurance companies (sec. 638 of
the bill and sec. 831 of the Code)
PRESENT LAW
A property and casualty insurance company generally is
subject to tax on its taxable income (sec. 831(a)). The taxable
income of a property and casualty insurance company is
determined as the sum of its underwriting income and investment
income (as well as gains and other income items), reduced by
allowable deductions (sec. 832).
A property and casualty insurance company may elect to be
taxed only on taxable investment income if its net written
premiums or direct written premiums (whichever is greater) do
not exceed $1.2 million (sec. 831(b)). For purposes of
determining the amount of a company's net written premiums or
direct written premiums under this rule, premiums received by
all members of a controlled group of corporations (as defined
in section 831(b)) of which the company is a part are taken
into account (including gross receipts of foreign and tax-
exempt corporations).
REASONS FOR CHANGE
The Committee believes that the $1.2 million ceiling on net
written premiums or direct written premiums of property and
casualty insurance companies electing to be taxed only on
taxable investment income should be increased to reflect
inflation in recent years,\338\ and should be indexed to take
account of future inflation.
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\338\ In 1986, the ceiling was set at $1.2 million and the
provision was expanded to apply to both stock and mutual property and
casualty insurance companies (sec. 1024 of Pub. L. No. 99-514, the
``Tax Reform Act of 1986'').
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EXPLANATION OF PROVISION
Under the provision, the $1.2 million ceiling on net
written premiums or direct written premiums for purposes of the
election to be taxed only on taxable investment income is
increased to $1.89 million, and is indexed for taxable years
beginning in a calendar year after 2004.
EFFECTIVE DATE
The provision is effective for taxable years beginning
after December 31, 2003.
20. Denial of deduction for interest on underpayments attributable to
nondisclosed reportable transactions (sec. 639 of the bill and
sec. 163 of the Code)
PRESENT LAW
In general, corporations may deduct interest paid or
accrued within a taxable year on indebtedness.\339\ Interest on
indebtedness to the Federal government attributable to an
underpayment of tax generally may be deducted pursuant to this
provision.
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\339\ Sec. 163(a).
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REASONS FOR CHANGE
The Committee believes that it is inappropriate for
corporations to deduct interest paid to the Government with
respect to certain tax shelter transactions.
EXPLANATION OF PROVISION
The provision disallows any deduction for interest paid or
accrued within a taxable year on any portion of an underpayment
of tax that is attributable to an understatement arising from
an undisclosed listed transaction or from an undisclosed
reportable avoidance transaction (other than a listed
transaction).\340\
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\340\ The definitions of these transactions are the same as those
previously described in connection with the provision elsewhere in this
bill to modify the accuracy-related penalty for listed and certain
reportable transactions.
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EFFECTIVE DATE
The provision is effective for underpayments attributable
to transactions entered into in taxable years beginning after
the date of enactment.
21. Clarification of rules for payment of estimated tax for certain
deemed asset sales (sec. 640 of the bill and sec. 338 of the
Code)
PRESENT LAW
In certain circumstances, taxpayers can make an election
under section 338(h)(10) to treat a qualifying purchase of 80
percent of the stock of a target corporation by a corporation
from a corporation that is a member of an affiliated group (or
a qualifying purchase of 80 percent of the stock of an S
corporation by a corporation from S corporation shareholders)
as a sale of the assets of the target corporation, rather than
as a stock sale. The election must be made jointly by the buyer
and seller of the stock and is due by the 15th day of the ninth
month beginning after the month in which the acquisition date
occurs. An agreement for the purchase and sale of stock often
may contain an agreement of the parties to make a section
338(h)(10) election.
Section 338(a) also permits a unilateral election by a
buyer corporation to treat a qualified stock purchase of a
corporation as a deemed asset acquisition, whether or not the
seller of the stock is a corporation (or an S corporation is
the target). In such a case, the seller or sellers recognize
gain or loss on the stock sale (including any estimated taxes
with respect to the stock sale), and the target corporation
recognizes gain or loss on the deemed asset sale.
Section 338(h)(13) provides that, for purposes of section
6655 (relating to additions to tax for failure by a corporation
to pay estimated income tax), tax attributable to a deemed
asset sale under section 338(a)(1) shall not be taken into
account.
REASONS FOR CHANGE
The Committee is concerned that some taxpayers may
inappropriately be taking the position that estimated tax and
the penalty (computed in the amount of an interest charge)
under section 6655 applies neither to the stock sale nor to the
asset sale in the case of a section 338(h)(10) election. The
Committee believes that estimated tax should not be avoided
merely because an election may be made under section
338(h)(10). Furthermore, the Committee understands that parties
typically negotiate a sale with an understanding as to whether
or not an election under section 338(h)(10) will be made. In
the event there is a contingency in this regard, the parties
may provide for adjustments to the price to reflect the effect
of the election.
EXPLANATION OF PROVISION
The provision clarifies section 338(h)(13) to provide that
the exception for estimated tax purposes with respect to tax
attributable to a deemed asset sale does not apply with respect
to a qualified stock purchase for which an election is made
under section 338(h)(10).
Under the provision, if a qualified stock purchase
transaction eligible for the election under section 338(h)(10)
occurs, estimated tax would be determined based on the stock
sale unless and until there is an agreement of the parties to
make a section 338(h)(10) election.
If at the time of the sale there is an agreement of the
parties to make a section 338(h)(10) election, then estimated
tax is computed based on an asset sale, computed from the date
of the sale.
If the agreement to make a section 338(h)(10) election is
concluded after the stock sale, such that the original
computation was based on the stock sale, estimated tax is
recomputed based on the asset sale election.
No inference is intended as to present law.
EFFECTIVE DATE
The provision is effective for qualified stock purchase
transactions that occur after the date of enactment.
22. Exclusion of like-kind exchange property from nonrecognition
treatment on the sale or exchange of a principal residence
(sec. 641 of the bill and sec. 121 of the Code)
PRESENT LAW
Under present law, a taxpayer may exclude up to $250,000
($500,000 if married filing a joint return) of gain realized on
the sale or exchange of a principal residence.\341\ To be
eligible for the exclusion, the taxpayer must have owned and
used the residence as a principal residence for at least two of
the five years prior to the sale or exchange. A taxpayer who
fails to meet these requirements by reason of a change of place
of employment, health, or, to the extent provided under
regulations, unforeseen circumstances is able to exclude an
amount equal to the fraction of the $250,000 ($500,000 if
married filing a joint return) that is equal to the fraction of
the two years that the ownership and use requirements are met.
There are no special rules relating to the sale or exchange of
a principal residence that was acquired in a like-kind exchange
within the prior five years.
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\341\ Sec. 121.
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REASONS FOR CHANGE
The Committee believes that the present-law exclusion of
gain allowable upon the sale or exchange of principal
residences serves an important role in encouraging home
ownership. The Committee does not believe that this exclusion
is appropriate for properties that were recently acquired in
like-kind exchanges. Under the like-kind exchange rules, a
taxpayer that exchanges property that was held for productive
use or investment for like-kind property may acquire the
replacement property on a tax-free basis. Because the
replacement property generally has a low carry-over tax basis,
the taxpayer will have taxable gain upon the sale or exchange
of the replacement property. However, when the taxpayer
converts the replacement property into the taxpayer's principal
residence, the taxpayer may shelter some or all of this gain
from income taxation. The Committee believes that this
provision balances the concerns associated with these
provisions to reduce this tax shelter concern without unduly
limiting the exclusion on sales or exchanges of principal
residences.
EXPLANATION OF PROVISION
The bill provides that the exclusion for gain on the sale
or exchange of a principal residence does not apply if the
principal residence was acquired in a like-kind exchange in
which any gain was not recognized within the prior five years.
EFFECTIVE DATE
The provision is effective for sales or exchanges of
principal residences after the date of enactment.
23. Prevention of mismatching of interest and original issue discount
deductions and income inclusions in transactions with related
foreign persons (sec. 642 of the bill and secs. 163 and 267 of
the Code)
PRESENT LAW
Income earned by a foreign corporation from its foreign
operations generally is subject to U.S. tax only when such
income is distributed to any U.S. person that holds stock in
such corporation. Accordingly, a U.S. person that conducts
foreign operations through a foreign corporation generally is
subject to U.S. tax on the income from such operations when the
income is repatriated to the United States through a dividend
distribution to the U.S. person. The income is reported on the
U.S. person's tax return for the year the distribution is
received, and the United States imposes tax on such income at
that time. However, certain anti-deferral regimes may cause the
U.S. person to be taxed on a current basis in the United States
with respect to certain categories of passive or highly mobile
income earned by the foreign corporations in which the U.S.
person holds stock. The main anti-deferral regimes are the
controlled foreign corporation rules of subpart F (secs. 951-
964), the passive foreign investment company rules (secs. 1291-
1298), and the foreign personal holding company rules (secs.
551-558).
As a general rule, there is allowed as a deduction all
interest paid or accrued within the taxable year with respect
to indebtedness, including the aggregate daily portions of
original issue discount (``OID'') of the issuer for the days
during such taxable year.\342\ However, if a debt instrument is
held by a related foreign person, any portion of such OID is
not allowable as a deduction to the payor of such instrument
until paid (``related-foreign-person rule''). This related-
foreign-person rule does not apply to the extent that the OID
is effectively connected with the conduct by such foreign
related person of a trade or business within the United States
(unless such OID is exempt from taxation or is subject to a
reduced rate of taxation under a treaty obligation).\343\
Treasury regulations further modify the related-foreign-person
rule by providing that in the case of a debt owed to a foreign
personal holding company (``FPHC''), controlled foreign
corporation (``CFC'') or passive foreign investment company
(``PFIC''), a deduction is allowed for OID as of the day on
which the amount is includible in the income of the FPHC, CFC
or PFIC, respectively.\344\
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\342\ Sec. 163(e)(1).
\343\ Sec. 163(e)(3).
\344\ Treas. Reg. sec. 1.163-12(b)(3). In the case of a PFIC, the
regulations further require that the person owing the amount at issue
have in effect a qualified electing fund election pursuant to section
1295 with respect to the PFIC.
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In the case of unpaid stated interest and expenses of
related persons, where, by reason of a payee's method of
accounting, an amount is not includible in the payee's gross
income until it is paid but the unpaid amounts are deductible
currently by the payor, the amount generally is allowable as a
deduction when such amount is includible in the gross income of
the payee.\345\ With respect to stated interest and other
expenses owed to related foreign corporations, Treasury
regulations provide a general rule that requires a taxpayer to
use the cash method of accounting with respect to the deduction
of amounts owed to such related foreign persons (with an
exception for income of a related foreign person that is
effectively connected with the conduct of a U.S. trade or
business and that is not exempt from taxation or subject to a
reduced rate of taxation under a treaty obligation).\346\ As in
the case of OID, the Treasury regulations additionally provide
that in the case of stated interest owed to a FPHC, CFC, or
PFIC, a deduction is allowed as of the day on which the amount
is includible in the income of the FPHC, CFC or PFIC.\347\
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\345\ Sec. 267(a)(2).
\346\ Treas. Reg. sec. 1.267(a)-3(b)(1), -3(c).
\347\ Treas. Reg. sec. 1.267(a)-3(c)(4).
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REASONS FOR CHANGE
The special rules in the Treasury regulations for FPHCs,
CFCs and PFICs are exceptions to the general rule that OID and
unpaid interest owed to a related foreign person are deductible
when paid (i.e., under the cash method). These special rules
were deemed appropriate in the case of FPHCs, CFCs and PFICs
because it was thought that there would be little material
distortion in matching of income and deductions with respect to
amounts owed to a related foreign corporation that is required
to determine its taxable income and earnings and profits for
U.S. tax purposes pursuant to the FPHC, subpart F or PFIC
provisions. The Committee believes that this premise fails to
take into account the situation where amounts owed to the
related foreign corporation are included in the income of the
related foreign corporation but are not currently included in
the income of the related foreign corporation's U.S.
shareholder. Consequently, under the Treasury regulations, both
the U.S. payors and U.S.-owned foreign payors may be able to
accrue deductions for amounts owed to related FPHCs, CFCs or
PFICs without the U.S. owners of such related entities taking
into account for U.S. tax purposes a corresponding amount of
income. These deductions can be used to reduce U.S. income or,
in the case of a U.S.-owned foreign payor, to reduce earnings
and profits which could reduce a CFC's income that would be
currently taxable to its U.S. shareholders under subpart F.
EXPLANATION OF PROVISION
The provision provides that deductions for amounts accrued
but unpaid (whether by U.S. or foreign persons) to related
FPHCs, CFCs, or PFICs are allowable only to the extent that the
amounts accrued by the payor are, for U.S. tax purposes,
currently includible in the income of the direct or indirect
U.S. owners of the related foreign corporation under the
relevant inclusion rules.\348\ Deductions that have accrued but
are not allowable under this provision are allowed when the
amounts are paid.
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\348\ Section 313 of the bill repeals the foreign personal holding
company regime, effective for taxable years of foreign corporations
beginning after December 31, 2004, and taxable years of U.S.
shareholders with or within which such taxable years of foreign
corporations end.
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For purposes of determining how much of the amount accrued,
if any, is currently includible in the income of a U.S. person
under the relevant inclusion rules, properly allowable
deductions of the related foreign corporation and qualified
deficits under section 952(c)(1)(B) are taken into account. For
this purpose, properly allowable deductions of the related
foreign corporation are those expenses, losses, or other
deductible amounts of the foreign corporation that are properly
allocable, under the principles of section 954(b)(5), to the
relevant income of the foreign corporation.
For example, assume the following facts. A U.S. parent
corporation accrues an expense item of 100 to its 60-percent
owned CFC. The item constitutes foreign base company income in
the hands of the CFC. An unrelated foreign corporation owns the
remaining 40 percent interest in the CFC. The item is the only
potential subpart F income of the CFC and has not been paid by
the end of the taxable year of the parent. Expenses of 60 are
properly allocated or apportioned to the 100 of foreign base
company income under the principles of section 954(b)(5). In
addition, other income and expense items of the CFC net to a
loss of 30, which, when taken together with the 40 (100-60) of
net foreign base company income, results in current net income
for the CFC of 10. Assuming further that the CFC has no current
earnings and profits adjustments, the CFC's subpart F income in
this case is limited to 10, six of which is includible in the
gross income of the U.S. parent as its pro rata share of
subpart F income. Under these facts, the U.S. parent is allowed
a current deduction of 42 ((10 + 60) 60%) under this
provision. If the other income and expense items of the CFC net
to a loss of 50 instead of 30, the U.S. parent would instead be
allowed a current deduction of 30 ((40-50 + 60) 60%).
The provision grants the Secretary regulatory authority to
provide exceptions to these rules, including an exception for
amounts accrued where payment of the amount accrued occurs
within a short period after accrual, and the transaction giving
rise to the payment is entered into by the payor in the
ordinary course of a business in which the payor is
predominantly engaged.
EFFECTIVE DATE
The provision is effective for payments accrued on or after
date of enactment.
24. Exclusion from gross income for interest on overpayments of income
tax by individuals (sec. 643 of the bill and new sec. 139A of
the Code)
PRESENT LAW
Overpayment interest
Interest is included in the list of items that are required
to be included in gross income (sec. 61(a)(4)). Interest on
overpayments of Federal income tax is required to be included
in taxable income in the same manner as any other interest that
is received by the taxpayer.
Cash basis taxpayers are required to report overpayment
interest as income in the period the interest is received.
Accrual basis taxpayers are required to report overpayment
interest as income when all events fixing the right to the
receipt of the overpayment interest have occurred and the
amount can be estimated with reasonable accuracy. Generally,
this occurs on the date the appropriate IRS official signs the
pertinent schedule of overassessments.
Underpayment interest
A corporate taxpayer is allowed to currently take into
account interest paid on underpayments of Federal income tax as
an ordinary and necessary business expense. Typically, this
results in a current deduction. However, the deduction may be
deferred if the interest is required to be capitalized or may
be disallowed if and to the extent it is determined to be a
cost of earning tax exempt income under section 265.
Section 163(h) of the Code prohibits the deduction of
personal interest by taxpayers other than corporations.
Noncorporate taxpayers, including individuals, generally are
not allowed to deduct interest on the underpayment of Federal
income taxes.
Temporary regulations provide that personal interest
includes interest paid on underpayments of individual Federal,
State or local income taxes, regardless of the source of the
income generating the tax liability. This is consistent with
the statement in the General Explanation of the Tax Reform Act
of 1986 that ``(p)ersonal interest also includes interest on
underpayments of individual Federal, State, or local income
taxes notwithstanding that all or a portion of the income may
have arisen in a trade or business, because such taxes are not
considered derived from conduct of a trade or business.'' The
validity of the temporary regulation has been upheld in those
Circuits that have considered the issue, including the Fourth,
Fifth, Sixth, Seventh, Eighth, and Ninth Circuits.
Personal interest also includes interest that is paid by a
trust, S corporation, or other pass-through entity on
underpayments of State or local income taxes. Personal interest
does not include interest that is paid with respect to sales,
excise or similar taxes that are incurred in connection with a
trade or business or an investment activity.
REASONS FOR CHANGE
The Committee believes that there should be consistency in
the treatment of interest paid by the Federal government to an
individual taxpayer and interest paid by an individual taxpayer
to the Federal government. Allowing individual taxpayers to
exclude interest on overpayments will treat all individual
taxpayers consistently, whether or not they itemize deductions.
EXPLANATION OF PROVISION
The bill excludes overpayment interest that is paid to
individual taxpayers on overpayments of Federal income tax from
gross income. Interest excluded under the provision is not
considered disqualified income that could limit the earned
income credit. Interest excluded under the provision also is
not considered in determining what portion of a taxpayer's
social security or tier 1 railroad retirement benefits are
subject to tax (sec. 86), whether a taxpayer has sufficient
taxable income to be required to file a return (sec. 6012(d)),
or for any other computation in which interest exempt from tax
is otherwise required to be added to adjusted gross income.
The exclusion from income of overpayment interest does not
apply if the Secretary determines that the taxpayer's principal
purpose for overpaying his or her tax is to take advantage of
the exclusion.
For example, a taxpayer prepares his return without taking
into account significant itemized deductions of which he is, or
should be, aware. Before the expiration of the statute of
limitations, the taxpayer files an amended return claiming
these itemized deductions and requesting a refund with
interest. Unless the taxpayer can establish a principal purpose
for originally overpaying the tax other than collecting
excludible interest, the Secretary may determine that the
principal purpose of waiting to claim the deductions on an
amended return was to earn interest that would be excluded from
income. In that case, the interest on the overpayment could not
be excluded from income.
It is expected that the Secretary will indicate whether the
interest is eligible to be excluded from income on the Form
1099 it provides that taxpayer for the taxable year in which
the underpayment interest is paid.
EFFECTIVE DATE
The provision is effective for interest received in
calendar years beginning after the date of enactment.
25. Deposits made to suspend the running of interest on potential
underpayments (sec. 644 of the bill and new sec. 6603 of the
Code)
PRESENT LAW
Generally, interest on underpayments and overpayments
continues to accrue during the period that a taxpayer and the
IRS dispute a liability. The accrual of interest on an
underpayment is suspended if the IRS fails to notify an
individual taxpayer in a timely manner, but interest will begin
to accrue once the taxpayer is properly notified. No similar
suspension is available for other taxpayers.
A taxpayer that wants to limit its exposure to underpayment
interest has a limited number of options. The taxpayer can
continue to dispute the amount owed and risk paying a
significant amount of interest. If the taxpayer continues to
dispute the amount and ultimately loses, the taxpayer will be
required to pay interest on the underpayment from the original
due date of the return until the date of payment.
In order to avoid the accrual of underpayment interest, the
taxpayer may choose to pay the disputed amount and immediately
file a claim for refund. Payment of the disputed amount will
prevent further interest from accruing if the taxpayer loses
(since there is no longer any underpayment) and the taxpayer
will earn interest on the resultant overpayment if the taxpayer
wins. However, the taxpayer will generally lose access to the
Tax Court if it follows this alternative. Amounts paid
generally cannot be recovered by the taxpayer on demand, but
must await final determination of the taxpayer's liability.
Even if an overpayment is ultimately determined, overpaid
amounts may not be refunded if they are eligible to be offset
against other liabilities of the taxpayer.
The taxpayer may also make a deposit in the nature of a
cash bond. The procedures for making a deposit in the nature of
a cash bond are provided in Rev. Proc. 84-58.
A deposit in the nature of a cash bond will stop the
running of interest on an amount of underpayment equal to the
deposit, but the deposit does not itself earn interest. A
deposit in the nature of a cash bond is not a payment of tax
and is not subject to a claim for credit or refund. A deposit
in the nature of a cash bond may be made for all or part of the
disputed liability and generally may be recovered by the
taxpayer prior to a final determination. However, a deposit in
the nature of a cash bond need not be refunded to the extent
the Secretary determines that the assessment or collection of
the tax determined would be in jeopardy, or that the deposit
should be applied against another liability of the taxpayer in
the same manner as an overpayment of tax. If the taxpayer
recovers the deposit prior to final determination and a
deficiency is later determined, the taxpayer will not receive
credit for the period in which the funds were held as a
deposit. The taxable year to which the deposit in the nature of
a cash bond relates must be designated, but the taxpayer may
request that the deposit be applied to a different year under
certain circumstances.
REASONS FOR CHANGE
The Committee believes that taxpayers should be able to
limit their underpayment interest exposure in a tax dispute. An
improved deposit system will help taxpayers better manage their
exposure to underpayment interest without requiring them to
surrender access to their funds or requiring them to make a
potentially indefinite-term investment in a non-interest
bearing account. The Committee believes that an improved
deposit system that allows for the payment of interest on
amounts that are not ultimately needed to offset tax liability
when the taxpayer's position is upheld, as well as allowing for
the offset of tax liability when the taxpayer's position fails,
will provide an effective way for taxpayers to manage their
exposure to underpayment interest. However, the Committee
believes that such an improved deposit system should be
reserved for the issues that are known to both parties, either
through IRS examination or voluntary taxpayer disclosure.
EXPLANATION OF PROVISION
In general
The provision allows a taxpayer to deposit cash with the
IRS that may subsequently be used to pay an underpayment of
income, gift, estate, generation-skipping, or certain excise
taxes. Interest will not be charged on the portion of the
underpayment that is deposited for the period that the amount
is on deposit. Generally, deposited amounts that have not been
used to pay a tax may be withdrawn at any time if the taxpayer
so requests in writing. The withdrawn amounts will earn
interest at the applicable Federal rate to the extent they are
attributable to a disputable tax.
The Secretary may issue rules relating to the making, use,
and return of the deposits.
Use of a deposit to offset underpayments of tax
Any amount on deposit may be used to pay an underpayment of
tax that is ultimately assessed. If an underpayment is paid in
this manner, the taxpayer will not be charged underpayment
interest on the portion of the underpayment that is so paid for
the period the funds were on deposit.
For example, assume a calendar year individual taxpayer
deposits $20,000 on May 15, 2005, with respect to a disputable
item on its 2004 income tax return. On April 15, 2007, an
examination of the taxpayer's year 2004 income tax return is
completed, and the taxpayer and the IRS agree that the taxable
year 2004 taxes were underpaid by $25,000. The $20,000 on
deposit is used to pay $20,000 of the underpayment, and the
taxpayer also pays the remaining $5,000. In this case, the
taxpayer will owe underpayment interest from April 15, 2005
(the original due date of the return) to the date of payment
(April 15, 2007) only with respect to the $5,000 of the
underpayment that is not paid by the deposit. The taxpayer will
owe underpayment interest on the remaining $20,000 of the
underpayment only from April 15, 2005, to May 15, 2005, the
date the $20,000 was deposited.
Withdrawal of amounts
A taxpayer may request the withdrawal of any amount of
deposit at any time. The Secretary must comply with the
withdrawal request unless the amount has already been used to
pay tax or the Secretary properly determines that collection of
tax is in jeopardy. Interest will be paid on deposited amounts
that are withdrawn at a rate equal to the short-term applicable
Federal rate for the period from the date of deposit to a date
not more than 30 days preceding the date of the check paying
the withdrawal. Interest is not payable to the extent the
deposit was not attributable to a disputable tax.
For example, assume a calendar year individual taxpayer
receives a 30-day letter showing a deficiency of $20,000 for
taxable year 2004 and deposits $20,000 on May 15, 2006. On
April 15, 2007, an administrative appeal is completed, and the
taxpayer and the IRS agree that the 2004 taxes were underpaid
by $15,000. $15,000 of the deposit is used to pay the
underpayment. In this case, the taxpayer will owe underpayment
interest from April 15, 2005 (the original due date of the
return) to May 15, 2006, the date the $20,000 was deposited.
Simultaneously with the use of the $15,000 to offset the
underpayment, the taxpayer requests the return of the remaining
amount of the deposit (after reduction for the underpayment
interest owed by the taxpayer from April 15, 2005, to May 15,
2006). This amount must be returned to the taxpayer with
interest determined at the short-term applicable Federal rate
from the May 15, 2006, to a date not more than 30 days
preceding the date of the check repaying the deposit to the
taxpayer.
Limitation on amounts for which interest may be allowed
Interest on a deposit that is returned to a taxpayer shall
be allowed for any period only to the extent attributable to a
disputable item for that period. A disputable item is any item
for which the taxpayer (1) has a reasonable basis for the
treatment used on its return and (2) reasonably believes that
the Secretary also has a reasonable basis for disallowing the
taxpayer's treatment of such item.
All items included in a 30-day letter to a taxpayer are
deemed disputable for this purpose. Thus, once a 30-day letter
has been issued, the disputable amount cannot be less than the
amount of the deficiency shown in the 30-day letter. A 30-day
letter is the first letter of proposed deficiency that allows
the taxpayer an opportunity for administrative review in the
Internal Revenue Service Office of Appeals.
Deposits are not payments of tax
A deposit is not a payment of tax prior to the time the
deposited amount is used to pay a tax. Similarly, withdrawal of
a deposit will not establish a period for which interest was
allowable at the short-term applicable Federal rate for the
purpose of establishing a net zero interest rate on a similar
amount of underpayment for the same period.
EFFECTIVE DATE
The provision applies to deposits made after the date of
enactment. Amounts already on deposit as of the date of
enactment are treated as deposited (for purposes of applying
this provision) on the date the taxpayer identifies the amount
as a deposit made pursuant to this provision.
26. Authorize IRS to enter into installment agreements that provide for
partial payment (sec. 645 of the bill and sec. 6159 of the
Code)
PRESENT LAW
The Code authorizes the IRS to enter into written
agreements with any taxpayer under which the taxpayer is
allowed to pay taxes owed, as well as interest and penalties,
in installment payments if the IRS determines that doing so
will facilitate collection of the amounts owed (sec. 6159). An
installment agreement does not reduce the amount of taxes,
interest, or penalties owed. Generally, during the period
installment payments are being made, other IRS enforcement
actions (such as levies or seizures) with respect to the taxes
included in that agreement are held in abeyance.
Prior to 1998, the IRS administratively entered into
installment agreements that provided for partial payment
(rather than full payment) of the total amount owed over the
period of the agreement. In that year, the IRS Chief Counsel
issued a memorandum concluding that partial payment installment
agreements were not permitted.
REASONS FOR CHANGE
According to the Department of the Treasury, at the end of
fiscal year 2003, the IRS had not pursued 2.25 million cases
totaling more than $16.5 billion in delinquent taxes. The
Committee believes that clarifying that the IRS is authorized
to enter into installment agreements with taxpayers that do not
provide for full payment of the taxpayer's liability over the
life of the agreement will improve effective tax
administration.
The Committee recognizes that some taxpayers are unable or
unwilling to enter into a realistic offer-in-compromise. The
Committee believes that these taxpayers should be encouraged to
make partial payments toward resolving their tax liability, and
that providing for partial payment installment agreements will
help facilitate this.
EXPLANATION OF PROVISION
The provision clarifies that 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 provision also requires the IRS to review
partial payment installment agreements at least every two
years. The primary purpose of this review is to determine
whether the financial condition of the taxpayer has
significantly changed so as to warrant an increase in the value
of the payments being made.
EFFECTIVE DATE
The provision is effective for installment agreements
entered into on or after the date of enactment.
27. Affirmation of consolidated return regulation authority (sec. 646
of the bill and sec. 1502 of the Code)
PRESENT LAW
An affiliated group of corporations may elect to file a
consolidated return in lieu of separate returns. A condition of
electing to file a consolidated return is that all corporations
that are members of the consolidated group must consent to all
the consolidated return regulations prescribed under section
1502 prior to the last day prescribed by law for filing such
return.\349\
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\349\ Sec. 1501.
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Section 1502 states:
The Secretary shall prescribe such regulations as he
may deem necessary in order that the tax liability of
any affiliated group of corporations making a
consolidated return and of each corporation in the
group, both during and after the period of affiliation,
may be returned, determined, computed, assessed,
collected, and adjusted, in such manner as clearly to
reflect the income-tax liability and the various
factors necessary for the determination of such
liability, and in order to prevent the avoidance of
such tax liability.\350\
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\350\ Sec. 1502.
Under this authority, the Treasury Department has issued
extensive consolidated return regulations.\351\
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\351\ Regulations issued under the authority of section 1502 are
considered to be ``legislative'' regulations rather than
``interpretative'' regulations, and as such are usually given greater
deference by courts in case of a taxpayer challenge to such a
regulation. See, S. Rep. No. 960, 70th Cong., 1st Sess. at 15 (1928),
describing the consolidated return regulations as ``legislative in
character''. The Supreme Court has stated that ``. . . legislative
regulations are given controlling weight unless they are arbitrary,
capricious, or manifestly contrary to the statute.'' Chevron, U.S.A.,
Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844
(1984) (involving an environmental protection regulation). For examples
involving consolidated return regulations, see, e.g., Wolter
Construction Company v. Commissioner, 634 F.2d 1029 (6th Cir. 1980);
Garvey, Inc. v. United States, 1 Ct. Cl. 108 (1983), aff'd 726 F.2d
1569 (Fed. Cir. 1984), cert. denied, 469 U.S. 823 (1984). Compare,
e.g., Audrey J. Walton v. Commissioner, 115 T.C. 589 (2000), describing
different standards of review. The case did not involve a consolidated
return regulation.
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In the recent case of Rite Aid Corp. v. United States,
\352\ the Federal Circuit Court of Appeals addressed the
application of a particular provision of certain consolidated
return loss disallowance regulations, and concluded that the
provision was invalid.\353\ The particular provision, known as
the ``duplicated loss'' provision,\354\ would have denied a
loss on the sale of stock of a subsidiary by a parent
corporation that had filed a consolidated return with the
subsidiary, to the extent the subsidiary corporation had assets
that had a built-in loss, or had a net operating loss, that
could be recognized or used later.\355\
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\352\ 255 F.3d 1357 (Fed. Cir. 2001), reh'g denied, 2001 U.S. App.
LEXIS 23207 (Fed. Cir. Oct. 3, 2001).
\353\ Prior to this decision, there had been a few instances
involving prior laws in which certain consolidated return regulations
were held to be invalid. See, e.g., American Standard, Inc. v. United
States, 602 F.2d 256 (Ct. Cl. 1979), discussed in the text infra. See
also Union Carbide Corp. v. United States, 612 F.2d 558 (Ct. Cl. 1979),
and Allied Corporation v. United States, 685 F. 2d 396 (Ct. Cl. 1982),
all three cases involving the allocation of income and loss within a
consolidated group for purposes of computation of a deduction allowed
under prior law by the Code for Western Hemisphere Trading
Corporations. See also Joseph Weidenhoff v. Commissioner, 32 T.C. 1222,
1242-1244 (1959), involving the application of certain regulations to
the excess profits tax credit allowed under prior law, and concluding
that the Commissioner had applied a particular regulation in an
arbitrary manner inconsistent with the wording of the regulation and
inconsistent with even a consolidated group computation. Cf. Kanawha
Gas & Utilities Co. v. Commissioner, 214 F.2d 685 (1954), concluding
that the substance of a transaction was an acquisition of assets rather
than stock. Thus, a regulation governing basis of the assets of
consolidated subsidiaries did not apply to the case. See also General
Machinery Corporation v. Commissioner, 33 B.T.A. 1215 (1936); Lefcourt
Realty Corporation, 31 B.T.A. 978 (1935); Helvering v. Morgans, Inc.,
293 U.S. 121 (1934), interpreting the term ``taxable year.''
\354\ Treas. Reg. sec. 1.1502-20(c)(1)(iii).
