[House Report 108-755]
[From the U.S. Government Publishing Office]
108th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 108-755
_______________________________________________________________________
AMERICAN JOBS CREATION ACT OF 2004
----------
CONFERENCE REPORT
to accompany
H.R. 4520
October 7, 2004.--Ordered to be printed
AMERICAN JOBS CREATION ACT OF 2004
108th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 108-755
_______________________________________________________________________
AMERICAN JOBS CREATION ACT OF 2004
__________
CONFERENCE REPORT
to accompany
H.R. 4520
October 7, 2004.--Ordered to be printed
108th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 108-755
======================================================================
AMERICAN JOBS CREATION ACT OF 2004
_______
October 7, 2004.--Ordered to be printed
_______
Mr. Thomas, from the committee of conference, submitted the following
CONFERENCE REPORT
[To accompany H.R. 4520]
The committee of conference on the disagreeing votes of
the two Houses on the amendment of the Senate to 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 met, after full and
free conference, have agreed to recommend and do recommend to
their respective Houses as follows:
That the House recede from its disagreement to the
amendment of the Senate and agree to the same with an amendment
as follows:
In lieu of the matter proposed to be inserted by the
Senate amendment, insert the following:
SECTION 1. SHORT TITLE; ETC.
(a) Short Title.--This Act may be cited as the ``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:
TITLE I--PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR EXTRATERRITORIAL
INCOME
Sec. 101. Repeal of exclusion for extraterritorial income.
Sec. 102. Deduction relating to income attributable to domestic
production activities.
TITLE II--BUSINESS TAX INCENTIVES
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.
Subtitle C--Community Revitalization
Sec. 221. Modification of targeted areas and low-income communities for
new markets tax credit.
Sec. 222. Expansion of designated renewal community area based on 2000
census data.
Sec. 223. Modification of income requirement for census tracts within
high migration rural counties.
Subtitle D--S Corporation Reform and Simplification
Sec. 231. Members of family treated as 1 shareholder.
Sec. 232. Increase in number of eligible shareholders to 100.
Sec. 233. Expansion of bank S corporation eligible shareholders to
include IRAs.
Sec. 234. Disregard of unexercised powers of appointment in determining
potential current beneficiaries of ESBT.
Sec. 235. Transfer of suspended losses incident to divorce, etc.
Sec. 236. Use of passive activity loss and at-risk amounts by qualified
subchapter S trust income beneficiaries.
Sec. 237. Exclusion of investment securities income from passive income
test for bank S corporations.
Sec. 238. Relief from inadvertently invalid qualified subchapter S
subsidiary elections and terminations.
Sec. 239. Information returns for qualified subchapter S subsidiaries.
Sec. 240. Repayment of loans for qualifying employer securities.
Subtitle E--Other Business Incentives
Sec. 241. Phaseout of 4.3-cent motor fuel excise taxes on railroads and
inland waterway transportation which remain in general fund.
Sec. 242. Modification of application of income forecast method of
depreciation.
Sec. 243. Improvements related to real estate investment trusts.
Sec. 244. Special rules for certain film and television productions.
Sec. 245. Credit for maintenance of railroad track.
Sec. 246. Suspension of occupational taxes relating to distilled
spirits, wine, and beer.
Sec. 247. Modification of unrelated business income limitation on
investment in certain small business investment companies.
Sec. 248. Election to determine corporate tax on certain international
shipping activities using per ton rate.
Subtitle F--Stock Options and Employee Stock Purchase Plan Stock Options
Sec. 251. Exclusion of incentive stock options and employee stock
purchase plan stock options from wages.
TITLE III--TAX RELIEF FOR AGRICULTURE AND SMALL MANUFACTURERS
Subtitle A--Volumetric Ethanol Excise Tax Credit
Sec. 301. Alcohol and biodiesel excise tax credit and extension of
alcohol fuels income tax credit.
Sec. 302. Biodiesel income tax credit.
Sec. 303. Information reporting for persons claiming certain tax
benefits.
Subtitle B--Agricultural Incentives
Sec. 311. Special rules for livestock sold on account of weather-related
conditions.
Sec. 312. Payment of dividends on stock of cooperatives without reducing
patronage dividends.
Sec. 313. Apportionment of small ethanol producer credit.
Sec. 314. Coordinate farmers and fishermen income averaging and the
alternative minimum tax.
Sec. 315. Capital gain treatment under section 631(b) to apply to
outright sales by landowners.
Sec. 316. Modification to cooperative marketing rules to include value
added processing involving animals.
Sec. 317. Extension of declaratory judgment procedures to farmers'
cooperative organizations.
Sec. 318. Certain expenses of rural letter carriers.
Sec. 319. Treatment of certain income of cooperatives.
Sec. 320. Exclusion for payments to individuals under National Health
Service Corps loan repayment program and certain State loan
repayment programs.
Sec. 321. Modification of safe harbor rules for timber REITs.
Sec. 322. Expensing of certain reforestation expenditures.
Subtitle C--Incentives for Small Manufacturers
Sec. 331. Net income from publicly traded partnerships treated as
qualifying income of regulated investment companies.
Sec. 332. Simplification of excise tax imposed on bows and arrows.
Sec. 333. Reduction of excise tax on fishing tackle boxes.
Sec. 334. Sonar devices suitable for finding fish.
Sec. 335. Charitable contribution deduction for certain expenses
incurred in support of Native Alaskan subsistence whaling.
Sec. 336. Modification of depreciation allowance for aircraft.
Sec. 337. Modification of placed in service rule for bonus depreciation
property.
Sec. 338. Expensing of capital costs incurred in complying with
Environmental Protection Agency sulfur regulations.
Sec. 339. Credit for production of low sulfur diesel fuel.
Sec. 340. Expansion of qualified small-issue bond program.
Sec. 341. Oil and gas from marginal wells.
TITLE IV--TAX REFORM AND SIMPLIFICATION FOR UNITED STATES BUSINESSES
Sec. 401. Interest expense allocation rules.
Sec. 402. Recharacterization of overall domestic loss.
Sec. 403. Look-thru rules to apply to dividends from noncontrolled
section 902 corporations.
Sec. 404. Reduction to 2 foreign tax credit baskets.
Sec. 405. Attribution of stock ownership through partnerships to apply
in determining section 902 and 960 credits.
Sec. 406. Clarification of treatment of certain transfers of intangible
property.
Sec. 407. United States property not to include certain assets of
controlled foreign corporation.
Sec. 408. Translation of foreign taxes.
Sec. 409. Repeal of withholding tax on dividends from certain foreign
corporations.
Sec. 410. Equal treatment of interest paid by foreign partnerships and
foreign corporations.
Sec. 411. Treatment of certain dividends of regulated investment
companies.
Sec. 412. Look-thru treatment for sales of partnership interests.
Sec. 413. Repeal of foreign personal holding company rules and foreign
investment company rules.
Sec. 414. Determination of foreign personal holding company income with
respect to transactions in commodities.
Sec. 415. Modifications to treatment of aircraft leasing and shipping
income.
Sec. 416. Modification of exceptions under subpart F for active
financing.
Sec. 417. 10-year foreign tax credit carryover; 1-year foreign tax
credit carryback.
Sec. 418. Modification of the treatment of certain REIT distributions
attributable to gain from sales or exchanges of United States
real property interests.
Sec. 419. Exclusion of income derived from certain wagers on horse races
and dog races from gross income of nonresident alien
individuals.
Sec. 420. Limitation of withholding tax for Puerto Rico corporations.
Sec. 421. Foreign tax credit under alternative minimum tax.
Sec. 422. Incentives to reinvest foreign earnings in United States.
Sec. 423. Delay in effective date of final regulations governing
exclusion of income from international operation of ships or
aircraft.
Sec. 424. Study of earnings stripping provisions.
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--FAIR AND EQUITABLE TOBACCO REFORM
Sec. 601. Short title.
Subtitle A--Termination of Federal Tobacco Quota and Price Support
Programs
Sec. 611. Termination of tobacco quota program and related provisions.
Sec. 612. Termination of tobacco price support program and related
provisions.
Sec. 613. Conforming amendments.
Sec. 614. Continuation of liability for 2004 and earlier crop years.
Subtitle B--Transitional Payments to Tobacco Quota Holders and Producers
of Tobacco
Sec. 621. Definitions.
Sec. 622. Contract payments to tobacco quota holders.
Sec. 623. Contract payments for producers of quota tobacco.
Sec. 624. Administration.
Sec. 625. Use of assessments as source of funds for payments.
Sec. 626. Tobacco Trust Fund.
Sec. 627. Limitation on total expenditures.
Subtitle C--Implementation and Transition
Sec. 641. Treatment of tobacco loan pool stocks and outstanding loan
costs.
Sec. 642. Regulations.
Sec. 643. Effective date.
TITLE VII--MISCELLANEOUS PROVISIONS
Sec. 701. Brownfields demonstration program for qualified green building
and sustainable design projects.
Sec. 702. Exclusion of gain or loss on sale or exchange of certain
brownfield sites from unrelated business taxable income.
Sec. 703. Civil rights tax relief.
Sec. 704. Modification of class life for certain track facilities.
Sec. 705. Suspension of policyholders surplus account provisions.
Sec. 706. Certain Alaska natural gas pipeline property treated as 7-year
property.
Sec. 707. Extension of enhanced oil recovery credit to certain Alaska
facilities.
Sec. 708. Method of accounting for naval shipbuilders.
Sec. 709. Modification of minimum cost requirement for transfer of
excess pension assets.
Sec. 710. Expansion of credit for electricity produced from certain
renewable resources.
Sec. 711. Certain business credits allowed against regular and minimum
tax.
Sec. 712. Inclusion of primary and secondary medical strategies for
children and adults with sickle cell disease as medical
assistance under the Medicaid program.
Sec. 713. Ceiling fans.
Sec. 714. Certain steam generators, and certain reactor vessel heads and
pressurizers, used in nuclear facilities.
TITLE VIII--REVENUE PROVISIONS
Subtitle A--Provisions to Reduce Tax Avoidance Through Individual and
Corporate Expatriation
Sec. 801. Tax treatment of expatriated entities and their foreign
parents.
Sec. 802. Excise tax on stock compensation of insiders in expatriated
corporations.
Sec. 803. Reinsurance of United States risks in foreign jurisdictions.
Sec. 804. Revision of tax rules on expatriation of individuals.
Sec. 805. Reporting of taxable mergers and acquisitions.
Sec. 806. Studies.
Subtitle B--Provisions Relating to Tax Shelters
Part I--Taxpayer-Related Provisions
Sec. 811. Penalty for failing to disclose reportable transactions.
Sec. 812. Accuracy-related penalty for listed transactions, other
reportable transactions having a significant tax avoidance
purpose, etc.
Sec. 813. Tax shelter exception to confidentiality privileges relating
to taxpayer communications.
Sec. 814. Statute of limitations for taxable years for which required
listed transactions not reported.
Sec. 815. Disclosure of reportable transactions.
Sec. 816. Failure to furnish information regarding reportable
transactions.
Sec. 817. Modification of penalty for failure to maintain lists of
investors.
Sec. 818. Penalty on promoters of tax shelters.
Sec. 819. Modifications of substantial understatement penalty for
nonreportable transactions.
Sec. 820. Modification of actions to enjoin certain conduct related to
tax shelters and reportable transactions.
Sec. 821. Penalty on failure to report interests in foreign financial
accounts.
Sec. 822. Regulation of individuals practicing before the Department of
Treasury.
Part II--Other Provisions
Sec. 831. Treatment of stripped interests in bond and preferred stock
funds, etc.
Sec. 832. Minimum holding period for foreign tax credit on withholding
taxes on income other than dividends.
Sec. 833. Disallowance of certain partnership loss transfers.
Sec. 834. No reduction of basis under section 734 in stock held by
partnership in corporate partner.
Sec. 835. Repeal of special rules for FASITS.
Sec. 836. Limitation on transfer or importation of built-in losses.
Sec. 837. Clarification of banking business for purposes of determining
investment of earnings in United States property.
Sec. 838. Denial of deduction for interest on underpayments attributable
to nondisclosed reportable transactions.
Sec. 839. Clarification of rules for payment of estimated tax for
certain deemed asset sales.
Sec. 840. Recognition of gain from the sale of a principal residence
acquired in a like-kind exchange within 5 years of sale.
Sec. 841. Prevention of mismatching of interest and original issue
discount deductions and income inclusions in transactions with
related foreign persons.
Sec. 842. Deposits made to suspend running of interest on potential
underpayments.
Sec. 843. Partial payment of tax liability in installment agreements.
Sec. 844. Affirmation of consolidated return regulation authority.
Sec. 845. Expanded disallowance of deduction for interest on convertible
debt.
Part III--Leasing
Sec. 847. Reform of tax treatment of certain leasing arrangements.
Sec. 848. Limitation on deductions allocable to property used by
governments or other tax-exempt entities.
Sec. 849. Effective date.
Subtitle C--Reduction of Fuel Tax Evasion
Sec. 851. Exemption from certain excise taxes for mobile machinery.
Sec. 852. Modification of definition of off-highway vehicle.
Sec. 853. Taxation of aviation-grade kerosene.
Sec. 854. Dye injection equipment.
Sec. 855. Elimination of administrative review for taxable use of dyed
fuel.
Sec. 856. Penalty on untaxed chemically altered dyed fuel mixtures.
Sec. 857. Termination of dyed diesel use by intercity buses.
Sec. 858. Authority to inspect on-site records.
Sec. 859. Assessable penalty for refusal of entry.
Sec. 860. Registration of pipeline or vessel operators required for
exemption of bulk transfers to registered terminals or
refineries.
Sec. 861. Display of registration.
Sec. 862. Registration of persons within foreign trade zones, etc.
Sec. 863. Penalties for failure to register and failure to report.
Sec. 864. Electronic filing of required information reports.
Sec. 865. Taxable fuel refunds for certain ultimate vendors.
Sec. 866. Two-party exchanges.
Sec. 867. Modifications of tax on use of certain vehicles.
Sec. 868. Dedication of revenues from certain penalties to the Highway
Trust Fund.
Sec. 869. Simplification of tax on tires.
Sec. 870. Transmix and diesel fuel blend stocks treated as taxable fuel.
Sec. 871. Study regarding fuel tax compliance.
Subtitle D--Other Revenue Provisions
Sec. 881. Qualified tax collection contracts.
Sec. 882. Treatment of charitable contributions of patents and similar
property.
Sec. 883. Increased reporting for noncash charitable contributions.
Sec. 884. Donations of motor vehicles, boats, and airplanes.
Sec. 885. Treatment of nonqualified deferred compensation plans.
Sec. 886. Extension of amortization of intangibles to sports franchises.
Sec. 887. Modification of continuing levy on payments to Federal
venders.
Sec. 888. Modification of straddle rules.
Sec. 889. Addition of vaccines against hepatitis A to list of taxable
vaccines.
Sec. 890. Addition of vaccines against influenza to list of taxable
vaccines.
Sec. 891. Extension of IRS user fees.
Sec. 892. COBRA fees.
Sec. 893. Prohibition on nonrecognition of gain through complete
liquidation of holding company.
Sec. 894. Effectively connected income to include certain foreign source
income.
Sec. 895. Recapture of overall foreign losses on sale of controlled
foreign corporation.
Sec. 896. Recognition of cancellation of indebtedness income realized on
satisfaction of debt with partnership interest.
Sec. 897. Denial of installment sale treatment for all readily tradable
debt.
Sec. 898. Modification of treatment of transfers to creditors in
divisive reorganizations.
Sec. 899. Clarification of definition of nonqualified preferred stock.
Sec. 900. Modification of definition of controlled group of
corporations.
Sec. 901. Class lives for utility grading costs.
Sec. 902. Consistent amortization of periods for intangibles.
Sec. 903. Freeze of provisions regarding suspension of interest where
Secretary fails to contact taxpayer.
Sec. 904. Increase in withholding from supplemental wage payments in
excess of $1,000,000.
Sec. 905. Treatment of sale of stock acquired pursuant to exercise of
stock options to comply with conflict-of-interest
requirements.
Sec. 906. Application of basis rules to nonresident aliens.
Sec. 907. Limitation of employer deduction for certain entertainment
expenses.
Sec. 908. Residence and source rules relating to United States
possessions.
Sec. 909. Sales or dispositions to implement Federal Energy Regulatory
Commission or State electric restructuring policy.
Sec. 910. Expansion of limitation on depreciation of certain passenger
automobiles.
TITLE I--PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR
EXTRATERRITORIAL INCOME
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.--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 September 17, 2003, 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. DEDUCTION RELATING TO INCOME ATTRIBUTABLE TO DOMESTIC
PRODUCTION ACTIVITIES.
(a) In General.--Part VI of subchapter B of chapter 1
(relating to itemized deductions for individuals and
corporations) is amended by adding at the end the following new
section:
``SEC. 199. INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES.
``(a) Allowance of Deduction.--
``(1) In general.--There shall be allowed as a
deduction an amount equal to 9 percent of the lesser
of--
``(A) the qualified production activities
income of the taxpayer for the taxable year, or
``(B) taxable income (determined without
regard to this section) for the taxable year.
``(2) Phasein.--In the case of any taxable year
beginning after 2004 and before 2010, paragraph (1) and
subsections (d)(1) and (d)(6) shall be applied by
substituting for the percentage contained therein the
transition percentage determined under the following
table:
``For taxable years The transition
beginning in: percentage is:
2005 or 2006.............................................. 3
2007, 2008, or 2009....................................... 6.
``(b) Deduction Limited to Wages Paid.--
``(1) In general.--The amount of the deduction
allowable under subsection (a) for any taxable year
shall not exceed 50 percent of the W-2 wages of the
employer for the taxable year.
``(2) W-2 wages.--For purposes of paragraph (1),
the term `W-2 wages' means the sum of the aggregate
amounts the taxpayer is required to include on
statements under paragraphs (3) and (8) of section
6051(a) with respect to employment of employees of the
taxpayer during the calendar year ending during the
taxpayer's taxable year.
``(3) Acquisitions and dispositions.--The Secretary
shall provide for the application of this subsection in
cases where the taxpayer acquires, or disposes of, the
major portion of a trade or business or the major
portion of a separate unit of a trade or business
during the taxable year.
``(c) Qualified Production Activities Income.--For purposes
of this section--
``(1) In general.--The term `qualified production
activities income' for any taxable year means an amount
equal to the excess (if any) of--
``(A) the taxpayer's domestic production
gross receipts for such taxable year, over
``(B) 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.
``(2) 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) Special rules for determining costs.--
``(A) In general.--For purposes of
determining costs under clause (i) of paragraph
(1)(B), any item or service brought into the
United States shall be treated as acquired by
purchase, and its cost shall be treated as not
less than its value immediately after it
entered the United States. A similar rule shall
apply in determining the adjusted basis of
leased or rented property where the lease or
rental gives rise to domestic production gross
receipts.
``(B) Exports for further manufacture.--In
the case of any property described in
subparagraph (A) that had been exported by the
taxpayer for further manufacture, the increase
in cost or adjusted basis under subparagraph
(A) shall not exceed the difference between the
value of the property when exported and the
value of the property when brought back into
the United States after the further
manufacture.
``(4) Domestic production gross receipts.--
``(A) In general.--The term `domestic
production gross receipts' means the gross
receipts of the taxpayer which are derived
from--
``(i) any lease, rental, license,
sale, exchange, or other disposition
of--
``(I) qualifying production
property which was
manufactured, produced, grown,
or extracted by the taxpayer in
whole or in significant part
within the United States,
``(II) any qualified film
produced by the taxpayer, or
``(III) electricity,
natural gas, or potable water
produced by the taxpayer in the
United States,
``(ii) construction performed in
the United States, or
``(iii) engineering or
architectural services performed in the
United States for construction projects
in the United States.
``(B) Exceptions.--Such term shall not
include gross receipts of the taxpayer which
are derived from--
``(i) the sale of food and
beverages prepared by the taxpayer at a
retail establishment, and
``(ii) the transmission or
distribution of electricity, natural
gas, or potable water.
``(5) Qualifying production property.--The term
`qualifying production property' means--
``(A) tangible personal property,
``(B) any computer software, and
``(C) any property described in section
168(f)(4).
``(6) Qualified film.--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. 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.
``(7) Related persons.--
``(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).
``(d) Definitions and Special Rules.--
``(1) Application of section to pass-thru
entities.--
``(A) In general.--In the case of an S
corporation, partnership, estate or trust, or
other pass-thru entity--
``(i) subject to the provisions of
paragraphs (2) and (3), this section
shall be applied at the shareholder,
partner, or similar level, and
``(ii) the Secretary shall
prescribe rules for the application of
this section, including rules relating
to--
``(I) restrictions on the
allocation of the deduction to
taxpayers at the partner or
similar level, and
``(II) additional reporting
requirements.
``(B) Application of wage limitation.--
Notwithstanding subparagraph (A)(i), for
purposes of applying subsection (b), a
shareholder, partner, or similar person which
is allocated qualified production activities
income from an S corporation, partnership,
estate, trust, or other pass-thru entity shall
also be treated as having been allocated W-2
wages from such entity in an amount equal to
the lesser of--
``(i) such person's allocable share
of such wages (without regard to this
subparagraph), as determined under
regulations prescribed by the
Secretary, or
``(ii) 2 times 9 percent of the
qualified production activities income
allocated to such person for the
taxable year.
``(2) Application to individuals.--In the case of
an individual, subsection (a)(1)(B) shall be applied by
substituting `adjusted gross income' for `taxable
income'. For purposes of the preceding sentence,
adjusted gross income shall be determined--
``(A) after application of sections 86,
135, 137, 219, 221, 222, and 469, and
``(B) without regard to this section.
``(3) Patrons of agricultural and horticultural
cooperatives.--
``(A) In general.--If any amount described
in paragraph (1) or (3) of section 1385(a)--
``(i) is received by a person from
an organization to which part I of
subchapter T applies which is engaged--
``(I) in the manufacturing,
production, growth, or
extraction in whole or
significant part of any
agricultural or horticultural
product, or
``(II) in the marketing of
agricultural or horticultural
products, and
``(ii) is allocable to the portion
of the qualified production activities
income of the organization which, but
for this paragraph, would be deductible
under subsection (a) by the
organization and is designated as such
by the organization in a written notice
mailed to its patrons during the
payment period described in section
1382(d),
then such person shall be allowed a deduction
under subsection (a) with respect to such
amount. The taxable income of the organization
shall not be reduced under section 1382 by
reason of any amount to which the preceding
sentence applies.
``(B) Special rules.--For purposes of
applying subparagraph (A), in determining the
qualified production activities income which
would be deductible by the organization under
subsection (a)--
``(i) there shall not be taken into
account in computing the organization's
taxable income any deduction allowable
under subsection (b) or (c) of section
1382 (relating to patronage dividends,
per-unit retain allocations, and
nonpatronage distributions), and
``(ii) in the case of an
organization described in subparagraph
(A)(i)(II), the organization shall be
treated as having manufactured,
produced, grown, or extracted in whole
or significant part any qualifying
production property marketed by the
organization which its patrons have so
manufactured, produced, grown, or
extracted.
``(4) Special rule for affiliated groups.--
``(A) In general.--All members of an
expanded affiliated group shall be treated as a
single corporation for purposes of this
section.
``(B) Expanded affiliated group.--For
purposes of this section, the term `expanded
affiliated group' means an affiliated group as
defined in section 1504(a), determined--
``(i) by substituting `50 percent'
for `80 percent' each place it appears,
and
``(ii) without regard to paragraphs
(2) and (4) of section 1504(b).
``(C) Allocation of deduction.--Except as
provided in regulations, the deduction under
subsection (a) shall be allocated among the
members of the expanded affiliated group in
proportion to each member's respective amount
(if any) of qualified production activities
income.
``(5) Trade or business requirement.--This section
shall be applied by only taking into account items
which are attributable to the actual conduct of a trade
or business.
``(6) Coordination with minimum tax.--The deduction
under this section shall be allowed for purposes of the
tax imposed by section 55; except that for purposes of
section 55, the deduction under subsection (a) shall be
9 percent of the lesser of--
``(A) qualified production activities
income (determined without regard to part IV of
subchapter A), or
``(B) alternative minimum taxable income
(determined without regard to this section) for
the taxable year.
In the case of an individual, subparagraph (B) shall be
applied by substituting `adjusted gross income' for
`alternative minimum taxable income'. For purposes of
the preceding sentence, adjusted gross income shall be
determined in the same manner as provided in paragraph
(2).
``(7) Regulations.--The Secretary shall prescribe
such regulations as are necessary to carry out the
purposes of this section.''.
(b) Minimum Tax.--Section 56(g)(4)(C) (relating to
disallowance of items not deductible in computing earnings and
profits) is amended by adding at the end the following new
clause:
``(v) Deduction for domestic
production.--Clause (i) shall not apply
to any amount allowable as a deduction
under section 199.''.
(c) Special Rule Relating to Election To Treat Cutting of
Timber as a Sale or Exchange.--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.
(d) Technical Amendments.--
(1) Sections 86(b)(2)(A), 135(c)(4)(A),
137(b)(3)(A), and 219(g)(3)(A)(ii) are each amended by
inserting ``199,'' before ``221''.
(2) Clause (i) of section 221(b)(2)(C) is amended
by inserting ``199,'' before ``222''.
(3) Clause (i) of section 222(b)(2)(C) is amended
by inserting ``199,'' before ``911''.
(4) Paragraph (1) of section 246(b) is amended by
inserting ``199,'' after ``172,''.
(5) Clause (iii) of section 469(i)(3)(F) is amended
by inserting ``199,'' before ``219,''.
(6) Subsection (a) of section 613 is amended by
inserting ``and without the deduction under section
199'' after ``without allowances for depletion''.
(7) Subsection (a) of section 1402 is amended by
striking ``and'' at the end of paragraph (14), by
striking the period at the end of paragraph (15) and
inserting ``, and'', and by inserting after paragraph
(15) the following new paragraph:
``(16) the deduction provided by section 199 shall
not be allowed.''.
(8) The table of sections for part VI of subchapter
B of chapter 1 is amended by adding at the end the
following new item:
``Sec. 199. Income attributable to domestic production
activities.''.
(e) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2004.
TITLE II--BUSINESS TAX INCENTIVES
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.
Subtitle C--Community Revitalization
SEC. 221. MODIFICATION OF TARGETED AREAS AND LOW-INCOME COMMUNITIES FOR
NEW MARKETS TAX CREDIT.
(a) Targeted Areas.--Paragraph (2) of section 45D(e)
(relating to targeted areas) is amended to read as follows:
``(2) Targeted populations.--The Secretary shall
prescribe regulations under which 1 or more targeted
populations (within the meaning of section 103(20) of
the Riegle Community Development and Regulatory
Improvement Act of 1994 (12 U.S.C. 4702(20))) may be
treated as low-income communities. Such regulations
shall include procedures for determining which entities
are qualified active low-income community businesses
with respect to such populations.''.
(b) Tracts With Low Population.--Subsection (e) of section
45D (defining low-income community) is amended by adding at the
end the following:
``(4) Tracts with low population.--A population
census tract with a population of less than 2,000 shall
be treated as a low-income community for purposes of
this section if such tract--
``(A) is within an empowerment zone the
designation of which is in effect under section
1391, and
``(B) is contiguous to 1 or more low-income
communities (determined without regard to this
paragraph).''.
(c) Effective Dates.--
(1) Targeted areas.--The amendment made by
subsection (a) shall apply to designations made by the
Secretary of the Treasury after the date of the
enactment of this Act.
(2) Tracts with low population.--The amendment made
by subsection (b) shall apply to investments made after
the date of the enactment of this Act.
SEC. 222. EXPANSION OF DESIGNATED RENEWAL COMMUNITY AREA BASED ON 2000
CENSUS DATA.
(a) In General.--Section 1400E (relating to designation of
renewal communities) is amended by adding at the end the
following new subsection:
``(g) Expansion of Designated Area Based on 2000 Census.--
``(1) In general.--At the request of all
governments which nominated an area as a renewal
community, the Secretary of Housing and Urban
Development may expand the area of such community to
include any census tract if--
``(A)(i) at the time such community was
nominated, such community would have met the
requirements of this section using 1990 census
data even if such tract had been included in
such community, and
``(ii) such tract has a poverty rate using
2000 census data which exceeds the poverty rate
for such tract using 1990 census data, or
``(B)(i) such community would be described
in subparagraph (A)(i) but for the failure to
meet one or more of the requirements of
paragraphs (2)(C)(i), (3)(C), and (3)(D) of
subsection (c) using 1990 census data,
``(ii) such community, including such
tract, has a population of not more than
200,000 using either 1990 census data or 2000
census data,
``(iii) such tract meets the requirement of
subsection (c)(3)(C) using 2000 census data,
and
``(iv) such tract meets the requirement of
subparagraph (A)(ii).
``(2) Exception for certain census tracts with low
population in 1990.--In the case of any census tract
which did not have a poverty rate determined by the
Bureau of the Census using 1990 census data, paragraph
(1)(B) shall be applied without regard to clause (iv)
thereof.
``(3) Special rule for certain census tracts with
low population in 2000.--At the request of all
governments which nominated an area as a renewal
community, the Secretary of Housing and Urban
Development may expand the area of such community to
include any census tract if--
``(A) either--
``(i) such tract has no population
using 2000 census data, or
``(ii) no poverty rate for such
tract is determined by the Bureau of
the Census using 2000 census data,
``(B) such tract is one of general
distress, and
``(C) such community, including such tract,
meets the requirements of subparagraphs (A) and
(B) of subsection (c)(2).
``(4) Period in effect.--Any expansion under this
subsection shall take effect as provided in subsection
(b).''.
(b) Effective Date.--The amendment made by subsection (a)
shall take effect as if included in the amendments made by
section 101 of the Community Renewal Tax Relief Act of 2000.
SEC. 223. MODIFICATION OF INCOME REQUIREMENT FOR CENSUS TRACTS WITHIN
HIGH MIGRATION RURAL COUNTIES.
(a) In General.--Section 45D(e) (relating to low-income
community), as amended by this Act, is amended by inserting
after paragraph (4) the following new paragraph:
``(5) Modification of income requirement for census
tracts within high migration rural counties.--
``(A) In general.--In the case of a
population census tract located within a high
migration rural county, paragraph (1)(B)(i)
shall be applied by substituting `85 percent'
for `80 percent'.
``(B) High migration rural county.--For
purposes of this paragraph, the term `high
migration rural county' means any county which,
during the 20-year period ending with the year
in which the most recent census was conducted,
has a net out-migration of inhabitants from the
county of at least 10 percent of the population
of the county at the beginning of such
period.''.
(b) Effective Date.--The amendment made by this section
shall take effect as if included in the amendment made by
section 121(a) of the Community Renewal Tax Relief Act of 2000.
Subtitle D--S Corporation Reform and Simplification
SEC. 231. 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 6 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 this Act, 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. 232. 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. 233. 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. 234. 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. 235. 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. 236. 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. 237. 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. 238. 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 or the termination occurred
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 or the termination occurred, 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 elections made and terminations made after
December 31, 2004.
SEC. 239. 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. 240. 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, 1997.
Subtitle E--Other Business Incentives
SEC. 241. PHASEOUT OF 4.3-CENT MOTOR FUEL EXCISE TAXES ON RAILROADS AND
INLAND WATERWAY TRANSPORTATION WHICH REMAIN IN
GENERAL FUND.
(a) Taxes on Trains.--
(1) In general.--Clause (ii) of section
4041(a)(1)(C) is amended by striking subclauses (I),
(II), and (III) and inserting the following new
subclauses:
``(I) 3.3 cents per gallon
after December 31, 2004, and
before July 1, 2005,
``(II) 2.3 cents per gallon
after June 30, 2005, and before
January 1, 2007, and
``(III) 0 after December
31, 2006.''.
(2) Conforming amendments.--
(A) Subsection (d) of section 4041 is
amended by redesignating paragraph (3) as
paragraph (4) and by inserting after paragraph
(2) the following new paragraph:
``(3) Diesel fuel used in trains.--In the case of
any sale for use or use after December 31, 2006, there
is hereby imposed a tax of 0.1 cent per gallon on any
liquid other than gasoline (as defined in section
4083)--
``(A) sold by any person to an owner,
lessee, or other operator of a diesel-powered
train for use as a fuel in such train, or
``(B) used by any person as a fuel in a
diesel-powered train unless there was a taxable
sale of such fuel under subparagraph (A).
No tax shall be imposed by this paragraph on the sale
or use of any liquid if tax was imposed on such liquid
under section 4081.''.
(B) Subsection (f) of section 4082 is
amended by striking ``section 4041(a)(1)'' and
inserting ``subsections (a)(1) and (d)(3) of
section 4041''.
(C) Subparagraph (B) of section 6421(f)(3)
is amended to read as follows:
``(B) so much of the rate specified in
section 4081(a)(2)(A) as does not exceed the
rate applicable under section
4041(a)(1)(C)(ii).''.
(D) Subparagraph (B) of section 6427(l)(3)
is amended to read as follows:
``(B) so much of the rate specified in
section 4081(a)(2)(A) as does not exceed the
rate applicable under section
4041(a)(1)(C)(ii).''.
(b) Fuel Used on Inland Waterways.--Subparagraph (C) of
section 4042(b)(2) is amended to read as follows:
``(C) The deficit reduction rate is--
``(i) 3.3 cents per gallon after
December 31, 2004, and before July 1,
2005,
``(ii) 2.3 cents per gallon after
June 30, 2005, and before January 1,
2007, and
``(iii) 0 after December 31,
2006.''.
(c) Effective Date.--The amendments made by this section
shall take effect on January 1, 2005.
SEC. 242. MODIFICATION OF APPLICATION OF INCOME FORECAST METHOD OF
DEPRECIATION.
(a) In General.--Section 167(g) (relating to depreciation
under income forecast method) is amended by adding at the end
the following new paragraph:
``(7) Treatment of participations and residuals.--
``(A) In general.--For purposes of
determining the depreciation deduction
allowable with respect to a property under this
subsection, the taxpayer may include
participations and residuals with respect to
such property in the adjusted basis of such
property for the taxable year in which the
property is placed in service, but only to the
extent that such participations and residuals
relate to income estimated (for purposes of
this subsection) to be earned in connection
with the property before the close of the 10th
taxable year referred to in paragraph (1)(A).
``(B) Participations and residuals.--For
purposes of this paragraph, the term
`participations and residuals' means, with
respect to any property, costs the amount of
which by contract varies with the amount of
income earned in connection with such property.
``(C) Special rules relating to
recomputation years.--If the adjusted basis of
any property is determined under this
paragraph, paragraph (4) shall be applied by
substituting `for each taxable year in such
period' for `for such period'.
``(D) Other special rules.--
``(i) Participations and
residuals.--Notwithstanding
subparagraph (A), the taxpayer may
exclude participations and residuals
from the adjusted basis of such
property and deduct such participations
and residuals in the taxable year that
such participations and residuals are
paid.
``(ii) Coordination with other
rules.--Deductions computed in
accordance with this paragraph shall be
allowable notwithstanding paragraph
(1)(B) or sections 263, 263A, 404, 419,
or 461(h).
``(E) Authority to make adjustments.--The
Secretary shall prescribe appropriate
adjustments to the basis of property and to the
look-back method for the additional amounts
allowable as a deduction solely by reason of
this paragraph.''.
(b) Determination of Income.--Section 167(g)(5) (relating
to special rules) is amended by redesignating subparagraphs (E)
and (F) as subparagraphs (F) and (G), respectively, and
inserting after subparagraph (D) the following new
subparagraph:
``(E) Treatment of distribution costs.--For
purposes of this subsection, the income with
respect to any property shall be the taxpayer's
gross income from such property.''.
(c) 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. 243. 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. 244. SPECIAL RULES FOR CERTAIN FILM AND TELEVISION PRODUCTIONS.
(a) In General.--Part VI of subchapter B of chapter 1 is
amended by inserting after section 180 the following new
section:
``SEC. 181. TREATMENT OF CERTAIN QUALIFIED FILM AND TELEVISION
PRODUCTIONS.
``(a) Election To Treat Costs as Expenses.--
``(1) In general.--A taxpayer may elect to treat
the cost of any qualified film or television production
as an expense which is not chargeable to capital
account. Any cost so treated shall be allowed as a
deduction.
``(2) Dollar limitation.--
``(A) In general.--Paragraph (1) shall not
apply to any qualified film or television
production the aggregate cost of which exceeds
$15,000,000.
``(B) Higher dollar limitation for
productions in certain areas.--In the case of
any qualified film or television production the
aggregate cost of which is significantly
incurred in an area eligible for designation
as--
``(i) a low-income community under
section 45D, or
``(ii) a distressed county or
isolated area of distress by the Delta
Regional Authority established under
section 2009aa-1 of title 7, United
States Code,
subparagraph (A) shall be applied by
substituting `$20,000,000' for `$15,000,000'.
``(b) No Other Deduction or Amortization Deduction
Allowable.--With respect to the basis of any qualified film or
television production to which an election is made under
subsection (a), no other depreciation or amortization deduction
shall be allowable.
``(c) Election.--
``(1) In general.--An election under this section
with respect to any qualified film or television
production shall be made in such manner as prescribed
by the Secretary and by the due date (including
extensions) for filing the taxpayer's return of tax
under this chapter for the taxable year in which costs
of the production are first incurred.
``(2) Revocation of election.--Any election made
under this section may not be revoked without the
consent of the Secretary.
``(d) Qualified Film or Television Production.--For
purposes of this section--
``(1) In general.--The term `qualified film or
television production' means any production described
in paragraph (2) if 75 percent of the total
compensation of the production is qualified
compensation.
``(2) Production.--
``(A) In general.--A production is
described in this paragraph if such production
is property described in section 168(f)(3). For
purposes of a television series, only the first
44 episodes of such series may be taken into
account.
``(B) Exception.--A production is not
described in this paragraph if records are
required under section 2257 of title 18, United
States Code, to be maintained with respect to
any performer in such production.
``(3) Qualified compensation.--For purposes of
paragraph (1)--
``(A) In general.--The term `qualified
compensation' means compensation for services
performed in the United States by actors,
directors, producers, and other relevant
production personnel.
``(B) Participations and residuals
excluded.--The term `compensation' does not
include participations and residuals (as
defined in section 167(g)(7)(B)).
``(e) Application of Certain Other Rules.--For purposes of
this section, rules similar to the rules of subsections (b)(2)
and (c)(4) of section 194 shall apply.
``(f) Termination.--This section shall not apply to
qualified film and television productions commencing after
December 31, 2008.''.
(b) Conforming Amendment.--The table of sections for part
VI of subchapter B of chapter 1 is amended by inserting after
the item relating to section 180 the following new item:
``Sec. 181. Treatment of certain qualified film and television
productions.''.
(c) Effective Date.--The amendments made by this section
shall apply to qualified film and television productions (as
defined in section 181(d)(1) of the Internal Revenue Code of
1986, as added by this section) commencing after the date of
the enactment of this Act.
SEC. 245. CREDIT FOR MAINTENANCE OF RAILROAD TRACK.
(a) In General.--Subpart D of part IV of subchapter A of
chapter 1 (relating to business-related credits) is amended by
adding at the end the following new section:
``SEC. 45G. RAILROAD TRACK MAINTENANCE CREDIT.
``(a) General Rule.--For purposes of section 38, the
railroad track maintenance credit determined under this section
for the taxable year is an amount equal to 50 percent of the
qualified railroad track maintenance expenditures paid or
incurred by an eligible taxpayer during the taxable year.
``(b) Limitation.--The credit allowed under subsection (a)
for any taxable year shall not exceed the product of--
``(1) $3,500, and
``(2) the number of miles of railroad track owned
or leased by the eligible taxpayer as of the close of
the taxable year.
A mile of railroad track may be taken into account by a person
other than the owner only if such mile is assigned to such
person by the owner for purposes of this subsection. Any mile
which is so assigned may not be taken into account by the owner
for purposes of this subsection.
``(c) Eligible Taxpayer.--For purposes of this section, the
term `eligible taxpayer' means--
``(1) any Class II or Class III railroad, and
``(2) any person who transports property using the
rail facilities of a person described in paragraph (1)
or who furnishes railroad-related property or services
to such a person.
``(d) Qualified Railroad Track Maintenance Expenditures.--
For purposes of this section, the term `qualified railroad
track maintenance expenditures' means expenditures (whether or
not otherwise chargeable to capital account) for maintaining
railroad track (including roadbed, bridges, and related track
structures) owned or leased as of January 1, 2005, by a Class
II or Class III railroad.
``(e) Other Definitions and Special Rules.--
``(1) Class ii or class iii railroad.--For purposes
of this section, the terms `Class II railroad' and
`Class III railroad' have the respective meanings given
such terms by the Surface Transportation Board.
``(2) Controlled groups.--Rules similar to the
rules of paragraph (1) of section 41(f) shall apply for
purposes of this section.
``(3) Basis adjustment.--For purposes of this
subtitle, if a credit is allowed under this section
with respect to any railroad track, the basis of such
track shall be reduced by the amount of the credit so
allowed.
``(f) Application of Section.--This section shall apply to
qualified railroad track maintenance expenditures paid or
incurred during taxable years beginning after December 31,
2004, and before January 1, 2008.''.
(b) Limitation on Carryback.--
(1) In general.--Subsection (d) of section 39 is
amended to read as follows:
``(d) Transitional Rule.--No portion of the unused business
credit for any taxable year which is attributable to a credit
specified in section 38(b) or any portion thereof may be
carried back to any taxable year before the first taxable year
for which such specified credit or such portion is allowable
(without regard to subsection (a)).''.
(2) Effective date.--The amendment made by
paragraph (1) shall apply with respect to taxable years
ending after December 31, 2003.
(c) Conforming Amendments.--
(1) Section 38(b) (relating to general business
credit) 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) the railroad track maintenance credit
determined under section 45G(a).''.
(2) Subsection (a) of section 1016 is amended by
striking ``and'' at the end of paragraph (27), by
striking the period at the end of paragraph (28) and
inserting ``, and'', and by inserting after paragraph
(28) the following new paragraph:
``(29) in the case of railroad track with respect
to which a credit was allowed under section 45G, to the
extent provided in section 45G(e)(3).''.
(d) Clerical Amendment.--The table of sections for subpart
D of part IV of subchapter A of chapter 1 is amended by
inserting after the item relating to section 45F the following
new item:
``Sec. 45G. Railroad track maintenance credit.''.
(e) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2004.
SEC. 246. 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, 2005,
and ending on June 30, 2008.''.
(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. 247. 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 after the date of the
enactment of the American Jobs Creation
Act of 2004 under the Small Business
Investment Act of 1958 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 after the date of the
enactment of this Act by a small business investment company
licensed after the date of the enactment of this Act.
SEC. 248. ELECTION TO DETERMINE CORPORATE TAX ON CERTAIN INTERNATIONAL
SHIPPING ACTIVITIES USING PER TON RATE.
(a) In General.--Chapter 1 is amended by inserting after
subchapter Q the following new subchapter:
``Subchapter R--Election To Determine Corporate Tax on Certain
International Shipping Activities Using Per Ton Rate
``Sec. 1352. Alternative tax on qualifying shipping activities.
``Sec. 1353. Notional shipping income.
``Sec. 1354. Alternative 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 vessels.
``SEC. 1352. ALTERNATIVE TAX ON QUALIFYING SHIPPING ACTIVITIES.
``In the case of an electing corporation, the tax imposed
by section 11 shall be the amount equal to the sum of--
``(1) the tax imposed by section 11 determined
after the application of this subchapter, and
``(2) a tax equal to--
``(A) the highest rate of tax specified in
section 11, multiplied by
``(B) the notional shipping income for the
taxable year.
``SEC. 1353. NOTIONAL SHIPPING INCOME.
``(a) In General.--For purposes of this subchapter, the
notional shipping income of an electing corporation shall be
the sum of the amounts determined under subsection (b) for each
qualifying vessel operated by such electing corporation.
``(b) Amounts.--
``(1) In general.--For purposes of subsection (a),
the amount of notional shipping income of an electing
corporation for each qualifying vessel for the taxable
year shall equal the product of--
``(A) the daily notional shipping income,
and
``(B) the number of days during the taxable
year that the electing corporation operated
such vessel as a qualifying vessel in United
States foreign trade.
``(2) Treatment of vessels the income from which is
not otherwise subject to tax.--In the case of a
qualifying vessel any of the income from which is not
included in gross income by reason of section 883 or
otherwise, the amount of notional shipping income from
such vessel for the taxable year shall be the amount
which bears the same ratio to such shipping income
(determined without regard to this paragraph) as the
gross income from the operation of such vessel in the
United States foreign trade bears to the sum of such
gross income and the income so excluded.
``(c) Daily Notional Shipping Income.--For purposes of
subsection (b), the daily notional shipping income from the
operation of a qualifying vessel is--
``(1) 40 cents for each 100 tons of so much of the
net tonnage of the vessel as does not exceed 25,000 net
tons, and
``(2) 20 cents for each 100 tons of so much of the
net tonnage of the vessel as exceeds 25,000 net tons.
``(d) Multiple Operators of Vessel.--If for any period 2 or
more persons are operators of a qualifying vessel, the notional
shipping income from the operation of such vessel for such
period shall be allocated among such persons on the basis of
their respective ownership and charter interests in such vessel
or on such other basis as the Secretary may prescribe by
regulations.
``SEC. 1354. ALTERNATIVE TAX ELECTION; REVOCATION; TERMINATION.
``(a) In General.--A qualifying vessel operator may elect
the application of this subchapter.
``(b) Time and Manner; Years for Which Effective.--An
election under this subchapter--
``(1) shall be made in such form as prescribed by
the Secretary, and
``(2) shall be effective for the taxable year for
which made and all succeeding taxable years until
terminated under subsection (d).
Such election may be effective for any taxable year only if
made before the due date (including extensions) for filing the
corporation's return for such taxable year.
``(c) Consistent Elections By Members of Controlled
Groups.--An election under subsection (a) by a member of a
controlled group shall apply to all qualifying vessel operators
that are members of such group.
``(d) 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 3d 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 for taxable years beginning
on and after the date so specified.
``(2) By person ceasing to be qualifying vessel
operator.--
``(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 corporation is an
electing corporation) such corporation ceases
to be a qualifying vessel operator.
``(B) When effective.--Any termination
under this paragraph shall be effective on and
after the date of cessation.
``(C) Annualization.--The Secretary shall
prescribe such annualization and other rules as
are appropriate in the case of a termination
under this paragraph.
``(e) Election After Termination.--If a qualifying vessel
operator has made an election under subsection (a) and if such
election has been terminated under subsection (d), such
operator (and any successor operator) 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) Electing corporation.--The term `electing
corporation' means any corporation for which an
election is in effect under this subchapter.
``(2) Electing group; controlled group.--
``(A) Electing group.--The term `electing
group' means a controlled group of which one or
more members is an electing corporation.
``(B) Controlled group.--The term
`controlled group' means any group which would
be treated as a single employer under
subsection (a) or (b) of section 52 if
paragraphs (1) and (2) of section 52(a) did not
apply.
``(3) Qualifying vessel operator.--The term
`qualifying vessel operator' means any corporation--
``(A) who operates one or more qualifying
vessels, and
``(B) who meets the shipping activity
requirement in subsection (c).
``(4) Qualifying vessel.--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
exclusively in the United States foreign trade during
the period that the election under this subchapter is
in effect.
``(5) United states flag vessel.--The term `United
States flag vessel' means any vessel documented under
the laws of the United States.
``(6) United states domestic trade.--The term
`United States domestic trade' means the transportation
of goods or passengers between places in the United
States.
``(7) United states foreign trade.--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.
``(8) Charter.--The term `charter' includes an
operating agreement.
``(b) Operating a Vessel.--For purposes of this
subchapter--
``(1) In general.--Except as provided in paragraph
(2), a person is treated as operating any vessel during
any period if such vessel is--
``(A) owned by, or chartered (including a
time charter) to, the person, and
``(B) is in use as a qualifying vessel
during such period.
``(2) Bareboat charters.--A person is treated as
operating and using a vessel that it has chartered out
on bareboat charter terms only if--
``(A)(i) the vessel is temporarily surplus
to the person's requirements and the term of
the charter does not exceed 3 years, or
``(ii) the vessel is bareboat chartered to
a member of a controlled group which includes
such person or to an unrelated person who sub-
bareboats or time charters the vessel to such a
member (including the owner of the vessel), and
``(B) the vessel is used as a qualifying
vessel by the person to whom ultimately
chartered.
``(c) Shipping Activity Requirement.--For purposes of this
section--
``(1) In general.--Except as otherwise provided in
this subsection, a corporation meets the shipping
activity requirement of this subsection for any taxable
year only if the requirement of paragraph (4) is met
for each of the 2 preceding taxable years.
``(2) Special rule for 1st year of election.--A
corporation meets the shipping activity requirement of
this subsection for the first taxable year for which
the election under section 1354(a) is in effect only if
the requirement of paragraph (4) is met for the
preceding taxable year.
``(3) Controlled groups.--A corporation who is a
member of a controlled group meets the shipping
activity requirement of this subsection only if such
requirement is met determined--
``(A) by treating all members of such group
as 1 person, and
``(B) by disregarding vessel charters
between members of such group.
``(4) Requirement.--The requirement of this
paragraph is met for any taxable year if, on average
during such year, at least 25 percent of the aggregate
tonnage of qualifying vessels used by the corporation
were owned by such corporation or chartered to such
corporation on bareboat charter terms.
``(d) Activities Carried on Partnerships, Etc.--In applying
this subchapter to a partner in a partnership--
``(1) each partner shall be treated as operating
vessels operated by the partnership,
``(2) each partner shall be treated as conducting
the activities conducted by the partnership, and
``(3) the extent of a partner's ownership or
charter interest in any vessel owned by or chartered to
the partnership shall be determined on the basis of the
partner's interest in the partnership.
A similar rule shall apply with respect to other pass-thru
entities.
``(e) Effect of Temporarily Ceasing To Operate a Qualifying
Vessel.--
``(1) In general.--For purposes of subsections (b)
and (c), an electing corporation shall be treated as
continuing to use a qualifying vessel during any period
of temporary cessation if the electing corporation
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.--Notice shall be deemed timely if
given not later than the due date (including
extensions) for the corporation's tax return for the
taxable year in which the temporary cessation begins.
``(3) Period disregard in effect.--The period of
temporary cessation under paragraph (1) shall continue
until the earlier of the date on which--
``(A) the electing corporation abandons its
intention to resume operation of the qualifying
vessel, or
``(B) the electing corporation resumes
operation of the qualifying vessel.
``(f) Effect of Temporarily Operating a Qualifying Vessel
in the United States Domestic Trade.--
``(1) In general.--For purposes of this subchapter,
an electing corporation shall be treated as continuing
to use a qualifying vessel in the United States foreign
trade during any period of temporary use in the United
States domestic trade if the electing corporation 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.--Notice shall be deemed timely if
given not later than the due date (including
extensions) for the corporation's tax return for the
taxable year in which the temporary cessation begins.
``(3) Period disregard in effect.--The period of
temporary use under paragraph (1) continues until the
earlier of the date of which--
``(A) the electing corporation abandons its
intention to resume operations of the vessel in
the United States foreign trade, or
``(B) the electing corporation resumes
operation of the vessel in the United States
foreign trade.
``(4) No disregard if domestic trade use exceeds 30
days.--Paragraph (1) shall not apply to any qualifying
vessel which is operated in the United States domestic
trade for more than 30 days during the taxable year.
``(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 term `qualifying shipping activities' means--
``(1) core qualifying activities,
``(2) qualifying secondary activities, and
``(3) qualifying incidental activities.
``(b) Core Qualifying Activities.--For purposes of this
subchapter, the term `core qualifying activities' means
activities in operating qualifying vessels in United States
foreign trade.
``(c) Qualifying Secondary Activities.--For purposes of
this section--
``(1) In general.--The term `qualifying secondary
activities' means secondary activities but only to the
extent that, without regard to this subchapter, the
gross income derived by such corporation from such
activities does not exceed 20 percent of the gross
income derived by the corporation from its core
qualifying activities.
``(2) Secondary activities.--The term `secondary
activities' means--
``(A) the active management or operation of
vessels other than qualifying vessels in the
United States foreign trade,
``(B) the provision of vessel, barge,
container, or cargo-related facilities or
services to any person,
``(C) other activities of the electing
corporation 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--
``(i) 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,
``(ii) the inland haulage of cargo
shipped, or to be shipped, on
qualifying vessels in United States
foreign trade, and
``(iii) the provision of terminal,
maintenance, repair, logistical, or
other vessel, barge, container, or
cargo-related services that are an
integral part of operating qualifying
vessels in United States foreign trade,
and
``(D) such other activities as may be
prescribed by the Secretary pursuant to
regulations.
``(3) Coordination with core activities.--
``(A) In general.--Such term shall not
include any core qualifying activities.
``(B) Nonelecting corporations.--In the
case of a corporation (other than an electing
corporation) which is a member of an electing
group, any core qualifying activities of the
corporation shall be treated as qualifying
secondary activities (and not as core
qualifying activities).
``(d) Qualifying Incidental Activities.--For purposes of
this section, the term `qualified incidental activities' means
shipping-related activities if--
``(1) they are incidental to the corporation's core
qualifying activities,
``(2) they are not qualifying secondary activities,
and
``(3) without regard to this subchapter, the gross
income derived by such corporation from such activities
does not exceed 0.1 percent of the corporation's gross
income from its core qualifying activities.
``(e) Application of Gross Income Tests in Case of Electing
Group.--In the case of an electing group, subsections (c)(1)
and (d)(3) shall be applied as if such group were 1 entity, and
the limitations under such subsections shall be allocated among
the corporations in such group.
``SEC. 1357. ITEMS NOT SUBJECT TO REGULAR TAX; DEPRECIATION; INTEREST.
``(a) Exclusion From Gross Income.--Gross income of an
electing corporation shall not include its income from
qualifying shipping activities.
``(b) Electing Group Member.--Gross income of a corporation
(other than an electing corporation) which is a member of an
electing group shall not include its income from qualifying
shipping activities conducted by such member.
``(c) Denial of Losses, Deductions, and Credits.--
``(1) General rule.--Subject to paragraph (2), 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.--
``(A) In general.--Notwithstanding
paragraph (1), the adjusted basis (for purposes
of determining gain) of any qualifying vessel
shall be determined as if the deduction for
depreciation had been allowed.