\355\ Treasury Regulation section 1.1502-20, generally imposing
certain ``loss disallowance'' rules on the disposition of subsidiary
stock, contained other limitations besides the ``duplicated loss'' rule
that could limit the loss available to the group on a disposition of a
subsidiary's stock. Treasury Regulation section 1.1502-20 as a whole
was promulgated in connection with regulations issued under section
337(d), principally in connection with the so-called General Utilities
repeal of 1986 (referring to the case of General Utilities & Operating
Company v. Helvering, 296 U.S. 200 (1935)). Such repeal generally
required a liquidating corporation, or a corporation acquired in a
stock acquisition treated as a sale of assets, to pay corporate level
tax on the excess of the value of its assets over the basis. Treasury
regulation section 1.1502-20 principally reflected an attempt to
prevent corporations filing consolidated returns from offsetting income
with a loss on the sale of subsidiary stock. Such a loss could result
from the unique upward adjustment of a subsidiary's stock basis
required under the consolidated return regulations for subsidiary
income earned in consolidation, an adjustment intended to prevent
taxation of both the subsidiary and the parent on the same income or
gain. As one example, absent a denial of certain losses on a sale of
subsidiary stock, a consolidated group could obtain a loss deduction
with respect to subsidiary stock, the basis of which originally
reflected the subsidiary's value at the time of the purchase of the
stock, and that had then been adjusted upward on recognition of any
built-in income or gain of the subsidiary reflected in that value. The
regulations also contained the duplicated loss factor addressed by the
court in Rite Aid. The preamble to the regulations stated: ``it is not
administratively feasible to differentiate between loss attributable to
built-in gain and duplicated loss.'' T.D. 8364, 1991-2 C.B. 43, 46
(Sept. 13, 1991). The government also argued in the Rite Aid case that
duplicated loss was a separate concern of the regulations. 255 F.3d at
1360.
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The Federal Circuit Court opinion contained language
discussing the fact that the regulation produced a result
different than the result that would have obtained if the
corporations had filed separate returns rather than
consolidated returns.\356\
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\356\ For example, the court stated: ``The duplicated loss factor .
. . addresses a situation that arises from the sale of stock regardless
of whether corporations file separate or consolidated returns. With
I.R.C. secs. 382 and 383, Congress has addressed this situation by
limiting the subsidiary's potential future deduction, not the parent's
loss on the sale of stock under I.R.C. sec. 165.'' 255 F.3d 1357, 1360
(Fed. Cir. 2001).
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The Federal Circuit Court opinion cited a 1928 Senate
Finance Committee Report to legislation that authorized
consolidated return regulations, which stated that ``many
difficult and complicated problems, . . . have arisen in the
administration of the provisions permitting the filing of
consolidated returns'' and that the committee ``found it
necessary to delegate power to the commissioner to prescribe
regulations legislative in character covering them.'' \357\ The
Court's opinion also cited a previous decision of the Court of
Claims for the proposition, interpreting this legislative
history, that section 1502 grants the Secretary ``the power to
conform the applicable income tax law of the Code to the
special, myriad problems resulting from the filing of
consolidated income tax returns;'' but that section 1502 ``does
not authorize the Secretary to choose a method that imposes a
tax on income that would not otherwise be taxed.'' \358\
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\357\ S. Rep. No. 960, 70th Cong., 1st Sess. 15 (1928). Though not
quoted by the court in Rite Aid, the same Senate report also indicated
that one purpose of the consolidated return authority was to permit
treatment of the separate corporations as if they were a single unit,
stating ``The mere fact that by legal fiction several corporations
owned by the same shareholders are separate entities should not obscure
the fact that they are in reality one and the same business owned by
the same individuals and operated as a unit.'' S. Rep. No. 960, 70th
Cong., 1st Sess. 29 (1928).
\358\ American Standard, Inc. v. United States, 602 F.2d 256, 261
(Ct. Cl. 1979). That case did not involve the question of separate
returns as compared to a single return approach. It involved the
computation of a Western Hemisphere Trade Corporation (``WHTC'')
deduction under prior law (which deduction would have been computed as
a percentage of each WHTC's taxable income if the corporations had
filed separate returns), in a case where a consolidated group included
several WHTCs as well as other corporations. The question was how to
apportion income and losses of the admittedly consolidated WHTCs and
how to combine that computation with the rest of the group's
consolidated income or losses. The court noted that the new, changed
regulations approach varied from the approach taken to a similar
problem involving public utilities within a group and previously
allowed for WHTCs. The court objected that the allocation method
adopted by the regulation allowed non-WHTC losses to reduce WHTC
income. However, the court did not disallow a method that would net
WHTC income of one WHTC with losses of another WHTC, a result that
would not have occurred under separate returns. Nor did the court
expressly disallow a different fractional method that would net both
income and losses of the WHTCs with those of other corporations in the
consolidated group. The court also found that the regulation had been
adopted without proper notice.
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The Federal Circuit Court construed these authorities and
applied them to invalidate Treas. Reg. Sec. 1.1502-
20(c)(1)(iii), stating that:
The loss realized on the sale of a former
subsidiary's assets after the consolidated group sells
the subsidiary's stock is not a problem resulting from
the filing of consolidated income tax returns. The
scenario also arises where a corporate shareholder
sells the stock of a non-consolidated subsidiary. The
corporate shareholder could realize a loss under I.R.C.
sec. 1001, and deduct the loss under I.R.C. sec. 165.
The subsidiary could then deduct any losses from a
later sale of assets. The duplicated loss factor,
therefore, addresses a situation that arises from the
sale of stock regardless of whether corporations file
separate or consolidated returns. With I.R.C. secs. 382
and 383, Congress has addressed this situation by
limiting the subsidiary's potential future deduction,
not the parent's loss on the sale of stock under I.R.C.
sec. 165.\359\
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\359\ Rite Aid, 255 F.3d at 1360.
The Treasury Department has announced that it will not
continue to litigate the validity of the duplicated loss
provision of the regulations, and has issued interim
regulations that permit taxpayers for all years to elect a
different treatment, though they may apply the provision for
the past if they wish.\360\
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\360\ See Temp. Reg. Sec. 1.1502-20T(i)(2), Temp. Reg. Sec.
1.337(d)-2T, and Temp. Reg. Sec. 1.1502-35T. The Treasury Department
has also indicated its intention to continue to study all the issues
that the original loss disallowance regulations addressed (including
issues of furthering single entity principles) and possibly issue
different regulations (not including the particular approach of Treas.
Reg. Sec. 1.1502-20(c)(1)(iii)) on the issues in the future. See Notice
2002-11, 2002-7 I.R.B. 526 (Feb. 19, 2002); T.D. 8984, 67 F.R. 11034
(March 12, 2002); REG-102740-02, 67 F.R. 11070 (March 12, 2002); see
also Notice 2002-18, 2002-12 I.R.B. 644 (March 25, 2002); REG-131478-
02, 67 F.R. 65060 (October 18, 2002); T.D. 9048, 68 F.R. 12287 (March
14, 2003); and T.D. 9118, REG-153172-03 (March 17, 2004).
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REASONS FOR CHANGE
The Committee is concerned that Treasury Department
resources might be unnecessarily devoted to defending
challenges to consolidated return regulations on the mere
assertion by a taxpayer that the result under the consolidated
return regulations is different than the result for separate
taxpayers. The consolidated return regulations offer many
benefits that are not available to separate taxpayers,
including generally rules that tax income received by the group
once and attempt to avoid a second tax on that same income when
stock of a subsidiary is sold.
EXPLANATION OF PROVISION
The provision confirms that, in exercising its authority
under section 1502 to issue consolidated return regulations,
the Treasury Department may provide rules treating corporations
filing consolidated returns differently from corporations
filing separate returns.
Thus, under the statutory authority of section 1502, the
Treasury Department is authorized to issue consolidated return
regulations utilizing either a single taxpayer or separate
taxpayer approach or a combination of the two approaches, as
Treasury deems necessary in order that the tax liability of any
affiliated group of corporations making a consolidated return,
and of each corporation in the group, both during and after the
period of affiliation, may be determined and adjusted in such
manner as clearly to reflect the income-tax liability and the
various factors necessary for the determination of such
liability, and in order to prevent avoidance of such liability.
Rite Aid is thus overruled to the extent it suggests that
the Secretary is required to identify a problem created from
the filing of consolidated returns in order to issue
regulations that change the application of a Code provision.
The Secretary may promulgate consolidated return regulations to
change the application of a tax code provision to members of a
consolidated group, provided that such regulations are
necessary to clearly reflect the income tax liability of the
group and each corporation in the group, both during and after
the period of affiliation.
The provision nevertheless allows the result of the Rite
Aid case to stand with respect to the type of factual situation
presented in the case. That is, the bill provides for the
override of the regulatory provision that took the approach of
denying a loss on a deconsolidating disposition of stock of a
consolidated subsidiary \361\ to the extent the subsidiary had
net operating losses or built in losses that could be used
later outside the group.\362\
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\361\ Treas. Reg. sec. 1.1502-20(c)(1)(iii).
\362\ The provision is not intended to overrule the current
Treasury Department regulations, which allow taxpayers in certain
circumstances for the past to follow Treasury Regulations Section
1.1502-20(c)(1)(iii), if they choose to do so. Temp. Reg. Sec. 1.1502-
20T(i)(2).
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Retaining the result in the Rite Aid case with respect to
the particular regulation section 1.1502-20(c)(1)(iii) as
applied to the factual situation of the case does not in any
way prevent or invalidate the various approaches Treasury has
announced it will apply or that it intends to consider in lieu
of the approach of that regulation, including, for example, the
denial of a loss on a stock sale if inside losses of a
subsidiary may also be used by the consolidated group, and the
possible requirement that inside attributes be adjusted when a
subsidiary leaves a group.\363\
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\363\ See, e.g., Notice 2002-11, 2002-7 I.R.B. 526 (Feb. 19, 2002);
Temp. Reg. Sec. 1.337(d)-2T, (T.D. 8984, 67 F.R. 11034 (March 12, 2002)
and T.D. 8998, 67 F.R. 37998 (May 31, 2002)); REG-102740-02, 67 F.R.
11070 (March 12, 2002); see also Notice 2002-18, 2002-12 I.R.B. 644
(March 25, 2002); REG-131478-02, 67 F.R. 65060 (October 18, 2002);
Temp. Reg. Sec. 1.1502-35T (T.D. 9048, 68 F.R. 12287 (March 14, 2003));
and T.D. 9118, REG-153172-03 (March 17, 2004). In exercising its
authority under section 1502, the Secretary is also authorized to
prescribe rules that protect the purpose of General Utilities repeal
using presumptions and other simplifying conventions.
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EFFECTIVE DATE
The provision is effective for all years, whether beginning
before, on, or after the date of enactment of the provision. No
inference is intended that the results following from this
provision are not the same as the results under present law.
28. Reform of tax treatment of certain leasing arrangements and
limitation on deductions allocable to property used by
governments or other tax-exempt entities (secs. 647 through 649
of the bill, secs. 167 and 168 of the Code, and new sec. 470 of
the Code)
PRESENT LAW
Overview of depreciation
A taxpayer is allowed to recover, through annual
depreciation deductions, the cost of certain property used in a
trade or business or for the production of income. The amount
of the depreciation deduction allowed with respect to tangible
property for a taxable year is determined under the modified
accelerated cost recovery system (``MACRS''). Under MACRS,
different types of property generally are assigned applicable
recovery periods and depreciation methods based on such
property's class life. The recovery periods applicable to most
tangible personal property (generally tangible property other
than residential rental property and nonresidential real
property) range from 3 to 25 years and are significantly
shorter than the property's class life, which is intended to
approximate the economic useful life of the property. In
addition, the depreciation methods generally applicable to
tangible personal property are the 200-percent and 150-percent
declining balance methods, switching to the straight-line
method for the taxable year in which the depreciation deduction
would be maximized.
Characterization of leases for tax purposes
In general, a taxpayer is treated as the tax owner and is
entitled to depreciate property leased to another party if the
taxpayer acquires and retains significant and genuine
attributes of a traditional owner of the property, including
the benefits and burdens of ownership. No single factor is
determinative of whether a lessor will be treated as the owner
of the property. Rather, the determination is based on all the
facts and circumstances surrounding the leasing transaction.
A sale-leaseback transaction is respected for Federal tax
purposes if ``there is a genuine multiple-party transaction
with economic substance which is compelled or encouraged by
business or regulatory realities, is imbued with tax-
independent considerations, and is not shaped solely by tax-
avoidance features that have meaningless labels attached.''
\364\
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\364\ Frank Lyon Co. v. United States, 435 U.S. 561, 583-84 (1978).
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Recovery period for tax-exempt use property
Under present law, ``tax-exempt use property'' must be
depreciated on a straight-line basis over a recovery period
equal to the longer of the property's class life or 125 percent
of the lease term.\365\ For purposes of this rule, ``tax-exempt
use property'' is tangible property that is leased (other than
under a short-term lease) to a tax-exempt entity.\366\ For this
purpose, the term ``tax-exempt entity'' includes Federal, State
and local governmental units, charities, and, foreign entities
or persons.\367\
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\365\ Sec. 168(g)(3)(A). Under present law, section 168(g)(3)(C)
states that the recovery period of ``qualified technological
equipment'' is five years.
\366\ Sec. 168(h)(1).
\367\ Sec. 168(h)(2).
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In determining the length of the lease term for purposes of
the 125-percent calculation, several special rules apply. In
addition to the stated term of the lease, the lease term
includes options to renew the lease or other periods of time
during which the lessee could be obligated to make rent
payments or assume a risk of loss related to the leased
property.
Tax-exempt use property does not include property that is
used by a taxpayer to provide a service to a tax-exempt entity.
So long as the relationship between the parties is a bona fide
service contract, the taxpayer will be allowed to depreciate
the property used in satisfying the contract under normal MACRS
rules, rather than the rules applicable to tax-exempt use
property.\368\ In addition, property is not treated as tax-
exempt use property merely by reason of a short-term lease. In
general, a short-term lease means any lease the term of which
is less than three years and less than the greater of one year
or 30 percent of the property's class life.\369\
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\368\ Sec. 7701(e) provides that a service contract will not be
respected, and instead will be treated as a lease of property, if such
contract is properly treated as a lease taking into account all
relevant factors. The relevant factors include, among others, the
service recipient controls the property, the service recipient is in
physical possession of the property, the service provider does not bear
significant risk of diminished receipts or increased costs if there is
nonperformance, the property is not used to concurrently provide
services to other entities, and the contract price does not
substantially exceed the rental value of the property.
\369\ Sec. 168(h)(1)(C).
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Also, tax-exempt use property generally does not include
qualified technological equipment that meets the exception for
leases of high technology equipment to tax-exempt entities with
lease terms of five years or less.\370\ The recovery period for
qualified technological equipment that is treated as tax-exempt
use property, but is not subject to the high technology
equipment exception, is five years.\371\
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\370\ Sec. 168(h)(3). However, the exception does not apply if part
or all of the qualified technological equipment is financed by a tax-
exempt obligation, is sold by the tax-exempt entity (or related party)
and leased back to the tax-exempt entity (or related party), or the
tax-exempt entity is the United States or any agency or instrumentality
of the United States.
\371\ Sec. 168(g)(3)(C).
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The term ``qualified technological equipment'' is defined
as computers and related peripheral equipment, high technology
telephone station equipment installed on a customer's premises,
and high technology medical equipment.\372\ In addition, tax-
exempt use property does not include computer software because
it is intangible property.
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\372\ Sec. 168(i)(2).
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REASONS FOR CHANGE
The special rules applicable to the depreciation of tax-
exempt use property were enacted to prevent tax-exempt entities
from using leasing arrangements to transfer the tax benefits of
accelerated depreciation on property they used to a taxable
entity. The Committee is concerned that some taxpayers are
attempting to circumvent this policy through the creative use
of service contracts with the tax-exempt entities.
More generally, the Committee believes that certain ongoing
leasing activity with tax-exempt entities and foreign
governments indicates that the present-law tax rules are not
effective in curtailing the ability of a tax-exempt entity to
transfer certain tax benefits to a taxable entity. The
Committee is concerned about this activity and the continual
development of new structures that purport to minimize or
neutralize the effect of these rules. In addition, the
Committee also is concerned by the increasing use of certain
leasing structures involving property purported to be qualified
technological equipment. Although the Committee recognizes that
leasing plays an important role in ensuring the availability of
capital to businesses, it believes that certain transactions of
which it recently has become aware do not serve this role.
These transactions result in little or no accumulation of
capital for financing or refinancing but, instead, essentially
involve an accommodation fee paid by a U.S. taxpayer to a tax
indifferent party.
In discussing the reasons for the enactment of rules in
1984 that were intended to limit the transfer of tax benefits
to taxable entities with respect to property used by tax-exempt
entities, Congress at the time stated that: (1) the Federal
budget was in no condition to sustain substantial and growing
revenue losses by making additional tax benefits (in excess of
tax exemption itself) available to tax-exempt entities through
leasing transactions; (2) there were concerns about possible
problems of accountability of governments to their citizens,
and of tax-exempt organizations to their clientele, if
substantial amounts of their property came under the control of
outside parties solely because the Federal tax system made
leasing more favorable than owning; (3) the tax system should
not encourage tax-exempt entities to dispose of assets they own
or to forego control over the assets they use; (4) there were
concerns about waste of Federal revenues because in some cases
a substantial portion of the tax savings was retained by
lawyers, investment bankers, lessors, and investors and, thus,
the Federal revenue loss became more of a gain to financial
entities than to tax-exempt entities; (5) providing aid to tax-
exempt entities through direct appropriations was more
efficient and appropriate than providing such aid through the
Code; and (6) popular confidence in the tax system must be
sustained by ensuring that the system generally is working
correctly and fairly.\373\
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\373\ See H. Rep. 98-432, Pt. 2, pp. 1140-1141 (1984) and S. Prt.
98-169, Vol. I, pp. 125-127 (1984).
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The Committee believes that the reasons stated above for
the enactment in 1984 of the present-law rules are as important
today as they were in 1984. Unfortunately, the present-law
rules have not adequately deterred taxpayers from engaging in
transactions that attempt to circumvent the rules enacted in
1984. Therefore, the Committee believes that changes to present
law are essential to ensure the attainment of the
aforementioned Congressional intentions, provided such changes
do not inhibit legitimate commercial leasing transactions that
involve a significant and genuine transfer of the benefits and
burdens of tax ownership between the taxpayer and the tax-
exempt lessee.
EXPLANATION OF PROVISION
Overview
The bill modifies the recovery period of certain property
leased to a tax-exempt entity, alters the definition of lease
term for all property leased to a tax-exempt entity, expands
the short-term lease exception for qualified technological
equipment, and establishes rules to limit deductions associated
with leases to tax-exempt entities if the leases do not satisfy
specified criteria.
Modify the recovery period of certain property leased to a tax-exempt
entity
The bill modifies the recovery period for qualified
technological equipment and computer software leased to a tax-
exempt entity \374\ to be the longer of the property's assigned
class life (or assigned useful life in the case of computer
software) or 125 percent of the lease term. The bill does not
apply to short-term leases, as defined under present law with a
modification described below for short-term leases of qualified
technological equipment.
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\374\ The bill defines a tax-exempt entity as under present law.
Thus, it includes Federal, State, local, and foreign governmental
units, charities, foreign entities or persons.
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Modify definition of lease term
In determining the length of the lease term for purposes of
the 125-percent calculation, the bill provides that the lease
term includes all service contracts (whether or not treated as
a lease under section 7701(e)) and other similar arrangements
that follow a lease of property to a tax-exempt entity and that
are part of the same transaction (or series of transactions) as
the lease.\375\
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\375\ A service contract involving property that previously was
leased to the tax-exempt entity is not part of the same transaction as
the preceding leasing arrangement (and, thus, is not included in the
lease term of such arrangement) if the service contract was not
included in the terms and conditions, or contemplated at the inception,
of the preceding leasing arrangement.
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Under the bill, service contracts and other similar
arrangements include arrangements by which services are
provided using the property in exchange for fees that provide a
source of repayment of the capital investment in the
property.\376\
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\376\ For purposes of the bill, a service contract does not include
an arrangement for the provision of services if the leased property or
substantially similar property is not utilized to provide such
services. For example, if at the conclusion of a lease term, a tax-
exempt lessee purchases property from the taxpayer and enters into an
agreement pursuant to which the taxpayer maintains the property, the
maintenance agreement will not be included in the lease term for
purposes of the 125-percent computation.
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This requirement applies to all leases of property to a
tax-exempt entity.
Expand short-term lease exception for qualified technological equipment
For purposes of determining whether a lease of qualified
technological equipment to a tax-exempt entity satisfies the
present-law 5-year short-term lease exception for leases of
qualified technological equipment, the bill provides that the
term of the lease does not include an option or options of the
lessee to renew or extend the lease, provided the rents under
the renewal or extension are based upon fair market value
determined at the time of the renewal or extension. The
aggregate period of such renewals or extensions not included in
the lease term under this provision may not exceed 24 months.
In addition, this provision does not apply to any period
following the failure of a tax-exempt lessee to exercise a
purchase option if the result of such failure is that the lease
renews automatically at fair market value rents.
Limit deductions for certain leases of property to tax-exempt parties
The bill also provides that if a taxpayer leases property
to a tax-exempt entity, the taxpayer may not claim deductions
from the lease transaction in excess of the taxpayer's gross
income from the lease for that taxable year. This provision
does not apply to certain transactions involving property with
respect to which the low-income housing credit or the
rehabilitation credit is allowable.
This provision applies to deductions or losses related to a
lease to a tax-exempt entity and the leased property.\377\ Any
disallowed deductions are carried forward and treated as
deductions related to the lease in the following taxable year
subject to the same limitations. Under rules similar to those
applicable to passive activity losses (including the treatment
of dispositions of property in which less than all of the gain
or loss from the disposition is recognized),\378\ a taxpayer
generally is permitted to deduct previously disallowed
deductions and losses when the taxpayer completely disposes of
its interest in the property.
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\377\ Deductions related to a lease of tax-exempt use property
include any depreciation or amortization expense, maintenance expense,
taxes or the cost of acquiring an interest in, or lease of, property.
In addition, this provision applies to interest that is properly
allocable to tax-exempt use property, including interest on any
borrowing by a related person, the proceeds of which were used to
acquire an interest in the property, whether or not the borrowing is
secured by the leased property or any other property.
\378\ See Sec. 469(g).
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A lease of property to a tax-exempt party is not subject to
the deduction limitations of this provision if the lease
satisfies all of the following requirements: \379\
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\379\ Even if a transaction satisfies each of the following
requirements, the taxpayer will be treated as the owner of the leased
property only if the taxpayer acquires and retains significant and
genuine attributes of an owner of the property under the present-law
tax rules, including the benefits and burdens of ownership.
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(1) Tax-exempt lessee does not monetize its lease
obligations
In general, the tax-exempt lessee may not monetize its
lease obligations (including any purchase option) in an amount
that exceeds 20 percent of the taxpayer's adjusted basis \380\
in the leased property at the time the lease is entered
into.\381\ Specifically, a lease does not satisfy this
requirement if the tax-exempt lessee monetizes such excess
amount pursuant to an arrangement, set-aside, or expected set-
aside, that is to or for the benefit of the taxpayer or any
lender, or is to or for the benefit of the tax-exempt lessee,
in order to satisfy the lessee's obligations or options under
the lease. This determination shall be made at all times during
the lease term and shall include the amount of any interest or
other income or gain earned on any amount set aside or subject
to an arrangement described in this provision. For purposes of
determining whether amounts have been set aside or are expected
to be set aside, amounts are treated as set aside or expected
to be set aside only if a reasonable person would conclude that
the facts and circumstances indicate that such amounts are set
aside or expected to be set aside.\382\
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\380\ For purposes of this requirement, the adjusted basis of
property acquired by the taxpayer in a like-kind exchange or
involuntary conversion to which section 1031 or section 1033 applies is
equal to the lesser of (1) the fair market value of the property as of
the beginning of the lease term, or (2) the amount that would be the
taxpayer's adjusted basis if section 1031 or section 1033 did not apply
to such acquisition.
\381\ Arrangements to monetize lease obligations include defeasance
arrangements, loans by the tax-exempt entity (or an affiliate) to the
taxpayer (or an affiliate) or any lender, deposit agreements, letters
of credit collateralized with cash or cash equivalents, payment
undertaking agreements, prepaid rent (within the meaning of the
regulations under section 467), sinking fund arrangements, guaranteed
investment contracts, financial guaranty insurance, or any similar
arrangements.
\382\ It is anticipated that the customary and budgeted funding by
tax-exempt entities of current obligations under a lease through
unrestricted accounts or funds for general working capital needs will
not be considered arrangements, set-asides, or expected set-asides
under this requirement.
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The Secretary may provide by regulations that this
requirement is satisfied, even if a tax-exempt lessee monetizes
its lease obligations or options in an amount that exceeds 20
percent of the taxpayer's adjusted basis in the leased
property, in cases in which the creditworthiness of the tax-
exempt lessee would not otherwise satisfy the taxpayer's
customary underwriting standards. Such credit support would not
be permitted to exceed 50 percent of the taxpayer's adjusted
basis in the property. In addition, if the lease provides the
tax-exempt lessee an option to purchase the property for a
fixed purchase price (or for other than the fair market value
of the property determined at the time of exercise of the
option), such credit support at the time that such option may
be exercised would not be permitted to exceed 50 percent of the
purchase option price.
Certain lease arrangements that involve circular cash flows
or insulation of the taxpayer's equity investment from the risk
of loss fail this requirement without regard to the amount in
which the tax-exempt lessee monetizes its lease obligations or
options. Thus, a lease does not satisfy this requirement if the
tax-exempt lessee enters into an arrangement to monetize in any
amount its lease obligations or options if such arrangement
involves (1) a loan (other than an amount treated as a loan
under section 467 with respect to a section 467 rental
agreement) from the tax-exempt lessee to the taxpayer or a
lender, (2) a deposit that is received, a letter of credit that
is issued, or a payment undertaking agreement that is entered
into by a lender otherwise involved in the transaction, or (3)
in the case of a transaction that involves a lender, any credit
support made available to the taxpayer in which any such lender
does not have a claim that is senior to the taxpayer.
(2) Taxpayer makes and maintains a substantial equity
investment in the leased property
The taxpayer must make and maintain a substantial equity
investment in the leased property. For this purpose, a taxpayer
generally does not make or maintain a substantial equity
investment unless (1) at the time the lease is entered into,
the taxpayer initially makes an unconditional at-risk equity
investment in the property of at least 20 percent of the
taxpayer's adjusted basis \383\ in the leased property at that
time,\384\ (2) the taxpayer maintains such equity investment
throughout the lease term, and (3) at all times during the
lease term, the fair market value of the property at the end of
the lease term is reasonably expected to be equal to at least
20 percent of such basis.\385\ For this purpose, the fair
market value of the property at the end of the lease term is
reduced to the extent that a person other than the taxpayer
bears a risk of loss in the value of the property.
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\383\ For purposes of this requirement, the adjusted basis of
property acquired by the taxpayer in a like-kind exchange or
involuntary conversion to which section 1031 or section 1033 applies is
equal to the lesser of (1) the fair market value of the property as of
the beginning of the lease term, or (2) the amount that would be the
taxpayer's adjusted basis if section 1031 or section 1033 did not apply
to such acquisition.
\384\ The taxpayer's at-risk equity investment shall include only
consideration paid, and personal liability incurred, by the taxpayer to
acquire the property. Cf. Rev. Proc. 2001-28, 2001-2 C.B. 1156.
\385\ Cf. Rev. Proc. 2001-28, sec. 4.01(2), 2001-1 C.B. 1156. The
fair market value of the property must be determined without regard to
inflation or deflation during the lease term and after subtracting the
cost of removing the property.
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This requirement does not apply to leases with lease terms
of 5 years or less.
(3) Tax-exempt lessee does not bear more than a minimal
risk of loss
The tax-exempt lessee generally may not assume or retain
more than a minimal risk of loss, other than the obligation to
pay rent and insurance premiums, to maintain the property, or
other similar conventional obligations of a net lease.\386\ For
this purpose, a tax-exempt lessee assumes or retains more than
a minimal risk of loss if, as a result of obligations assumed
or retained by, on behalf of, or pursuant to an agreement with
the tax-exempt lessee, the taxpayer is protected from either
(1) any portion of the loss that would occur if the fair market
value of the leased property were 25 percent less than the
leased property's reasonably expected fair market value at the
time the lease is terminated, or (2) an aggregate loss that is
greater than 50 percent of the loss that would occur if the
fair market value of the leased property were zero at lease
termination.\387\ In addition, the Secretary may provide by
regulations that this requirement is not satisfied where the
tax-exempt lessee otherwise retains or assumes more than a
minimal risk of loss. Such regulations shall be prospective
only.
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\386\ Examples of arrangements by which a tax-exempt lessee might
assume or retain a risk of loss include put options, residual value
guarantees, residual value insurance, and service contracts. However,
leases do not fail to satisfy this requirement solely by reason of
lease provisions that require the tax-exempt lessee to pay a
contractually stipulated loss value to the taxpayer in the event of an
early termination due to a casualty loss, a material default by the
tax-exempt lessee (excluding the failure by the tax-exempt lessee to
enter into an arrangement described above), or other similar
extraordinary events that are not reasonably expected to occur at lease
inception.
\387\ For purposes of this requirement, residual value protection
provided to the taxpayer by a manufacturer or dealer of the leased
property is not treated as borne by the tax-exempt lessee if the
manufacturer or dealer provides such residual value protection to
customers in the ordinary course of its business.
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This requirement does not apply to leases with lease terms
of 5 years or less.
Coordination with like-kind exchange and involuntary
conversion rules
Under this provision, neither the like-kind exchange rules
(sec. 1031) nor the involuntary conversion rules (sec. 1033)
apply if either (1) the exchanged or converted property is tax-
exempt use property subject to a lease that was entered into
prior to the effective date of this provision and the lease
would not have satisfied the requirements of this provision had
such requirements been in effect when the lease was entered
into, or (2) the replacement property is tax-exempt use
property subject to a lease that does not meet the requirements
of this provision.
Other rules
This provision continues to apply throughout the lease term
to property that initially was tax-exempt use property, even if
the property ceases to be tax-exempt use property during the
lease term.\388\ In addition, this provision is applied before
the application of the passive activity loss rules under
section 469.
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\388\ Conversely, however, a lease of property that is not tax-
exempt use property does not become subject to this provision solely by
reason of requisition or seizure by the Federal government in national
emergency circumstances.
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This provision does not alter the treatment of any
Qualified Motor Vehicle Operating Agreement within the meaning
of section 7701(h). In the case of any such agreement, the
second and third requirements provided by this provision
(relating to taxpayer equity investment and tax-exempt lessee
risk of loss, respectively) shall be applied without regard to
any terminal rental adjustment clause.
EFFECTIVE DATE
The provision generally is effective for leases entered
into after March 12, 2004.\389\ However, the provision does not
apply to property located in the United States that is subject
to a lease with respect to which a formal application (1) was
submitted for approval to the Federal Transit Administration
(an agency of the Department of Transportation) after June 30,
2003, and before March 13, 2004, (2) is approved by the Federal
Transit Administration before January 1, 2005, and (3) includes
a description and the fair market value of such property.
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\389\ If a lease entered into on or before March 12, 2004, is
transferred in a transaction that does not materially alter the terms
of such lease, the bill shall not apply to the lease as a result of
such transfer.
---------------------------------------------------------------------------
The provisions relating to coordination with the like-kind
exchange and involuntary conversion rules are effective with
respect to property that is exchanged or converted after the
date of enactment.
No inference is intended regarding the appropriate present-
law tax treatment of transactions entered into prior to the
effective date of this provision. In addition, it is intended
that this provision shall not be construed as altering or
supplanting the present-law tax rules providing that a taxpayer
is treated as the owner of leased property only if the taxpayer
acquires and retains significant and genuine attributes of an
owner of the property, including the benefits and burdens of
ownership. This provision also is not intended to affect the
scope of any other present-law tax rules or doctrines
applicable to purported leasing transactions.
C. Reduction of Fuel Tax Evasion
1. Exemption from certain excise taxes for mobile machinery vehicles
(sec. 651 of the bill, and secs. 4053, 4072, 4082, 4483 and
6421 of the Code)
PRESENT LAW
Under present law, the definition of a ``highway vehicle''
affects the application of the retail tax on heavy vehicles,
the heavy vehicle use tax, the tax on tires, and fuel
taxes.\390\ Section 4051 of the Code provides for a 12-percent
retail sales tax on tractors, heavy trucks with a gross vehicle
weight (``GVW'') over 33,000 pounds, and trailers with a GVW
over 26,000 pounds. Section 4071 provides for a tax on highway
vehicle tires that weigh more than 40 pounds, with higher rates
of tax for heavier tires. Section 4481 provides for an annual
use tax on heavy vehicles with a GVW of 55,000 pounds or more,
with higher rates of tax on heavier vehicles. All of these
excise taxes are paid into the Highway Trust Fund.
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\390\ Secs. 4051, 4071, 4481, 4041 and 4081.
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Federal excise taxes are also levied on the motor fuels
used in highway vehicles. Gasoline is subject to a tax of 18.4
cents per gallon, of which 18.3 cents per gallon is paid into
the Highway Trust Fund and 0.1 cent per gallon is paid into the
Leaking Underground Storage Tank (``LUST'') Trust Fund. Highway
diesel fuel is subject to a tax of 24.4 cents per gallon, of
which 24.3 cents per gallon is paid into the Highway Trust Fund
and 0.1 cent per gallon is paid into the LUST Trust Fund.
The Code does not define a ``highway vehicle.'' For
purposes of these taxes, Treasury regulations define a highway
vehicle as any self-propelled vehicle or trailer or semitrailer
designed to perform a function of transporting a load over the
public highway, whether or not also designed to perform other
functions. Excluded from the definition of highway vehicle are
(1) certain specially designed mobile machinery vehicles for
non-transportation functions (the ``mobile machinery
exception''); (2) certain vehicles specially designed for off-
highway transportation for which the special design
substantially limits or impairs the use of such vehicle to
transport loads over the highway (the ``off-highway
transportation vehicle'' exception); and (3) certain trailers
and semi-trailers specially designed to function only as an
enclosed stationary shelter for the performance of non-
transportation functions off the public highways.\391\
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\391\ See Treas. Reg. sec. 48.4061-1(d)).
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The mobile machinery exception applies if three tests are
met: (1) the vehicle consists of a chassis to which jobsite
machinery (unrelated to transportation) has been permanently
mounted; (2) the chassis has been specially designed to serve
only as a mobile carriage and mount for the particular
machinery; and (3) by reason of such special design, the
chassis could not, without substantial structural modification,
be used to transport a load other than the particular
machinery. An example of a mobile machinery vehicle is a crane
mounted on a truck chassis that meets the forgoing factors.
On June 6, 2002, the Treasury Department put forth
proposed regulations that would eliminate the mobile machinery
exception.\392\ The other exceptions from the definition of
highway vehicle would continue to apply with some
modifications. Under the proposed regulations, the chassis of a
mobile machinery vehicle would be subject to the retail sales
tax on heavy vehicles unless the vehicle qualified under the
off-highway transportation vehicle exception. Also, under the
proposed regulations, mobile machinery vehicles may be subject
to the heavy vehicle use tax. In addition, the tax credits,
refunds, and exemptions from tax may not be available for the
fuel used in these vehicles.
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\392\ Prop. Treas. Reg. sec. 48.4051-1(a), 67 Fed. Reg. 38913,
38914-38915 (2002).
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REASONS FOR CHANGE
The Treasury Department has delayed issuance of final
regulations regarding mobile machinery to allow Congressional
action on a statutory definition of mobile machinery vehicle.
The Highway Trust Fund is supported by taxes related to the use
of vehicles on the public highways. The Committee understands
that a mobile machinery exemption was created by Treasury
regulation because the Treasury Department believed that mobile
machinery used the public highways only incidentally to get
from one job site to another. However, it has come to the
Committee's attention that certain vehicles are taking
advantage of the mobile machinery exemption even though they
spend a significant amount of time on public highways and,
therefore, cause wear and tear to such highways. Because the
mobile machinery exemption is based on incidental use of the
public highways, the Committee believes it is appropriate to
add a use-based test to the design-based test that exists under
current regulation. The Committee believes that a use-based
test is practical to administer only for purposes of the fuel
excise tax.
EXPLANATION OF PROVISION
The provision codifies the present-law mobile machinery
exemption for purposes of three taxes: the retail tax on heavy
vehicles, the heavy vehicle use tax, and the tax on tires.
Thus, if a vehicle can satisfy the three-part test, it will not
be treated as a highway vehicle and will be exempt from these
taxes.
For purposes of the fuel excise tax, the three-part design
test is codified and a use test is added by the provision.
Specifically, in addition to the three-part design test, the
vehicle must not have traveled more than 7,500 miles over
public highways during the owner's taxable year. Refunds of
fuel taxes are permitted on an annual basis only. For purposes
of this rule, a person's taxable year is his taxable year for
income tax purposes.
EFFECTIVE DATE
The provision generally is effective after the date of
enactment. As to the fuel taxes, the provision is effective for
taxable years beginning after the date of enactment.
2. Taxation of aviation-grade kerosene (sec. 652 of the bill and secs.
4041, 4081, 4082, 4083, 4091, 4092, 4093, 4101, and 6427 of the
Code)
PRESENT LAW
In general
Aviation fuel is kerosene and any liquid (other than any
product taxable under section 4081) that is suitable for use as
a fuel in an aircraft.\393\ Unlike other fuels that generally
are taxed upon removal from a terminal rack,\394\ aviation fuel
is taxed upon sale of the fuel by a producer or importer.\395\
Sales by a registered producer to another registered producer
are exempt from tax, with the result that, as a practical
matter, aviation fuel is not taxed until the fuel is used at
the airport (or sold to an unregistered person). Use of untaxed
aviation fuel by a producer is treated as a taxable sale.\396\
The producer or importer is liable for the tax. The rate of tax
on aviation fuel is 21.9 cents per gallon.\397\
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\393\ Sec. 4093(a).
\394\ A rack is a mechanism capable of delivering taxable fuel into
a means of transport other than a pipeline or vessel. Treas. Reg. sec.
48.4081-1(b).
\395\ Sec. 4091(a)(1).
\396\ Sec. 4091(a)(2).
\397\ Sec. 4091(b). This rate includes a 0.1 cent per gallon
Leaking Underground Storage Tank (``LUST'') Trust Fund tax. The LUST
Trust Fund tax is set to expire after March 31, 2005, with the result
that on April 1, 2005, the tax rate is scheduled to be 21.8 cents per
gallon. Secs. 4091(b)(3)(B) and 4081(d)(3). Beginning on October 1,
2007, the rate of tax is reduced to 4.3 cents per gallon. Sec.
4091(b)(3)(A).
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The tax on aviation fuel is reported by filing Form 720--
Quarterly Federal Excise Tax Return. Generally, semi-monthly
deposits are required using Form 8109B--Federal Tax Deposit
Coupon or by depositing the tax by electronic funds transfer.
Partial exemptions
In general, aviation fuel sold for use or used in
commercial aviation is taxed at a reduced rate of 4.4 cents per
gallon.\398\ Commercial aviation means any use of an aircraft
in a business of transporting persons or property for
compensation or hire by air (unless the use is allocable to any
transportation exempt from certain excise taxes).\399\
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\398\ Sec. 4092(b). The 4.4 cent rate includes 0.1 cent per gallon
that is attributable to the LUST Trust Fund financing rate. A full
exemption, discussed below, applies to aviation fuel that is sold for
use in commercial aviation as fuel supplies for vessels or aircraft,
which includes use by certain foreign air carriers and for the
international flights of domestic carriers. Secs. 4092(a), 4092(b), and
4221(d)(3).
\399\ Secs. 4092(b) and 4041(c)(2).
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In order to qualify for the 4.4 cents per gallon rate, the
person engaged in commercial aviation must be registered with
the Secretary \400\ and provide the seller with a written
exemption certificate stating the airline's name, address,
taxpayer identification number, registration number, and
intended use of the fuel. A person that is registered as a
buyer of aviation fuel for use in commercial aviation generally
is assigned a registration number with a ``Y'' suffix (a ``Y''
registrant), which entitles the registrant to purchase aviation
fuel at the 4.4 cents per gallon rate.
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\400\ Notice 88-132, sec. III(D). See also, Form 637--Application
for Registration (For Certain Excise Tax Activities). A bond may be
required as a condition of registration.
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Large commercial airlines that also are producers of
aviation fuel qualify for registration numbers with an ``H''
suffix. As producers of aviation fuel, ``H'' registrants may
buy aviation fuel tax free pursuant to a full exemption that
applies to sales of aviation fuel by a registered producer to a
registered producer. If the ``H'' registrant ultimately uses
such untaxed fuel in domestic commercial aviation, the H
registrant is liable for the aviation fuel tax at the 4.4 cents
per gallon rate.
Exemptions
Aviation fuel sold by a producer or importer for use by the
buyer in a nontaxable use is exempt from the excise tax on
sales of aviation fuel.\401\ To qualify for the exemption, the
buyer must provide the seller with a written exemption
certificate stating the buyer's name, address, taxpayer
identification number, registration number (if applicable), and
intended use of the fuel.
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\401\ Sec. 4092(a).
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Nontaxable uses include: (1) use other than as fuel in an
aircraft (such as use in heating oil); (2) use on a farm for
farming purposes; (3) use in a military aircraft owned by the
United States or a foreign country; (4) use in a domestic air
carrier engaged in foreign trade or trade between the United
States and any of its possessions;\402\ (5) use in a foreign
air carrier engaged in foreign trade or trade between the
United States and any of its possessions (but only if the
foreign carrier's country of registration provides similar
privileges to United States carriers); (6) exclusive use of a
State or local government; (7) sales for export, or shipment to
a United States possession; (8) exclusive use by a nonprofit
educational organization; (9) use by an aircraft museum
exclusively for the procurement, care, or exhibition of
aircraft of the type used for combat or transport in World War
II, and (10) use as a fuel in a helicopter or a fixed-wing
aircraft for purposes of providing transportation with respect
to which certain requirements are met.\403\
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\402\ ``Trade'' includes the transportation of persons or property
for hire. Treas. Reg. sec. 48.4221-4(b)(8).
\403\ Secs. 4041(f)(2), 4041(g), 4041(h), 4041(l), and 4092.
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A producer that is registered with the Secretary may sell
aviation fuel tax-free to another registered producer.\404\
Producers include refiners, blenders, wholesale distributors of
aviation fuel, dealers selling aviation fuel exclusively to
producers of aviation fuel, the actual producer of the aviation
fuel, and with respect to fuel purchased at a reduced rate, the
purchaser of such fuel.
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\404\ Sec. 4092(c).
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Refunds and credits
A claim for refund of taxed aviation fuel held by a
registered aviation fuel producer is allowed \405\ (without
interest) if: (1) the aviation fuel tax was paid by an importer
or producer (the ``first producer'') and the tax has not
otherwise been credited or refunded; (2) the aviation fuel was
acquired by a registered aviation fuel producer (the ``second
producer'') after the tax was paid; (3) the second producer
files a timely refund claim with the proper information; and
(4) the first producer and any other person that owns the fuel
after its sale by the first producer and before its purchase by
the second producer have met certain reporting
requirements.\406\ Refund claims should contain the volume and
type of aviation fuel, the date on which the second producer
acquired the fuel, the amount of tax that the first producer
paid, a statement by the claimant that the amount of tax was
not collected nor included in the sales price of the fuel by
the claimant when the fuel was sold to a subsequent purchaser,
the name, address, and employer identification number of the
first producer, and a copy of any required statement of a
subsequent seller (subsequent to the first producer but prior
to the second producer) that the second producer received. A
claim for refund is filed on Form 8849, Claim for Refund of
Excise Taxes, and may not be combined with any other
refunds.\407\
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\405\ Sec. 4091(d).
\406\ Treas. Reg. sec. 48.4091-3(b).
\407\ Treas. Reg. sec. 48.4091-3(d)(1).
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A payment is allowable to the ultimate purchaser of taxed
aviation fuel if the aviation fuel is used in a nontaxable
use.\408\ A claim for payment may be made on Form 8849 or on
Form 720, Schedule C. A claim made on Form 720, Schedule C, may
be netted against the claimant's excise tax liability.\409\
Claims for payment not so taken may be allowable as income tax
credits \410\ on Form 4136, Credit for Federal Tax Paid on
Fuels.
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\408\ Sec. 6427(l)(1).
\409\ Treas. Reg. sec. 40.6302(c)-1(a)(3).
\410\ Sec. 34.
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REASONS FOR CHANGE
The Committee believes that the present law rules for
taxation of aviation fuel create opportunities for widespread
abuse and evasion of fuels excise taxes. In general, aviation
fuel is taxed on its sale, whereas other fuel generally is
taxed on its removal from a refinery or terminal rack. Because
the incidence of tax on aviation fuel is sale and not removal,
under present law, aviation fuel may be removed from a refinery
or terminal rack tax free if such fuel is intended for use in
aviation purposes. The Committee is aware that unscrupulous
persons are removing fuel tax free, purportedly for aviation
use, but then selling the fuel for highway use, charging their
customer the full rate of tax that would be owed on highway
fuel, and keeping the amount of the tax.
In order to prevent such fraud, the Committee believes that
it is appropriate to conform the tax treatment of all taxable
fuels by shifting the incidence of taxation on aviation fuel
from the sale of aviation fuel to the removal of such fuel from
a refinery or terminal rack. In general, all removals of
aviation fuel will be fully taxed at the time of removal,
therefore minimizing the cost to the government of the
fraudulent diversion of aviation fuel for non-aviation uses. If
fuel is later used for an aviation use to which a reduced rate
of tax applies, refunds are available. The Committee notes that
when the incidence of tax for other fuels (for example,
gasoline or diesel) was shifted to the rack, collection of the
tax increased significantly indicating that fraud had been
occurring.
The provision provides exceptions to the general rule in
cases where the opportunities for fraud are insignificant. For
example, if fuel is removed from an airport terminal directly
into the wing of a commercial aircraft by a hydrant system, it
is clear that the fuel will be used in commercial aviation and
that the reduced rate of tax for commercial aviation should
apply. In addition, if a terminal is located within an secure
airport and, except in exigent circumstances, does not fuel
highway vehicles, then the Committee believes it is appropriate
to permit certain airline refueling vehicles to transport fuel
from the terminal rack directly to the wing of an aircraft and
have the applicable rate of tax (reduced or otherwise) apply
upon removal from the refueling vehicle.
EXPLANATION OF PROVISION
The provision changes the incidence of taxation of aviation
fuel from the sale of aviation fuel to the removal of aviation
fuel from a refinery or terminal, or the entry into the United
States of aviation fuel. Sales of not previously taxed aviation
fuel to an unregistered person also are subject to tax.
Under the provision, the full rate of tax--21.9 cents per
gallon--is imposed upon removal of aviation fuel from a
refinery or terminal (or entry into the United States).
Aviation fuel may be removed at a reduced rate--either 4.4 or
zero cents per gallon--only if the aviation fuel is: (1)
removed directly into the wing of an aircraft (i) that is
registered with the Secretary as a buyer of aviation fuel for
use in commercial aviation (e.g., a ``Y'' registrant under
current law), (ii) that is a foreign airline entitled to the
present law exemption for aviation fuel used in foreign trade,
or (iii) for a tax-exempt use; or (2) removed or entered as
part of an exempt bulk transfer.\411\ An exempt bulk transfer
is a removal or entry of aviation fuel transferred in bulk by
pipeline or vessel to a terminal or refinery if the person
removing or entering the aviation fuel, the operator of such
pipeline or vessel, and the operator of such terminal or
refinery are registered with the Secretary.
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\411\ See sec. 4081(a)(1)(B).
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Under a special rule, the provision treats certain refueler
trucks, tankers, and tank wagons as a terminal if certain
requirements are met. For the special rule to apply, a
qualifying truck, tanker, or tank wagon must be loaded with
aviation fuel from a terminal: (1) that is located within an
airport, and (2) from which no vehicle licensed for highway use
is loaded with aviation fuel, except in exigent circumstances
identified by the Secretary in regulations. The Committee
intends that a terminal is located within an airport if the
terminal is located in a secure facility on airport grounds.
For example, if an access road runs between a terminal and an
airport's runways, and the terminal, like the runways, is
physically located on airport grounds and is part of a secure
facility, the Committee intends that under the provision the
terminal is located within the airport. The Committee intends
that an exigent circumstance under which loading a vehicle
registered for highway use with fuel would not disqualify a
terminal under the special rule would include, for example, the
unloading of fuel from bulk storage tanks into highway vehicles
in order to repair the storage tanks.
In order to qualify for the special rule, a refueler truck,
tanker, or tank wagon must: (1) deliver the aviation fuel
directly into the wing of the aircraft at the airport where the
terminal is located; (2) have storage tanks, hose, and coupling
equipment designed and used for the purposes of fueling
aircraft; (3) not be licensed for highway use; and (4) be
operated by the terminal operator (who operates the terminal
rack from which the fuel is unloaded) or by a person that makes
a daily accounting to such terminal operator of each delivery
of fuel from such truck, tanker, or tank wagon.\412\
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\412\ The provision requires that if such delivery of information
is provided to a terminal operator (or if a terminal operator collects
such information), that the terminal operator provide such information
to the Secretary.
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The provision does not change the applicable rates of tax
under present law, 21.9 cents per gallon for use in
noncommercial aviation, 4.4 cents per gallon for use in
commercial aviation, and zero cents per gallon for use by
domestic airlines in an international flight, by foreign
airlines, or other nontaxable use. The provision imposes
liability for the tax on aviation fuel removed from a refinery
or terminal directly into the wing of an aircraft for use in
commercial aviation on the person receiving the fuel, in which
case, such person self-assesses the tax on a return. The
provision does not change present-law nontaxable uses of
aviation fuel, or change the persons or the qualifications of
persons who are entitled to purchase fuel at a reduced rate,
except that a producer is not permitted to purchase aviation
fuel at a reduced rate by reason of such persons' status as a
producer.
Under the provision, a refund is allowable to the ultimate
vendor of aviation fuel if such ultimate vendor purchases fuel
tax paid and subsequently sells the fuel to a person qualified
to purchase at a reduced rate and who waives the right to a
refund. In such a case, the provision permits an ultimate
vendor to net refund claims against any excise tax liability of
the ultimate vendor, in a manner similar to the present law
treatment of ultimate purchaser payment claims.
As under present law, if previously taxed aviation fuel is
used for a nontaxable use, the ultimate purchaser may claim a
refund for the tax previously paid. If previously taxed
aviation fuel is used for a taxable non aircraft use, the fuel
is subject to the tax imposed on kerosene (24.4 cents per
gallon) and a refund of the previously paid aviation fuel tax
is allowed. Claims by the ultimate vendor or the purchaser that
are not taken as refund claims may be allowable as income tax
credits.
For example, for an airport that is not served by a
pipeline, aviation fuel generally is removed from a terminal
and transported to an airport storage facility for eventual use
at the airport. In such a case, the aviation fuel will be taxed
at 21.9 cents per gallon upon removal from the terminal. At the
airport, if the fuel is purchased from a vendor by a person
registered with the Secretary to use fuel in commercial
aviation, the purchaser may buy the fuel at a reduced rate
(generally, 4.4 cents per gallon for domestic flights and zero
cents per gallon for international flights) and waive the right
to a refund. The ultimate vendor generally may claim a refund
for the difference between 21.9 cents per gallon of tax paid
upon removal and the rate of tax paid to the vendor by the
purchaser. To obtain a zero rate upon purchase, a registered
domestic airline must certify to the vendor at the time of
purchase that the fuel is for use in an international flight;
otherwise, the airline must pay the 4.4 cents per gallon rate
and file a claim for refund to the Secretary if the fuel is
used for international aviation. If a zero rate is paid and the
fuel subsequently is used in domestic and not international
travel, the domestic airline is liable for tax at 4.4 cents per
gallon. A foreign airline eligible under present law to
purchase aviation fuel tax-free would continue to purchase such
fuel tax-free.
As another example, for an airport that is served by a
pipeline, aviation fuel generally is delivered to the wing of
an aircraft either by a refueling truck or by a ``hydrant''
that runs directly from the pipeline to the airplane wing. If a
refueling truck that is not licensed for highway use loads fuel
from a terminal located within the airport (and the other
requirements of the provision for such truck and terminal are
met), and delivers the fuel directly to the wing of an aircraft
for use in commercial aviation, the aviation fuel is taxed at
4.4 cents per gallon upon delivery to the wing and the person
receiving the fuel is liable for the tax, which such person
would be able to self-assess on a return.\413\ If fuel is
loaded into a refueling truck that does not meet the
requirements of the provision, then the fuel is treated as
removed from the terminal into the refueling truck and tax of
21.9 cents per gallon is paid on such removal. The ultimate
vendor is entitled to a refund of the difference between 21.9
cents per gallon paid on removal and the rate paid by a
commercial airline purchaser (assuming the purchaser waived the
refund right). If fuel is removed from a terminal directly to
the wing of an aircraft registered to use fuel in commercial
aviation by a hydrant or similar device, the person removing
the aviation fuel is liable for a tax of 4.4 cents per gallon
(or zero in the case of an international flight or qualified
foreign airline) and may self-assess such tax on a return.
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\413\ Alternatively, if the aviation fuel in the example is for use
in noncommercial aviation, the fuel is taxed at 21.9 cents per gallon
upon delivery into the wing. Self-assessment of the tax would not apply
in such case.
---------------------------------------------------------------------------
Under the provision, a floor stocks tax applies to aviation
fuel held by a person (if title for such fuel has passed to
such person) on October 1, 2004. The tax is equal to the amount
of tax that would have been imposed before October 1, 2004, if
the provision was in effect at all times before such date,
reduced by the tax imposed by section 4091, as in effect on the
day before the date of enactment. The Secretary shall determine
the time and manner for payment of the tax, including the
nonapplication of the tax on de minimis amounts of aviation
fuel. Under the provision, 0.1 cents per gallon of such tax is
transferred to the LUST Trust Fund. The remainder is
transferred to the Airport and Airway Trust Fund.
EFFECTIVE DATE
The provision is effective for aviation fuel removed,
entered, or sold after September 30, 2004.
3. Mechanical dye injection and related penalties (sec. 653 of the bill
and sec. 4082 and new sec. 6715A of the Code)
PRESENT LAW
Statutory rules
Gasoline, diesel fuel and kerosene are generally subject to
excise tax upon removal from a refinery or terminal, upon
importation into the United States, and upon sale to
unregistered persons unless there was a prior taxable removal
or importation of such fuels.\414\ However, a tax is not
imposed upon diesel fuel or kerosene if all of the following
are met: (1) the Secretary determines that the fuel is destined
for a nontaxable use, (2) the fuel is indelibly dyed in
accordance with regulations prescribed by the Secretary,\415\
and (3) the fuel meets marking requirements prescribed by the
Secretary.\416\ A nontaxable use is defined as (1) any use that
is exempt from the tax imposed by section 4041(a)(1) other than
by reason of a prior imposition of tax, (2) any use in a train,
or (3) certain uses in buses for public and school
transportation, as described in section 6427(b)(1) (after
application of section 6427(b)(3)).\417\
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\414\ Sec. 4081(a)(1)(A). If such fuel is used for a nontaxable
purpose, the purchaser is entitled to a refund of tax paid, or in some
cases, an income tax credit. See sec. 6427.
\415\ Dyeing is not a requirement, however, for certain fuels under
certain conditions, i.e., diesel fuel or kerosene exempted from dyeing
in certain States by the EPA under the Clean Air Act, aviation-grade
kerosene as determined under regulations prescribed by the Secretary,
kerosene received by pipeline or vessel and used by a registered
recipient to produce substances (other than gasoline, diesel fuel or
special fuels), kerosene removed or entered by a registrant to produce
such substances or for resale, and (under regulations) kerosene sold by
a registered distributor who sells kerosene exclusively to ultimate
vendors that resell it (1) from a pump that is not suitable for fueling
any diesel-powered highway vehicle or train, or (2) for blending with
heating oil to be used during periods of extreme or unseasonable cold.
Sec. 4082(c), (d).
\416\ Sec. 4082(a).
\417\ Sec. 4082(b).
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The Secretary is required to prescribe necessary
regulations relating to dyeing, including specifically the
labeling of retail diesel fuel and kerosene pumps.\418\
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\418\ Sec. 4082(e).
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A person who sells dyed fuel (or holds dyed fuel for sale)
for any use that such person knows (or has reason to know) is a
taxable use, or who willfully alters or attempts to alter the
dye in any dyed fuel, is subject to a penalty.\419\ The penalty
also applies to any person who uses dyed fuel for a taxable use
(or holds dyed fuel for such a use) and who knows (or has
reason to know) that the fuel is dyed.\420\ The penalty is the
greater of $1,000 per act or $10 per gallon of dyed fuel
involved. In determining the amount of the penalty, the $1,000
is increased by the product of $1,000 and the number of prior
penalties imposed upon such person (or a related person or
predecessor of such person or related person).\421\ The penalty
may be imposed jointly and severally on any business entity,
each officer, employee, or agent of such entity who willfully
participated in any act giving rise to such penalty.\422\ For
purposes of the penalty, the term ``dyed fuel'' means any dyed
diesel fuel or kerosene, whether or not the fuel was dyed
pursuant to section 4082.\423\
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\419\ Sec. 6715(a).
\420\ Sec. 6715(a).
\421\ Sec. 6715(b).
\422\ Sec. 6715(d).
\423\ Sec. 6715(c)(1).
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Regulations
The Secretary has prescribed certain regulations under this
provision, including regulations that specify the allowable
types and concentration of dye, that the person claiming the
exemption must be a taxable fuel registrant, that the terminal
must be an approved terminal (in the case of a removal from a
terminal rack), and the contents of the notice to be posted on
diesel fuel and kerosene pumps.\424\ However, the regulations
do not prescribe the time or method of adding the dye to
taxable fuel.\425\ Diesel fuel is usually dyed at a terminal
rack by either manual dyeing or mechanical injection.
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\424\ Treas. Reg. secs. 48.4082-1, -2.
\425\ In March 2000, the IRS withdrew its Notice of Proposed
Rulemaking PS-6-95 (61 F.R. 10490 (1996)) relating to dye injection
systems. Announcement 2000-42, 2000-1 C.B. 949. The proposed regulation
established standards for mechanical dye injection equipment and
required terminal operators to report nonconforming dyeing to the IRS.
See also Treas. Reg. sec. 48.4082-1(c), (d).
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REASONS FOR CHANGE
The Federal government, State governments, and various
segments of the petroleum industry have long been concerned
with the problem of diesel fuel tax evasion. To address this
problem, Congress changed the law to require that untaxed
diesel fuel be indelibly dyed. The Committee is concerned,
however, that tax can still be evaded through removals at a
terminal of undyed fuel that has been designated as dyed.
Manual dyeing is inherently difficult to monitor. It occurs
after diesel fuel has been withdrawn from a terminal storage
tank, generally requires the work of several people, is
imprecise, and does not automatically create a reliable record.
The Committee believes that requiring that untaxed diesel fuel
be dyed only by mechanical injection will significantly reduce
the opportunities for diesel fuel tax evasion.
The Committee further believes that security of such
mechanical dyeing systems will be enhanced by the establishment
of standards for making such systems tamper resistant, and by
the addition of new penalties for tampering with such
mechanical dyeing systems and for failing to maintain the
established security standards for such systems. In furtherance
of the enforcement of these penalties in the case of business
entities, it is appropriate to impose joint and several
liability for such penalties upon natural persons who have
willfully participated in any act giving rise to these
penalties and upon the parent corporation of an affiliated
group of which the business entity is a member.
EXPLANATION OF PROVISION
With respect to terminals that offer dyed fuel, the
provision eliminates manual dyeing of fuel and requires dyeing
by a mechanical system. Not later than 180 days after enactment
of this provision, the Secretary of the Treasury is to
prescribe regulations establishing standards for tamper
resistant mechanical injector dyeing. Such standards shall be
reasonable, cost-effective, and establish levels of security
commensurate with the applicable facility.
The provision adds an additional set of penalties for
violation of the new rules. A penalty, equal to the greater of
$25,000 or $10 for each gallon of fuel involved, applies to
each act of tampering with a mechanical dye injection system.
The person committing the act is also responsible for any
unpaid tax on removed undyed fuel. A penalty of $1,000 is
imposed for each failure to maintain security for mechanical
dye injection systems. An additional penalty of $1,000 is
imposed for each day any such violation remains uncorrected
after the first day such violation has been or reasonably
should have been discovered. For purposes of the daily penalty,
a violation may be corrected by shutting down the portion of
the system causing the violation. If any of these penalties are
imposed on any business entity, each officer, employee, or
agent of such entity or other contracting party who willfully
participated in any act giving rise to such penalty shall be
jointly and severally liable with such entity for such penalty.
If such business entity is part of an affiliated group, the
parent corporation of such entity shall be jointly and
severally liable with such entity for the penalty.
EFFECTIVE DATE
The provision is effective 180 days after the date that the
Secretary issues the required regulations. The Secretary must
issue such regulations no later than 180 days after enactment.
4. Authority to inspect on-site records (sec. 654 of the bill and sec.
4083 of the Code)
PRESENT LAW
The IRS is authorized to inspect any place where taxable
fuel \426\ is produced or stored (or may be stored). The
inspection is authorized to: (1) examine the equipment used to
determine the amount or composition of the taxable fuel and the
equipment used to store the fuel; and (2) take and remove
samples of taxable fuel. Places of inspection include, but are
not limited to, terminals, fuel storage facilities, retail fuel
facilities or any designated inspection site.\427\
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\426\ ``Taxable fuel'' means gasoline, diesel fuel, and kerosene.
Sec. 4083(a).
\427\ Sec. 4083(c)(1)(A).
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In conducting the inspection, the IRS may detain any
receptacle that contains or may contain any taxable fuel, or
detain any vehicle or train to inspect its fuel tanks and
storage tanks. The scope of the inspection includes the book
and records kept at the place of inspection to determine the
excise tax liability under section 4081.\428\
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\428\ Treas. Reg. sec. 48.4083-1(c)(1).
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REASONS FOR CHANGE
The Committee believes it is appropriate to expand the
authority of the IRS to make on-site inspections of books and
records. The Committee believes that such expanded authority
will aid in the detection of fuel tax evasion and the
enforcement of Federal fuel taxes.
EXPLANATION OF PROVISION
The provision expands the scope of the inspection to
include any books, records, or shipping papers pertaining to
taxable fuel located in any authorized inspection location.
EFFECTIVE DATE
The provision effective on the date on enactment.
5. Registration of pipeline or vessel operators required for exemption
of bulk transfers to registered terminals or refineries (sec.
655 of the bill and sec. 4081 of the Code)
PRESENT LAW
In general, gasoline, diesel fuel, and kerosene (``taxable
fuel'') are taxed upon removal from a refinery or a
terminal.\429\ Tax also is imposed on the entry into the United
States of any taxable fuel for consumption, use, or
warehousing. The tax does not apply to any removal or entry of
a taxable fuel transferred in bulk (a ``bulk transfer'') to a
terminal or refinery if both the person removing or entering
the taxable fuel and the operator of such terminal or refinery
are registered with the Secretary.\430\
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\429\ Sec. 4081(a)(1)(A).
\430\ Sec. 4081(a)(1)(B). The sale of a taxable fuel to an
unregistered person prior to a taxable removal or entry of the fuel is
subject to tax. Sec. 4081(a)(1)(A).