``(B) Method.--
``(i) In general.--Except as
provided in clause (ii), the straight-
line method of depreciation shall apply
to qualifying vessels the income from
operation of which is excluded from
gross income under this section.
``(ii) Exception.--Clause (i) shall
not apply to any qualifying vessel
which is subject to a charter entered
into before the date of the enactment
of this subchapter.
``(3) Interest.--
``(A) In general.--Except as provided in
subparagraph (B), the interest expense of an
electing corporation shall be disallowed in the
ratio that the fair market value of such
corporation's qualifying vessels bears to the
fair market value of such corporation's total
assets.
``(B) Electing group.--In the case of a
corporation which is a member of an electing
group, the interest expense of such corporation
shall be disallowed in the ratio that the fair
market value of such corporation's qualifying
vessels bears to the fair market value of the
electing group's total assets.
``SEC. 1358. ALLOCATION OF CREDITS, INCOME, AND DEDUCTIONS.
``(a) Qualifying Shipping Activities.--For purposes of this
chapter, the qualifying shipping activities of an electing
corporation shall be treated as a separate trade or business
activity distinct from all other activities conducted by such
corporation.
``(b) Exclusion of Credits or Deductions.--
``(1) No deduction shall be allowed against the
notional shipping income of an electing corporation,
and no credit shall be allowed against the tax imposed
by section 1352(a)(2).
``(2) No deduction shall be allowed for any net
operating loss attributable to the qualifying shipping
activities of any person to the extent that such loss
is carried forward by such person from a taxable year
preceding the first taxable year for which such person
was an electing corporation.
``(c) Transactions Not at Arm's Length.--Section 482
applies in accordance with this subsection to a transaction or
series of transactions--
``(1) as between an electing corporation and
another person, or
``(2) as between a person's qualifying shipping
activities and other activities carried on by it.
``SEC. 1359. DISPOSITION OF QUALIFYING VESSELS.
``(a) In General.--If any qualifying vessel operator sells
or disposes of any qualifying vessel in an otherwise taxable
transaction, at the election of such operator, no gain shall be
recognized if any replacement qualifying vessel is 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 vessel.
``(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
vessel 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) Application of Section to Noncorporate Operators.--
For purposes of this section, the term `qualifying vessel
operator' includes any person who would be a qualifying vessel
operator were such person a corporation.
``(d) Time for Assessment of Deficiency Attributable to
Gain.--If a qualifying vessel operator 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 such
operator (in such manner as the Secretary may by
regulations prescribe) of the replacement qualifying
vessel 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.
``(e) Basis of Replacement Qualifying Vessel.--In the case
of any replacement qualifying vessel purchased by the
qualifying vessel operator which resulted in the nonrecognition
of any part of the gain realized as the result of a sale or
other disposition of a qualifying vessel, the basis shall be
the cost of the replacement qualifying vessel 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.''
(b) Technical Amendments.--
(1) 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''.
(2) The table of subchapters for chapter 1 is
amended by inserting after the item relating to
subchapter S the following new item:
``Subchapter R. Election to determine corporate tax on certain
international shipping activities using per ton
rate.''
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
Subtitle F--Stock Options and Employee Stock Purchase Plan Stock
Options
SEC. 251. 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.
TITLE III--TAX RELIEF FOR AGRICULTURE AND SMALL MANUFACTURERS
Subtitle A--Volumetric Ethanol Excise Tax Credit
SEC. 301. ALCOHOL AND BIODIESEL EXCISE TAX CREDIT AND EXTENSION OF
ALCOHOL FUELS INCOME TAX CREDIT.
(a) In General.--Subchapter B of chapter 65 (relating to
rules of special application) is amended by inserting after
section 6425 the following new section:
``SEC. 6426. CREDIT FOR ALCOHOL FUEL AND BIODIESEL MIXTURES.
``(a) Allowance of Credits.--There shall be allowed as a
credit against the tax imposed by section 4081 an amount equal
to the sum of--
``(1) the alcohol fuel mixture credit, plus
``(2) the biodiesel mixture credit.
``(b) Alcohol Fuel Mixture Credit.--
``(1) In general.--For purposes of this section,
the alcohol fuel mixture credit is the product of the
applicable amount and the number of gallons of alcohol
used by the taxpayer in producing any alcohol fuel
mixture for sale or use in a trade or business of the
taxpayer.
``(2) Applicable amount.--For purposes of this
subsection--
``(A) In general.--Except as provided in
subparagraph (B), the applicable amount is 51
cents.
``(B) Mixtures not containing ethanol.--In
the case of an alcohol fuel mixture in which
none of the alcohol consists of ethanol, the
applicable amount is 60 cents.
``(3) Alcohol fuel mixture.--For purposes of this
subsection, the term `alcohol fuel mixture' means a
mixture of alcohol and a taxable fuel which--
``(A) is sold by the taxpayer producing
such mixture to any person for use as a fuel,
or
``(B) is used as a fuel by the taxpayer
producing such mixture.
For purposes of subparagraph (A), a mixture produced by
any person at a refinery prior to a taxable event which
includes ethyl tertiary butyl ether or other ethers
produced from alcohol shall be treated as sold at the
time of its removal from the refinery (and only at such
time) to another person for use as a fuel.
``(4) Other definitions.--For purposes of this
subsection--
``(A) Alcohol.--The term `alcohol' includes
methanol and ethanol but does not include--
``(i) alcohol produced from
petroleum, natural gas, or coal
(including peat), or
``(ii) alcohol with a proof of less
than 190 (determined without regard to
any added denaturants).
Such term also includes an alcohol gallon
equivalent of ethyl tertiary butyl ether or
other ethers produced from such alcohol.
``(B) Taxable fuel.--The term `taxable
fuel' has the meaning given such term by
section 4083(a)(1).
``(5) Termination.--This subsection shall not apply
to any sale, use, or removal for any period after
December 31, 2010.
``(c) Biodiesel Mixture Credit.--
``(1) In general.--For purposes of this section,
the biodiesel mixture credit is the product of the
applicable amount and the number of gallons of
biodiesel used by the taxpayer in producing any
biodiesel mixture for sale or use in a trade or
business of the taxpayer.
``(2) Applicable amount.--For purposes of this
subsection--
``(A) In general.--Except as provided in
subparagraph (B), the applicable amount is 50
cents.
``(B) Amount for agri-biodiesel.--In the
case of any biodiesel which is agri-biodiesel,
the applicable amount is $1.00.
``(3) Biodiesel mixture.--For purposes of this
section, the term `biodiesel mixture' means a mixture
of biodiesel and diesel fuel (as defined in section
4083(a)(3)), determined without regard to any use of
kerosene, which--
``(A) is sold by the taxpayer producing
such mixture to any person for use as a fuel,
or
``(B) is used as a fuel by the taxpayer
producing such mixture.
``(4) Certification for biodiesel.--No credit shall
be allowed under this subsection unless the taxpayer
obtains a certification (in such form and manner as
prescribed by the Secretary) from the producer of the
biodiesel which identifies the product produced and the
percentage of biodiesel and agri-biodiesel in the
product.
``(5) Other definitions.--Any term used in this
subsection which is also used in section 40A shall have
the meaning given such term by section 40A.
``(6) Termination.--This subsection shall not apply
to any sale, use, or removal for any period after
December 31, 2006.
``(d) Mixture Not Used As a Fuel, Etc.--
``(1) Imposition of tax.--If--
``(A) any credit was determined under this
section with respect to alcohol or biodiesel
used in the production of any alcohol fuel
mixture or biodiesel mixture, respectively, and
``(B) any person--
``(i) separates the alcohol or
biodiesel from the mixture, or
``(ii) without separation, uses the
mixture other than as a fuel,
then there is hereby imposed on such person a
tax equal to the product of the applicable
amount and the number of gallons of such
alcohol or biodiesel.
``(2) Applicable laws.--All provisions of law,
including penalties, shall, insofar as applicable and
not inconsistent with this section, apply in respect of
any tax imposed under paragraph (1) as if such tax were
imposed by section 4081 and not by this section.
``(e) Coordination With Exemption From Excise Tax.--Rules
similar to the rules under section 40(c) shall apply for
purposes of this section.''.
(b) Registration Requirement.--Section 4101(a)(1) (relating
to registration), as amended by section 861, is amended by
inserting ``and every person producing or importing biodiesel
(as defined in section 40A(d)(1)) or alcohol (as defined in
section 6426(b)(4)(A))'' before ``shall register with the
Secretary''.
(c) Additional Amendments.--
(1) Section 40(c) is amended by striking
``subsection (b)(2), (k), or (m) of section 4041,
section 4081(c), or section 4091(c)'' and inserting
``section 4041(b)(2), section 6426, or section
6427(e)''.
(2) Paragraph (4) of section 40(d) is amended to
read as follows:
``(4) Volume of alcohol.--For purposes of
determining under subsection (a) the number of gallons
of alcohol with respect to which a credit is allowable
under subsection (a), the volume of alcohol shall
include the volume of any denaturant (including
gasoline) which is added under any formulas approved by
the Secretary to the extent that such denaturants do
not exceed 5 percent of the volume of such alcohol
(including denaturants).''.
(3) Section 40(e)(1) is amended--
(A) by striking ``2007'' in subparagraph
(A) and inserting ``2010'', and
(B) by striking ``2008'' in subparagraph
(B) and inserting ``2011''.
(4) Section 40(h) is amended--
(A) by striking ``2007'' in paragraph (1)
and inserting ``2010'', and
(B) by striking ``, 2006, or 2007'' in the
table contained in paragraph (2) and inserting
``through 2010''.
(5) Section 4041(b)(2)(B) is amended by striking
``a substance other than petroleum or natural gas'' and
inserting ``coal (including peat)''.
(6) Section 4041 is amended by striking subsection
(k).
(7) Section 4081 is amended by striking subsection
(c).
(8) Paragraph (2) of section 4083(a) is amended to
read as follows:
``(2) Gasoline.--The term `gasoline'--
``(A) includes any gasoline blend, other
than qualified methanol or ethanol fuel (as
defined in section 4041(b)(2)(B)), partially
exempt methanol or ethanol fuel (as defined in
section 4041(m)(2)), or a denatured alcohol,
and
``(B) includes, to the extent prescribed in
regulations--
``(i) any gasoline blend stock, and
``(ii) any product commonly used as
an additive in gasoline (other than
alcohol).
For purposes of subparagraph (B)(i), the term `gasoline
blend stock' means any petroleum product component of
gasoline.''.
(9) Section 6427 is amended by inserting after
subsection (d) the following new subsection:
``(e) Alcohol or Biodiesel Used To Produce Alcohol Fuel and
Biodiesel Mixtures.--Except as provided in subsection (k)--
``(1) Used to produce a mixture.--If any person
produces a mixture described in section 6426 in such
person's trade or business, the Secretary shall pay
(without interest) to such person an amount equal to
the alcohol fuel mixture credit or the biodiesel
mixture credit with respect to such mixture.
``(2) Coordination with other repayment
provisions.--No amount shall be payable under paragraph
(1) with respect to any mixture with respect to which
an amount is allowed as a credit under section 6426.
``(3) Termination.--This subsection shall not apply
with respect to--
``(A) any alcohol fuel mixture (as defined
in section 6426(b)(3)) sold or used after
December 31, 2010, and
``(B) any biodiesel mixture (as defined in
section 6426(c)(3)) sold or used after December
31, 2006.''.
(10) Section 6427(i)(3) is amended--
(A) by striking ``subsection (f)'' both
places it appears in subparagraph (A) and
inserting ``subsection (e)(1)'',
(B) by striking ``gasoline, diesel fuel, or
kerosene used to produce a qualified alcohol
mixture (as defined in section 4081(c)(3))'' in
subparagraph (A) and inserting ``a mixture
described in section 6426'',
(C) by adding at the end of subparagraph
(A) the following new flush sentence:
``In the case of an electronic claim, this
subparagraph shall be applied without regard to
clause (i).'',
(D) by striking ``subsection (f)(1)'' in
subparagraph (B) and inserting ``subsection
(e)(1)'',
(E) by striking ``20 days of the date of
the filing of such claim'' in subparagraph (B)
and inserting ``45 days of the date of the
filing of such claim (20 days in the case of an
electronic claim)'', and
(F) by striking ``alcohol mixture'' in the
heading and inserting ``alcohol fuel and
biodiesel mixture''.
(11) Section 9503(b)(1) is amended by adding at the
end the following new flush sentence:
``For purposes of this paragraph, taxes received under
sections 4041 and 4081 shall be determined without
reduction for credits under section 6426.''.
(12) Section 9503(b)(4) is amended--
(A) by adding ``or'' at the end of
subparagraph (C),
(B) by striking the comma at the end of
subparagraph (D)(iii) and inserting a period,
and
(C) by striking subparagraphs (E) and (F).
(13) Section 9503(c)(2)(A) is amended by adding at
the end the following: ``Clauses (i)(III) and (ii)
shall not apply to claims under section 6427(e).''.
(14) The table of sections for subchapter B of
chapter 65 is amended by inserting after the item
relating to section 6425 the following new item:
``Sec. 6426. Credit for alcohol fuel and biodiesel mixtures.''.
(d) Effective Dates.--
(1) In general.--Except as otherwise provided in
this subsection, the amendments made by this section
shall apply to fuel sold or used after December 31,
2004.
(2) Registration requirement.--The amendment made
by subsection (b) shall take effect on April 1, 2005.
(3) Extension of alcohol fuels credit.--The
amendments made by paragraphs (3), (4), and (14) of
subsection (c) shall take effect on the date of the
enactment of this Act.
(4) Repeal of general fund retention of certain
alcohol fuels taxes.--The amendments made by subsection
(c)(12) shall apply to fuel sold or used after
September 30, 2004.
(e) Format for Filing.--The Secretary of the Treasury shall
describe the electronic format for filing claims described in
section 6427(i)(3)(B) of the Internal Revenue Code of 1986 (as
amended by subsection (c)(10)(C)) not later than December 31,
2004.
SEC. 302. BIODIESEL INCOME TAX CREDIT.
(a) In General.--Subpart D of part IV of subchapter A of
chapter 1 (relating to business related credits) is amended by
inserting after section 40 the following new section:
``SEC. 40A. BIODIESEL USED AS FUEL.
``(a) General Rule.--For purposes of section 38, the
biodiesel fuels credit determined under this section for the
taxable year is an amount equal to the sum of--
``(1) the biodiesel mixture credit, plus
``(2) the biodiesel credit.
``(b) Definition of Biodiesel Mixture Credit and Biodiesel
Credit.--For purposes of this section--
``(1) Biodiesel mixture credit.--
``(A) In general.--The biodiesel mixture
credit of any taxpayer for any taxable year is
50 cents for each gallon of biodiesel used by
the taxpayer in the production of a qualified
biodiesel mixture.
``(B) Qualified biodiesel mixture.--The
term `qualified biodiesel mixture' means a
mixture of biodiesel and diesel fuel (as
defined in section 4083(a)(3)), determined
without regard to any use of kerosene, which--
``(i) is sold by the taxpayer
producing such mixture to any person
for use as a fuel, or
``(ii) is used as a fuel by the
taxpayer producing such mixture.
``(C) Sale or use must be in trade or
business, etc.--Biodiesel used in the
production of a qualified biodiesel mixture
shall be taken into account--
``(i) only if the sale or use
described in subparagraph (B) is in a
trade or business of the taxpayer, and
``(ii) for the taxable year in
which such sale or use occurs.
``(D) Casual off-farm production not
eligible.--No credit shall be allowed under
this section with respect to any casual off-
farm production of a qualified biodiesel
mixture.
``(2) Biodiesel credit.--
``(A) In general.--The biodiesel credit of
any taxpayer for any taxable year is 50 cents
for each gallon of biodiesel which is not in a
mixture with diesel fuel and which during the
taxable year--
``(i) is used by the taxpayer as a
fuel in a trade or business, or
``(ii) is sold by the taxpayer at
retail to a person and placed in the
fuel tank of such person's vehicle.
``(B) User credit not to apply to biodiesel
sold at retail.--No credit shall be allowed
under subparagraph (A)(i) with respect to any
biodiesel which was sold in a retail sale
described in subparagraph (A)(ii).
``(3) Credit for agri-biodiesel.--In the case of
any biodiesel which is agri-biodiesel, paragraphs
(1)(A) and (2)(A) shall be applied by substituting
`$1.00' for `50 cents'.
``(4) Certification for biodiesel.--No credit shall
be allowed under this section unless the taxpayer
obtains a certification (in such form and manner as
prescribed by the Secretary) from the producer or
importer of the biodiesel which identifies the product
produced and the percentage of biodiesel and agri-
biodiesel in the product.
``(c) Coordination With Credit Against Excise Tax.--The
amount of the credit determined under this section with respect
to any biodiesel shall be properly reduced to take into account
any benefit provided with respect to such biodiesel solely by
reason of the application of section 6426 or 6427(e).
``(d) Definitions and Special Rules.--For purposes of this
section--
``(1) Biodiesel.--The term `biodiesel' means the
monoalkyl esters of long chain fatty acids derived from
plant or animal matter which meet--
``(A) the registration requirements for
fuels and fuel additives established by the
Environmental Protection Agency under section
211 of the Clean Air Act (42 U.S.C. 7545), and
``(B) the requirements of the American
Society of Testing and Materials D6751.
``(2) Agri-biodiesel.--The term `agri-biodiesel'
means biodiesel derived solely from virgin oils,
including esters derived from virgin vegetable oils
from corn, soybeans, sunflower seeds, cottonseeds,
canola, crambe, rapeseeds, safflowers, flaxseeds, rice
bran, and mustard seeds, and from animal fats.
``(3) Mixture or biodiesel not used as a fuel,
etc.--
``(A) Mixtures.--If--
``(i) any credit was determined
under this section with respect to
biodiesel used in the production of any
qualified biodiesel mixture, and
``(ii) any person--
``(I) separates the
biodiesel from the mixture, or
``(II) without separation,
uses the mixture other than as
a fuel,
then there is hereby imposed on such person a
tax equal to the product of the rate applicable
under subsection (b)(1)(A) and the number of
gallons of such biodiesel in such mixture.
``(B) Biodiesel.--If--
``(i) any credit was determined
under this section with respect to the
retail sale of any biodiesel, and
``(ii) any person mixes such
biodiesel or uses such biodiesel other
than as a fuel,
then there is hereby imposed on such person a
tax equal to the product of the rate applicable
under subsection (b)(2)(A) and the number of
gallons of such biodiesel.
``(C) Applicable laws.--All provisions of
law, including penalties, shall, insofar as
applicable and not inconsistent with this
section, apply in respect of any tax imposed
under subparagraph (A) or (B) as if such tax
were imposed by section 4081 and not by this
chapter.
``(4) Pass-thru in the case of estates and
trusts.--Under regulations prescribed by the Secretary,
rules similar to the rules of subsection (d) of section
52 shall apply.
``(e) Termination.--This section shall not apply to any
sale or use after December 31, 2006.''.
(b) Credit Treated as Part of General Business Credit.--
Section 38(b) (relating to current year business credit), as
amended by this Act, is amended by striking ``plus'' at the end
of paragraph (15), by striking the period at the end of
paragraph (16) and inserting ``, plus'', and by inserting after
paragraph (16) the following new paragraph:
``(17) the biodiesel fuels credit determined under
section 40A(a).''.
(c) Conforming Amendments.--
(1)(A) Section 87 is amended to read as follows:
``SEC. 87. ALCOHOL AND BIODIESEL FUELS CREDITS.
``Gross income includes--
``(1) the amount of the alcohol fuel credit
determined with respect to the taxpayer for the taxable
year under section 40(a), and
``(2) the biodiesel fuels credit determined with
respect to the taxpayer for the taxable year under
section 40A(a).''.
(B) The item relating to section 87 in the table of
sections for part II of subchapter B of chapter 1 is
amended by striking ``fuel credit'' and inserting ``and
biodiesel fuels credits''.
(2) Section 196(c) is amended by striking ``and''
at the end of paragraph (9), by striking the period at
the end of paragraph (10) and inserting ``, and'', and
by adding at the end the following new paragraph:
``(11) the biodiesel fuels credit determined under
section 40A(a).''.
(3) The table of sections for subpart D of part IV
of subchapter A of chapter 1 is amended by adding after
the item relating to section 40 the following new item:
``Sec. 40A. Biodiesel used as fuel.''.
(d) Effective Date.--The amendments made by this section
shall apply to fuel produced, and sold or used, after December
31, 2004, in taxable years ending after such date.
SEC. 303. INFORMATION REPORTING FOR PERSONS CLAIMING CERTAIN TAX
BENEFITS.
(a) In General.--Subpart C of part III of subchapter A of
chapter 32 is amended by adding at the end the following new
section:
``SEC. 4104. INFORMATION REPORTING FOR PERSONS CLAIMING CERTAIN TAX
BENEFITS.
``(a) In General.--The Secretary shall require any person
claiming tax benefits--
``(1) under the provisions of section 34, 40, and
40A, to file a return at the time such person claims
such benefits (in such manner as the Secretary may
prescribe), and
``(2) under the provisions of section 4041(b)(2),
6426, or 6427(e) to file a quarterly return (in such
manner as the Secretary may prescribe).
``(b) Contents of Return.--Any return filed under this
section shall provide such information relating to such
benefits and the coordination of such benefits as the Secretary
may require to ensure the proper administration and use of such
benefits.
``(c) Enforcement.--With respect to any person described in
subsection (a) and subject to registration requirements under
this title, rules similar to rules of section 4222(c) shall
apply with respect to any requirement under this section.''.
(b) Conforming Amendment.--The table of sections for
subpart C of part III of subchapter A of chapter 32 is amended
by adding at the end the following new item:
``Sec. 4104. Information reporting for persons claiming certain tax
benefits.''.
(c) Effective Date.--The amendments made by this section
shall take effect on January 1, 2005.
Subtitle B--Agricultural Incentives
SEC. 311. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF WEATHER-
RELATED CONDITIONS.
(a) Replacement of Livestock With Other Farm Property.--
Subsection (f) of section 1033 (relating to involuntary
conversions) is amended--
(1) by inserting ``drought, flood, or other
weather-related conditions, or'' after ``because of'',
(2) by inserting ``in the case of soil
contamination or other environmental contamination''
after ``including real property'', and
(3) by striking ``Where There Has Been
Environmental Contamination'' in the heading and
inserting ``in Certain Cases''.
(b) Extension of Replacement Period 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.''.
(c) Income Inclusion Rules.--Section 451(e) (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.''.
(d) 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. 312. 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. 313. APPORTIONMENT OF SMALL ETHANOL PRODUCER CREDIT.
(a) Allocation of Alcohol Fuels Credit to Patrons of a
Cooperative.--Section 40(g) (relating to definitions and
special rules for eligible small ethanol producer credit) is
amended by adding at the end the following new paragraph:
``(6) Allocation of small ethanol producer credit
to patrons of cooperative.--
``(A) Election to allocate.--
``(i) In general.--In the case of a
cooperative organization described in
section 1381(a), any portion of the
credit determined under subsection
(a)(3) for the taxable year may, at the
election of the organization, be
apportioned pro rata among patrons of
the organization on the basis of the
quantity or value of business done with
or for such patrons for the taxable
year.
``(ii) Form and effect of
election.--An election under clause (i)
for any taxable year shall be made on a
timely filed return for such year. Such
election, once made, shall be
irrevocable for such taxable year.
``(B) Treatment of organizations and
patrons.--
``(i) Organizations.--The amount of
the credit not apportioned to patrons
pursuant to subparagraph (A) shall be
included in the amount determined under
subsection (a)(3) for the taxable year
of the organization.
``(ii) Patrons.--The amount of the
credit apportioned to patrons pursuant
to subparagraph (A) shall be included
in the amount determined under such
subsection for the first taxable year
of each patron ending on or after the
last day of the payment period (as
defined in section 1382(d)) for the
taxable year of the organization or, if
earlier, for the taxable year of each
patron ending on or after the date on
which the patron receives notice from
the cooperative of the apportionment.
``(iii) Special rules for decrease
in credits for taxable year.--If the
amount of the credit of the
organization determined under such
subsection for a taxable year is less
than the amount of such credit shown on
the return of the organization for such
year, an amount equal to the excess
of--
``(I) such reduction, over
``(ii) the amount not
apportioned to such patrons
under subparagraph (A) for the
taxable year,
shall be treated as an increase in tax
imposed by this chapter on the
organization. Such increase shall not
be treated as tax imposed by this
chapter for purposes of determining the
amount of any credit under this chapter
or for purposes of section 55.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years ending after the date of the
enactment of this Act.
SEC. 314. COORDINATE FARMERS AND FISHERMEN INCOME AVERAGING AND THE
ALTERNATIVE MINIMUM TAX.
(a) In General.--Section 55(c) (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 and fishermen.--Solely for purposes of this
section, section 1301 (relating to averaging of farm
and fishing income) shall not apply in computing the
regular tax.''.
(b) Allowing Income Averaging for Fishermen.--
(1) In general.--Section 1301(a) is amended by
striking ``farming business'' and inserting ``farming
business or fishing business''.
(2) Definition of elected farm income.--
(A) In general.--Clause (i) of section
1301(b)(1)(A) is amended by inserting ``or
fishing business'' before the semicolon.
(B) Conforming amendment.--Subparagraph (B)
of section 1301(b)(1) is amended by inserting
``or fishing business'' after ``farming
business'' both places it occurs.
(3) Definition of fishing business.--Section
1301(b) is amended by adding at the end the following
new paragraph:
``(4) Fishing business.--The term `fishing
business' means the conduct of commercial fishing as
defined in section 3 of the Magnuson-Stevens Fishery
Conservation and Management Act (16 U.S.C. 1802).''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2003.
SEC. 315. 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. 316. MODIFICATION TO COOPERATIVE MARKETING RULES TO INCLUDE VALUE
ADDED PROCESSING INVOLVING ANIMALS.
(a) In General.--Section 1388 (relating to definitions and
special rules) is amended by adding at the end the following
new subsection:
``(k) Cooperative Marketing Includes Value-Added Processing
Involving Animals.--For purposes of section 521 and this
subchapter, the marketing of the products of members or other
producers shall include the feeding of such products to cattle,
hogs, fish, chickens, or other animals and the sale of the
resulting animals or animal products.''.
(b) Conforming Amendment.--Section 521(b) is amended by
adding at the end the following new paragraph:
``(7) Cross Reference.--
``For treatment of value-added processing involving animals,
see section 1388(k).''.
(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. 317. EXTENSION OF DECLARATORY JUDGMENT PROCEDURES TO FARMERS'
COOPERATIVE ORGANIZATIONS.
(a) In General.--Section 7428(a)(1) (relating to
declaratory judgments of tax exempt organizations) is amended
by striking ``or'' at the end of subparagraph (B) and by adding
at the end the following new subparagraph:
``(D) with respect to the initial
classification or continuing classification of
a cooperative as an organization described in
section 521(b) which is exempt from tax under
section 521(a), or''.
(b) Effective Date.--The amendments made by this section
shall apply with respect to pleadings filed after the date of
the enactment of this Act.
SEC. 318. CERTAIN EXPENSES OF RURAL LETTER CARRIERS.
(a) In General.--Section 162(o) (relating to treatment of
certain reimbursed expenses of rural mail carriers) is amended
by redesignating paragraph (2) as paragraph (3) and by
inserting after paragraph (1) the following:
``(2) Special rule where expenses exceed
reimbursements.--Notwithstanding paragraph (1)(A), if
the expenses incurred by an employee for the use of a
vehicle in performing services described in paragraph
(1) exceed the qualified reimbursements for such
expenses, such excess shall be taken into account in
computing the miscellaneous itemized deductions of the
employee under section 67.''.
(b) Conforming Amendment.--The heading for section 162(o)
is amended by striking ``Reimbursed''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2003.
SEC. 319. TREATMENT OF CERTAIN INCOME OF COOPERATIVES.
(a) Income From Open Access and Nuclear Decommissioning
Transactions.--
(1) In general.--Subparagraph (C) of section
501(c)(12) is amended by striking clause (ii) and
adding at the end the following:
``(ii) from any provision or sale
of electric energy transmission
services or ancillary services if such
services are provided on a
nondiscriminatory open access basis
under an open access transmission
tariff approved or accepted by FERC or
under an independent transmission
provider agreement approved or accepted
by FERC (other than income received or
accrued directly or indirectly from a
member),
``(iii) from the provision or sale
of electric energy distribution
services or ancillary services if such
services are provided on a
nondiscriminatory open access basis to
distribute electric energy not owned by
the mutual or electric cooperative
company--
``(I) to end-users who are
served by distribution
facilities not owned by such
company or any of its members
(other than income received or
accrued directly or indirectly
from a member), or
``(II) generated by a
generation facility not owned
or leased by such company or
any of its members and which is
directly connected to
distribution facilities owned
by such company or any of its
members (other than income
received or accrued directly or
indirectly from a member),
``(iv) from any nuclear
decommissioning transaction, or
``(v) from any asset exchange or
conversion transaction.
Clauses (ii) through (v) shall not apply to
taxable years beginning after December 31,
2006.''.
(2) Definitions and special rules.--Paragraph (12)
of section 501(c) is amended by adding at the end the
following new subparagraphs:
``(E) For purposes of subparagraph (C)(ii),
the term `FERC' means the Federal Energy
Regulatory Commission and references to such
term shall be treated as including the Public
Utility Commission of Texas with respect to any
ERCOT utility (as defined in section
212(k)(2)(B) of the Federal Power Act (16
U.S.C. 824k(k)(2)(B))).
``(F) For purposes of subparagraph
(C)(iii), the term `nuclear decommissioning
transaction' means--
``(i) any transfer into a trust,
fund, or instrument established to pay
any nuclear decommissioning costs if
the transfer is in connection with the
transfer of the mutual or cooperative
electric company's interest in a
nuclear power plant or nuclear power
plant unit,
``(ii) any distribution from any
trust, fund, or instrument established
to pay any nuclear decommissioning
costs, or
``(iii) any earnings from any
trust, fund, or instrument established
to pay any nuclear decommissioning
costs.
``(G) For purposes of subparagraph (C)(iv),
the term `asset exchange or conversion
transaction' means any voluntary exchange or
involuntary conversion of any property related
to generating, transmitting, distributing, or
selling electric energy by a mutual or
cooperative electric company, the gain from
which qualifies for deferred recognition under
section 1031 or 1033, but only if the
replacement property acquired by such company
pursuant to such section constitutes property
which is used, or to be used, for--
``(i) generating, transmitting,
distributing, or selling electric
energy, or
``(ii) producing, transmitting,
distributing, or selling natural
gas.''.
(b) Treatment of Income From Load Loss Transactions, Etc.--
Paragraph (12) of section 501(c), as amended by subsection
(a)(2), is amended by adding after subparagraph (G) the
following new subparagraph:
``(H)(i) In the case of a mutual or
cooperative electric company described in this
paragraph or an organization described in
section 1381(a)(2)(C), income received or
accrued from a load loss transaction shall be
treated as an amount collected from members for
the sole purpose of meeting losses and
expenses.
``(ii) For purposes of clause (i), the term
`load loss transaction' means any wholesale or
retail sale of electric energy (other than to
members) to the extent that the aggregate sales
during the recovery period do not exceed the
load loss mitigation sales limit for such
period.
``(iii) For purposes of clause (ii), the
load loss mitigation sales limit for the
recovery period is the sum of the annual load
losses for each year of such period.
``(iv) For purposes of clause (iii), a
mutual or cooperative electric company's annual
load loss for each year of the recovery period
is the amount (if any) by which--
``(I) the megawatt hours of
electric energy sold during such year
to members of such electric company are
less than
``(II) the megawatt hours of
electric energy sold during the base
year to such members.
``(v) For purposes of clause (iv)(II), the
term `base year' means--
``(I) the calendar year preceding
the start-up year, or
``(II) at the election of the
mutual or cooperative electric company,
the second or third calendar years
preceding the start-up year.
``(vi) For purposes of this subparagraph,
the recovery period is the 7-year period
beginning with the start-up year.
``(vii) For purposes of this subparagraph,
the start-up year is the first year that the
mutual or cooperative electric company offers
nondiscriminatory open access or the calendar
year which includes the date of the enactment
of this subparagraph, if later, at the election
of such company.
``(viii) A company shall not fail to be
treated as a mutual or cooperative electric
company for purposes of this paragraph or as a
corporation operating on a cooperative basis
for purposes of section 1381(a)(2)(C) by reason
of the treatment under clause (i).
``(ix) For purposes of subparagraph (A), in
the case of a mutual or cooperative electric
company, income received, or accrued,
indirectly from a member shall be treated as an
amount collected from members for the sole
purpose of meeting losses and expenses.
``(x) This subparagraph shall not apply to
taxable years beginning after December 31,
2006.''.
(c) Exception From Unrelated Business Taxable Income.--
Subsection (b) of section 512 (relating to modifications) is
amended by adding at the end the following new paragraph:
``(18) Treatment of mutual or cooperative electric
companies.--In the case of a mutual or cooperative
electric company described in section 501(c)(12), there
shall be excluded income which is treated as member
income under subparagraph (H) thereof.''.
(d) Cross Reference.--Section 1381 is amended by adding at
the end the following new subsection:
``(c) Cross Reference.--
``For treatment of income from load loss transactions of
organizations described in subsection (a)(2)(C), see section
501(c)(12)(H).''.
(e) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
SEC. 320. EXCLUSION FOR PAYMENTS TO INDIVIDUALS UNDER NATIONAL HEALTH
SERVICE CORPS LOAN REPAYMENT PROGRAM AND CERTAIN
STATE LOAN REPAYMENT PROGRAMS.
(a) In General.--Section 108(f) (relating to student loans)
is amended by adding at the end the following new paragraph:
``(4) Payments under national health service corps
loan repayment program and certain state loan repayment
programs.--In the case of an individual, gross income
shall not include any amount received under section
338B(g) of the Public Health Service Act or under a
State program described in section 338I of such Act.''.
(b) Treatment for Purposes of Employment Taxes.--Each of
the following provisions is amended by inserting ``108(f)(4),''
after ``74(c),'':
(1) Section 3121(a)(20).
(2) Section 3231(e)(5).
(3) Section 3306(b)(16).
(4) Section 3401(a)(19).
(5) Section 209(a)(17) of the Social Security Act.
(c) Effective Date.--The amendments made by this section
shall apply to amounts received by an individual in taxable
years beginning after December 31, 2003.
SEC. 321. MODIFICATION OF SAFE HARBOR RULES FOR TIMBER REITS.
(a) Expansion of Prohibited Transaction Safe Harbor.--
Section 857(b)(6) (relating to income from prohibited
transactions) is amended by redesignating subparagraphs (D) and
(E) as subparagraphs (E) and (F), respectively, and by
inserting after subparagraph (C) the following new
subparagraph:
``(D) Certain sales not to constitute
prohibited transactions.--For purposes of this
part, the term `prohibited transaction' does
not include a sale of property which is a real
estate asset (as defined in section
856(c)(5)(B)) if--
``(i) the trust held the property
for not less than 4 years in connection
with the trade or business of producing
timber,
``(ii) the aggregate expenditures
made by the trust, or a partner of the
trust, during the 4-year period
preceding the date of sale which--
``(I) are includible in the
basis of the property (other
than timberland acquisition
expenditures), and
``(II) are directly related
to operation of the property
for the production of timber or
for the preservation of the
property for use as timberland,
do not exceed 30 percent of the net
selling price of the property,
``(iii) the aggregate expenditures
made by the trust, or a partner of the
trust, during the 4-year period
preceding the date of sale which--
``(I) are includible in the
basis of the property (other
than timberland acquisition
expenditures), and
``(II) are not directly
related to operation of the
property for the production of
timber, or for the preservation
of the property for use as
timberland,
do not exceed 5 percent of the net
selling price of the property,
``(iv)(I) during the taxable year
the trust does not make more than 7
sales of property (other than sales of
foreclosure property or sales to which
section 1033 applies), or
``(II) the aggregate adjusted bases
(as determined for purposes of
computing earnings and profits) of
property (other than sales of
foreclosure property or sales to which
section 1033 applies) sold during the
taxable year does not exceed 10 percent
of the aggregate bases (as so
determined) of all of the assets of the
trust as of the beginning of the
taxable year,
``(v) in the case that the
requirement of clause (iv)(I) is not
satisfied, substantially all of the
marketing expenditures with respect to
the property were made through an
independent contractor (as defined in
section 856(d)(3)) from whom the trust
itself does not derive or receive any
income, and
``(vi) the sales price of the
property sold by the trust is not based
in whole or in part on income or
profits, including income or profits
derived from the sale or operation of
such property.''.
(b) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after the date of the
enactment of this Act.
SEC. 322. EXPENSING OF CERTAIN REFORESTATION EXPENDITURES.
(a) In General.--So much of subsection (b) of section 194
(relating to amortization of reforestation expenditures) as
precedes paragraph (2) is amended to read as follows:
``(b) Treatment as Expenses.--
``(1) Election to treat certain reforestation
expenditures as expenses.--
``(A) In general.--In the case of any
qualified timber property with respect to which
the taxpayer has made (in accordance with
regulations prescribed by the Secretary) an
election under this subsection, the taxpayer
shall treat reforestation expenditures which
are paid or incurred during the taxable year
with respect to such property as an expense
which is not chargeable to capital account. The
reforestation expenditures so treated shall be
allowed as a deduction.
``(B) Dollar limitation.--The aggregate
amount of reforestation expenditures which may
be taken into account under subparagraph (A)
with respect to each qualified timber property
for any taxable year shall not exceed $10,000
($5,000 in the case of a separate return by a
married individual (as defined in section
7703)).''.
(b) Net Amortizable Basis.--Section 194(c)(2) (defining
amortizable basis) is amended by inserting ``which have not
been taken into account under subsection (b)'' after
``expenditures''.
(c) Conforming Amendments.--
(1) Section 194(b) is amended by striking
paragraphs (3) and (4).
(2) Section 194(b)(2) is amended by striking
``paragraph (1)'' both places it appears and inserting
``paragraph (1)(B)''.
(3) Section 194(c) is amended by striking paragraph
(4) and inserting the following new paragraphs:
``(4) Treatment of trusts and estates.--
``(A) In general.--Except as provided in
subparagraph (B), this section shall not apply
to trusts and estates.
``(B) Amortization deduction allowed to
estates.--The benefit of the deduction for
amortization provided by subsection (a) shall
be allowed to estates in the same manner as in
the case of an individual. The allowable
deduction shall be apportioned between the
income beneficiary and the fiduciary under
regulations prescribed by the Secretary. Any
amount so apportioned to a beneficiary shall be
taken into account for purposes of determining
the amount allowable as a deduction under
subsection (a) to such beneficiary.
``(5) Application with other deductions.--No
deduction shall be allowed under any other provision of
this chapter with respect to any expenditure with
respect to which a deduction is allowed or allowable
under this section to the taxpayer.''.
(4) The heading for section 194 is amended by
striking ``AMORTIZATION'' and inserting ``TREATMENT''.
(5) The item relating to section 194 in the table
of sections for part VI of subchapter B of chapter 1 is
amended by striking ``Amortization'' and inserting
``Treatment''.
(d) Repeal of Reforestation Credit.--
(1) In general.--Section 46 (relating to amount of
credit) is amended--
(A) by adding ``and'' at the end of
paragraph (1),
(B) by striking ``, and'' at the end of
paragraph (2) and inserting a period, and
(C) by striking paragraph (3).
(2) Conforming amendments.--
(A) Section 48 is amended--
(i) by striking subsection (b),
(ii) by striking ``this
subsection'' in paragraph (5) of
subsection (a) and inserting
``subsection (a)'', and
(iii) by redesignating such
paragraph (5) as subsection (b).
(B) The heading for section 48 is amended
by striking ``; REFORESTATION CREDIT''.
(C) The item relating to section 48 in the
table of sections for subpart E of part IV of
subchapter A of chapter 1 is amended by
striking ``, reforestation credit''.
(D) Section 50(c)(3) is amended by striking
``or reforestation credit''.
(e) Effective Date.--The amendments made by this section
shall apply with respect to expenditures paid or incurred after
the date of the enactment of this Act.
Subtitle C--Incentives for Small Manufacturers
SEC. 331. NET INCOME 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) net 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. 332. 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 the date which is 30 days after the date of the
enactment of this Act.
SEC. 333. REDUCTION OF EXCISE TAX ON FISHING TACKLE BOXES.
(a) In General.--Subsection (a) of section 4161 (relating
to sport fishing equipment) is amended by redesignating
paragraph (3) as paragraph (4) and by inserting after paragraph
(2) the following new paragraph:
``(3) 3 percent rate of tax for tackle boxes.--In
the case of fishing tackle boxes, paragraph (1) shall
be applied by substituting `3 percent' for `10
percent'.''.
(b) Effective Date.--The amendments made this section shall
apply to articles sold by the manufacturer, producer, or
importer after December 31, 2004.
SEC. 334. 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. 335. 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.
``(4) Substantiation of expenses.--The Secretary
shall issue guidance requiring that the taxpayer
substantiate the whaling expenses for which a deduction
is claimed under this subsection, including by
maintaining appropriate written records with respect to
the time, place, date, amount, and nature of the
expense, as well as the taxpayer's eligibility for such
deduction, and that (to the extent provided by the
Secretary) such substantiation be provided as part of
the taxpayer's return of tax.''.
(b) Effective Date.--The amendments made by subsection (a)
shall apply to contributions made after December 31, 2004.
SEC. 336. 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. 337. MODIFICATION OF PLACED IN SERVICE RULE FOR BONUS DEPRECIATION
PROPERTY.
(a) In General.--Subclause (II) of section
168(k)(2)(E)(iii) (relating to syndication), as amended by the
Working Families Tax Relief Act of 2004 and as redesignated by
this Act, is amended by inserting before the comma at the end
the following: ``(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)''.
(b) Effective Date.--The amendment made by this section
shall apply to property sold after June 4, 2004.
SEC. 338. EXPENSING OF CAPITAL COSTS INCURRED IN COMPLYING WITH
ENVIRONMENTAL PROTECTION AGENCY SULFUR REGULATIONS.
(a) In General.--Part VI of subchapter B of chapter 1
(relating to itemized deductions for individuals and
corporations) is amended by inserting after section 179A the
following new section:
``SEC. 179B. DEDUCTION FOR CAPITAL COSTS INCURRED IN COMPLYING WITH
ENVIRONMENTAL PROTECTION AGENCY SULFUR REGULATIONS.
``(a) Allowance of Deduction.--In the case of a small
business refiner (as defined in section 45H(c)(1)) which elects
the application of this section, there shall be allowed as a
deduction an amount equal to 75 percent of qualified capital
costs (as defined in section 45H(c)(2)) which are paid or
incurred by the taxpayer during the taxable year.
``(b) Reduced Percentage.--In the case of a small business
refiner with average daily domestic refinery runs for the 1-
year period ending on December 31, 2002, in excess of 155,000
barrels, the number of percentage points described in
subsection (a) shall be reduced (not below zero) by the product
of such number (before the application of this subsection) and
the ratio of such excess to 50,000 barrels.
``(c) Basis Reduction.--
``(1) In general.--For purposes of this title, the
basis of any property shall be reduced by the portion
of the cost of such property taken into account under
subsection (a).
``(2) Ordinary income recapture.--For purposes of
section 1245, the amount of the deduction allowable
under subsection (a) with respect to any property which
is of a character subject to the allowance for
depreciation shall be treated as a deduction allowed
for depreciation under section 167.''.
``(d) Coordination With Other Provisions.--Section 280B
shall not apply to amounts which are treated as expenses under
this section.''.
(b) Conforming Amendments.--
(1) Section 263(a)(1), as amended by this Act, is
amended by striking ``or'' at the end of subparagraph
(G), by striking the period at the end of subparagraph
(H) and inserting ``, or'', and by adding at the end
the following new subparagraph:
``(I) expenditures for which a deduction is
allowed under section 179B.''.
(2) Section 263A(c)(3) is amended by inserting
``179B,'' after ``section''.
(3) Section 312(k)(3)(B) is amended by striking
``or 179A'' each place it appears in the heading and
text and inserting ``179A, or 179B''.
(4) Section 1016(a) is amended by striking ``and''
at the end of paragraph (28), by striking the period at
the end of paragraph (29) and inserting ``, and'', and
by inserting after paragraph (29) the following new
paragraph:
``(30) to the extent provided in section 179B(c).''
(5) Paragraphs (2)(C) and (3)(C) of section 1245(a)
are each amended by inserting ``179B,'' after
``179A,''.
(6) The table of sections for part VI of subchapter
B of chapter 1, as amended by this Act, is amended by
inserting after the item relating to section 179A the
following new item:
``Sec. 179B. Deduction for capital costs incurred in complying
with Environmental Protection Agency sulfur
regulations.''.
(c) Effective Date.--The amendment made by this section
shall apply to expenses paid or incurred after December 31,
2002, in taxable years ending after such date.
SEC. 339. CREDIT FOR PRODUCTION OF LOW SULFUR DIESEL FUEL.
(a) In General.--Subpart D of part IV of subchapter A of
chapter 1 (relating to business-related credits), as amended by
this Act, is amended by inserting after section 45G the
following new section:
``SEC. 45H. CREDIT FOR PRODUCTION OF LOW SULFUR DIESEL FUEL.
``(a) In General.--For purposes of section 38, the amount
of the low sulfur diesel fuel production credit determined
under this section with respect to any facility of a small
business refiner is an amount equal to 5 cents for each gallon
of low sulfur diesel fuel produced during the taxable year by
such small business refiner at such facility.
``(b) Maximum Credit.--
``(1) In general.--The aggregate credit determined
under subsection (a) for any taxable year with respect
to any facility shall not exceed--
``(A) 25 percent of the qualified capital
costs incurred by the small business refiner
with respect to such facility, reduced by
``(B) the aggregate credits determined
under this section for all prior taxable years
with respect to such facility.
``(2) Reduced percentage.--In the case of a small
business refiner with average daily domestic refinery
runs for the 1-year period ending on December 31, 2002,
in excess of 155,000 barrels, the number of percentage
points described in paragraph (1) shall be reduced (not
below zero) by the product of such number (before the
application of this paragraph) and the ratio of such
excess to 50,000 barrels.
``(c) Definitions and Special Rule.--For purposes of this
section--
``(1) Small business refiner.--The term `small
business refiner' means, with respect to any taxable
year, a refiner of crude oil--
``(A) with respect to which not more than
1,500 individuals are engaged in the refinery
operations of the business on any day during
such taxable year, and
``(B) the average daily domestic refinery
run or average retained production of which for
all facilities of the taxpayer for the 1-year
period ending on December 31, 2002, did not
exceed 205,000 barrels.
``(2) Qualified capital costs.--The term `qualified
capital costs' means, with respect to any facility,
those costs paid or incurred during the applicable
period for compliance with the applicable EPA
regulations with respect to such facility, including
expenditures for the construction of new process
operation units or the dismantling and reconstruction
of existing process units to be used in the production
of low sulfur diesel fuel, associated adjacent or
offsite equipment (including tankage, catalyst, and
power supply), engineering, construction period
interest, and sitework.
``(3) Applicable epa regulations.--The term
`applicable EPA regulations' means the Highway Diesel
Fuel Sulfur Control Requirements of the Environmental
Protection Agency.
``(4) Applicable period.--The term `applicable
period' means, with respect to any facility, the period
beginning on January 1, 2003, and ending on the earlier
of the date which is 1 year after the date on which the
taxpayer must comply with the applicable EPA
regulations with respect to such facility or December
31, 2009.
``(5) Low sulfur diesel fuel.--The term `low sulfur
diesel fuel' means diesel fuel with a sulfur content of
15 parts per million or less.
``(d) Reduction in Basis.--For purposes of this subtitle,
if a credit is determined under this section for any
expenditure with respect to any property, the increase in basis
of such property which would (but for this subsection) result
from such expenditure shall be reduced by the amount of the
credit so determined.
``(e) Special Rule for Determination of Refinery Runs.--For
purposes this section and section 179B(b), in the calculation
of average daily domestic refinery run or retained production,
only refineries which on April 1, 2003, were refineries of the
refiner or a related person (within the meaning of section
613A(d)(3)), shall be taken into account.
``(f) Certification.--
``(1) Required.--No credit shall be allowed unless,
not later than the date which is 30 months after the
first day of the first taxable year in which the low
sulfur diesel fuel production credit is determined with
respect to a facility, the small business refiner
obtains certification from the Secretary, after
consultation with the Administrator of the
Environmental Protection Agency, that the taxpayer's
qualified capital costs with respect to such facility
will result in compliance with the applicable EPA
regulations.
``(2) Contents of application.--An application for
certification shall include relevant information
regarding unit capacities and operating characteristics
sufficient for the Secretary, after consultation with
the Administrator of the Environmental Protection
Agency, to determine that such qualified capital costs
are necessary for compliance with the applicable EPA
regulations.
``(3) Review period.--Any application shall be
reviewed and notice of certification, if applicable,
shall be made within 60 days of receipt of such
application. In the event the Secretary does not notify
the taxpayer of the results of such certification
within such period, the taxpayer may presume the
certification to be issued until so notified.
``(4) Statute of limitations.--With respect to the
credit allowed under this section--
``(A) the statutory period for the
assessment of any deficiency attributable to
such credit shall not expire before the end of
the 3-year period ending on the date that the
review period described in paragraph (3) ends
with respect to the taxpayer, and
``(B) 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.
``(g) Cooperative Organizations.--
``(1) Apportionment of credit.--
``(A) In general.--In the case of a
cooperative organization described in section
1381(a), any portion of the credit determined
under subsection (a) for the taxable year may,
at the election of the organization, be
apportioned among patrons eligible to share in
patronage dividends on the basis of the
quantity or value of business done with or for
such patrons for the taxable year.
``(B) Form and effect of election.--An
election under subparagraph (A) for any taxable
year shall be made on a timely filed return for
such year. Such election, once made, shall be
irrevocable for such taxable year.
``(2) Treatment of organizations and patrons.--
``(A) Organizations.--The amount of the
credit not apportioned to patrons pursuant to
paragraph (1) shall be included in the amount
determined under subsection (a) for the taxable
year of the organization.
``(B) Patrons.--The amount of the credit
apportioned to patrons pursuant to paragraph
(1) shall be included in the amount determined
under subsection (a) for the first taxable year
of each patron ending on or after the last day
of the payment period (as defined in section
1382(d)) for the taxable year of the
organization or, if earlier, for the taxable
year of each patron ending on or after the date
on which the patron receives notice from the
cooperative of the apportionment.
``(3) Special rule.--If the amount of a credit
which has been apportioned to any patron under this
subsection is decreased for any reason--
``(A) such amount shall not increase the
tax imposed on such patron, and
``(B) the tax imposed by this chapter on
such organization shall be increased by such
amount.
The increase under subparagraph (B) shall not be
treated as tax imposed by this chapter for purposes of
determining the amount of any credit under this chapter
or for purposes of section 55.''.
(b) Credit Made Part of General Business Credit.--
Subsection (b) of section 38 (relating to general business
credit), as amended by this Act, is amended by striking
``plus'' at the end of paragraph (16), by striking the period
at the end of paragraph (17) and inserting ``, plus'', and by
inserting after paragraph (17) the following new paragraph:
``(18) the low sulfur diesel fuel production credit
determined under section 45H(a).''.
(c) Denial of Double Benefit.--Section 280C (relating to
certain expenses for which credits are allowable) is amended by
adding at the end the following new subsection:
``(d) Low Sulfur Diesel Fuel Production Credit.--No
deduction shall be allowed for that portion of the expenses
otherwise allowable as a deduction for the taxable year which
is equal to the amount of the credit determined for the taxable
year under section 45H(a).''.
(d) Basis Adjustment.--Section 1016(a) (relating to
adjustments to basis), as amended by this Act, is amended by
striking ``and'' at the end of paragraph (29), by striking the
period at the end of paragraph (30) and inserting ``, and'',
and by inserting after paragraph (30) the following new
paragraph:
``(31) in the case of a facility with respect to
which a credit was allowed under section 45H, to the
extent provided in section 45H(d).''.
(e) Deduction for Certain Unused Business Credits.--Section
196(c) (defining qualified business credits), as amended by
this Act, is amended by striking ``and'' at the end of
paragraph (10), by striking the period at the end of paragraph
(11) and inserting ``, and'', and by adding after paragraph
(11) the following new paragraph:
``(12) the low sulfur diesel fuel production credit
determined under section 45H(a).''.
(e) Clerical Amendment.--The table of sections for subpart
D of part IV of subchapter A of chapter 1, as amended by this
Act, is amended by inserting after the item relating to section
45G the following new item:
``Sec. 45H. Credit for production of low sulfur diesel fuel.''.
(f) Effective Date.--The amendments made by this section
shall apply to expenses paid or incurred after December 31,
2002, in taxable years ending after such date.
SEC. 340. EXPANSION OF QUALIFIED SMALL-ISSUE BOND PROGRAM.
(a) In General.--Section 144(a)(4) (relating to $10,000,000
limit in certain cases) is amended by adding at the end the
following new subparagraph:
``(G) Additional capital expenditures not
taken into account.--With respect to bonds
issued after September 30, 2009, in addition to
any capital expenditure described in
subparagraph (C), capital expenditures of not
to exceed $10,000,000 shall not be taken into
account for purposes of applying subparagraph
(A)(ii).''.
(b) Conforming Amendment.--Subparagraph (F) of section
144(a)(4) is amended by adding at the end the following new
sentence: ``This subparagraph shall not apply to bonds issued
after September 30, 2009.''.
SEC. 341. OIL AND GAS FROM MARGINAL WELLS.
(a) In General.--Subpart D of part IV of subchapter A of
chapter 1 (relating to business credits), as amended by this
Act, is amended by inserting after section 45H the following:
``SEC. 45I. CREDIT FOR PRODUCING OIL AND GAS FROM MARGINAL WELLS.
``(a) General Rule.--For purposes of section 38, the
marginal well production credit for any taxable year is an
amount equal to the product of--
``(1) the credit amount, and
``(2) the qualified credit oil production and the
qualified natural gas production which is attributable
to the taxpayer.
``(b) Credit Amount.--For purposes of this section--
``(1) In general.--The credit amount is--
``(A) $3 per barrel of qualified crude oil
production, and
``(B) 50 cents per 1,000 cubic feet of
qualified natural gas production.