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Present law does not require that the vessel or pipeline
operator that transfers fuel as part of a bulk transfer be
registered in order for the transfer to be exempt. For example,
a registered refiner may transfer fuel to an unregistered
vessel or pipeline operator who in turn transfers fuel to a
registered terminal operator. The transfer is exempt despite
the intermediate transfer to an unregistered person.
In general, the owner of the fuel is liable for payment of
tax with respect to bulk transfers not received at an approved
terminal or refinery.\431\ The refiner is liable for payment of
tax with respect to certain taxable removals from the
refinery.\432\
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\431\ Treas. Reg. sec. 48.4081-3(e)(2).
\432\ Treas. Reg. sec. 48.4081-3(b).
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REASONS FOR CHANGE
The Committee is concerned that unregistered pipeline and
vessel operators are receiving bulk transfers of taxable fuel,
and then diverting the fuel to retailers or end users without
the tax ever being paid. The Committee believes that requiring
that a pipeline or vessel operator be registered with the IRS
in order for a bulk transfer exemption to be valid, in
combination with other provisions that impose penalties
relating to registration, will help to ensure that transfers of
fuel in bulk are delivered as intended to approved refineries
and terminals and taxed appropriately.
EXPLANATION OF PROVISION
The provision requires that for a bulk transfer of a
taxable fuel to be exempt from tax, any pipeline or vessel
operator that is a party to the bulk transfer be registered
with the Secretary. Transfer to an unregistered party will
subject the transfer to tax.
The Secretary is required to publish periodically a list of
all registered persons that are required to register.
EFFECTIVE DATE
The provision is effective on October 1, 2004, except that
the Secretary is required to publish the list of registered
persons beginning on July 1, 2004.
6. Display of registration and penalties for failure to display
registration and to register (secs. 656 and 657 of the bill,
secs. 4101, 7232, 7272 and new secs. 6717 and 6718 of the Code)
PRESENT LAW
Blenders, enterers, pipeline operators, position holders,
refiners, terminal operators, and vessel operators are required
to register with the Secretary with respect to fuels taxes
imposed by sections 4041(a)(1) and 4081.\433\ A non-assessable
penalty for failure to register is $50.\434\ A criminal penalty
of $5,000, or imprisonment of not more than five years, or
both, together with the costs of prosecution also applies to a
failure to register and to certain false statements made in
connection with a registration application.\435\
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\433\ Sec. 4101; Treas. Reg. sec. 48.4101-1(a) and (c)(1).
\434\ Sec. 7272(a).
\435\ Sec. 7232.
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REASONS FOR CHANGE
Registration with the Secretary is a critical component of
enabling the Secretary to regulate the movement and use of
taxable fuels and ensure that the appropriate excise taxes are
being collected. The Committee believes that present law
penalties are not severe enough to ensure that persons that are
required to register in fact register. Accordingly, the
Committee believes it is appropriate to increase present law
penalties significantly and to add a new assessable penalty for
failure to register. In addition, the Committee believes that
persons that do business with vessel operators should be able
easily to verify whether the vessel operator is registered.
Thus, the Committee requires that vessel operators display
proof of registration on their vessels and imposes an attendant
penalty for failure to display such proof.
EXPLANATION OF PROVISION
The provision requires that every operator of a vessel who
is required to register with the Secretary display on each
vessel used by the operator to transport fuel, proof of
registration through an electronic identification device
prescribed by the Secretary. A failure to display such proof of
registration results in a penalty of $500 per month per vessel.
The amount of the penalty is increased for multiple prior
violations. No penalty is imposed upon a showing by the
taxpayer of reasonable cause. The provision authorizes amounts
equivalent to the penalties received to be appropriated to the
Highway Trust Fund.
The provision imposes a new assessable penalty for failure
to register of $10,000 for each initial failure, plus $1,000
per day that the failure continues. No penalty is imposed upon
a showing by the taxpayer of reasonable cause. In addition, the
provision increases the present-law non-assessable penalty for
failure to register from $50 to $10,000 and the present law
criminal penalty for failure to register from $5,000 to
$10,000. The provision authorizes amounts equivalent to any of
such penalties received to be appropriated to the Highway Trust
Fund.
EFFECTIVE DATE
The provision requiring display of registration is
effective on October 1, 2004. The provision relating to
penalties is effective for penalties imposed after September
30, 2004.
7. Penalties for failure to report (sec. 657 of the bill and new sec.
6725 of the Code)
PRESENT LAW
A fuel information reporting program, the Excise Summary
Terminal Activity Reporting System (``ExSTARS''), requires
terminal operators and bulk transport carriers to report
monthly on the movement of any liquid product into or out of an
approved terminal.\436\ Terminal operators file Form 720-TO--
Terminal Operator Report, which shows the monthly receipts and
disbursements of all liquid products to and from an approved
terminal.\437\ Bulk transport carriers (barges, vessels, and
pipelines) that receive liquid product from an approved
terminal or deliver liquid product to an approved terminal file
Form 720-CS--Carrier Summary Report, which details such
receipts and disbursements. In general, the penalty for failure
to file a report or a failure to furnish all of the required
information in a report is $50 per report.\438\
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\436\ Sec. 4010(d); Treas. Reg. sec. 48.4101-2. The reports are
required to be filed by the end of the month following the month to
which the report relates.
\437\ An approved terminal is a terminal that is operated by a
taxable fuel registrant that is a terminal operator. Treas. Reg. sec.
48.4081-1(b).
\438\ Sec. 6721(a).
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REASONS FOR CHANGE
The Committee believes that the proper and timely reporting
of the disbursements of taxable fuels under the ExSTARs system
is essential to the Treasury Department's ability to monitor
and enforce the excise fuels taxes. Accordingly, the Committee
believes it is appropriate to provide for significant penalties
if required information is not provided accurately, completely,
and on a timely basis.
EXPLANATION OF PROVISION
The provision imposes a new assessable penalty for failure
to file a report or to furnish information required in a report
required by the ExSTARS system. The penalty is $10,000 per
failure with respect to each vessel or facility (e.g., a
terminal or other facility) for which information is required
to be furnished. No penalty is imposed upon a showing by the
taxpayer of reasonable cause. The provision authorizes amounts
equivalent to the penalties received to be appropriated to the
Highway Trust Fund.
EFFECTIVE DATE
The provision is effective for penalties imposed after
September 30, 2004.
8. Collection from Customs bond where importer not registered (sec. 658
of the bill and new sec. 4104 of the Code)
PRESENT LAW
Typically, gasoline, diesel fuel, and kerosene are
transferred by pipeline or barge in large quantities (``bulk'')
to terminal storage facilities that geographically are located
closer to destination retail markets. A fuel is taxed when it
``breaks bulk,'' i.e., when it is removed from the refinery or
terminal, typically by truck or rail car, for delivery to a
smaller wholesale facility or a retail outlet. The party liable
for payment of the taxes is the ``position holder,'' i.e., the
person shown on the records of the terminal facility as owning
the fuel.
Tax is also imposed on the entry into the United States of
any taxable fuel for consumption, use, or warehousing.\439\
This tax does not apply to any entry of a taxable fuel
transferred in bulk to a terminal or refinery if the person
entering the taxable fuel and the operator of such terminal or
refinery are registered. The ``enterer'' is liable for the tax.
An enterer generally means the importer of record (under
customs law) with respect to the taxable fuel. However, if the
importer of record is acting as an agent (a broker for
example), the person for whom the agent is acting is the
enterer. If there is no importer of record for taxable fuel
entered into the United States, the owner of the taxable fuel
at the time it is brought into the United States is the
enterer. An importer's liability for Customs duties includes a
liability for any internal revenue taxes that attach upon the
importation of merchandise unless otherwise provided by law or
regulation.\440\
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\439\ Sec. 4081(a)(1)(A)(iii).
\440\ 19 C.F.R. sec. 141.3 (2004).
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As a part of the entry documentation, the importer,
consignee, or an authorized agent usually is required to file a
bond with Customs. The bond, among other things, guarantees
that proper entry summary, with payment of estimated duties and
taxes when due, will be made for imported merchandise and that
any additional duties and taxes subsequently found to be due
will be paid.
As a condition of permitting anyone to be registered with
the IRS, under section 4101 of the Code, the Secretary may
require that such person give a bond in such sum as the
Secretary determines appropriate.
REASONS FOR CHANGE
It is the Committee's understanding that fuel is brought
into the United States by unregistered parties and the
appropriate tax is not being remitted. Therefore, the Committee
believes it is appropriate to allow the Secretary to recover
the tax due from the Customs bond.
EXPLANATION OF PROVISION
Under the provision, the importer of record is jointly and
severally liable for the tax imposed upon entry of fuel into
the United States if, under regulations, any other person that
is not registered with the Secretary as a taxable fuel
registrant is liable for such tax. If the importer of record is
liable for the tax and such tax is not paid on or before the
last date prescribed for payment, the Secretary may collect
such tax from the Customs bond posted with respect to the
importation of the taxable fuel to which the tax relates.
For purposes of determining the jurisdiction of any court
of the United States or any agency of the United States, any
action by the Secretary to collect the tax from the Customs
bond is treated as an action to collect tax from a bond
authorized by section 4101 of the Code, not as an action to
collect from a bond relating to the importation of merchandise.
EFFECTIVE DATE
The provision is effective for fuel entered after September
30, 2004.
9. Modification of the use tax on heavy highway vehicles (sec. 659 of
the bill and secs. 4481, 4483 and 6165 of the Code)
PRESENT LAW
An annual use tax is imposed on heavy highway vehicles, at
the rates below.\441\
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\441\ Sec. 4481.
Under 55,000 pounds....................... No tax.
55,000-75,000 pounds...................... $100 plus $22 per 1,000
pounds over 55,000.
Over 75,000 pounds........................ $550.
The annual use tax is imposed for a taxable period of July
1 through June 30. Generally, the tax is paid by the person in
whose name the vehicle is registered. In certain cases,
taxpayers are allowed to pay the tax in installments.\442\
State governments are required to receive proof of payment of
the use tax as a condition of vehicle registration.
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\442\ Sec. 6156.
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Exemptions and reduced rates are provided for certain
``transit-type buses,'' trucks used for fewer than 5,000 miles
on public highways (7,500 miles for agricultural vehicles), and
logging trucks.\443\ Any highway motor vehicle that is issued a
base plate by Canada or Mexico and is operated on U.S. highways
is subject to the highway use tax whether or not the vehicles
are required to be registered in the United States. The tax
rate for Canadian and Mexican vehicles is 75 percent of the
rate that would otherwise be imposed.\444\
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\443\ See generally, sec. 4483.
\444\ Sec. 4483(f): Treas. Reg. sec. 41.4483-7(a).
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REASONS FOR CHANGE
The Committee notes that in the case of taxpayers that
elect quarterly installment payments, the IRS has no procedure
for ensuring that installments subsequent to the first one
actually are paid. Thus, it is possible for taxpayers to
receive State registrations when only the first quarterly
installment is paid with the return. Similarly, it is possible
for taxpayers repeatedly to pay the first quarterly installment
and continue to receive State registrations because the IRS has
no computerized system for checking past compliance when it
issues certificates of payment for the current year. In the
case of taxpayers owning only one or a few vehicles, it is not
cost effective for the IRS to monitor and enforce compliance.
Thus, the Committee believes it is appropriate to eliminate the
ability of taxpayers to pay the use tax in installments. The
Committee also believes that Canadian and Mexican vehicles
operating on U.S. highways should be subject to the full amount
of use tax, as such vehicles contribute to the wear and tear on
U.S. highways.
EXPLANATION OF PROVISION
The provision eliminates the ability to pay the tax in
installments. It also eliminates the reduced rates for Canadian
and Mexican vehicles. The provision requires taxpayers with 25
or more vehicles for any taxable period to file their returns
electronically. Finally, the provision permits proration of tax
for vehicles sold during the taxable period.
EFFECTIVE DATE
The provision is effective for taxable periods beginning
after the date of enactment.
10. Modification of ultimate vendor refund claims with respect to
farming (sec. 660 of the bill and sec. 6427 of the Code)
PRESENT LAW
In general, the Code provides that, if diesel fuel,
kerosene, or aviation fuel on which tax has been imposed is
used by any person in a nontaxable use, the Secretary is to
refund (without interest) the amount of tax imposed. The refund
is made to the ultimate purchaser of the taxed fuel. However,
in the case of diesel fuel or kerosene used on a farm for
farming purposes or by a State or local government, refund
payments are paid to the ultimate, registered vendors
(``ultimate vendors'') of such fuels.
REASONS FOR CHANGE
The Committee reaffirms its belief that fuel used for
farming purposes be exempt from tax, but is concerned that,
when large quantities of undyed, or clear, diesel fuel or
kerosene are sold for exempt uses and a refund claimed by the
``ultimate vendor,'' there is an increased possibility of
diversion of fuel to taxable uses. If there were no expense to
the provision and storage of dyed fuel, and if dyed fuel were
easily available at all times and locations, the Committee
would prefer that only dyed fuel be sold for exempt purposes.
However, the Committee recognizes that, to insure sufficient
quantities of fuel are available in a timely manner for farming
purposes, sometimes clear fuel must be sold to the farmer. In
such circumstances, a refund for the tax paid in the price of
the clear fuel is appropriate. The Committee believes that the
person engaged in farming who purchases the clear fuel is in
the best position to certify that the taxed fuel is, in fact,
used for farming purposes and therefore it is more appropriate
for such a person to claim refunds, rather than the ``ultimate
vendor'' who, as a dealer in fuels, really has no knowledge as
to what use the fuel will be put. Notwithstanding this general
conclusion, the Committee believes it is appropriate to permit
``ultimate vendor'' refunds when small amounts of fuel are
purchased to ease the filing burden on farmers who purchase
small quantities of clear fuel.
EXPLANATION OF PROVISION
In the case of diesel fuel or kerosene used on a farm for
farming purposes, the provision limits ultimate vendor claims
for refund to sales of such fuel in amounts less than 250
gallons per farmer per claim.
EFFECTIVE DATE
The provision is effective for fuels sold for nontaxable
use after the date of enactment.
11. Dedication of revenue from certain penalties to the Highway Trust
Fund (sec. 661 of the bill and sec. 9503 of the Code)
PRESENT LAW
Present law does not dedicate to the Highway Trust Fund any
penalties assessed and collected by the Secretary.
REASONS FOR CHANGE
The Committee believes it is appropriate to dedicate to the
Highway Trust Fund penalties associated with the administration
and enforcement of taxes supporting the Highway Trust Fund.
EXPLANATION OF PROVISION
The provision dedicates to the Highway Trust Fund amounts
equivalent to the penalties paid under sections 6715 (relating
to dyed fuel sold for use or used in taxable use), 6715A
(penalty for tampering or failing to maintain security
requirements for mechanical dye injection systems), 6717
(penalty for failing to display tax registration on vessels),
6718 (penalty for failing to register under section 4101), 6725
(penalty for failing to report information required by the
Secretary), 7232 (penalty for failing to register and false
representations of registration status), and 7272 (but only
with regard to penalties related to failure to register under
section 4101).
EFFECTIVE DATE
The provision is effective October 1, 2004.
12. Taxable fuel refunds for certain ultimate vendors (sec. 662 of the
bill and secs. 6416 and 6427 of the Code)
PRESENT LAW
The Code provides that, in the case of gasoline on which
tax has been paid and sold to a State or local government, to a
nonprofit educational organization, for supplies for vessels or
aircraft, for export, or for the production of special fuels, a
wholesale distributor that sells the gasoline for such exempt
purposes is treated as the person who paid the tax and thereby
is the proper claimant for a credit or refund of the tax paid.
In the case of undyed diesel fuel or kerosene used on a farm
for farming purposes or by a State or local government, a
credit or payment is allowable only to the ultimate, registered
vendors (``ultimate vendors'') of such fuels.
In general, refunds are paid without interest. However, in
the case of overpayments of tax on gasoline, diesel fuel, or
kerosene that is used to produce a qualified alcohol mixture
and for refunds due ultimate vendors of diesel fuel or kerosene
used on a farm for farming purposes or by a State or local
government, the Secretary is required to pay interest on
certain refunds. The Secretary must pay interest on refunds of
$200 or more ($100 or more in the case of kerosene) due to the
taxpayer arising from sales over any period of a week or more,
if the Secretary does not make payment of the refund within 20
days.
REASONS FOR CHANGE
The Committee observes that refund procedures for gasoline
differ from those for diesel fuel and kerosene. The Committee
believes that simplification of administration can be achieved
for both taxpayers and the IRS by providing a more uniform
refund procedure applicable to all taxed highway fuels. The
Committee further believes that compliance can be increased and
administration made less costly by increased use of electronic
filing.
The Committee further observes that often State and local
governments find it prudent to monitor and pay for fuel
purchases by the use of a credit card, fleet buying card, or
similar arrangement. In such a case the person extending the
credit stands between the vendor of fuel and purchaser of fuel
(the State or local government) in an exempt transaction, and
the person extending the credit insures payment of the fuel
bill thereby paying the amount of any tax owed that is embedded
in the price of the fuel. In addition, because the person
extending credit to the tax-exempt purchaser has a contractual
relationship with the tax-exempt user, the person extending the
credit should be best able to establish that the fuel should be
sold at a tax-exempt price. The Committee believes that in such
a situation it is appropriate to deem the person extending the
credit to hold ultimate vendor status, not withstanding that
such a person is not actually a vendor of fuel. The Committee
observes that the billing service provided by the person
extending credit to the tax-exempt purchaser creates a ``paper
trail'' that should facilitate compliance and aid in any
necessary audits that the IRS may undertake.
EXPLANATION OF PROVISION
For sales of gasoline to a State or local government for
the exclusive use of a State or local government or to a
nonprofit educational organization for its exclusive use on
which tax has been imposed, the provision conforms the payment
of refunds to that procedure established under present law in
the case of diesel fuel or kerosene. That is, the ultimate
vendor claims for refund.
The provision modifies the payment of interest on refunds.
Under the provision, in the case of overpayments of tax on
gasoline, diesel fuel, or kerosene that is used to produce a
qualified alcohol mixture and for refunds due ultimate vendors
of diesel fuel or kerosene used on a farm for farming purposes
or by a State or local government, all refunds unpaid after 45
days must be paid with interest. If the taxpayer has filed for
his or her refund by electronic means, refunds unpaid after 20
days must be paid with interest.
Lastly, for claims for refund of tax paid on diesel fuel or
kerosene sold to State and local governments or for sales of
gasoline to a State or local government for the exclusive use
of a State or local government or to a nonprofit educational
organization for its exclusive use on which tax has been
imposed and for which the ultimate purchaser utilized a credit
card, the provision deems the person extending the credit to
the ultimate purchaser to be the ultimate vendor. That is, the
person extending credit via a credit card administers claims
for refund, and is responsible for supplying all the
appropriate documentation currently required from ultimate
vendors.
EFFECTIVE DATE
The provision is effective on October 1, 2004.
13. Two party exchanges (sec. 663 of the bill and new sec. 4105 of the
Code)
PRESENT LAW
Most fuel is taxed when it is removed from a registered
terminal.\445\ The party liable for payment of this tax is the
``position holder.'' The position holder is the person
reflected on the records of the terminal operator as holding
the inventory position in the fuel.\446\
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\445\ A ``terminal'' is a storage and distribution facility that is
supplied by pipeline or vessel, and from which fuel may be removed at a
rack. A ``rack'' is a mechanism capable of delivering taxable fuel into
a means of transport other than a pipeline or vessel.
\446\ Such person has a contractual agreement with the terminal
operator to store and provide services with respect to the fuel. A
``terminal operator'' is any person who owns, operates, or otherwise
controls a terminal. A terminal operator can also be a position holder
if that person owns fuel in its terminal.
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It is common industry practice for oil companies to serve
customers of other oil companies under exchange agreements,
e.g., where Company A's terminal is more conveniently located
for wholesale or retail customers of Company B. In such cases,
the exchange agreement party (Company B in the example) owns
the fuel when the motor fuel is removed from the terminal and
sold to B's customer.
REASONS FOR CHANGE
The Committee believes it is appropriate to recognize
industry practice under exchange agreements by relieving the
original position holder of tax liability for the removal of a
taxable fuel from a terminal if certain circumstances are met.
EXPLANATION OF PROVISION
The provision permits two registered parties to switch
position holder status in fuel within a registered terminal
(thereby relieving the person originally owning the fuel \447\
of tax liability as the position holder) if all of the
following occur:
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\447\ In the provision, this person is referred to as the
``delivering person.''
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(1) The transaction includes a transfer from the original
owner, i.e., the person who holds the original inventory
position for taxable fuel in the terminal as reflected in the
records of the terminal operator prior to the transaction.
(2) The exchange transaction occurs at the same time as
completion of removal across the rack from the terminal by the
receiving person or its customer.
(3) The terminal operator in its books and records treats
the receiving person as the person that removes the product
across a terminal rack for purposes of reporting the
transaction to the Internal Revenue Service.
(4) The transaction is the subject of a written contract.
EFFECTIVE DATE
The provision is effective on the date of enactment.
14. Simplification of tax on tires (sec. 664 of the bill and sec. 4071
of the Code)
PRESENT LAW
A graduated excise tax is imposed on the sale by a
manufacturer (or importer) of tires designed for use on highway
vehicles (sec. 4071). The tire tax rates are as follows:
Tire weight Tax rate
Not more than 40 lbs...................... No tax.
More than 40 lbs., but not more than 70 15 cents/lb. in excess of 40
lbs. lbs
More than 70 lbs., but not more than 90 $4.50 plus 30 cents/lb. in
lbs. excess of 70 lbs.
More than 90 lbs.......................... $10.50 plus 50 cents/lb. in
excess of 90 lbs.
No tax is imposed on the recapping of a tire that
previously has been subject to tax. Tires of extruded tiring
with internal wire fastening also are exempt.
The tax expires after September 30, 2005.
REASONS FOR CHANGE
Under present law, the tire excise tax is based on the
weight of each tire. This forces tire manufacturers to weigh
sample batches of every type of tire made and collect the tax
based on that weight. This regime also makes it difficult for
the IRS to measure and enforce compliance with the tax, as the
IRS likewise must weigh sample batches of tires to ensure
compliance. The Committee believes significant administrative
simplification for both tire manufacturers and the IRS will be
achieved if the tax were based on the weight carrying capacity
of the tire, rather than the weight of the tire, because
Department of Transportation requires the load rating to be
stamped on the side of highway tires. Thus, both the
manufacturer and the IRS will know immediately whether a tire
is taxable and how much tax should be paid.
EXPLANATION OF PROVISION
The provision modifies the excise tax applicable to tires.
The provision replaces the present-law tax rates based on the
weight of the tire with a tax rate based on the load capacity
of the tire. In general, the tax is 9.4 cents for each 10
pounds of tire load capacity in excess of 3,500 pounds. In the
case of a biasply tire, the tax rate is 4.7 cents for each 10
pounds of tire load capacity in excess of 3,500 pounds.
The provision modifies the definition of tires for use on
highway vehicles to include any tire marked for highway use
pursuant to certain regulations promulgated by the Secretary of
Transportation. The provision also exempts from tax any tire
sold for the exclusive use of the United States Department of
Defense or the United States Coast Guard.
Tire load capacity is the maximum load rating labeled on
the tire pursuant to regulations promulgated by the Secretary
of Transportation. A biasply tire is any tire manufactured
primarily for use on piggyback trailers.
EFFECTIVE DATE
The provision is effective for sales in calendar years
beginning more than 30 days after the date of enactment.
D. Nonqualified Deferred Compensation Plans
1. Treatment of nonqualified deferred compensation plans (sec. 671 of
the bill and new sec. 409A and sec. 6051 of the Code)
PRESENT LAW
In general
The determination of when amounts deferred under a
nonqualified deferred compensation arrangement are includible
in the gross income of the individual earning the compensation
depends on the facts and circumstances of the arrangement. A
variety of tax principles and Code provisions may be relevant
in making this determination, including the doctrine of
constructive receipt, the economic benefit doctrine,\448\ the
provisions of section 83 relating generally to transfers of
property in connection with the performance of services, and
provisions relating specifically to nonexempt employee trusts
(sec. 402(b)) and nonqualified annuities (sec. 403(c)).
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\448\ See, e.g., Sproull v. Commissioner, 16 T.C. 244 (1951), aff'd
per curiam, 194 F.2d 541 (6th Cir. 1952); Rev. Rul. 60-31, 1960-1 C.B.
174.
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In general, the time for income inclusion of nonqualified
deferred compensation depends on whether the arrangement is
unfunded or funded. If the arrangement is unfunded, then the
compensation is generally includible in income when it is
actually or constructively received. If the arrangement is
funded, then income is includible for the year in which the
individual's rights are transferable or not subject to a
substantial risk of forfeiture.
Nonqualified deferred compensation is generally subject to
social security and Medicare taxes when the compensation is
earned (i.e., when services are performed), unless the
nonqualified deferred compensation is subject to a substantial
risk of forfeiture. If nonqualified deferred compensation is
subject to a substantial risk of forfeiture, it is subject to
social security and Medicare tax when the risk of forfeiture is
removed (i.e., when the right to the nonqualified deferred
compensation vests). Amounts deferred under a nonaccount
balance plan that are not reasonably ascertainable are not
required to be taken into account as wages subject to social
security and Medicare taxes until the first date that such
amounts are reasonably ascertainable. Social security and
Medicare tax treatment is not affected by whether the
arrangement is funded or unfunded, which is relevant in
determining when amounts are includible in income (and subject
to income tax withholding).
In general, an arrangement is considered funded if there
has been a transfer of property under section 83. Under that
section, a transfer of property occurs when a person acquires a
beneficial ownership interest in such property. The term
``property'' is defined very broadly for purposes of section
83.\449\ Property includes real and personal property other
than money or an unfunded and unsecured promise to pay money in
the future. Property also includes a beneficial interest in
assets (including money) that are transferred or set aside from
claims of the creditors of the transferor, for example, in a
trust or escrow account. Accordingly, if, in connection with
the performance of services, vested contributions are made to a
trust on an individual's behalf and the trust assets may be
used solely to provide future payments to the individual, the
payment of the contributions to the trust constitutes a
transfer of property to the individual that is taxable under
section 83. On the other hand, deferred amounts are generally
not includible in income if nonqualified deferred compensation
is payable from general corporate funds that are subject to the
claims of general creditors, as such amounts are treated as
unfunded and unsecured promises to pay money or property in the
future.
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\449\ Treas. Reg. sec. 1.83-3(e). This definition in part reflects
previous IRS rulings on nonqualified deferred compensation.
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As discussed above, if the arrangement is unfunded, then
the compensation is generally includible in income when it is
actually or constructively received under section 451.\450\
Income is constructively received when it is credited to an
individual's account, set apart, or otherwise made available so
that it may be drawn on at any time. Income is not
constructively received if the taxpayer's control of its
receipt is subject to substantial limitations or restrictions.
A requirement to relinquish a valuable right in order to make
withdrawals is generally treated as a substantial limitation or
restriction.
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\450\ Treas. Reg. secs. 1.451-1 and 1.451-2.
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Rabbi trusts
Arrangements have developed in an effort to provide
employees with security for nonqualified deferred compensation,
while still allowing deferral of income inclusion. A ``rabbi
trust'' is a trust or other fund established by the employer to
hold assets from which nonqualified deferred compensation
payments will be made. The trust or fund is generally
irrevocable and does not permit the employer to use the assets
for purposes other than to provide nonqualified deferred
compensation, except that the terms of the trust or fund
provide that the assets are subject to the claims of the
employer's creditors in the case of insolvency or bankruptcy.
As discussed above, for purposes of section 83, property
includes a beneficial interest in assets set aside from the
claims of creditors, such as in a trust or fund, but does not
include an unfunded and unsecured promise to pay money in the
future. In the case of a rabbi trust, terms providing that the
assets are subject to the claims of creditors of the employer
in the case of insolvency or bankruptcy have been the basis for
the conclusion that the creation of a rabbi trust does not
cause the related nonqualified deferred compensation
arrangement to be funded for income tax purposes.\451\ As a
result, no amount is included in income by reason of the rabbi
trust; generally income inclusion occurs as payments are made
from the trust.
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\451\ This conclusion was first provided in a 1980 private ruling
issued by the IRS with respect to an arrangement covering a rabbi;
hence the popular name ``rabbi trust.'' Priv. Ltr. Rul. 8113107 (Dec.
31, 1980).
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The IRS has issued guidance setting forth model rabbi trust
provisions.\452\ Revenue Procedure 92-64 provides a safe harbor
for taxpayers who adopt and maintain grantor trusts in
connection with unfunded deferred compensation arrangements.
The model trust language requires that the trust provide that
all assets of the trust are subject to the claims of the
general creditors of the company in the event of the company's
insolvency or bankruptcy.
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\452\ Rev. Proc. 92-64, 1992-2 C.B. 422, modified in part by Notice
2000-56, 2000-2 C.B. 393.
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Since the concept of rabbi trusts was developed,
arrangements have developed which attempt to protect the assets
from creditors despite the terms of the trust. Arrangements
also have developed which attempt to allow deferred amounts to
be available to individuals, while still purporting to meet the
safe harbor requirements set forth by the IRS.
REASONS FOR CHANGE
The Committee is aware of the popular use of deferred
compensation arrangements by executives to defer current
taxation of substantial amounts of income. The Committee
believes that many nonqualified deferred compensation
arrangements have developed which allow improper deferral of
income. Executives often use arrangements that allow deferral
of income, but also provide security of future payment and
control over amounts deferred. For example, nonqualified
deferred compensation arrangements often contain provisions
that allow participants to receive distributions upon request,
subject to forfeiture of a minimal amount (i.e., a ``haircut''
provision).
The Committee is aware that since the concept of a rabbi
trust was developed, techniques have been used that attempt to
protect the assets from creditors despite the terms of the
trust. For example, the trust or fund may be located in a
foreign jurisdiction, making it difficult or impossible for
creditors to reach the assets.
While the general tax principles governing deferred
compensation are well established, the determination whether a
particular arrangement effectively allows deferral of income is
generally made on a facts and circumstances basis. There is
limited specific guidance with respect to common deferral
arrangements. The Committee believes that it is appropriate to
provide specific rules regarding whether deferral of income
inclusion should be permitted.
The Committee believes that certain arrangements that allow
participants inappropriate levels of control or access to
amounts deferred should not result in deferral of income
inclusion. The Committee also believes that certain
arrangements, such as offshore trusts, which effectively
protect assets from creditors, should be treated as funded and
not result in deferral of income inclusion.\453\
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\453\ The staff of the Joint Committee on Taxation made
recommendations similar to the new provision in the report on their
investigation of Enron Corporation, which detailed how executives
deferred millions of dollars in Federal income taxes through
nonqualified deferred compensation arrangements. See Joint Committee on
Taxation, Report of Investigation of Enron Corporation and Related
Entities Regarding Federal Tax and Compensation Issues, and Policy
Recommendations (JCS-3-03), February 2003.
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EXPLANATION OF PROVISION
Under the provision, all amounts deferred under a
nonqualified deferred compensation plan \454\ for all taxable
years are currently includible in gross income to the extent
not subject to a substantial risk of forfeiture \455\ and not
previously included in gross income, unless certain
requirements are satisfied. If the requirements of the
provision are not satisfied, in addition to current income
inclusion, interest at the underpayment rate plus one
percentage point is imposed on the underpayments that would
have occurred had the compensation been includible in income
when first deferred, or if later, when not subject to a
substantial risk of forfeiture. Actual or notional earnings on
amounts deferred are also subject to the provision.
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\454\ A plan includes an agreement or arrangement, including an
agreement or arrangement that includes one person.
\455\ As under section 83, the rights of a person to compensation
are subject to a substantial risk of forfeiture if the person's rights
to such compensation are conditioned upon the performance of
substantial services by any individual.
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Under the provision, distributions from a nonqualified
deferred compensation plan may be allowed only upon separation
from service (as determined by the Secretary), death, a
specified time (or pursuant to a fixed schedule), change in
control in a corporation (to the extent provided by the
Secretary), occurrence of an unforeseeable emergency, or if the
participant becomes disabled. A nonqualified deferred
compensation plan may not allow distributions other than upon
the permissible distribution events and may not permit
acceleration of a distribution, except as provided in
regulations by the Secretary.
In the case of a specified employee, distributions upon
separation from service may not be made earlier than six months
after the date of the separation from service. Specified
employees are key employees \456\ of publicly-traded
corporations.
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\456\ Key employees are defined in section 416(i) and generally
include officers having annual compensation greater than $130,000
(adjusted for inflation and limited to 50 employees), five percent
owners, and one percent owners having annual compensation from the
employer greater than $150,000.
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Amounts payable at a specified time or pursuant to a fixed
schedule must be specified under the plan at the time of
deferral. Amounts payable upon the occurrence of an event are
not treated as amounts payable at a specified time. For
example, amounts payable when an individual attains age 65 are
payable at a specified time, while amounts payable when an
individual's child begins college are payable upon the
occurrence of an event.
Distributions upon a change in the ownership or effective
control of a corporation, or in the ownership of a substantial
portion of the assets of a corporation, may only be made to the
extent provided by the Secretary. It is intended that the
Secretary use a similar, but more restrictive, definition of
change in control as is used for purposes of the golden
parachute provisions of section 280G consistent with the
purposes of the provision. The provision requires the Secretary
to issue guidance defining change of control within 90 days
after the date of enactment.
An unforeseeable emergency is defined as a severe financial
hardship to the participant resulting from a sudden and
unexpected illness or accident of the participant, the
participant's spouse, or a dependent (as defined in 152(a)) of
the participant; loss of the participant's property due to
casualty; or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control
of the participant. The amount of the distribution must be
limited to the amount needed to satisfy the emergency plus
taxes reasonably anticipated as a result of the distribution.
Distributions may not be allowed to the extent that the
hardship may be relieved through reimbursement or compensation
by insurance or otherwise, or by liquidation of the
participant's assets (to the extent such liquidation would not
itself cause a severe financial hardship).
A participant is considered disabled if he or she (i) is
unable to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment
which can be expected to result in death or can be expected to
last for a continuous period of not less than 12 months; or
(ii) is, by reason on any medically determinable physical or
mental impairment which can be expected to result in death or
can be expected to last for a continuous period of not less
than 12 months, receiving income replacement benefits for a
period of not less than three months under an accident and
health plan covering employees of the participant's employer.
As previously discussed, except as provided in regulations
by the Secretary, no accelerations of distributions may be
allowed. For example, changes in the form of a distribution
from an annuity to a lump sum are not permitted. The provision
provides the Secretary authority to provide, through
regulations, limited exceptions to the general rule that no
accelerations can be permitted. It is intended that exceptions
be provided only in limited cases where the accelerated
distribution is required for reasons beyond the control of the
participant. For example, it is anticipated that an exception
could be provided in order to comply with Federal conflict of
interest requirements or court-approved settlements.
The provision requires that the plan must provide that
compensation for services performed during a taxable year may
be deferred at the participant's election only if the election
to defer is made no later than the close of the preceding
taxable year, or at such other time as provided in Treasury
regulations. For example, it is expected that Treasury
regulations provide that, in appropriate circumstances,
elections to defer incentive bonuses earned over a period of
several years may be made after the beginning of the service
period, as long as such elections may in no event be made later
than 12 months before the earliest date on which such incentive
bonus is initially payable. The Secretary may consider other
factors in determining the appropriate election period, such as
when the amount of the bonus payment is determinable. It is
expected that Treasury regulations will not permit any election
to defer any bonus or other compensation if the timing of such
election would be inconsistent with the purposes of the
provision. Under the provision, in the first year that an
employee becomes eligible for participation in a nonqualified
deferred compensation plan, the election may be made within 30
days after the date that the employee is initially eligible.
The time and form of distributions must be specified at the
time of initial deferral. A plan could specify the time and
form of payments that are to be made as a result of a
distribution event (e.g., a plan could specify that payments
upon separation of service will be paid in lump sum within 30
days of separation from service) or could allow participants to
elect the time and form of payment at the time of the initial
deferral election. If a plan allows participants to elect the
time and form of payment, such election is subject to the rules
regarding initial deferral elections under the provision.
Under the provision, a plan may allow changes in the time
and form of distributions subject to certain requirements. A
nonqualified deferred compensation plan may allow a subsequent
election to delay the timing or form of distributions only if:
(1) the plan requires that such election cannot be effective
for at least 12 months after the date on which the election is
made; (2) except in the case of elections relating to
distributions on account of death, disability or unforeseeable
emergency, the plan requires that the additional deferral with
respect to which such election is made is for a period of not
less than five years from the date such payment would otherwise
have been made; and (3) the plan requires that an election
related to a distribution to be made upon a specified time may
not be made less than 12 months prior to the date of the first
scheduled payment. It is expected that in limited cases, the
Secretary shall issue guidance, consistent with the purposes of
the provision, regarding to what extent elections to change a
stream of payments are permissible.
If impermissible distributions or elections are made, or if
the nonqualified deferred compensation plan allows
impermissible distributions or elections, all amounts deferred
under the plan (including amounts deferred in prior years) are
currently includible in income to the extent not subject to a
substantial risk of forfeiture and not previously included in
income. In addition, interest at the underpayment rate plus one
percentage point is imposed on the underpayments that would
have occurred had the compensation been includible in income
when first deferred, or if later, when not subject to a
substantial risk of forfeiture.
Under the provision, in the case of assets set aside
(directly or indirectly) in a trust (or other arrangement
determined by the Secretary) for purposes of paying
nonqualified deferred compensation, such assets are treated as
property transferred in connection with the performance of
services under section 83 (whether or not such assets are
available to satisfy the claims of general creditors) at the
time set aside if such assets are located outside of the United
States or at the time transferred if such assets are
subsequently transferred outside of the United States. Any
subsequent increases in the value of, or any earnings with
respect to, such assets are treated as additional transfers of
property. Interest at the underpayment rate plus one percentage
point is imposed on the underpayments that would have occurred
had the amounts been includible in income for the taxable year
in which first deferred or, if later, the first taxable year
not subject to a substantial risk of forfeiture. It is expected
that the Secretary shall provide rules for identifying the
deferrals to which assets set aside are attributable, for
situations in which assets equal to less than the full amount
of deferrals are set aside. The Secretary has authority to
exempt arrangements from the provision if the arrangements do
not result in an improper deferral of U.S. tax and will not
result in assets being effectively beyond the reach of
creditors.
Under the provision, a transfer of property in connection
with the performance of services under section 83 also occurs
with respect to compensation deferred under a nonqualified
deferred compensation plan if the plan provides that upon a
change in the employer's financial health, assets will be
restricted to the payment of nonqualified deferred
compensation. The transfer of property occurs as of the earlier
of when the assets are so restricted or when the plan provides
that assets will be restricted. It is intended that the
transfer of property occurs to the extent that assets are
restricted or will be restricted with respect to such
compensation. For example, in the case of a plan that provides
that upon a change in the employer's financial health, a trust
will become funded to the extent of all deferrals, all amounts
deferred under the plan are treated as property transferred
under section 83. If a plan provides that deferrals of certain
individuals will be funded upon a change in financial health,
the transfer of property would occur with respect to
compensation deferred by such individuals. Any subsequent
increases in the value of, or any earnings with respect to,
such assets are treated as additional transfers of property.
Interest at the underpayment rate plus one percentage point is
imposed on the underpayments that would have occurred had the
amounts been includible in income for the taxable year in which
first deferred or, if later, the first taxable year not subject
to a substantial risk of forfeiture.
A nonqualified deferred compensation plan is any plan that
provides for the deferral of compensation other than a
qualified employer plan or any bona fide vacation leave, sick
leave, compensatory time, disability pay, or death benefit
plan. A qualified employer plan means a qualified retirement
plan, tax-deferred annuity, simplified employee pension, and
SIMPLE.\457\ A governmental eligible deferred compensation plan
(sec. 457) is also a qualified employer plan under the
provision.\458\ Plans subject to section 457, other than
governmental eligible deferred compensation plans, are subject
to both the requirements of section 457 and the provision. For
example, in addition to the requirements of the provision, an
eligible deferred compensation plan of a tax-exempt employer
would still be required to meet the applicable dollar limits
under section 457.
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\457\ A qualified employer plan also includes a section 501(c)(18)
trust.
\458\ A governmental deferred compensation plan that is not an
eligible deferred compensation plan is not a qualified employer plan.
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Interest imposed under the provision is treated as interest
on an underpayment of tax. Income (whether actual or notional)
attributable to nonqualified deferred compensation is treated
as additional deferred compensation and is subject to the
provision. The provision is not intended to prevent the
inclusion of amounts in gross income under any provision or
rule of law earlier than the time provided in the provision.
Any amount included in gross income under the provision shall
not be required to be included in gross income under any
provision of law later than the time provided in the provision.
The provision does not affect the rules regarding the timing of
an employer's deduction for nonqualified deferred compensation.
The provision requires annual reporting to the Internal
Revenue Service of amounts deferred. Such amounts are required
to be reported on an individual's Form W-2 for the year
deferred even if the amount is not currently includible in
income for that taxable year. Under the provision, the
Secretary is authorized, through regulations, to establish a
minimum amount of deferrals below which the reporting
requirement does not apply. The Secretary may also provide that
the reporting requirement does not apply with respect to
amounts of deferrals that are not reasonably ascertainable. It
is intended that the exception for amounts not reasonable
ascertainable only apply to nonaccount balance plans and that
amounts be required to be reported when they first become
reasonably ascertainable.\459\
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\459\ It is intended that the exception be similar to that under
Treas. Reg. sec. 31.3121(v)(2)-1(e)(4).
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The provision provides the Secretary authority to prescribe
regulations as are necessary to carry out the purposes of
provision, including regulations: (1) providing for the
determination of amounts of deferral in the case of defined
benefit plans; (2) relating to changes in the ownership and
control of a corporation or assets of a corporation; (3)
exempting from the provisions providing for transfers of
property arrangements that will not result in an improper
deferral of U.S. tax and will not result in assets being
effectively beyond the reach of creditors; (4) defining
financial health; and (5) disregarding a substantial risk of
forfeiture.
It is intended that substantial risk of forfeitures may not
be used to manipulate the timing of income inclusion. It is
intended that substantial risks of forfeiture should be
disregarded in cases in which they are illusory or are used
inconsistent with the purposes of the provision. For example,
if an executive is effectively able to control the acceleration
of the lapse of a substantial risk of forfeiture, such risk of
forfeiture should be disregarded and income inclusion should
not be postponed on account of such restriction.
EFFECTIVE DATE
The provision is effective for amounts deferred after June
3, 2004. The provision does not apply to amounts deferred after
June 3, 2004, and before January 1, 2005, pursuant to an
irrevocable election or binding arrangement made before June 4,
2004. Earnings on amounts deferred before the effective date
are subject to the provision to the extent that such amounts
deferred are subject to the provision.
It is intended that amounts further deferred under a
subsequent election with respect to amounts originally deferred
before June 4, 2004, are subject to the requirements of the
provision.
No later than 90 days after the date of enactment, the
Secretary shall issue guidance providing a limited period of
time during which an individual participating in a nonqualified
deferred compensation plan adopted before June 4, 2004, may,
without violating the requirements of the provision, terminate
participation or cancel an outstanding deferral election with
regard to amounts earned after June 3, 2004, if such amounts
are includible in income as earned.
E. Other Revenue Provisions
1. Qualified tax collection contracts (sec. 681 of the bill and new
sec. 6306 of the Code)
PRESENT LAW
In fiscal years 1996 and 1997, the Congress earmarked $13
million for IRS to test the use of private debt collection
companies. There were several constraints on this pilot
project. First, because both IRS and OMB considered the
collection of taxes to be an inherently governmental function,
only government employees were permitted to collect the
taxes.\460\ The private debt collection companies were utilized
to assist the IRS in locating and contacting taxpayers,
reminding them of their outstanding tax liability, and
suggesting payment options. If the taxpayer agreed at that
point to make a payment, the taxpayer was transferred from the
private debt collection company to the IRS. Second, the private
debt collection companies were paid a flat fee for services
rendered; the amount that was ultimately collected by the IRS
was not taken into account in the payment mechanism.
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\460\ Sec. 7801(a).
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The pilot program was discontinued because of disappointing
results. GAO reported \461\ that IRS collected $3.1 million
attributable to the private debt collection company efforts;
expenses were also $3.1 million. In addition, there were lost
opportunity costs of $17 million to the IRS because collection
personnel were diverted from their usual collection
responsibilities to work on the pilot. The pilot program
results were disappointing because ``IRS' efforts to design and
implement the private debt collection pilot program were
hindered by limitations that affected the program's results.''
The limitations included the scope of work permitted to the
private debt collection companies, the number and type of cases
referred to the private debt collection companies, and the
ability of IRS' computer systems to identify, select, and
transmit collection cases to the private debt collectors.
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\461\ GAO/GGD-97-129R Issues Affecting IRS' Collection Pilot (July
18, 1997).
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The IRS has in the last several years expressed renewed
interest in the possible use of private debt collection
companies; for example, IRS recently revised its extensive
Request for Information concerning its possible use of private
debt collection companies.\462\ GAO recently reviewed IRS'
planning and preparation for the use of private debt collection
companies.\463\ GAO identified five broad factors critical to
the success of using private debt collection companies to
collect taxes. GAO concluded: ``If Congress does authorize PCA
\464\ use, IRS's planning and preparations to address the
critical success factors for PCA contracting provide greater
assurance that the PCA program is headed in the right direction
to meet its goals and achieve desired results. Nevertheless,
much work and many challenges remain in addressing the critical
success factors and helping to maximize the likelihood that a
PCA program would be successful.'' \465\
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\462\ TIRNO-03-H-0001 (February 14, 2003), at
www.procurement.irs.treas.gov. The basic request for information is 104
pages, and there are 16 additional attachments.
\463\ GAO-04-492 Tax Debt Collection: IRS Is Addressing Critical
Success Factors for Contracting Out but Will Need to Study the Best Use
of Resources (May 2004).
\464\ Private collection agencies.
\465\ Page 19 of the May 2004 GAO report.
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In general, Federal agencies are permitted to enter into
contracts with private debt collection companies for collection
services to recover indebtedness owed to the United
States.\466\ That provision does not apply to the collection of
debts under the Internal Revenue Code.\467\
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\466\ 31 U.S.C. sec. 3718.
\467\ 31 U.S.C. sec. 3718(f).
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The President's fiscal year 2004 and 2005 budget proposals
proposed the use of private debt collection companies to
collect Federal tax debts.
REASONS FOR CHANGE
The Committee believes that the use of private debt
collection agencies will help facilitate the collection of
taxes that are owed to the Government. The Committee also
believes that the safeguards it has incorporated will protect
taxpayers' rights and privacy.
EXPLANATION OF PROVISION
The bill permits the IRS to use private debt collection
companies to locate and contact taxpayers owing outstanding tax
liabilities of any type \468\ and to arrange payment of those
taxes by the taxpayers. There must be an assessment pursuant to
section 6201 in order for there to be an outstanding tax
liability. An assessment is the formal recording of the
taxpayer's tax liability that fixes the amount payable. An
assessment must be made before the IRS is permitted to commence
enforcement actions to collect the amount payable. In general,
an assessment is made at the conclusion of all examination and
appeals processes within the IRS.\469\
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\468\ The provision generally applies to any type of tax imposed
under the Internal Revenue Code. It is anticipated that the focus in
implementing the provision will be: (a) taxpayers who have filed a
return showing a balance due but who have failed to pay that balance in
full; and (b) taxpayers who have been assessed additional tax by the
IRS and who have made several voluntary payments toward satisfying
their obligation but have not paid in full.
\469\ An amount of tax reported as due on the taxpayer's tax return
is considered to be self-assessed. If the IRS determines that the
assessment or collection of tax will be jeopardized by delay, it has
the authority to assess the amount immediately (sec. 6861), subject to
several procedural safeguards.
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Several steps are involved in the deployment of private
debt collection companies. First, the private debt collection
company contacts the taxpayer by letter.\470\ If the taxpayer's
last known address is incorrect, the private debt collection
company searches for the correct address. Second, the private
debt collection company telephones the taxpayer to request full
payment.\471\ If the taxpayer cannot pay in full immediately,
the private debt collection company offers the taxpayer an
installment agreement providing for full payment of the taxes
over a period of as long as five years. If the taxpayer is
unable to pay the outstanding tax liability in full over a
five-year period, the private debt collection company obtains
financial information from the taxpayer and will provide this
information to the IRS for further processing and action by the
IRS.
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\470\ Several portions of the provision require that the IRS
disclose confidential taxpayer information to the private debt
collection company. Section 6103(n) permits disclosure for ``the
providing of other services ... for purposes of tax administration.''
Accordingly, no amendment to section 6103 is necessary to implement the
provision. It is intended, however, that the IRS vigorously protect the
privacy of confidential taxpayer information by disclosing the least
amount of information possible to contractors consistent with the
effective operation of the provision.
\471\ The private debt collection company is not permitted to
accept payment directly. Payments are required to be processed by IRS
employees.
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The bill specifies several procedural conditions under
which the provision would operate. First, provisions of the
Fair Debt Collection Practices Act apply to the private debt
collection company. Second, taxpayer protections that are
statutorily applicable to the IRS are also made statutorily
applicable to the private sector debt collection companies. In
addition, taxpayer protections that are statutorily applicable
to IRS employees are also made statutorily applicable to
employees of private sector debt collection companies. Third,
subcontractors are prohibited from having contact with
taxpayers, providing quality assurance services, and composing
debt collection notices; any other service provided by a
subcontractor must receive prior approval from the IRS. In
addition, the Committee intends that the IRS require the
private sector debt collection companies to inform every
taxpayer they contact of the availability of assistance from
the Taxpayer Advocate.
The bill creates a revolving fund from the amounts
collected by the private debt collection companies. The private
debt collection companies will be paid out of this fund. The
bill prohibits the payment of fees for all services in excess
of 25 percent of the amount collected under a tax collection
contract.\472\
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\472\ It is assumed that there will be competitive bidding for
these contracts by private sector tax collection agencies and that
vigorous bidding will drive the overhead costs down.
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EFFECTIVE DATE
The provision is effective on the date of enactment.
2. Modify charitable contribution rules for donations of patents and
other intellectual property (sec. 682 of the bill and secs. 170
and 6050L of the Code)
PRESENT LAW
In general, a deduction is permitted for charitable
contributions, subject to certain limitations that depend on
the type of taxpayer, the property contributed, and the donee
organization.\473\ In the case of non-cash contributions, the
amount of the deduction generally equals the fair market value
of the contributed property on the date of the contribution.
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\473\ Charitable deductions are provided for income, estate, and
gift tax purposes. Secs. 170, 2055, and 2522, respectively.
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For certain contributions of property, the taxpayer is
required to reduce the deduction amount by any gain, generally
resulting in a deduction equal to the taxpayer's basis. This
rule applies to contributions of: (1) Property that, at the
time of contribution, would not have resulted in long-term
capital gain if the property was sold by the taxpayer on the
contribution date; (2) tangible personal property that is used
by the donee in a manner unrelated to the donee's exempt (or
governmental) purpose; and (3) property to or for the use of a
private foundation (other than a foundation defined in section
170(b)(1)(E)).
Charitable contributions of capital gain property generally
are deductible at fair market value. Capital gain property
means any capital asset or property used in the taxpayer's
trade or business the sale of which at its fair market value,
at the time of contribution, would have resulted in gain that
would have been long-term capital gain. Contributions of
capital gain property are subject to different percentage
limitations than other contributions of property. Under present
law, certain copyrights are not considered capital assets, in
which case the charitable deduction for such copyrights
generally is limited to the taxpayer's basis.\474\
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\474\ See sec. 1221(a)(3), 1231(b)(1)(C).
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In general, a charitable contribution deduction is allowed
only for contributions of the donor's entire interest in the
contributed property, and not for contributions of a partial
interest.\475\ If a taxpayer sells property to a charitable
organization for less than the property's fair market value,
the amount of any charitable contribution deduction is
determined in accordance with the bargain sale rules.\476\ In
general, if a donor receives a benefit or quid pro quo in
return for a contribution, any charitable contribution
deduction is reduced by the amount of the benefit received. For
contributions of $250 or more, no charitable contribution
deduction is allowed unless the donee organization provides a
contemporaneous written acknowledgement of the contribution
that describes and provides a good faith estimate of the value
of any goods or services provided by the donee organization in
exchange for the contribution.\477\
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\475\ Sec. 170(f)(3).
\476\ Sec. 1011(b) and Treas. Reg. sec. 1.1011-2.
\477\ Sec. 170(f)(8).
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Taxpayers are required to obtain a qualified appraisal for
donated property with a value of $5,000 or more, and to attach
the appraisal to the tax return in certain cases.\478\ Under
Treasury regulations, a qualified appraisal means an appraisal
document that, among other things, (1) relates to an appraisal
that is made not earlier than 60 days prior to the date of
contribution of the appraised property and not later than the
due date (including extensions) of the return on which a
deduction is first claimed under section 170; \479\ (2) is
prepared, signed, and dated by a qualified appraiser; (3)
includes (a) a description of the property appraised; (b) the
fair market value of such property on the date of contribution
and the specific basis for the valuation; (c) a statement that
such appraisal was prepared for income tax purposes; (d) the
qualifications of the qualified appraiser; and (e) the
signature and taxpayer identification number (``TIN'') of such
appraiser; and (4) does not involve an appraisal fee that
violates certain prescribed rules.\480\
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\478\ Pub. L. No. 98-369, sec. 155(a)(1) through (6) (1984)
(providing that not later than December 31, 1984, the Secretary shall
prescribe regulations requiring an individual, a closely held
corporation, or a personal service corporation claiming a charitable
deduction for property (other than publicly traded securities) to
obtain a qualified appraisal of the property contributed and attach an
appraisal summary to the taxpayer's return if the claimed value of such
property (plus the claimed value of all similar items of property
donated to one or more donees) exceeds $5,000). Under Pub. L. No. 98-
369, a qualified appraisal means an appraisal prepared by a qualified
appraiser that includes, among other things, (1) a description of the
property appraised; (2) the fair market value of such property on the
date of contribution and the specific basis for the valuation; (3) a
statement that such appraisal was prepared for income tax purposes; (4)
the qualifications of the qualified appraiser; (5) the signature and
TIN of such appraiser; and (6) such additional information as the
Secretary prescribes in such regulations.
\479\ In the case of a deduction first claimed or reported on an
amended return, the deadline is the date on which the amended return is
filed.
\480\ Treas. Reg. sec. 1.170A-13(c)(3).
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REASONS FOR CHANGE
The Committee believes that the value of certain
intellectual property, such as patents, copyrights, trademarks,
trade names, trade secrets, know-how, software, similar
property, or applications or registrations of such property,
that is contributed to a charity often is highly speculative.
Some donated intellectual property may prove to be worthless,
or the initial promise of worth may be diminished by future
inventions, marketplace competition, or other factors. Although
in theory, such intellectual property may promise significant
monetary benefits, the benefits generally will not materialize
if the charity does not make the appropriate investments, have
the right personnel and equipment, or even have sufficient
sustained interest to exploit the intellectual property. The
Committee understands that valuation is made yet more difficult
in the charitable contribution context because the transferee
does not provide full, if any, consideration in exchange for
the transferred property pursuant to arm's length negotiations,
and there may not be a comparable sales market for such
property to use as a benchmark for valuations.
The Committee is concerned that taxpayers with intellectual
property are taking advantage of the inherent difficulties in
valuing such property and are preparing or obtaining erroneous
valuations. In such cases, the charity receives an asset of
questionable value, while the taxpayer receives a significant
tax benefit. The Committee believes that the excessive
charitable contribution deductions enabled by inflated
valuations is best addressed by ensuring that the amount of the
deduction for charitable contributions of such property may not
exceed the taxpayer's basis in the property. The Committee
notes that for other types of charitable contributions for
which valuation is especially problematic--charitable
contributions of property created by the personal efforts of
the taxpayer and charitable contributions to certain private
foundations--a basis deduction generally is the result under
present law.
Although the Committee believes that a deduction of basis
is appropriate in this context, the Committee recognizes that
some contributions of intellectual property may prove to be of
economic benefit to the charity and that donors may need an
economic incentive to make such contributions. Accordingly, the
Committee believes that it is appropriate to permit donors of
intellectual property to receive certain additional charitable
contribution deductions in the future but only if the
contributed property generates qualified income for the
charitable organization.
EXPLANATION OF PROVISION
The provision provides that if a taxpayer contributes a
patent or other intellectual property (other than certain
copyrights or inventory) 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. In addition, the
taxpayer is permitted to deduct, as a charitable deduction,
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 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).
The amount of any additional charitable deduction is
calculated as a sliding-scale percentage of qualified donee
income received or accrued by the charitable donee that
properly is allocable to the contributed property to the
applicable taxable year of the donor, determined as follows:
------------------------------------------------------------------------
Deduction permitted for such
Taxable year of donor taxable year
------------------------------------------------------------------------
1st year ending on or after contribution.. 100 percent of qualified
donee income.
2nd year ending on or after contribution.. 100 percent of qualified
donee income.
3rd year ending on or after contribution.. 90 percent of qualified
donee income.
4th year ending on or after contribution.. 80 percent of qualified
donee income.
5th year ending on or after contribution.. 70 percent of qualified
donee income.
6th year ending on or after contribution.. 60 percent of qualified
donee income.
7th year ending on or after contribution.. 50 percent of qualified
donee income.
8th year ending on or after contribution.. 40 percent of qualified
donee income.
9th year ending on or after contribution.. 30 percent of qualified
donee income.
10th year ending on or after contribution. 20 percent of qualified
donee income.
11th year ending on or after contribution. 10 percent of qualified
donee income.
12th year ending on or after contribution. 10 percent of qualified
donee income.
Taxable years thereafter.................. No deduction permitted.
------------------------------------------------------------------------
An additional charitable deduction is allowed only to the
extent that the aggregate of the amounts that are calculated
pursuant to the sliding-scale exceed the amount of the
deduction claimed upon the contribution of the patent or
intellectual property.
No charitable deduction is permitted with respect to any
revenues or income received or accrued by the charitable donee
after the expiration of the legal life of the patent or
intellectual property, or after the tenth anniversary of the
date the contribution was made by the donor.
The taxpayer is required to inform the donee at the time of
the contribution that the taxpayer intends to treat the
contribution as a contribution subject to the additional
charitable deduction provisions of the provision. In addition,
the taxpayer must obtain written substantiation from the donee
of the amount of any qualified donee income properly allocable
to the contributed property during the charity's taxable
year.\481\ The donee is required to file an annual information
return that reports the qualified donee income and other
specified information relating to the contribution. In
instances where the donor's taxable year differs from the
donee's taxable year, the donor bases its additional charitable
deduction on the qualified donee income of the charitable donee
properly allocable to the donee's taxable year that ends within
the donor's taxable year.
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\481\ The net income taken into account by the taxpayer may not
exceed the amount of qualified donee income reported by the donee to
the taxpayer and the IRS under the provision's substantiation and
reporting requirements.
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Under the provision, additional charitable deductions are
not available for patents or other intellectual property
contributed to a private foundation (other than a private
operating foundation or certain other private foundations
described in section 170(b)(1)(E)).
Under the provision, the Secretary may prescribe
regulations or other guidance to carry out the purposes of the
provision, including providing for the determination of amounts
to be treated as qualified donee income in certain cases where
the donee uses the donated property to further its exempt
activities or functions, or as may be necessary or appropriate
to prevent the avoidance of the purposes of the provision.
EFFECTIVE DATE
The provision is effective for contributions made after
June 3, 2004.
3. Require increased reporting for noncash charitable contributions
(sec. 683 of the bill and sec. 170 of the Code)
PRESENT LAW
In general, a deduction is permitted for charitable
contributions, subject to certain limitations that depend on
the type of taxpayer, the property contributed, and the donee
organization.\482\ In the case of non-cash contributions, the
amount of the deduction generally equals the fair market value
of the contributed property on the date of the contribution.
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\482\ Charitable deductions are provided for income, estate, and
gift tax purposes. Secs. 170, 2055, and 2522, respectively.
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In general, if the total charitable deduction claimed for
non-cash property exceeds $500, the taxpayer must file IRS Form
8283 (Noncash Charitable Contributions) with the IRS. C
corporations (other than personal service corporations and
closely-held corporations) are required to file Form 8283 only
if the deduction claimed exceeds $5,000.
Taxpayers are required to obtain a qualified appraisal for
donated property (other than money and publicly traded
securities) with a value of more than $5,000.\483\ Corporations
(other than a closely-held corporation, a personal service
corporation, or an S corporation) are not required to obtain a
qualified appraisal. Taxpayers are not required to attach a
qualified appraisal to the taxpayer's return, except in the
case of contributed art-work valued at more than $20,000. Under
Treasury regulations, a qualified appraisal means an appraisal
document that, among other things, (1) relates to an appraisal
that is made not earlier than 60 days prior to the date of
contribution of the appraised property and not later than the
due date (including extensions) of the return on which a
deduction is first claimed under section 170; \484\ (2) is
prepared, signed, and dated by a qualified appraiser; (3)
includes (a) a description of the property appraised; (b) the
fair market value of such property on the date of contribution
and the specific basis for the valuation; (c) a statement that
such appraisal was prepared for income tax purposes; (d) the
qualifications of the qualified appraiser; and (e) the
signature and taxpayer identification number of such appraiser;
and (4) does not involve an appraisal fee that violates certain
prescribed rules.\485\
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\483\ Pub. L. No. 98-369, sec. 155(a)(1) through (6) (1984)
(providing that not later than December 31, 1984, the Secretary shall
prescribe regulations requiring an individual, a closely held
corporation, or a personal service corporation claiming a charitable
deduction for property (other than publicly traded securities) to
obtain a qualified appraisal of the property contributed and attach an
appraisal summary to the taxpayer's return if the claimed value of such
property (plus the claimed value of all similar items of property
donated to one or more donees) exceeds $5,000). Under Pub. L. No. 98-
369, a qualified appraisal means an appraisal prepared by a qualified
appraiser that includes, among other things, (1) a description of the
property appraised; (2) the fair market value of such property on the
date of contribution and the specific basis for the valuation; (3) a
statement that such appraisal was prepared for income tax purposes; (4)
the qualifications of the qualified appraiser; (5) the signature and
taxpayer identification number of such appraiser; and (6) such
additional information as the Secretary prescribes in such regulations.
\484\ In the case of a deduction first claimed or reported on an
amended return, the deadline is the date on which the amended return is
filed.
\485\ Treas. Reg. sec. 1.170A-13(c)(3).
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REASONS FOR CHANGE
Under present law, an individual who contributes property
to a charity and claims a deduction in excess of $5,000 must
obtain a qualified appraisal, but a C corporation (other than a
closely-held corporation or a personal services corporation)
that donates property in excess of $5,000 is not required to
obtain such an appraisal. Present law does not require that
appraisals, even for large gifts, be attached to a taxpayer's
return. The Committee believes that requiring C corporations to
obtain a qualified appraisal for charitable contributions of
certain property in excess of $5,000, and requiring that
appraisals be attached to a taxpayer's return for large gifts,
will reduce valuation abuses.
EXPLANATION OF PROVISION
The provision requires increased donor reporting for
certain charitable contributions of property other than cash,
inventory, or publicly traded securities. The provision extends
to all C corporations the present law requirement, applicable
to an individual, closely-held corporation, personal service
corporation, partnership, or S corporation, that the donor must
obtain a qualified appraisal of the property if the amount of
the deduction claimed exceeds $5,000. The provision also
provides that if the amount of the contribution of property
other than cash, inventory, or publicly traded securities
exceeds $500,000, then the donor (whether an individual,
partnership, or corporation) must attach the qualified
appraisal to the donor's tax return. For purposes of the dollar
thresholds under the provision, property and all similar items
of property donated to one or more donees are treated as one
property.
The provision provides that a donor that fails to
substantiate a charitable contribution of property, as required
by the Secretary, is denied a charitable contribution
deduction. If the donor is a partnership or S corporation, the
deduction is denied at the partner or shareholder level. The
denial of the deduction does not apply if it is shown that such
failure is due to reasonable cause and not to willful neglect.