``(2) Reduction as oil and gas prices increase.--
``(A) In general.--The $3 and 50 cents
amounts under paragraph (1) shall each be
reduced (but not below zero) by an amount which
bears the same ratio to such amount (determined
without regard to this paragraph) as--
``(i) the excess (if any) of the
applicable reference price over $15
($1.67 for qualified natural gas
production), bears to
``(ii) $3 ($0.33 for qualified
natural gas production).
The applicable reference price for a taxable
year is the reference price of the calendar
year preceding the calendar year in which the
taxable year begins.
``(B) Inflation adjustment.--In the case of
any taxable year beginning in a calendar year
after 2005, each of the dollar amounts
contained in subparagraph (A) shall be
increased to an amount equal to such dollar
amount multiplied by the inflation adjustment
factor for such calendar year (determined under
section 43(b)(3)(B) by substituting `2004' for
`1990').
``(C) Reference price.--For purposes of
this paragraph, the term `reference price'
means, with respect to any calendar year--
``(i) in the case of qualified
crude oil production, the reference
price determined under section
29(d)(2)(C), and
``(ii) in the case of qualified
natural gas production, the Secretary's
estimate of the annual average wellhead
price per 1,000 cubic feet for all
domestic natural gas.
``(c) Qualified Crude Oil and Natural Gas Production.--For
purposes of this section--
``(1) In general.--The terms `qualified crude oil
production' and `qualified natural gas production' mean
domestic crude oil or natural gas which is produced
from a qualified marginal well.
``(2) Limitation on amount of production which may
qualify.--
``(A) In general.--Crude oil or natural gas
produced during any taxable year from any well
shall not be treated as qualified crude oil
production or qualified natural gas production
to the extent production from the well during
the taxable year exceeds 1,095 barrels or
barrel-of-oil equivalents (as defined in
section 29(d)(5)).
``(B) Proportionate reductions.--
``(i) Short taxable years.--In the
case of a short taxable year, the
limitations under this paragraph shall
be proportionately reduced to reflect
the ratio which the number of days in
such taxable year bears to 365.
``(ii) Wells not in production
entire year.--In the case of a well
which is not capable of production
during each day of a taxable year, the
limitations under this paragraph
applicable to the well shall be
proportionately reduced to reflect the
ratio which the number of days of
production bears to the total number of
days in the taxable year.
``(3) Definitions.--
``(A) Qualified marginal well.--The term
`qualified marginal well' means a domestic
well--
``(i) the production from which
during the taxable year is treated as
marginal production under section
613A(c)(6), or
``(ii) which, during the taxable
year--
``(I) has average daily
production of not more than 25
barrel-of-oil equivalents (as
so defined), and
``(II) produces water at a
rate not less than 95 percent
of total well effluent.
``(B) Crude oil, etc.--The terms `crude
oil', `natural gas', `domestic', and `barrel'
have the meanings given such terms by section
613A(e).
``(d) Other Rules.--
``(1) Production attributable to the taxpayer.--In
the case of a qualified marginal well in which there is
more than one owner of operating interests in the well
and the crude oil or natural gas production exceeds the
limitation under subsection (c)(2), qualifying crude
oil production or qualifying natural gas production
attributable to the taxpayer shall be determined on the
basis of the ratio which taxpayer's revenue interest in
the production bears to the aggregate of the revenue
interests of all operating interest owners in the
production.
``(2) Operating interest required.--Any credit
under this section may be claimed only on production
which is attributable to the holder of an operating
interest.
``(3) Production from nonconventional sources
excluded.--In the case of production from a qualified
marginal well which is eligible for the credit allowed
under section 29 for the taxable year, no credit shall
be allowable under this section unless the taxpayer
elects not to claim the credit under section 29 with
respect to the well.''.
(b) Credit Treated as Business Credit.--Section 38(b), as
amended by this Act, is amended by striking ``plus'' at the end
of paragraph (17), by striking the period at the end of
paragraph (18) and inserting ``, plus'', and by inserting after
paragraph (18) the following:
``(19) the marginal oil and gas well production
credit determined under section 45I(a).''.
(c) Carryback.--Subsection (a) of section 39 (relating to
carryback and carryforward of unused credits generally) is
amended by adding at the end the following:
``(3) 5-year carryback for marginal oil and gas
well production credit.--Notwithstanding subsection
(d), in the case of the marginal oil and gas well
production credit--
``(A) this section shall be applied
separately from the business credit (other than
the marginal oil and gas well production
credit),
``(B) paragraph (1) shall be applied by
substituting `5 taxable years' for `1 taxable
years' in subparagraph (A) thereof, and
``(C) paragraph (2) shall be applied--
``(i) by substituting `25 taxable
years' for `21 taxable years' in
subparagraph (A) thereof, and
``(ii) by substituting `24 taxable
years' for `20 taxable years' in
subparagraph (B) thereof.''.
(d) Clerical Amendment.--The table of sections for subpart
D of part IV of subchapter A of chapter 1, as amended by this
Act, is amended by inserting after section 45H the following:
``Sec. 45I. Credit for producing oil and gas from marginal
wells.''.
(e) Effective Date.--The amendments made by this section
shall apply to production in taxable years beginning after
December 31, 2004.
TITLE IV--TAX REFORM AND SIMPLIFICATION FOR UNITED STATES BUSINESSES
SEC. 401. 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)(D)(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) Anti-abuse 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. 402. 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. 403. 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 from a taxable year
beginning on or after January 1, 2003,
to a taxable year beginning before such
date for purposes of allocating such
dividend among the separate categories
in effect for the taxable year to which
carried.''.
(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. 404. 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), as amended by section 403(b)(3), 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) 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.--
``(i) In general.--In the case of
taxable years beginning after December
31, 2006, 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).
``(ii) Special rule for years
before 2007.--
``(I) In general.--In the
case of taxes paid or accrued
in taxable years beginning
after December 31, 2004, and
before January 1, 2007, a
taxpayer may elect to treat 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 as tax
imposed on income described in
subparagraph (C) or (I) of
paragraph (1).
``(II) Election
irrevocable.--Any such election
shall apply to the taxable year
for which made and all
subsequent taxable years
described in subclause (I)
unless revoked with the consent
of the Secretary.''.
(f) 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 and amended by
section 404(b)(3), 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) 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 from a taxable year beginning
on or after January 1, 2007, to a
taxable year beginning before such date
for purposes of allocating such income
among the separate categories in effect
for the taxable year to which
carried.''.
(6) Section 904(j)(3)(A)(i) is amended by striking
``subsection (d)(2)(A)'' and inserting ``subsection
(d)(2)(B)''.
(g) Effective Dates.--
(1) In general.--The amendments made by this
section shall apply to taxable years beginning after
December 31, 2006.
(2) Transitional rule relating to income tax base
difference.--Section 904(d)(2)(H)(ii) of the Internal
Revenue Code of 1986, as added by subsection (e), shall
apply to taxable years beginning after December 31,
2004.
SEC. 405. 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. 406. 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. 407. 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. 408. TRANSLATION OF FOREIGN TAXES.
(a) Elective Exception for Taxes Paid Other Than in
Functional Currency.--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) Special Rule for Regulated Investment Companies.--
(1) In general.--Section 986(a)(1), as amended by
subsection (a), is amended by redesignating
subparagraph (E) as subparagraph (F) and by inserting
after subparagraph (D) the following:
``(E) Special rule for regulated investment
companies.--In the case of a regulated
investment company which takes into account
income on an accrual basis, subparagraphs (A)
through (D) shall not apply and foreign income
taxes paid or accrued with respect to such
income shall be translated into dollars using
the exchange rate as of the date the income
accrues.''.
(2) Conforming amendment.--Section 986(a)(2) is
amended by inserting ``or (E)'' after ``subparagraph
(A)''.
(c) Effective Date.--The amendments made by this section
shall apply to taxable years beginning after December 31, 2004.
SEC. 409. 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. 410. EQUAL TREATMENT OF 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. 411. 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, the term `interest-
related dividend' means 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. Such
term shall not include any dividend with
respect to any taxable year of the company
beginning after December 31, 2007.
``(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, the term
`short-term capital gain dividend' means 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. Such term shall
not include any dividend with respect to any
taxable year of the company beginning after
December 31, 2007.
``(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 (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.
``(3) Termination.--This subsection shall not apply
to estates of decedents dying after December 31,
2007.''
(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.--
``(i) In general.--The term
`qualified investment entity' means--
``(I) any real estate
investment trust, and
``(II) any regulated
investment company.
``(ii) Termination.--Clause (i)(II)
shall not apply after December 31,
2007.
``(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. 412. LOOK-THRU TREATMENT FOR SALES OF PARTNERSHIP INTERESTS.
(a) In General.--Section 954(c) (defining foreign personal
holding company income) is amended by adding after paragraph
(3) the following new paragraph:
``(4) 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. 413. 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) 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''.
(3) Paragraph (2) of section 245(a) is amended by
striking ``foreign personal holding company or''.
(4) Section 312 is amended by striking subsection
(j).
(5) 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)''.
(6) Subsection (e) of section 443 is amended by
striking paragraph (3) and by redesignating paragraphs
(4) and (5) as paragraphs (3) and (4), respectively.
(7) 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).
(8) 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).
(9) Paragraph (1) of section 562(b) is amended by
striking ``or a foreign personal holding company
described in section 552''.
(10) 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)''.
(11) 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)''.
(12) 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.
(13)(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.''.
(14) 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).''.
(15)(A) Subparagraph (A) of section 904(h)(1), as
redesignated by this Act, 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''.
(16) Section 951 is amended by striking subsections
(c) and (d) and by redesignating subsections (e) and
(f) as subsections (c) and (d), respectively.
(17) Paragraph (3) of section 989(b) is amended by
striking ``, 551(a),''.
(18) Paragraph (5) of section 1014(b) is amended by
inserting ``and before January 1, 2005,'' after
``August 26, 1937,''.
(19) Subsection (a) of section 1016 is amended by
striking paragraph (13).
(20)(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.
(21) Section 1223 is amended by striking paragraph
(10) and by redesignating the following paragraphs
accordingly.
(22) Subsection (d) of section 1248 is amended by
striking paragraph (5) and by redesignating paragraphs
(6) and (7) as paragraphs (5) and (6), respectively.
(23) Paragraph (2) of section 1260(c) is amended by
striking subparagraphs (H) and (I) and by redesignating
subparagraph (J) as subparagraph (H).
(24)(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''.
(25) 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.''.
(26) Section 6035 is hereby repealed.
(27) 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.
(28) 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.''.
(29) 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).
(30) Sections 170(f)(10)(A), 508(d), 4947, and
4948(c)(4) are each amended by striking ``556(b)(2),''
each place it appears.
(31) The table of parts for subchapter G of chapter
1 is amended by striking the item relating to part III.
(32) 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.
(33) 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)(27).--The amendments made by
subsection (c)(27) shall apply to disclosures of return
or return information with respect to taxable years
beginning after December 31, 2004.
SEC. 414. 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, as amended by this Act, is amended by adding after
paragraph (4) the following new paragraph:
``(5) 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. 415. 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. 416. 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.
SEC. 417. 10-YEAR FOREIGN TAX CREDIT CARRYOVER; 1-YEAR FOREIGN TAX
CREDIT CARRYBACK.
(a) General Rule.--Section 904(c) (relating to carryback
and carryover of excess tax paid) is amended--
(1) by striking ``in the second preceding taxable
year,'', and
(2) by striking ``, and in the first, second,
third, fourth, or fifth'' and inserting ``and in any of
the first 10''.
(b) Excess Extraction Taxes.--Paragraph (1) of section
907(f) is amended--
(1) by striking ``in the second preceding taxable
year,'',
(2) by striking ``, and in the first, second,
third, fourth, or fifth'' and inserting ``and in any of
the first 10'', and
(3) by striking the last sentence.
(c) Effective Date.--
(1) Carryback.--The amendments made by subsections
(a)(1) and (b)(1) shall apply to excess foreign taxes
arising in taxable years beginning after the date of
the enactment of this Act.
(2) Carryover.--The amendments made by subsections
(a)(2) and (b)(2) shall apply to excess foreign taxes
which (without regard to the amendments made by this
section) may be carried to any taxable year ending
after the date of the enactment of this Act.
SEC. 418. MODIFICATION OF THE TREATMENT OF CERTAIN REIT DISTRIBUTIONS
ATTRIBUTABLE TO GAIN FROM SALES OR EXCHANGES OF
UNITED STATES REAL PROPERTY INTERESTS.
(a) In General.--Paragraph (1) of section 897(h) (relating
to look-through of distributions) is amended by adding at the
end the following new sentence: ``Notwithstanding the preceding
sentence, any distribution by a REIT with respect to any class
of stock which is regularly traded on an established securities
market located in the United States shall not be treated as
gain recognized from the sale or exchange of a United States
real property interest if the shareholder did not own more than
5 percent of such class of stock at any time during the taxable
year.''.
(b) Conforming Amendment.--Paragraph (3) of section 857(b)
(relating to capital gains) is amended by adding at the end the
following new subparagraph:
``(F) Certain distributions.--In the case
of a shareholder of a real estate investment
trust to whom section 897 does not apply by
reason of the second sentence of section
897(h)(1), the amount which would be included
in computing long-term capital gains for such
shareholder under subparagraph (B) or (D)
(without regard to this subparagraph)--
``(i) shall not be included in
computing such shareholder's long-term
capital gains, and
``(ii) shall be included in such
shareholder's gross income as a
dividend from the real estate
investment trust.''.
(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. 419. EXCLUSION OF INCOME DERIVED FROM CERTAIN WAGERS ON HORSE
RACES AND DOG RACES FROM GROSS INCOME OF
NONRESIDENT ALIEN INDIVIDUALS.
(a) In General.--Subsection (b) of section 872 (relating to
exclusions) is amended by redesignating paragraphs (5), (6),
and (7) as paragraphs (6), (7), and (8), respectively, and
inserting after paragraph (4) the following new paragraph:
``(5) Income derived from wagering transactions in
certain parimutuel pools.--Gross income derived by a
nonresident alien individual from a legal wagering
transaction initiated outside the United States in a
parimutuel pool with respect to a live horse race or
dog race in the United States.''.
(b) Conforming Amendment.--Section 883(a)(4) is amended by
striking ``(5), (6), and (7)'' and inserting ``(6), (7), and
(8)''.
(c) Effective Date.--The amendments made by this section
shall apply to wagers made after the date of the enactment of
this Act.
SEC. 420. LIMITATION OF WITHHOLDING TAX FOR PUERTO RICO CORPORATIONS.
(a) In General.--Subsection (b) of section 881 is amended
by redesignating paragraph (2) as paragraph (3) and by
inserting after paragraph (1) the following new paragraph:
``(2) Commonwealth of puerto rico.--
``(A) In general.--If dividends are
received during a taxable year by a
corporation--
``(i) created or organized in, or
under the law of, the Commonwealth of
Puerto Rico, and
``(ii) with respect to which the
requirements of subparagraphs (A), (B),
and (C) of paragraph (1) are met for
the taxable year,
subsection (a) shall be applied for such
taxable year by substituting `10 percent' for
`30 percent'.
``(B) Applicability.--If, on or after the
date of the enactment of this paragraph, an
increase in the rate of the Commonwealth of
Puerto Rico's withholding tax which is
generally applicable to dividends paid to
United States corporations not engaged in a
trade or business in the Commonwealth to a rate
greater than 10 percent takes effect, this
paragraph shall not apply to dividends received
on or after the effective date of the
increase.''.
(b) Withholding.--Subsection (c) of section 1442 (relating
to withholding of tax on foreign corporations) is amended--
(1) by striking ``For purposes'' and inserting the
following:
``(1) Guam, american samoa, the northern mariana
islands, and the virgin islands.--For purposes'', and
(2) by adding at the end the following new
paragraph:
``(2) Commonwealth of puerto rico.--
``(A) In general.--If dividends are
received during a taxable year by a
corporation--
``(i) created or organized in, or
under the law of, the Commonwealth of
Puerto Rico, and
``(ii) with respect to which the
requirements of subparagraphs (A), (B),
and (C) of section 881(b)(1) are met
for the taxable year,
subsection (a) shall be applied for such
taxable year by substituting `10 percent' for
`30 percent'.
``(B) Applicability.--If, on or after the
date of the enactment of this paragraph, an
increase in the rate of the Commonwealth of
Puerto Rico's withholding tax which is
generally applicable to dividends paid to
United States corporations not engaged in a
trade or business in the Commonwealth to a rate
greater than 10 percent takes effect, this
paragraph shall not apply to dividends received
on or after the effective date of the
increase.''.
(c) Conforming Amendments.--
(1) Subsection (b) of section 881 is amended by
striking ``Guam and Virgin Islands Corporations'' in
the heading and inserting ``Possessions''.
(2) Paragraph (1) of section 881(b) is amended by
striking ``In general'' in the heading and inserting
``Guam, american samoa, the northern mariana islands,
and the virgin islands''.
(d) Effective Date.--The amendments made by this section
shall apply to dividends paid after the date of the enactment
of this Act.
SEC. 421. 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. 422. 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 and for which the
election under this section is in effect for the
taxable year, there shall be allowed as a deduction an
amount equal to 85 percent of the cash dividends which
are received during such taxable year by such
shareholder from controlled foreign corporations.
``(2) Dividends paid indirectly from controlled
foreign corporations.--If, within the taxable year for
which the election under this section is in effect, a
United States shareholder receives a cash 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 cash 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 cash
dividend during such taxable year 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 cash distributions
described in section 959(b) which are made
during such taxable year 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 equal
to the amount of such liability divided by
0.35.
The amounts described in subparagraphs (B) and (C)
shall be treated as being zero if there is no such
statement or such statement fails to show a specific
amount of such earnings or liability, as the case may
be.
``(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 controlled foreign
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 controlled
foreign corporations, and
``(iii) the amounts that would have
been included for each base period year
but for section 959(a) with respect to
controlled foreign 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. Amounts described in subparagraph (B) for
any base period year shall be such amounts as
shown on the most recent return filed for such
year; except that amended returns filed after
June 30, 2003, shall not be taken into account.
``(3) Reduction of benefit if increase in related
party indebtedness.--The amount of dividends which
would (but for this paragraph) be taken into account
under subsection (a) shall be reduced by the excess (if
any) of--
``(A) the amount of indebtedness of the
controlled foreign corporation to any related
person (as defined in section 954(d)(3)) as of
the close of the taxable year for which the
election under this section is in effect, over
``(B) the amount of indebtedness of the
controlled foreign corporation to any related
person (as so defined) as of the close of
October 3, 2004.
All controlled foreign corporations with respect to
which the taxpayer is a United States shareholder shall
be treated as 1 controlled foreign corporation for
purposes of this paragraph.
``(4) 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
domestic reinvestment plan which--
``(A) is approved by the taxpayer's
president, chief executive officer, or
comparable official before the payment of such
dividend and subsequently approved by the
taxpayer's board of directors, management
committee, executive committee, or similar
body, and
``(B) provides for the reinvestment of such
dividend in the United States (other than as
payment for executive compensation), including
as a source for the funding of worker hiring
and training, infrastructure, research and
development, capital investments, or the
financial stabilization of the corporation for
the purposes of job retention or creation.
``(c) Definitions and Special Rules.--For purposes of this
section--
``(1) Applicable financial statement.--The term
`applicable financial statement' means, with respect to
a United States shareholder, the most recently audited
financial statement (including notes and other
documents which accompany such statement) which
includes such shareholder--
``(A) which is certified on or before June
30, 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 June 30, 2003.
``(2) Base period years.--
``(A) In general.--The base period years
are the 3 taxable years--
``(i) which are among the 5 most
recent taxable years ending on or
before June 30, 2003, and
``(ii) 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.
``(B) Shorter period.--If the taxpayer has
fewer than 5 taxable years ending on or before
June 30, 2003, then in lieu of applying
subparagraph (A), the base period years shall
include all the taxable years of the taxpayer
ending on or before June 30, 2003.
``(C) Mergers, acquisitions, etc.--
``(i) In general.--Rules similar to
the rules of subparagraphs (A) and (B)
of section 41(f)(3) shall apply for
purposes of this paragraph.
``(ii) Spin-offs, etc.--If there is
a distribution to which section 355 (or
so much of section 356 as relates to
section 355) applies during the 5-year
period referred to in subparagraph
(A)(i) and the controlled corporation
(within the meaning of section 355) is
a United States shareholder--
``(I) the controlled
corporation shall be treated as
being in existence during the
period that the distributing
corporation (within the meaning
of section 355) is in
existence, and
``(II) for purposes of
applying subsection (b)(2) to
the controlled corporation and
the distributing corporation,
amounts described in subsection
(b)(2)(B) which are received or
includible by the distributing
corporation or controlled
corporation (as the case may
be) before the distribution
referred to in subclause (I)
from a controlled foreign
corporation shall be allocated
between such corporations in
proportion to their respective
interests as United States
shareholders of such controlled
foreign corporation immediately
after such distribution.
Subclause (II) shall not apply if
neither the controlled corporation nor
the distributing corporation is a
United States shareholder of such
controlled foreign corporation
immediately after such distribution.
``(3) Dividend.--The term `dividend' shall not
include amounts includible in gross income as a
dividend under section 78, 367, or 1248. In the case of
a liquidation under section 332 to which section 367(b)
applies, the preceding sentence shall not apply to the
extent the United States shareholder actually receives
cash as part of the liquidation.
``(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.
``(5) Controlled groups.--
``(A) In general.--All United States
shareholders which are members of an affiliated
group filing a consolidated return under
section 1501 shall be treated as one United
States shareholder.
``(B) Application of $500,000,000 limit.--
All corporations which are treated as a single
employer under section 52(a) shall be limited
to one $500,000,000 amount in subsection
(b)(1)(A), and such amount shall be divided
among such corporations under regulations
prescribed by the Secretary.
``(C) Permanently reinvested earnings.--If
a financial statement is an applicable
financial statement for more than 1 United
States shareholder, the amount applicable under
subparagraph (B) or (C) of subsection (b)(1)
shall be divided among such shareholders under
regulations prescribed by the Secretary.
``(d) Denial of Foreign Tax Credit; Denial of Certain
Expenses.--
``(1) Foreign tax credit.--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--
``(A) any dividend, or
``(B) any amount described in subsection
(a)(2) which is included in income under
section 951(a)(1)(A).
No deduction shall be allowed under this chapter for
any tax for which credit is not allowable by reason of
the preceding sentence.
``(2) Expenses.--No deduction shall be allowed for
expenses properly allocated and apportioned to the
deductible portion described in paragraph (1).
``(3) Deductible portion.--For purposes of
paragraph (1), unless the taxpayer otherwise specifies,
the deductible portion of any dividend or other amount
is the amount which bears the same ratio to the amount
of such dividend or other amount 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) Limitation on reduction in taxable income,
etc.--
``(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.--The taxpayer may elect to apply this
section to--
``(1) the taxpayer's last taxable year which begins
before the date of the enactment of this section, or
``(2) the taxpayer's first taxable year which
begins during the 1-year period beginning on such date.
Such election may be made for a taxable year only if made
before the due date (including extensions) for filing the
return of tax for such taxable year.''
(b) Alternative Minimum Tax.--Subparagraph (C) of section
56(g)(4) is amended by inserting after clause (v) the following
new clause:
``(vi) 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.
SEC. 423. DELAY IN EFFECTIVE DATE OF FINAL REGULATIONS GOVERNING
EXCLUSION OF INCOME FROM INTERNATIONAL OPERATION OF
SHIPS OR AIRCRAFT.
Notwithstanding the provisions of Treasury regulation
Sec. 1.883-5, the final regulations issued by the Secretary of
the Treasury relating to income derived by foreign corporations
from the international operation of ships or aircraft (Treasury
regulations Sec. 1.883-1 through Sec. 1.883-5) shall apply to
taxable years of a foreign corporation seeking qualified
foreign corporation status beginning after September 24, 2004.
SEC. 424. STUDY OF EARNINGS STRIPPING PROVISIONS.
(a) In General.--The Secretary of the Treasury or the
Secretary's delegate shall conduct a study of the effectiveness
of the provisions of the Internal Revenue Code of 1986
applicable to earnings stripping, including a study of--
(1) the effectiveness of section 163(j) of such
Code in preventing the shifting of income outside the
United States,
(2) whether any deficiencies of such provisions
place United States-based businesses at a competitive
disadvantage relative to foreign-based businesses,
(3) the impact of earnings stripping activities on
the United States tax base,
(4) whether laws of foreign countries facilitate
stripping of earnings out of the United States, and
(5) whether changes to the earning stripping rules
would affect jobs in the United States.
(b) Report.--Not later than June 30, 2005, the Secretary
shall submit to the Congress a report of the study conducted
under this section, including specific recommendations as to
how to improve the provisions of such Code applicable to
earnings stripping.
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 may be determined
under tables.--
``(i) In general.--At the election
of the taxpayer for the taxable year,
the amount of the deduction allowed
under this paragraph for such year
shall be--
``(I) the amount determined
under this paragraph (without
regard to this subparagraph)
with respect to motor vehicles,
boats, and other items
specified by the Secretary, and
``(II) the amount
determined under tables
prescribed by the Secretary
with respect to items to which
subclause (I) does not apply.
``(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) of items to which
clause (i)(I) does not apply,
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--FAIR AND EQUITABLE TOBACCO REFORM
SEC. 601. SHORT TITLE.
This title may be cited as the ``Fair and Equitable Tobacco
Reform Act of 2004''.
Subtitle A--Termination of Federal Tobacco Quota and Price Support
Programs
SEC. 611. 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) Tobacco Inspections.--Section 213 of the Tobacco
Adjustment Act of 1983 (7 U.S.C. 511r) is repealed.
(c) Tobacco Control.--The Act of April 25, 1936 (commonly
known as the Tobacco Control Act; 7 U.S.C. 515 et seq.), is
repealed.
(d) Processing Tax.--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,''.
(e) Declaration of Policy.--Section 2 of the Agricultural
Adjustment Act of 1938 (7 U.S.C. 1282) is amended by striking
``tobacco,''.
(f) 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).
(g) 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,''.
(h) Administrative Provisions.--Section 361 of the
Agricultural Adjustment Act of 1938 (7 U.S.C. 1361) is amended
by striking ``tobacco,''.
(i) 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''.
(j) Reports and Records.--Section 373 of the Agricultural
Adjustment Act of 1938 (7 U.S.C. 1373) is amended--
(1) by striking ``rice, or tobacco'' each place it
appears in subsections (a) and (b) and inserting ``or
rice''; and
(2) in subsection (a)--
(A) in the first sentence, by striking
``all persons engaged in the business of
redrying, prizing, or stemming tobacco for
producers,''; and
(B) in the last sentence, by striking
``$500;'' and all that follows through the
period at the end of the sentence and inserting
``$500.''.
(k) 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).
(l) 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).
(m) 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).
(n) Acreage-Poundage Quotas.--Section 4 of the Act of April
16, 1955 (Public Law 89-12; 7 U.S.C. 1314c note), is repealed.
(o) Burley Tobacco Acreage Allotments.--The Act of July 12,
1952 (7 U.S.C. 1315), is repealed.
(p) Transfer of Allotments.--Section 703 of the Food and
Agriculture Act of 1965 (7 U.S.C. 1316) is repealed.
(q) 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''.
(r) Tobacco Field Measurement.--Section 1112 of the Omnibus
Budget Reconciliation Act of 1987 (Public Law 100-203; 101
Stat. 1330-8) is amended by striking subsection (c).
(s) Burley Tobacco Import Review.--Section 3 of Public Law
98-59 (7 U.S.C. 625) is repealed.
SEC. 612. 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. 613. CONFORMING AMENDMENTS.
Section 320B(c)(1) of the Agricultural Adjustment Act of
1938 (7 U.S.C. 1314h(c)(1)) is amended--
(1) by inserting ``(A)'' after ``(1)'';
(2) by striking ``by'' at the end and inserting
``or''; and
(3) by adding at the end the following:
``(B) in the case of the 2004 marketing year, the
price support rate for the kind of tobacco involved in
effect under section 106 of the Agricultural Act of
1949 (7 U.S.C. 1445) at the time of the violation;
by''.
SEC. 614. CONTINUATION OF LIABILITY FOR 2004 AND EARLIER CROP YEARS.
The amendments made by this subtitle shall not affect the
liability of any person under any provision of law so amended
with respect to the 2004 or an earlier crop of each kind of
tobacco.
Subtitle B--Transitional Payments to Tobacco Quota Holders and
Producers of Tobacco
SEC. 621. DEFINITIONS.
In this subtitle and subtitle C:
(1) Agricultural act of 1949.--The term
``Agricultural Act of 1949'' means the Agricultural Act
of 1949 (7 U.S.C. 1421 et seq.), as in effect on the
day before the date of the enactment of this title.
(2) Agricultural adjustment act of 1938.--The term
``Agricultural Adjustment Act of 1938'' means the
Agricultural Adjustment Act of 1938 (7 U.S.C. 1281 et
seq.), as in effect on the day before the date of the
enactment of this title.
(3) 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.
(4) Contract.--The term ``contract'' means a
contract entered into under section 622 or 623.
(5) Contract payment.--The term ``contract
payment'' means a payment made under section 622 or 623
pursuant to a contract.
(6) Producer of quota tobacco.--The term ``producer
of quota tobacco'' means an owner, operator, landlord,
tenant, or sharecropper that shared in the risk of
producing tobacco on a farm where tobacco was produced
or considered planted pursuant to a tobacco farm
poundage 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.).
(7) Quota tobacco.--The term ``quota tobacco''
means a kind of tobacco that is subject to a farm
marketing quota or farm acreage allotment for the 2004
tobacco marketing year under a marketing quota or
allotment program established under part I of subtitle
B of title III of the Agricultural Adjustment Act of
1938 (7 U.S.C. 1311 et seq.).
(8) Tobacco.--The term ``tobacco'' means each of
the following kinds of tobacco:
(A) Flue-cured tobacco, comprising types
11, 12, 13, and 14.
(B) Fire-cured tobacco, comprising types 22
and 23.
(C) Dark air-cured tobacco, comprising
types 35 and 36.
(D) Virginia sun-cured tobacco, comprising
type 37.
(E) Virginia fire-cured tobacco, comprising
type 21.
(F) Burley tobacco, comprising type 31.
(G) Cigar-filler and cigar-binder tobacco,
comprising types 42, 43, 44, 53, 54, and 55.
(9) Tobacco quota holder.--The term ``tobacco quota
holder'' means a person that was an owner of a farm, as
of the date of enactment of this title, for which a
basic tobacco farm marketing quota or farm acreage
allotment for quota tobacco was established for the
2004 tobacco marketing year.
(10) Tobacco trust fund.--The term ``Tobacco Trust
Fund'' means the Tobacco Trust Fund established under
section 626.
(11) Secretary.--The term ``Secretary'' means the
Secretary of Agriculture.
SEC. 622. CONTRACT PAYMENTS TO TOBACCO QUOTA HOLDERS.
(a) Contract Offered.--The Secretary shall offer to enter
into a contract with each tobacco quota holder under which the
tobacco quota holder shall be entitled to receive payments
under this section in exchange for the termination of tobacco
marketing quotas and related price support under the amendments
made by sections 611 and 612. The contract payments shall
constitute full and fair consideration for the termination of
such tobacco marketing quotas and related price support.
(b) Eligibility.--To be eligible to enter into a contract
to receive a contract 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 is a tobacco
quota holder. The application shall be submitted within such
time, in such form, and in such manner as the Secretary may
require.
(c) Base Quota Level.--
(1) Establishment.--The Secretary shall establish a
base quota level applicable to each 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 quota for quota tobacco established for the
2002 tobacco marketing year under a marketing quota
program established under part I of subtitle B of title
III of the Agriculture Adjustment Act of 1938 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 quantity equal
to the product obtained by multiplying--
(A) the basic tobacco farm marketing quota
or allotment for the 2002 marketing year
established by the Secretary for quota tobacco
owned by the tobacco quota holder; by
(B) the average production yield, per acre,
for the period covering the 2001, 2002, and
2003 crop years for that kind of tobacco in the
county in which the quota tobacco is located.
(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 title, and the parties to the sale
are unable to agree to the disposition of eligibility
for contract payments, the Secretary, taking into
account any transfer of quota that has been agreed to,
shall provide for the equitable division of the
contract payments among the parties by adjusting the
determination of who is the tobacco quota holder with
respect to particular pounds or allotment 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 title, 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) Contract Payments.--
(1) Calculation of total payment amount.--The total
amount of contract payments to which an eligible
tobacco quota holder is entitled under this section,
with respect to a kind of tobacco, shall be equal to
the product obtained by multiplying--
(A) $7.00 per pound; by
(B) the base quota level of the tobacco
quota holder determined under subsection (c)
with respect to that kind of tobacco.
(2) Annual payment.--During each of fiscal years
2005 through 2014, the Secretary shall make a contract
payment under this section to each eligible tobacco
quota holder, with respect to a kind of tobacco, in an
amount equal to \1/10\ of the amount determined under
paragraph (1) for the tobacco quota holder for that
kind of tobacco.
(f) Death of Tobacco Quota Holder.--If a tobacco quota
holder who is entitled to contract 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. 623. CONTRACT PAYMENTS FOR PRODUCERS OF QUOTA TOBACCO.
(a) Contract Offered.--The Secretary shall offer to enter
into a contract with each producer of quota tobacco under which
the producer of quota tobacco shall be entitled to receive
payments under this section in exchange for the termination of
tobacco marketing quotas and related price support under the
amendments made by sections 611 and 612. The contract payments
shall constitute full and fair consideration for the
termination of such tobacco marketing quotas and related price
support.
(b) Eligibility.--
(1) Application and determination.--To be eligible
to enter into a contract to receive a contract 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 is a
producer of quota tobacco. The application shall be
submitted within such time, in such form, and in such
manner as the Secretary may require.
(2) Effect of Multiple Producers for Same Quota
Tobacco.--If, on the basis of the applications
submitted under paragraph (1) or other information, the
Secretary determines that two or more persons are a
producer of the same quota tobacco, the Secretary shall
provide for an equitable distribution among the persons
of the contract payments made under this section with
respect to that quota tobacco, based on relative share
of such persons in the risk of producing the quota
tobacco and such other factors as the Secretary
considers appropriate.
(c) Base Quota Level.--
(1) Establishment.--The Secretary shall establish a
base quota level applicable to each producer of quota
tobacco, as determined under this subsection.
(2) Flue-cured and burley tobacco.--In the case of
Flue-cured tobacco (types 11, 12, 13, and 14) and
Burley tobacco (type 31), the base quota level for each
producer of quota tobacco shall be equal to the
effective tobacco marketing quota (irrespective of
disaster lease and transfers) under part I of subtitle
B of title III of the Agriculture Adjustment Act of
1938 for the 2002 marketing year for quota tobacco
produced on the farm.
(3) Other kinds of tobacco.--In the case of each
kind of tobacco (other than tobacco covered by
paragraph (2)), for the purpose of calculating a
contract payment to a producer of quota tobacco, the
base quota level for the producer of quota tobacco
shall be the quantity obtained by multiplying--
(A) the basic tobacco farm acreage
allotment for the 2002 marketing year
established by the Secretary for quota tobacco
produced on the farm; by
(B) the average annual yield, per acre, of
quota tobacco produced on the farm for the
period covering the 2001, 2002, and 2003 crop
years.
(d) Contract Payments.--
(1) Calculation of total payment amount.--Subject
to subsection (b)(2), the total amount of contract
payments to which an eligible producer of quota tobacco
is entitled under this section, with respect to a kind
of tobacco, shall be equal to the product obtained by
multiplying--
(A) subject to paragraph (2), $3.00 per
pound; by
(B) the base quota level of the producer of
quota tobacco determined under subsection (c)
with respect to that kind of tobacco.
(2) Annual payment.--During each of fiscal years
2005 through 2014, the Secretary shall make a contract
payment under this section to each eligible producer of
tobacco, with respect to a kind of tobacco, in an
amount equal to \1/10\ of the amount determined under
paragraph (1) for the producer for that kind of
tobacco.
(3) Variable payment rates.--The rate for payments
to a producer of quota tobacco under paragraph (1)(A)
shall be equal to--
(A) in the case of a producer of quota
tobacco that produced quota tobacco marketed,
or considered planted, under a marketing quota
in all three of the 2002, 2003, or 2004 tobacco
marketing years, the rate prescribed under
paragraph (1)(A);
(B) in the case of a producer of quota
tobacco that produced quota tobacco marketed,
or considered planted, under a marketing quota
in only two of those tobacco marketing years,
\2/3\ of the rate prescribed under paragraph
(1)(A); and
(C) in the case of a producer of quota
tobacco that produced quota tobacco marketed,
or considered planted, under a marketing quota
in only one of those tobacco marketing years,
\1/3\ of the rate prescribed under paragraph
(1)(A).
(e) Death of Tobacco Producer.--If a producer of quota
tobacco who is entitled to contract payments under this section
dies and is survived by a spouse or one or more dependents, the
right to receive the contract payments shall transfer to the
surviving spouse or, if there is no surviving spouse, to the
estate of the producer.
SEC. 624. ADMINISTRATION.
(a) Time for Payment of Contract Payments.--Contract
payments required to be made for a fiscal year shall be made by
the Secretary as soon as practicable.
(b) Use of County Committees to Resolve Disputes.--Any
dispute regarding the eligibility of a person to enter into a
contract or to receive contract payments, and any dispute
regarding the amount of a contract payment, may be appealed to
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.
(c) Role of National Appeals Division.--Any adverse
determination of a county committee under subsection (b) may be
appealed to the National Appeals Division established under
subtitle H of the Department of Agriculture Reorganization Act
of 1994 (7 U.S.C. 6991 et seq.).
(d) Use of Financial Institutions.--The Secretary may use a
financial institution to manage assets, make contract payments,
and otherwise carry out this title.
(e) Payment to Financial Institutions.--The Secretary shall
permit a tobacco quota holder or producer of quota tobacco
entitled to contract payments to assign to a financial
institution the right to receive the contract payments. Upon
receiving notification of the assignment, the Secretary shall
make subsequent contract payments for the tobacco quota holder
or producer of quota tobacco directly to the financial
institution designated by the tobacco quota holder or producer
of quota tobacco. The Secretary shall make information
available to tobacco quota holders and producers of quota
tobacco regarding their ability to elect to have the Secretary
make payments directly to a financial institution under this
subsection so that they may obtain a lump sum or other payment.
SEC. 625. USE OF ASSESSMENTS AS SOURCE OF FUNDS FOR PAYMENTS.
(a) Definitions.--In this section:
(1) Base period.--The term ``base period'' means
the one-year period ending the June 30 before the
beginning of a fiscal year.
(2) Gross domestic volume.--The term ``gross
domestic volume'' means the volume of tobacco
products--
(A) removed (as defined by section 5702 of
the Internal Revenue Code of 1986); and
(B) not exempt from tax under chapter 52 of
the Internal Revenue Code of 1986 at the time
of their removal under that chapter or the
Harmonized Tariff Schedule of the United States
(19 U.S.C. 1202).
(3) Market share.--The term ``market share'' means
the share of each manufacturer or importer of a class
of tobacco product (expressed as a decimal to the
fourth place) of the total volume of domestic sales of
the class of tobacco product during the base period for
a fiscal year for an assessment under this section.
(b) Quarterly Assessments.--
(1) Imposition of assessment.--The Secretary,
acting through the Commodity Credit Corporation, shall
impose quarterly assessments during each of fiscal
years 2005 through 2014, calculated in accordance with
this section, on each tobacco product manufacturer and
tobacco product importer that sells tobacco products in
domestic commerce in the United States during that
fiscal year.
(2) Amounts.--Beginning with the calendar quarter
ending on December 31 of each of fiscal years 2005
through 2014, the assessment payments over each four-
calendar quarter period shall be sufficient to cover--
(A) the contract payments made under
sections 622 and 623 during that period; and
(B) other expenditures from the Tobacco
Trust Fund made during the base quarter periods
corresponding to the four calendar quarters of
that period.
(3) Deposit.--Assessments collected under this
section shall be deposited in the Tobacco Trust Fund.
(c) Assessments for Classes of Tobacco Products.--
(1) Initial allocation.--The percentage of the
total amount required by subsection (b) to be assessed
against, and paid by, the manufacturers and importers
of each class of tobacco product in fiscal year 2005
shall be as follows:
(A) For cigarette manufacturers and
importers, 96.331 percent.
(B) For cigar manufacturers and importers,
2.783 percent.
(C) For snuff manufacturers and importers,
0.539 percent.
(D) For roll-your-own tobacco manufacturers
and importers, 0.171 percent.
(E) For chewing tobacco manufacturers and
importers, 0.111 percent.
(F) For pipe tobacco manufacturers and
importers, 0.066 percent.
(2) Subsequent allocations.--For subsequent fiscal
years, the Secretary shall periodically adjust the
percentage of the total amount required under
subsection (b) to be assessed against, and paid by, the
manufacturers and importers of each class of tobacco
product specified in paragraph (1) to reflect changes
in the share of gross domestic volume held by that
class of tobacco product.
(3) Effect of insufficient amounts.--If the
Secretary determines that the assessment imposed under
subsection (b) will result in insufficient amounts to
carry out this subtitle during a fiscal year, the
Secretary shall assess such additional amounts as the
Secretary determines to be necessary to carry out this
subtitle during that fiscal year. The additional amount
shall be allocated to manufacturers and importers of
each class of tobacco product specified in paragraph
(1) in the same manner and based on the same
percentages applicable under paragraph (1) or (2) for
that fiscal year.
(d) Notification and Timing of Assessments.--
(1) Notification of assessments.--The Secretary
shall provide each manufacturer or importer subject to
an assessment under subsection (b) with written notice
setting forth the amount to be assessed against the
manufacturer or importer for each quarterly payment
period. The notice for a quarterly period shall be
provided not later than 30 days before the date payment
is due under paragraph (3).
(2) Content.--The notice shall include the
following information with respect to the quarterly
period used by the Secretary in calculating the amount:
(A) The total combined assessment for all
manufacturers and importers of tobacco
products.
(B) The total assessment with respect to
the class of tobacco products manufactured or
imported by the manufacturer or importer.
(C) Any adjustments to the percentage
allocations among the classes of tobacco
products made pursuant to paragraph (2) or (3)
of subsection (c).
(D) The volume of gross sales of the
applicable class of tobacco product treated as
made by the manufacturer or importer for
purposes of calculating the manufacturer's or
importer's market share under subsection (f).
(E) The total volume of gross sales of the
applicable class of tobacco product that the
Secretary treated as made by all manufacturers
and importers for purposes of calculating the
manufacturer's or importer's market share under
subsection (f).
(F) The manufacturer's or importer's market
share of the applicable class of tobacco
product, as determined by the Secretary under
subsection (f).
(G) The market share, as determined by the
Secretary under subsection (f), of each other
manufacturer and importer, for each applicable
class of tobacco product.
(3) Timing of assessment payments.--
(A) Collection date.--Assessments shall be
collected at the end of each calendar year
quarter, except that the Secretary shall ensure
that the final assessment due under this
section is collected not later than September
30, 2014.
(B) Base period quarter.--The assessment
for a calendar year quarter shall correspond to
the base period quarter that ended at the end
of the preceding calendar year quarter.
(e) Allocation of Assessment Within Each Class of Tobacco
Product.--
(1) Pro rata basis.--The assessment for each class
of tobacco product specified in subsection (c)(1) shall
be allocated on a pro rata basis among manufacturers
and importers based on each manufacturer's or
importer's share of gross domestic volume.
(2) Limitation.--No manufacturer or importer shall
be required to pay an assessment that is based on a
share that is in excess of the manufacturer's or
importer's share of domestic volume.
(f) Allocation of Total Assessments by Market Share.--The
amount of the assessment for each class of tobacco product
specified in subsection (c)(1) to be paid by each manufacturer
or importer of that class of tobacco product shall be
determined for each quarterly payment period by multiplying--
(1) the market share of the manufacturer or
importer, as calculated with respect to that payment
period, of the class of tobacco product; by
(2) the total amount of the assessment for that
quarterly payment period under subsection (c), for the
class of tobacco product.
(g) Determination of Volume of Domestic Sales.--
(1) In general.--The calculation of the volume of
domestic sales of a class of tobacco product by a
manufacturer or importer, and by all manufacturers and
importers as a group, shall be made by the Secretary
based on information provided by the manufacturers and
importers pursuant to subsection (h), as well as any
other relevant information provided to or obtained by
the Secretary.
(2) Gross domestic volume.--The volume of domestic
sales shall be calculated based on gross domestic
volume.
(3) Measurement.--For purposes of the calculations
under this subsection and the certifications under
subsection (h) by the Secretary, the volumes of
domestic sales shall be measured by--
(A) in the case of cigarettes and cigars,
the number of cigarettes and cigars; and
(B) in the case of the other classes of
tobacco products specified in subsection
(c)(1), in terms of number of pounds, or
fraction thereof, of those products.
(h) Measurement of Volume of Domestic Sales.--
(1) Submission of information.--Each manufacturer
and importer of tobacco products shall submit to the
Secretary a certified copy of each of the returns or
forms described by paragraph (2) that are required to
be filed with a Federal agency on the same date that
those returns or forms are filed, or required to be
filed, with the agency.
(2) Returns and forms.--The returns and forms
described by this paragraph are those returns and forms
that relate to--
(A) the removal of tobacco products into
domestic commerce (as defined by section 5702
of the Internal Revenue Code of 1986); and
(B) the payment of the taxes imposed under
charter 52 of the Internal Revenue Code of
1986, including AFT Form 5000.24 and United
States Customs Form 7501 under currently
applicable regulations.
(3) Effect of failure to provide required
information.--Any person that knowingly fails to
provide information required under this subsection or
that provides false information under this subsection
shall be subject to the penalties described in section
1003 of title 18, United States Code. The Secretary may
also assess against the person a civil penalty in an
amount not to exceed two percent of the value of the
kind of tobacco products manufactured or imported by
the person during the fiscal year in which the
violation occurred, as determined by the Secretary.
(i) Challenge to Assessment.--
(1) Appeal to secretary.--A manufacturer or
importer subject to this section may contest an
assessment imposed on the manufacturer or importer
under this section by notifying the Secretary, not
later than 30 business days after receiving the
assessment notification required by subsection (d),
that the manufacturer or importer intends to contest
the assessment.
(2) Information.--Not later than 180 days after the
date of the enactment of this title, the Secretary
shall establish by regulation a procedure under which a
manufacturer or importer contesting an assessment under
this subsection may present information to the
Secretary to demonstrate that the assessment applicable
to the manufacturer or importer is incorrect. In
challenging the assessment, the manufacturer or
importer may use any information that is available,
including third party data on industry or individual
company sales volumes.
(3) Revision.--If a manufacturer or importer
establishes that the initial determination of the
amount of an assessment is incorrect, the Secretary
shall revise the amount of the assessment so that the
manufacturer or importer is required to pay only the
amount correctly determined.
(4) Time for review.--Not later than 30 days after
receiving notice from a manufacturer or importer under
paragraph (1), the Secretary shall--
(A) decide whether the information provided
to the Secretary under paragraph (2), and any
other information that the Secretary determines
is appropriate, is sufficient to establish that
the original assessment was incorrect; and
(B) make any revisions necessary to ensure
that each manufacturer and importer pays only
its correct pro rata share of total gross
domestic volume from all sources.
(5) Immediate payment of undisputed amounts.--The
regulations promulgated by the Secretary under
paragraph (2) shall provide for the immediate payment
by a manufacturer or importer challenging an assessment
of that portion of the assessment that is not in
dispute. The manufacturer and importer may place into
escrow, in accordance with such regulations, only the
portion of the assessment being challenged in good
faith pending final determination of the claim.
(j) Judicial Review.--
(1) In general.--Any manufacturer or importer
aggrieved by a determination of the Secretary with
respect to the amount of any assessment may seek review
of the determination in the United States District
Court for the District of Columbia or for the district
in which the manufacturer or importer resides or has
its principal place of business at any time following
exhaustion of the administrative remedies available
under subsection (i).
(2) Time limits.--Administrative remedies shall be
deemed exhausted if no decision by the Secretary is
made within the time limits established under
subsection (i)(4).
(3) Excessive assessments.--The court shall
restrain collection of the excessive portion of any
assessment or order a refund of excessive assessments
already paid, along with interest calculated at the
rate prescribed in section 3717 of title 31, United
States Code, if it finds that the Secretary's
determination is not supported by a preponderance of
the information available to the Secretary.
(k) Termination Date.--The authority provided by this
section to impose assessments terminates on September 30, 2014.
SEC. 626. TOBACCO TRUST FUND.
(a) Establishment.--There is established in the Commodity
Credit Corporation a revolving trust fund, to be known as the
``Tobacco Trust Fund'', which shall be used in carrying out
this subtitle. The Tobacco Trust Fund shall consist of the
following:
(1) Assessments collected under section 625.
(2) Such amounts as are necessary from the
Commodity Credit Corporation.
(3) Any interest earned on investment of amounts in
the Tobacco Trust Fund under subsection (c).
(b) Expenditures.--
(1) Authorized expenditures.--Subject to paragraph
(2), and notwithstanding any other provision of law,
the Secretary shall use amounts in the Tobacco Trust
Fund, in such amounts as the Secretary determines are
necessary--
(A) to make payments under sections 622 and
623;
(B) to provide reimbursement under section
641(c);
(C) to reimburse the Commodity Credit
Corporation for costs incurred by the Commodity
Credit Corporation under paragraph (2); and
(D) to make payments to financial
institutions to satisfy contractual obligations
under section 622 or 623.
(2) Expenditures by commodity credit corporation.--
Notwithstanding any other provision of law, the
Secretary shall use the funds, facilities, and
authorities of the Commodity Credit Corporation to make
payments described in paragraph (1). Not later than
January 1, 2015, the Secretary shall use amounts in the
Tobacco Trust Fund to fully reimburse, with interest,
the Commodity Credit Corporation for all funds of the
Commodity Credit Corporation expended under the
authority of this paragraph. Administrative costs
incurred by the Secretary or the Commodity Credit
Corporation to carry out this title may not be paid
using amounts in the Tobacco Trust Fund.
(c) Investment of Amounts.--
(1) In general.--The Commodity Credit Corporation
shall invest such portion of the amounts in the Tobacco
Trust Fund as are not, in the judgment of the Commodity
Credit Corporation, required to meet current
expenditures.
(2) Interest-bearing obligations.--Investments may
be made only in interest-bearing obligations of the
United States.
(3) Acquisition of obligations.--For the purpose of
investments under paragraph (1), obligations may be
acquired--
(A) on original issue at the issue price;
or
(B) by purchase of outstanding obligations
at the market price.
(4) Sale of obligations.--Any obligation acquired
by the Tobacco Trust Fund may be sold by the Commodity
Credit Corporation at the market price.
(5) Credits to fund.--The interest on, and the
proceeds from the sale or redemption of, any
obligations held in the Tobacco Trust Fund shall be
credited to and form a part of the Fund.
SEC. 627. LIMITATION ON TOTAL EXPENDITURES.
The total amount expended by the Secretary from the Tobacco
Trust Fund to make payments under sections 622 and 623 and for
the other authorized purposes of the Fund shall not exceed
$10,140,000,000.
Subtitle C--Implementation and Transition
SEC. 641. TREATMENT OF TOBACCO LOAN POOL STOCKS AND OUTSTANDING LOAN
COSTS.
(a) Disposal of Stocks.--To provide for the orderly
disposition of quota tobacco held by an association that has
entered into a loan agreement with the Commodity Credit
Corporation under section 106A or 106B of the Agricultural Act
of 1949 (7 U.S.C. 1445-1, 1445-2) (referred to in this section
as an ``association''), loan pool stocks for each kind of
tobacco held by the association shall be disposed of in
accordance with this section.
(b) Disposal by Associations.--For each kind of tobacco
held by an association, the association shall be responsible
for the disposal of a specific quantity of the loan pool stocks
for that kind of tobacco held by the association. The quantity
transferred to the association for disposal shall be equal to
the quantity determined by dividing--
(1) the amount of funds held by the association in
the No Net Cost Tobacco Fund and the No Net Cost
Tobacco Account established under sections 106A and
106B of the Agricultural Act of 1949 (7 U.S.C. 1445-1,
1445-2) for the kind of tobacco; by
(2) the average list price per pound for the kind
of tobacco, as determined by the Secretary.
(c) Disposal of Remainder by Commodity Credit
Corporation.--
(1) Disposal.--Any loan pool stocks of a kind of
tobacco of an association that are not transferred to
the association under subsection (b) for disposal shall
be disposed of by Commodity Credit Corporation in a
manner determined by the Secretary.
(2) Reimbursement.--As required by section
626(b)(1)(B), the Secretary shall transfer from the
Tobacco Trust Fund to the No Net Cost Tobacco Fund or
the No Net Cost Tobacco Account of an association
established under section 106A or 106B of the
Agricultural Act of 1949 (7 U.S.C. 1445-1, 1445-2) such
amounts as the Secretary determines will be adequate to
reimburse the Commodity Credit Corporation for any net
losses that the Corporation may sustain under its loan
agreements with the association.
(d) Transfer of Remaining No Net Cost Funds.--Any funds in
the No Net Cost Tobacco Fund or the No Net Cost Tobacco Account
of an association established under sections 106A and 106B of
the Agricultural Act of 1949 (7 U.S.C. 1445-1, 1445-2) that
remain after the application of subsections (b) and (c) shall
be transferred to the association for distribution to producers
of quota tobacco in accordance with a plan approved by the
Secretary.
SEC. 642. REGULATIONS.
(a) In General.--The Secretary may promulgate such
regulations as are necessary to implement this title and the
amendments made by this title.
(b) Procedure.--The promulgation of the regulations and
administration of this title and the amendments made by this
title shall be made without regard to--
(1) the notice and comment provisions of section
553 of title 5, United States Code;
(2) the Statement of Policy of the Secretary of
Agriculture effective July 24, 1971 (36 Fed. Reg.
13804), relating to notices of proposed rulemaking and
public participation in rulemaking; and
(3) chapter 35 of title 44, United States Code
(commonly known as the ``Paperwork Reduction Act'').
(c) Congressional Review of Agency Rulemaking.--In carrying
out this section, the Secretary shall use the authority
provided under section 808 of title 5, United States Code.
SEC. 643. EFFECTIVE DATE.
This title and the amendments made by this title shall
apply to the 2005 and subsequent crops of each kind of tobacco.