The provision provides that the Secretary may prescribe
such regulations as may be necessary or appropriate to carry
out the purposes of the provision, including regulations that
may provide that some or all of the requirements of the
provision do not apply in appropriate cases.
EFFECTIVE DATE
The provision is effective for contributions made after
June 3, 2004.
4. Require qualified appraisals for charitable contributions of
vehicles (sec. 684 of the bill and sec. 170 of the Code)
PRESENT LAW
In general, a deduction is permitted for charitable
contributions, subject to certain limitations that depend on
the type of taxpayer, the property contributed, and the donee
organization.\486\ In the case of non-cash contributions, the
amount of the deduction generally equals the fair market value
of the contributed property on the date of the contribution.
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\486\ Charitable deductions are provided for income, estate, and
gift tax purposes. Secs. 170, 2055, and 2522, respectively.
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For certain contributions of property, the taxpayer is
required to determine the deductible amount by subtracting any
gain from fair market value, generally resulting in a deduction
equal to the taxpayer's basis. This rule applies to
contributions of: (1) property that, at the time of
contribution, would not have resulted in long-term capital gain
if the property was sold by the taxpayer on the contribution
date; (2) tangible personal property that is used by the donee
in a manner unrelated to the donee's exempt (or governmental)
purpose; and (3) property to or for the use of a private
foundation (other than a foundation defined in section
170(b)(1)(E)).
Charitable contributions of capital gain property generally
are deductible at fair market value. Capital gain property
means any capital asset or property used in the taxpayer's
trade or business the sale of which at its fair market value,
at the time of contribution, would have resulted in gain that
would have been long-term capital gain. Contributions of
capital gain property are subject to different percentage
limitations than other contributions of property.
A taxpayer who donates a used automobile to a charitable
donee generally deducts the fair market value (rather than the
taxpayer's basis) of the automobile. A taxpayer who donates a
used automobile generally is permitted to use an established
used car pricing guide to determine the fair market value of
the automobile, but only if the guide lists a sales price for
an automobile of the same make, model and year, sold in the
same area, and in the same condition as the donated automobile.
Similar rules apply to contributions of other types of vehicles
and property, such as boats.
Charities are required to provide donors with written
substantiation of donations of $250 or more. Taxpayers are
required to report non-cash contributions totaling $500 or more
and the method used for determining fair market value.
Taxpayers are required to obtain a qualified appraisal for
donated property with a value of $5,000 or more, and to attach
the appraisal to the tax return in certain cases.\487\ Under
Treasury regulations, a qualified appraisal means an appraisal
document that, among other things, (1) relates to an appraisal
that is made not earlier than 60 days prior to the date of
contribution of the appraised property and not later than the
due date (including extensions) of the return on which a
deduction is first claimed under section 170; \488\ (2) is
prepared, signed, and dated by a qualified appraiser; (3)
includes (a) a description of the property appraised; (b) the
fair market value of such property on the date of contribution
and the specific basis for the valuation; (c) a statement that
such appraisal was prepared for income tax purposes; (d) the
qualifications of the qualified appraiser; and (e) the
signature and taxpayer identification number (``TIN'') of such
appraiser; and (4) does not involve an appraisal fee that
violates certain prescribed rules.\489\
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\487\ Pub. L. No. 98-369, sec. 155(a)(1) through (6) (1984)
(providing that not later than December 31, 1984, the Secretary shall
prescribe regulations requiring an individual, a closely held
corporation, or a personal service corporation claiming a charitable
deduction for property (other than publicly traded securities) to
obtain a qualified appraisal of the property contributed and attach an
appraisal summary to the taxpayer's return if the claimed value of such
property (plus the claimed value of all similar items of property
donated to one or more donees) exceeds $5,000). Under Pub. L. No. 98-
369, a qualified appraisal means an appraisal prepared by a qualified
appraiser that includes, among other things, (1) a description of the
property appraised; (2) the fair market value of such property on the
date of contribution and the specific basis for the valuation; (3) a
statement that such appraisal was prepared for income tax purposes; (4)
the qualifications of the qualified appraiser; (5) the signature and
TIN of such appraiser; and (6) such additional information as the
Secretary prescribes in such regulations.
\488\ In the case of a deduction first claimed or reported on an
amended return, the deadline is the date on which the amended return is
filed.
\489\ Treas. Reg. sec. 1.170A-13(c)(3).
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Appraisal fees paid by an individual to determine the fair
market value of donated property are deductible as
miscellaneous expenses subject to the 2 percent of adjusted
gross income limit.\490\
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\490\ Rev. Rul. 67-461, 1967-2 C.B. 125.
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REASONS FOR CHANGE
The Committee is aware that in recent years, charitable
organizations increasingly have been soliciting charitable
contributions of vehicles, which are promptly sold (by the
charity or the charity's agent) at auctions for prices far less
than the value claimed by taxpayers for purposes of taking a
charitable contribution deduction. The Committee believes that
requiring taxpayers to obtain a qualified appraisal of a
vehicle at the time of the contribution will help to ensure
that the value claimed for a vehicle properly takes into
account the vehicle's condition and will prevent donors from
making excessive claims of value based on generic pricing
guides for vehicles.
EXPLANATION OF PROVISION
The provision allows a charitable deduction for
contributions of vehicles for which the taxpayer claims a
deduction of more than $250 only if the taxpayer obtains a
qualified appraisal of the vehicle. The provision applies to
automobiles and other types of motor vehicles manufactured
primarily for use on public streets, roads, and highways;
boats; and aircraft. The provision does not affect
contributions of inventory property. The definition of
qualified appraisal generally follows the definition contained
in present law, subject to additional regulations or guidance
provided by the Secretary. The qualified appraisal of a donated
vehicle must be obtained by the taxpayer by the time the
contribution is made. Under the provision, the Secretary shall
prescribe such regulations or other guidance as may be
necessary to carry out the purposes of the provision.
EFFECTIVE DATE
The provision is effective for contributions made after
June 3, 2004.
5. Extend the present-law intangible amortization provisions to
acquisitions of sports franchises (sec. 685 of the bill and
sec. 197 of the Code)
PRESENT LAW
The purchase price allocated to intangible assets
(including franchise rights) acquired in connection with the
acquisition of a trade or business generally must be
capitalized and amortized over a 15-year period.\491\ These
rules were enacted in 1993 to minimize disputes regarding the
proper treatment of acquired intangible assets. The rules do
not apply to a franchise to engage in professional sports and
any intangible asset acquired in connection with such a
franchise.\492\ However, other special rules apply to certain
of these intangible assets.
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\491\ Sec. 197.
\492\ Sec. 197(e)(6).
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Under section 1056, when a franchise to conduct a sports
enterprise is sold or exchanged, the basis of a player contract
acquired as part of the transaction is generally limited to the
adjusted basis of such contract in the hands of the transferor,
increased by the amount of gain, if any, recognized by the
transferor on the transfer of the contract. Moreover, not more
than 50 percent of the consideration from the transaction may
be allocated to player contracts unless the transferee
establishes to the satisfaction of the Commissioner that a
specific allocation in excess of 50 percent is proper. However,
these basis rules may not apply if a sale or exchange of a
franchise to conduct a sports enterprise is effected through a
partnership.\493\ Basis allocated to the franchise or to other
valuable intangible assets acquired with the franchise may not
be amortizable if these assets lack a determinable useful life.
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\493\ P.D.B. Sports, Ltd. v. Comm., 109 T.C. 423 (1997).
---------------------------------------------------------------------------
In general, section 1245 provides that gain from the sale
of certain property is treated as ordinary income to the extent
depreciation or amortization was allowed on such property.
Section 1245(a)(4) provides special rules for recapture of
depreciation and deductions for losses taken with respect to
player contracts. The special recapture rules apply in the case
of the sale, exchange, or other disposition of a sports
franchise. Under the special recapture rules, the amount
recaptured as ordinary income is the amount of gain not to
exceed the greater of (1) the sum of the depreciation taken
plus any deductions taken for losses (i.e., abandonment losses)
with respect to those player contracts which are initially
acquired as a part of the original acquisition of the franchise
or (2) the amount of depreciation taken with respect to those
player contracts which are owned by the seller at the time of
the sale of the sports franchise.
REASONS FOR CHANGE
The present-law rules under section 197 were enacted to
minimize disputes regarding the measurement of acquired
intangible assets. Prior to the enactment of the rules, there
were many disputes regarding the value and useful life of
various intangible assets acquired together in a business
acquisition. Furthermore, in the absence of a showing of a
reasonably determinable useful life, an asset could not be
amortized. Taxpayers tended to identify and allocate large
amounts of purchase price to assets said to have short useful
lives, while the IRS would allocate a large amount of value to
intangible assets for which no determinable useful life could
be shown (e.g., goodwill), and would deny amortization for that
amount of purchase price.
The present-law rules for acquisitions of sports franchises
do not eliminate the potential for disputes, because they
address only player contracts, while a sports franchise
acquisition can involve many intangibles other than player
contracts. In addition, disputes may arise regarding the
appropriate period for amortization of particular player
contracts. The Committee believes expending taxpayer and
government resources disputing these items is an unproductive
use of economic resources. The Committee further believes that
the section 197 rules should apply to all types of businesses
regardless of the nature of their assets.
EXPLANATION OF PROVISION
The provision extends the 15-year recovery period for
intangible assets to franchises to engage in professional
sports and any intangible asset acquired in connection with the
acquisition of such a franchise (including player contracts).
Thus, the same rules for amortization of intangibles that apply
to other acquisitions under present law will apply to
acquisitions of sports franchises. The provision also repeals
the special rules under section 1245(a)(4) and makes other
conforming changes.
EFFECTIVE DATE
The provision is effective for property acquired after the
date of enactment. The amendment to section 1245(a)(4) applies
to franchises acquired after the date of enactment.
6. Increase continuous levy for certain Federal payments (sec. 686 of
the bill and sec. 6331 of the Code)
PRESENT LAW
If any person is liable for any internal revenue tax and
does not pay it within 10 days after notice and demand \494\ by
the IRS, the IRS may then collect the tax by levy upon all
property and rights to property belonging to the person,\495\
unless there is an explicit statutory restriction on doing so.
A levy is the seizure of the person's property or rights to
property. Property that is not cash is sold pursuant to
statutory requirements.\496\
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\494\ Notice and demand is the notice given to a person liable for
tax stating that the tax has been assessed and demanding that payment
be made. The notice and demand must be mailed to the person's last
known address or left at the person's dwelling or usual place of
business (Code sec. 6303).
\495\ Code sec. 6331.
\496\ Code secs. 6335-6343.
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A continuous levy is applicable to specified Federal
payments.\497\ This includes any Federal payment for which
eligibility is not based on the income and/or assets of a
payee. Thus, a Federal payment to a vendor of goods or services
to the government is subject to continuous levy. This
continuous levy attaches up to 15 percent of any specified
payment due the taxpayer.
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\497\ Code sec. 6331(h).
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REASONS FOR CHANGE
There have recently been reports \498\ of abuses of the
Federal tax system by some Federal contractors. Consequently,
the Committee believes that it is appropriate to increase the
permissible percentage of Federal payments subject to levy.
---------------------------------------------------------------------------
\498\ Some DOD Contractors Abuse the Federal Tax System with Little
Consequence, GAO-04-95, February 2004.
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EXPLANATION OF PROVISION
The provision permits a levy of up to 100 percent of a
Federal payment to a vendor of goods or services to the
Government.
EFFECTIVE DATE
The provision is effective on the date of enactment.
7. Modification of straddle rules (sec. 687 of the bill and sec. 1092
of the Code)
PRESENT LAW
Straddle rules
In general
A ``straddle'' generally refers to offsetting positions
(sometimes referred to as ``legs'' of the straddle) with
respect to actively traded personal property. Positions are
offsetting if there is a substantial diminution in the risk of
loss from holding one position by reason of holding one or more
other positions in personal property. A ``position'' is an
interest (including a futures or forward contract or option) in
personal property. When a taxpayer realizes a loss with respect
to a position in a straddle, the taxpayer may recognize that
loss for any taxable year only to the extent that the loss
exceeds the unrecognized gain (if any) with respect to
offsetting positions in the straddle.\499\ Deferred losses are
carried forward to the succeeding taxable year and are subject
to the same limitation with respect to unrecognized gain in
offsetting positions.
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\499\ Sec. 1092.
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Positions in stock
The straddle rules generally do not apply to positions in
stock. However, the straddle rules apply where one of the
positions is stock and at least one of the offsetting positions
is: (1) an option with respect to the stock, (2) a securities
futures contract (as defined in section 1234B) with respect to
the stock, or (3) a position with respect to substantially
similar or related property (other than stock) as defined in
Treasury regulations. In addition, the straddle rules apply to
stock of a corporation formed or availed of to take positions
in personal property that offset positions taken by any
shareholder.
Although the straddle rules apply to offsetting positions
that consist of stock and an option with respect to stock, the
straddle rules generally do not apply if the option is a
``qualified covered call option'' written by the taxpayer.\500\
In general, a qualified covered call option is defined as an
exchange-listed option that is not deep-in-the-money and is
written by a non-dealer more than 30 days before expiration of
the option.
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\500\ However, if the option written by the taxpayer is a qualified
covered call option that is in-the-money, then (1) any loss with
respect to such option is treated as long-term capital loss if, at the
time such loss is realized, gain on the sale or exchange of the
offsetting stock held by the taxpayer would be treated as long-term
capital gain, and (2) the holding period of such stock does not include
any period during which the taxpayer is the grantor of the option (sec.
1092(f)).
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The stock exception from the straddle rules has been
largely curtailed by statutory amendment and regulatory
interpretation. Under proposed Treasury regulations, the
application of the stock exception essentially would be limited
to offsetting positions involving direct ownership of stock and
short sales of stock.\501\
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\501\ Prop. Treas. Reg. sec. 1.1092(d)-2(c).
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Unbalanced straddles
When one position with respect to personal property offsets
only a portion of one or more other positions (``unbalanced
straddles''), the Treasury Secretary is directed to prescribe
by regulations the method for determining the portion of such
other positions that is to be taken into account for purposes
of the straddle rules.\502\ To date, no such regulations have
been promulgated.
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\502\ Sec. 1092(c)(2)(B).
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Unbalanced straddles can be illustrated with the following
example: Assume the taxpayer holds two shares of stock (i.e.,
is long) in XYZ stock corporation--share A with a $30 basis and
share B with a $40 basis. When the value of the XYZ stock is
$45, the taxpayer pays a $5 premium to purchase a put option on
one share of the XYZ stock with an exercise price of $40. The
issue arises as to whether the purchase of the put option
creates a straddle with respect to share A, share B, or both.
Assume that, when the value of the XYZ stock is $100, the put
option expires unexercised. Taxpayer incurs a loss of $5 on the
expiration of the put option, and sells share B for a $60 gain.
On a literal reading of the straddle rules, the $5 loss would
be deferred because the loss ($5) does not exceed the
unrecognized gain ($70) in share A, which is also an offsetting
position to the put option--notwithstanding that the taxpayer
recognized more gain than the loss through the sale of share B.
This problem is exacerbated when the taxpayer has a large
portfolio of actively traded personal property that may be
offsetting the loss leg of the straddle.
Although Treasury has not issued regulations to address
unbalanced straddles, the IRS issued a private letter ruling in
1999 that addressed an unbalanced straddle situation.\503\
Under the facts of the ruling, a taxpayer entered into a
costless collar with respect to a portion of the shares of a
particular stock held by the taxpayer.\504\ Other shares were
held in an account as collateral for a loan and still other
shares were held in excess of the shares used as collateral and
the number of shares specified in the collar. The ruling
concluded that the collar offset only a portion of the stock
(i.e., the number of shares specified in the costless collar)
because that number of shares determined the payoff under each
option comprising the collar. The ruling further concluded
that:
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\503\ Priv. Ltr. Rul. 199925044 (Feb. 3, 1999).
\504\ A costless collar generally is comprised of the purchase of a
put option and the sale of a call option with the same trade dates and
maturity dates and set such that the premium paid substantially equals
the premium received. The collar can be considered as economically
similar to a short position in the stock.
In the absence of regulations under section
1092(c)(2)(B), we conclude that it is permissible for
Taxpayer to identify which shares of Corporation stock
are part of the straddles and which shares are used as
collateral for the loans using appropriately modified
versions of the methods of section 1.1012-1(c)(2) and
(3) [providing rules for adequate identification of
shares of stock sold or transferred by a taxpayer] or
section 1.1092(b)-3T(d)(4) [providing requirements and
methods for identification of positions that are part
of a section 1092(b)(2) identified mixed straddle].
Holding period for dividends-received deduction
If an instrument issued by a U.S. corporation is classified
for tax purposes as stock, a corporate holder of the instrument
generally is entitled to a dividends-received deduction for
dividends received on that instrument.\505\ The dividends-
received deduction is allowed to a corporate shareholder only
if the shareholder satisfies a 46-day holding period for the
dividend-paying stock (or a 91-day holding period for certain
dividends on preferred stock).\506\ The holding period must be
satisfied for each dividend over a period that is immediately
before and immediately after the taxpayer becomes entitled to
receive the dividend. The 46- or 91-day holding period
generally does not include any time during which the
shareholder is protected (other than by writing a qualified
covered call) from the risk of loss that is otherwise inherent
in the ownership of any equity interest.\507\
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\505\ Sec. 243. The amount of the deduction is 70 percent of
dividends received if the recipient owns less than 20 percent (by vote
and value) of stock of the payor. If the recipient owns more than 20
percent of the stock, the deduction is increased to 80 percent. If the
recipient owns more than 80 percent of the stock, the deduction is
further increased to 100 percent for qualifying dividends.
\506\ Sec. 246(c).
\507\ Sec. 246(c)(4).
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REASONS FOR CHANGE
The Committee believes that the straddle rules should be
modified in several respects. While the present-law rules
provide authority for the Secretary to issue guidance
concerning unbalanced straddles, the Committee is of the view
that such guidance is not forthcoming. Therefore, the Committee
believes that it is necessary at this time to provide such
guidance by statute. The Committee further believes that it is
appropriate to repeal the exception from the straddle rules for
positions in stock, particularly in light of statutory changes
in the straddle rules and elsewhere in the Code that have
significantly diminished the continuing utility of the
exception. In addition, the Committee believes that the
present-law treatment of physically settled positions under the
straddle rules requires clarification.
EXPLANATION OF PROVISION
Straddle rules
The bill modifies the straddle rules in three respects: (1)
permits taxpayers to identify offsetting positions of a
straddle; (2) provides a special rule to clarify the present-
law treatment of certain physically settled positions of a
straddle; and (3) repeals the stock exception from the straddle
rules.
Identified straddles
Under the bill, taxpayers generally are permitted to
identify the offsetting positions that are components of a
straddle at the time the taxpayer enters into a transaction
that creates a straddle, including an unbalanced straddle.\508\
If there is a loss with respect to any identified position that
is part of an identified straddle, the general straddle loss
deferral rules do not apply to such loss. Instead, the basis of
each of the identified positions that offset the loss position
in the identified straddle is increased by an amount that bears
the same ratio to the loss as the unrecognized gain (if any)
with respect to such offsetting position bears to the aggregate
unrecognized gain with respect to all positions that offset the
loss position in the identified straddle.\509\ Any loss with
respect to an identified position that is part of an identified
straddle cannot otherwise be taken into account by the taxpayer
or any other person to the extent that the loss increases the
basis of any identified positions that offset the loss position
in the identified straddle.
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\508\ However, to the extent provided by Treasury regulations,
taxpayers are not permitted to identify offsetting positions of a
straddle if the fair market value of the straddle position already held
by the taxpayer at the creation of the straddle is less than its
adjusted basis in the hands of the taxpayer.
\509\ For this purpose, ``unrecognized gain'' is the excess of the
fair market value of an identified position that is part of an
identified straddle at the time the taxpayer incurs a loss with respect
to another identified position in the identified straddle, over the
fair market value of such position when the taxpayer identified the
position as a position in the identified straddle.
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In addition, the provision provides authority to issue
Treasury regulations that would specify (1) the proper methods
for clearly identifying a straddle as an identified straddle
(and identifying positions as positions in an identified
straddle), (2) the application of the identified straddle rules
for a taxpayer that fails to properly identify the positions of
an identified straddle,\510\ and (3) provide an ordering rule
for dispositions of less than an entire position that is part
of an identified straddle.
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\510\ For example, although the provision does not require
taxpayers to identify any positions of a straddle as an identified
straddle, it may be necessary to provide rules requiring all balanced
offsetting positions to be included in an identified straddle if a
taxpayer elects to identify any of the offsetting positions as an
identified straddle.
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Physically settled straddle positions
The bill also clarifies the present-law straddle rules with
respect to taxpayers that settle a position that is part of a
straddle by delivering property to which the position relates.
Specifically, the provision clarifies that the present-law
straddle loss deferral rules treat as a two-step transaction
the physical settlement of a straddle position that, if
terminated, would result in the realization of a loss. With
respect to the physical settlement of such a position, the
taxpayer is treated as having terminated the position for its
fair market value immediately before the settlement. The
taxpayer then is treated as having sold at fair market value
the property used to physically settle the position.
Stock exception repeal
The bill also eliminates the exception from the straddle
rules for stock (other than the exception relating to qualified
covered call options). Thus, offsetting positions comprised of
actively traded stock and a position with respect to
substantially similar or related property generally constitute
a straddle.\511\
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\511\ It is intended that Treasury regulations defining
substantially similar or related property for this purpose will
continue to apply subsequent to repeal of the stock exception and
generally will constitute the exclusive definition of a straddle with
respect to offsetting positions involving stock. See Prop. Treas. Reg.
sec. 1.1092(d)-2(b). However, the general straddles rules regarding
substantial diminution in risk of loss will continue to apply to stock
of corporations formed or availed of to take positions in personal
property that offset positions taken by the shareholder.
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Dividends-received deduction holding period
The bill also modifies the required 46- or 91-day holding
period for the dividends-received deduction by providing that
the holding period does not include any time during which the
shareholder is protected from the risk of loss otherwise
inherent in the ownership of any equity interest if the
shareholder obtains such protection by writing an in-the-money
call option on the dividend-paying stock.
EFFECTIVE DATE
The provision is effective for positions established on or
after the date of enactment that substantially diminish the
risk of loss from holding offsetting positions (regardless of
when such offsetting position was established).
8. Add vaccines against hepatitis A to the list of taxable vaccines
(sec. 688 of the bill and sec. 4132 of the Code)
PRESENT LAW
A manufacturer's excise tax is imposed at the rate of 75
cents per dose \512\ on the following vaccines routinely
recommended for administration to children: diphtheria,
pertussis, tetanus, measles, mumps, rubella, polio, HIB
(haemophilus influenza type B), hepatitis B, varicella (chicken
pox), rotavirus gastroenteritis, and streptococcus pneumoniae.
The tax applied to any vaccine that is a combination of vaccine
components equals 75 cents times the number of components in
the combined vaccine.
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\512\ Sec. 4131.
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Amounts equal to net revenues from this excise tax are
deposited in the Vaccine Injury Compensation Trust Fund to
finance compensation awards under the Federal Vaccine Injury
Compensation Program for individuals who suffer certain
injuries following administration of the taxable vaccines. This
program provides a substitute Federal, ``no fault'' insurance
system for the State-law tort and private liability insurance
systems otherwise applicable to vaccine manufacturers. All
persons immunized after September 30, 1988, with covered
vaccines must pursue compensation under this Federal program
before bringing civil tort actions under State law.
REASONS FOR CHANGE
The Committee is aware that the Centers for Disease Control
and Prevention have recommended that children in 17 highly
endemic States be inoculated with a hepatitis A vaccine. The
population of children in the affected States exceeds 20
million. Several of the affected States mandate childhood
vaccination against hepatitis A. The Committee is aware that
the Advisory Commission on Childhood Vaccines has recommended
that the vaccine excise tax be extended to cover vaccines
against hepatitis A. For these reasons, the Committee believes
it is appropriate to include vaccines against hepatitis A as
part of the Vaccine Injury Compensation Program. Making the
hepatitis A vaccine taxable is a first step.\513\ In the
unfortunate event of an injury related to this vaccine,
families of injured children are eligible for the no-fault
arbitration system established under the Vaccine Injury
Compensation Program rather than going to Federal Court to seek
compensatory redress.
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\513\ The Committee recognizes that, to become covered under the
Vaccine Injury Compensation Program, the Secretary of Health and Human
Services also must list the hepatitis A vaccine on the Vaccine Injury
Table.
---------------------------------------------------------------------------
EXPLANATION OF PROVISION
The provision adds any vaccine against hepatitis A to the
list of taxable vaccines.
EFFECTIVE DATE
The provision is effective for vaccines sold beginning on
the first day of the first month beginning more than four weeks
after the date of enactment.
9. Add vaccines against influenza to the list of taxable vaccines (sec.
689 of the bill and sec. 4132 of the Code)
PRESENT LAW
A manufacturer's excise tax is imposed at the rate of 75
cents per dose \514\ on the following vaccines routinely
recommended for administration to children: diphtheria,
pertussis, tetanus, measles, mumps, rubella, polio, HIB
(haemophilus influenza type B), hepatitis B, varicella (chicken
pox), rotavirus gastroenteritis, and streptococcus pneumoniae.
The tax applied to any vaccine that is a combination of vaccine
components equals 75 cents times the number of components in
the combined vaccine.
---------------------------------------------------------------------------
\514\ Sec. 4131.
---------------------------------------------------------------------------
Amounts equal to net revenues from this excise tax are
deposited in the Vaccine Injury Compensation Trust Fund to
finance compensation awards under the Federal Vaccine Injury
Compensation Program for individuals who suffer certain
injuries following administration of the taxable vaccines. This
program provides a substitute Federal, ``no fault'' insurance
system for the State-law tort and private liability insurance
systems otherwise applicable to vaccine manufacturers. All
persons immunized after September 30, 1988, with covered
vaccines must pursue compensation under this Federal program
before bringing civil tort actions under State law.
REASONS FOR CHANGE
The Committee understands that on October 15, 2003, the
Advisory Committee on Immunization Practices of the Centers for
Disease Control and Prevention issued a recommendation for the
routine annual vaccination of infants six to 23 months of age
with an inactivated influenza vaccine licensed by FDA. This is
the first recommendation for ``routine use'' in children
although trivalent influenza vaccine products have long been
available and approved for use in children of varying ages and
these vaccines have long been recommended for use by seniors.
For these reasons, the Committee believes it is appropriate to
include trivalent vaccines against influenza as part of the
Vaccine Injury Compensation Program. Making an influenza
vaccine taxable is a first step.\515\ In the unfortunate event
of an injury related to these vaccines, an injured individual
is eligible for the no-fault arbitration system established
under the Vaccine Injury Compensation Program rather than going
to Federal Court to seek compensatory redress.
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\515\ The Committee recognizes that, to become covered under the
Vaccine Injury Compensation Program, the Secretary of Health and Human
Services also must list each trivalent vaccine against influenza on the
Vaccine Injury Table.
---------------------------------------------------------------------------
EXPLANATION OF PROVISION
The provision adds any trivalent vaccine against influenza
to the list of taxable vaccines.
EFFECTIVE DATE
The provision is effective for vaccines sold or used
beginning on the later of the first day of the first month
beginning more than four weeks after the date of enactment or
the date on which the Secretary of Health and Human Services
lists any such vaccine for purpose of compensation for any
vaccine-related injury or death through the Vaccine Injury
Compensation Trust Fund.
10. Extension of IRS user fees (sec. 690 of the bill and sec. 7528 of
the Code)
PRESENT LAW
The IRS provides written responses to questions of
individuals, corporations, and organizations relating to their
tax status or the effects of particular transactions for tax
purposes. The IRS generally charges a fee for requests for a
letter ruling, determination letter, opinion letter, or other
similar ruling or determination.\516\ Public Law 108-89 \517\
extended the statutory authorization for these user fees
through December 31, 2004, and moved the statutory
authorization for these fees into the Code.\518\
---------------------------------------------------------------------------
\516\ These user fees were originally enacted in section 10511 of
the Revenue Act of 1987 (Pub. Law No. 100-203, December 22, 1987).
Public Law 104-117 (An Act to provide that members of the Armed Forces
performing services for the peacekeeping efforts in Bosnia and
Herzegovina, Croatia, and Macedonia shall be entitled to tax benefits
in the same manner as if such services were performed in a combat zone,
and for other purposes (March 20, 1996)) extended the statutory
authorization for these user fees through September 30, 2003.
\517\ 117 Stat. 1131; H.R. 3146, signed by the President on October
1, 2003.
\518\ That Public Law also moved into the Code the user fee
provision relating to pension plans that was enacted in section 620 of
the Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L.
107-16, June 7, 2001).
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee believes that it is appropriate to provide a
further extension of the applicability of these user fees.
EXPLANATION OF PROVISION
The provision extends the statutory authorization for these
user fees through September 30, 2014.
EFFECTIVE DATE
The provision is effective for requests made after the date
of enactment.
11. Extension of customs user fees (sec. 691 of the bill)
PRESENT LAW
Section 13031 of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA) (P.L. 99-272), authorized
the Secretary of the Treasury to collect certain service fees.
Section 412 (P.L 107-296) of the Homeland Security Act of 2002
authorized the Secretary of the Treasury to delegate such
authority to the Secretary of Homeland Security. Provided for
under 19 U.S.C. 58c, these fees include: processing fees for
air and sea passengers, commercial trucks, rail cars, private
aircraft and vessels, commercial vessels, dutiable mail
packages, barges and bulk carriers, merchandise, and Customs
broker permits. COBRA was amended on several occasions but most
recently by P.L. 108-121 which extended authorization for the
collection of these fees through March 1, 2005.\519\
---------------------------------------------------------------------------
\519\ Sec. 201; 117 Stat. 1335.
---------------------------------------------------------------------------
REASONS FOR CHANGE
The Committee believes it is important to extend these fees
to cover the expenses of the services provided. However, the
Committee also believes it is important that any fee imposed be
a true user fee. That is, the Committee believes that when the
Congress authorizes the executive branch to assess user fees,
those fees must be determined to reflect only the cost of
providing the service for which the fee is assessed.
EXPLANATION OF PROVISION
The provision extends the passenger and conveyance
processing fees and the merchandise processing fees authorized
under the Consolidated Omnibus Budget Reconciliation Act of
1985 through September 30, 2014. For fiscal years after
September 30, 2005, the Secretary is to charge fees in amount
that are reasonably related to the costs of providing customs
services in connection with the activity or item for which the
fee is charged.
The provision also includes a Sense of the Congress that
the fees set forth in paragraphs (1) through (8) of subsection
(a) of section 13031 of the Consolidated Omnibus Budget
Reconciliation Act of 1985 have been reasonably related to the
costs of providing customs services in connection with the
activities or items for which the fees have been charged under
such paragraphs. The Sense of Congress also states that the
fees collected under such paragraphs have not exceeded, in the
aggregate, the amounts paid for the costs described in
subsection (f)(3)(A) incurred in providing customs services in
connection with the activities or items for which the fees were
charged under such paragraphs.
The provision further provides that the Secretary conduct a
study of all the fees collected by the Department of Homeland
Security, and shall submit to the Congress, not later than
September 30, 2005, a report containing the recommendations of
the Secretary on what fees should be eliminated, what the rate
of fees retains should be, and any other recommendations with
respect to the fees that the Secretary considers appropriate.
EFFECTIVE DATE
The provisions are effective upon the date of enactment.
TITLE VII--MARKET REFORM FOR TOBACCO GROWERS
(Secs. 701-725 of the bill)
PRESENT LAW
The current tobacco program has two main components: a
supply management component and a price support component. In
addition, in 1982, Congress passed the ``No-Net-Cost Tobacco
Program Act'' \520\ that assured the tobacco program would run
at no-net cost to the Federal government.
---------------------------------------------------------------------------
\520\ Pub. L. No. 97-218 (1982).
---------------------------------------------------------------------------
Supply management
The supply management component limits and stabilizes the
quantity of tobacco marketed by farmers. This is achieved
through marketing quotas. The Secretary of Agriculture raises
or lowers the national marketing quota on an annual basis. The
Secretary establishes the national marketing quota for each
type of tobacco based upon domestic and export demand, but at a
price above the government support price. The purpose of
matching supply with demand is to keep the price of tobacco
high. There is a secondary market in tobacco quota. Tobacco
growers who do not have sufficient quota may purchase or rent
one.
Support price
Given the numerous variables that affect tobacco supply and
demand, marketing quotas alone have not always been able to
guarantee tobacco prices. Therefore, in addition to marketing
quotas, Federal support prices are established and guaranteed
through the mechanism of nonrecourse loans available on each
farmer's marketed crop. The loan price for each type of tobacco
is announced each year by the Department of Agriculture using
the formula specified in the law to calculate loan levels. This
system guarantees minimum prices for the different types of
tobacco.
The national loan price on 2004 crop flue-cured tobacco is
$1.69 per pound; the burley loan price is $1.873 per pound.
No-net-cost assessment
In 1982, Congress passed the ``No-Net-Cost Tobacco Program
Act.'' The purpose of this program is to ensure that the
nonrecourse loan program is run at no-net-cost to the Federal
government.
When tobacco is not contracted, it is sold at an auction
sale barn. At the auction sale barn, each lot of tobacco goes
to the highest bidder, unless that bid does not exceed the
government's loan price. When the bid does not exceed this
price, the farmer may choose to be paid the loan price by a
cooperative, with money borrowed from the Commodity Credit
Corporation (``CCC''). In such cases, the tobacco is consigned
to the cooperative (known as a price stabilization
cooperative), which redries, packs, and stores the tobacco as
collateral for the CCC. The cooperative, acting as an agent for
the CCC, later sells the tobacco, with the proceeds going to
repay the loan plus interest. If the cooperative does not
recover the cost of the loan plus interest, the Secretary of
Agriculture assesses growers, purchasers and importers of
tobacco in order to repay the difference. All growers,
purchasers and importers of tobacco participate in paying these
assessments, regardless of whether or not they participate in
the loan program.
The no-net-cost assessment on 2004 crop flue-cured is 10
cents per pound; the burley assessment is 2 cents per pound.
The no-net-cost assessment funds are deposited in an escrow
account that is held to reimburse the government for any
financial losses resulting from tobacco loan operations.
Currently, over 80 percent of growers market their tobacco
through contracts with tobacco companies, and thus these
growers do not participate in the loan program. However, they
must still pay the no-net-cost assessment when the Secretary
levies it. The remaining 20 percent of growers market their
tobacco through the auction system, and are eligible for
participation in the loan program. Of this group, over 60
percent have consistently participated in the loan program
during the past several years.
REASONS FOR CHANGE
The tobacco price support program was first created in the
1930s. Almost seventy years later, this depression era program
is no longer achieving its stated mission of helping to support
tobacco farmers through support prices and marketing quotas.
There are two main reasons for the current failure of the
tobacco price support system to achieve its stated goals.
First, consumption of tobacco products has declined
substantially in recent years. For example, cigarette
consumption has declined nearly 36 percent in the United States
since 1981, from 640 billion to an estimated 410 billion in
2003.
Second, the current program prevents U.S. tobacco from
being price competitive on the domestic and world market. For
example, the share of U.S. tobacco in U.S cigarettes has
declined from 90 percent in 1960 to 45 percent in 2003. Exports
of U.S. tobacco have also declined. At the same time, imports
of foreign tobacco have increased to fill the void.
The combined result of declining consumption and the
increasing price of U.S. tobacco has been the steady reduction
of tobacco quota available to farmers in recent years. Since
1998, the Secretary of Agriculture has cut the national
marketing quota by approximately 50 percent. As quota levels
have been reduced, so has the volume of domestically-produced
tobacco sales. At the same time, quota rental rates have risen,
as has the no-net-cost assessment partially paid by growers.
This has led to an overall decrease in farm revenue from
tobacco production.
The provision eliminates the tobacco program, ending
government participation in the growing and marketing of
tobacco. Producers are provided transition assistance and quota
holders are provided a payment to buy out the asset value of
the quota.
EXPLANATION OF PROVISION
The provision repeals the Federal tobacco support program,
including marketing quotas and nonrecourse marketing
loans.\521\
---------------------------------------------------------------------------
\521\ Secs. 711-712 of the bill.
---------------------------------------------------------------------------
The provision also provides quota holders $7.00 per pound
on their 2002 quota allotment paid in equal installments over
five years.\522\
---------------------------------------------------------------------------
\522\ Sec. 722 of the bill.
---------------------------------------------------------------------------
Additionally, the provision provides producers transition
payments of $3.00 per pound based on their 2002 quota levels
paid in equal installments over five years.\523\
---------------------------------------------------------------------------
\523\ Sec. 723 of the bill.
---------------------------------------------------------------------------
The provision caps payments to quota holders and growers at
$9.6 billion over fiscal years 2005 through 2009.\524\
---------------------------------------------------------------------------
\524\ Sec. 725 of the bill.
---------------------------------------------------------------------------
EFFECTIVE DATE
The provision is effective on the date of enactment.
TITLE VIII--TRADE PROVISIONS
A. Suspension of Duties on Ceiling Fans
(Sec. 801 of the bill)
PRESENT LAW
A 4.7-percent ad valorem customs duty is collected on
imported ceiling fans from all sources.
REASONS FOR CHANGE
The Committee observes that ceiling fans are an energy
efficient method of cooling and heating residences and
commercial buildings. However, because there is a lack of U.S.
production of ceiling fans, the Committee notes that a tariff
only serves to increase the cost of ceiling fans to the U.S.
consumer. Reducing the tariff on imported ceiling fans is
expected to reduce the costs to consumers and encourage energy
conservation.
EXPLANATION OF PROVISION
The provision agreement suspends the present customs duty
applicable to ceiling fans through December 31, 2006.
EFFECTIVE DATE
The provision is effective on the fifteenth day after the
date of enactment.
B. Suspension of Duties on Nuclear Steam Generators
(Sec. 802 of the bill)
PRESENT LAW
Nuclear steam generators, as classified under heading
9902.84.02 of the Harmonized Tariff Schedule of the United
States, enter the United States duty free until December 31,
2006. After December 31, 2006, the duty on nuclear steam
generators returns to the column 1 rate of 5.2 percent under
subheading 8402.11.00 of the Harmonized Tariff Schedule of the
United States.
REASONS FOR CHANGE
The Committee notes that nuclear steam generators are
essential components to nuclear electricity plants, but at the
present time, there is a lack of U.S. production of nuclear
steam generators. Therefore the Committee concludes that a
tariff only serves to increase the cost of these products to
the U.S. purchasers. Reducing the tariff on imported nuclear
steam generators is expected to encourage installation of more
modern and energy efficient equipment and to reduce the costs
to consumers of electricity.
EXPLANATION OF PROVISION
The provision extends the present-law suspension of customs
duty applicable to nuclear steam generators through December
31, 2008.
EFFECTIVE DATE
The provision is effective on the date of enactment.
C. Suspension of Duties on Nuclear Reactor Vessel Heads
(Sec. 802 of the bill)
PRESENT LAW
According to section 5202 of the Trade Act of 2002, nuclear
reactor vessel heads are classified under subheading 8401.40.00
of the Harmonized Tariff Schedule of the United States and
enter the United States with a column 1 duty rate of 3.3
percent.
REASONS FOR CHANGE
The Committee notes that nuclear reactor vessel heads are
essential components to nuclear electricity plants, but at the
present time, there is a lack of U.S. production of nuclear
reactor vessel heads. Therefore the Committee concludes that a
tariff only serves to increase the cost of these products to
the U.S. purchasers. Reducing the tariff on imported nuclear
reactor vessel heads is expected to encourage installation of
more modern and energy efficient equipment and to reduce the
costs to consumers of electricity.
EXPLANATION OF PROVISION
The provision temporarily suspends the present customs duty
applicable to nuclear reactor vessel heads for column 1
countries through December 31, 2008.
EFFECTIVE DATE
The provision is effective on the fifteenth day after the
date of enactment.
II. VOTES OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statements are made
concerning the votes of the Committee on Ways and Means in its
consideration of the bill, H.R. 4520.
MOTION TO REPORT THE BILL
The bill, H.R. 4520, as amended, was ordered favorably
reported by a rollcall vote of 27 yeas to 9 nays (with a quorum
being present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Thomas..................... X .... .... Mr. Rangel....... .... X .....
Mr. Crane...................... X .... .... Mr. Stark........ .... ........ .....
Mr. Shaw....................... X .... .... Mr. Matsui....... .... ........ .....
Mrs. Johnson................... X .... .... Mr. Levin........ .... X .....
Mr. Houghton................... X .... .... Mr. Cardin....... .... X .....
Mr. Herger..................... X .... .... Mr. McDermott.... .... X .....
Mr. McCrery.................... X .... .... Mr. Kleczka...... .... ........ .....
Mr. Camp....................... X .... .... Mr. Lewis (GA)... .... X .....
Mr. Ramstad.................... X .... .... Mr. Neal......... .... ........ .....
Mr. Nussle..................... X .... .... Mr. McNulty...... .... ........ .....
Mr. Johnson.................... X .... .... Mr. Jefferson.... X ........ .....
Ms. Dunn....................... X .... .... Mr. Tanner....... X ........ .....
Mr. Collins.................... X .... .... Mr. Becerra...... .... X .....
Mr. Portman.................... X .... .... Mr. Doggett...... .... X .....
Mr. English.................... X .... .... Mr. Pomeroy...... .... X .....
Mr. Hayworth................... X .... .... Mr. Sandlin...... X ........ .....
Mr. Weller..................... X .... .... Ms. Tubbs Jones.. .... X .....
Mr. Hulshof.................... X .... ......... ................. ........ ........
Mr. McInnis.................... X .... ......... ................. ........ ........
Mr. Lewis (KY)................. X .... ......... ................. ........ ........
Mr. Foley...................... X .... ......... ................. ........ ........
Mr. Brady...................... X .... ......... ................. ........ ........
Mr. Ryan....................... X .... ......... ................. ........ ........
Mr. Cantor..................... X .... ......... ................. ........ ........
----------------------------------------------------------------------------------------------------------------
VOTES ON AMENDMENTS
A rollcall vote was conducted on the following amendments
to the Chairman's amendment in the nature of a substitute.
An amendment by Mr. Rangel, which would strike all of the
Chairman's amendment in the nature of a substitute, except for
Title VII, and insert new provisions, was defeated by a
rollcall vote of 11 yeas to 25 nays. The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Thomas..................... ........ X ......... Mr. Rangel....... X ........ .........
Mr. Crane...................... ........ X ......... Mr. Stark........ ........ ........ .........
Mr. Shaw....................... ........ X ......... Mr. Matsui....... ........ ........ .........
Mrs. Johnson................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Houghton................... ........ X ......... Mr. Cardin....... X ........ .........
Mr. Herger..................... ........ X ......... Mr. McDermott.... X ........ .........
Mr. McCrery.................... ........ X ......... Mr. Kleczka...... ........ ........ .........
Mr. Camp....................... ........ X ......... Mr. Lewis (GA)... X ........ .........
Mr. Ramstad.................... ........ X ......... Mr. Neal......... ........ ........ .........
Mr. Nussle..................... ........ X ......... Mr. McNulty...... ........ ........ .........
Mr. Johnson.................... ........ X ......... Mr. Jefferson.... X ........ .........
Ms. Dunn....................... ........ X ......... Mr. Tanner....... X ........ .........
Mr. Collins.................... ........ X ......... Mr. Becerra...... X ........ .........
Mr. Portman.................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. English.................... ........ X ......... Mr. Pomeroy...... ........ X .........
Mr. Hayworth................... ........ X ......... Mr. Sandlin...... X ........ .........
Mr. Weller..................... ........ X ......... Ms. Tubbs Jones.. X ........ .........
Mr. Hulshof.................... ........ X .........
Mr. McInnis.................... ........ X .........
Mr. Lewis (KY)................. ........ X .........
Mr. Foley...................... ........ X .........
Mr. Brady...................... ........ X .........
Mr. Ryan....................... ........ X .........
Mr. Cantor..................... ........ X .........
----------------------------------------------------------------------------------------------------------------
An amendment by Mr. McDermott, which would strike Section
681, which would have permitted private sector debt collection
companies to collect taxes, was defeated by a rollcall vote of
12 yeas to 24 nays. The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Thomas..................... ........ X ......... Mr. Rangel....... X ........ .........
Mr. Crane...................... ........ X ......... Mr. Stark........ ........ ........ .........
Mr. Shaw....................... ........ X ......... Mr. Matsui....... ........ ........ .........
Mrs. Johnson................... ........ X ......... Mr. Levin........ X ........ .........
Mr. Houghton................... ........ X ......... Mr. Cardin....... X ........ .........
Mr. Herger..................... ........ X ......... Mr. McDermott.... X ........ .........
Mr. McCrery.................... ........ X ......... Mr. Kleczka...... ........ ........ .........
Mr. Camp....................... ........ X ......... Mr. Lewis (GA)... X ........ .........
Mr. Ramstad.................... ........ X ......... Mr. Neal......... ........ ........ .........
Mr. Nussle..................... ........ X ......... Mr. McNulty...... ........ ........ .........
Mr. Johnson.................... ........ X ......... Mr. Jefferson.... X ........ .........
Ms. Dunn....................... ........ X ......... Mr. Tanner....... X ........ .........
Mr. Collins.................... ........ X ......... Mr. Becerra...... X ........ .........
Mr. Portman.................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. English.................... ........ X ......... Mr. Pomeroy...... X ........ .........
Mr. Hayworth................... ........ X ......... Mr. Sandlin...... X ........ .........
Mr. Weller..................... ........ X ......... Ms. Tubbs Jones.. X ........ .........
Mr. Hulshof.................... ........ X .........
Mr. McInnis.................... ........ X .........
Mr. Lewis (KY)................. ........ X .........
Mr. Foley...................... ........ X .........
Mr. Brady...................... ........ X .........
Mr. Ryan....................... ........ X .........
Mr. Cantor..................... ........ X .........
----------------------------------------------------------------------------------------------------------------
An amendment by Mr. Sandlin, which would strike Title III
and replace Title V with a new Title V that would create a
permanent deduction for State and local general retail sales
taxes, was defeated by a rollcall vote of 8 yeas to 28 nays.
The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representatives Yea Nay Present Representatives Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Thomas..................... ........ X ......... Mr. Rangel....... X ........ .........
Mr. Crane...................... ........ X ......... Mr. Stark........ ........ ........ .........
Mr. Shaw....................... ........ X ......... Mr. Matsui....... ........ ........ .........
Mrs. Johnson................... ........ X ......... Mr. Levin........ ........ X .........
Mr. Houghton................... ........ X ......... Mr. Cardin....... ........ X .........
Mr. Herger..................... ........ X ......... Mr. McDermott.... X ........ .........
Mr. McCrery.................... ........ X ......... Mr. Kleczka...... ........ ........ .........
Mr. Camp....................... ........ X ......... Mr. Lewis (GA)... X ........ .........
Mr. Ramstad.................... ........ X ......... Mr. Neal......... ........ ........ .........
Mr. Nussle..................... ........ X ......... Mr. McNulty...... ........ ........ .........
Mr. Johnson.................... ........ X ......... Mr. Jefferson.... X ........ .........
Ms. Dunn....................... ........ X ......... Mr. Tanner....... X ........ .........
Mr. Collins.................... ........ X ......... Mr. Becerra...... ........ X .........
Mr. Portman.................... ........ X ......... Mr. Doggett...... X ........ .........
Mr. English.................... ........ X ......... Mr. Pomeroy...... ........ X .........
Mr. Hayworth................... ........ X ......... Mr. Sandlin...... X ........ .........
Mr. Weller..................... ........ X ......... Ms. Tubbs Jones.. X ........ .........
Mr. Hulshof.................... ........ X
Mr. McInnis.................... ........ X
Mr. Lewis (KY)................. ........ X
Mr. Foley...................... ........ X
Mr. Brady...................... ........ X
Mr. Ryan....................... ........ X
Mr. Cantor..................... ........ X
----------------------------------------------------------------------------------------------------------------
III. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d)(2) of the rule XIII of the
Rules of the House of Representatives, the following statement
is made concerning the effects on the budget of the revenue
provisions of the bill, H.R. 4520 as reported.
The bill is estimated to have the following effects on
budget receipts for fiscal years 2003-2008:
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue reducing income tax
provisions involve increased tax expenditures, and the revenue
increasing provisions involve reduced tax expenditures (See
amounts in table in Part III.A., above.)
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, June 16, 2004.
Hon. William ``Bill'' M. Thomas,
Chairman, Committee on Ways and Means
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 4520, the American
Jobs Creation Act of 2004, which was ordered reported by the
House Committee on Ways and Means on June 14, 2004.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Annabelle
Bartsch.
Douglas Holtz-Eakin,
Director.
Enclosure.
H.R. 4520--American Jobs Creation Act of 2004
Summary: H.R. 4520 would repeal the exclusion from taxation
for a portion of income earned by U.S. exporters, reduce tax
rates on certain corporate income, extend various expiring tax
provisions, and make numerous other changes to tax law. In
addition, H.R. 4520 would extend Internal Revenue Service (IRS)
and customs user fees. The bill also would repeal the federal
tobacco production quota program and provide direct payments
through 2009 to both holders of tobacco quotas and tobacco
growers. The provisions of the bill have various effective
dates.
The Congressional Budget Office (CBO) and the Joint
Committee on Taxation (JCT) estimate that enacting the bill
would increase federal revenues by about $1.5 billion in 2004
and decrease revenues by about $29.2 billion over the 2004-2009
period and $42.2 billion over the 2004-2014 period. CBO
estimates that enacting the bill would increase direct spending
by $45 million in 2004 and about $4.1 billion over the 2004-
2009 period, and reduce direct spending by about $5.4 billion
over the 2004-2014 period. Finally, CBO estimates that
implementing the bill would increase discretionary spending by
$43 million over the 2004-2014 period, assuming appropriation
of the necessary sums.
JCT and CBO have determined that the provisions of H.R.
4520 contain no intergovernmental mandates as defined in the
Unfunded Mandates Reform Act (UMRA). The provisions of the bill
that would subject vaccines for hepatitis A and influenza to
taxation would increase state spending for Medicaid by about
$140 million over the 2004-2009 period.
JCT has determined that H.R. 4520 contains seven private-
sector mandates as defined by UMRA. CBO has reviewed the non-
tax provisions and determined that the extension of the customs
user fees and the extension of provisions in the Mental Health
Parity Act are private-sector mandates as defined in UMRA. In
aggregate, the costs of all the mandates in the bill would
greatly exceed the annual threshold established by UMRA for
private-sector mandates ($120 million in 2004, adjusted
annually for inflation) in each of the first five years the
mandates are in effect.
Estimated Cost to the Federal Government: The estimated
budgetary impact of H.R. 4520 is shown in the following table.
The spending impact of the legislation falls within budget
functions 300 (natural resources and environment), 350
(agriculture), 550 (health), 570 (Medicare), 750
(administration of justice) and 800 (general government).
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
------------------------------------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
--------------------------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUES
Title I: Provisions relating to 0 -1,645 -1,697 -1,282 -2,267 -2,670 -2,509 -3,310 -3,533 -4,688 -5,282
trade compliance and reduction
in corporate income tax rates.
Title II: Provisions relating 2,665 -1,757 -7,222 -8,226 -1,830 2,670 1,421 1,673 1,486 1,075 808
to job creation tax incentives
for manufacturers, small
business, and farmers.........
Title III: Provisions relating -608 -262 -399 -925 -1,768 -2,523 -4,250 -4,440 -4,641 -4,845 -5,060
to tax reform and
simplification for United
States businesses.............
Title IV: Extension of certain -946 -4,962 -4,205 -1,269 -844 -517 -232 -179 -197 -246 -235
expiring provisions...........
Title V: Deduction of state and 0 -2,208 1,373 0 0 0 0 0 0 0 0
local general sales taxes.....
Title VI: Revenue provisions... 405 3,324 2,747 3,176 3,481 3,822 4,103 4,487 4,839 5,167 5,529
Title VIII: Trade provisions... -4 -19 -21 -8 -3 -1 0 0 0 0 0
------------------------------------------------------------------------------------------------------------------------
Estimated revenues............. 1,512 -7,529 -12,170 -8,534 -3,231 781 -1,467 -1,769 -2,046 -3,537 -4,240
CHANGES IN DIRECT SPENDING
Payments in lieu of excise tax
credits for alcohol fuels:
Estimated budget authority. 0 105 114 116 117 119 121 38 0 0 0
Estimated outlays.......... 0 105 114 116 117 119 121 38 0 0 0
Expiration of special tax
treatment for ethanol:
Estimated budget authority. 0 0 0 0 0 0 0 19 32 54 66
Estimated outlays.......... 0 0 0 0 0 0 0 19 32 54 66
Cover over of tax on distilled
spirits:
Estimated budget authority. 35 115 18 0 0 0 0 0 0 0 0
Estimated outlays.......... 35 115 18 0 0 0 0 0 0 0 0
Spending of conservation-
relateed excise taxes:
Estimated budget authority. 0 111 114 122 126 131 135 137 141 144 148
Estimated outlays.......... 0 28 62 93 109 121 127 132 133 137 140
IRS contracting for debt
collection:
Estimated budget authority. 0 0 19 50 45 40 37 37 37 37 37
Estimated outlays.......... 0 0 19 50 45 40 37 37 37 37 37
Taxation of hepatitis A and
influenza vaccines:
Estimated budget authority. 10 56 54 56 58 59 59 60 62 63 63
Estimated outlays.......... 10 56 54 56 58 59 59 60 62 63 63
Extension of customers user
fees:
Estimated budget authority. 0 -784 -1,565 -1,656 -1,751 -1,893 -1,960 -2,074 -2,194 -2,321 -2,456
Estimated outlays.......... 0 -784 -1,565 -1,656 -1,751 -1,893 -1,960 -2,074 -2,194 -2,321 -2,456
Market reform for tobacco
growers:
Estimated budget authority. 0 1,927 1,927 1,927 1,927 1,892 0 0 0 0 0
Estimated outlays.......... 0 1,927 1,927 1,927 1,927 1,892 0 0 0 0 0
Termination of no-net-cost
tobacco price support program:
Estimated budget authority. 0 500 0 0 0 0 0 0 0 0 0
Estimated outlays.......... 0 500 0 0 0 0 0 0 0 0 0
Total changes in direct
spending:
Estimated budget authority. 45 2,030 681 615 522 388 -1,608 -1,783 -1,922 -2,023 -2,143
Estimated outlays.......... 45 1,947 629 586 505 378 -1,616 -1,788 -1,930 -2,030 -2,150
CHANGES IN SPENDING SUBJECT TO APPROPRIATION
Studies:
Estimated authorization 0 2 0 0 0 0 0 0 0 0 0
level.....................
Estimated outlays.......... 0 2 0 0 0 0 0 0 0 0 0
Spending from IRS user fees:
Estimated authorization 0 3 3 4 4 4 4 4 5 5 5
level.....................
Estimated outlays.......... 0 3 3 4 4 4 4 4 5 5 5
Total changes in discretionary
spending:
Authorization level........ 0 5 3 4 4 4 4 4 5 5 5
Estimated outlays.......... 0 5 3 4 4 4 4 4 5 5 5
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--Details may not sum to totals due to rounding.
Sources: CBO and the Joint Committee on Taxation.
Basis of Estimate: This estimate assumes the bill would be
enacted in the summer of 2004.
Revenues
With the exception of the provisions relating to mental
health parity, IRS user fees, and customs duty suspensions, JCT
provided all the revenue estimates for this legislation. CBO
and JCT estimate that the provisions of H.R. 4520 would
increase federal revenues by about $1.5 billion in 2004 and
decrease revenues by about $29.2 billion over the 2004-2009
period and $42.2 billion over the 2004-2014 period.
Title I. This title would repeal the exclusion for a
portion of income earned by U.S. exporters beginning in 2005,
and would provide transition relief in the first two years. JCT
estimates that doing so would increase federal revenues by
about $16.8 billion over the 2005-2009 period and about $49.6
billion over the 2005-2014 period. Title I also would lower the
tax rate on corporations for income from certain manufacturing
and other activities, and for taxable income from
nonmanufacturing activities below certain amounts. JCT
estimates that those tax rate reductions would decrease
governmental receipts by about $26.4 billion over the 2005-2009
period and $78.5 billion over the 2005-2014 period. On net,
title I would reduce revenues by about $9.6 billion over the
2005-2009 period and by $28.9 billion over the 2005-2014
period.
Title II. The provisions of title II would make numerous
changes to existing tax law relating primarily to domestic
business activity. On net, JCT estimates that those provisions
would increase governmental receipts by about $2.7 billion in
2004, and decrease receipts by about $13.7 billion over the
2004-2009 period and $7.2 billion over the 2004-2014 period.
Those provisions include, but are not limited to:
Extending for two years the increased expensing of
fixed investments by small businesses;
Altering depreciation rules for various types of
property;
Providing relief from the alternative minimum tax;
Restructuring tax laws for alcohol fuels; and
Temporarily reducing the effective rate of tax on
certain dividends paid by foreign corporations.
One provision would repeal the existing exemptions from the
gasoline tax for alcohol fuels and replace those exemptions
with an excise tax credit worth the same amount. JCT estimates
that the increased compliance from doing so would increase
federal revenues by $113 million over the 2005-2009 period and
$220 million over the 2005-2014 period if the excise tax credit
for alcohol fuels were extended beyond the provision's 2010
expiration.
Budget law (the Balanced Budget and Emergency Deficit
Control Act of 1985) requires CBO to treat excise taxes
dedicated to trust funds as permanent, even if they expire
during the projection period. CBO's baseline includes permanent
extension of the reduced rates of taxation on alcohol fuels
beyond their expiration because they reduce amounts credited to
the Highway Trust Fund (HTF). However, the excise tax credit
for alcohol fuels, as established by the bill, would not reduce
amounts credited to the HTF. Therefore, CBO and JCT do not
assume the credit would be extended and estimate that repealing
the existing exemptions from the gasoline tax rate for alcohol
fuels would increase governmental receipts by an additional
$5.9 billion between 2011 and 2014, after the new tax credit
would expire.
Title III. The provisions of title III would makes changes
to tax law relating to U.S. businesses with foreign operations.
Roughly half of the effect on revenues would result from
altering interest expense allocation rules beginning in 2009,
which JCT estimates would reduce federal revenues by about
$14.4 billion over the 2009-2004 period.
Title IV. This title would temporarily extend numerous
provisions set to expire under current law. Some of those
provisions include the tax credit for research and
experimentation expenses, the work opportunity and welfare-to-
work tax credits, the treatment of nonrefundable personal
credits under the individual alternative minimum tax, and
parity in the application of certain limits to mental health.
CBO and JCT estimate that those extensions would reduce federal
revenues by $946 million in 2004, about $12.7 billion over the
2004-2009 period, and $13.8 billion over the 2004-2014 period.
Title V. Section 501 would allow taxpayers to elect to
deduct state and local sales taxes in lieu of state and local
income taxes. The provision would apply to tax years 2004 and
2005 and would reduce governmental receipts by an estimated
$3.6 billion over fiscal years 2005 and 2006.
Title VI. All of the numerous provisions in title VI would
increase revenues. CBO and JCT estimate that revenues would
increase by $405 million in 2004, about $17.0 billion over the
2004-2009 period, and about $41.1 billion over the 2004-2014
period. Roughly half of the increase would come from reforming
the tax treatment for leasing transactions with parties
generally exempt from tax, which JCT estimates would result in
additional revenues of about $19.6 billion between 2004 and
2014. Title VI also includes an extension of IRS user fees
through September 30, 2014. Currently, the fees are set to
expire on December 31, 2004. CBO estimates that this provision
would increase revenues by $170 million over the 2005-2009
period and $396 million over the 2005-2014 period.
Title VII. Title VII would affect the Department of
Agriculture's tobacco program and would have no effect on
federal revenue collections.
Title VIII. Sections 801 and 802 would temporarily suspend
the duties on certain ceiling fans and nuclear reactor vessel
heads through December 31, 2006, and December 31, 2008,
respectively. In addition, section 802 would extend the duty-
free treatment of nuclear steam generators for two years beyond
its current December 31, 2006, expiration date. CBO estimates
that enacting those duty suspensions would reduce governmental
receipts by $4 million in 2004 and $56 million over the 2004-
2009 period.
Direct spending
Providing Direct Payments in Lieu of Excise Credits for
Alcohol Fuels. Title II would provide for payments to
recipients of the tax credits who have insufficient tax
liability to use them otherwise. CBO estimates that outlays
would increase by $571 million over the 2005-2009 period and
$730 million over the 2005-2011 period. Because these payments
would replace the existing reduced tax rate on alcohol fuels,
these amounts exactly equal the increase in revenues estimated
for this provision.
Expiration of Special Tax Treatment for Ethanol. Replacing
the gasoline tax exemption for alcohol fuels with an excise tax
credit would result in increased spending for farm price and
income support payments after 2010 because the former is
assumed to continue after 2010, but the latter is assumed to
expire. Because the alcohol in such fuels is primarily derived
from corn, demand for corn rises and falls with the demand for
ethanol. The higher after-tax price of alcohol fuels resulting
from expiration of the tax credit in 2010 would slightly reduce
demand for ethanol and corn prices relative to those projected
in the CBO baseline. As a result, CBO estimates that federal
spending for farm price and income support payments would
increase by $171 million over the 2011-2014 period.
Cover Over of Tax on Distilled Spirits. Under current law,
an excise tax of $13.50 per proof gallon is assessed on
distilled spirits produced in or brought into the United
States. The U.S. Treasury pays the treasuries of Puerto Rico
and the Virgin Islands $10.50 per proof gallon of rum imported
into the U.S. from any country or those possessions. A higher
payment rate of $13.25 expired on December 31, 2003. Under H.R.
4520, the governments of Puerto Rico and the Virgin Islands
would receive payments of $13.25 per proof gallon for tax
assessments made between January 1, 2004, and December 31,
2005. Those payments are recorded as outlays in the budget.
Based on recent tax and payment data, CBO estimates that
increasing the possessions' share of the excise tax would
increase direct spending by $168 million over fiscal years
2004-2006.
Spending of Conservation-Related Excise Taxes. Title VI of
the bill would eliminate a requirement in current law that a
portion of fuel excise taxes used by motorboats and small
engines be deposited in the general fund. Those amounts would
instead be deposited into the Aquatic Resources Trust Fund
(ARTF). The bill also would eliminate or reduce excise taxes on
certain fishing and hunting products, including archery
equipment, which are deposited into either the ARTF or the
Federal Aid-Wildlife Fund. Amounts in the two funds are used
primarily for grants to states for the conservation of
wildlife, sport fish, and coastal wetlands. CBO estimates that
the net effect of enacting these two provisions would be an
increase in direct spending from those funds of $1.1 billion
over the 2005-2014 period.
Installment Agreements for Tax Payments. Under current law,
taxpayers can elect to pay their full tax liability through
installments. Section 645 would allow the IRS to enter into
agreements for the partial payment of tax liabilities. That
change would result in more installment agreements and
additional revenue collections. The IRS charges a fee of $43
for each installment agreement, which it can spend without
further appropriation. CBO estimates that allowing installment
agreements providing for the partial payment of tax liabilities
would increase IRS collections of installment fees by about $1
million over the 2004-2006 period. Because the IRS has the
authority to retain and spend such collections without further
appropriation, the change would have no significant net
budgetary impact.
IRS Contracting for Debt Collection. H.R. 4520 would allow
the IRS to contract with private collection agencies (PCAs) to
collect payments of tax liabilities. JCT estimates that this
provision would increase revenues by about $1.4 billion over
the 2006-2014 period. The IRS would be allowed to retain and
spend up to 25 percent of the amount collected by the PCAs to
pay for the services they provide. CBO estimates that allowing
the IRS to retain and spend 25 percent of the amounts collected
would increase direct spending by $339 million over the 2006-
2014 period.