TITLE VII--MISCELLANEOUS PROVISIONS
SEC. 701. BROWNFIELDS DEMONSTRATION PROGRAM FOR QUALIFIED GREEN
BUILDING AND SUSTAINABLE DESIGN PROJECTS.
(a) Treatment as Exempt Facility Bond.--Subsection (a) of
section 142 (relating to the definition of exempt facility
bond) is amended by striking ``or'' at the end of paragraph
(12), by striking the period at the end of paragraph (13) and
inserting ``, or'', and by inserting at the end the following
new paragraph:
``(14) qualified green building and sustainable
design projects.''.
(b) Qualified Green Building and Sustainable Design
Projects.--Section 142 (relating to exempt facility bonds) is
amended by adding at the end thereof the following new
subsection:
``(l) Qualified Green Building and Sustainable Design
Projects.--
``(1) In general.--For purposes of subsection
(a)(14), the term `qualified green building and
sustainable design project' means any project which is
designated by the Secretary, after consultation with
the Administrator of the Environmental Protection
Agency, as a qualified green building and sustainable
design project and which meets the requirements of
clauses (i), (ii), (iii), and (iv) of paragraph (4)(A).
``(2) Designations.--
``(A) In general.--Within 60 days after the
end of the application period described in
paragraph (3)(A), the Secretary, after
consultation with the Administrator of the
Environmental Protection Agency, shall
designate qualified green building and
sustainable design projects. At least one of
the projects designated shall be located in, or
within a 10-mile radius of, an empowerment zone
as designated pursuant to section 1391, and at
least one of the projects designated shall be
located in a rural State. No more than one
project shall be designated in a State. A
project shall not be designated if such project
includes a stadium or arena for professional
sports exhibitions or games.
``(B) Minimum conservation and technology
innovation objectives.--The Secretary, after
consultation with the Administrator of the
Environmental Protection Agency, shall ensure
that, in the aggregate, the projects designated
shall--
``(i) reduce electric consumption
by more than 150 megawatts annually as
compared to conventional generation,
``(ii) reduce daily sulfur dioxide
emissions by at least 10 tons compared
to coal generation power,
``(iii) expand by 75 percent the
domestic solar photovoltaic market in
the United States (measured in
megawatts) as compared to the expansion
of that market from 2001 to 2002, and
``(iv) use at least 25 megawatts of
fuel cell energy generation.
``(3) Limited designations.--A project may not be
designated under this subsection unless--
``(A) the project is nominated by a State
or local government within 180 days of the
enactment of this subsection, and
``(B) such State or local government
provides written assurances that the project
will satisfy the eligibility criteria described
in paragraph (4).
``(4) Application.--
``(A) In general.--A project may not be
designated under this subsection unless the
application for such designation includes a
project proposal which describes the energy
efficiency, renewable energy, and sustainable
design features of the project and demonstrates
that the project satisfies the following
eligibility criteria:
``(i) Green building and
sustainable design.--At least 75
percent of the square footage of
commercial buildings which are part of
the project is registered for United
States Green Building Council's LEED
certification and is reasonably
expected (at the time of the
designation) to receive such
certification. For purposes of
determining LEED certification as
required under this clause, points
shall be credited by using the
following:
``(I) For wood products,
certification under the
Sustainable Forestry Initiative
Program and the American Tree
Farm System.
``(II) For renewable wood
products, as credited for
recycled content otherwise
provided under LEED
certification.
``(III) For composite wood
products, certification under
standards established by the
American National Standards
Institute, or such other
voluntary standards as
published in the Federal
Register by the Administrator
of the Environmental Protection
Agency.
``(ii) Brownfield redevelopment.--
The project includes a brownfield site
as defined by section 101(39) of the
Comprehensive Environmental Response,
Compensation, and Liability Act of 1980
(42 U.S.C. 9601), including a site
described in subparagraph
(D)(ii)(II)(aa) thereof.
``(iii) State and local support.--
The project receives specific State or
local government resources which will
support the project in an amount equal
to at least $5,000,000. For purposes of
the preceding sentence, the term
`resources' includes tax abatement
benefits and contributions in kind.
``(iv) Size.--The project includes
at least one of the following:
``(I) At least 1,000,000
square feet of building.
``(II) At least 20 acres.
``(v) Use of tax benefit.--The
project proposal includes a description
of the net benefit of the tax-exempt
financing provided under this
subsection which will be allocated for
financing of one or more of the
following:
``(I) The purchase,
construction, integration, or
other use of energy efficiency,
renewable energy, and
sustainable design features of
the project.
``(II) Compliance with
certification standards cited
under clause (i).
``(III) The purchase,
remediation, and foundation
construction and preparation of
the brownfields site.
``(vi) Prohibited facilities.--An
issue shall not be treated as an issue
described in subsection (a)(14) if any
proceeds of such issue are used to
provide any facility the principal
business of which is the sale of food
or alcoholic beverages for consumption
on the premises.
``(vii) Employment.--The project is
projected to provide permanent
employment of at least 1,500 full time
equivalents (150 full time equivalents
in rural States) when completed and
construction employment of at least
1,000 full time equivalents (100 full
time equivalents in rural States).
The application shall include an independent
analysis which describes the project's economic
impact, including the amount of projected
employment.
``(B) Project description.--Each
application described in subparagraph (A) shall
contain for each project a description of--
``(i) the amount of electric
consumption reduced as compared to
conventional construction,
``(ii) the amount of sulfur dioxide
daily emissions reduced compared to
coal generation,
``(iii) the amount of the gross
installed capacity of the project's
solar photovoltaic capacity measured in
megawatts, and
``(iv) the amount, in megawatts, of
the project's fuel cell energy
generation.
``(5) Certification of use of tax benefit.--No
later than 30 days after the completion of the project,
each project must certify to the Secretary that the net
benefit of the tax-exempt financing was used for the
purposes described in paragraph (4).
``(6) Definitions.--For purposes of this
subsection--
``(A) Rural state.--The term `rural State'
means any State which has--
``(i) a population of less than
4,500,000 according to the 2000 census,
``(ii) a population density of less
than 150 people per square mile
according to the 2000 census, and
``(iii) increased in population by
less than half the rate of the national
increase between the 1990 and 2000
censuses.
``(B) Local government.--The term `local
government' has the meaning given such term by
section 1393(a)(5).
``(C) Net benefit of tax-exempt
financing.--The term `net benefit of tax-exempt
financing' means the present value of the
interest savings (determined by a calculation
established by the Secretary) which result from
the tax-exempt status of the bonds.
``(7) Aggregate face amount of tax-exempt
financing.--
``(A) In general.--An issue shall not be
treated as an issue described in subsection
(a)(14) if the aggregate face amount of bonds
issued by the State or local government
pursuant thereto for a project (when added to
the aggregate face amount of bonds previously
so issued for such project) exceeds an amount
designated by the Secretary as part of the
designation.
``(B) Limitation on amount of bonds.--The
Secretary may not allocate authority to issue
qualified green building and sustainable design
project bonds in an aggregate face amount
exceeding $2,000,000,000.
``(8) Termination.--Subsection (a)(14) shall not
apply with respect to any bond issued after September
30, 2009.
``(9) Treatment of current refunding bonds.--
Paragraphs (7)(B) and (8) shall not apply to any bond
(or series of bonds) issued to refund a bond issued
under subsection (a)(14) before October 1, 2009, if--
``(A) the average maturity date of the
issue of which the refunding bond is a part is
not later than the average maturity date of the
bonds to be refunded by such issue,
``(B) the amount of the refunding bond does
not exceed the outstanding amount of the
refunded bond, and
``(C) the net proceeds of the refunding
bond are used to redeem the refunded bond not
later than 90 days after the date of the
issuance of the refunding bond.
For purposes of subparagraph (A), average maturity
shall be determined in accordance with section
147(b)(2)(A).''.
(c) Exemption From General State Volume Caps.--Paragraph
(3) of section 146(g) (relating to exception for certain bonds)
is amended--
(1) by striking ``or (13)'' and inserting ``(13),
or (14)'', and
(2) by striking ``and qualified public educational
facilities'' and inserting ``qualified public
educational facilities, and qualified green building
and sustainable design projects''.
(d) Accountability.--Each issuer shall maintain, on behalf
of each project, an interest bearing reserve account equal to 1
percent of the net proceeds of any bond issued under this
section for such project. Not later than 5 years after the date
of issuance, the Secretary of the Treasury, after consultation
with the Administrator of the Environmental Protection Agency,
shall determine whether the project financed with such bonds
has substantially complied with the terms and conditions
described in section 142(l)(4) of the Internal Revenue Code of
1986 (as added by this section). If the Secretary, after such
consultation, certifies that the project has substantially
complied with such terms and conditions and meets the
commitments set forth in the application for such project
described in section 142(l)(4) of such Code, amounts in the
reserve account, including all interest, shall be released to
the project. If the Secretary determines that the project has
not substantially complied with such terms and conditions,
amounts in the reserve account, including all interest, shall
be paid to the United States Treasury.
(e) Effective Date.--The amendments made by this section
shall apply to bonds issued after December 31, 2004.
SEC. 702. EXCLUSION OF GAIN OR LOSS ON SALE OR EXCHANGE OF CERTAIN
BROWNFIELD SITES FROM UNRELATED BUSINESS TAXABLE
INCOME.
(a) In General.--Subsection (b) of section 512 (relating to
unrelated business taxable income) is amended by adding at the
end the following new paragraph:
``(18) Treatment of gain or loss on sale or
exchange of certain brownfield sites.--
``(A) In general.--Notwithstanding
paragraph (5)(B), there shall be excluded any
gain or loss from the qualified sale, exchange,
or other disposition of any qualifying
brownfield property by an eligible taxpayer.
``(B) Eligible taxpayer.--For purposes of
this paragraph--
``(i) In general.--The term
`eligible taxpayer' means, with respect
to a property, any organization exempt
from tax under section 501(a) which--
``(I) acquires from an
unrelated person a qualifying
brownfield property, and
``(II) pays or incurs
eligible remediation
expenditures with respect to
such property in an amount
which exceeds the greater of
$550,000 or 12 percent of the
fair market value of the
property at the time such
property was acquired by the
eligible taxpayer, determined
as if there was not a presence
of a hazardous substance,
pollutant, or contaminant on
the property which is
complicating the expansion,
redevelopment, or reuse of the
property.
``(ii) Exception.--Such term shall
not include any organization which is--
``(I) potentially liable
under section 107 of the
Comprehensive Environmental
Response, Compensation, and
Liability Act of 1980 with
respect to the qualifying
brownfield property,
``(II) affiliated with any
other person which is so
potentially liable through any
direct or indirect familial
relationship or any
contractual, corporate, or
financial relationship (other
than a contractual, corporate,
or financial relationship which
is created by the instruments
by which title to any
qualifying brownfield property
is conveyed or financed or by a
contract of sale of goods or
services), or
``(III) the result of a
reorganization of a business
entity which was so potentially
liable.
``(C) Qualifying brownfield property.--For
purposes of this paragraph--
``(i) In general.--The term
`qualifying brownfield property' means
any real property which is certified,
before the taxpayer incurs any eligible
remediation expenditures (other than to
obtain a Phase I environmental site
assessment), by an appropriate State
agency (within the meaning of section
198(c)(4)) in the State in which such
property is located as a brownfield
site within the meaning of section
101(39) of the Comprehensive
Environmental Response, Compensation,
and Liability Act of 1980 (as in effect
on the date of the enactment of this
paragraph).
``(ii) Request for certification.--
Any request by an eligible taxpayer for
a certification described in clause (i)
shall include a sworn statement by the
eligible taxpayer and supporting
documentation of the presence of a
hazardous substance, pollutant, or
contaminant on the property which is
complicating the expansion,
redevelopment, or reuse of the property
given the property's reasonably
anticipated future land uses or
capacity for uses of the property
(including a Phase I environmental site
assessment and, if applicable, evidence
of the property's presence on a local,
State, or Federal list of brownfields
or contaminated property) and other
environmental assessments prepared or
obtained by the taxpayer.
``(D) Qualified sale, exchange, or other
disposition.--For purposes of this paragraph--
``(i) In general.--A sale,
exchange, or other disposition of
property shall be considered as
qualified if--
``(I) such property is
transferred by the eligible
taxpayer to an unrelated
person, and
``(II) within 1 year of
such transfer the eligible
taxpayer has received a
certification from the
Environmental Protection Agency
or an appropriate State agency
(within the meaning of section
198(c)(4)) in the State in
which such property is located
that, as a result of the
eligible taxpayer's remediation
actions, such property would
not be treated as a qualifying
brownfield property in the
hands of the transferee.
For purposes of subclause (II), before
issuing such certification, the
Environmental Protection Agency or
appropriate State agency shall respond
to comments received pursuant to clause
(ii)(V) in the same form and manner as
required under section 117(b) of the
Comprehensive Environmental Response,
Compensation, and Liability Act of 1980
(as in effect on the date of the
enactment of this paragraph).
``(ii) Request for certification.--
Any request by an eligible taxpayer for
a certification described in clause (i)
shall be made not later than the date
of the transfer and shall include a
sworn statement by the eligible
taxpayer certifying the following:
``(I) Remedial actions
which comply with all
applicable or relevant and
appropriate requirements
(consistent with section 121(d)
of the Comprehensive
Environmental Response,
Compensation, and Liability Act
of 1980) have been
substantially completed, such
that there are no hazardous
substances, pollutants, or
contaminants which complicate
the expansion, redevelopment,
or reuse of the property given
the property's reasonably
anticipated future land uses or
capacity for uses of the
property.
``(II) The reasonably
anticipated future land uses or
capacity for uses of the
property are more economically
productive or environmentally
beneficial than the uses of the
property in existence on the
date of the certification
described in subparagraph
(C)(i). For purposes of the
preceding sentence, use of
property as a landfill or other
hazardous waste facility shall
not be considered more
economically productive or
environmentally beneficial.
``(III) A remediation plan
has been implemented to bring
the property into compliance
with all applicable local,
State, and Federal
environmental laws,
regulations, and standards and
to ensure that the remediation
protects human health and the
environment.
``(IV) The remediation plan
described in subclause (III),
including any physical
improvements required to
remediate the property, is
either complete or
substantially complete, and, if
substantially complete,
sufficient monitoring, funding,
institutional controls, and
financial assurances have been
put in place to ensure the
complete remediation of the
property in accordance with the
remediation plan as soon as is
reasonably practicable after
the sale, exchange, or other
disposition of such property.
``(V) Public notice and the
opportunity for comment on the
request for certification was
completed before the date of
such request. Such notice and
opportunity for comment shall
be in the same form and manner
as required for public
participation required under
section 117(a) of the
Comprehensive Environmental
Response, Compensation, and
Liability Act of 1980 (as in
effect on the date of the
enactment of this paragraph).
For purposes of this subclause,
public notice shall include, at
a minimum, publication in a
major local newspaper of
general circulation.
``(iii) Attachment to tax
returns.--A copy of each of the
requests for certification described in
clause (ii) of subparagraph (C) and
this subparagraph shall be included in
the tax return of the eligible taxpayer
(and, where applicable, of the
qualifying partnership) for the taxable
year during which the transfer occurs.
``(iv) Substantial completion.--For
purposes of this subparagraph, a
remedial action is substantially
complete when any necessary physical
construction is complete, all immediate
threats have been eliminated, and all
long-term threats are under control.
``(E) Eligible remediation expenditures.--
For purposes of this paragraph--
``(i) In general.--The term
`eligible remediation expenditures'
means, with respect to any qualifying
brownfield property, any amount paid or
incurred by the eligible taxpayer to an
unrelated third person to obtain a
Phase I environmental site assessment
of the property, and any amount so paid
or incurred after the date of the
certification described in subparagraph
(C)(i) for goods and services necessary
to obtain a certification described in
subparagraph (D)(i) with respect to
such property, including expenditures--
``(I) to manage, remove,
control, contain, abate, or
otherwise remediate a hazardous
substance, pollutant, or
contaminant on the property,
``(II) to obtain a Phase II
environmental site assessment
of the property, including any
expenditure to monitor, sample,
study, assess, or otherwise
evaluate the release, threat of
release, or presence of a
hazardous substance, pollutant,
or contaminant on the property,
``(III) to obtain
environmental regulatory
certifications and approvals
required to manage the
remediation and monitoring of
the hazardous substance,
pollutant, or contaminant on
the property, and
``(IV) regardless of
whether it is necessary to
obtain a certification
described in subparagraph
(D)(i)(II), to obtain
remediation cost-cap or stop-
loss coverage, re-opener or
regulatory action coverage, or
similar coverage under
environmental insurance
policies, or financial
guarantees required to manage
such remediation and
monitoring.
``(ii) Exceptions.--Such term shall
not include--
``(I) any portion of the
purchase price paid or incurred
by the eligible taxpayer to
acquire the qualifying
brownfield property,
``(II) environmental
insurance costs paid or
incurred to obtain legal
defense coverage, owner/
operator liability coverage,
lender liability coverage,
professional liability
coverage, or similar types of
coverage,
``(III) any amount paid or
incurred to the extent such
amount is reimbursed, funded,
or otherwise subsidized by
grants provided by the United
States, a State, or a political
subdivision of a State for use
in connection with the
property, proceeds of an issue
of State or local government
obligations used to provide
financing for the property the
interest of which is exempt
from tax under section 103, or
subsidized financing provided
(directly or indirectly) under
a Federal, State, or local
program provided in connection
with the property, or
``(IV) any expenditure paid
or incurred before the date of
the enactment of this
paragraph.
For purposes of subclause (III), the
Secretary may issue guidance regarding
the treatment of government-provided
funds for purposes of determining
eligible remediation expenditures.
``(F) Determination of gain or loss.--For
purposes of this paragraph, the determination
of gain or loss shall not include an amount
treated as gain which is ordinary income with
respect to section 1245 or section 1250
property, including amounts deducted as section
198 expenses which are subject to the recapture
rules of section 198(e), if the taxpayer had
deducted such amounts in the computation of its
unrelated business taxable income.
``(G) Special rules for partnerships.--
``(i) In general.--In the case of
an eligible taxpayer which is a partner
of a qualifying partnership which
acquires, remediates, and sells,
exchanges, or otherwise disposes of a
qualifying brownfield property, this
paragraph shall apply to the eligible
taxpayer's distributive share of the
qualifying partnership's gain or loss
from the sale, exchange, or other
disposition of such property.
``(ii) Qualifying partnership.--The
term `qualifying partnership' means a
partnership which--
``(I) has a partnership
agreement which satisfies the
requirements of section
514(c)(9)(B)(vi) at all times
beginning on the date of the
first certification received by
the partnership under
subparagraph (C)(i),
``(II) satisfies the
requirements of subparagraphs
(B)(i), (C), (D), and (E), if
`qualified partnership' is
substituted for `eligible
taxpayer' each place it appears
therein (except subparagraph
(D)(iii)), and
``(III) is not an
organization which would be
prevented from constituting an
eligible taxpayer by reason of
subparagraph (B)(ii).
``(iii) Requirement that tax-exempt
partner be a partner since first
certification.--This paragraph shall
apply with respect to any eligible
taxpayer which is a partner of a
partnership which acquires, remediates,
and sells, exchanges, or otherwise
disposes of a qualifying brownfield
property only if such eligible taxpayer
was a partner of the qualifying
partnership at all times beginning on
the date of the first certification
received by the partnership under
subparagraph (C)(i) and ending on the
date of the sale, exchange, or other
disposition of the property by the
partnership.
``(iv) Regulations.--The Secretary
shall prescribe such regulations as are
necessary to prevent abuse of the
requirements of this subparagraph,
including abuse through--
``(I) the use of special
allocations of gains or losses,
or
``(II) changes in ownership
of partnership interests held
by eligible taxpayers.
``(H) Special rules for multiple
properties.--
``(i) In general.--An eligible
taxpayer or a qualifying partnership of
which the eligible taxpayer is a
partner may make a 1-time election to
apply this paragraph to more than 1
qualifying brownfield property by
averaging the eligible remediation
expenditures for all such properties
acquired during the election period. If
the eligible taxpayer or qualifying
partnership makes such an election, the
election shall apply to all qualified
sales, exchanges, or other dispositions
of qualifying brownfield properties the
acquisition and transfer of which occur
during the period for which the
election remains in effect.
``(ii) Election.--An election under
clause (i) shall be made with the
eligible taxpayer's or qualifying
partnership's timely filed tax return
(including extensions) for the first
taxable year for which the taxpayer or
qualifying partnership intends to have
the election apply. An election under
clause (i) is effective for the
period--
``(I) beginning on the date
which is the first day of the
taxable year of the return in
which the election is included
or a later day in such taxable
year selected by the eligible
taxpayer or qualifying
partnership, and
``(II) ending on the date
which is the earliest of a date
of revocation selected by the
eligible taxpayer or qualifying
partnership, the date which is
8 years after the date
described in subclause (I), or,
in the case of an election by a
qualifying partnership of which
the eligible taxpayer is a
partner, the date of the
termination of the qualifying
partnership.
``(iii) Revocation.--An eligible
taxpayer or qualifying partnership may
revoke an election under clause (i)(II)
by filing a statement of revocation
with a timely filed tax return
(including extensions). A revocation is
effective as of the first day of the
taxable year of the return in which the
revocation is included or a later day
in such taxable year selected by the
eligible taxpayer or qualifying
partnership. Once an eligible taxpayer
or qualifying partnership revokes the
election, the eligible taxpayer or
qualifying partnership is ineligible to
make another election under clause (i)
with respect to any qualifying
brownfield property subject to the
revoked election.
``(I) Recapture.--If an eligible taxpayer
excludes gain or loss from a sale, exchange, or
other disposition of property to which an
election under subparagraph (H) applies, and
such property fails to satisfy the requirements
of this paragraph, the unrelated business
taxable income of the eligible taxpayer for the
taxable year in which such failure occurs shall
be determined by including any previously
excluded gain or loss from such sale, exchange,
or other disposition allocable to such
taxpayer, and interest shall be determined at
the overpayment rate established under section
6621 on any resulting tax for the period
beginning with the due date of the return for
the taxable year during which such sale,
exchange, or other disposition occurred, and
ending on the date of payment of the tax.
``(J) Related persons.--For purposes of
this paragraph, a person shall be treated as
related to another person if--
``(i) such person bears a
relationship to such other person
described in section 267(b) (determined
without regard to paragraph (9)
thereof), or section 707(b)(1),
determined by substituting `25 percent'
for `50 percent' each place it appears
therein, and
``(ii) in the case such other
person is a nonprofit organization, if
such person controls directly or
indirectly more than 25 percent of the
governing body of such organization.
``(K) Termination.--Except for purposes of
determining the average eligible remediation
expenditures for properties acquired during the
election period under subparagraph (H), this
paragraph shall not apply to any property
acquired by the eligible taxpayer or qualifying
partnership after December 31, 2009.''.
(b) Exclusion From Definition of Debt-Financed Property.--
Section 514(b)(1) (defining debt-financed property) is amended
by striking ``or'' at the end of subparagraph (C), by striking
the period at the end of subparagraph (D) and inserting ``;
or'', and by inserting after subparagraph (D) the following new
subparagraph:
``(E) any property the gain or loss from
the sale, exchange, or other disposition of
which would be excluded by reason of the
provisions of section 512(b)(18) in computing
the gross income of any unrelated trade or
business.''.
(c) Savings Clause.--Nothing in the amendments made by this
section shall affect any duty, liability, or other requirement
imposed under any other Federal or State law. Notwithstanding
section 128(b) of the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, a certification
provided by the Environmental Protection Agency or an
appropriate State agency (within the meaning of section
198(c)(4) of the Internal Revenue Code of 1986) shall not
affect the liability of any person under section 107(a) of such
Act.
(d) Effective Date.--The amendments made by this section
shall apply to any gain or loss on the sale, exchange, or other
disposition of any property acquired by the taxpayer after
December 31, 2004.
SEC. 703. CIVIL RIGHTS TAX RELIEF.
(a) Deduction Allowed Whether or Not Taxpayer Itemizes
Other Deductions.--Subsection (a) of section 62 (defining
adjusted gross income) is amended by inserting after paragraph
(18) the following new item:
``(19) Costs involving discrimination suits, etc.--
Any deduction allowable under this chapter for attorney
fees and court costs paid by, or on behalf of, the
taxpayer in connection with any action involving a
claim of unlawful discrimination (as defined in
subsection (e)) or a claim of a violation of subchapter
III of chapter 37 of title 31, United States Code or a
claim made under section 1862(b)(3)(A) of the Social
Security Act (42 U.S.C. 1395y(b)(3)(A)). The preceding
sentence shall not apply to any deduction in excess of
the amount includible in the taxpayer's gross income
for the taxable year on account of a judgment or
settlement (whether by suit or agreement and whether as
lump sum or periodic payments) resulting from such
claim.''.
(b) Unlawful Discrimination Defined.--Section 62 is amended
by adding at the end the following new subsection:
``(e) Unlawful Discrimination Defined.--For purposes of
subsection (a)(19), the term `unlawful discrimination' means an
act that is unlawful under any of the following:
``(1) Section 302 of the Civil Rights Act of 1991
(2 U.S.C. 1202).
``(2) Section 201, 202, 203, 204, 205, 206, or 207
of the Congressional Accountability Act of 1995 (2
U.S.C. 1311, 1312, 1313, 1314, 1315, 1316, or 1317).
``(3) The National Labor Relations Act (29 U.S.C.
151 et seq.).
``(4) The Fair Labor Standards Act of 1938 (29
U.S.C. 201 et seq.).
``(5) Section 4 or 15 of the Age Discrimination in
Employment Act of 1967 (29 U.S.C. 623 or 633a).
``(6) Section 501 or 504 of the Rehabilitation Act
of 1973 (29 U.S.C. 791 or 794).
``(7) Section 510 of the Employee Retirement Income
Security Act of 1974 (29 U.S.C. 1140).
``(8) Title IX of the Education Amendments of 1972
(20 U.S.C. 1681 et seq.).
``(9) The Employee Polygraph Protection Act of 1988
(29 U.S.C. 2001 et seq.).
``(10) The Worker Adjustment and Retraining
Notification Act (29 U.S.C. 2102 et seq.).
``(11) Section 105 of the Family and Medical Leave
Act of 1993 (29 U.S.C. 2615).
``(12) Chapter 43 of title 38, United States Code
(relating to employment and reemployment rights of
members of the uniformed services).
``(13) Section 1977, 1979, or 1980 of the Revised
Statutes (42 U.S.C. 1981, 1983, or 1985).
``(14) Section 703, 704, or 717 of the Civil Rights
Act of 1964 (42 U.S.C. 2000e-2, 2000e-3, or 2000e-16).
``(15) Section 804, 805, 806, 808, or 818 of the
Fair Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or
3617).
``(16) Section 102, 202, 302, or 503 of the
Americans with Disabilities Act of 1990 (42 U.S.C.
12112, 12132, 12182, or 12203).
``(17) Any provision of Federal law (popularly
known as whistleblower protection provisions)
prohibiting the discharge of an employee, the
discrimination against an employee, or any other form
of retaliation or reprisal against an employee for
asserting rights or taking other actions permitted
under Federal law.
``(18) Any provision of Federal, State, or local
law, or common law claims permitted under Federal,
State, or local law--
``(i) providing for the enforcement
of civil rights, or
``(ii) regulating any aspect of the
employment relationship, including
claims for wages, compensation, or
benefits, or prohibiting the discharge
of an employee, the discrimination
against an employee, or any other form
of retaliation or reprisal against an
employee for asserting rights or taking
other actions permitted by law.''.
(c) Effective Date.--The amendments made by this section
shall apply to fees and costs paid after the date of the
enactment of this Act with respect to any judgment or
settlement occurring after such date.
SEC. 704. MODIFICATION OF CLASS LIFE FOR CERTAIN TRACK FACILITIES.
(a) 7-Year Property.--Subparagraph (C) of section 168(e)(3)
(relating to classification of certain property) is amended by
redesignating clause (ii) as clause (iii) and by inserting
after clause (i) the following new clause:
``(ii) any motorsports
entertainment complex, and''.
(b) Definition.--Section 168(i) (relating to definitions
and special rules) is amended by adding at the end the
following new paragraph:
``(15) Motorsports entertainment complex.--
``(A) In general.--The term `motorsports
entertainment complex' means a racing track
facility which--
``(i) is permanently situated on
land, and
``(ii) during the 36-month period
following the first day of the month in
which the asset is placed in service,
hosts 1 or more racing events for
automobiles (of any type), trucks, or
motorcycles which are open to the
public for the price of admission.
``(B) Ancillary and support facilities.--
Such term shall include, if owned by the
taxpayer who owns the complex and provided for
the benefit of patrons of the complex--
``(i) ancillary facilities and land
improvements in support of the
complex's activities (including parking
lots, sidewalks, waterways, bridges,
fences, and landscaping),
``(ii) support facilities
(including food and beverage retailing,
souvenir vending, and other nonlodging
accommodations), and
``(iii) appurtenances associated
with such facilities and related
attractions and amusements (including
ticket booths, race track surfaces,
suites and hospitality facilities,
grandstands and viewing structures,
props, walls, facilities that support
the delivery of entertainment services,
other special purpose structures,
facades, shop interiors, and
buildings).
``(C) Exception.--Such term shall not
include any transportation equipment,
administrative services assets, warehouses,
administrative buildings, hotels, or motels.
``(D) Termination.--This paragraph shall
not apply to any property placed in service
after December 31, 2007.''.
(c) Effective Date.--
(1) In general.--The amendments made by this
section shall apply to any property placed in service
after the date of the enactment of this Act.
(2) Special rule for asset class 80.0.--In the case
of race track facilities placed in service after the
date of the enactment of this Act, such facilities
shall not be treated as theme and amusement facilities
classified under asset class 80.0.
(3) No inference.--Nothing in this section or the
amendments made by this section shall be construed to
affect the treatment of property placed in service on
or before the date of the enactment of this Act.
SEC. 705. SUSPENSION OF POLICYHOLDERS SURPLUS ACCOUNT PROVISIONS.
(a) Distributions To Shareholders From Pre-1984
Policyholders Surplus Account.--Section 815 (relating to
distributions to shareholders from pre-1984 policyholders
surplus account) is amended by adding at the end the following:
``(g) Special Rules Applicable During 2005 and 2006.--In
the case of any taxable year of a stock life insurance company
beginning after December 31, 2004, and before January 1, 2007--
``(1) the amount under subsection (a)(2) for such
taxable year shall be treated as zero, and
``(2) notwithstanding subsection (b), in
determining any subtractions from an account under
subsections (c)(3) and (d)(3), any distribution to
shareholders during such taxable year shall be treated
as made first out of the policyholders surplus account,
then out of the shareholders surplus account, and
finally out of other accounts.''.
(b) Effective Date.--The amendment made by this section
shall apply to taxable years beginning after December 31, 2004.
SEC. 706. CERTAIN ALASKA NATURAL GAS PIPELINE PROPERTY TREATED AS 7-
YEAR PROPERTY.
(a) In General.--Section 168(e)(3)(C) (defining 7-year
property), as amended by this Act, is amended by striking
``and'' at the end of clause (ii), by redesignating clause
(iii) as clause (iv), and by inserting after clause (ii) the
following new clause:
``(iii) any Alaska natural gas
pipeline, and''.
(b) Alaska Natural Gas Pipeline.--Section 168(i) (relating
to definitions and special rules), as amended by this Act, is
amended by inserting after paragraph (15) the following new
paragraph:
``(16) Alaska natural gas pipeline.--The term
`Alaska natural gas pipeline' means the natural gas
pipeline system located in the State of Alaska which--
``(A) has a capacity of more than
500,000,000,000 Btu of natural gas per day, and
``(B) is--
``(i) placed in service after
December 31, 2013, or
``(ii) treated as placed in service
on January 1, 2014, if the taxpayer who
places such system in service before
January 1, 2014, elects such treatment.
Such term includes the pipe, trunk lines, related
equipment, and appurtenances used to carry natural gas,
but does not include any gas processing plant.''.
(c) Alternative System.--The table contained in section
168(g)(3)(B) (relating to special rule for certain property
assigned to classes) is amended by inserting after the item
relating to subparagraph (C)(ii) the following new item:
``(C)(iii)......... 22''.
(d) Effective Date.--The amendments made by this section
shall apply to property placed in service after December 31,
2004.
SEC. 707. EXTENSION OF ENHANCED OIL RECOVERY CREDIT TO CERTAIN ALASKA
FACILITIES.
(a) In General.--Section 43(c)(1) (defining qualified
enhanced oil recovery costs) is amended by adding at the end
the following new subparagraph:
``(D) Any amount which is paid or incurred
during the taxable year to construct a gas
treatment plant which--
``(i) is located in the area of the
United States (within the meaning of
section 638(1)) lying north of 64
degrees North latitude,
``(ii) prepares Alaska natural gas
for transportation through a pipeline
with a capacity of at least
2,000,000,000,000 Btu of natural gas
per day, and
``(iii) produces carbon dioxide
which is injected into hydrocarbon-
bearing geological formations.''.
(b) Alaska Natural Gas.--Section 43(c) is amended by adding
at the end the following new paragraph:
``(5) Alaska Natural Gas.--For purposes of
paragraph (1)(D)--
``(1) In general.--The term `Alaska natural gas'
means natural gas entering the Alaska natural gas
pipeline (as defined in section 168(i)(16) (determined
without regard to subparagraph (B) thereof)) which is
produced from a well--
``(A) located in the area of the State of
Alaska lying north of 64 degrees North
latitude, determined by excluding the area of
the Alaska National Wildlife Refuge (including
the continental shelf thereof within the
meaning of section 638(1)), and
``(B) pursuant to the applicable State and
Federal pollution prevention, control, and
permit requirements from such area (including
the continental shelf thereof within the
meaning of section 638(1)).
``(2) Natural gas.--The term `natural gas' has the
meaning given such term by section 613A(e)(2).''.
(c) Effective Date.--The amendment made by this section
shall apply to costs paid or incurred in taxable years
beginning after December 31, 2004.
SEC. 708. METHOD OF ACCOUNTING FOR NAVAL SHIPBUILDERS.
(a) In General.--In the case of a qualified naval ship
contract, the taxable income of such contract during the 5-
taxable year period beginning with the taxable year in which
the contract commencement date occurs shall be determined under
a method identical to the method used in the case of a
qualified ship contract (as defined in section 10203(b)(2)(B)
of the Revenue Act of 1987).
(b) Recapture of Tax Benefit.--In the case of a qualified
naval ship contract to which subsection (a) applies, the
taxpayer's tax imposed by chapter 1 of the Internal Revenue
Code of 1986 for the first taxable year following the 5-taxable
year period described in subsection (a) shall be increased by
the excess (if any) of--
(1) the amount of tax which would have been imposed
during such period if this section had not been
enacted, over
(2) the amount of tax so imposed during such
period.
(c) Qualified Naval Ship Contract.--For purposes of this
section--
(1) In general.--The term ``qualified naval ship
contract'' means any contract or portion thereof that
is for the construction in the United States of 1 ship
or submarine for the Federal Government if the taxpayer
reasonably expects the acceptance date will occur no
later than 9 years after the construction commencement
date.
(2) Acceptance date.--The term ``acceptance date''
means the date 1 year after the date on which the
Federal Government issues a letter of acceptance or
other similar document for the ship or submarine.
(3) Construction commencement date.--The term
``construction commencement date'' means the date on
which the physical fabrication of any section or
component of the ship or submarine begins in the
taxpayer's shipyard.
(d) Effective Date.--This section shall apply to contracts
for ships or submarines with respect to which the construction
commencement date occurs after the date of the enactment of
this Act.
SEC. 709. MODIFICATION OF MINIMUM COST REQUIREMENT FOR TRANSFER OF
EXCESS PENSION ASSETS.
(a) Amendments of ERISA.--
(1) Section 101(e)(3) of the Employee Retirement
Income Security Act of 1974 (29 U.S.C. 1021(e)(3)) is
amended by striking ``Pension Funding Equity Act of
2004'' and inserting ``American Jobs Creation Act of
2004''.
(2) Section 403(c)(1) of such Act (29 U.S.C.
1103(c)(1)) is amended by striking ``Pension Funding
Equity Act of 2004'' and inserting ``American Jobs
Creation Act of 2004''.
(3) Paragraph (13) of section 408(b) of such Act
(29 U.S.C. 1108(b)(3)) is amended by striking ``Pension
Funding Equity Act of 2004'' and inserting ``American
Jobs Creation Act of 2004''.
(b) Minimum Cost Requirements.--
(1) In general.--Section 420(c)(3)(E) is amended by
adding at the end the following new clause:
``(ii) Insignificant cost
reductions permitted.--
``(I) In general.--An
eligible employer shall not be
treated as failing to meet the
requirements of this paragraph
for any taxable year if, in
lieu of any reduction of
retiree health coverage
permitted under the regulations
prescribed under clause (i),
the employer reduces applicable
employer cost by an amount not
in excess of the reduction in
costs which would have occurred
if the employer had made the
maximum permissible reduction
in retiree health coverage
under such regulations. In
applying such regulations to
any subsequent taxable year,
any reduction in applicable
employer cost under this clause
shall be treated as if it were
an equivalent reduction in
retiree health coverage.
``(II) Eligible employer.--
For purposes of subclause (I),
an employer shall be treated as
an eligible employer for any
taxable year if, for the
preceding taxable year, the
qualified current retiree
health liabilities of the
employer were at least 5
percent of the gross receipts
of the employer. For purposes
of this subclause, the rules of
paragraphs (2), (3)(B), and
(3)(C) of section 448(c) shall
apply in determining the amount
of an employer's gross
receipts.''.
(2) Conforming amendment.--Section 420(c)(3)(E) is
amended by striking ``The Secretary'' and inserting:
``(i) In general.--The Secretary''.
(3) Effective date.--The amendments made by this
subsection shall apply to taxable years ending after
the date of the enactment of this Act.
SEC. 710. EXPANSION OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN
RENEWABLE RESOURCES.
(a) Expansion of Qualified Energy Resources.--Subsection
(c) of section 45 (relating to electricity produced from
certain renewable resources) is amended to read as follows:
``(c) Qualified Energy Resources and Refined Coal.--For
purposes of this section--
``(1) In general.--The term `qualified energy
resources' means--
``(A) wind,
``(B) closed-loop biomass,
``(C) open-loop biomass,
``(D) geothermal energy,
``(E) solar energy,
``(F) small irrigation power, and
``(G) municipal solid waste.
``(2) Closed-loop biomass.--The term `closed-loop
biomass' means any organic material from a plant which
is planted exclusively for purposes of being used at a
qualified facility to produce electricity.
``(3) Open-loop biomass.--
``(A) In general.--The term `open-loop
biomass' means--
``(i) any agricultural livestock
waste nutrients, or
``(ii) any solid, nonhazardous,
cellulosic waste material which is
segregated from other waste materials
and which is derived from--
``(I) any of the following
forest-related resources: mill
and harvesting residues,
precommercial thinnings, slash,
and brush,
``(II) solid wood waste
materials, including waste
pallets, crates, dunnage,
manufacturing and construction
wood wastes (other than
pressure-treated, chemically-
treated, or painted wood
wastes), and landscape or
right-of-way tree trimmings,
but not including municipal
solid waste, gas derived from
the biodegradation of solid
waste, or paper which is
commonly recycled, or
``(III) agriculture
sources, including orchard tree
crops, vineyard, grain,
legumes, sugar, and other crop
by-products or residues.
Such term shall not include closed-loop biomass
or biomass burned in conjunction with fossil
fuel (cofiring) beyond such fossil fuel
required for startup and flame stabilization.
``(B) Agricultural livestock waste
nutrients.--
``(i) In general.--The term
`agricultural livestock waste
nutrients' means agricultural livestock
manure and litter, including wood
shavings, straw, rice hulls, and other
bedding material for the disposition of
manure.
``(ii) Agricultural livestock.--The
term `agricultural livestock' includes
bovine, swine, poultry, and sheep.
``(4) Geothermal energy.--The term `geothermal
energy' means energy derived from a geothermal deposit
(within the meaning of section 613(e)(2)).
``(5) Small irrigation power.--The term `small
irrigation power' means power--
``(A) generated without any dam or
impoundment of water through an irrigation
system canal or ditch, and
``(B) the nameplate capacity rating of
which is not less than 150 kilowatts but is
less than 5 megawatts.
``(6) Municipal solid waste.--The term `municipal
solid waste' has the meaning given the term `solid
waste' under section 2(27) of the Solid Waste Disposal
Act (42 U.S.C. 6903).
``(7) Refined coal.--
``(A) In general.--The term `refined coal'
means a fuel which--
``(i) is a liquid, gaseous, or
solid synthetic fuel produced from coal
(including lignite) or high carbon fly
ash, including such fuel used as a
feedstock,
``(ii) is sold by the taxpayer with
the reasonable expectation that it will
be used for purpose of producing steam,
``(iii) is certified by the
taxpayer as resulting (when used in the
production of steam) in a qualified
emission reduction, and
``(iv) is produced in such a manner
as to result in an increase of at least
50 percent in the market value of the
refined coal (excluding any increase
caused by materials combined or added
during the production process), as
compared to the value of the feedstock
coal.
``(B) Qualified emission reduction.--The
term `qualified emission reduction' means a
reduction of at least 20 percent of the
emissions of nitrogen oxide and either sulfur
dioxide or mercury released when burning the
refined coal (excluding any dilution caused by
materials combined or added during the
production process), as compared to the
emissions released when burning the feedstock
coal or comparable coal predominantly available
in the marketplace as of January 1, 2003.''.
(b) Expansion of Qualified Facilities.--
(1) In general.--Section 45 is amended by
redesignating subsection (d) as subsection (e) and by
inserting after subsection (c) the following new
subsection:
``(d) Qualified Facilities.--For purposes of this section--
``(1) Wind facility.--In the case of a facility
using wind to produce electricity, the term `qualified
facility' means any facility owned by the taxpayer
which is originally placed in service after December
31, 1993, and before January 1, 2006.
``(2) Closed-loop biomass facility.--
``(A) In general.--In the case of a
facility using closed-loop biomass to produce
electricity, the term `qualified facility'
means any facility--
``(i) owned by the taxpayer which
is originally placed in service after
December 31, 1992, and before January
1, 2006, or
``(ii) owned by the taxpayer which
before January 1, 2006, is originally
placed in service and modified to use
closed-loop biomass to co-fire with
coal, with other biomass, or with both,
but only if the modification is
approved under the Biomass Power for
Rural Development Programs or is part
of a pilot project of the Commodity
Credit Corporation as described in 65
Fed. Reg. 63052.
``(B) Special rules.--In the case of a
qualified facility described in subparagraph
(A)(ii)--
``(i) the 10-year period referred
to in subsection (a) shall be treated
as beginning no earlier than the date
of the enactment of this clause,
``(ii) the amount of the credit
determined under subsection (a) with
respect to the facility shall be an
amount equal to the amount determined
without regard to this clause
multiplied by the ratio of the thermal
content of the closed-loop biomass used
in such facility to the thermal content
of all fuels used in such facility, and
``(iii) if the owner of such
facility is not the producer of the
electricity, the person eligible for
the credit allowable under subsection
(a) shall be the lessee or the operator
of such facility.
``(3) Open-loop biomass facilities.--
``(A) In general.--In the case of a
facility using open-loop biomass to produce
electricity, the term `qualified facility'
means any facility owned by the taxpayer
which--
``(i) in the case of a facility
using agricultural livestock waste
nutrients--
``(I) is originally placed
in service after the date of
the enactment of this subclause
and before January 1, 2006, and
``(II) the nameplate
capacity rating of which is not
less than 150 kilowatts, and
``(ii) in the case of any other
facility, is originally placed in
service before January 1, 2006.
``(B) Credit eligibility.--In the case of
any facility described in subparagraph (A), if
the owner of such facility is not the producer
of the electricity, the person eligible for the
credit allowable under subsection (a) shall be
the lessee or the operator of such facility.
``(4) Geothermal or solar energy facility.--In the
case of a facility using geothermal or solar energy to
produce electricity, the term `qualified facility'
means any facility owned by the taxpayer which is
originally placed in service after the date of the
enactment of this paragraph and before January 1, 2006.
Such term shall not include any property described in
section 48(a)(3) the basis of which is taken into
account by the taxpayer for purposes of determining the
energy credit under section 48.
``(5) Small irrigation power facility.--In the case
of a facility using small irrigation power to produce
electricity, the term `qualified facility' means any
facility owned by the taxpayer which is originally
placed in service after the date of the enactment of
this paragraph and before January 1, 2006.
``(6) Landfill gas facilities.--In the case of a
facility producing electricity from gas derived from
the biodegradation of municipal solid waste, the term
`qualified facility' means any facility owned by the
taxpayer which is originally placed in service after
the date of the enactment of this paragraph and before
January 1, 2006.
``(7) Trash combustion facilities.--In the case of
a facility which burns municipal solid waste to produce
electricity, the term `qualified facility' means any
facility owned by the taxpayer which is originally
placed in service after the date of the enactment of
this paragraph and before January 1, 2006.
``(8) Refined coal production facility.--The term
`refined coal production facility' means a facility
which is placed in service after the date of the
enactment of this paragraph and before January 1,
2009.''.
(2) Rules for refined coal production facilities.--
Subsection (e) of section 45, as so redesignated, is
amended by adding at the end the following new
paragraph:
``(8) Refined coal production facilities.--
``(A) Determination of credit amount.--In
the case of a producer of refined coal, the
credit determined under this section (without
regard to this paragraph) for any taxable year
shall be increased by an amount equal to $4.375
per ton of qualified refined coal--
``(i) produced by the taxpayer at a
refined coal production facility during
the 10-year period beginning on the
date the facility was originally placed
in service, and
``(ii) sold by the taxpayer--
``(I) to an unrelated
person, and
``(II) during such 10-year
period and such taxable year.
``(B) Phaseout of credit.--The amount of
the increase determined under subparagraph (A)
shall be reduced by an amount which bears the
same ratio to the amount of the increase
(determined without regard to this
subparagraph) as--
``(i) the amount by which the
reference price of fuel used as a
feedstock (within the meaning of
subsection (c)(7)(A)) for the calendar
year in which the sale occurs exceeds
an amount equal to 1.7 multiplied by
the reference price for such fuel in
2002, bears to
``(ii) $8.75.
``(C) Application of rules.--Rules similar
to the rules of the subsection (b)(3) and
paragraphs (1) through (5) and (9) of this
subsection shall apply for purposes of
determining the amount of any increase under
this paragraph.''.
(3) Conforming amendments.--
(A) Section 45(e), as so redesignated, is
amended by striking ``subsection (c)(3)(A)'' in
paragraph (7)(A)(i) and inserting ``subsection
(d)(1)''.
(B) The heading of section 45 and the item
relating to such section in the table of
sections for subpart D of part IV of subchapter
A of chapter 1 are each amended by inserting
before the period at the end ``, etc''.
(C) Paragraph (2) of section 45(b) is
amended by striking ``The 1.5 cent amount'' and
all that follows through ``paragraph (1)'' and
inserting ``The 1.5 cent amount in subsection
(a), the 8 cent amount in paragraph (1), the
$4.375 amount in subsection (e)(8)(A), and in
subsection (e)(8)(B)(i) the reference price of
fuel used as a feedstock (within the meaning of
subsection (c)(7)(A)) in 2002''.
(c) Special Credit Rate and Period for Electricity Produced
and Sold After Enactment Date.--Section 45(b) is amended by
adding at the end the following new paragraph:
``(4) Credit rate and period for electricity
produced and sold from certain facilities.--
``(A) Credit rate.--In the case of
electricity produced and sold in any calendar
year after 2003 at any qualified facility
described in paragraph (3), (5), (6), or (7) of
subsection (d), the amount in effect under
subsection (a)(1) for such calendar year
(determined before the application of the last
sentence of paragraph (2) of this subsection)
shall be reduced by one-half.
``(B) Credit period.--
``(i) In general.--Except as
provided in clause (ii), in the case of
any facility described in paragraph
(3), (4), (5), (6), or (7) of
subsection (d), the 5-year period
beginning on the date the facility was
originally placed in service shall be
substituted for the 10-year period in
subsection (a)(2)(A)(ii).
``(ii) Certain open-loop biomass
facilities.--In the case of any
facility described in subsection
(d)(3)(A)(ii) placed in service before
the date of the enactment of this
paragraph, the 5-year period beginning
on the date of the enactment of this
Act shall be substituted for the 10-
year period in subsection
(a)(2)(A)(ii).''.
(d) Coordination With Other Credits.--Section 45(e), as
redesignated and amended by this section, is amended by
inserting after paragraph (8) the following new paragraph:
``(9) Coordination with credit for producing fuel
from a nonconventional source.--The term `qualified
facility' shall not include any facility the production
from which is allowed as a credit under section 29 for
the taxable year or any prior taxable year.''.
(e) Coordination With Section 48.--Section 48(a)(3)
(defining energy property) is amended by adding at the end the
following new sentence: ``Such term shall not include any
property which is part of a facility the production from which
is allowed as a credit under section 45 for the taxable year or
any prior taxable year.''.
(f) Elimination of Certain Credit Reductions.--Section
45(b)(3) (relating to credit reduced for grants, tax-exempt
bonds, subsidized energy financing, and other credits) is
amended--
(1) by inserting ``the lesser of \1/2\ or'' before
``a fraction'' in the matter preceding subparagraph
(A), and
(2) by adding at the end the following new
sentence: ``This paragraph shall not apply with respect
to any facility described in subsection
(d)(2)(A)(ii).''.
(g) Effective Dates.--
(1) In general.--Except as otherwise provided in
this subsection, the amendments made by this section
shall apply to electricity produced and sold after the
date of the enactment of this Act, in taxable years
ending after such date.
(2) Certain biomass facilities.--With respect to
any facility described in section 45(d)(3)(A)(ii) of
the Internal Revenue Code of 1986, as added by
subsection (b)(1), which is placed in service before
the date of the enactment of this Act, the amendments
made by this section shall apply to electricity
produced and sold after December 31, 2004, in taxable
years ending after such date.
(3) Credit rate and period for new facilities.--The
amendments made by subsection (c) shall apply to
electricity produced and sold after December 31, 2004,
in taxable years ending after such date.
(4) Nonapplication of amendments to preeffective
date poultry waste facilities.--The amendments made by
this section shall not apply with respect to any
poultry waste facility (within the meaning of section
45(c)(3)(C), as in effect on the day before the date of
the enactment of this Act) placed in service before
January 1, 2004.
(5) Refined coal production facilities.--Section
45(e)(8) of the Internal Revenue Code of 1986, as added
by this section, shall apply to refined coal produced
and sold after the date of the enactment of this Act.
SEC. 711. CERTAIN BUSINESS RELATED CREDITS ALLOWED AGAINST REGULAR AND
MINIMUM TAX.
(a) In General.--Subsection (c) of section 38 (relating to
limitation based on amount of tax) is amended by redesignating
paragraph (4) as paragraph (5) and by inserting after paragraph
(3) the following new paragraph:
``(4) Special rules for specified credits.--
``(A) In general.--In the case of specified
credits--
``(i) this section and section 39
shall be applied separately with
respect to such credits, and
``(ii) in applying paragraph (1) to
such credits--
``(I) the tentative minimum
tax shall be treated as being
zero, and
``(II) the limitation under
paragraph (1) (as modified by
subclause (I)) shall be reduced
by the credit allowed under
subsection (a) for the taxable
year (other than the specified
credits).
``(B) Specified credits.--For purposes of
this subsection, the term `specified credits'
includes--
``(i) for taxable years beginning
after December 31, 2004, the credit
determined under section 40,
``(ii) the credit determined under
section 45 to the extent that such
credit is attributable to electricity
or refined coal produced--
``(I) at a facility which
is originally placed in service
after the date of the enactment
of this paragraph, and
``(II) during the 4-year
period beginning on the date
that such facility was
originally placed in service''.
(b) Conforming Amendments.--Paragraph (2)(A)(ii)(II) and
(3)(A)(ii)(II) of section 38(c) are each amended by inserting
``or the specified credits'' after ``employee credit''.
(c) Effective Date.--Except as otherwise provided, the
amendments made by this section shall apply to taxable years
ending after the date of the enactment of this Act.
SEC. 712. INCLUSION OF PRIMARY AND SECONDARY MEDICAL STRATEGIES FOR
CHILDREN AND ADULTS WITH SICKLE CELL DISEASE AS
MEDICAL ASSISTANCE UNDER THE MEDICAID PROGRAM.
(a) Optional Medical Assistance.--
(1) In general.--Section 1905 of the Social
Security Act (42 U.S.C. 1396d) is amended--
(A) in subsection (a)--
(i) by striking ``and'' at the end
of paragraph (26);
(ii) by redesignating paragraph
(27) as paragraph (28); and
(iii) by inserting after paragraph
(26), the following:
``(27) subject to subsection (x), primary and
secondary medical strategies and treatment and services
for individuals who have Sickle Cell Disease; and'';
and
(B) by adding at the end the following:
``(x) For purposes of subsection (a)(27), the strategies,
treatment, and services described in that subsection include
the following:
``(1) Chronic blood transfusion (with deferoxamine
chelation) to prevent stroke in individuals with Sickle
Cell Disease who have been identified as being at high
risk for stroke.
``(2) Genetic counseling and testing for
individuals with Sickle Cell Disease or the sickle cell
trait to allow health care professionals to treat such
individuals and to prevent symptoms of Sickle Cell
Disease.
``(3) Other treatment and services to prevent
individuals who have Sickle Cell Disease and who have
had a stroke from having another stroke.''.
(2) Rule of Construction.--Nothing in subsections
(a)(27) or (x) of section 1905 of the Social Security
Act (42 U.S.C. 1396d), as added by paragraph (1), shall
be construed as implying that a State medicaid program
under title XIX of such Act could not have treated,
prior to the date of enactment of this Act, any of the
primary and secondary medical strategies and treatment
and services described in such subsections as medical
assistance under such program, including as early and
periodic screening, diagnostic, and treatment services
under section 1905(r) of such Act.