Taxation of Hepatitis A and Influenza Vaccines. Sections
688 and 689 would require buyers of hepatitis A and influenza
vaccines to pay an excise tax on each dose purchased. Medicaid
is a major purchaser of vaccines through the Vaccines for
Children program, administered through the Centers for Disease
Control and Prevention (CDC). Medicare is a major purchaser of
the vaccines for the elderly. CBO estimates that Medicaid and
Medicare pay for approximately half of the hepatitis A and
influenza vaccines sold annually. Based on estimates provided
by JCT, CBO expects that implementing the bill would cost the
Medicaid and Medicare programs about $10 million in 2004 and
$556 million over the 2004-2014 period. (Those amounts are
reflected in the estimates of the revenues resulting from the
bill.)
Receipts from the tax would go to the Vaccine Injury
Compensation Fund (VICF), which is administered by the Health
Resources and Services Administration (HRSA). The fund uses tax
revenues to pay compensation to claimants injured by vaccines.
Once a vaccine becomes taxable, injuries attributed to its use
become compensable through this fund. Based on information
provided by HRSA and CDC, we expect there would be few
compensable claims related to the hepatitis A and influenza
vaccines. CBO estimates that the provisions of H.R. 4520 would
increase outlays from the VICF by $46 million over the 2005-
2014 period. Thus, we estimate that outlays resulting from the
vaccine provisions would total $10 million in 2004 and $602
million over the 2004-2014 period.
Extension of Customs User Fees. Under current law, customs
user fees expire after March 1, 2005. H.R. 4520 would extend
these fees through September 30, 2014. CBO estimates that this
provision would increase offsetting receipts by about $18.6
billion over the 2005-2014 period.
Market Reform for Tobacco Growers. Title VII would repeal
laws implemented by the Department of Agriculture (USDA) to
control the supply and price of tobacco grown in the U.S. by
granting individuals rights (known as quotas) to produce and
market specific quantities of tobacco. Under the bill, this
system of control through quotas and acreage allotments would
be replaced by a series of direct federal payments to domestic
tobacco growers and owners of tobacco quotas. (Because those
holding tobacco quotas to produce and market tobacco can lease
that right to others, the quota owners and growers may be
different individuals.)
The bill would provide a direct payment to individuals of
$1.49 per pound of tobacco quota owned and $0.60 per pound of
tobacco quota grown for each year over the 2005-2009 period.
Based on information from USDA on the volume of tobacco quotas
and the use of those quotas, CBO estimates payments under the
bill would be $1,927 million a year. Because the bill would
limit the new direct payments under this title to $9.6 billion,
payments would have to be reduced slightly in 2009 to comply
with this limitation.
In addition to the direct federal payments authorized by
this title, CBO estimates that tobacco growers and buyers would
be relieved of paying a federal assessment of about $500
million in 2005 due to the termination of USDA's No-Net-Cost
Tobacco program. The No-Net-Cost Tobacco program is operated
under current law to provide a support price (also known as
loan rate) to growers of the many varieties of domestic
tobacco. This program is administered through the Commodity
Credit Corporation (CCC) and is separate and in addition to the
tobacco quota system discussed above. Support prices for the
various tobacco varieties are set by a formula specified in
current law, and USDA is charged with attempting to control the
supply of tobacco through quotas so that the actual market
price of tobacco is at or above the support price. In the event
that USDA cannot manage supply to achieve the support price in
the market, growers are guaranteed the support price by USDA.
Any net cost incurred by USDA to maintain the support price,
however, is offset by an assessment imposed on all tobacco
growers and buyers. Thus, the price support program operates at
no net cost to the federal government.
Under the bill, the CCC price support for tobacco would be
effective for the 2004 crop, but not for future crops. CBO
expects that after enactment of this bill the market price for
domestic tobacco would drop precipitously because USDA's quota
and acreage allotment systems would not longer restrict the
supply of tobacco. We estimate the price support program would
cost the CCC about $500 million in 2005 as more growers would
accept the support price for tobacco and forfeit crops from
2004 and previous years to the government. Because the bill
would terminate the No-Net-Cost Tobacco program for future
years' crops, USDA would have no opportunity to collect
assessments from tobacco producers and buyers to offset this
cost. That loss of receipts to USDA would bring the total
estimated coast of enacting this title to $10.1 billion over
the 2005-2009 period.
Spending subject to appropriation
Studies. Section 606 would require the Treasury Department
to complete studies on transfer pricing rules, income tax
treaties, and corporate expatriation. Assuming the
appropriations of the necessary amounts, CBO estimates that
performing these studies would cost about $2 million in fiscal
year 2005.
Extension of IRS User Fees. Section 690 would extend the
authority of the IRS to charge taxpayers fees for certain
rulings, opinion letters, and determinations through September
30, 2014. The bill would authorize the IRS to retain and spend
a portion of the fees collected, subject to appropriation.
Based on the historical level of fees spent, CBO estimates that
implementing this provision would cost $18 million over the
2005-2009 period and about $41 million over the 2005-2014
period, subject to the appropriation of the necessary amounts.
Estimated Impact on State, Local, and Tribal Governments:
JCT and CBO have determined that the provisions of H.R. 4520
contain no intergovernmental mandates as defined in UMRA. The
provisions of the bill that would subject vaccines for
hepatitis A and influenza to taxation would increase state
spending for Medicaid by about $140 million over the 2004-2009
period.
Estimated Impact on the Private Sector: JCT and CBO have
determined that H.R. 4520 contains several private-sector
mandates as defined in UMRA. In aggregate, the costs of those
mandates would greatly exceed the annual threshold established
by UMRA for private-sector mandates ($120 million in 2004,
adjusted annually for inflation) in each of the first five
years the mandates are in effect.
Tax Mandates
JCT has determined that the following tax provisions of
H.R. 4520 contain private-sector mandates as defined in UMRA:
(1) repealing the exclusion for extraterritorial income; (2)
altering tax law relating to reportable transactions and tax
shelters; (3) reforming the tax treatment for leasing
transactions with parties that are generally exempt from tax;
(4) taxing aviation-grade kerosene; (5) requiring registration
of pipeline and vessel operators for exemption of bulk
transfers and imposing a penalty for failure to display such
registration; (6) modifying the heavy vehicle use tax; and (7)
modifying the charitable contribution rules for donations of
patents and other intellectual property.
Other Mandates
CBO has determined that the non-tax provisions of the bill
contain two private-sector mandates as defined in UMRA--an
extension of customs user fees and an extension of provisions
in the Mental Health Parity Act.
Customs User Fees. Section 691 would extend through 2014
the customs user fees that are scheduled to expire after March
1, 2005. CBO estimates that the cost of the private-sector
mandate in section 691 relative to the case where the mandate
is allowed to expire would be more than $70 million in fiscal
year 2005 and larger in later years.
Mental Health Parity. Section 420 would extend the
provisions of the Mental Health Parity Act of 1996, which
expires on December 31, 2004, through the end of calendar year
2005. That act prohibits group health plans that provide both
medical and surgical benefits and mental health benefits from
imposing aggregate lifetime limits or annual limits for
coverage of mental health benefits that are different from
those used for medical and surgical benefits. CBO estimates
that the cost of the private-sector mandate in section 420
relative to the case where the mandates is allowed to expire
would be $39 million in fiscal year 2005 and $41 million in
fiscal year 2006.
Previous CBO Estimates: On November 5, 2003, CBO
transmitted a cost estimate for H.R. 2896, the American Jobs
Creation Act of 2003, as ordered reported by the House
Committee on Ways and Means on October 28, 2003. Many of the
provisions in the two bills are different, and the assumed
enactment dates differ as well. The estimated budgetary impact
of the two bills reflects those differences.
On November 6, 2003, CBO transmitted a cost estimate for S.
1637, the Jumpstart Our Business Strength (JOBS) Act, as
ordered reported by the Senate Committee on Finance on October
2, 2003. Again, many of the provisions in the two bills are
different, and the assumed enactment dates differ as well. The
estimated budgetary impact of the two bills reflects those
differences.
Estimated Prepared by: Federal Revenues: Annabelle Bartsch.
Federal Spending: Deborah Reis, Mark Grabowicz, David Hull, and
Matthew Pickford; Margaret Nowak. Impact on State, Local and
Tribal Governments: Leo Lex. Impact on the Private Sector:
Paige Piper/Bach.
Estimate Approved by: G. Thomas Woodward, Assistant
Director for Tax Analysis; Robert A. Sunshine, Assistant
Director for Budget Analysis.
D. Macroeconomic Impact Analysis
In compliance with clause 3(h)(2) of rule XIII of the Rules
of the House of Representatives, the following statement is
made by the Joint Committee on Taxation with respect to the
provisions of the bill amending the Internal Revenue Code of
1986:
This bill contains provisions that have partially
offsetting effects on business tax rates. Among the major
provisions, it lowers marginal and average tax rates on
corporate manufacturing income and some other specified
corporate income. It also repeals the extraterritorial income
exclusion, and includes additional provisions that increase
taxes for some corporations. There are many smaller provisions
affecting corporate and non-corporate businesses, some of which
increase marginal or average rates, and some of which decrease
rates.
The net reductions in taxation of U.S. corporations
provided for in this bill will provide some incentive for
additional investment in corporate capital by the corporations
that experience net reductions in their corporate tax rates.
However, some firms may experience an increase in taxes due to
the repeal of the extraterritorial income exclusion, the
limitations placed on certain leasing transactions, and other
provisions. Because the rate reductions in this bill are not
uniformly provided to all corporations, this proposal is likely
to result in a reallocation of investment resources across
different corporate sectors both within the U.S. and
internationally. Provisions affecting both corporate and non-
corporate businesses in small subsectors of the economy would
be likely to result in the reallocation of the tax burden
across these sectors, which could have positive or negative
implications for economic efficiency, and hence, long-run
growth. In addition, certain export activity may increase if
repeal of the extraterritorial exclusion leads to the
elimination of tariffs currently imposed by the European Union.
Finally, the net increase in the U.S. Federal government
deficit may crowd out some domestic investment in the long run.
In light of these considerations, the effects of the bill
on total economic activity within the six-year budget horizon
are so small as to be incalculable within the context of our
current models of the aggregate economy. In order to produce a
complete quantitative analysis of the effects of this proposal
on specific sectors of the economy, it would be necessary to
model separately the effects of the bill on the average and
marginal tax rates of corporations and other businesses of
different sizes, and with varying amounts of domestic and
international activities. However, current modeling
capabilities do not allow for these specific changes to be
explicitly modeled at this level of detail.
IV. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives (relating to oversight findings),
the Committee advises that it was a result of the Committee's
oversight review concerning the tax burden on American
taxpayers that the Committee concluded that it is appropriate
and timely to enact the revenue provisions included in the bill
as reported.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Constitutional Authority Statement
With respect to clause 3(d)(1) of the rule XIII of the
Rules of the House of Representatives (relating to
Constitutional Authority), the Committee states that the
Committee's action in reporting this bill is derived from
Article I of the Constitution, Section 8 (``The Congress shall
have Power To lay and collect Taxes, Duties, Imposts and
Excises . . .''), and from the 16th Amendment to the
Constitution.
D. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Act of 1995 (Pub. L. No. 104-4).
The Committee has determined that the bill contains seven
Federal mandates on the private sector: (1) the provision to
repeal the exclusion for extraterritorial income; (2) the
provision relating to reportable transactions and tax shelters;
(3) the provision relating to the reform of the tax treatment
for leasing transactions with tax-indifferent parties; (4) the
provision relating to the taxation of aviation grade kerosene;
(5) the provision requiring registration of pipeline and vessel
operators for exemption of bulk transfers and imposing a
penalty for failure to display such registration; (6) the
provision to modify the heavy vehicle use tax; and (7) the
provision to modify the charitable contribution rules for
donations of patents and other intellectual property. The costs
required to comply with each Federal private sector mandate
generally are no greater than the aggregate estimated budget
effects of the provision. Benefits from the provision include
improved administration of the tax laws and a more accurate
measurement of income for Federal tax purposes.
The Committee has determined that the bill does not impose
a Federal intergovernmental mandate on State, local, or tribal
governments.
E. Applicability of House Rule XXI 5(b)
Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the provisions of the bill, and states that
the provisions of the bill do not involve any Federal income
tax rate increases within the meaning of the rule.
F. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the
Joint Committee on Taxation (in consultation with the Internal
Revenue Service and the Department of the Treasury) to provide
a tax complexity analysis. The complexity analysis is required
for all legislation reported by the House Committee on Ways and
Means, the Senate Committee on Finance, or any committee of
conference if the legislation includes a provision that
directly or indirectly amends the Internal Revenue Code and has
widespread applicability to individuals or small businesses.
The staff of the Joint Committee on Taxation has determined
that a complexity analysis is not required under section
4022(b) of the IRS Reform Act because the bill contains no
provisions that amend the Internal Revenue Code and that have
``widespread applicability'' to individuals or small
businesses.
V. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
Legislative Counsel has not prepared a Ramseyer at the time
of the filing of this report (June 16, 2004).
VI. DISSENTING AND ADDITIONAL VIEWS
----------
DISSENTING VIEWS
The bill reported by the Committee is the fourth
legislative proposal from Chairman Thomas addressing the World
Trade Organization ruling concerning the FSC/ETI export related
tax benefits. The only consistent theme in all of those
proposals has been the inclusion of tax incentives for
companies to move operations and jobs offshore.
The first proposal, H.R. 5095 from the 107th
Congress, was introduced almost two years ago. It included
large domestic tax increases to finance $86 billion of overseas
tax benefits. As a result, the bill was never scheduled for
markup.
The second bill, H.R. 2896, was introduced a year
later on July 25, 2003. The fiscal cost of that bill ($128
billion over 10 years) and the lack of any general domestic
replacement for the FSC/ETI benefit meant that there were not
sufficient votes in the Committee to report the legislation in
its introduced form.
Chairman Thomas' third proposal came when he
announced his substitute in connection with the markup of H.R.
2896 on October 28, 2003. For the first time, the Chairman was
willing to include elements of the bipartisan Crane-Rangel-
Manzullo-Levin bill. Those modifications were sufficient to
allow the bill to be reported on a straight party-line vote.
However, the bill never was scheduled for Floor consideration,
presumably because it did not have sufficient votes.
Finally, the Chairman has brought forth a fourth
version, essentially unchanged in its basic structure from the
bill reported last year. The major significant change is the
addition of extraneous items designed to buy votes.
At no time during the almost 2-year period that began with
the introduction of his first bill did the Chairman attempt to
bring the Committee on Ways and Means together on a bipartisan
basis to reach a consensus on how to respond to the European
challenge to our FSC/ETI program. The 2-year delay was not
necessary and has resulted in U.S. products being subjected to
European retaliatory tariffs. Congressmen Crane, Rangel,
Manzullo, and Levin introduced legislation during that period,
which demonstrated that a bipartisan consensus could have been
reached on this issue, avoiding trade sanctions.
Now the Chairman has abandoned any pretext of justifying
his approach to the FSC/ETI issue on policy grounds. He is
adopting the crude and perhaps effective approach of simply
buying the votes with unrelated, and, often, special interest
provisions, many of which have never borne the scrutiny of a
Committee hearing or markup.
We hope that those who are being offered blandishments to
support the Chairman's bill will consider the following:
1. First, the blandishments being offered can quickly
disappear in conference. There will be extraordinary pressure
to shrink the size of the bill, because the Senate will insist
that the bill be revenue neutral. Few should be surprised if
the conference report reflects the priorities of the Chairman
and does not include many of the ornaments being attached to
the bill in order to buy votes.
2. Second, Members should not just focus on the
blandishments being offered to buy votes. They should examine
the rest of the Committee bill and make sure they would be
comfortable defending its provisions. The Committee bill
provides tremendous incentives for companies to move jobs
offshore. Even its ``domestic rate cut'' will reward companies
that purchase cheap, imported parts or outsource services
overseas. It permits companies to put profits above patriotism
and move their corporate charters offshore for tax avoidance.
3. Third, while this bill includes some offsets, it still
increases deficits over the next ten years by $34 billion. This
number is deceptive, however, because the delayed effective
dates and other accounting gimmicks indicate the long-term
effect on the national debt will be much greater. In addition,
some of the offsets, like authorizing the IRS to outsource
collections to private debt collectors, are simply bad policy.
It is bad enough to be promoting the off-shore outsourcing of
American jobs through enhanced corporate tax subsidies. It is
totally indefensible to pay for such subsidies by increasing
deficits that have already proven a drag on our economy, and
will eventually have to be paid through higher taxes on future
generations of Americans.
4. Finally, Members should understand that farmers and
other small businesses will be large losers if the Committee
bill prevails. Both corporate and noncorporate taxpayers are
eligible for export-related benefits under current law. As a
result, the bill passed by the Senate and the amendment offered
by Congressman Rangel provide across-the-board rate reductions
for all domestic producers, whether organized as taxable
corporations or as subchapter S corporations, partnerships, or
sole proprietorships. Only the Committee bill limits the
general rate reductions to corporations and it provides the
largest rate reduction for the biggest corporations.
Following is an elaboration of some of the provisions in
the Committee bill that make it a bad choice:
Committee Bill Provides Increased Incentives for Moving Jobs Offshore
PRESENT LAW
A recent study published by the American Enterprise
Institute noted that our current international tax rules
already provide significant incentives for U.S. companies to
move jobs and operations offshore. That study concluded that
federal tax receipts would rise by $7 billion per year if the
United States provided a tax exemption for the overseas
business income of our multinationals.
The Joint Committee on Taxation reached a similar
conclusion in a preliminary revenue estimate that indicated
that such a territorial system would raise approximately $60
billion over 10 years.
Any doubt over the accuracy of those estimates was removed
when the National Foreign Trade Council (a group of large,
U.S.-based multinationals) issued a press report stating that
moving to a territorial system ``would put U.S. companies at a
significant disadvantage in the global market.''
These facts suggest that our current system, in many
circumstances, provides a negative tax overseas, i.e., benefits
greater than the exemption under a territorial system. The fact
that U.S. multinationals oppose adoption of a territorial
system is stark evidence of the liberal nature of our system.
The Congressional Research Service concluded that our
current international tax rules provide incentives for U.S.
firms to move overseas. In a recent report, they stated--``We
begin by looking at the incentive effects of the current U.S.-
international system, with the deferral system and indirect
foreign tax credit described above. Economic theory is
relatively clear on the basic incentive impact of the system:
it encourages U.S. firms to invest more capital than they
otherwise would in overseas locations where local taxes are
low. * * * Deferral poses an incentive for U.S. firms to invest
abroad in countries with low tax rates over investment in the
United States.''
COMMITTEE BILL
The Committee reported bill provides a dramatic increase in
the incentives to more offshore. Moreover, the bill
deliberately attempts to hide the size of the tax cuts on
offshore operations through delayed effective dates.
When the bill is fully effective, the annual cost of the
international benefits is approximately $5 billion. The
Committee bill almost doubles the size of the negative tax
overseas.
Though billed as reform, a number of the international
provisions do not constitute reform, they include some very
large overseas benefits and a larger number of small special
interest provisions.
The Committee bill provides some new, significant tax
benefits that would encourage companies to move jobs and
operations offshore. Following are examples.
A. Increased Cross-Crediting
The Committee bill (sec. 303) reduces the number of foreign
tax credit baskets to two. This may seem like a technical
change but it would cost over $1 billion per year, and increase
incentives to move offshore.
The provision repeals current law limitations on cross-
crediting, i.e., using taxes paid in one country at rates
exceeding U.S. rates to offset U.S. tax on income from other
countries.
The provision effectively subsidizes high-tax foreign
countries. Companies could locate in a high-tax country and
have the United States government bear the cost of that
country's tax above the U.S. rate if they also have income in
low-tax countries.
Companies would receive no tax advantage from locating in
the United States rather than a higher tax country overseas,
since they could use the higher foreign taxes to reduce tax on
other income.
Also, the provision creates incentives to shift operations
from the United States into low-tax jurisdictions to take
advantage of the cross-crediting.
B. Liberalized Deferral
The Committee bill (sec. 311) contains modifications to
subpart F (anti-deferral regime) that would also increase
incentives to move jobs offshore.
The modifications would permit amounts earned by one
offshore subsidiary to be reinvested in any other location
(other than the United States) without tax.
The modifications also would permit U.S. companies to avoid
tax on their income from operations in developed countries
through earnings stripping transactions. This would provide a
substantial incentive to move offshore; companies could get the
benefits of operating in a developed country without tax.
If U.S. companies can get the benefits of low tax rates for
investments located in high-tax countries, one economist
suggested that the United States is ``likely to lose capital
and jobs, as well as all of the taxable profits associated with
them.''
The Committee bill also includes a series of narrowly
targeted benefits for companies operating overseas, such as
benefits for overseas commodity traders, companies leasing
aircraft overseas, and security dealers.
Thomas Bill's Domestic Manufacturing Benefit Is Deeply Flawed
1. Small corporations and unincorporated small businesses need not
apply
The bipartisan H.R. 1769 would provide an effective 10%
across the board rate reduction for all corporations,
regardless of size, engaged in domestic manufacturing. The
Senate bill extends the rate reduction to businesses, like
subchapter S corporations, partnerships, farms, and other
proprietorships not subject to the corporate tax. Extension of
the rate cut to those businesses was among the improvements to
H.R. 1769 that were included in the amendment that Congressman
Rangel offered in the Committee.
In contrast, Chairman Thomas' ``manufacturing rate cut''
provides its largest benefit to large corporations and little
or no benefit to other corporations or businesses. According to
the nonpartisan Joint Committee on Taxation, 82% of all
profitable corporations do not have incomes large enough to
benefit from the rate adjustment contained in the Committee
bill. The Committee rate reduction does not apply to businesses
that are not taxed as corporations. Therefore, all subchapter S
corporations, partnerships, farms and other proprietorships
engaged in manufacturing activities will receive no rate
adjustment whatsoever from the Committee bill.
Again, we would like to emphasize that 82% of all
profitable corporations will receive no tax benefit from the
Committee bill because they are too small. No business engaged
in manufacturing, but not organized as a taxable corporation,
will receive any benefit. All of those businesses, regardless
of size or organizational structure, would receive a tax
reduction under Congressman Rangel's amendment.
2. Alternative minimum tax (AMT) clawback
Republicans have often described the corporate alternative
minimum tax as the ``anti-manufacturing tax.'' that rhetoric is
fairly hypocritical when one views the substance of the
Committee's manufacturing tax cut.
The Committee bill reduces the regular tax on manufacturing
income but not the minimum tax. As a result, all corporations
affected by the minimum tax under current law will receive no
benefit from the rate reduction contained in the Committee
bill. Other manufacturers may find that the name of the tax
they pay has changed, but the amount stays the same. The
Committee bill promises a three-point rate reduction, but some
corporations will find that much, if not all, of their rate
reduction is taken back by the corporate minimum tax. Capital-
intensive manufacturers will be among those most adversely by
this aspect of the Committee bill.
In contrast, the Senate bill and the amendment offered by
Congressman Rangel provides an effective 10% across the board
reduction in both corporate and minimum tax rates. No portion
of the benefit promised in those proposals will be clawed back
through the minimum tax.
3. Tax incentives for outsourcing labor force and parts
The Committee bill will provide substantial tax benefits
for the income of domestic companies that is attributable to
outsourcing technical and administrative services overseas, or
is that is attributable to cost-savings from using cheap
imported parts. If a domestic manufacturer is able to reduce
its cost by conducting research, testing, computer programming,
or other service functions overseas, it will receive a rate
reduction for the income resulting from those cost savings. If
a domestic manufacturer assembles a product in the United
States using cheap imported parts, it will receive a rate
reduction for the income resulting from the cost-savings.
Effectively, even the portion of the Committee bill which is
advertised as helping U.S. manufacturers provides incentives
for outsourcing overseas.
Last Thursday, The Wall Street Journal published an article
which gives an idea of how large the potential loophole in the
Committee bill may be. It described how auto manufacturers were
forcing their suppliers to outsource parts manufacturing
overseas. All of the cost savings from that offshoring will
receive tax benefits under the Committee bill.
This aspect of the Committee bill is deliberate, not
accidental. The provision passed by the Senate and the
amendment offered by Mr. Rangel, both contain provisions
designed to ensure that the ``U.S. manufacturing benefit'' only
be allowed for income earned from productive activities in the
United States. Both of those proposals explicitly make clear
that income resulting from offshoring will not be eligible for
the new rate reduction. It is difficult to understand what
could motivate Republican members of this Committee to endorse
a proposal incentivizing offshoring.
Previously, most of the jobs moved by U.S. companies
overseas were manufacturing jobs. Now, increasingly, we are
seeing U.S. companies moving technical work, computer
programming, call centers, and other service jobs to take
advantage of cheap labor rates overseas. That trend will be
accelerated by the tax benefits provided by the Committee bill
for income resulting from the cost saving of hiring cheaper
foreign labor.
For example, if a software company hires foreign computer
programmers to produce parts of its software because of lower
wage rates overseas, it will receive a rate reduction for the
cost saving so long as the final computer program is assembled
in the United States. Manufacturers that move call centers or
technical assistance services overseas similarly will get rate
reductions for the income derived by hiring cheap, foreign
labor. Importers of cheap foreign goods will receive benefits
if there is some assembly here.
Patriotism Just Has To Take a Back Seat to Profits
A spokesperson for a major accounting firm which was
promoting the tax avoidance device of moving the corporate
charter offshore was asked whether there was any downside to
these transactions. The response was stark. The spokesperson
suggested that the 9/11 tragedies placed an emphasis on
patriotism. That concern was dismissed with the statement that
the profits from the transaction were so large that ``the
patriotism issue needs to take a back seat.''
The Thomas bill is totally consistent with the view
expressed by that person. It contains no meaningful
restrictions on the ability of corporations to move their
corporate charters offshore for tax avoidance purposes. The
Bush Treasury Department representative at the markup
acknowledged that the Committee bill did little to stop these
transactions. Remarkably, he supported the bill anyway, arguing
that the Bush Administration opposes ``putting up walls'' that
prevent businesses from moving their corporate charters
offshore.
Committee Bill Imposes Costs on State and Local Governments To Fund
Corporate Tax Benefits
Increasingly, the Bush Administration, and the Republican
Congress, have increased the burdens on State and local
governments. They have imposed new mandates without providing
needed resources. Some of the tax policies promoted by the Bush
Administration have had the indirect impact of increasing the
burden of State and local taxes.
Budget crises faced by State and local governments have
caused some of them to engage in leasing transactions from
which they receive some monetary benefits. We recognize that
many of these transactions are abusive, and that the amount
received by the State and local government is a relatively
small portion of the overall federal revenue loss. Therefore,
we would support reform in this area, but cannot support the
Committee bill that merely increases the burden on State and
local governments, and makes no attempt to replace the benefit.
IRS Use of Private Collectors for Federal Tax Debts
The bill's provision to ``privatize'' IRS debt collection
should be an affront to taxpayers nationwide. Federal tax
collection is and should continue to be the job of the IRS and
the Department of Treasury--it is an inherently governmental
function. The collection of Federal taxes should not be a
profitable business venture for corporate America looking to
expand their debt collection market share. The very notion of
unleashing a small army of bill collectors on the taxpayers of
this Nation should give major pause to everyone.
The Committee bill specifically rewards private debt
collectors up to 25% of amounts collected from taxpayers. It is
offensive and a failure of responsibility for the Committee to
give companies and their employees--who are not directly
accountable to the Treasury Department Secretary and IRS
Commissioner--``a bounty'' for getting money from taxpayers.
The IRS's earlier project to use private debt collectors
resulted in numerous violations of the Fair Debt Collection Act
and was abandoned, in large part, because the companies were
not able to collect taxes from the taxpayers assigned to them--
cases having large and old tax delinquencies. Now, the Treasury
Department plans to given these firms small and recent cases so
they can make profit. This ``cherry picking'' means that
private tax collectors will be able to work on average taxpayer
cases--those who, in fact, filed a return in 2001, 2002 or 2003
and were unable to enclose a balance due check of $40-$600.
Clearly, the IRS could do this collection work if it had
more resources. The Republican Leadership just plain refuses to
give the IRS the resources it needs and wants to do its job of
properly administering our tax laws. There is no question that
the IRS could efficiently and effectively collect additional
taxes due and do so for about 3-5% of the amount collected. The
notice and letter machines, the telephone lines, the know-how,
the entire process is there and ready to go at the IRS. All
that is needed are staff and resources to do the work under the
existing system. Why would we pay someone 25% of a $1,000 tax
bill for making a phone call or sending a letter to a taxpayer,
when the IRS could send that some letter or make that same
phone call at little cost?
The proposal is unfair, inefficient, and a threat to
taxpayer confidentiality. The fact that the provision
specifically prevents a lawsuit against the United States in
the event a taxpayer is abused by a tax collection company
clearly shows that the Committee's plan does include taking
responsibility for how the private debt collection plan turns
out.
ADDITIONAL VIEWS OF REPRESENTATIVE EARL POMEROY
The road to reporting H.R. 4520 has been long and tortured.
It began with various legislative efforts to assist domestic
manufacturers, including the Domestic International Sales
Corporation (DISC) provisions, Foreign Sales Corporation (FSC)
provisions, and ultimately the provisions of the
Extraterritorial Income Exclusion (ETI) Act. Unfortunately, the
World Trade Organization has found ETI unlawful and authorized
billions of dollars of sanctions until such time as ETI is
repealed.
Presently, our companies and products are facing tariffs of
8 percent, with this rising by 1 percentage point a month until
repeal is affected. This situation is untenable and we must
therefore pass legislation that at a minimum repeals ETI. I
also believe that it is appropriate to find a WTO-compliant way
of providing an equivalent benefit for our domestic
manufacturers. This was the purpose behind the bipartisan
Crane-Rangel proposal, which I supported.
Ultimately, I find myself unable to wholly support either
the underlying bill or the substitute amendment that was
offered. While my concerns are many, I am most concerned about
the fact that the Chairman's bill has chosen to exclude non-C
corporation taxpayers from the tax reductions that are
provided. Small businesses, whether they are S corporations or
sole proprietorships, farmers or other small manufacturers,
should not be excluded from the effort to solidify our domestic
production activities.
Similarly, while I am concerned that the Chairman's mark
has a minimum cost of $35 billion dollars, and likely much more
once the various gimmicks are accounted for, I am equally
concerned that in the rush to find offsets, we are continuing a
trend that has been underway for the last several years, that
being shifting our tax burdens from the federal level to our
state and local governments. Specifically, I am concerned that
efforts to curb leasing transactions, which are most often used
by state and local governmental entities, are being undertaken
without ensuring that there is a viable financing alternative
left to fund infrastructure projects at our universities, water
treatment facilities, and transit systems.
I support the vast majority of the provisions contained in
the substitute amendment. Unfortunately, the substitute has, I
believe, itself overreached with its provisions on corporate
inversion. I do not support the actions of those companies that
have chosen to invert. I believe, however, that the inversion
provisions in the substitute amendment would have an unfair
retroactive effect. The substitute would reach back and punish
those companies who legally, though still unwisely in my view,
inverted before March of 2002, when Congress first gave notice
that it might change the applicable tax laws.
The inversions that were finalized before 2002 were
approved by corporate shareholders that paid tens of millions
of dollars in U.S. taxes as a result of the transactions. The
substitute does not address how to undo this. Additionally, had
the inverting corporations been given notice of impending
Congressional action, they might not have inverted and may have
made other decisions regarding their corporate structures and
business activities. This logic is supported by the lack of
companies inverting after March 2002, once Congress gave fair
warning. Making a retroactive change going back to before March
2002 could threaten over 2,000 manufacturing jobs in North
Dakota and likely even more across the rest of the country.
Therefore, despite my concerns about the act of inverting, I
cannot support the manner in which the substitute addresses the
issue.
I am also concerned that neither of the bills before the
committee addressed the issue of energy tax incentives. In its
bill, the Senate included a thoughtful array of energy tax
provisions, including important provisions relating to the wind
energy tax credit and ethanol and biodiesel. As with the
proposed tax rate reductions for our domestic manufacturers,
these energy provisions can play a significant role in
employing Americans while also reducing our energy dependence.
I support these measures and I am hopeful that the Senate's
energy provisions will be retained in conference.
I remain hopeful that we can quickly pass legislation
repealing ETI and that in conference a fair resolution will be
made relating to the scope of any tax benefits and the handling
of leasing transactions and corporate inverters.
Earl Pomeroy.