(b) Federal Reimbursement for Education and Other Services
Related to the Prevention and Treatment of Sickle Cell
Disease.--Section 1903(a)(3) of the Social Security Act (42
U.S.C. 1396b(a)(3)) is amended--
(1) in subparagraph (D), by striking ``plus'' at
the end and inserting ``and''; and
(2) by adding at the end the following:
``(E) 50 percent of the sums expended with
respect to costs incurred during such quarter
as are attributable to providing--
``(i) services to identify and
educate individuals who are likely to
be eligible for medical assistance
under this title and who have Sickle
Cell Disease or who are carriers of the
sickle cell gene, including education
regarding how to identify such
individuals; or
``(ii) education regarding the
risks of stroke and other
complications, as well as the
prevention of stroke and other
complications, in individuals who are
likely to be eligible for medical
assistance under this title and who
have Sickle Cell Disease; plus''.
(c) Demonstration Program for the Development and
Establishment of Systemic Mechanisms for the Prevention and
Treatment of Sickle Cell Disease.--
(1) Authority to conduct demonstration program.--
(A) In general.--The Administrator, through
the Bureau of Primary Health Care and the
Maternal and Child Health Bureau, shall conduct
a demonstration program by making grants to up
to 40 eligible entities for each fiscal year in
which the program is conducted under this
section for the purpose of developing and
establishing systemic mechanisms to improve the
prevention and treatment of Sickle Cell
Disease, including through--
(i) the coordination of service
delivery for individuals with Sickle
Cell Disease;
(ii) genetic counseling and
testing;
(iii) bundling of technical
services related to the prevention and
treatment of Sickle Cell Disease;
(iv) training of health
professionals; and
(v) identifying and establishing
other efforts related to the expansion
and coordination of education,
treatment, and continuity of care
programs for individuals with Sickle
Cell Disease.
(B) Grant award requirements.--
(i) Geographic diversity.--The
Administrator shall, to the extent
practicable, award grants under this
section to eligible entities located in
different regions of the United States.
(ii) Priority.--In awarding grants
under this subsection, the
Administrator shall give priority to
awarding grants to eligible entities
that are--
(I) Federally-qualified
health centers that have a
partnership or other
arrangement with a
comprehensive Sickle Cell
Disease treatment center that
does not receive funds from the
National Institutes of Health;
or
(II) Federally-qualified
health centers that intend to
develop a partnership or other
arrangement with a
comprehensive Sickle Cell
Disease treatment center that
does not receive funds from the
National Institutes of Health.
(2) Additional requirements.--An eligible entity
awarded a grant under this subsection shall use funds
made available under the grant to carry out, in
addition to the activities described in paragraph
(1)(A), the following activities:
(A) To facilitate and coordinate the
delivery of education, treatment, and
continuity of care for individuals with Sickle
Cell Disease under--
(i) the entity's collaborative
agreement with a community-based Sickle
Cell Disease organization or a
nonprofit entity that works with
individuals who have Sickle Cell
Disease;
(ii) the Sickle Cell Disease
newborn screening program for the State
in which the entity is located; and
(iii) the maternal and child health
program under title V of the Social
Security Act (42 U.S.C. 701 et seq.)
for the State in which the entity is
located.
(B) To train nursing and other health staff
who provide care for individuals with Sickle
Cell Disease.
(C) To enter into a partnership with adult
or pediatric hematologists in the region and
other regional experts in Sickle Cell Disease
at tertiary and academic health centers and
State and county health offices.
(D) To identify and secure resources for
ensuring reimbursement under the medicaid
program, State children's health insurance
program, and other health programs for the
prevention and treatment of Sickle Cell
Disease.
(3) National coordinating center.--
(A) Establishment.--The Administrator shall
enter into a contract with an entity to serve
as the National Coordinating Center for the
demonstration program conducted under this
subsection.
(B) Activities described.--The National
Coordinating Center shall--
(i) collect, coordinate, monitor,
and distribute data, best practices,
and findings regarding the activities
funded under grants made to eligible
entities under the demonstration
program;
(ii) develop a model protocol for
eligible entities with respect to the
prevention and treatment of Sickle Cell
Disease;
(iii) develop educational materials
regarding the prevention and treatment
of Sickle Cell Disease; and
(iv) prepare and submit to Congress
a final report that includes
recommendations regarding the
effectiveness of the demonstration
program conducted under this subsection
and such direct outcome measures as--
(I) the number and type of
health care resources utilized
(such as emergency room visits,
hospital visits, length of
stay, and physician visits for
individuals with Sickle Cell
Disease); and
(II) the number of
individuals that were tested
and subsequently received
genetic counseling for the
sickle cell trait.
(4) Application.--An eligible entity desiring a
grant under this subsection shall submit an application
to the Administrator at such time, in such manner, and
containing such information as the Administrator may
require.
(5) Definitions.--In this subsection:
(A) Administrator.--The term
``Administrator'' means the Administrator of
the Health Resources and Services
Administration.
(B) Eligible entity.--The term ``eligible
entity'' means a Federally-qualified health
center, a nonprofit hospital or clinic, or a
university health center that provides primary
health care, that--
(i) has a collaborative agreement
with a community-based SickleCell
Disease organization or a nonprofit
entity with experience in working with
individuals who have Sickle Cell
Disease; and
(ii) demonstrates to the
Administrator that either the
Federally-qualified health center, the
nonprofit hospital or clinic, the
university health center, the
organization or entity described in
clause (i), or the experts described in
paragraph (2)(C), has at least 5 years
of experience in working with
individuals who have Sickle Cell
Disease.
(C) Federally-qualified health center.--The
term ``Federally-qualified health center'' has
the meaning given that term in section
1905(l)(2)(B) of the Social Security Act (42
U.S.C. 1396d(l)(2)(B)).
(6) Authorization of appropriations.--There is
authorized to be appropriated to carry out this
subsection, $10,000,000 for each of fiscal years 2005
through 2009.
(d) Effective Date.--The amendments made by subsections (a)
and (b) take effect on the date of enactment of this Act and
apply to medical assistance and services provided under title
XIX of the Social Security Act (42 U.S.C. 1396 et seq.) on or
after that date.
SEC. 713. 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 for Free No change No change On or before
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. 714. CERTAIN STEAM GENERATORS, AND CERTAIN REACTOR VESSEL HEADS
AND PRESSURIZERS, 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 and Pressurizers.--
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
heads and 12/31/2008 ''.
pressurizers
for nuclear
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.
TITLE VIII--REVENUE PROVISIONS
Subtitle A--Provisions to Reduce Tax Avoidance Through Individual and
Corporate Expatriation
SEC. 801. 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.
``(3) Coordination with subsection (b).--Paragraph
(1) shall not apply to any entity which is treated as a
domestic corporation under subsection (b).
``(b) Inverted Corporations Treated as Domestic
Corporations.--Notwithstanding section 7701(a)(4), a foreign
corporation shall be treated for purposes of this title as a
domestic corporation if such corporation would be a surrogate
foreign corporation if subsection (a)(2) were applied by
substituting `80 percent' for `60 percent'.
``(c) 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.
``(d) 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.
``(e) 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.
``(f) 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.
``(g) 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. 802. 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--
``(1) the rate of tax specified in section
1(h)(1)(C), multiplied by
``(2) 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. 803. 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. 804. 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. 805. 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. 806. 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) Effectiveness of Corporate Expatriation Provisions.--
The Secretary of the Treasury or the Secretary's delegate shall
conduct a study of the effectiveness 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 effectiveness of such provisions in carrying out
the purposes of this title. Not later than December 31, 2006,
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. 811. 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 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) Penalty Reported to SEC.--In the case of a person--
``(1) which is required to file periodic reports
under section 13 or 15(d) of the Securities Exchange
Act of 1934 or is required to be consolidated with
another person for purposes of such reports, and
``(2) which--
``(A) is required to pay a penalty under
this section with respect to a listed
transaction,
``(B) is required to pay a penalty under
section 6662A with respect to any reportable
transaction at a rate prescribed under section
6662A(c), or
``(C) is required to pay a penalty under
section 6662(h) with respect to any reportable
transaction and would (but for section
6662A(e)(2)(C)) have been subject to penalty
under section 6662A at a rate prescribed under
section 6662A(c),
the requirement to pay such penalty shall be disclosed in such
reports filed by such person for such periods as the Secretary
shall specify. Failure to make a disclosure in accordance with
the preceding sentence shall be treated as a failure to which
the penalty under subsection (b)(2) applies.
``(f) 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. 812. 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 Listed and Other
Avoidance 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.
``(C) Coordination with valuation
penalties.--
``(i) Section 6662(e).--Section
6662(e) shall not apply to any portion
of an understatement on which a penalty
is imposed under this section.
``(ii) Section 6662(h).--This
section shall not apply to any portion
of an understatement on which a penalty
is imposed under section 6662(h).
``(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) Clerical Amendments.--
(1) The heading for section 6662 is amended to read
as follows:
``SEC. 6662. IMPOSITION OF ACCURACY-RELATED PENALTY ON
UNDERPAYMENTS.''.
(2) 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. 813. 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. 814. 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. 815. 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, insuring, 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) Effective Date.--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.
SEC. 816. 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. 817. 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. 818. 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. 819. 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) Secretarial List.--
(1) In general.--Section 6662(d) is amended by
adding at the end the following new paragraph:
``(3) Secretarial list.--The Secretary may
prescribe a list of positions which the Secretary
believes do not meet the 1 or more of the standards
specified in paragraph (2)(B)(i), section 6664(d)(2),
and section 6694(a)(1). Such list (and any revisions
thereof) shall be published in the Federal Register or
the Internal Revenue Bulletin.''.
(2) Conforming amendment.--Paragraph (2) of section
6662(d) is amended by striking subparagraph (D).
(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. 820. 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, which is--
``(1) subject to penalty under section 6700, 6701,
6707, or 6708, or
``(2) in violation of any requirement under
regulations issued under section 330 of title 31,
United States Code.''.
(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. 821. 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
$10,000.
``(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) $100,000, or
``(II) 50 percent of the
amount 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. 822. REGULATION OF INDIVIDUALS PRACTICING BEFORE THE DEPARTMENT OF
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 and may be in addition to, or in lieu of,
any suspension, disbarment, or censure of the
representative.''.
(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. 831. 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. 832. 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 31-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. 833. 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 after subsection (d) 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 before the date
which is 24 months after 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) Special rule for securitization partnerships.--
Section 743 is amended by adding after subsection (e)
the following new subsection:
``(f) Exception for Securitization Partnerships.--
``(1) No adjustment of partnership basis.--For
purposes of this section, a securitization partnership
shall not be treated as having a substantial built-in
loss with respect to any transfer.
``(2) Securitization partnership.--For purposes of
paragraph (1), the term `securitization partnership'
means any partnership the sole business activity of
which is to issue securities which provide for a fixed
principal (or similar) amount and which are primarily
serviced by the cash flows of a discrete pool (either
fixed or revolving) of receivables or other financial
assets that by their terms convert into cash in a
finite period, but only if the sponsor of the pool
reasonably believes that the receivables and other
financial assets comprising the pool are not acquired
so as to be disposed of.''
(6) 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) Exception for securitization partnerships.--
Section 734 is amended by inserting after subsection
(d) the following new subsection:
``(e) Exception for Securitization Partnerships.--For
purposes of this section, a securitization partnership (as
defined in section 743(f)) shall not be treated as having a
substantial basis reduction with respect to any distribution of
property to a partner.''.
(5) 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. 834. 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. 835. 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. 836. LIMITATION ON TRANSFER OR IMPORTATION OF BUILT-IN LOSSES.
(a) In General.--Section 362 (relating to basis to
corporations) is amended by adding at the end the following new
subsection:
``(e) Limitations on Built-In Losses.--
``(1) Limitation on importation of built-in
losses.--
``(A) In general.--If in any transaction
described in subsection (a) or (b) there would
(but for this subsection) be an importation of
a net built-in loss, the basis of each property
described in subparagraph (B) which is acquired
in such transaction shall (notwithstanding
subsections (a) and (b)) be its fair market
value immediately after such transaction.
``(B) Property described.--For purposes of
subparagraph (A), property is described in this
subparagraph if--
``(i) gain or loss with respect to
such property is not subject to tax
under this subtitle in the hands of the
transferor immediately before the
transfer, and
``(ii) gain or loss with respect to
such property is subject to such tax in
the hands of the transferee immediately
after such transfer.
In any case in which the transferor is a
partnership, the preceding sentence shall be
applied by treating each partner in such
partnership as holding such partner's
proportionate share of the property of such
partnership.
``(C) Importation of net built-in loss.--
For purposes of subparagraph (A), there is an
importation of a net built-in loss in a
transaction if the transferee's aggregate
adjusted bases of property described in
subparagraph (B) which is transferred in such
transaction would (but for this paragraph)
exceed the fair market value of such property
immediately after such transaction.
``(2) Limitation on transfer of built-in losses in
section 351 transactions.--
``(A) In general.--If--
``(i) property is transferred by a
transferor in any transaction which is
described in subsection (a) and which
is not described in paragraph (1) of
this subsection, and
``(ii) the transferee's aggregate
adjusted bases of such property so
transferred would (but for this
paragraph) exceed the fair market value
of such property immediately after such
transaction,
then, notwithstanding subsection (a), the
transferee's aggregate adjusted bases of the
property so transferred shall not exceed the
fair market value of such property immediately
after such transaction.
``(B) Allocation of basis reduction.--The
aggregate reduction in basis by reason of
subparagraph (A) shall be allocated among the
property so transferred in proportion to their
respective built-in losses immediately before
the transaction.
``(C) Election to apply limitation to
transferor's stock basis.--
``(i) In general.--If the
transferor and transferee of a
transaction described in subparagraph
(A) both elect the application of this
subparagraph--
``(I) subparagraph (A)
shall not apply, and
``(II) the transferor's
basis in the stock received for
property to which subparagraph
(A) does not apply by reason of
the election shall not exceed
its fair market value
immediately after the transfer.
``(ii) Election.--An election under
clause (i) shall be included with the
return of tax for the taxable year in
which the transaction occurred, shall
be in such form and manner as the
Secretary may prescribe, and, once
made, shall be irrevocable.''.
(b) Comparable Treatment Where Liquidation.--Paragraph (1)
of section 334(b) (relating to liquidation of subsidiary) is
amended to read as follows:
``(1) In general.--If property is received by a
corporate distributee in a distribution in a complete
liquidation to which section 332 applies (or in a
transfer described in section 337(b)(1)), the basis of
such property in the hands of such distributee shall be
the same as it would be in the hands of the transferor;
except that the basis of such property in the hands of
such distributee shall be the fair market value of the
property at the time of the distribution--
``(A) in any case in which gain or loss is
recognized by the liquidating corporation with
respect to such property, or
``(B) in any case in which the liquidating
corporation is a foreign corporation, the
corporate distributee is a domestic
corporation, and the corporate distributee's
aggregate adjusted bases of property described
in section 362(e)(1)(B) which is distributed in
such liquidation would (but for this
subparagraph) exceed the fair market value of
such property immediately after such
liquidation.''.
(c) Effective Dates.--
(1) In general.--The amendment made by subsection
(a) shall apply to transactions after the date of the
enactment of this Act.
(2) Liquidations.--The amendment made by subsection
(b) shall apply to liquidations after the date of the
enactment of this Act.
SEC. 837. 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--
``(i) any bank (as defined by
section 2(c) of the Bank Holding
Company Act of 1956 (12 U.S.C.
1841(c)), without regard to
subparagraphs (C) and (G) of paragraph
(2) of such section), or
``(ii) any corporation not
described in clause (i) with respect to
which a bank holding company (as
defined by section 2(a) of such Act) or
financial holding company (as defined
by section 2(p) of such Act) owns
directly or indirectly more than 80
percent by vote or value of the stock
of such corporation;''.
(b) Effective Date.--The amendment made by this section
shall take effect on the date of the enactment of this Act.
SEC. 838. 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. 839. 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. 840. 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. 841. 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
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 is includible
(determined without regard to properly
allocable deductions and qualified
deficits under section 952(c)(1)(B))
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 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 is includible (determined without
regard to properly allocable deductions
and qualified deficits under section
952(c)(1)(B)) 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. 842. 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), except as
provided in paragraph (4), 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 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. 843. 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. 844. 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.
SEC. 845. EXPANDED DISALLOWANCE OF DEDUCTION FOR INTEREST ON
CONVERTIBLE DEBT.
(a) In General.--Paragraph (2) of section 163(l) is amended
by inserting ``or equity held by the issuer (or any related
party) in any other person'' after ``or a related party''.
(b) Capitalization Allowed With Respect to Equity of
Persons Other Than Issuer and Related Parties.--Section 163(l)
is amended by redesignating paragraphs (4) and (5) as
paragraphs (5) and (6) and by inserting after paragraph (3) the
following new paragraph:
``(4) Capitalization allowed with respect to equity
of persons other than issuer and related parties.--If
the disqualified debt instrument of a corporation is
payable in equity held by the issuer (or any related
party) in any other person (other than a related
party), the basis of such equity shall be increased by
the amount not allowed as a deduction by reason of
paragraph (1) with respect to the instrument.''.
(c) Exception for Certain Instruments Issued by Dealers in
Securities.--Section 163(l), as amended by subsection (b), is
amended by redesignating paragraphs (5) and (6) as paragraphs
(6) and (7) and by inserting after paragraph (4) the following
new paragraph:
``(5) Exception for certain instruments issued by
dealers in securities.--For purposes of this
subsection, the term `disqualified debt instrument'
does not include indebtedness issued by a dealer in
securities (or a related party) which is payable in, or
by reference to, equity (other than equity of the
issuer or a related party) held by such dealer in its
capacity as a dealer in securities. For purposes of
this paragraph, the term `dealer in securities' has the
meaning given such term by section 475.''.
(d) Conforming Amendment.--Paragraph (3) of section 163(l)
is amended by striking ``or a related party'' in the material
preceding subparagraph (A) and inserting ``or any other
person''.
(e) Effective Date.--The amendments made by this section
shall apply to debt instruments issued after October 3, 2004.
PART III--LEASING
SEC. 847. 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 and Amortization Periods for
Intangibles Leased to Tax-Exempt Entity.--
(1) Computer software.--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)).''.
(2) Certain interests or rights acquired
separately.--Paragraph (2) of section 167(f) is amended
by adding at the end the following new sentence: ``If
such property would be tax-exempt use property as
defined in subsection (h) of section 168 if such
section applied to such property, the useful life under
such regulations shall not be less than 125 percent of
the lease term (within the meaning of section
168(i)(3)).''.
(3) Section 197 intangibles.--Section 197(f)
(relating to special rules) is amended by adding at the
end the following new paragraph:
``(10) Tax-exempt use property subject to lease.--
In the case of any section 197 intangible which would
be tax-exempt use property as defined in subsection (h)
of section 168 if such section applied to such
intangible, the amortization period under this section
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.''.
(e) Treatment of Certain Indian Tribal Governments As Tax-
Exempt Entities.--Section 168(h)(2)(A) 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
inserting at the end the following:
``(iv) any Indian tribal government
described in section 7701(a)(40).
For purposes of applying this subsection, any
Indian tribal government referred to in clause
(iv) shall be treated in the same manner as a
State.''
SEC. 848. 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), except that such section shall be
applied--
``(A) without regard to paragraphs (1)(C)
and (3) thereof, and
``(B) as if property described in--
``(i) section 167(f)(1)(B),
``(ii) section 167(f)(2), and
``(iii) section 197 intangible,
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.--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.
``(4) Property with more than 7-year class life.--
In the case of a lease--
``(A) of property with a class life (as
defined in section 168(i)(1)) of more than 7
years, other than fixed-wing aircraft and
vessels, and
``(B) under which the lessee has the option
to purchase the property,
the lease meets the requirements of this paragraph only
if the purchase price under the option equals the fair
market value of the property (determined at the time of
exercise).
``(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
purposes 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. 849. 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, 2006, 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 section 848, shall apply to
property exchanged or converted after the date of the
enactment of this Act.
(4) Intangibles and indian tribal governments.--The
amendments made subsections (b)(2), (b)(3), and (e) of
section 847, and the treatment of property described in
clauses (ii) and (iii) of section 470(c)(2)(B) of the
Internal Revenue Code of 1986 (as added by section 848)
as tangible property, shall apply to leases entered
into after October 3, 2004.
Subtitle C--Reduction of Fuel Tax Evasion
SEC. 851. 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. This clause shall be
applied without regard to use of the
vehicle by any organization which is
described in section 501(c) and exempt
from tax under section 501(a).''.
(2) No tax-free sales.--Subsection (b) of section
4082 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. 852. MODIFICATION OF DEFINITION OF OFF-HIGHWAY VEHICLE.
(a) In General.--Section 7701(a) (relating to definitions)
is amended by adding at the end the following new paragraph:
``(48) Off-highway vehicles.--
``(A) Off-highway transportation
vehicles.--
``(i) In general.--A vehicle shall
not be treated as a highway vehicle if
such vehicle is specially designed for
the primary function of transporting a
particular type of load other than over
the public highway and because of this
special design such vehicle's
capability to transport a load over the
public highway is substantially limited
or impaired.
``(ii) Determination of vehicle's
design.--For purposes of clause (i), a
vehicle's design is determined solely
on the basis of its physical
characteristics.
``(iii) Determination of
substantial limitation or impairment.--
For purposes of clause (i), in
determining whether substantial
limitation or impairment exists,
account may be taken of factors such as
the size of the vehicle, whether such
vehicle is subject to the licensing,
safety, and other requirements
applicable to highway vehicles, and
whether such vehicle can transport a
load at a sustained speed of at least
25 miles per hour. It is immaterial
that a vehicle can transport a greater
load off the public highway than such
vehicle is permitted to transport over
the public highway.
``(B) Nontransportation trailers and
semitrailers.--A trailer or semitrailer shall
not be treated as a highway vehicle if it is
specially designed to function only as an
enclosed stationary shelter for the carrying on
of an off-highway function at an off-highway
site.''.
(c) Effective Dates.--
(1) In general.--Except as provided in paragraph
(2), the amendment made by this section shall take
effect on the date of the enactment of this Act.
(2) Fuel taxes.--With respect to taxes imposed
under subchapter B of chapter 31 and part III of
subchapter A of chapter 32, the amendment made by this
section shall apply to taxable periods beginning after
the date of the enactment of this Act.
SEC. 853. 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.--
(A) In general.--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.--For purposes of
paragraph (2)(C), a refueler truck, tanker, or
tank wagon shall be treated as part of a
terminal if--
``(i) such terminal is located
within a secured area of an airport,
``(ii) any aviation-grade kerosene
which is loaded in such truck, tanker,
or wagon at such terminal is for
delivery only into aircraft at the
airport in which such terminal is
located,
``(iii) such truck, tanker, or
wagon meets the requirements of
subparagraph (B) with respect to such
terminal, and
``(iv) 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 a terminal if
such truck, tanker, or wagon--
``(i) has storage tanks, hose, and
coupling equipment designed and used
for the purposes of fueling aircraft,
``(ii) is not registered for
highway use, and
``(iii) 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)(iii)(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.''.
(B) List of airports with secured
terminals.--Not later than December 15, 2004,
the Secretary of the Treasury shall publish and
maintain a list of airports which include a
secured area in which a terminal is located
(within the meaning of section 4081(a)(3)(A)(i)
of the Internal Revenue Code of 1986, as added
by this paragraph).
(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 applicable under
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) Section 4041(m)(1) is amended to read
as follows:
``(1) In general.--In the case of the sale or use
of any partially exempt methanol or ethanol fuel the
rate of the tax imposed by subsection (a)(2) shall be--
``(A) after September 30, 1997, and before
October 1, 2005--
``(i) in the case of fuel none of
the alcohol in which consists of
ethanol, 9.15 cents per gallon, and
``(ii) in any other case, 11.3
cents per gallon, and
``(B) after September 30, 2005--
``(i) in the case of fuel none of
the alcohol in which consists of
ethanol, 2.15 cents per gallon, and
``(ii) in any other case, 4.3 cents
per gallon.''.
(F) Sections 4101(a), 4103, 4221(a), and
6206 are each amended by striking ``, 4081, or
4091'' and inserting ``or 4081''.
(G) Section 6416(b)(2) is amended by
striking ``4091 or''.
(H) Section 6416(b)(3) is amended by
striking ``or 4091'' each place it appears.
(I) 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)''.
(J) Section 6427(j)(1) is amended by
striking ``, 4081, and 4091'' and inserting
``and 4081''.
(K)(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)''.
(L) Subparagraph (B) of section 6724(d)(1),
as amended by section 805, is amended by
striking clause (xvi) and by redesignating the
succeeding clauses accordingly.
(M) Paragraph (2) of section 6724(d), as
amended by section 805, is amended by striking
subparagraph (X) and by redesignating the
succeeding subparagraphs accordingly.
(N) 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''.
(O) 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).''.
(P) Subsection (b) of section 9508 is
amended by striking paragraph (3) and by
redesignating paragraphs (4) and (5) as
paragraphs (3) and (4), respectively.
(Q) Section 9508(c)(2)(A) is amended by
striking ``sections 4081 and 4091'' and
inserting ``section 4081''.
(R) 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.''.
(S) 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''.
(T) 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 December 31, 2004.
(f) Floor Stocks Tax.--
(1) In general.--There is hereby imposed on
aviation-grade kerosene held on January 1, 2005, 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 sum of--
(i) the tax imposed before such
date on such kerosene under section
4091 of the Internal Revenue Code of
1986, as in effect on such date, and
(ii) in the case of kerosene held
exclusively for such person's own use,
the amount which such person would (but
for this clause) reasonably expect (as
of such date) to be paid as a refund
under section 6427(l) of such Code with
respect to such kerosene.
(2) Exception for fuel held in aircraft fuel
tank.--Paragraph (1) shall not apply to kerosene held
in the fuel tank of an aircraft on January 1, 2005.
(3) Liability for tax and method of payment.--
(A) Liability for tax.--The person holding
the kerosene on January 1, 2005, 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.
(4) 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) in any case in which tax was not
imposed by section 4091 of such Code, 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) of such Code to the extent of
the remainder.
(5) Held by a person.--For purposes of this
subsection, 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).
(6) 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. 854. 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. 855. ELIMINATION OF ADMINISTRATIVE REVIEW FOR TAXABLE USE OF DYED
FUEL.
(a) In General.--Section 6715 is amended by inserting at
the end the following new subsection:
``(e) No Administrative Appeal for Third and Subsequent
Violations.--In the case of any person who is found to be
subject to the penalty under this section after a chemical
analysis of such fuel and who has been penalized under this
section at least twice after the date of the enactment of this
subsection, no administrative appeal or review shall be allowed
with respect to such finding except in the case of a claim
regarding--
``(1) fraud or mistake in the chemical analysis, or
``(2) mathematical calculation of the amount of the
penalty.''.
(b) Effective Date.--The amendment made by this section
shall apply to penalties assessed after the date of the
enactment of this Act.
SEC. 856. PENALTY ON UNTAXED CHEMICALLY ALTERED DYED FUEL MIXTURES.
(a) In General.--Section 6715(a) (relating to dyed fuel
sold for use or used in taxable use, etc.) is amended by
striking ``or'' in paragraph (2), by inserting ``or'' at the
end of paragraph (3), and by inserting after paragraph (3) the
following new paragraph:
``(4) any person who has knowledge that a dyed fuel
which has been altered as described in paragraph (3)
sells or holds for sale such fuel for any use which the
person knows or has reason to know is not a nontaxable
use of such fuel,''.
(b) Conforming Amendment.--Section 6715(a)(3) is amended by
striking ``alters, or attempts to alter,'' and inserting
``alters, chemically or otherwise, or attempts to so alter,''.
(c) Effective Date.--The amendments made by this section
shall take effect on the date of the enactment of this Act.
SEC. 857. TERMINATION OF DYED DIESEL USE BY INTERCITY BUSES.
(a) In General.--Paragraph (3) of section 4082(b) (relating
to nontaxable use) is amended to read as follows:
``(3) any use described in section
4041(a)(1)(C)(iii)(II).''.
(b) Ultimate Vendor Refund.--Subsection (b) of section 6427
is amended by adding at the end the following new paragraph:
``(4) Refunds for use of diesel fuel in certain
intercity buses.--With respect to any fuel to which
paragraph (2)(A) applies, if the ultimate purchaser of
such fuel 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--
``(A) is registered under section 4101, and
``(B) meets the requirements of
subparagraph (A), (B), or (D) of section
6416(a)(1).''.
(c) Payment of Refunds.--Subparagraph (A) of section
6427(i)(4), as amended by this Act, is amended by inserting
``subsections (b)(4) and'' after ``filed under''.
(d) Effective Date.--The amendments made by this section
shall apply to fuel sold after December 31, 2004.
SEC. 858. AUTHORITY TO INSPECT ON-SITE RECORDS.
(a) In General.--Section 4083(d)(1)(A) (relating to
administrative authority), as 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. 859. ASSESSABLE PENALTY FOR REFUSAL OF ENTRY.
(a) In General.--Part I of subchapter B of chapter 68
(relating to assessable penalties), as amended by this Act, is
amended by inserting after section 6716 the following new
section:
``SEC. 6717. REFUSAL OF ENTRY.
``(a) In General.--In addition to any other penalty
provided by law, any person who refuses to admit entry or
refuses to permit any other action by the Secretary authorized
by section 4083(d)(1) shall pay a penalty of $1,000 for such
refusal.
``(b) 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.
``(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.''.
(b) Conforming Amendments.--
(1) Section 4083(d)(3), as amended by this Act, is
amended--
(A) by striking ``entry.--The penalty'' and
inserting: ``entry.--
``(A) Forfeiture.--The penalty'', and
(B) by adding at the end the following new
subparagraph:
``(B) Assessable penalty.--For additional
assessable penalty for the refusal to admit
entry or other refusal to permit an action by
the Secretary authorized by paragraph (1), see
section 6717.''.
(2) The table of sections for part I of subchapter
B of chapter 68, as amended by this Act, is amended by
inserting after the item relating to section 6716 the
following new item:
``Sec. 6717. Refusal of entry.''.
(c) Effective Date.--The amendments made by this section
shall take effect on January 1, 2005.
SEC. 860. 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 March 1, 2005.
(c) Publication of Registered Persons.--Beginning on
January 1, 2005, the Secretary of the Treasury (or the
Secretary's delegate) shall periodically publish under section
6103(k)(7) of the Internal Revenue Code of 1986 a current list
of persons registered under section 4101 of such Code who are
required to register under such section.
SEC. 861. 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
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), as amended by
this Act, is amended by inserting after section 6717
the following new section:
``SEC. 6718. 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, as amended by
this Act, is amended by inserting after the item
relating to section 6717 the following new item:
``Sec. 6718. Failure to display tax registration on vessels.''.
(c) Effective Dates.--
(1) Subsection (a).--The amendments made by
subsection (a) shall take effect on January 1, 2005.
(2) Subsection (b).--The amendments made by
subsection (b) shall apply to penalties imposed after
December 31, 2004.
SEC. 862. REGISTRATION OF PERSONS WITHIN FOREIGN TRADE ZONES, ETC.
(a) In General.--Section 4101(a), as amended by this Act,
is amended by redesignating paragraph (2) as paragraph (3), and
by inserting after paragraph (1) the following new paragraph:
``(2) Registration of persons within foreign trade
zones, etc.--The Secretary shall require registration
by any person which--
``(A) operates a terminal or refinery
within a foreign trade zone or within a customs
bonded storage facility, or
``(B) holds an inventory position with
respect to a taxable fuel in such a
terminal.''.
(b) Technical Amendment.--Section 6718(a), as added by this
Act, is amended by striking ``section 4101(a)(2)'' and
inserting ``section 4101(a)(3)''.
(c) Effective Date.--The amendments made by this section
shall take effect on January 1, 2005.
SEC. 863. 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), as amended by
this Act, is amended by inserting after section 6718 at
the end the following new section:
``SEC. 6719. 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, as amended by
this Act, is amended by inserting after the item
relating to section 6718 the following new item:
``Sec. 6719. 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 December 31, 2004.
SEC. 864. ELECTRONIC FILING OF REQUIRED INFORMATION REPORTS.
(a) In General.--Section 4101(d) is amended by adding at
the end the following new flush sentence:
``Any person who is required to report under this subsection
and who has 25 or more reportable transactions in a month shall
file such report in electronic format.''.
(b) Effective Date.--The amendment made by this section
shall apply on January 1, 2006.
SEC. 865. 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.
``(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 are certified and
entitled to a refund under subparagraph (C) or
(D) of subsection (b)(2).''.
(b) Effective Date.--The amendments made by this section
shall take effect on January 1, 2005.
SEC. 866. TWO-PARTY EXCHANGES.
(a) In General.--Subpart C of part III of subchapter A of
chapter 32, as amended by this Act, is amended by inserting
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 of 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 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 product 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 C of part III of subchapter A of chapter 32, as amended
by of this Act, is amended by adding after the last item 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. 867. 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. 868. 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, 6719, 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 on or after the date of the
enactment of this Act.
SEC. 869. 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 9.45 cents (4.725 cents
in the case of a biasply tire or super single tire) for each 10
pounds so much of the maximum rated load capacity thereof as
exceeds 3,500 pounds.''
(b) Biasply and Super Single Tires.--Section 4072 is
amended by adding at the end the following new subsections:
``(c) Biasply.--For purposes of this part, the term
`biasply tire'' means a pneumatic tire on which the ply cords
that extend to the beads are laid at alternate angles
substantially less than 90 degrees to the centerline of the
tread.
``(d) Super single tire.--For purposes of this part, the
term `super single tire' means a single tire greater than 13
inches in cross section width designed to replace 2 tires in a
dual fitment.''.
(b) Taxable Tire.--Section 4072, as amended by subsection
(a), is amended by redesignating subsections (a), (b), (c), and
(d) as subsections (b), (c), (d), and (e) 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.
SEC. 870. TRANSMIX AND DIESEL FUEL BLEND STOCKS TREATED AS TAXABLE
FUEL.
(a) In General.--Paragraph (3) of section 4083(a) is
amended to read as follows:
``(3) Diesel fuel.--
``(A) In general.--The term `diesel fuel'
means--
``(i) any liquid (other than
gasoline) which is suitable for use as
a fuel in a diesel-powered highway
vehicle, or a diesel-powered train,
``(ii) transmix, and
``(iii) diesel fuel blend stocks
identified by the Secretary.
``(B) Transmix.--For purposes of
subparagraph (A), the term `transmix' means a
byproduct of refined products pipeline
operations created by the mixing of different
specification products during pipeline
transportation.''.
(b) Conforming Amendment.--Subsection (h) of section 6427
is amended to read as follows:
``(h) Blend Stocks Not Used for Producing Taxable Fuel.--
``(1) Gasoline blend stocks or additives not used
for producing gasoline.--Except as provided in
subsection (k), if any gasoline blend stock or additive
(within the meaning of section 4083(a)(2)) is not used
by any person to produce gasoline and such person
establishes that the ultimate use of such gasoline
blend stock or additive is not to produce gasoline, the
Secretary shall pay (without interest) to such person
an amount equal to the aggregate amount of the tax
imposed on such person with respect to such gasoline
blend stock or additive.
``(2) Diesel fuel blend stocks or additives not
used for producing diesel.--Except as provided in
subsection (k), if any diesel fuel blend stock is not
used by any person to produce diesel fuel and such
person establishes that the ultimate use of such diesel
fuel blend stock is not to produce diesel fuel, the
Secretary shall pay (without interest) to such person
an amount equal to the aggregate amount of the tax
imposed on such person with respect to such diesel fuel
blend stock.''.
(c) Effective Date.--The amendment made by this section
shall apply to fuel removed, sold, or used after December 31,
2004.
SEC. 871. STUDY REGARDING FUEL TAX COMPLIANCE.
(a) In General.--Not later than January 31, 2005, the
Secretary of the Treasury shall submit to the Committee on
Finance of the Senate and the Committee on Ways and Means of
the House of Representatives a report regarding compliance with
the tax imposed under subchapter B of chapter 31 and part III
of subchapter A of chapter 32 of the Internal Revenue Code of
1986. Such report shall include the information, analysis, and
recommendations specified in subsections (b), (c), and (d).
(b) Taxable Fuel Blendstocks.--The Secretary shall identify
chemical products to be added to the list of blendstocks from
lab analysis of fuel samples collected by the Internal Revenue
Service which have been blended with taxable fuel but are not
treated as blendstocks. The Secretary shall include statistics
regarding the frequency in which a chemical product has been
collected, and whether the sample contained an above normal
concentration of the chemical product.
(c) Waste Products Added to Taxable Fuels.--The report
shall include a discussion of Internal Revenue Service findings
regarding the addition of waste products to taxable fuel and
any recommendations to address the taxation of such products.
(d) Erroneous Claims of Fuel Tax Exemptions.--The report
shall include a discussion of Internal Revenue Service findings
regarding sales of taxable fuel to entities claiming exempt
status as a State or local government and the frequency of
erroneous certifications of tax exempt status. The Secretary,
in consultation with representatives of State and local
governments, shall provide recommendations to address such
erroneous claims, including recommendations on the feasibility
of a State maintained list of exempt governmental entities
within the State.
Subtitle D--Other Revenue Provisions
SEC. 881. 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--
``(1) 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, and
``(2) an amount not in excess of 25 percent of such
amount collected for collection enforcement activities
of the Internal Revenue Service.
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(g).''.
(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) Biennial Report.--The Secretary of the Treasury shall
biennially submit (beginning in 2005) to the Committee on
Finance of the Senate and the Committee on Ways and Means of
the House of Representatives a report with respect to qualified
tax collection contracts under section 6306 of the Internal
Revenue Code of 1986 (as added by this section) which
includes--
(1) a complete cost benefit analysis,
(2) the impact of such contracts on collection
enforcement staff levels in the Internal Revenue
Service,
(3) the impact of such contracts on the total
number and amount of unpaid assessments, and on the
number and amount of assessments collected by Internal
Revenue Service personnel after initial contact by a
contractor,
(4) the amounts collected and the collection costs
incurred (directly and indirectly) by the Internal
Revenue Service,
(5) an evaluation of contractor performance,
(6) a disclosure safeguard report in a form similar
to that required under section 6103(p)(5) of such Code,
and
(7) a measurement plan which includes a comparison
of the best practices used by the private collectors
with the Internal Revenue Service's own collection
techniques) and mechanisms to identify and capture
information on successful collection techniques used by
the contractors which could be adopted by the Internal
Revenue Service.
(f) Effective Date.--The amendments made to this section
shall take effect on the date of the enactment of this Act.
SEC. 882. 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 AfterApplicable 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 this Act, 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. 883. 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), publicly
traded securities (as defined
in section 6050L(a)(2)(B)), and
any qualified vehicle described
in paragraph (12)(A)(ii) for
which an acknowledgement under
paragraph (12)(B)(iii) is
provided.
``(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. 884. DONATIONS OF MOTOR VEHICLES, BOATS, AND AIRPLANES.
(a) In General.--Subsection (f) of section 170 (relating to
disallowance of deduction in certain cases and special rules),
as amended by this Act, is amended by inserting after paragraph
(11) the following new paragraph:
``(12) Contributions of used motor vehicles, boats,
and airplanes.--
``(A) In general.--In the case of a
contribution of a qualified vehicle the claimed
value of which exceeds $500--
``(i) paragraph (8) shall not apply
and no deduction shall be allowed under
subsection (a) for such contribution
unless the taxpayer substantiates the
contribution by a contemporaneous
written acknowledgement of the
contribution by the donee organization
that meets the requirements of
subparagraph (B) and includes the
acknowledgement with the taxpayer's
return of tax which includes the
deduction, and
``(ii) if the organization sells
the vehicle without any significant
intervening use or material improvement
of such vehicle by the organization,
the amount of the deduction allowed
under subsection (a) shall not exceed
the gross proceeds received from such
sale.
``(B) Content of acknowledgement.--An
acknowledgement meets the requirements of this
subparagraph if it includes the following
information:
``(i) The name and taxpayer
identification number of the donor.
``(ii) The vehicle identification
number or similar number.
``(iii) In the case of a qualified
vehicle to which subparagraph (A)(ii)
applies--
``(I) a certification that
the vehicle was sold in an
arm's length transaction
between unrelated parties,
``(II) the gross proceeds
from the sale, and
``(III) a statement that
the deductible amount may not
exceed the amount of such gross
proceeds.
``(iv) In the case of a qualified
vehicle to which subparagraph (A)(ii)
does not apply--
``(I) a certification of
the intended use or material
improvement of the vehicle and
the intended duration of such
use, and
``(II) a certification that
the vehicle would not be
transferred in exchange for
money, other property, or
services before completion of
such use or improvement.
``(C) Contemporaneous.--For purposes of
subparagraph (A), an acknowledgement shall be
considered to be contemporaneous if the donee
organization provides it within 30 days of--
``(i) the sale of the qualified
vehicle, or
``(ii) in the case of an
acknowledgement including a
certification described in subparagraph
(B)(iv), the contribution of the
qualified vehicle.
``(D) Information to secretary.--A donee
organization required to provide an
acknowledgement under this paragraph shall
provide to the Secretary the information
contained in the acknowledgement. Such
information shall be provided at such time and
in such manner as the Secretary may prescribe.
``(E) Qualified vehicle.--For purposes of
this paragraph, the term `qualified vehicle'
means any--
``(i) motor vehicle manufactured
primarily for use on public streets,
roads, and highways,
``(ii) boat, or
``(iii) airplane.
Such term shall not include any property which
is described in section 1221(a)(1).
``(F) 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. The Secretary
may prescribe regulations or other guidance
which exempts sales by the donee organization
which are in direct furtherance of such
organization's charitable purpose from the
requirements of subparagraphs (A)(ii) and
(B)(iv)(II).''.
(b) Penalty for Fraudulent Acknowledgments.--
(1) In general.--Part I of subchapter B of chapter
68 (relating to assessable penalties), as amended by
this Act, is amended by inserting after section 6719
the following new section:
``SEC. 6720. FRAUDULENT ACKNOWLEDGMENTS WITH RESPECT TO DONATIONS OF
MOTOR VEHICLES, BOATS, AND AIRPLANES.
``Any donee organization required under section
170(f)(12)(A) to furnish a contemporaneous written
acknowledgment to a donor which knowingly furnishes a false or
fraudulent acknowledgment, or which knowingly fails to furnish
such acknowledgment in the manner, at the time, and showing the
information required under section 170(f)(12), or regulations
prescribed thereunder, shall for each such act, or for each
such failure, be subject to a penalty equal to--
``(1) in the case of an acknowledgment with respect
to a qualified vehicle to which section
170(f)(12)(A)(ii) applies, the greater of--
``(A) the product of the highest rate of
tax specified in section 1 and the sales price
stated on the acknowledgment, or
``(B) the gross proceeds from the sale of
such vehicle, and
``(2) in the case of an acknowledgment with respect
to any other qualified vehicle to which section
170(f)(12) applies, the greater of--
``(A) the product of the highest rate of
tax specified in section 1 and the claimed
value of the vehicle, or
``(B) $5,000.''.
(2) Conforming amendment.--The table of sections
for part I of subchapter B of chapter 68, as amended by
this Act, is amended by inserting after the item
relating to section 6719 the following new item:
``Sec. 6720. Fraudulent acknowledgments with respect to
donations of motor vehicles, boats, and airplanes.''.
(c) Effective Date.--The amendments made by this section
shall apply to contributions made after December 31, 2004.
SEC. 885. 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) Plan failures.--
``(A) Gross income inclusion.--
``(i) In general.--If at any time
during a taxable year a nonqualified
deferred compensation plan--
``(I) fails to meet the
requirements of paragraphs (2),
(3), and (4), or
``(II) is not operated in
accordance with such
requirements,
all compensation deferred under the
plan for the taxable year and all
preceding taxable years shall be
includible in gross income for the
taxable year to the extent not subject
to a substantial risk of forfeiture and
not previously included in gross
income.
``(ii) Application only to affected
participants.--Clause (i) shall only
apply with respect to all compensation
deferred under the plan for
participants with respect to whom the
failure relates.
``(B) Interest and additional tax 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 the taxable year shall be
increased by the sum of--
``(I) the amount of
interest determined under
clause (ii), and
``(II) an amount equal to
20 percent of the compensation
which is required to be
included in gross income.
``(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 any specified employee, the
requirement of subparagraph (A)(i) is
met only if distributions may not be
made before the date which is 6 months
after the date of separation from
service (or, if earlier, the date of
death of the employee). For purposes of
the preceding sentence, a specified
employee is a key employee (as defined
in section 416(i) without regard to
paragraph (5) thereof) of a corporation
any 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
an 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.--
``(i) In general.--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.
``(ii) First year of eligibility.--
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.
``(iii) Performance-based
compensation.--In the case of any
performance-based compensation based on
services performed over a period of at
least 12 months, such election may be
made no later than 6 months before the
end of the period.
``(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 of 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
(or such trust or other arrangement) are
located outside of the United States, or
``(B) at the time transferred if such
assets (or such trust or other arrangement) are
subsequently transferred outside of the United
States.
This paragraph shall not apply to assets located in a
foreign jurisdiction if substantially all of the
services to which the nonqualified deferred
compensation relates are performed in such
jurisdiction.
``(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,
whether or not such assets are available to satisfy
claims of general creditors.
``(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 sum of--
``(i) the amount of interest
determined under subparagraph (B), and
``(ii) an amount equal to 20
percent of the amounts required to be
included in gross income.
``(B) Interest.--For purposes of
subparagraph (A), 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 amounts are 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) (without regard to
subparagraph (A)(iii)),
``(B) any eligible deferred compensation
plan (within the meaning of section 457(b)),
and
``(C) any plan described in section 415(m).
``(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.
``(6) Aggregation rules.--Except as provided by the
Secretary, rules similar to the rules of subsections
(b) and (c) of section 414 shall apply.
``(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) Treatment of Deferred Amounts.--
(1) W-2 forms.--
(A) 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 for the year
under a nonqualified deferred compensation plan (within
the meaning of section 409A(d)).''.
(B) 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 may (by regulation) establish a
minimum amount of deferrals below which
paragraph (13) does not apply.''.
(2) Wage withholding.--Section 3401(a) (defining
wages) is amended by adding at the end the following
flush sentence: ``The term `wages' includes any amount
includible in gross income of an employee under section
409A and payment of such amount shall be treated as
having been made in the taxable year in which the
amount is so includible.''.
(3) Other reporting.--Section 6041 (relating to
information at source) is amended by adding at the end
the following new subsection:
``(g) Nonqualified Deferred Compensation.--Subsection (a)
shall apply to--
``(1) any deferrals for the year under a
nonqualified deferred compensation plan (within the
meaning of section 409A(d)), whether or not paid,
except that this paragraph shall not apply to deferrals
which are required to be reported under section
6051(a)(13) (without regard to any de minimis
exception), and
``(2) any amount includible under section 409A and
which is not treated as wages under section 3401(a).''.
(c) Clerical Amendment.--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 December
31, 2004.
(2) Special rules.--
(A) Earnings.--The amendments made by this
section shall apply to earnings on deferred
compensation only to the extent that such
amendments apply to such compensation.
(B) Material modifications.--For purposes
of this subsection, amounts deferred in taxable
years beginning before January 1, 2005, shall
be treated as amounts deferred in a taxable
year beginning on or after such date if the
plan under which the deferral is made is
materially modified after October 3, 2004,
unless such modification is pursuant to the
guidance issued under subsection (f).
(3) Exception for nonelective deferred
compensation.--The amendments made by this section
shall not apply to any nonelective deferred
compensation to which section 457 of the Internal
Revenue Code of 1986 does not apply by reason of
section 457(e)(12) of such Code, but only if such
compensation is provided under a nonqualified deferred
compensation plan--
(A) which was in existence on May 1, 2004,
(B) which was providing nonelective
deferred compensation described in such section
457(e)(12) on such date, and
(C) which is established or maintained by
an organization incorporated on July 2, 1974.
If, after May 1, 2004, a plan described in the
preceding sentence adopts a plan amendment which
provides a material change in the classes of
individuals eligible to participate in the plan, this
paragraph shall not apply to any nonelective deferred
compensation provided under the plan on or after the
date of the adoption of the amendment.
(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 60 days after the date of the
enactment of this Act, the Secretary of the Treasury shall
issue guidance providing a limited period during which a
nonqualified deferred compensation plan adopted before December
31, 2004, may, without violating the requirements of paragraphs
(2), (3), and (4) of section 409A(a) of the Internal Revenue
Code of 1986 (as added by this section), be amended--
(1) to provide that a participant may terminate
participation in the plan, or cancel an outstanding
deferral election with regard to amounts deferred after
December 31, 2004, but only if amounts subject to the
termination or cancellation are includible in income of
the participant as earned (or, if later, when no longer
subject to substantial risk of forfeiture), and
(2) to conform to the requirements of such section
409A with regard to amounts deferred after December 31,
2004.
SEC. 886. 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. 887. 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. 888. 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.--In the case of stock,
the term `personal property' includes stock
only if--
``(i) such stock is of a type which
is actively traded and at least 1 of
the positions offsetting such stock is
a position with respect to such stock
or substantially similar or related
property, or
``(ii) such stock is 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. 889. 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. 890. 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. 891. 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. 892. 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.
SEC. 893. PROHIBITION ON NONRECOGNITION OF GAIN THROUGH COMPLETE
LIQUIDATION OF HOLDING COMPANY.
(a) In General.--Section 332 is amended by adding at the
end the following new subsection:
``(d) Recognition of Gain on Liquidation of Certain Holding
Companies.--
``(1) In general.--In the case of any distribution
to a foreign corporation in complete liquidation of an
applicable holding company--
``(A) subsection (a) and section 331 shall
not apply to such distribution, and
``(B) such distribution shall be treated as
a distribution to which section 301 applies.
``(2) Applicable holding company.--For purposes of
this subsection--
``(A) In general.--The term `applicable
holding company' means any domestic
corporation--
``(i) which is a common parent of
an affiliated group,
``(ii) stock of which is directly
owned by the distributee foreign
corporation,
``(iii) substantially all of the
assets of which consist of stock in
other members of such affiliated group,
and
``(iv) which has not been in
existence at all times during the 5
years immediately preceding the date of
the liquidation.
``(B) Affiliated group.--For purposes of
this subsection, the term `affiliated group'
has the meaning given such term by section
1504(a) (without regard to paragraphs (2) and
(4) of section 1504(b)).
``(3) Coordination with subpart f.--If the
distributee of a distribution described in paragraph
(1) is a controlled foreign corporation (as defined in
section 957), then notwithstanding paragraph (1) or
subsection (a), such distribution shall be treated as a
distribution to which section 331 applies.
``(4) Regulations.--The Secretary shall provide
such regulations as appropriate to prevent the abuse of
this subsection, including regulations which provide,
for the purposes of clause (iv) of paragraph (2)(A),
that a corporation is not in existence for any period
unless it is engaged in the active conduct of a trade
or business or owns a significant ownership interest in
another corporation so engaged.''.
(b) Effective Date.--The amendment made by this section
shall apply to distributions in complete liquidation occurring
on or after the date of the enactment of this Act.
SEC. 894. EFFECTIVELY CONNECTED INCOME TO INCLUDE CERTAIN FOREIGN
SOURCE INCOME.
(a) In General.--Section 864(c)(4)(B) (relating to
treatment of income from sources without the United States as
effectively connected income) is amended by adding at the end
the following new flush sentence:
``Any income or gain which is equivalent to any
item of income or gain described in clause (i),
(ii), or (iii) shall be treated in the same
manner as such item for purposes of this
subparagraph.''.
(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. 895. RECAPTURE OF OVERALL FOREIGN LOSSES ON SALE OF CONTROLLED
FOREIGN CORPORATION.
(a) In General.--Section 904(f)(3) (relating to
dispositions) is amending by adding at the end the following
new subparagraph:
``(D) Application to certain dispositions
of stock in controlled foreign corporation.--
``(i) In general.--This paragraph
shall apply to an applicable
disposition in the same manner as if it
were a disposition of property
described in subparagraph (A), except
that the exception contained in
subparagraph (C)(i) shall not apply.
``(ii) Applicable disposition.--For
purposes of clause (i), the term
`applicable disposition' means any
disposition of any share of stock in a
controlled foreign corporation in a
transaction or series of transactions
if, immediately before such transaction
or series of transactions, the taxpayer
owned more than 50 percent (by vote or
value) of the stock of the controlled
foreign corporation. Such term shall
not include a disposition described in
clause (iii) or (iv), except that
clause (i) shall apply to any gain
recognized on any such disposition.
``(iii) Exception for certain
exchanges where ownership percentage
retained.--A disposition shall not be
treated as an applicable disposition
under clause (ii) if it is part of a
transaction or series of transactions--
``(I) to which section 351
or 721 applies, or under which
the transferor receives stock
in a foreign corporation in
exchange for the stock in the
controlled foreign corporation
and the stock received is
exchanged basis property (as
defined in section
7701(a)(44)), and
``(II) immediately after
which, the transferor owns (by
vote or value) at least the
same percentage of stock in the
controlled foreign corporation
(or, if the controlled foreign
corporation is not in existence
after such transaction or
series of transactions, in
another foreign corporation
stock in which was received by
the transferor in exchange for
stock in the controlled foreign
corporation) as the percentage
of stock in the controlled
foreign corporation which the
taxpayer owned immediately
before such transaction or
series of transactions.
``(iv) Exception for certain asset
acquisitions.--A disposition shall not
be treated as an applicable disposition
under clause (ii) if it is part of a
transaction or series of transactions
in which the taxpayer (or any member of
a controlled group of corporations
filing a consolidated return under
section 1501 which includes the
taxpayer) acquires the assets of a
controlled foreign corporation in
exchange for the shares of the
controlled foreign corporation in a
liquidation described in section 332 or
a reorganization described in section
368(a)(1).
``(v) Controlled foreign
corporation.--For purposes of this
subparagraph, the term `controlled
foreign corporation' has the meaning
given such term by section 957.
``(vi) Stock ownership.--For
purposes of this subparagraph,
ownership of stock shall be determined
under the rules of subsections (a) and
(b) of section 958.''.
(b) Effective Date.--The amendment made by this section
shall apply to dispositions after the date of the enactment of
this Act.
SEC. 896. RECOGNITION OF CANCELLATION OF INDEBTEDNESS INCOME REALIZED
ON SATISFACTION OF DEBT WITH PARTNERSHIP INTEREST.
(a) In General.--Paragraph (8) of section 108(e) (relating
to general rules for discharge of indebtedness (including
discharges not in title 11 cases or insolvency) is amended to
read as follows:
``(8) Indebtedness satisfied by corporate stock or
partnership interest.--For purposes of determining
income of a debtor from discharge of indebtedness, if--
``(A) a debtor corporation transfers stock,
or
``(B) a debtor partnership transfers a
capital or profits interest in such
partnership,
to a creditor in satisfaction of its recourse or
nonrecourse indebtedness, such corporation or
partnership shall be treated as having satisfied the
indebtedness with an amount of money equal to the fair
market value of the stock or interest. In the case of
any partnership, any discharge of indebtedness income
recognized under this paragraph shall be included in
the distributive shares of taxpayers which were the
partners in the partnership immediately before such
discharge.''.
(b) Effective Date.--The amendment made by this section
shall apply with respect to cancellations of indebtedness
occurring on or after the date of the enactment of this Act.
SEC. 897. DENIAL OF INSTALLMENT SALE TREATMENT FOR ALL READILY TRADABLE
DEBT.
(a) In General.--Section 453(f)(4)(B) (relating to
purchaser evidences of indebtedness payable on demand or
readily tradable) is amended by striking ``is issued by a
corporation or a government or political subdivision thereof
and''.
(b) Effective Date.--The amendment made by this section
shall apply to sales occurring on or after the date of the
enactment of this Act.
SEC. 898. MODIFICATION OF TREATMENT OF TRANSFERS TO CREDITORS IN
DIVISIVE REORGANIZATIONS.
(a) In General.--Section 361(b)(3) (relating to treatment
of transfers to creditors) is amended by adding at the end the
following new sentence: ``In the case of a reorganization
described in section 368(a)(1)(D) with respect to which stock
or securities of the corporation to which the assets are
transferred are distributed in a transaction which qualifies
under section 355, this paragraph shall apply only to the
extent that the sum of the money and the fair market value of
other property transferred to such creditors does not exceed
the adjusted bases of such assets transferred.''.
(b) Liabilities in Excess of Basis.--Section 357(c)(1)(B)
is amended by inserting ``with respect to which stock or
securities of the corporation to which the assets are
transferred are distributed in a transaction which qualifies
under section 355'' after ``section 368(a)(1)(D)''.
(c) Effective Date.--The amendments made by this section
shall apply to transfers of money or other property, or
liabilities assumed, in connection with a reorganization
occurring on or after the date of the enactment of this Act.
SEC. 899. CLARIFICATION OF DEFINITION OF NONQUALIFIED PREFERRED STOCK.
(a) In General.--Section 351(g)(3)(A) is amended by adding
at the end the following: ``Stock shall not be treated as
participating in corporate growth to any significant extent
unless there is a real and meaningful likelihood of the
shareholder actually participating in the earnings and growth
of the corporation.''.
(b) Effective Date.--The amendment made by this section
shall apply to transactions after May 14, 2003.
SEC. 900. MODIFICATION OF DEFINITION OF CONTROLLED GROUP OF
CORPORATIONS.
(a) In General.--Section 1563(a)(2) (relating to brother-
sister controlled group) is amended by striking ``possessing--
'' and all that follows through ``(B)'' and inserting
``possessing''.
(b) Application of Existing Rules to Other Code
Provisions.--Section 1563(f) (relating to other definitions and
rules) is amended by adding at the end the following new
paragraph:
``(5) Brother-sister controlled group definition
for provisions other than this part.--
``(A) In general.--Except as specifically
provided in an applicable provision, subsection
(a)(2) shall be applied to an applicable
provision as if it read as follows:
```(2) Brother-sister controlled group.--Two or
more corporations if 5 or fewer persons who are
individuals, estates, or trusts own (within the meaning
of subsection (d)(2) stock possessing--
```(A) at least 80 percent of the total
combined voting power of all classes of stock
entitled to vote, or at least 80 percent of the
total value of shares of all classes of stock,
of each corporation, and
```(B) more than 50 percent of the total
combined voting power of all classes of stock
entitled to vote or more than 50 percent of the
total value of shares of all classes of stock
of each corporation, taking into account the
stock ownership of each such person only to the
extent such stock ownership is identical with
respect to each such corporation.'
``(B) Applicable provision.--For purposes
of this paragraph, an applicable provision is
any provision of law (other than this part)
which incorporates the definition of controlled
group of corporations under subsection (a).''.
(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. 901. CLASS LIVES FOR UTILITY GRADING COSTS.
(a) Gas Utility Property.--Section 168(e)(3)(E) (defining
15-year property), as amended by this Act, is amended by
striking ``and'' at the end of clause (iv), by striking the
period at the end of clause (v) and inserting ``, and'', and by
adding at the end the following new clause:
``(vi) initial clearing and grading
land improvements with respect to gas
utility property.''.
(b) Electric Utility Property.--Section 168(e)(3) is
amended by adding at the end the following new subparagraph:
``(F) 20-year property.--The term `20-year
property' means initial clearing and grading
land improvements with respect to any electric
utility transmission and distribution plant.''.
(c) Conforming Amendment.--The table contained in section
168(g)(3)(B), as amended by this Act, is amended by inserting
after the item relating to subparagraph (E)(v) the following
new items:
``(E)(vi)................................................. 20''.
``(F)..................................................... 25''.
(d) 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. 902. CONSISTENT AMORTIZATION OF PERIODS FOR INTANGIBLES.
(a) Start-Up Expenditures.--
(1) Allowance of deduction.--Paragraph (1) of
section 195(b) (relating to start-up expenditures) is
amended to read as follows:
``(1) Allowance of deduction.--If a taxpayer elects
the application of this subsection with respect to any
start-up expenditures--
``(A) the taxpayer shall be allowed a
deduction for the taxable year in which the
active trade or business begins in an amount
equal to the lesser of--
``(i) the amount of start-up
expenditures with respect to the active
trade or business, or
``(ii) $5,000, reduced (but not
below zero) by the amount by which such
start-up expenditures exceed $50,000,
and
``(B) the remainder of such start-up
expenditures shall be allowed as a deduction
ratably over the 180-month period beginning
with the month in which the active trade or
business begins.''.
(2) Conforming amendment.--Subsection (b) of
section 195 is amended by striking ``Amortize'' and
inserting ``Deduct'' in the heading.
(b) Organizational Expenditures.--Subsection (a) of section
248 (relating to organizational expenditures) is amended to
read as follows:
``(a) Election to Deduct.--If a corporation elects the
application of this subsection (in accordance with regulations
prescribed by the Secretary) with respect to any organizational
expenditures--
``(1) the corporation shall be allowed a deduction
for the taxable year in which the corporation begins
business in an amount equal to the lesser of--
``(A) the amount of organizational
expenditures with respect to the taxpayer, or
``(B) $5,000, reduced (but not below zero)
by the amount by which such organizational
expenditures exceed $50,000, and
``(2) the remainder of such organizational
expenditures shall be allowed as a deduction ratably
over the 180-month period beginning with the month in
which the corporation begins business.''.
(c) Treatment of Organizational and Syndication Fees or
Partnerships.--
(1) In general.--Section 709(b) (relating to
amortization of organization fees) is amended by
redesignating paragraph (2) as paragraph (3) and by
amending paragraph (1) to read as follows:
``(1) Allowance of deduction.--If a taxpayer elects
the application of this subsection (in accordance with
regulations prescribed by the Secretary) with respect
to any organizational expenses--
``(A) the taxpayer shall be allowed a
deduction for the taxable year in which the
partnership begins business in an amount equal
to the lesser of--
``(i) the amount of organizational
expenses with respect to the
partnership, or
``(ii) $5,000, reduced (but not
below zero) by the amount by which such
organizational expenses exceed $50,000,
and
``(B) the remainder of such organizational
expenses shall be allowed as a deduction
ratably over the 180-month period beginning
with the month in which the partnership begins
business.
``(2) Dispositions before close of amortization
period.--In any case in which a partnership is
liquidated before the end of the period to which
paragraph (1)(B) applies, any deferred expenses
attributable to the partnership which were not allowed
as a deduction by reason of this section may be
deducted to the extent allowable under section 165.''.
(2) Conforming amendment.--Subsection (b) of
section 709 is amended by striking ``Amortization'' and
inserting ``Deduction'' in the heading.
(d) Effective Date.--The amendments made by this section
shall apply to amounts paid or incurred after the date of the
enactment of this Act.
SEC. 903. FREEZE OF PROVISIONS REGARDING SUSPENSION OF INTEREST WHERE
SECRETARY FAILS TO CONTACT TAXPAYER.
(a) In General.--Section 6404(g) (relating to suspension of
interest and certain penalties where Secretary fails to contact
taxpayer) is amended by striking ``1-year period (18-month
period in the case of taxable years beginning before January 1,
2004)'' both places it appears and inserting ``18-month
period''.
(b) Exception for Gross Misstatement.--Section 6404(g)(2)
(relating to exceptions) is amended by striking ``or'' at the
end of subparagraph (C), by redesignating subparagraph (D) as
subparagraph (E), and by inserting after subparagraph (C) the
following new subparagraph:
``(D) any interest, penalty, addition to
tax, or additional amount with respect to any
gross misstatement; or''.
(c) Exception for Listed and Reportable Transactions.--
Section 6404(g)(2) (relating to exceptions), as amended by
subsection (b), is amended by striking ``or'' at the end of
subparagraph (D), by redesignating subparagraph (E) as
subparagraph (F), and by inserting after subparagraph (D) the
following new subparagraph:
``(E) any interest, penalty, addition to
tax, or additional amount with respect to any
reportable transaction with respect to which
the requirement of section 6664(d)(2)(A) is not
met and any listed transaction (as defined in
6707A(c)); or''.
(d) 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, 2003.
(2) Exception for reportable or listed
transactions.--The amendments made by subsection (c)
shall apply with respect to interest accruing after
October 3, 2004.
SEC. 904. INCREASE IN WITHHOLDING FROM SUPPLEMENTAL WAGE PAYMENTS IN
EXCESS OF $1,000,000.
(a) In General.--If an employer elects under Treasury
Regulation 31.3402(g)-1 to determine the amount to be deducted
and withheld from any supplemental wage payment by using a flat
percentage rate, the rate to be used in determining the amount
to be so deducted and withheld shall not be less than 28
percent (or the corresponding rate in effect under section
1(i)(2) of the Internal Revenue Code of 1986 for taxable years
beginning in the calendar year in which the payment is made).
(b) Special Rule for Large Payments.--
(1) In general.--Notwithstanding subsection (a), if
the supplemental wage payment, when added to all such
payments previously made by the employer to the
employee during the calendar year, exceeds $1,000,000,
the rate used with respect to such excess shall be
equal to the maximum rate of tax in effect under
section 1 of such Code for taxable years beginning in
such calendar year.
(2) Aggregation.--All persons treated as a single
employer under subsection (a) or (b) of section 52 of
the Internal Revenue Code of 1986 shall be treated as a
single employer for purposes of this subsection.
(c) Conforming Amendment.--Section 13273 of the Revenue
Reconciliation Act of 1993 (Public Law 103-66) is repealed.
(d) Effective Date.--The provisions of, and the amendment
made by, this section shall apply to payments made after
December 31, 2004.
SEC. 905. TREATMENT OF SALE OF STOCK ACQUIRED PURSUANT TO EXERCISE OF
STOCK OPTIONS TO COMPLY WITH CONFLICT-OF-INTEREST
REQUIREMENTS.
(a) In General.--Section 421 (relating to general rules for
certain stock options) is amended by adding at the end the
following new subsection:
``(d) Certain Sales To Comply With Conflict-of-Interest
Requirements.--If--
``(1) a share of stock is transferred to an
eligible person (as defined in section 1043(b)(1))
pursuant to such person's exercise of an option to
which this part applies, and
``(2) such share is disposed of by such person
pursuant to a certificate of divestiture (as defined in
section 1043(b)(2)),
such disposition shall be treated as meeting the requirements
of section 422(a)(1) or 423(a)(1), whichever is applicable.''
(b) Effective Date.--The amendment made by this section
shall apply to sales after the date of the enactment of this
Act.
SEC. 906. APPLICATION OF BASIS RULES TO NONRESIDENT ALIENS.
(a) In General.--Section 72 (relating to annuities and
certain proceeds of endowment and life insurance contracts) is
amended by redesignating subsection (w) as subsection (x) and
by inserting after subsection (v) the following new subsection:
``(w) Application of Basis Rules to Nonresident Aliens.--
``(1) In general.--Notwithstanding any other
provision of this section, for purposes of determining
the portion of any distribution which is includible in
gross income of a distributee who is a citizen or
resident of the United States, the investment in the
contract shall not include any applicable nontaxable
contributions or applicable nontaxable earnings.
``(2) Applicable nontaxable contribution.--For
purposes of this subsection, the term `applicable
nontaxable contribution' means any employer or employee
contribution--
``(A) which was made with respect to
compensation--
``(i) for labor or personal
services performed by an employee who,
at the time the labor or services were
performed, was a nonresident alien for
purposes of the laws of the United
States in effect at such time, and
``(ii) which is treated as from
sources without the United States, and
``(B) which was not subject to income tax
(and would have been subject to income tax if
paid as cash compensation when the services
were rendered) under the laws of the United
States or any foreign country.
``(3) Applicable nontaxable earnings.--For purposes
of this subsection, the term `applicable nontaxable
earnings' means earnings--
``(A) which are paid or accrued with
respect to any employer or employee
contribution which was made with respect to
compensation for labor or personal services
performed by an employee,
``(B) with respect to which the employee
was at the time the earnings were paid or
accrued a nonresident alien for purposes of the
laws of the United States, and
``(C) which were not subject to income tax
under the laws of the United States or any
foreign country.
``(4) Regulations.--The Secretary shall prescribe
such regulations as may be necessary to carry out the
provisions of this subsection, including regulations
treating contributions and earnings as not subject to
tax under the laws of any foreign country where
appropriate to carry out the purposes of this
subsection.''
(b) Basis.--Section 83 (relating to property transferred in
connection with the performance of services is amended by
adding after paragraph (3) of subsection (c) the following new
paragraph:
``(4) For purposes of determining an individual's
basis in property transferred in connection with the
performance of services, rules similar to the rules of
section 72(w) shall apply.''
(c) Effective Date.--The amendments made by this section
shall apply to distributions on or after the date of the
enactment of this Act.
SEC. 907. LIMITATION OF EMPLOYER DEDUCTION FOR CERTAIN ENTERTAINMENT
EXPENSES.
(a) In General.--Paragraph (2) of section 274(e) (relating
to expenses treated as compensation) is amended to read as
follows:
``(2) Expenses treated as compensation.--
``(A) In general.--Except as provided in
subparagraph (B), expenses for goods, services,
and facilities, to the extent that the expenses
are treated by the taxpayer, with respect to
the recipient of the entertainment, amusement,
or recreation, as compensation to an employee
on the taxpayer's return of tax under this
chapter and as wages to such employee for
purposes of chapter 24 (relating to withholding
of income tax at source on wages).
``(B) Specified individuals.--
``(i) In general.--In the case of a
recipient who is a specified
individual, subparagraph (A) and
paragraph (9) shall each be applied by
substituting `to the extent that the
expenses do not exceed the amount of
the expenses which' for `to the extent
that the expenses'.
``(ii) Specified individual.--For
purposes of clause (i), the term
`specified individual' means any
individual who--
``(I) is subject to the
requirements of section 16(a)
of the Securities Exchange Act
of 1934 with respect to the
taxpayer, or
``(II) would be subject to
such requirements if the
taxpayer were an issuer of
equity securities referred to
in such section.''
(b) Effective Date.--The amendment made by this section
shall apply to expenses incurred after the date of the
enactment of this Act.
SEC. 908. RESIDENCE AND SOURCE RULES RELATING TO UNITED STATES
POSSESSIONS.
(a) Residence and Source Rules.--Subpart D of part III of
subchapter N of chapter 1 (relating to possessions of the
United States) is amended by adding at the end the following
new section:
``SEC. 937. RESIDENCE AND SOURCE RULES INVOLVING POSSESSIONS.
``(a) Bona Fide Resident.--For purposes of this subpart,
section 865(g)(3), section 876, section 881(b), paragraphs (2)
and (3) of section 901(b), section 957(c), section
3401(a)(8)(C), and section 7654(a), except as provided in
regulations, the term `bona fide resident' means a person--
``(1) who is present for at least 183 days during
the taxable year in Guam, American Samoa, the Northern
Mariana Islands, Puerto Rico, or the Virgin Islands, as
the case may be, and
``(2) who does not have a tax home (determined
under the principles of section 911(d)(3) without
regard to the second sentence thereof) outside such
specified possession during the taxable year and does
not have a closer connection (determined under the
principles of section 7701(b)(3)(B)(ii)) to the United
States or a foreign country than to such specified
possession.
For purposes of paragraph (1), the determination as to whether
a person is present for any day shall be made under the
principles of section 7701(b).
``(b) Source Rules.--Except as provided in regulations, for
purposes of this title--
``(1) except as provided in paragraph (2), rules
similar to the rules for determining whether income is
income from sources within the United States or is
effectively connected with the conduct of a trade or
business within the United States shall apply for
purposes of determining whether income is from sources
within a possession specified in subsection (a)(1) or
effectively connected with the conduct of a trade or
business within any such possession, and
``(2) any income treated as income from sources
within the United States or as effectively connected
with the conduct of a trade or business within the
United States shall not be treated as income from
sources within any such possession or as effectively
connected with the conduct of a trade or business
within any such possession.
``(c) Reporting Requirement.--
``(1) In general.--If, for any taxable year, an
individual takes the position for United States income
tax reporting purposes that the individual became, or
ceases to be, a bona fide resident of a possession
specified in subsection (a)(1), such individual shall
file with the Secretary, at such time and in such
manner as the Secretary may prescribe, notice of such
position.
``(2) Transition rule.--If, for any of an
individual's 3 taxable years ending before the
individual's first taxable year ending after the date
of the enactment of this subsection, the individual
took a position described in paragraph (1), the
individual shall file with the Secretary, at such time
and in such manner as the Secretary may prescribe,
notice of such position.''.
(b) Penalty.--Section 6688 is amended--
(1) by inserting ``under section 937(c) or'' before
``by regulations'', and
(2) by striking ``$100'' and inserting ``$1,000''.
(c) Conforming and Clerical Amendments.--
(1) Section 931(d) is amended to read as follows:
``(d) Employees of the United States.--Amounts paid for
services performed as an employee of the United States (or any
agency thereof) shall be treated as not described in paragraph
(1) or (2) of subsection (a).''
(2) Section 932 is amended by striking ``at the
close of the taxable year'' and inserting ``during the
entire taxable year'' each place it appears.
(3) Section 934(b)(4) is amended by striking ``the
Virgin Islands or'' each place it appears.
(4) Section 935, as in effect before the effective
date of its repeal, is amended--
(A) by striking ``for the taxable year
who'' in subsection (a) and inserting ``who,
during the entire taxable year'',
(B) by inserting ``bona fide'' before
``resident'' in subsection (a)(1),
(C) in subsection (b)(1)--
(i) by inserting ``(other a bona
fide resident of Guam during the entire
taxable year)'' after ``United States''
in subparagraph (A), and
(ii) by inserting ``bona fide''
before ``resident'' in subparagraph
(B), and
(D) in subsection (b)(2) by striking
``residence and''.
(5) Section 957(c) is amended--
(A) in paragraph (2)(B) by striking
``conduct of an active'' and inserting ``active
conduct of a'', and
(B) in the last sentence by striking
``derived from sources within a possession, was
effectively connected with the conduct of a
trade or business within a possession, or''.
(6) The table of sections of subpart D of part III
of subchapter N of chapter 1 is amended by adding at
the end the following new item:
``Sec. 937. Residence and source rules involving possessions.''.
(d) Effective Date.--
(1) In general.--Except as otherwise provided in
this subsection, the amendments made by this section
shall apply to taxable years ending after the date of
the enactment of this Act.
(2) 183-day rule.--Section 937(a)(1) of the
Internal Revenue Code of 1986 (as added by this
section) shall apply to taxable years beginning after
the date of the enactment of this Act.
(3) Sourcing.--Section 937(b)(2) of such Code (as
so added) shall apply to income earned after the date
of the enactment of this Act.
SEC. 909. SALES OR DISPOSITIONS TO IMPLEMENT FEDERAL ENERGY REGULATORY
COMMISSION OR STATE ELECTRIC RESTRUCTURING POLICY.
(a) In General.--Section 451 (relating to general rule for
taxable year of inclusion) is amended by adding at the end the
following new subsection:
``(i) Special Rule for Sales or Dispositions To Implement
Federal Energy Regulatory Commission or State Electric
Restructuring Policy.--
``(1) In general.--In the case of any qualifying
electric transmission transaction for which the
taxpayer elects the application of this section,
qualified gain from such transaction shall be
recognized--
``(A) in the taxable year which includes
the date of such transaction to the extent the
amount realized from such transaction exceeds--
``(i) the cost of exempt utility
property which is purchased by the
taxpayer during the 4-year period
beginning on such date, reduced (but
not below zero) by
``(ii) any portion of such cost
previously taken into account under
this subsection, and
``(B) ratably over the 8-taxable year
period beginning with the taxable year which
includes the date of such transaction, in the
case of any such gain not recognized under
subparagraph (A).
``(2) Qualified gain.--For purposes of this
subsection, the term `qualified gain' means, with
respect to any qualifying electric transmission
transaction in any taxable year--
``(A) any ordinary income derived from such
transaction which would be required to be
recognized under section 1245 or 1250 for such
taxable year (determined without regard to this
subsection), and
``(B) any income derived from such
transaction in excess of the amount described
in subparagraph (A) which is required to be
included in gross income for such taxable year
(determined without regard to this subsection).
``(3) Qualifying electric transmission
transaction.--For purposes of this subsection, the term
`qualifying electric transmission transaction' means
any sale or other disposition before January 1, 2007,
of--
``(A) property used in the trade or
business of providing electric transmission
services, or
``(B) any stock or partnership interest in
a corporation or partnership, as the case may
be, whose principal trade or business consists
of providing electric transmission services,
but only if such sale or disposition is to an
independent transmission company.
``(4) Independent transmission company.--For
purposes of this subsection, the term `independent
transmission company' means--
``(A) an independent transmission provider
approved by the Federal Energy Regulatory
Commission,
``(B) a person--
``(i) who the Federal Energy
Regulatory Commission determines in its
authorization of the transaction under
section 203 of the Federal Power Act
(16 U.S.C. 824b) or by declaratory
order is not a market participant
within the meaning of such Commission's
rules applicable to independent
transmission providers, and
``(ii) whose transmission
facilities to which the election under
this subsection applies are under the
operational control of a Federal Energy
Regulatory Commission-approved
independent transmission provider
before the close of the period
specified in such authorization, but
not later than the close of the period
applicable under subsection (a)(2)(B)
as extended under paragraph (2), or
``(C) in the case of facilities subject to
the jurisdiction of the Public Utility
Commission of Texas--
``(i) a person which is approved by
that Commission as consistent with
Texas State law regarding an
independent transmission provider, or
``(ii) a political subdivision or
affiliate thereof whose transmission
facilities are under the operational
control of a person described in clause
(i).
``(5) Exempt utility property.--For purposes of
this subsection--
``(A) In general.--The term `exempt utility
property' means property used in the trade or
business of--
``(i) generating, transmitting,
distributing, or selling electricity,
or
``(ii) producing, transmitting,
distributing, or selling natural gas.
``(B) Nonrecognition of gain by reason of
acquisition of stock.--Acquisition of control
of a corporation shall be taken into account
under this subsection with respect to a
qualifying electric transmission transaction
only if the principal trade or business of such
corporation is a trade or business referred to
in subparagraph (A).
``(6) Special rule for consolidated groups.--In the
case of a corporation which is a member of an
affiliated group filing a consolidated return, any
exempt utility property purchased by another member of
such group shall be treated as purchased by such
corporation for purposes of applying paragraph (1)(A).
``(7) Time for assessment of deficiencies.--If the
taxpayer has made the election under paragraph (1) and
any gain is recognized by such taxpayer as provided in
paragraph (1)(B), then--
``(A) the statutory period for the
assessment of any deficiency, for any taxable
year in which any part of the gain on the
transaction 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 taxpayer (in such manner as the
Secretary may by regulations prescribe) of the
purchase of exempt utility property or of an
intention not to purchase such property, and
``(B) such deficiency may be assessed
before the expiration of such 3-year period
notwithstanding any law or rule of law which
would otherwise prevent such assessment.
``(8) Purchase.--For purposes of this subsection,
the taxpayer shall be considered to have purchased any
property if the unadjusted basis of such property is
its cost within the meaning of section 1012.
``(9) Election.--An election under paragraph (1)
shall be made at such time and in such manner as the
Secretary may require and, once made, shall be
irrevocable.
``(10) Nonapplication of installment sales
treatment.--Section 453 shall not apply to any
qualifying electric transmission transaction with
respect to which an election to apply this subsection
is made.''.
(b) Effective Date.--The amendments made by this section
shall apply to transactions occurring after the date of the
enactment of this Act, in taxable years ending after such date.
SEC. 910. EXPANSION OF LIMITATION ON DEPRECIATION OF CERTAIN PASSENGER
AUTOMOBILES.
(a) In General.--Section 179(b) (relating to limitations)
is amended by adding at the end the following new paragraph:
``(6) Limitation on cost taken into account for
certain passenger vehicles.--
``(A) In general.--The cost of any sport
utility vehicle for any taxable year which may
be taken into account under this section shall
not exceed $25,000.
``(B) Sport utility vehicle.--For purposes
of subparagraph (A)--
``(i) In general.--The term `sport
utility vehicle' means any 4-wheeled
vehicle--
``(I) which is primarily
designed or which can be used
to carry passengers over public
streets, roads, or highways
(except any vehicle operated
exclusively on a rail or
rails),
``(II) which is not subject
to section 280F, and
``(III) which is rated at
not more than 14,000 pounds
gross vehicle weight.
``(ii) Certain vehicles excluded.--
Such term does not include any vehicle
which--
``(I) is designed to have a
seating capacity of more than 9
persons behind the driver's
seat,
``(II) is equipped with a
cargo area of at least 6 feet
in interior length which is an
open area or is designed for
use as an open area but is
enclosed by a cap and is not
readily accessible directly
from the passenger compartment,
or
``(III) has an integral
enclosure, fully enclosing the
driver compartment and load
carrying device, does not have
seating rearward of the
driver's seat, and has no body
section protruding more than 30
inches ahead of the leading
edge of the windshield.''.
(b) Effective Date.--The amendment made by this section
shall apply to property placed in service after the date of the
enactment of this Act.
And the Senate agree to the same.
From the Committee on Ways and Means, for
consideration of the House bill and the Senate
amendment, and modifications committed to
conference:
William M. Thomas,
Phil Crane,
Jim McCrery,
From the Committee on Agriculture, for
consideration of Title VII of the House bill,
and subtitle B of Title XI of the Senate
amendment, and modifications committed to
conference:
Bob Goodlatte,
John Boehner,
Charlie Stenholm,
From the Committee on Education and the
Workforce, for consideration of sections 489,
489, 616, 701, and 719 of the Senate amendment,
and modifications committed to conference:
John Boehner,
Sam Johnson,
From the Committee on Energy and Commerce, for
consideration of sections 662 and subtitle A of
Title XI of the Senate amendment, and
modifications committed to conference:
Joe Barton,
Richard Burr,
From the Committee on the Judiciary, for
consideration of sections 422, 442, 1111, 1151,
and 1161 of the Senate amendment, and
modifications committed to conference:
Lamar Smith,
For consideration of the House bill and the
Senate amendment, and modifications committed
to conference:
Tom DeLay,
Managers on the Part of the House.
Chuck Grassley,
Orrin Hatch,
Don Nickles,
Trent Lott,
Olympia Snowe,
Jon Kyl,
Craig Thomas,
Rick Santorum,
Gordon Smith,
Jim Bunning,
Mitch McConnell,
Max Baucus,
Tom Daschle,
John Breaux,
Kent Conrad,
Jeff Bingaman,
Blanche L. Lincoln,
Managers on the Part of the Senate.
JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE
The managers on the part of the House and the Senate at
the conference on the disagreeing votes of the two Houses on
the amendment of the Senate to the bill (H.R. 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, submit the following joint statement to the
House and the Senate in explantion of the effect of the action
agreed upon by the managers and recommended in the accompanying
conference report:
The Senate amendment struck all of the House bill after
the enacting clause and inserted a substitute text.
The House recedes from its disagreement to the amendment
of the Senate with an amendment that is a substitute for the
House bill and the Senate amendment. The differences between
the House bill, the Senate amendment, and the substitute agreed
to in conference are noted below, except for clerical
corrections, conforming changes made necessary by agreements
reached by the conferees, and minor drafting and clarifying
changes.
CONTENTS
Page
Title I--Provisions Relating to Repeal of Exclusion for
Extraterritorial Income........................................ 262
A. Repeal of Extraterritorial Income Regime (sec. 101 of the
House bill, sec. 101 of the Senate amendment, and secs. 114
and 941 through 943 of the Code)........................... 262
B. Deduction Relating to Income Attributable to United States
Production Activities (sec. 102 of the House bill, secs.
102 and 103 of the Senate amendment, and sec. 11 of the
Code)...................................................... 265
C. Reduced Corporate Income Tax Rate for Small Corporations
(sec. 103 of the House bill and sec. 11 of the Code)....... 275
Title II--Provisions Relating to Job Creation Tax Incentives for
Manufacturers, Small Businesses, and Farmers................... 277
A. Section 179 Expensing (sec. 201 of the House bill, sec.
309 of the Senate amendment and sec. 179 of the Code)...... 277
B. Depreciation.............................................. 279
1. Recovery period for depreciation of certain leasehold
improvements (sec. 211 of the House bill and sec. 168
of the Code)........................................... 279
2. Recovery period for depreciation of certain restaurant
improvements (sec. 211 of the House bill and sec. 168
of the Code)........................................... 281
3. Extended placed in service date for bonus depreciation
for certain aircraft (excluding aircraft used in the
transportation industry) (sec. 212 of the House bill,
sec. 622 of the Senate amendment, and sec. 168 of the
Code).................................................. 282
4. Special placed in service rule for bonus depreciation
for certain property subject to syndication (sec. 213
of the House bill, sec. 621 of the Senate amendment,
and sec. 168 of the Code).............................. 285
C. S Corporation Reform and Simplification (sec. 221-231 of
the House bill, sec. 654 of the Senate amendment and secs.
1361-1379 and 4975 of the Code)............................ 286
1. Members of family treated as one shareholder.......... 287
2. Increase in number of eligible shareholders to 100.... 288
3. Expansion of bank S corporation eligible shareholders
to include IRAs........................................ 289
4. Disregard of unexercised powers of appointment in
determining potential current beneficiaries of ESBT.... 290
5. Transfers of suspended losses incident to divorce, etc 290
6. Use of passive activity loss and at-risk amounts by
qualified subchapter S trust income beneficiaries...... 291
7. Exclusion of investment securities income from passive
investment income test for bank S corporations......... 291
8. Treatment of bank director shares..................... 292
9. Relief from inadvertently invalid qualified subchapter
S subsidiary elections and terminations................ 294
10. Information returns for qualified subchapter S
subsidiaries........................................... 294
11. Repayment of loans for qualifying employer securities 294
D. Alternative Minimum Tax Relief............................ 297
1. Repeal limitation on use of foreign tax credit (sec.
241 of the House bill, sec. 203 of the Senate
amendment, and sec. 59 of the Code).................... 297
2. Expansion of exemption from alternative minimum tax
for small corporations (sec. 242 of the House bill and
sec. 55 of the Code)................................... 298
3. Coordinate farmer and fisherman income averaging and
the alternative minimum tax (sec. 243 of the House bill
and secs. 55 and 1301 of the Code)..................... 298
E. Restructuring of Incentives for Alcohol Fuels, Etc........ 299
1. Incentives for alcohol and biodiesel fuels (secs. 251
and 252 of the House bill, sec. 861 of the Senate
amendment, and secs. 4041, 4081, 4091, 6427, 9503 and
new section 6426 of the Code).......................... 299
2. Biodiesel income tax credit (sec. 862 of the bill and
new sec. 40A of the Code).............................. 309
F. Exclusion of Incentive Stock Options and Employee Stock
Purchase Plan Stock Options From Wages (sec. 261 of the
House bill and secs. 421(b), 423(c), 3121(a), 3231, and
3306(b) of the Code)....................................... 310
G. Incentives To Reinvest Foreign Earnings in the United
States (sec. 271 of the House bill, sec. 231 of the Senate
amendment, and new sec. 965 of the Code)................... 312
H. Other Incentive Provisions................................ 317
1. Special rules for livestock sold on account of
weather-related conditions (sec. 281 of the House bill,
sec. 649 of the Senate amendment, and secs. 1033 and
451 of the Code)....................................... 317
2. Payment of dividends on stock of cooperatives without
reducing patronage dividends (sec. 282 of the House
bill, sec. 648 of the Senate amendment, and sec. 1388
of the Code)........................................... 318
3. Manufacturing relating to timber...................... 319
a. Capital gains treatment to apply to outright sales
of timber by landowner (sec. 283 of the House bill,
sec. 333 of the Senate amendment, and sec. 631(b)
of the Code)....................................... 319
b. Expensing of reforestation expenditures (sec. 331
of the Senate amendment and secs. 48 and 194 of the
Code).............................................. 320
c. Election to treat cutting of timber as a sale or
exchange (sec. 102(b) of the House bill, sec. 332
of the Senate amendment, and sec. 631(a) of the
Code).............................................. 321
d. Modified safe harbor rules for timber REITs (sec.
334 of the Senate amendment and sec. 857 of the
Code).............................................. 321
4. Net income from publicly traded partnerships treated
as qualifying income of regulated investment company
(sec. 284 of the House bill, sec. 899 of the Senate
amendment, and secs. 851(b), 469(k), 7704(d) and new
sec. 851(h) of the Code)............................... 325
5. Improvements related to real estate investment trusts
(sec. 285 of the House bill and secs. 856, 857 and 860
of the Code)........................................... 327
6. Treatment of certain dividends of regulated investment
companies (sec. 286 of the House bill and secs. 871 and
881 of the Code)....................................... 336
7. Taxation of certain settlement funds (sec. 287 of the
House bill and sec. 468B of the Code).................. 341
8. Expand human clinical trials expenses qualifying for
the orphan drug tax credit (sec. 288 of the House bill
and sec. 45C of the Code).............................. 342
9. Simplification of excise tax imposed on bows and
arrows (sec. 289 of the House bill, sec. 305 of the
Senate amendment, and sec. 4161 of the Code)........... 343
10. Reduce rate of excise tax on fishing tackle boxes to
three percent (sec. 290 of the House bill and sec. 4162
of the Code)........................................... 344
11. Repeal of excise tax on sonar devices suitable for
finding fish (sec. 291 of the House bill and secs. 4161
and 4162 of the Code).................................. 345
12. Income tax credit for cost of carrying tax-paid
distilled spirits in wholesale inventories (sec. 292 of
the House bill)........................................ 345
13. Suspension of occupational taxes relating to
distilled spirits, wine, and beer (sec. 293 of the
House bill and new sec. 5148 of the Code).............. 346
14. Modification of unrelated business income limitation
on investment in certain small business investment
companies (sec. 294 of the House bill, sec. 642 of the
Senate amendment, and sec. 514 of the Code)............ 348
15. Election to determine taxable income from certain
international shipping activities using per ton rate
(sec. 295 of the House bill and new secs. 1352-1359 of
the Code).............................................. 349
16. Charitable contribution deduction for certain
expenses in support of Native Alaskan subsistence
whaling (sec. 296 of the House bill and sec. 170 of the
Code).................................................. 355
I. General Provisions........................................ 357
1. Modification to qualified small issue bonds (sec. 301
of the Senate amendment and sec. 144 of the Code)...... 357
2. Expensing of investment in broadband equipment (sec.
302 of the Senate amendment and new sec. 191 of the
Code).................................................. 358
3. Exemption for natural aging process from interest
capitalization (sec. 303 of the Senate amendment and
sec. 263A of the Code)................................. 359
4. Section 355 ``active business test'' applied to chains
of affiliated corporations (sec. 304 of the Senate
amendment and sec. 355 of the Code).................... 360
5. Modification to cooperative marketing rules to include
value-added processing involving animals (sec. 306 of
the Senate amendment and sec. 1388 of the Code)........ 362
6. Extension of declaratory judgment procedures to
farmers' cooperative organizations (sec. 307 of the
Senate amendment and sec. 7428 of the Code)............ 363
7. Temporary suspension of personal holding company tax
(sec. 308 of the Senate amendment and sec. 541 of the
Code).................................................. 364
8. 5-year NOL carryback for 2003 NOLs if taxpayer elects
out of bonus depreciation as modified; extend temporary
suspension of 90-percent limit on minimum tax NOLs
(sec. 310 of the Senate amendment and sec. 172 of the
Code).................................................. 366
9. Manufacturer's jobs credit (sec. 313 of the Senate
amendment)............................................. 367
10. Brownfields demonstration program for qualified green
building and sustainable design projects (sec. 314 of
the Senate amendment and secs. 142 and 146 of the Code) 368
J. Manufacturing Relating to Films........................... 371
1. Special rules for certain film and television
production (sec. 321 of the Senate amendment and new
sec. 181 of the Code).................................. 371
2. Modification of application of income forecast method
of depreciation (sec. 322 of the Senate amendment and
sec. 167 of the Code).................................. 373
Title III--Provisions Relating to Tax Reform and Simplification
for United States Businesses................................... 375
1. Interest expense allocation rules (sec. 301 of the
House bill, sec. 205 of the Senate amendment, and sec.
864 of the Code)....................................... 375
2. Recharacterize overall domestic loss (sec. 302 of the
House bill, sec. 204 of the Senate amendment, and sec.
904 of the Code)....................................... 379
3. Foreign tax credit baskets and ``base differences''
(sec. 303 of the House bill, sec. 225 of the Senate
amendment, and sec. 904 of the Code)................... 381
4. Apply look-through rules for dividends from
noncontrolled section 902 corporations (sec. 304 of the
House bill, sec. 202 of the Senate amendment, and sec.
904 of the Code)....................................... 385
5. Attribution of stock ownership through partnerships in
determining section 902 and 960 credits (sec. 305 of
the House bill, sec. 213 of the Senate amendment, and
sec. 902 of the Code).................................. 386
6. Foreign tax credit treatment of deemed payments under
section 367(d) of the Code (sec. 306 of the House bill,
sec. 229 of the Senate amendment, and sec. 367(d) of
the Code).............................................. 388
7. United States property not to include certain assets
of controlled foreign corporations (sec. 307 of the
House bill, sec. 227 of the Senate amendment, and sec.
956 of the Code)....................................... 389
8. Election not to use average exchange rate for foreign
tax paid other than in functional currency (sec. 308 of
the House bill, sec. 224 of the Senate amendment, and
sec. 986 of the Code).................................. 391
9. Eliminate secondary withholding tax with respect to
dividends paid by certain foreign corporations (sec.
309 of the House bill, sec. 215 of the Senate
amendment, and sec. 871 of the Code)................... 392
10. Equal treatment for interest paid by foreign
partnerships and foreign corporations (sec. 310 of the
House bill, sec. 228 of the Senate amendment, and sec.
861 of the Code)....................................... 394
11. Look-through treatment of payments between related
controlled foreign corporations (sec. 311 of the House
bill, sec. 222 of the Senate amendment, and sec. 954 of
the Code).............................................. 395
12. Look-through treatment under subpart F for sales of
partnership interests (sec. 312 of the House bill, sec.
223 of the Senate amendment, and sec. 954 of the Code). 396
13. Repeal of foreign personal holding company rules and
foreign investment company rules (sec. 313 of the House
bill, sec. 211 of the Senate amendment, and secs. 542,
551-558, 954, 1246, and 1247 of the Code).............. 397
14. Determination of foreign personal holding company
income with respect to transactions in commodities
(sec. 314 of the House bill, sec. 206 of the Senate
amendment, and sec. 954 of the Code)................... 398
15. Modification to treatment of aircraft leasing and
shipping income (sec. 315 of the House bill, sec. 221
of the Senate amendment, and sec. 954 of the Code)..... 400
16. Modification of exceptions under subpart F for active
financing (sec. 316 of the House bill, sec. 226 of the
Senate amendment, and sec. 954 of the Code)............ 404
17. Ten-year foreign tax credit carryover; one-year
foreign tax credit carryback (sec. 201 of the Senate
amendment and sec. 904 of the Code).................... 406
18. Expand the subpart F de minimis rule to the lesser of
five percent of gross income or $5 million (sec. 212 of
the Senate amendment and sec. 954 of the Code)......... 407
19. Limit application of uniform capitalization rules in
the case of foreign persons (sec. 214 of the Senate
amendment and sec. 263A of the Code)................... 408
20. Eliminate the 30-percent tax on certain U.S.-source
capital gains of nonresident individuals (sec. 216 of
the Senate amendment and sec. 871 of the Code)......... 410
21. Modify FIRPTA rules for real estate investment trusts
(sec. 230 of the Senate amendment and sec. 857 and 897
of the Code)........................................... 412
22. Exclusion of certain horse-racing and dog-racing
gambling winnings from the income of nonresident alien
individuals (sec. 232 of the Senate amendment and sec.
872 of the Code)....................................... 413
23. Limitation of withholding on U.S.-source dividends
paid to Puerto Rico corporation (sec. 233 of the Senate
amendment and sec. 881 and 1442 of the Code)........... 415
24. Require Commerce Department report on adverse
decisions of the World Trade Organization (sec. 234 of
the Senate amendment).................................. 416
25. Study of impact of international tax law on taxpayers
other than large corporations (sec. 235 of the Senate
amendment)............................................. 417
26. Delay in effective date of final regulations
governing exclusion of income from international
operations of ships and aircraft (sec. 236 of the
Senate amendment and sec. 883 of the Code)............. 418
27. Interest payments deductible where taxpayer could
have borrowed without a guarantee (sec. 237 of the
Senate amendment and sec. 163(j) of the Code).......... 419
Title IV--Extension of Certain Expiring Provisions............... 419
28. Nonrefundable personal credits allowed against the
alternative minimum tax (``AMT'') (sec. 401 of the
House bill, sec. 713 of the Senate amendment, and sec.
26 of the Code)........................................ 419
29. Extension and modification of the research credit
(sec. 402 of the House bill, secs. 311 and 312 of the
Senate amendment, and sec. 41 of the Code)............. 420
30. Extension of credit for electricity produced from
certain renewable resources (sec. 403 of the House
bill, secs. 714 and 8801 of the Senate amendment, and
sec. 45 of the Code)................................... 421
31. Indian employment tax credit (sec. 404 of the House
bill, sec. 716 of the Senate amendment, and sec. 45A of
the Code).............................................. 422
32. Extension of the work opportunity tax credit (sec.
405 of the House bill, sec. 702 of the Senate
amendment, and sec. 51 of the Code).................... 423
33. Extension of the welfare-to-work tax credit (sec. 406
of the House bill, sec. 702 of the Senate amendment,
and sec. 51A of the Code).............................. 425
34. Combination and modification of the work opportunity
tax credit and the welfare-to-work tax credit (sec. 703
of the Senate amendment and sec. 51 of the Code)....... 427
35. Certain expenses of elementary and secondary school
teachers (sec. 407 of the House bill, sec. 707 of the
Senate amendment, and sec. 62 of the Code)............. 428
36. Accelerated depreciation for business property on
Indian reservations (sec. 408 of the House bill, sec.
717 of the Senate amendment, and sec. 168 of the Code). 429
37. Charitable contributions of computer technology and
equipment used for educational purposes and of
scientific property used for research (sec. 409 of the
House bill, sec. 706 of the Senate amendment, and sec.
170 of the Code)....................................... 430
38. Expensing of environmental remediation costs (sec.
410 of the House bill, sec. 708 of the Senate
amendment, and sec. 198 of the Code)................... 431
39. Availability of Archer medical savings accounts (sec.
411 of the House bill and sec. 220 of the Code)........ 431
40. Suspension of 100-percent-of-net-income limitation on
percentage depletion for oil and gas from marginal
wells (sec. 412 of the House bill, secs. 715 and 846 of
the Senate amendment, and sec. 613A of the Code)....... 433
41. Qualified zone academy bonds (sec. 413 of the House
bill, secs. 612 and 704 of the Senate amendment, and
sec. 1397E of the Code)................................ 435
42. Tax Incentives for Investment in the District of
Columbia (sec. 414 of the House bill, sec. 711 of the
Senate amendment, and secs. 1400, 1400A, and 1400C of
the Code).............................................. 436
43. Modifications to New York Liberty Zone bond
provisions (sec. 415 of the House bill, secs. 611 and
709 of the Senate amendment, and sec. 1400L of the
Code).................................................. 436
44. Qualified New York Liberty Zone leasehold improvement
election out (sec. 709(c) of the Senate amendment)..... 437
45. Disclosures relating to terrorist activities (sec.
416 of the House bill and sec. 6103 of the Code)....... 438
46. Disclosure of return information relating to student
loans (sec. 417 of the House bill, sec. 718 of the
Senate amendment, and sec. 6103(l) of the Code)........ 440
47. Extension of cover over of excise tax on distilled
spirits to Puerto Rico and Virgin Islands (sec. 418 of
the House bill, sec. 705 of the Senate amendment, and
sec. 7652 of the Code)................................. 441
48. Joint review of strategic plans and budget for the
IRS (sec. 419 of the House bill and secs. 8021 and 8022
of the Code)........................................... 442
49. Extension of parity in the application of certain
limits to mental health benefits (sec. 420 of the House
bill, sec. 701 of the Senate amendment, and sec. 9812
of the Code, sec. 712 of ERISA, and section 2705 of the
PHSA).................................................. 442
50. Combined employment tax reporting (sec. 421 of the
House bill and sec. 712 of the Senate amendment)....... 444
51. Deduction for qualified clean-fuel vehicle property
(sec. 422 of the House bill, sec. 721 of the Senate
amendment, and sec. 179 of the Code)................... 445
52. Credit for qualified electric vehicles (sec. 422 of
the House bill, sec. 720 of the Senate amendment, and
sec. 30 of the Code)................................... 445
53. Repeal of reduction of deductions for mutual life
insurance companies (sec. 710 of the Senate amendment
and sec. 809 of the Code).............................. 446
54. Study of earnings stripping provisions (sec. 163(j)
of the Code)........................................... 447
Title V--Deduction of State and Local General Sales Taxes........ 448
A. Deduction of State and Local General Sales Taxes (sec. 501
of the House bill and sec. 164 of the Code)................ 448
Title VI--Fair and Equitable Tobacco Reform...................... 450
A. Tobacco Reform (secs. 701-725 of the House bill and title
XI of the Senate amendment)................................ 450
Title VII--Protection of United States Workers From Competition
of Foreign Workforces.......................................... 452
Title VIII--Other Provisions..................................... 452
A. Provisions Relating to Housing............................ 452
1. Treatment of qualified mortgage revenue bonds (sec.
601 of the Senate amendment and sec. 143 of the Code).. 452
2. Premiums for mortgage insurance (sec. 602 of the
Senate amendment and secs. 163(h) and 6050H of the
Code).................................................. 453
3. Increase in historic rehabilitation credit for
residential housing for the elderly (sec. 603 of the
Senate amendment and secs. 42 and 47 of the Code)...... 455
B. Provisions Relating to Bonds.............................. 456
1. Modification of the authority of Indian tribal
governments to issue tax-exempt bonds (sec. 613 of the
Senate amendment and sec. 7871 of the Code)............ 456
2. Definition of manufacturing facility for qualified
small issue bonds (sec. 614 of the Senate amendment and
sec. 144 of the Code).................................. 457
3. Qualified forest conservation bonds (sec. 615 of the
Senate amendment and sec. 142 of the Code)............. 458
4. Qualified tribal school modernization bonds (sec. 616
of the Senate amendment)............................... 460
C. Provisions Relating to Depreciation....................... 461
1. 7-year recovery period for certain track facilities
(sec. 623 of the Senate amendment and sec. 168 of the
Code).................................................. 461
2. Alternative minimum tax and credits (sec. 624 of the
Senate amendment and secs. 38 and 53 of the Code)...... 462
D. Expansion of Business Credit.............................. 463
1. New markets tax credit for Native American
reservations (sec. 631 of the Senate amendment)........ 463
2. Ready Reserve-National Guard employee credit and Ready
Reserve-National Guard replacement employee credit
(sec. 632 of the Senate amendment)..................... 465
3. Rural investment tax credit (sec. 633 of the Senate
amendment and new sec. 42A of the Code)................ 466
4. Qualified small business rural investment tax credit
(sec. 634 of the Senate amendment and new sec. 42B of
the Code).............................................. 468
5. Provide a tax credit or maintenance of railroad track
(sec. 635 of the Senate amendment and new sec. 45I of
the Code).............................................. 469
6. Railroad revitalization and security investment credit
(sec. 636 of the Senate amendment)..................... 470
7. Special allocation of the railroad revitalization and
security investment credit for New York city rail
projects (sec. 636 of the Senate amendment)............ 471
8. Modification of targeted areas and low-income
communities designated for new markets tax credit (sec.
637 of the Senate amendment and sec. 45D of the Code).. 471
9. Modification of income requirement for census tracts
within high migration rural counties for new markets
tax credit (sec. 638 of the Senate amendment and sec.
45D of the Code)....................................... 473
10. Provide a tax credit for expenditures on closed
captioning technology in movies (sec. 639 of the Senate
amendment and new sec. 45T of the Code)................ 475
E. Miscellaneous Provisions.................................. 476
1. Exclusion of gain or loss on sale or exchange of
certain brownfield sites from unrelated business
taxable income (sec. 641 of the Senate amendment and
secs. 512 and 514 of the Code)......................... 476
2. Civil rights tax relief (sec. 643 of the Senate
amendment and sec. 62 of the Code)..................... 483
3. Exclusion from gross income for amounts paid under
National Health Service Corps loan repayment program
(sec. 644 of the Senate amendment and sec. 108 of the
Code).................................................. 485
4. Certain expenses of rural letter carriers (sec. 645 of
the Senate amendment and sec. 162(o) of the Code)...... 486
5. Method of accounting for naval shipbuilders (sec. 646
of the Senate amendment)............................... 486
6. Distributions to shareholders from policyholders
surplus account of life insurance companies (sec. 647
of the Senate amendment and sec. 815 of the Code)...... 487
7. Motor vehicle dealer transitional assistance (sec. 650
of the Senate amendment)............................... 489
8. Expansion of designated renewal community area based
on 2000 census data (sec. 651 of the Senate amendment
and sec. 1400E of the Code)............................ 490
9. Reduction of holding period to 12 months for purposes
of determining whether horses are section 1231 assets
(sec. 652 of the Senate amendment and sec. 1231 of the
Code).................................................. 491
10. Blue ribbon commission on comprehensive tax reform
(sec. 653 of the Senate amendment)..................... 492
11. Temporary accumulated earnings tax safe harbor (sec.
655 of the Senate amendment and sec. 537 of the Code).. 492
12. Tax Treatment of State Ownership of Railroad REIT
(sec. 656 of the Senate amendment and secs. 103, 115,
336 and 337 of the Code)............................... 494
13. Contribution in aid of construction (sec. 657 of the
Senate amendment and sec. 118 of the Code)............. 495
14. Credit for purchase and installation of agricultural
water conservation systems (sec. 658 of the Senate
amendment)............................................. 496
15. Modification of involuntary conversion rules for
businesses affected by the September 11th terrorist
attacks (sec. 659 of the Senate amendment and sec.
1400L of the Code)..................................... 497
16. Repeal of application of below-market loan rules to
amounts paid to certain continuing care facilities
(sec. 660 of the Senate amendment and sec. 7872 of the
Code).................................................. 498
17. Maximum capital gain rates of individuals for gold,
silver, platinum, and palladium (sec. 661 of the Senate
amendment and sec. 1(h) of the Code)................... 499
18. Inclusion of primary and secondary medical strategies
for children and adults with sickle cell disease as
medical assistance under the medicaid program (sec. 662
of the Senate amendment)............................... 500
19. Mortgage payment assistance (secs. 901 and 902 of the
Senate amendment)...................................... 502
20. Protection of overtime pay (secs. 489-490 of the
Senate amendment and sec. 13 of the Fair Labor
Standards Act of 1938)................................. 503
21. Report on acquisitions of goods from foreign sources
(sec. 1001 of the Senate amendment and sec. 43 of the
Office of Federal Procurement Policy Act).............. 504
22. Minimum cost requirement for excess asset transfers
(sec. 719 of the Senate amendment and sec. 420 of the
Code).................................................. 505
Title IX--Energy Tax Incentives.................................. 507
A. Credit for Electricity Produced from Certain Sources (sec.
801 of the Senate amendment and sec. 45 of the Code)....... 507
B. Alternative Motor Vehicles and Fuels Incentives........... 513
1. Alternative motor vehicle credit (sec. 811 of the
Senate amendment)...................................... 513
2. Modification of credit for electric vehicles (sec. 812
of Senate amendment and sec. 30 of the Code)........... 515
3. Modifications of deduction for refueling property
(sec. 813 of Senate amendment and sec. 179A of the
Code).................................................. 516
4. Credit for retail sale of alternative motor vehicle
fuels (sec. 814 of Senate amendment)................... 516
5. Small ethanol producer credit (sec. 815 of the Senate
amendment and sec. 40 of the Code)..................... 517
C. Conservation and Energy Efficiency Provisions............. 519
1. Energy efficient new homes (sec. 821 of the Senate
amendment)............................................. 519
2. Energy efficient appliances (sec. 822 of the Senate
amendment)............................................. 521
3. Residential solar hot water, photovoltaics and other
energy efficient property (sec. 823 of the Senate
amendment)............................................. 523
4. Credit for business installation of qualified fuel
cells and stationary microturbine power plants (sec.
824 of the Senate amendment and sec. 48 of the Code)... 525
5. Energy efficient commercial building deduction (sec.
825 of the Senate amendment)........................... 526
6. Three-year applicable recovery period for depreciation
of qualified energy management devices and qualified
water submetering devices (secs. 826 and 827 of the
Senate amendment and sec. 168 of the Code)............. 528
7. Energy credit for combined heat and power system
property (sec. 828 of the Senate amendment and sec. 48
of the Code)........................................... 528
8. Energy efficient improvements to existing homes (sec.
829 of the Senate amendment)........................... 530
D. Clean Coal Incentives..................................... 531
1. Credit for production from a clean coal technology
unit (secs. 831 and 834 of the Senate amendment)....... 531
2. Investment credit for clean coal technology units
(secs. 832 and 834 of the Senate amendment)............ 532
3. Credit for production from advanced clean coal
technology (secs. 833 and 834 of the Senate amendment). 534
E. Oil and Gas Provisions.................................... 535
1. Oil and gas production from marginal wells (sec. 841
of the Senate amendment and new sec. 451 of the Code).. 535
2. Natural gas gathering lines treated as seven-year
property (sec. 842 of the Senate amendment and sec. 168
of the Code)........................................... 536
3. Expensing of capital costs incurred for production in
complying with environmental protection agency sulfur
regulations for small refiners (sec. 843 of the Senate
amendment and new sec. 179B of the Code)............... 537
4. Credit for small refiners for production of diesel
fuel in compliance with Environmental Protection Agency
sulfur regulations for small refiners (sec. 844 of the
Senate amendment and new sec. 45H of the Code)......... 538
5. Determination of small refiner exception to oil
depletion deduction (sec. 845 of the Senate amendment
and sec. 613A of the Code)............................. 539
6. Suspension of 100-percent-of-net-income limitation on
percentage depletion for oil and gas from marginal
wells (sec. 412 of the House bill, sec. 846 of the
Senate amendment, and sec. 613A of the Code)........... 540
7. Delay rental payments (sec. 847 of the Senate
amendment and sec. 167 of the Code).................... 541
8. Geological and geophysical costs (sec. 848 of the
Senate amendment and sec. 167 of the Code)............. 542
9. Extension and modification of credit for producing
fuel from a non-coneventional source (sec. 849 of the
Senate amendment and sec. 29 of the Code).............. 543
10. Natural gas distribution lines treated as 15-year
property (sec. 850 of the Senate amendment and sec. 168
of the Code)........................................... 546
11. Credit for production of Alaska natural gas (sec. 851
of the Senate amendment)............................... 547
12. Treat certain Alaska pipeline property as seven-year
property (sec. 852 of the Senate amendment and sec. 168
of the Code)........................................... 548
13. Enhanced oil recovery credit for certain gas
processing facilities (sec. 853 of the Senate amendment
and sec. 43 of the Code)............................... 549
14. Exempt certain prepayments for natural gas from tax-
exempt bond arbitrage rules (sec. 854 of the Senate
amendment and secs. 141 and 148 of the Code)........... 549
F. Electric Utility Restructuring and Reliability Provisions. 553
1. Modification to special rules for nuclear
decommissioning costs (sec. 855 of the Senate amendment
and sec. 468A of the Code)............................. 553
2. Treatment of certain income of electric cooperatives
(sec. 856 of the Senate amendment and sec. 501 of the
Code).................................................. 556
3. Dispositions of transmission property to implement
Federal Energy Regulatory Commission restructuring
policy (no reinvestment obligation) (sec. 857 of the
Senate amendment and sec. 451 of the Code)............. 561
G. Additional Provisions..................................... 563
1. GAO Study (sec. 897 of the Senate amendment).......... 563
2. Repeal certain excise taxes on rail diesel fuel and
inland waterway barge fuels (sec. 898 of the Senate
amendment and secs. 4041, 4042, 6421, and 6427 of the
Code).................................................. 564
3. Increase tax limitation on use of business energy
credits (secs. 851(c) and 899A of the Senate amendment,
and sec. 38 of the Code)............................... 564
4. Transmission property treated as fifteen-year property
(sec. 899C of the Senate amendment and sec. 168 of the
Code).................................................. 565
5. Qualifying pollution control equipment credit (sec.
899B of the Senate amendment).......................... 566
Title X--Revenue Provisions...................................... 567
A. Provisions to Reduce Tax Avoidance Through Individual and
Corporate Expatriation..................................... 567
1. Tax treatment of expatriated entities and their
foreign parents (sec. 601 of the House bill, sec. 441
of the Senate amendment, and new sec. 7874 of the Code) 567
2. Excise tax on stock compensation of insiders in
expatriated corporations (sec. 602 of the House bill,
sec. 443 of the Senate amendment, and secs. 162(m),
275(a), and new sec. 4985 of the Code)................. 575
3. Reinsurance of U.S. risks in foreign jurisdictions
(sec. 603 of the House bill, sec. 444 of the Senate
amendment, and sec. 845(a) of the Code)................ 580
4. Revision of tax rules on expatriation of individuals
(sec. 604 of the House bill, sec. 442 of the Senate
amendment, and secs. 877, 2107, 2501 and 6039G of the
Code).................................................. 581
5. Reporting of taxable mergers and acquisitions (sec.
605 of the House bill, sec. 445 of the Senate
amendment, and new sec. 6043A of the Code.............. 593
6. Studies (sec. 606 of the House bill).................. 594
B. Provisions Relating to Tax Shelters....................... 595
1. Penalty for failure to disclose reportable
transactions (sec. 611 of the House bill, sec. 402 of
the Senate amendment, and new sec. 6707A of the Code).. 595
2. Modifications to the accuracy-related penalties for
listed transactions and reportable transactions having
a significant tax avoidance purpose (sec. 612 of the
House bill, sec. 403 of the Senate amendment, and new
sec. 6662A of the Code)................................ 599
3. Tax shelter exception to confidentiality privileges
relating to taxpayer communications (sec. 613 of the
House bill, sec. 406 of the Senate amendment, and sec.
7525 of the Code)...................................... 604
4. Statute of limitations for unreported listed
transactions (sec. 614 of the House bill, sec. 416 of
the Senate amendment, and sec. 6501 of the Code)....... 605
5. Disclosure of reportable transactions by material
advisors (secs. 615 and 616 of the House bill, secs.
407 and 408 of the Senate amendment, and secs. 6111 and
6707 of the Code)...................................... 606
6. Investor lists and modification of penalty for failure
to maintain investor lists (secs. 615 and 617 of the
House bill, secs. 407 and 409 of the Senate amendment,
and secs. 6112 and 6708 of the Code)................... 609
7. Penalty on promoters of tax shelters (sec. 618 of the
House bill, sec. 415 of the Senate amendment, and sec.
6700 of the Code)...................................... 611
8. Penalty for aiding and abetting the understatement of
tax liability (sec. 419 of the Senate amendment and
sec. 6701 of the Code)................................. 612
9. Modifications of substantial understatement penalty
for nonreportable transactions (sec. 619 of the House
bill, sec. 405 of the Senate amendment, and sec. 6662
of the Code)........................................... 613
10. Modification of actions to enjoin certain conduct
related to tax shelters and reportable transactions
(sec. 620 of the House bill, sec. 410 of the Senate
amendment, and sec. 7408 of the Code).................. 614
11. Penalty on failure to report interests in foreign
financial accounts (sec. 621 of the House bill, sec.
412 of the Senate amendment, and sec. 5321 of Title 31,
United States Code).................................... 614
12. Regulation of individuals practicing before the
Department of the Treasury (sec. 622 of the House bill,
sec. 414 of the Senate amendment, and sec. 330 of Title
31, Untied States Code)................................ 616
13. Treatment of stripped bonds to apply to stripped
interests in bond and preferred stock funds (sec. 631
of the House bill, sec. 461 of the Senate amendment,
and secs. 305 and 1286 of the Code).................... 617
14. Minimum holding period for foreign tax credit with
respect to withholding taxes on income other than
dividends (sec. 632 of the House bill, sec. 456 of the
Senate amendment, and sec. 901 of the Code)............ 620
15. Treatment of partnership loss transfers and
partnership basis adjustments (sec. 633 of the House
bill, sec. 469 of the Senate amendment, and secs. 704,
734, 743, and 754 of the Code)......................... 621
16. No reduction of basis under section 734 in stock held
by partnership in corporate partner (sec. 634 of the
House bill, sec. 432 of the Senate amendment, and sec.
755 of the Code)....................................... 628
17. Repeal of special rules for FASITs (sec. 635 of the
House bill, sec. 433 of the Senate amendment, and secs.
860H through 860L of the Code)......................... 629
18. Limitation on transfer and importation of built-in
losses (sec. 636 of the House bill, sec. 431 of the
Senate amendment, and secs. 362 and 334 of the Code)... 634
19. Clarification of banking business for purposes of
determining investment of earnings in U.S. property
(sec. 637 of the House bill, sec. 451 of the Senate
amendment, and sec. 956 of the Code)................... 636
20. Alternative tax for small insurance companies and
modification of exemption from tax for small property
and casualty insurance companies (sec. 638 of the House
bill, sec. 493 of the Senate amendment, and secs.
501(c)(15) and 831(b) of the Code)..................... 638
21. Denial of deduction for interest on underpayments
attributable to nondisclosed reportable transactions
(sec. 639 of the House bill, sec. 417 of the Senate
amendment, and sec. 163 of the Code)................... 639
22. Clarification of rules for payment of estimated tax
for certain deemed asset sales (sec. 640 of the House
bill, sec. 481 of the Senate amendment, and sec. 338 of
the Code).............................................. 640
23. Exclusion of like-kind exchange property from
nonrecognition treatment on the sale or exchange of a
principal resident (sec. 641 of the House bill and sec.
492 of the Senate amendment)........................... 641
24. Prevention of mismatching of interest and original
issue discount deductions and income inclusions in
transactions with related foreign persons (sec. 642 of
the House bill, sec. 453 of the Senate amendment, and
secs. 163 and 267 of the Code)......................... 642
25. Exclusion from gross income for interest on
overpayments of income tax by individuals (sec. 643 of
the House bill)........................................ 644
26. Deposits made to suspend the running of interest on
potential underpayments (sec. 644 of the House bill,
sec. 486 of the Senate amendment, and new sec. 6603 of
the Code).............................................. 646
27. Authorize IRS to enter into installment agreements
that provide for partial payment (sec. 645 of the House
bill, sec. 484 of the Senate amendment, and sec. 6159
of the Code)........................................... 649
28. Affirmation of consolidated return regulation
authority (sec. 646 of the House bill, sec. 421 of the
Senate amendment, and sec. 1502 of the Code)........... 650
29. 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. 475
and 476 of the Senate amendment, secs. 167 and 168 of
the Code, and new sec. 470 of the Code)................ 654
30. Clarification of the economic substance doctrine
(sec. 401 of the Senate amendment and sec. 7701 of the
Code).................................................. 663
31. Penalty for understatements attributable to
transactions lacking economic substance, etc. (sec. 404
of the Senate amendment and sec. 6662B of the Code).... 669
32. Understatement of taxpayer's liability by income tax
return preparer (sec. 411 of the Senate amendment)..... 671
33. Frivolous tax submissions (sec. 413 of the Senate
amendment and sec. 6702 of the Code)................... 672
34. Authorization of appropriations for tax law
enforcement (sec. 418 of the Senate amendment)......... 673
35. Declaration by chief executive officer relating to
Federal annual corporate income tax return (sec. 422 of
the Senate amendment).................................. 673
36. Denial of deduction for certain fines, penalties, and
other amounts (sec. 423 of the Senate amendment and
sec. 162 of the Code).................................. 675
37. Denial of deduction for punitive damages (sec. 424 of
the Senate amendment and sec. 162 of the Code)......... 677
38. Increase in criminal monetary penalty limitation for
the underpayment or overpayment of tax due to fraud
(sec. 425 of the Senate amendment)..................... 678
39. Expanded disallowance of deduction for interest on
convertible debt (sec. 434 of the Senate amendment and
sec. 163 of the Code).................................. 679
40. Expand authority to disallow tax benefits under
section 269 (sec. 435 of the Senate amendment and sec.
269 of the Code)....................................... 680
41. Modification of coordination rules for controlled
foreign corporation and passive foreign investment
company regimes (sec. 436 of the Senate amendment and
sec. 1297 of the Code)................................. 681
C. Reduction of Fuel Tax Evasion............................. 684
1. Exemption from certain excise taxes for mobile
machinery vehicles and modification of definition of
offhighway vehicle (sec. 651 of the House bill, sec.
896 of the Senate amendment, and secs. 4053, 4072,
4082, 4483, 6421, and 7701 of the Code)................ 684
2. Taxation of aviation-grade kerosene (sec. 652 of the
House bill, sec. 871 of the Senate amendment, and secs.
4041, 4081, 4082, 4083, 4091, 4092, 4093, 4101, and
6427 of the Code)...................................... 687
3. Provide for transfer from Airport and Airway Trust
Fund to Highway Trust Fund to adjust for continued
highway use of aviation fuel (sec. 872 of the Senate
amendment and secs. 9502 and 9503 of the Code)......... 693
4. Mechanical dye injection and related penalties (sec.
653 of the House bill, secs. 873, 874 and 875 of the
Senate amendment and secs. 4082 and 6715 and new sec.
6715A of the Code)..................................... 694
5. Terminate dyed diesel use by intercity buses (sec. 876
of the Senate amendment and secs. 4082 and 6427 of the
Code).................................................. 697
6. Authority to inspect on-site records (sec. 654 of the
House bill, sec. 877 of the Senate amendment, and sec.
4083 of the Code)...................................... 698
7. Assessable penalty for refusal of entry (sec. 878 of
the Senate amendment and new sec. 6717 of the Code).... 698
8. Registration of pipeline or vessel operators required
for exemption of bulk transfers to registered terminals
or refineries (sec. 655 of the House bill, sec. 879 of
the Senate amendment, and sec. 4081 of the Code)....... 700
9. Display of registration and penalties for failure to
display registration and to register (secs. 656 and 657
of the House bill, secs. 880 and 882 of the Senate
amendment, and secs. 4101, 7232, 7272 and new secs.
6718 and 6719 of the Code)............................. 701
10. Registration of persons within foreign trade zones
(sec. 881 of the Senate amendment and sec. 4101 of the
Code).................................................. 702
11. Penalties for failure to report (sec. 657 of the
House bill, sec. 882 of the Senate amendment, and new
sec. 6725 of the Code)................................. 702
12. Electronic filing of required information reports
(sec. 895 of the Senate amendment and sec. 4010 of the
Code).................................................. 703
13. Information reporting for persons claiming certain
tax benefits (sec. 883 of the Senate amendment and new
sec. 4104 of the Code)................................. 704
14. Collection from Customs bond where importer not
registered (sec. 658 of the House bill and sec. 884 of
Senate amendment)...................................... 705
15. Reconciliation of on-loaded cargo to entered cargo
(sec. 885 of the Senate amendment)..................... 706
16. Modification of the use tax on heavy highway vehicles
(sec. 659 of the House bill, sec. 890 of the Senate
amendment, and secs. 4481, 4483 and 6165 of the Code).. 707
17. Modification of ultimate vendor refund claims with
respect to farming (sec. 660 of the House bill, sec.
887 of the Senate amendment, and sec. 6427 of the Code) 708
18. Dedication of revenue from certain penalties to the
Highway Trust Fund (sec. 661 of the House bill, sec.
891 of the Senate amendment, and sec. 9503 of the Code) 709
19. Taxable fuel refunds for certain ultimate vendors
(sec. 662 of the House bill, sec. 888 of the Senate
amendment, and secs. 6416 and 6427 of the Code)........ 710
20. Two party exchanges (sec. 663 of the bill and new
sec. 4105 of the Code)................................. 711
21. Simplification of tax on tires (sec. 664 of the House
bill and sec. 4071 of the Code)........................ 712
22. Tax on sale of diesel fuel whether suitable for use
or not in a diesel-powered vehicle or train (sec. 886
of the Senate amendment)............................... 713
23. Nonapplication of export exemption to delivery of
fuel to motor vehicles removed from United States (sec.
892 of the Senate amendment)........................... 714
24. Taxation of transmix and diesel fuel blend stocks and
Treasury study on fuel tax compliance (secs. 893, 894
and 895 of the Senate amendment and sec. 4083 of the
Code).................................................. 716
D. Nonqualified Deferred Compensation Plans.................. 720
1. Treatment of nonqualified deferred compensation plans
(sec. 671 of the House bill, section 671 of the Senate
amendment, and new sec. 490A and secs. 6040 and 6051 of
the Code).............................................. 720
2. Denial of deferral of certain stock option and
restricted stock gains (sec. 672 of the Senate
amendment and sec. 83 of the Code)..................... 738
E. Other Revenue Provisions.................................. 739
1. Permit private sector debt collection companies to
collect tax debts (sec. 681 of the House bill, sec. 487
of the Senate amendment, and new sec. 6306 of the Code) 739
2. Modify charitable contribution rules for donations of
patents and other intellectual property (sec. 682 of
the House bill, sec. 494 of the Senate amendment, and
secs. 170 and 6050L of the Code)....................... 742
3. Require increased reporting for noncash charitable
contributions (sec. 683 of the House bill and sec. 170
of the Code)........................................... 745
4. Limit deduction for charitable contributions of
vehicles (sec. 684 of the House bill, sec. 731 of the
Senate amendment, and new sec. 6720 and sec. 170 of the
Code).................................................. 747
5. Extend the present-law intangible amortization
provisions to acquisitions of sports franchises (sec.
685 of the House bill, sec. 471 of the Senate
amendment, and sec. 197 of the Code)................... 752
6. Increase continuous levy for certain federal payments
(sec. 686 of the House bill, sec. 734 of the Senate
amendment, and sec. 6331(h) of the Code)............... 753
7. Modification of straddle rules (sec. 687 of the House
bill, sec. 64 of the Senate amendment, and sec. 1092 of
the Code).............................................. 754
8. Add vaccines against Hepatitis A to the list of
taxable vaccines (sec. 688 of the House bill, sec. 491
of the Senate amendment, and sec. 4132 of the Code).... 758
9. Add vaccines against influenza to the list of taxable
vaccines (sec. 689 of the House bill, sec. 732 of the
Senate amendment, and sec. 4132 of the Code)........... 759
10. Extension of IRS user fees (sec. 690 of the House
bill, sec. 482 of the Senate amendment, and sec. 7528
of the Code)........................................... 759
11. Extension of Customs user fees (Sec. 691 of the House
bill and sec. 485 of the Senate amendment)............. 760
12. Prohibition on nonrecognition of gain through
complete liquidation of holding company (sec. 452 of
the Senate amendment and sec. 332 of the Code)......... 761
13. Effectively connected income to include certain
foreign source income (sec. 454 of the Senate amendment
and sec. 864 of the Code).............................. 762
14. Recapture of overall foreign losses on sale of
controlled foreign corporation stock (sec. 455 of the
Senate amendment and sec. 904 of the Code)............. 764
15. Application of earnings-stripping rules to
partnerships and S corporations (sec. 462 of the Senate
amendment and sec. 163 of the Code).................... 766
16. Recognition of cancellation of indebtedness income
realized on satisfaction of debt with partnership
interest (sec. 463 of the Senate amendment and sec. 108
of the Code)........................................... 767
17. Denial of installment sale treatment for all readily
tradable debt (sec. 465 of the Senate amendment and
sec. 453 of the Code).................................. 769
18. Modify treatment of transfers to creditors in
divisive reorganizations (sec. 466 of the Senate
amendment and secs. 357 and 361 of the Code)........... 770
19. Clarify definition of nonqualified preferred stock
(sec. 467 of the Senate amendment and sec. 351(g) of
the Code).............................................. 771
20. Modify definition of controlled group of corporations
(sec. 468 of the Senate amendment and sec. 1563 of the
Code).................................................. 772
21. Establish specific class lives for utility grading
costs (sec. 472 of the Senate amendment and sec. 168 of
the Code).............................................. 773
22. Expansion of limitation on expensing of certain
passenger automobiles (sec. 473 of the Senate amendment
and sec. 179 of the Code).............................. 774
23. Provide consistent amortization period for
intangibles (sec. 474 of the Senate amendment and secs.
195, 248, and 709 of the Code)......................... 776
24. Doubling of certain penalties, fines, and interest on
underpayments related to certain offshore financial
arrangements (sec. 483 of the Senate amendment)........ 777
25. Whistleblower reforms (sec. 488 of the Senate
amendment)............................................. 778
26. Increase in age of minor children whose unearned
income is taxed as if parent's income (sec. 495 of the
Senate amendment and sec. 1 of the Code)............... 779
27. Modify holding period requirement for qualification
for reduced tax rate on dividends on preferred stock
(sec. 496 of the Senate amendment and sec. 1 of the
Code).................................................. 782
28. Grant Treasury regulatory authority to address
foreign tax credit transactions involving inappropriate
separation of foreign taxes from related foreign income
(sec. 661A of Senate amendment and sec. 901 of the
Code).................................................. 783
29. Freeze of provision regarding suspension of interest
where Secretary fails to contact taxpayer (sec. 662B of
the Senate amendment and sec. 6404(g) of the Code)..... 784
30. Increase in withholding from supplemental wage
payments in excess of $1 million (sec. 673 of the
Senate amendment and sec. 13273 of the Revenue
Reconciliation Act of 1993)............................ 785
31. Capital gain treatment on sale of stock acquired from
exercise of statutory stock options to comply with
conflict of interest requirements (sec 674 of the
Senate amendment and sec. 421 of the Code)............. 786
32. Application of basis rules to nonresident aliens (sec
675 of the Senate amendment and new sec. 72(w) and sec.
83 of the Code)........................................ 787
33. Residence and source rules related to a United States
possession (sec. 497 of the Senate amendment and new
sec. 937 of the Code).................................. 791
34. Include employer provided housing under foreign
earned income exclusion cap (sec. 632 of the Senate
amendment and sec. 911 of the Code).................... 795
35. Deduction for personal use of company aircraft and
other entertainment expenses (sec. 103(b) of the Senate
amendment and sec. 274(e) of the Code)................. 797
36. Treatment of contingent payment convertible debt
instruments (sec. 733 of the Senate Amendment and sec.
1275 of the Code)...................................... 799
Title XI--Trade Provisions....................................... 801
A. Suspension of Duties on Ceiling Fans (sec. 801 of the
House bill and Chapter 99, II of the harmonized Tariff
Schedule of the United States)............................. 801
B. Temporary Suspension of Certain Customs Duties............ 801
1. Suspension of duties on nuclear steam generators (sec.
802(a) of the House bill and Chapter 99, II of the
harmonized Tariff Schedule of the United States)....... 801
2. Suspension of Duties on Nuclear Reactor Vessel Heads
(sec. 802(b) of the House bill and Chapter 99, II of
the Harmonized Tariff Schedule of the United States.... 802
Title XII--Tax Complexity Analysis............................... 802
1. Deduction relating to income attributable to United
States production activities (sec. 102 of the House
bill, secs. 102 and 103 of the Senate amendment, and
sec. 11 of the Code)................................... 803
TITLE I--PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR
EXTRATERRITORIAL INCOME
A. Repeal of Extraterritorial Income Regime
(Sec. 101 of the House bill, sec. 101 of the Senate amendment, and
secs. 114 and 941 through 943 of the Code)
PRESENT LAW
Like many other countries, the United States has long
provided export-related benefits under its tax law. In the
United States, for most of the last two decades, these benefits
were provided under the foreign sales corporation (``FSC'')
regime. In 2000, the European Union succeeded in having the FSC
regime declared a prohibited export subsidy by the World Trade
Organization (``WTO''). In response to this WTO finding, the
United States repealed the FSC rules and enacted a new regime,
under the FSC Repeal and Extraterritorial Income Exclusion Act
of 2000.\1\ The European Union immediately challenged the
extraterritorial income (``ETI'') regime in the WTO, and in
January of 2002 the WTO Appellate Body held that the ETI regime
also constituted a prohibited export subsidy under the relevant
trade agreements.
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\1\ Transition rules delayed the repeal of the FSC rules and the
effective date of ETI for transactions before January 1, 2002. An
election was provided, however, under which taxpayers could adopt ETI
at an earlier date for transactions after September 30, 2000. This
election allowed the ETI rules to apply to transactions after September
30, 2000, including transactions occurring pursuant to pre-existing
binding contracts.
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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.
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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.
HOUSE BILL
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. 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.
SENATE AMENDMENT
The provision repeals the exclusion for extraterritorial
income. However, the provision provides that the
extraterritorial income 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 between
the taxpayer and an unrelated person and such contract is in
effect on September 17, 2003, and at all times thereafter.
The provision permits foreign corporations that have
elected to be treated as U.S. corporations pursuant to the
extraterritorial income exclusion provisions to revoke their
elections. Such revocations are effective on the date of
enactment of this provision. A corporation revoking its
election is treated as a U.S. corporation that transfers all of
its property to a foreign corporation in connection with an
exchange described in section 354 of the Code. In general, the
corporation shall not recognize any gain or loss on such deemed
transfer. However, a revoking corporation shall recognize any
gain on any asset held by the corporation if: (1) the basis of
such asset is determined (in whole or in part) by reference to
the basis of such asset in the hands of the person from whom
the corporation acquired such asset; (2) the asset was acquired
by an actual transfer (rather than as a result of the U.S.
corporation election by the corporation) occurring on or after
the first day on which the U.S. corporation election by the
corporation was effective; and (3) a principal purpose of the
acquisition was the reduction or avoidance of tax.
The provision also provides a deduction for taxable years
of certain corporations ending after the date of enactment of
the provision and beginning before January 1, 2007.\5\ The
amount of the deduction for each such taxable year is equal to
a specified percentage of the amount that, for the taxable year
of a corporation beginning in 2002, was excludable from the
gross income of the corporation under the extraterritorial
income exclusion provisions or was treated by the corporation
as exempt foreign trade income of related FSCs from property
acquired by the FSCs from the corporation.\6\ However, this
aggregate amount does not include any amount attributable to a
transaction involving a lease by the corporation unless the
corporation manufactured or produced (in whole or in part) the
leased property.
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\5\ The deduction also is available to cooperatives engaged in the
marketing of agricultural or horticultural products.
\6\ In the case of a short taxable year that ends after the date of
enactment and begins before January 1, 2007, the Treasury Secretary
shall prescribe guidance for determining the amount of the deduction,
including guidance that limits the amount of the deduction for a short
taxable year based upon the proportion that the number of days in the
short taxable year bears to 365.
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The specified percentage to be used in determining the
deduction is: 80 percent for calendar years 2004 and 2005; 60
percent for calendar year 2006; and 0 percent for calendar
years 2007 and thereafter. For calendar year 2003, the
specified percentage is the amount that bears the same ratio to
100 percent as the number of days after the date of enactment
of this provision bears to 365. In the case of a corporation
with a taxable year that is not the calendar year (i.e., a
fiscal year corporation), a special rule is provided for
determining a weighted average specified percentage based upon
the calendar years that are included in the taxable year.
The deduction for a taxable year generally is reduced by
the specified percentage of exempted FSC income and excluded
extraterritorial income of the corporation for the taxable year
from transactions pursuant to a binding contract.
Effective date.--The provision is effective for
transactions occurring after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, except
that under the conference agreement 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 \7\ between the taxpayer and an unrelated
person and such contract is in effect on September 17, 2003,
and at all times thereafter.
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\7\ This rule also applies to a purchase option, renewal option, or
replacement option that is included in such contract. For this purpose,
a replacement option will be considered enforceable against a lessor
notwithstanding the fact that a lessor retained approval of the
replacement lessee.
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Effective date.--The effective date is the same as the
House bill.
B. Deduction Relating to Income Attributable to United States
Production Activities
(Sec. 102 of the House bill, secs. 102 and 103 of the Senate amendment,
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
------------------------------------------------------------------------
Taxable income: Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................ 15 percent of taxable
income.
$50,001-$75,000........................... 25 percent of taxable
income.
$75,001-$10,000,000....................... 34 percent of taxable
income.
Over $10,000,000.......................... 35 percent of taxable
income.
------------------------------------------------------------------------
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.
HOUSE BILL
In general
The House 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.\8\
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\8\ The House bill provides that 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
Under the House bill, ``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; \9\ (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.\10\
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\9\ Domestic production gross receipts under the House bill 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.
\10\ It is intended under the House bill 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'' under the House bill
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 House 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 House bill provision is effective
for taxable years beginning after December 31, 2004.
SENATE AMENDMENT
In general
The Senate amendment provides a deduction equal to a
portion of the taxpayer's qualified production activities
income. For taxable years beginning after 2008, the Senate
amendment deduction is nine percent of such income. For taxable
years beginning in 2004, 2005, 2006, 2007 and 2008, the
deduction is five, five, five, six, and seven percent of
income, respectively. However, the deduction for a taxable year
is limited to 50 percent of the wages paid by the taxpayer
during such taxable year.\11\ In the case of corporate
taxpayers that are members of certain affiliated groups, the
deduction is determined by treating all members of such groups
as a single taxpayer.
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\11\ For purposes of the Senate amendment, ``wages'' include the
sum of the aggregate amounts of wages (as defined in section 3401(a)
without regard to exclusions for remuneration paid for services
performed in possessions of the United States) and elective deferrals
that the taxpayer is required to include on statements with respect to
the employment of employees of the taxpayer during the taxpayer's
taxable year. Elective deferrals include elective deferrals as defined
in section 402(g)(3), amounts deferred under section 457, and, for
taxable years beginning after December 31, 2005, designated Roth
contributions (as defined in section 402A). Any wages taken into
account for purposes of determining the wage limitation under the
Senate amendment cannot also be taken into account for purposes of
determining any credit allowable under sections 30A or 936.
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Qualified production activities income
In general, ``qualified production activities income''
under the Senate amendment is the modified taxable income \12\
of a taxpayer that is attributable to domestic production
activities. Income attributable to domestic production
activities generally is equal to domestic production gross
receipts, reduced by the sum of: (1) the costs of goods sold
that are allocable to such receipts; \13\ (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.\14\
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\12\ ``Modified taxable income'' under the Senate amendment is
taxable income of the taxpayer computed without regard to the deduction
provided by the Senate amendment. Qualified production activities
income is limited to the modified taxable income of the taxpayer.
\13\ For purposes of determining such costs under the Senate
amendment, any item or service that is imported into the United States
without an arm's length transfer price shall be treated as acquired by
purchase, and its cost shall be treated as not less than its fair
market value when it entered the United States. A similar rule shall
apply in determining the adjusted basis of leased or rented property
where the lease or rental gives rise to domestic production gross
receipts. With regard to property previously exported by the taxpayer
for further manufacture, the increase in cost or adjusted basis shall
not exceed the difference between the fair market value of the property
when exported and the fair market value of the property when re-
imported into the United States after further manufacture.
\14\ The Senate amendment provides that 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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For taxable years beginning before 2013, the Senate
amendment provides that qualified production activities income
is reduced by virtue of a fraction (not to exceed one), the
numerator of which is the value of the domestic production of
the taxpayer and the denominator of which is the value of the
worldwide production of the taxpayer (the ``domestic/worldwide
fraction'').\15\ For taxable years beginning in 2010, 2011, and
2012, the reduction in qualified production activities income
by virtue of this fraction is reduced by 25, 50, and 75
percent, respectively. For taxable years beginning after 2012,
there is no reduction in qualified production activities income
by virtue of this fraction.
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\15\ For purposes of the domestic/worldwide fraction under the
Senate amendment, the value of domestic production is the excess of
domestic production gross receipts (as defined below) over the cost of
deductible purchased inputs that are allocable to such receipts.
Similarly, the value of worldwide production is the excess of worldwide
production gross receipts over the cost of deductible purchased inputs
that are allocable to such receipts. For purposes of determining the
domestic/worldwide fraction, purchased inputs include: purchased
services (other than employees) used in manufacture, production,
growth, or extraction activities; purchased items consumed in
connection with such activities; and purchased items incorporated as
part of the property being manufactured, produced, grown, or extracted.
In the case of corporate taxpayers that are members of certain
affiliated groups, the domestic/worldwide fraction is determined by
treating all members of such groups as a single taxpayer.
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Domestic production gross receipts
Under the Senate amendment, ``domestic production gross
receipts'' are gross receipts of a taxpayer that are derived in
the actual conduct of a trade or business from 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 taxpayer within the United States or any possession of
the United States.\16\ Such term also includes a percentage of
gross receipts derived from engineering or architectural
services performed in the United States for construction
projects in the United States.\17\ Finally, such term includes
gross receipts derived by the taxpayer from the use of film and
videotape property produced in whole or in significant part by
the taxpayer within the United States. ``Qualifying production
property'' generally is any tangible personal property,
computer software, or property described in section 168(f)(3)
or (4) of the Code.\18\ However, qualifying production property
does not include: (1) consumable property that is sold, leased
or licensed as an integral part of the provision of services;
(2) oil or gas (other than certain primary products thereof);
\19\ (3) electricity; (4) water supplied by pipeline to the
consumer; (5) utility services; and (6) any film, tape,
recording, book, magazine, newspaper or similar property the
market for which is primarily topical or otherwise essentially
transitory in nature.\20\
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\16\ Under the Senate amendment, 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 (but
not 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).
\17\ For taxable years beginning in 2004 through 2008, the
applicable percentage is 25%. For taxable years beginning in 2009
through 2012, the applicable percentage is 50%. For taxable years
beginning after 2012, the applicable percentage is 100%.
\18\ For purposes of the definition of qualified production
property under the Senate amendment, property described in section
168(f)(3) or (4) of the Code includes underlying copyrights and
trademarks. In addition, gross receipts from the sale, exchange, lease,
rental, license or other disposition of property described in section
168(f)(3) or (4) are treated as domestic production gross receipts if
more than 50 percent of the aggregate development and production costs
of such property are incurred by the taxpayer within the United States.
For this purpose, property that is acquired by the taxpayer after
development or production has commenced, but before such property
generates substantial gross receipts, shall be treated as developed or
produced by the taxpayer.
\19\ Under the Senate amendment, qualifying production property
does not include extracted but unrefined oil or gas, but generally
includes primary products of oil and gas that are produced by the
taxpayer. Examples of primary products for this purpose include motor
fuels, chemical feedstocks and fertilizer. However, primary products do
not include the output of a natural gas processing plant. Natural gas
processing plants generally are located at or near the producing gas
field that supplies the facility, and the facility serves to separate
impurities from the natural gas liquids recovered from the field for
the purpose of selling the liquids for future production and
preparation of the natural gas for pipeline transportation.
\20\ The topical and transitory exclusion does not apply to the
extent of the gross receipts from the use of film and videotape
property produced in whole or in significant part by the taxpayer
within the United States.
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Other rules
Qualified production activities income of passthrough
entities (other than cooperatives)
With respect to domestic production activities of an S
corporation, partnership, estate, trust or other passthrough
entity (other than an agricultural or horticultural
cooperative), the deduction under the Senate amendment
generally is determined at the shareholder, partner or similar
level by taking into account at such level the proportionate
share of qualified production activities income of the
entity.\21\ The Senate amendment directs the Secretary to
prescribe rules for the application of the deduction to
passthrough entities, including reporting requirements and
rules relating to restrictions on the allocation of the
deduction to taxpayers at the partner or similar level.
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\21\ However, the wage limitation described above is determined at
the entity level in computing the deduction with respect to qualified
production activities income of a passthrough entity.
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Qualified production activities income of agricultural and
horticultural cooperatives
With regard to member-owned agricultural and
horticultural cooperatives formed under Subchapter T of the
Code, the Senate amendment provides the same treatment of
qualified production activities income derived from products
marketed through cooperatives as it provides for qualified
production activities income of other taxpayers (i.e., the
cooperative may claim a deduction from qualified production
activities income). In addition, the Senate amendment provides
that the amount of any patronage dividends or per-unit retain
allocations paid to a member of an agricultural or
horticultural cooperative (to which Part I of Subchapter T
applies), which is allocable to the portion of qualified
production activities income of the cooperative that is
deductible under the Senate amendment, is excludible from the
gross income of the member. In order to qualify, such amount
must be designated by the organization as allocable to the
deductible portion of qualified production activities income in
a written notice mailed to its patrons not later than the
payment period described in section 1382(d). The cooperative
cannot reduce its income under section 1382 (e.g., cannot claim
a dividends-paid deduction) for such amounts.
Separate application to films and videotape
Under the Senate amendment, the deduction provided by
this provision with respect to films and videotape is
determined separately with respect to qualified production
activities income of the taxpayer allocable to each of three
markets: theatrical, broadcast television, and home video. The
Senate amendment provides rules for making a separate
determination of qualified production activities allocable to
each market.
Alternative minimum tax
The deduction provided by the Senate amendment is allowed
for purposes of the alternative minimum tax (including adjusted
current earnings). The deduction is determined by reference to
modified alternative minimum taxable income.
Coordination with ETI repeal
For purposes of the Senate amendment, domestic production
gross receipts does not include gross receipts from any
transaction that produces excluded extraterritorial income
pursuant to the binding contract exception to the ETI repeal
provisions of the Senate amendment.
Qualified production activities income is determined
without regard to any deduction provided by the ETI repeal
provisions of the Senate amendment.
Effective date.--The Senate amendment provision is
effective for taxable years ending after the date of enactment.
CONFERENCE AGREEMENT
In general
The conference agreement provides a deduction from
taxable income (or, in the case of an individual, adjusted
gross income) that is equal to a portion of the taxpayer's
qualified production activities income. For taxable years
beginning after 2009, the deduction is equal to nine percent of
the lesser of (1) the qualified production activities income of
the taxpayer for the taxable year, or (2) taxable income
(determined without regard to this provision) for the taxable
year. For taxable years beginning in 2005 and 2006, the
deduction is three percent of income and, for taxable years
beginning in 2007, 2008 and 2009, the deduction is six percent
of income. However, the deduction for a taxable year is limited
to 50 percent of the wages paid by the taxpayer during the
calendar year that ends in such taxable year.\22\ In the case
of corporate taxpayers that are members of certain affiliated
groups, the deduction is determined by treating all members of
such groups as a single taxpayer and the deduction is allocated
among such members in proportion to each member's respective
amount (if any) of qualified production activities income.
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\22\ For purposes of the conference agreement, ``wages'' include
the sum of the aggregate amounts of wages and elective deferrals that
the taxpayer is required to include on statements with respect to the
employment of employees of the taxpayer during the taxpayer's taxable
year. Elective deferrals include elective deferrals as defined in
section 402(g)(3), amounts deferred under section 457, and, for taxable
years beginning after December 31, 2005, designated Roth contributions
(as defined in section 402A).
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Qualified production activities income
In general, ``qualified production activities income'' is
equal to domestic production gross receipts, reduced by the sum
of: (1) the costs of goods sold that are allocable to such
receipts; \23\ (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.\24\
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\23\ For purposes of determining such costs, any item or service
that is imported into the United States without an arm's length
transfer price shall be treated as acquired by purchase, and its cost
shall be treated as not less than its value when it entered the United
States. A similar rule shall apply in determining the adjusted basis of
leased or rented property where the lease or rental gives rise to
domestic production gross receipts. With regard to property previously
exported by the taxpayer for further manufacture, the increase in cost
or adjusted basis shall not exceed the difference between the value of
the property when exported and the value of the property when re-
imported into the United States after further manufacture. Except as
provided by the Secretary, the value of property for this purpose shall
be its customs value (as defined in section 1059A(b)(1)).
\24\ 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., sec. 263A, in determining the cost of
goods sold, and sec. 861, in determining the source of such items).
Other deductions, expenses or losses that are directly allocable to
such receipts include, for example, selling and marketing expenses. A
proper share of other deductions, expenses, and losses that are not
directly allocable to such receipts or another class of income include,
for example, general and administrative expenses allocable to selling
and marketing expenses.
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Domestic production gross receipts
``Domestic production gross receipts'' generally are
gross receipts of a taxpayer that are derived from: (1) any
sale, exchange or other disposition, or any lease, rental or
license, of qualifying production property that was
manufactured, produced, grown or extracted by the taxpayer in
whole or in significant part within the United States; \25\ (2)
any sale, exchange or other disposition, or any lease, rental
or license, of qualified film produced by the taxpayer; (3) any
sale, exchange or other disposition electricity, natural gas,
or potable water produced by the taxpayer in the United States;
(4) construction activities performed in the United States;
\26\ or (5) engineering or architectural services performed in
the United States for construction projects located in the
United States.
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\25\ 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).
\26\ For this purpose, construction activities include activities
that are directly related to the erection or substantial renovation of
residential and commercial buildings and infrastructure. Substantial
renovation would include structural improvements, but not mere cosmetic
changes, such as painting.
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However, domestic production gross receipts do not
include any gross receipts of the taxpayer that are derived
from (1) the sale of food or beverages prepared by the taxpayer
at a retail establishment,\27\ or (2) the transmission or
distribution of electricity, natural gas, or potable water.\28\
In addition, 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.\29\
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\27\ The conferees intend that food processing, which generally is
a qualified production activity under the conference agreement, does
not include activities carried out at retail establishment. Thus, under
the conference agreement while the gross receipts of a meat packing
establishment are qualified domestic production gross receipts, the
activities of a master chef who creates a venison sausage for his or
her restaurant menu cannot be construed as a qualified production
activity.
The conferees recognize that some taxpayers may own facilities at
which the predominant activity is domestic production as defined in the
conference agreement and other facilities at which they engage in the
retail sale of the taxpayer's produced goods and also sell food and
beverages. For example, assume that the taxpayer buys coffee beans and
roasts those beans at a facility, the primary activity of which is the
roasting and packaging of roasted coffee. The taxpayer sells the
roasted coffee through a variety of unrelated third-party vendors and
also sells roasted coffee at the taxpayer's own retail establishments.
In addition, at the taxpayer's retail establishments, the taxpayer
prepares brewed coffee and other foods. The conferees intend that to
the extent that the gross receipts of the taxpayer's retail
establishment represent receipts from the sale of its roasted coffee
beans to customers, the receipts are qualified domestic production
gross receipts, but to the extent that the gross receipts of the
taxpayer's retail establishment represent receipts from the sale of
brewed coffee or food prepared at the retail establishment, the
receipts are not qualified domestic production gross receipts. However,
the conferees intend that, in this case, the taxpayer may allocate part
of the receipts from the sale of the brewed coffee as qualified
domestic production gross receipts to the extent of the value of the
roasted coffee beans used to brew the coffee. The conferees intend that
the Secretary provide guidance drawing on the principles of section 482
by which such a taxpayer can allocate gross receipts between qualified
and nonqualified gross receipts. The conferees observe that in this
example, the taxpayer's sales of roasted coffee beans to unrelated
third parties would provide a value for the beans used in brewing a cup
of coffee for retail sale.
The conferees intend that the disqualification of gross receipts
derived from the sale of food and beverage prepared by the taxpayer at
a retail establishment not be construed narrowly to apply only to
establishments at which customers dine on premises. The receipts of a
facility that prepares food and beverage solely for take out service
would not be qualified production gross receipts. Likewise, the
conferees intend that the disqualification of gross receipts derived
from the sale of food and beverages prepared by the taxpayer need not
be limited to retail establishments primarily engaged in the dining
trade. For example, if a taxpayer operates a supermarket and as part of
the supermarket the taxpayer operates an in-store bakery, the same
allocation described above would apply to determine the extent to which
the taxpayer's gross receipts represent qualified domestic production
gross receipts.
\28\ The conference agreement provides that domestic production
gross receipts include the gross receipts from the production in the
United States of electricity, gas, and potable water, but excludes the
gross receipts from the transmission or distribution of electricity,
gas, and potable water. Thus, in the case of a taxpayer who owns a
facility for the production of electricity, whether the taxpayer's
facility is part of a regulated utility or an independent power
facility, the taxpayer's gross receipts from the production of
electricity at that facility are qualified domestic production gross
receipts. However, to the extent that the taxpayer is an integrated
producer that generates electricity and delivers electricity to end
users, any gross receipts properly attributable to the transmission of
electricity from the generating facility to a point of local
distribution and any gross receipts properly attributable to the
distribution of electricity to final customers are not qualified
domestic production gross receipts. For example, assume taxpayer A owns
a wind turbine that generates electricity and taxpayer B owns a high-
voltage transmission line that passes near taxpayer A's wind turbine
and ends near the system of local distribution lines of taxpayer C.
Taxpayer A sells the electricity produced at the wind turbine to
taxpayer C and contracts with taxpayer B to transmit the electricity
produced at the wind turbine to taxpayer C who sells the electricity to
his or her customers using taxpayer C's distribution network. The gross
receipts received by taxpayer A for the sale of electricity produced at
the wind turbine constitute qualifying domestic production gross
receipts. The gross receipts of taxpayer B from transporting taxpayer
A's electricity to taxpayer C are not qualifying domestic production
gross receipts. Likewise the gross receipts of taxpayer C from
distributing the electricity are not qualifying domestic production
gross receipts. Also, if taxpayer A made direct sales of electricity to
customers in taxpayer C's service area and taxpayer C receives
remuneration for the distribution of electricity, the gross receipts of
taxpayer C are not qualifying domestic production gross receipts. If
taxpayers A, B, and C are all related taxpayer, then taxpayers A, B,
and C must allocate gross receipts to production activities,
transmission activities, and distribution activities in a manner
consistent with the preceding example.
The conference agreement provides that the same principles apply in
the case of the natural gas and water supply industries. In the case of
natural gas, production activities generally are all activities
involved in extracting natural gas from the ground and processing the
gas into pipeline quality gas. Such activities would produce qualifying
domestic production gross receipts. However gross receipts of a
taxpayer attributable to transmission of pipeline quality gas from a
natural gas field (or from a natural gas processing plant) to a local
distribution company's citygate (or to another customer) are not
qualified domestic production gross receipts. Likewise gas purchased by
a local gas distribution company and distributed from the citygate to
the local customers does not give rise to domestic production gross
receipts.
In the case of the production of potable water the conferees intend
that activities involved in the production of potable water include the
acquisition, collection, and storage of raw water (untreated water). It
also includes the transportation of raw water to a water treatment
facility and treatment of raw water at such a facility. However, any
gross receipts from the storage of potable water after the water
treatment facility or delivery of potable water to customers does not
give rise to qualifying domestic production gross receipts. The
conferees intend that a taxpayer that both produces potable water and
distributes potable water will properly allocate gross receipts across
qualifying and non-qualifying activities.
\29\ 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 includes any
tangible personal property, computer software, or sound
recordings. ``Qualified film'' includes any motion picture film
or videotape \30\ (including live or delayed television
programming, but not including certain sexually explicit
productions) if 50 percent or more of the total compensation
relating to the production of such film (including compensation
in the form of residuals and participations \31\) constitutes
compensation for services performed in the United States by
actors, production personnel, directors, and producers.\32\
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\30\ The conferees intend that the nature of the material on which
properties described in section 168(f)(3) are embodied and the methods
and means of distribution of such properties shall not affect their
qualification under this provision.
\31\ To the extent that a taxpayer has included an estimate of
participations and/or residuals in its income forecast calculation
under section 167(g), such taxpayer must use the same estimate of
participations and/or residuals for purposes of determining total
compensation.
\32\ It is intended that the Secretary will provide appropriate
rules governing the determination of total compensation for services
performed in the United States.
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Other rules
Qualified production activities income of passthrough
entities (other than cooperatives)
With respect to domestic production activities of an S
corporation, partnership, estate, trust or other passthrough
entity (other than an agricultural or horticultural
cooperative), although the wage limitation is applied first at
the entity level, the deduction under the conference agreement
generally is determined at the shareholder, partner or similar
level by taking into account at such level the proportionate
share of qualified production activities income of the entity.
The Secretary is directed to prescribe rules for the
application of the conference agreement to passthrough
entities, including reporting requirements and rules relating
to restrictions on the allocation of the deduction to taxpayers
at the partner or similar level.
For purposes of applying the wage limitation at the level
of a shareholder, partner, or similar person, each person who
is allocated qualified production activities income from a
passthrough entity also is treated as having been allocated
wages from such entity in an amount that is equal to the lesser
of: (1) such person's allocable share of wages, as determined
under regulations prescribed by the Secretary; or (2) twice the
appropriate deductible percentage of qualified production
activities income that actually is allocated to such person for
the taxable year.
Qualified production activities income of agricultural and
horticultural cooperatives
With regard to member-owned agricultural and
horticultural cooperatives formed under Subchapter T of the
Code, the conference agreement provides the same treatment of
qualified production activities income derived from
agricultural or horticultural products that are manufactured,
produced, grown, or extracted by cooperatives,\33\ or that are
marketed through cooperatives, as it provides for qualified
production activities income of other taxpayers (i.e., the
cooperative may claim a deduction from qualified production
activities income).
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\33\ For this purpose, agricultural or horticultural products also
include fertilizer, diesel fuel and other supplies used in agricultural
or horticultural production that are manufactured, produced, grown, or
extracted by the cooperative.
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In addition, the conference agreement provides that the
amount of any patronage dividends or per-unit retain
allocations paid to a member of an agricultural or
horticultural cooperative (to which Part I of Subchapter T
applies), which is allocable to the portion of qualified
production activities income of the cooperative that is
deductible under the conference agreement, is deductible from
the gross income of the member. In order to qualify, such
amount must be designated by the organization as allocable to
the deductible portion of qualified production activities
income in a written notice mailed to its patrons not later than
the payment period described in section 1382(d). The
cooperative cannot reduce its income under section 1382 (e.g.,
cannot claim a dividends-paid deduction) for such amounts.
Alternative minimum tax
The deduction provided by the conference agreement is
allowed for purposes of computing alternative minimum taxable
income (including adjusted current earnings). The deduction in
computing alternative minimum taxable income is determined by
reference to the lesser of the qualified production activities
income (as determined for the regular tax) or the alternative
minimum taxable income (in the case of an individual, adjusted
gross income as determined for the regular tax) without regard
to this deduction.
Timber cutting
Under the conference agreement, an election made 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.
Exploration of fundamental tax reform
The conferees acknowledge that Congress has not reduced
the statutory corporate income tax rate since 1986. According
to the Organisation of Economic Cooperation and Development
(``OECD''), the combined corporate income tax rate, as defined
by the OECD, in most instances is lower than the U.S. corporate
income tax rate.\34\ Higher corporate tax rates factor into the
United States' ability to attract and retain economically
vibrant industries, which create good jobs and contribute to
overall economic growth.
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\34\ Organisation of Economic Cooperation and Development, Table
1.5, Tax Data Base Statistics, Tax Policy and Administration, Summary
Tables (2003).
---------------------------------------------------------------------------
This legislation was crafted to repeal an export tax
benefit that was deemed inconsistent with obligations of the
United States under the Agreement on Subsidies and
Countervailing Measures and other international trade
agreements. This legislation replaces the benefit with tax
relief specifically designed to be economically equivalent to a
3-percentage point reduction in U.S.-based manufacturing.
The conferees recognize that manufacturers are a segment
of the economy that has faced significant challenges during the
nation's recent economic slowdown. The conferees recognize that
trading partners of the United States retain subsidies for
domestic manufacturers and exports through their indirect tax
systems. The conferees are concerned about the adverse
competitive impact of these subsidies on U.S. manufacturers.
These concerns should be considered in the context of the
benefits of a unified top tax rate for all corporate taxpayers,
including manufacturing, in terms of efficiency and fairness.
The conferees also expect that the tax-writing committees will
explore a unified top corporate tax rate in the context of
fundamental tax reform.
Effective date.--The conference agreement is effective
for taxable years beginning after December 31, 2004.
C. Reduced Corporate Income Tax Rate for Small Corporations
(Sec. 103 of the House 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
------------------------------------------------------------------------
Taxable income: Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................ 15 percent of taxable
income.
$50,001-$75,000........................... 25 percent of taxable
income.
$75,001-$10,000,000....................... 34 percent of taxable
income.
Over $10,000,000.......................... 35 percent of taxable
income.
------------------------------------------------------------------------
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.
HOUSE BILL
Under the House bill, 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
------------------------------------------------------------------------
Taxable income: Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................ 15 percent of taxable
income.
$50,001-$75,000........................... 25 percent of taxable
income.
$75,001-$20,000,000....................... 32 percent of taxable
income.
Over $20,000,000.......................... 35 percent of taxable
income.
------------------------------------------------------------------------
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
------------------------------------------------------------------------
Taxable income: Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................ 15 percent of taxable
income.
$50,001-$75,000........................... 25 percent of taxable
income.
$75,001-$5,000,000........................ 32 percent of taxable
income.
$5,000,001-$10,000,000.................... 34 percent of taxable
income.
Over $10,000,000.......................... 35 percent of taxable
income.
------------------------------------------------------------------------
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
------------------------------------------------------------------------
Taxable income: Income tax rate:
------------------------------------------------------------------------
$0-$50,000................................ 15 percent of taxable
income.
$50,001-$75,000........................... 25 percent of taxable
income.
$75,001-$1,000,000........................ 32 percent of taxable
income.
$1,000,001-$10,000,000.................... 34 percent of taxable
income.
Over $10,000,000.......................... 35 percent of taxable income
------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------
Taxable income: Income tax rate:
----------------------------------------------------------------------------------------------------------------
$0-$50,000....................................................... 15 percent of taxable income.
$50,001-$75,000.................................................. 25 percent of taxable income.
$75,001-$1,000,000............................................... 33 percent of taxable income.
$1,000,001-$10,000,000........................................... 34 percent of taxable income.
Over $10,000,000................................................. 35 percent of taxable income.
----------------------------------------------------------------------------------------------------------------
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
TITLE II--PROVISIONS RELATING TO JOB CREATION TAX INCENTIVES FOR
MANUFACTURERS, SMALL BUSINESSES, AND FARMERS
A. Section 179 Expensing
(Sec. 201 of the House bill, sec. 309 of the Senate amendment 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 \35\ 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.\36\ 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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\35\ Pub. L. No. 108-27, sec. 202 (2003).
\36\ 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.\37\ 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.\38\
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\37\ Sec. 179(c)(1).
\38\ Under Treas. Reg. sec. 1.179-5, applicable to property placed
in service in taxable years ending after Jan. 25, 1993 (but not
including property placed in service in taxable years beginning after
2002 and before 2006), 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.\39\ 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.\40\
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\39\ Sec. 179(c)(2).
\40\ Id. Under Prop. and Temp. Treas. Reg. sec. 179-5T, applicable
to property placed in service in taxable years beginning after 2002 and
before 2006, a taxpayer is permitted to make or revoke an election
under section 179 without the consent of the Commissioner on an amended
Federal tax return for that taxable year. This amended return must be
filed within the time prescribed by law for filing an amended return
for the taxable year. T.D. 9146, Aug. 3, 2004.
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HOUSE BILL
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.
SENATE AMENDMENT
The provision provides that the $100,000 amount ($25,000
for taxable years beginning in 2006 and thereafter) is reduced
(but not below zero) by only one half of the amount by which
the cost of qualifying property placed in service during the
taxable year exceeds $400,000 ($200,000 for taxable years
beginning 2006 and thereafter).\41\
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\41\ As a result of the reduced phase-out percentage, the
deductible amount in the New York Liberty Zone, an enterprise zone or a
renewal community is correspondingly increased. See sec. 1400L(f), sec.
1397A and sec. 1400J.
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For example, under the provision, if in 2004 an eligible
taxpayer places in service qualifying property costing
$500,000, the $100,000 amount is reduced by $50,000 (i.e., one
half the amount by which the $500,000 cost of qualifying
property placed in service during the taxable year exceeds
$400,000). Thus, the maximum amount eligible for section 179
expensing by this taxpayer for 2004 is $50,000.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2002.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
B. Depreciation
1. Recovery period for depreciation of certain leasehold improvements
(sec. 211 of the House bill and sec. 168 of the Code)
PRESENT LAW
In general
A taxpayer generally must capitalize the cost of property
used in a trade or business and recover such cost over time
through annual deductions for depreciation or amortization.
Tangible property generally is depreciated under the modified
accelerated cost recovery system (``MACRS''), which determines
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of
various types of depreciable property (sec. 168). The cost of
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years.
Nonresidential real property is subject to the mid-month
placed-in-service convention. Under the mid-month convention,
the depreciation allowance for the first year property is
placed in service is based on the number of months the property
was in service, and property placed in service at any time
during a month is treated as having been placed in service in
the middle of the month.
Depreciation of leasehold improvements
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.\42\ This rule applies regardless of whether the lessor
or the lessee places the leasehold improvements in service.\43\
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.\44\
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\42\ Sec. 168(i)(8). The Tax Reform Act of 1986 modified the
Accelerated Cost Recovery System (``ACRS'') to institute MACRS. Prior
to the adoption of ACRS by the Economic Recovery Tax Act of 1981,
taxpayers were allowed to depreciate the various components of a
building as separate assets with separate useful lives. The use of
component depreciation was repealed upon the adoption of ACRS. The Tax
Reform Act of 1986 also denied the use of component depreciation under
MACRS.
\43\ 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.
\44\ Secs. 168(b)(3), (c), (d)(2), and (i)(6). If the improvement
is characterized as tangible personal property, ACRS or MACRS
depreciation is calculated using the shorter recovery periods,
accelerated methods, and conventions applicable to such property. The
determination of whether improvements are characterized as tangible
personal property or as nonresidential real property often depends on
whether or not the improvements constitute a ``structural component''
of a building (as defined by Treas. Reg. sec. 1.48-1(e)(1)). See, e.g.,
Metro National Corp v. Commissioner, 52 TCM (CCH) 1440 (1987); King
Radio Corp Inc. v. U.S., 486 F.2d 1091 (10th Cir. 1973); Mallinckrodt,
Inc. v. Commissioner, 778 F.2d 402 (8th Cir. 1985) (with respect to
various leasehold improvements).
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Qualified leasehold improvement property
The Job Creation and Worker Assistance Act of 2002 \45\
(``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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\45\ 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.
HOUSE BILL
The House bill provides a statutory 15-year recovery
period for qualified leasehold improvement property placed in
service before January 1, 2006.\46\ The provision requires that
qualified leasehold improvement property be recovered using the
straight-line method.
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\46\ 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,\47\ with the following modification. If
a lessor makes an improvement that qualifies as qualified
leasehold improvement property, such improvement does not
qualify as qualified leasehold improvement property to any
subsequent owner of such improvement. An exception to the rule
applies in the case of death and certain transfers of property
that qualify for non-recognition treatment.
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\47\ Sec. 168(k).
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Effective date.--The House bill provision is effective
for property placed in service after the date of enactment.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
2. Recovery period for depreciation of certain restaurant improvements
(sec. 211 of the House 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.
HOUSE BILL
The House bill provides a statutory 15-year recovery
period for qualified restaurant property placed in service
before January 1, 2006.\48\ 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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\48\ 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.
---------------------------------------------------------------------------
Effective date.--The House bill provision is effective
for property placed in service after the date of enactment.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
3. Extended placed in service date for bonus depreciation for certain
aircraft (excluding aircraft used in the transportation
industry) (sec. 212 of the House bill, sec. 622 of the Senate
amendment, 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 three
to 25 years. The depreciation methods generally applicable to
tangible personal property are the 200-percent and 150-percent
declining balance methods, switching to the straight-line
method for the taxable year in which the depreciation deduction
would be maximized.
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.\49\ 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.\50\
The basis of the property and the depreciation allowances in
the placed-in-service year 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.\51\
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\49\ 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.
\50\ However, the additional first-year depreciation deduction is
not allowed for purposes of computing earnings and profits.
\51\ 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)).\52\ Second, the original use \53\ 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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\52\ 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.
\53\ 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.\54\ Transportation property is defined
as tangible personal property used in the trade or business of
transporting persons or property.
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\54\ In order for property to qualify for the extended placed-in-
service date, the property must be subject to section 263A and have an
estimated production period exceeding two years or an estimated
production period exceeding one year and a cost exceeding $1 million.
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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.\55\ With respect to property that is
manufactured, constructed, or produced by the taxpayer for use
by the taxpayer, the taxpayer must begin the manufacture,
construction, or production of the property after September 10,
2001. For property eligible for the extended placed-in-service
date, a special rule limits the amount of costs eligible for
the additional first year depreciation. With respect to such
property, only the portion of the basis that is properly
attributable to the costs incurred before January 1, 2005
(``progress expenditures'') is eligible for the additional
first-year depreciation.\56\
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\55\ 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.
\56\ 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.\57\ 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.\58\
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\57\ 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.
\58\ 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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HOUSE BILL
Due to the extended production period, the House bill
provides criteria under which certain non-commercial aircraft
can qualify for the extended placed-in-service date. Qualifying
aircraft are eligible for the additional first-year
depreciation deduction if placed in service before January 1,
2006. In order to qualify, the aircraft must:
(1) Be acquired by the taxpayer during the
applicable time period as under present law;
(2) Meet the appropriate placed-in-service date
requirements;
(3) Not be tangible personal property used in the
trade or business of transporting persons or property
(except for agricultural or firefighting purposes);
(4) Be purchased \59\ 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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\59\ For this purpose, it is intended that the term ``purchase'' be
interpreted as it is defined in sec. 179(d)(2).
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(5) Have an estimated production period exceeding
four months and a cost exceeding $200,000.
Effective date.--The House bill 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except for the effective date.
Effective date.--The Senate amendment is effective for
taxable years beginning after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
4. Special placed in service rule for bonus depreciation for certain
property subject to syndication (sec. 213 of the House bill,
sec. 621 of the Senate amendment, 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,
and (2) the taxpayer must acquire the property (i) 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 (ii) pursuant to a binding
contract which was entered into after September 10, 2001, and
before January 1, 2005. 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.
The Working Families Tax Relief Act of 2004 (``H.R.
1308'') included a technical correction regarding the
syndication of a lease by the lessor. The technical correction
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.
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.
HOUSE BILL \60\
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\60\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of technical corrections.
---------------------------------------------------------------------------
The House bill 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 House bill 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.
SENATE AMENDMENT \61\
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\61\ The Senate amendment predated the enactment of H.R. 1308, Pub.
L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of technical corrections.
---------------------------------------------------------------------------
The Senate amendment is the same as the House bill,
except for the effective date.
Effective date.--The Senate amendment is effective for
sales occurring after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill with the
following modification. The clauses that were duplicative of
the provisions enacted as part of H.R. 1308 were removed. Thus,
the conference agreement provision provides only for the
special rule in the case of multiple units of property subject
to the same lease.
C. S Corporation Reform and Simplification
(Secs. 221-231 of the House bill, sec. 654 of the Senate amendment and
secs. 1361-1379 and 4975 of the Code)
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.
1. Members of family treated as one shareholder
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) \62\ 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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\62\ 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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HOUSE BILL
The bill provides an election to allow all members of a
family be treated as one shareholder in determining the number
of shareholders in the corporation (for purposes of section
1361(b)(1)(A)).
A family is defined as the common ancestor and all lineal
descendants of the common ancestor, as well as the spouses, or
former spouses, of these individuals. An individual shall not
be a common ancestor if, as of the later of the time of the
election or the effective date of this provision, the
individual is more than three generations removed from the
youngest generation of shareholders who would (but for this
rule) be members of the family. For purposes of this rule, a
spouse or former spouse is treated as in the same generation as
the person to whom the individual is (or was) married.
Except as provided by Treasury regulations, the election
for a family may be made by any family member and remains in
effect until terminated.
Effective date.--The provision applies to taxable years
beginning after December 31, 2004.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement includes the provision in the
House bill, except that the number of generations is increased
from three to six.
The conferees wish to clarify that members of a family
may be treated as one shareholder, for the purpose of
determining the number of shareholders, whether a family member
holds stock directly or is treated as a shareholder (under
section 1361(c)(2)(B)) by reason being a beneficiary of an
electing small business trust or qualified subchapter S trust.
2. 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) \63\ 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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\63\ 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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HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement includes the provision in the
House bill.
3. 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.
HOUSE BILL
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.\64\
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\64\ 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 date of
enactment.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement includes the provision in the
House bill.
4. 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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement includes the provision in the
House bill.
5. 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.
HOUSE BILL
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 transfers after
December 31, 2004.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement includes the provision in the
House bill.
6. 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.
HOUSE BILL
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 taxable years
beginning after December 31, 2004.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement includes the provision in the
House bill.
7. 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.\65\
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\65\ Notice 97-5, 1997-1 C.B. 352, sets forth guidance relating to
passive investment income on banking assets.
---------------------------------------------------------------------------
In addition, an S corporation election is terminated
whenever the S corporation has accumulated earnings and profits
at the close of each of three consecutive taxable years and has
gross receipts for each of those years more than 25 percent of
which are passive investment income.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement includes the provision in the
House bill.
8. 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.\66\
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\66\ 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.\67\
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\67\ 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.\68\ 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.\69\
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\68\ 12 U.S.C. secs. 71-72.
\69\ 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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HOUSE BILL
Under the bill, restricted bank director stock is not
taken into account as outstanding stock in applying the
provisions of subchapter S. 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.
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the provision
in the House bill.
9. 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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement includes the provision in the
House bill, effective for elections and terminations after
December 31, 2004.
10. 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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement includes the provision in the
House bill.
11. 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.\70\ 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.\71\ 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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\70\ Sec. 4975.
\71\ Sec. 4975(d)(3). An ESOP that borrows money to purchase
employer stock is referred to as a ``leveraged'' ESOP.
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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).\72\ 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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\72\ Treas. Reg. sec. 54.4975-7(b)(5).
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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).\73\ 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.\74\
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\73\ Sec. 404(k)(5)(B).
\74\ Sec. 404(k)(2)(B).
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Effective for taxable years beginning after December 31,
1997, a qualified retirement plan (including an ESOP) may be a
shareholder of an S corporation.\75\ As a result, an S
corporation may maintain an ESOP.
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\75\ Sec. 1361(c)(6).
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HOUSE BILL
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 make payments on 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.
SENATE AMENDMENT
The Senate amendment is the same as House bill (other
than the effective date).
Effective date.--The provision is effective on January 1,
1998.
CONFERENCE AGREEMENT
The conference agreement contains the provision in the
House bill and Senate amendment, with a modification of the
effective date. Thus, 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 make payments
on a loan (including payments of interest as well as principal)
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, 1997.
D. Alternative Minimum Tax Relief
1. Repeal limitation on use of foreign tax credit (sec. 241 of the
House bill, sec. 203 of the Senate amendment, and sec. 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 an exemption amount that phases out. 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).
HOUSE BILL
The House bill repeals the 90-percent limitation on the
utilization of the AMT foreign tax credit.
Effective date.--The provision applies to taxable years
beginning after December 31, 2004.
SENATE AMENDMENT
Same as House bill.
CONFERENCE AGREEMENT
The conference agreement includes the provision in the
House bill and Senate amendment.
2. Expansion of exemption from alternative minimum tax for small
corporations (sec. 242 of the House bill and sec. 55 of the
Code)
PRESENT LAW
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.
HOUSE BILL
The House bill increases the amount of average gross
receipts that an exempt corporation may receive from $7.5
million to $20 million.
Effective date.--The provision applies to taxable years
beginning after December 31, 2005.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the provision
in the House bill.
3. Coordinate farmer and fisherman income averaging and the alternative
minimum tax (sec. 243 of the House bill and secs. 55 and 1301
of the Code)
PRESENT LAW
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.
HOUSE BILL
The House bill 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 applies to taxable years
beginning after December 31, 2003.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement extends the benefits of income
averaging to fishermen. The provision also includes the
provision in the House bill relating to the AMT, applicable to
both farmers and fishermen.
Effective date.--Taxable years beginning after December
31, 2003.
E. Restructuring of Incentives for Alcohol Fuels, Etc.
1. Incentives for alcohol and biodiesel fuels (secs. 251 and 252 of the
House bill, sec. 861 of the Senate amendment, and secs. 4041,
4081, 4091, 6427, 9503 and new section 6426 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.\76\
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\76\ 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.
---------------------------------------------------------------------------
A taxpayer (generally a petroleum refiner, distributor,
or marketer) who mixes ethanol with gasoline (or a special fuel
\77\) 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.\78\
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\77\ A special fuel includes any liquid (other than gasoline) that
is suitable for use in an internal combustion engine.
\78\ 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.
---------------------------------------------------------------------------
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
In general
Generally, motor fuels tax rates are as follows: \79\
---------------------------------------------------------------------------
\79\ 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: \80\
---------------------------------------------------------------------------
\80\ 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.\81\
---------------------------------------------------------------------------
\81\ 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.
---------------------------------------------------------------------------
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.\82\ 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.
---------------------------------------------------------------------------
\82\ 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)).
---------------------------------------------------------------------------
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.\83\ 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.
---------------------------------------------------------------------------
\83\ 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)).
---------------------------------------------------------------------------
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.\84\
---------------------------------------------------------------------------
\84\ These rates include the additional 0.1 cent-per-gallon excise
tax to fund the Leaking Underground Storage Tank Trust Fund.
---------------------------------------------------------------------------
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.\85\ Fuel mixtures containing at least 10
percent alcohol are taxed at lower rates.\86\ 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.\87\
---------------------------------------------------------------------------
\85\ This rate includes the additional 0.1 cent-per-gallon tax for
the Leaking Underground Storage Tank Trust fund.
\86\ Secs. 4041(k)(1) and 4091(c).
\87\ Sec. 4091(c)(1).
---------------------------------------------------------------------------
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.\88\ 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.\89\
---------------------------------------------------------------------------
\88\ Sec. 9503(b)(4)(E).
\89\ Sec. 9503(b)(4)(F).
---------------------------------------------------------------------------
Biodiesel
If biodiesel is used in the production of blended taxable
fuel, the Code imposes tax on the removal or sale of the
blended taxable fuel.\90\ In addition, the Code imposes tax on
any liquid other than gasoline sold for use or used as a fuel
in a diesel-powered highway vehicle or diesel-powered train
unless tax was previously imposed and not refunded or
credited.\91\ If biodiesel that was not previously taxed or
exempt is sold for use or used as a fuel in a diesel-powered
highway vehicle or a diesel-powered train, tax is imposed.\92\
There are no reduced excise tax rates for biodiesel.
---------------------------------------------------------------------------
\90\ Sec. 4081(b); Rev. Rul. 2002-76, 2002-46 I.R.B. 841 (2002).
``Taxable fuels'' are gasoline, diesel and kerosene (sec. 4083).
Biodiesel, although suitable for use as a fuel in a diesel-powered
highway vehicle or diesel-powered train, contains less than four
percent normal paraffins and, therefore, is not treated as diesel fuel
under the applicable Treasury regulations. Treas. Reg. secs. 48.4081-
1(c)(2)(i) and (ii), and 48.4081-1(b); Rev. Rul. 2002-76, 2002-46
I.R.B. 841 (2002). As a result, biodiesel alone is not a taxable fuel
for purposes of section 4081. As noted above, however, tax is imposed
upon the removal or entry of blended taxable fuel made with biodiesel.
\91\ Sec. 4041. The tax imposed under section 4041 also will not
apply if an exemption from tax applies.
\92\ Rev. Rul. 2002-76, 2002-46 I.R.B. 841 (2002).
---------------------------------------------------------------------------
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.\93\
---------------------------------------------------------------------------
\93\ Sec. 9503(c)(4) and 9503(c)(5).
---------------------------------------------------------------------------
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.\94\
---------------------------------------------------------------------------
\94\ The Sport Fish Restoration Account also is funded with
receipts from an ad valorem manufacturers excise tax on sport fishing
equipment.
---------------------------------------------------------------------------
HOUSE BILL
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 is effective for taxes imposed after September
30, 2003. 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, 2006. 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.
SENATE AMENDMENT
Alcohol fuels
The Senate amendment is similar to the House bill with
respect to alcohol fuels, except that it also provides that
outlay payments are available for neat alcohol used as fuel. In
addition, the Senate amendment also extends the alcohol fuels
income tax credit (sec. 40) through December 31, 2010. The
Senate amendment requires importers and producers of alcohol to
be registered with the Secretary. Finally, the provision
extends the temporary additional duty on ethanol through
January 1, 2011.
Biodiesel fuels
The Senate amendment creates a refundable excise tax
credit for biodiesel fuel mixtures similar to that created for
alcohol fuel mixtures. The excise tax credit for biodiesel
mixtures is 50 cents for each gallon of biodiesel used by the
taxpayer in producing a qualified biodiesel mixture for sale or
use in a trade or business of the taxpayer. A qualified
biodiesel mixture is a mixture of biodiesel and diesel fuel
(determined without regard to any use of kerosene) that is (1)
sold for use or used by the taxpayer producing such mixture as
a fuel, or (2) removed from the refinery by a person producing
the mixture. In the case of agri-biodiesel, the credit is $1.00
per gallon. No credit is allowed unless the taxpayer obtains a
certification (in such form and manner as prescribed by the
Secretary) from the producer of the biodiesel that identifies
the product produced and the percentage of biodiesel and agri-
biodiesel in the product. The Senate amendment also provides
for outlay payments for biodiesel, not in a mixture, used as a
fuel.
The credit is not available for any sale or use for any
period after December 31, 2006. Credits and outlay payments are
paid out of the General Fund, rather than the Highway Trust
Fund. The excise tax credit is coordinated with the income tax
credit for biodiesel such that credit for the same biodiesel
cannot be claimed for both income and excise tax purposes.
The Senate amendment requires importers and producers of
biodiesel to be registered with the Secretary.
Motorboat and small engine fuel taxes
The Senate amendment does not change the General Fund's
retention of the 4.8 cents per gallon imposed on motorboat and
small engine fuel.
Effective date
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 regarding alcohol
fuels is effective for fuel sold or used after September 30,
2003. The Secretary is to provide electronic filing
instructions by September 30, 2004. The extension of the
section 40 alcohol fuels credit is effective on the date of
enactment. The requirement that producers and importers of
alcohol and biodiesel be registered is effective April 1, 2005.
CONFERENCE AGREEMENT
Overview
The conference agreement generally follows the Senate
amendment. The conference agreement does not include outlay
payments for neat alcohol and 100 percent biodiesel fuels. The
conference agreement does not change the temporary duty on
ethanol. In addition, the conference agreement does not change
the General Fund's retention of the 4.8 cents per gallon
imposed on motorboat and small engine fuel.
The conference agreement eliminates reduced rates of
excise tax for most alcohol-blended fuels and imposes the full
rate of excise tax on most alcohol-blended fuels (18.3 cents
per gallon on gasoline blends and 24.3 cents per gallon of
diesel blended fuel). In place of reduced rates, the conference
agreement creates two new excise tax credits: the alcohol fuel
mixture credit and the biodiesel mixture credit. The sum of
these credits may be taken against the tax imposed on taxable
fuels (by section 4081). The conference agreement allows
taxpayers to file a claim for payment equal to the amount of
these credits for biodiesel or alcohol used to produce an
eligible mixture.
Under certain circumstances, a tax is imposed if an
alcohol fuel mixture credit or biodiesel fuel mixture credit is
claimed with respect to alcohol or biodiesel used in the
production of any alcohol or biodiesel 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 conference agreement eliminates the General Fund
retention of certain taxes on alcohol fuels, and credits these
taxes to the Highway Trust Fund. The Highway Trust Fund is
credited with the full amount of tax imposed on alcohol and
biodiesel fuel mixtures.
The conference agreement also extends the present-law
alcohol fuels income tax credit through December 31, 2010.
Alcohol fuel mixture excise tax credit
The provision eliminates the reduced rates of excise tax
for most alcohol-blended fuels.\95\ 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.
---------------------------------------------------------------------------
\95\ The provision does not change the present-law treatment of
fuels blended with alcohol derived from natural gas (under sec.
4041(m)), or alcohol derived from coal or peat (under sec. 4041(b)(2)).
The provision does not change the taxes imposed to fund the Leaking
Underground Storage Tank Trust Fund.
---------------------------------------------------------------------------
In lieu of the reduced excise tax rates, the provision
provides for an excise tax credit, the alcohol fuel mixture
credit. The alcohol fuel mixture credit is 51 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.
For mixtures not containing ethanol (renewable source
methanol), the credit is 60 cents per gallon.
For purposes of the alcohol fuel mixture credit, an
``alcohol fuel mixture'' is a mixture of alcohol and a taxable
fuel that (1) is sold by the taxpayer producing such mixture to
any person for use as a fuel or (2) is 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). Taxable
fuel is gasoline, diesel, and kerosene.\96\ A mixture that
includes ETBE or other ethers produced from alcohol produced by
any person at a refinery prior to a taxable event is treated as
sold at the time of its removal from the refinery (and only at
such time) to another person for use as a fuel.
---------------------------------------------------------------------------
\96\ Sec. 4083(a)(1). Under present law, dyed fuels are taxable
fuels that have been exempted from tax.
---------------------------------------------------------------------------
The excise tax credit is coordinated with the alcohol
fuels income tax credit and is available through December 31,
2010.
Biodiesel mixture excise tax credit
The provision provides an excise tax credit for biodiesel
mixtures.\97\ The credit is 50 cents for each gallon of
biodiesel used by the taxpayer in producing a qualified
biodiesel mixture for sale or use in a trade or business of the
taxpayer. A qualified biodiesel mixture is a mixture of
biodiesel and diesel fuel that (1) is sold by the taxpayer
producing such mixture to any person for use as a fuel, or (2)
is used as a fuel by the taxpayer producing such mixture. In
the case of agri-biodiesel, the credit is $1.00 per gallon. No
credit is allowed unless the taxpayer obtains a certification
(in such form and manner as prescribed by the Secretary) from
the producer of the biodiesel that identifies the product
produced and the percentage of biodiesel and agri-biodiesel in
the product.
---------------------------------------------------------------------------
\97\ The excise tax credit uses the same definitions as the
biodiesel fuels income tax credit.
---------------------------------------------------------------------------
The credit is not available for any sale or use for any
period after December 31, 2006. This excise tax credit is
coordinated with the income tax credit for biodiesel such that
credit for the same biodiesel cannot be claimed for both income
and excise tax purposes.
Payments with respect to qualified alcohol and biodiesel 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. Thus, if the person has no
section 4081 liability, the credit is totally refundable. 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.
Similar rules apply to the biodiesel fuel mixture credit.
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 Secretary is to describe the electronic
format for filing claims by December 31, 2004.
The payment provision does not apply with respect to
alcohol fuel mixtures sold after December 31, 2010, and
biodiesel fuel mixtures sold after December 31, 2006.
Alcohol and biodiesel 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 or biodiesel fuel
mixtures and the Highway Trust Fund is not required to
reimburse the General Fund for any credits or payments taken or
made with respect to qualified alcohol fuel mixtures or
biodiesel fuel mixtures.
Registration requirement
Every person producing or importing biodiesel or alcohol
is required to register with the Secretary.
Alcohol fuels income tax credit
The provision extends the alcohol fuels credit (sec. 40)
through December 31, 2010.
Effective dates
The provisions generally are effective for fuel sold or
used after December 31, 2004. The repeal of the General Fund
retention of the 2.5/2.8 cents per gallon regarding alcohol
fuels is effective for fuel sold or used after September 30,
2004. The Secretary is to provide electronic filing
instructions by December 31, 2004. The registration requirement
is effective April 1, 2005.
2. Biodiesel income tax credit (sec. 862 of the bill and new sec. 40A
of the Code)
PRESENT LAW
No income tax credit or excise tax rate reduction is
provided for biodiesel fuels under present law. However, a 52-
cents-per-gallon income tax credit (the ``alcohol fuels
credit'') is allowed for ethanol and methanol (derived from
renewable sources) when the alcohol is used as a highway motor
fuel. Registered blenders may forgo the full income tax credit
and instead pay reduced rates of excise tax on gasoline that
they purchase for blending with alcohol. These present law
provisions are scheduled to expire in 2007.
HOUSE BILL
No provision.
SENATE AMENDMENT
In general
The Senate amendment provides a new income tax credit for
biodiesel and qualified biodiesel mixtures, the biodiesel fuels
credit. The biodiesel fuels credit is the sum of the biodiesel
mixture credit plus the biodiesel credit and is treated as a
general business credit. The amount of the biodiesel fuels
credit is includable in gross income. The biodiesel fuels
credit is coordinated to take into account benefits from the
biodiesel excise tax credit and payment provisions discussed
above. The credit may not be carried back to a taxable year
ending before or on September 30, 2004. The provision does not
apply to fuel sold or used after December 31, 2006.
Biodiesel is monoalkyl esters of long chain fatty acids
derived from plant or animal matter that meet (1) the
registration requirements established by the Environmental
Protection Agency under section 211 of the Clean Air Act and
(2) the requirements of the American Society of Testing and
Materials D6751. Agri-biodiesel is biodiesel derived solely
from virgin oils including oils from corn, soybeans, sunflower
seeds, cottonseeds, canola, crambe, rapeseeds, safflowers,
flaxseeds, rice bran, mustard seeds, or animal fats.
Biodiesel may be taken into account for purposes of the
credit only if the taxpayer obtains a certification (in such
form and manner as prescribed by the Secretary) from the
producer or importer of the biodiesel which identifies the
product produced and the percentage of the biodiesel and agri-
biodiesel in the product.
Biodiesel mixture credit
The biodiesel mixture credit is 50 cents for each gallon
of biodiesel used by the taxpayer in the production of a
qualified biodiesel mixture. For agri-biodiesel, the credit is
$1.00 per gallon. A qualified biodiesel mixture is a mixture of
biodiesel and diesel fuel that is (1) sold by the taxpayer
producing such mixture to any person for use as a fuel, or (2)
is used as a fuel by the taxpayer producing such mixture. The
sale or use must be in the trade or business of the taxpayer
and is to be taken into account for the taxable year in which
such sale or use occurs. No credit is allowed with respect to
any casual off-farm production of a qualified biodiesel
mixture.
Biodiesel credit
The biodiesel credit is 50 cents for each gallon of 100
percent biodiesel which is not in a mixture with diesel fuel
and which during the taxable year is (1) used by the taxpayer
as a fuel in a trade or business or (2) sold by the taxpayer at
retail to a person and placed in the fuel tank of such person's
vehicle. For agri-biodiesel, the credit is $1.00 per gallon.
Later separation or failure to use as fuel
In a manner similar to the treatment of alcohol fuels, a
tax is imposed if a biodiesel fuels credit is claimed with
respect to biodiesel that is subsequently used for a purpose
for which the credit is not allowed or that is changed into a
substance that does not qualify for the credit.
Effective date
The biodiesel fuel income tax credit provision is
effective for fuel produced, and sold or used after September
30, 2004, in taxable years ending after such date.
CONFERENCE AGREEMENT
The conference agreement generally follows the Senate
amendment, except for the effective date.
Effective date.--The provision is effective for fuel
produced, and sold or used after December 31, 2004, in taxable
years ending after such date.
F. Exclusion of Incentive Stock Options and Employee Stock Purchase
Plan Stock Options From Wages
(Sec. 261 of the House 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.\98\
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\98\ 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.\99\ The applicable Code provisions\100\
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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\99\ Secs. 3101, 3111 and 3301.
\100\ 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.\101\
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\101\ Notice 2002-47, 2002-28 I.R.B. 97.
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HOUSE BILL
The House bill 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 House bill, FICA and FUTA taxes do not
apply upon the exercise of a statutory stock option.\102\ The
House bill also provides that such remuneration is not taken
into account for purposes of determining Social Security
benefits.
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\102\ The provision also provides a similar exclusion under the
Railroad Retirement Tax Act.
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Additionally, the House bill 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 House bill is effective for stock
acquired pursuant to options exercised after the date of
enactment.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
G. Incentives to Reinvest Foreign Earnings in the United States
(Sec. 271 of the House bill, sec. 231 of the Senate amendment, 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 \103\
and the passive foreign investment company rules.\104\ 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.\105\
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\103\ Secs. 951-964.
\104\ Secs. 1291-1298.
\105\ Secs. 901, 902, 960, 1291(g).
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HOUSE BILL
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 House bill 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.
SENATE AMENDMENT
Under the provision, certain actual and deemed dividends
received by a U.S. corporation from a controlled foreign
corporation are subject to tax at a reduced rate of 5.25
percent. For corporations taxed at the top corporate income tax
rate of 35 percent, this rate reduction is equivalent to an 85-
percent dividends-received deduction. This rate reduction is
available only for the first taxable year of an electing
taxpayer ending 120 days or more after the date of enactment of
the provision.
The reduced rate applies only to repatriations in excess
of the taxpayer's average repatriation level over 3 of the 5
most recent taxable years ending on or before December 31,
2002, determined by disregarding the highest-repatriation year
and the lowest-repatriation year among such 5 years.\106\ The
taxpayer may designate which of its dividends are treated as
meeting the base-period average level and which of its
dividends are treated as comprising the excess.
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\106\ If the taxpayer has fewer than 5 taxable years ending on or
before December 31, 2002, then the base period consists of all such
taxable years, with none disregarded.
---------------------------------------------------------------------------
In order to qualify for the reduced rate, dividends must
be described in a ``domestic reinvestment plan'' approved by
the taxpayer's senior management and board of directors. This
plan must provide for the reinvestment of the repatriated
dividends in the United States, ``including as a source for the
funding of worker hiring and training; infrastructure; research
and development; capital investments; or the financial
stabilization of the corporation for the purposes of job
retention or creation.''
The provision disallows 85 percent of the foreign tax
credits attributable to dividends subject to the reduced rate
and removes 85 percent of the underlying income from the
taxpayer's foreign tax credit limitation fraction under section
904. In addition, any expenses, losses, or deductions of the
taxpayer may not be used to reduce the tax on dividends
qualifying for the benefits of the provision.
In the case of an affiliated group, an election under the
provision is made by the common parent on a group-wide basis,
and all members of the group are treated as a single taxpayer.
The election applies to all controlled foreign corporations
with respect to which an electing taxpayer is a United States
shareholder.
Effective date.--The Senate amendment provision is
effective for the first taxable year of an electing taxpayer
ending 120 days or more after the provision's date of
enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, with
modifications.
Under the conference agreement, certain dividends
received by a U.S. corporation from controlled foreign
corporations are eligible for an 85-percent dividends-received
deduction. At the taxpayer's election, this deduction is
available for dividends received either during the taxpayer's
first taxable year beginning on or after the date of enactment
of the bill, or during the taxpayer's last taxable year
beginning before such date.\107\ Dividends received after the
election period will be taxed in the normal manner under
present law. The conferees emphasize that this is a temporary
economic stimulus measure, and that there is no intent to make
this measure permanent, or to ``extend'' or enact it again in
the future.
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\107\ The election is to be made on a timely filed return
(including extensions) for the taxable year with respect to which the
deduction is claimed.
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The deduction applies only to cash dividends and other
cash amounts included in gross income as dividends, such as
cash amounts treated as dividends under sections 302 or 304
(but not to amounts treated as dividends under Code sections
78, 367, or 1248).\108\ 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, with the result that cash
travels through a chain of controlled foreign corporations to
the taxpayer within the election period. The amount of
dividends eligible for the deduction is reduced by any increase
in related-party indebtedness on the part of a controlled
foreign corporation between October 3, 2004 and the close of
the taxable year for which the deduction is being claimed,
determined by treating all controlled foreign corporations with
respect to which the taxpayer is a U.S. shareholder as one
controlled foreign corporation.\109\ This rule is intended to
prevent a deduction from being claimed in cases in which the
U.S. shareholder directly or indirectly (e.g., through a
related party) finances the payment of a dividend from a
controlled foreign corporation. In such a case, there may be no
net repatriation of funds, and thus it would be inappropriate
to provide the deduction.
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\108\ However, to the extent that the taxpayer actually receives
cash in an inbound liquidation that is described in Code section 332
and treated as a dividend under Code section 367(b), such amount is
treated as a dividend for these purposes. The conferees note that a
deemed liquidation effectuated by means of a ``check the box'' election
under the entity classification regulations will not involve an actual
receipt of cash that is reinvested in the United States as required for
purposes of this provision.
\109\ Thus, indebtedness between such controlled foreign
corporations is disregarded for purposes of this determination.
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The deduction is subject to a number of general
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 June 30,
2003, determined by disregarding the highest-repatriation year
and the lowest-repatriation year among such five years (the
``base-period average''). If the taxpayer has fewer than five
such years, then all taxable years ending on or before June 30,
2003 are included in the base period.\110\ Repatriation levels
are determined by reference to base-period tax returns as
filed, including any amended returns that were filed on or
before June 30, 2003. U.S. shareholders that file a
consolidated tax return are treated as one U.S. shareholder for
all purposes of this dividends-received deduction provision.
Thus, all such shareholders are aggregated in determining the
base-period average (as are all controlled foreign
corporations). In addition to cash dividends, dividends of
property, deemed repatriations under section 956, and
distributions of earnings previously taxed under subpart F are
included in the base-period average.
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\110\ A corporation that was spun off from another corporation
during the five-year period is treated for this purpose as having been
in existence for the same period that such other corporation has been
in existence. The pre-spin-off dividend history of the two corporations
is generally allocated between them on the basis of their interests in
the dividend-paying controlled foreign corporations immediately after
the spin-off. In other cases involving companies entering and exiting
corporate groups, the principles of Code section 41(f)(3)(A) and (B)
apply.
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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 June 30,
2003; \111\ or (3) in the case of an applicable financial
statement that does not 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 by grossing up the tax liability at a 35-percent
rate. If there is no applicable financial statement, or if such
statement does not show a specific earnings or tax liability
amount, then the $500 million limit applies. This $500 million
amount is divided among corporations that are members of a
controlled group, using a 50-percent standard of common
control. The two financial statement amounts described above
are divided among the U.S. shareholders that are included on
such statements.
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\111\ This rule refers to elements of Accounting Principles Board
Opinion 23 (``APB 23''), which provides an exception to the general
rule of comprehensive recognition of deferred taxes for temporary book-
tax differences. The exception is for temporary differences related to
undistributed earnings of foreign subsidiaries and foreign corporate
joint ventures that meet the indefinite reversal criterion in APB 23.
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Third, in order to qualify for the deduction, dividends
must be described in a domestic reinvestment plan approved by
the taxpayer's senior management and board of directors. This
plan must provide for the reinvestment of the repatriated
dividends in the United States, including as a source for the
funding of worker hiring and training, infrastructure, research
and development, capital investments, and the financial
stabilization of the corporation for the purposes of job
retention or creation. The conferees note that this list of
permitted uses is not exclusive. The reinvestment plan cannot,
however, designate repatriated funds for use as payment for
executive compensation. Dividends with respect to which the
deduction is not being claimed are not required to be included
in any domestic reinvestment plan.
No foreign tax credit (or deduction) is allowed for
foreign taxes attributable to the deductible portion of any
dividend. For this purpose, the taxpayer may specifically
identify which dividends are treated as carrying the deduction
and which dividends are not.\112\ In other words, the taxpayer
is allowed to choose which of its dividends are treated as
meeting the base-period repatriation level (and thus carry
foreign tax credits, to the extent otherwise allowable), and
which of its dividends are treated as comprising the excess
eligible for the deduction (and thus entail proportional
disallowance of any associated foreign tax credits). The
deduction itself will have the effect of appropriately reducing
the taxpayer's foreign tax credit limitation.
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\112\ In the absence of such a specification, a pro rata amount of
foreign tax credits will be disallowed with respect to every dividend
repatriated during the taxable year.
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Deductions are disallowed for expenses that are properly
allocated and apportioned to the deductible portion of any
dividend.
The income attributable to the nondeductible portion of a
qualifying dividend may not be offset by expenses, losses, or
deductions, and the tax attributable to such income generally
may not be offset by credits (other than foreign tax credits
and AMT credits).\113\ The tax on this amount also cannot
reduce the alternative minimum tax that otherwise would be owed
by the taxpayer. However, the deduction available under this
provision is not treated as a preference item for purposes of
computing the AMT. Thus, the deduction is allowed in computing
alternative minimum taxable income notwithstanding the fact
that it may not be deductible in computing earnings and
profits. No deduction under sections 243 or 245 is allowed for
any dividend for which a deduction is allowed under the
provision.
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\113\ These expenses, losses, and deductions may, however, have the
effect of reducing other income of the taxpayer.
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Effective date.--The provision is effective only 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. The
deduction available under the provision is not allowed for
dividends received in any taxable year beginning one year or
more after the date of enactment.
H. Other Incentive Provisions
1. Special rules for livestock sold on account of weather-related
conditions (sec. 281 of the House bill, sec. 649 of the Senate
amendment, 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 cost of such property reduced by the amount of gain not
recognized.
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 principal 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.
HOUSE BILL
The House bill 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 House bill 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except that it also permits the taxpayer to replace
compulsorily or involuntarily converted livestock with other
farm property if, due to drought, flood, or other weather-
related conditions, it is not feasible for the taxpayer to
reinvest the proceeds in property similar or related in use to
the livestock so converted.
Effective date.--The Senate amendment provision is
effective for taxable years beginning after December 31, 2001.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
except for the effective date.
Effective date.--The conference agreement 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 House bill, sec. 648 of
the Senate amendment, 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'').\114\ 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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\114\ Treas. Reg. sec. 1.1388-1(a)(1).
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HOUSE BILL
The House bill 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 House bill provision is effective
for distributions made in taxable years ending after the date
of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
Effective date.--The Senate amendment provision is
effective for distributions made in taxable years ending after
the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
3. Manufacturing relating to timber
a. Capital gains treatment to apply to outright sales of
timber by landowner (sec. 283 of the House bill,
sec. 333 of the Senate amendment, 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)).
HOUSE BILL
Under the House bill, 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.
SENATE AMENDMENT
The provision in the Senate amendment is the same as
House bill.
Effective date.--The provision is effective for sales of
timber after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement includes the provision in the
House bill and Senate amendment.
Effective date.--The provision is effective for sales of
timber after December 31, 2004.
b. Expensing of reforestation expenditures (sec. 331 of the
Senate amendment and secs. 48 and 194 of the Code)
PRESENT LAW
Section 194 provides for an 84-month amortization period
for up to $10,000 of qualified reforestation expenditures.
Section 48(b) provides a 10-percent credit on up to $10,000 of
qualified amortizable basis in timber property. The amount
amortized under section 194 is reduced by one half of the
amount of credit claimed under section 48(b).
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment permits up to $10,000 of qualified
reforestation expenditures to be deducted in the year paid or
incurred (i.e., expensed). The Senate amendment permits
qualified reforestation expenditures above $10,000 to be
amortized over 84 months. The Senate amendment also repeals the
reforestation tax credit.
Effective date.--Expenditures paid or incurred after the
date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
provision.
c. Election to treat cutting of timber as a sale or
exchange (sec. 102(b) of the House bill, sec. 332
of the Senate amendment, and sec. 631(a) of the
Code)
PRESENT LAW
Under present law, a taxpayer may elect to treat the
cutting of timber as a sale or exchange of the timber. If an
election is made, the gain or loss is recognized in an amount
equal to the difference between the fair market value of the
timber and the basis of the timber. An election, once made, is
effective for the taxable year and all subsequent taxable
years, unless the IRS, upon a showing of undue hardship by the
taxpayer, permits the revocation of the election. If an
election is revoked, a new election may be made only with the
consent of the IRS.
HOUSE BILL
Under the House bill, an election made by a corporation
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 applies to taxable years
ending after the date of enactment.
SENATE AMENDMENT
The provision is the same as the House bill, except the
provision applies to all taxpayers.
Effective date.--The provision applies to taxable years
ending after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement includes the provision in the
Senate amendment.
d. Modified safe harbor rules for timber REITs (sec. 334 of
the Senate amendment and sec. 857 of the Code)
PRESENT LAW
In general
Under present law, real estate investment trusts
(``REITs'') are subject to a special taxation regime. Under
this regime, a REIT is allowed a deduction for dividends paid
to its shareholders. As a result, REITs generally do not pay
tax on distributed income. REITs are generally restricted to
earning certain types of passive income, primarily rents from
real property and interests on mortgages secured by real
property.
To qualify as a REIT, a corporation must satisfy a number
of requirements, among which are four tests: organizational
structure, source of income, nature of assets, and distribution
of income.
Income or loss from prohibited transactions
A 100-percent tax is imposed on the net income of a REIT
from ``prohibited transactions''. A prohibited transaction is
the sale or other disposition of property held for sale in the
ordinary course of a trade or business,\115\ other than
foreclosure property.\116\ A safe harbor is provided for
certain sales of rent-producing real property. To qualify for
the safe harbor, three criteria generally must be met. First,
the REIT must have held the property for at least four years
for rental purposes. Second, the aggregate expenditures made by
the REIT during the four-year period prior to the date of the
sale must not exceed 30 percent of the net selling price of the
property. Third, either (i) the REIT must make seven or fewer
sales of property during the taxable year or (ii) the aggregate
adjusted basis of the property sold must not exceed 10 percent
of the aggregate bases of all the REIT's assets at the
beginning of the REIT's taxable year. In the latter case,
substantially all of the marketing and development expenditures
with respect to the property must be made through an
independent contractor.
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\115\ Sec. 1221(a)(l).
\116\ Thus, the 100-percent tax on prohibited transactions helps to
ensure that the REIT is a passive entity and may not engage in ordinary
retailing activities such as sales to customers of condominium units or
subdivided lots in a development project.
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Certain timber income
Some REITs have been formed to hold land on which trees
are grown. Upon maturity of the trees, the standing trees are
sold by the REIT. The Internal Revenue Service has issued
private letter rulings in particular instances stating that the
income from the sale of the trees can qualify as REIT real
property income because the uncut timber and the timberland on
which the timber grew is considered real property and the sale
of uncut trees can qualify as capital gain derived from the
sale of real property.\117\
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\117\ See, e.g., PLR 200052021, PLR 199945055, PLR 19927021, PLR
8838016. A private letter ruling may be relied upon only by the
taxpayer to which the ruling is issued. However, such rulings provide
an indication of administrative practice.
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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 five 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.\118\
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\118\ Certain securities that are within a safe-harbor definition
of ``straight debt'' are not taken into account for purposes of the
limitation to no more than 10 percent of the value of an issuer's
outstanding securities.
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Special rules for taxable REIT subsidiaries
Under an 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 REIT \119\ 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. 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.\120\
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\119\ 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).
\120\ If the excise tax applies, the item is not also reallocated
back to the TRS under section 482.
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HOUSE BILL
No provision.
SENATE AMENDMENT
Under the provision, a sale of a real estate asset by a
REIT will not be a prohibited transaction if the following six
requirements are met:
(1) The asset must have been held for at least four
years in the trade or business of producing timber;
(2) The aggregate expenditures made by the REIT (or
a partner of the REIT) during the four-year period
preceding the date of sale that are includible in the
basis of the property (other than timberland
acquisition expenditures \121\) and that are directly
related to the operation of the property for the
production of timber or for the preservation of the
property for use as timberland must not exceed 30
percent of the net selling price of the property;
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\121\ The timberland acquisition expenditures that are excluded for
this purpose are those expenditures that are related to timberland
other than the specific timberland that is being sold under the safe
harbor, but costs of which may be combined with costs of such property
in the same ``management block'' under Treas. Reg. sec. 1.611-3(d). Any
specific timberland being sold must meet the requirement that it has
been held for at least four years by the REIT in order to qualify for
the safe harbor.
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(3) The aggregate expenditures made by the REIT (or
a partner of the REIT) during the four-year period
preceding the date of sale that are includible in the
basis of the property and that are not directly related
to the operation of the property for the production of
timber or the preservation of the property for use as
timberland must not exceed five percent of the net
selling price of the property;
(4) The REIT either (a) does not make more than
seven sales of property (other than sales of
foreclosure property or sales to which 1033 applies) or
(b) the aggregate adjusted bases (as determined for
purposes of computing earnings and profits) of property
sold during the year (other than sales of foreclosure
property or sales to which 1033 applies) does not
exceed 10 percent of the aggregate bases (as determined
for purposes of computing earnings and profits) of
property of all assets of the REIT as of the beginning
of the year;
(5) Substantially all of the marketing expenditures
with respect to the property are made by persons who
are independent contractors (as defined by section
856(d)(3)) with respect to the REIT and from whom the
REIT does not derive any income; and
(6) The sales price on the sale of the property
cannot be based in whole or in part on income or
profits of any person, including income or profits
derived from the sale of such properties.
Capital expenditures counted towards the 30-percent limit
are those expenditures that are includible in the basis of the
property (other than timberland acquisition expenditures), and
that are directly related to operation of the property for the
production of timber, or for the preservation of the property
for use as timberland. These capital expenditures are those
incurred directly in the operation of raising timber (i.e.,
silviculture), as opposed to capital expenditures incurred in
the ownership of undeveloped land. In general, these capital
expenditures incurred directly in the operation of raising
timber include capital expenditures incurred by the REIT to
create an established stand of growing trees. A stand of trees
is considered established when a target stand exhibits the
expected growing rate and is free of non-target competition
(e.g., hardwoods, grasses, brush, etc.) that may significantly
inhibit or threaten the target stand survival. The costs
commonly incurred during stand establishment are: (1) site
preparation including manual or mechanical scarification,
manual or mechanical cutting, disking, bedding, shearing,
raking, piling, broadcast and windrow/pile burning (including
slash disposal costs as required for stand establishment); (2)
site regeneration including manual or mechanical hardwood
coppice; (3) chemical application via aerial or ground to
eliminate or reduce vegetation; (4) nursery operating costs
including personnel salaries and benefits, facilities costs,
cone collection and seed extraction, and other costs directly
attributable to the nursery operations (to the extent such
costs are allocable to seedlings used by the REIT); (5)
seedlings including storage, transportation and handling
equipment; (6) direct planting of seedlings; and (7) initial
stand fertilization, up through stand establishment. Other
examples of capital expenditures incurred directly in the
operation of raising timber include construction cost of road
to be used for managing the timber land (including for removal
of logs or fire protection), environmental costs (i.e., habitat
conservation plans), and any other post stand establishment
capital costs (e.g., ``mid-term fertilization costs).''
Capital expenditures counted towards the five-percent
limit are those capital expenditures incurred in the ownership
of undeveloped land that are not incurred in the direct
operation of raising timber (i.e., silviculture). This category
of capital expenditures includes: (1) expenditures to separate
the REIT's holdings of land into separate parcels; (2) costs of
granting leases or easements to cable, cellular or similar
companies; (3) costs in determining the presence or quality of
minerals located on the land; (4) costs incurred to defend
changes in law that would limit future use of the land by the
REIT or a purchaser from the REIT; (5) costs incurred to
determine alternative uses of the land (e.g., recreational
use); and (6) development costs of the property incurred by the
REIT (e.g., engineering, surveying, legal, permit, consulting,
road construction, utilities, and other development costs for
use other than to grow timber).
Costs that are not includible in the basis of the
property are not counted towards either the 30-percent or five-
percent requirements.
Effective date.--The provision is effective for taxable
years beginning after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
4. Net income from publicly traded partnerships treated as qualifying
income of regulated investment company (sec. 284 of the House
bill, sec. 899 of the Senate amendment, and secs. 851(b),
469(k), 7704(d) and new sec. 851(h) 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.\122\ 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.\123\ In addition, the corporation must elect RIC
status, and must satisfy certain other requirements.\124\
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\122\ Sec. 852(b).
\123\ Sec. 851(a).
\124\ Sec. 851(b).
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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.\125\ 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).\126\ Under
present law, no distinction is made under this rule between a
publicly traded partnership and any other partnership.
---------------------------------------------------------------------------
\125\ Sec. 851(b)(2).
\126\ Sec. 851(b).
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The RIC qualification rules include limitations on the
ownership of assets and on the composition of the RIC's
assets.\127\ 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.\128\
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\127\ Sec. 851(b)(3).
\128\ Sec. 851(d).
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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, 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.\129\
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\129\ Sec. 7704(a), (c), and (d).
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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.\130\ 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.\131\ Thus, income or loss from the publicly traded
partnership is treated as separate from income or loss from
other passive activities.
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\130\ Sec. 469.
\131\ Sec. 469(k).
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HOUSE BILL
The House bill modifies the 90-percent test with respect
to income of a RIC to include net income derived from an
interest in a publicly traded partnership. The House bill also
modifies the look-through rule for partnership income of a RIC
so that it applies only to income from a partnership other than
a publicly traded partnership.
The House bill 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 House bill 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 House bill provision is effective
for taxable years beginning after the date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and
Senate amendment. In addition, the conference agreement
provides that net income from an interest in a publicly traded
partnership is used for purposes of both the numerator and
denominator of the 90-percent test. As under present law, the
conference agreement also provides that gains from the sale or
other disposition of interests in publicly traded partnerships
constitute qualifying income of regulated investment companies.
5. Improvements related to real estate investment trusts (sec. 285 of
the House 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, and
income and gain derived from foreclosure property.
Qualified rental income
Amounts received as impermissible ``tenant services
income'' are not treated as rents from real property.\132\ In
general, such amounts are for services rendered to tenants that
are not ``customarily furnished'' in connection with the rental
of real property.\133\
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\132\ 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.
\133\ 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.\134\ 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.\135\
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\134\ Sec. 856(d)(2)(B).
\135\ 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 not due to fraud with
intent to evade tax, then the REIT does not lose its REIT
status provided that the failure to meet the 95-percent or 75-
percent test is due to reasonable cause and not due to willful
neglect. If the REIT qualifies for this relief, the REIT must
pay a tax measured by the greater of the amount by which 90
percent\136\ 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.\137\
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\136\ 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.
\137\ 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)\138\ 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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\138\ Sec. 1361(c)(5), without regard to paragraph (B)(iii)
thereof.
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Straight debt for purposes of the REIT provision\139\ 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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\139\ 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\140\ 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 to the extent that
the amount of the rents would be reduced on distribution,
apportionment, or allocation under section 482 to clearly
reflect income as a result of services furnished by a TRS of
the REIT to a tenant of the REIT.\141\
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\140\ 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).
\141\ If the excise tax applies, then the item is not reallocated
back to the TRS under section 482.
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The 100 percent excise tax does not apply to amounts
received directly or indirectly by a REIT from a TRS that would
be excluded from unrelated taxable income if received by an
organization described in section 511(a)(2). Such amounts are
defined in section 512(b)(3).
Rents paid by a TRS to a REIT generally are treated as
rents from real property if at least 90 percent of the leased
space of the property is rented to persons other than the
REIT's TRSs and other than persons related to the REIT. In such
a case, the rent paid by the TRS to the REIT is treated as rent
from real property only to the extent that it is substantially
comparable to rents from other tenants of the REIT's property
for comparable space.
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.
If a REIT fails to meet the source of income
requirements, but has set out the income it did receive in a
schedule and any error in the schedule is not due to fraud with
intent to evade tax, then the REIT does not lose its REIT
status, provided that the failure to meet the 95-percent or 75-
percent test is due to reasonable cause and not to willful
neglect. If the REIT qualifies for this relief, the REIT must
pay the disallowed income as a tax to the Treasury.\142\
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\142\ Secs. 856(c)(6) and 857(b)(5).
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Failure to satisfy the asset test is excused if the REIT
eliminates the discrepancy within 30 days. Failure to meet
distribution requirements may also be excused if the REIT was
unable to meet such requirement by reason of distributions
previously made to meet the requirements of section 4981.
There are no similar provisions that allow 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.
HOUSE BILL
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.\143\
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\143\ 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.\144\
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\144\ 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 \145\ or are from a TRS and are described
in section 512(b)(3). 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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\145\ 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.\146\ The
requirements must be satisfied each quarter.
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\146\ 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.\147\
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\147\ 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, by 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
6. Treatment of certain dividends of regulated investment companies
(sec. 286 of the House 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-cent 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-cent 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-cent
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.\148\ 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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\148\ 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.
HOUSE BILL
In general
Under the House 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
House 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 House 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 House 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
House 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 House bill also extends the special rules for
domestically-controlled REITs to domestically-controlled RICs.
Estate tax treatment
Under the House 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 House bill 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 House bill 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 House bill provision is effective
after December 31, 2004.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, except
the conference agreement only applies: (1) to dividends with
respect to taxable years of RICs beginning after December 31,
2004 and before January 1, 2008; (2) with respect to the
treatment of a RIC for estate tax purposes, to estates of
decedents dying after December 31, 2004 and before January 1,
2008; and (3) with respect to the treatment of RICs under
section 897 (relating to U.S. real property interests), after
December 31, 2004 and before January 1, 2008.
7. Taxation of certain settlement funds (sec. 287 of the House 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.
HOUSE BILL
The House bill 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 House bill provision is effective
for taxable years beginning after December 31, 2004.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
8. Expand human clinical trials expenses qualifying for the orphan drug
tax credit (sec. 288 of the House 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.
HOUSE BILL
The House bill 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
9. Simplification of excise tax imposed on bows and arrows (sec. 289 of
the House bill, sec. 305 of the Senate amendment, 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.\149\ 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).\150\ 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).\151\
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\149\ Sec. 4161(b)(1)(A).
\150\ Sec. 4161(b)(2).
\151\ Sec. 4161(b)(1)(B).
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HOUSE BILL
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.\152\ 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.\153\ 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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\152\ 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.
\153\ 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
Effective date.--The provision is effective for articles
sold by the manufacturer, producer or importer 30 days after
the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and
Senate amendment with the effective date of the Senate
amendment.
Effective date.--The conference agreement follows the
Senate amendment.
10. Reduce rate of excise tax on fishing tackle boxes to three percent
(sec. 290 of the House bill and sec. 4162 of the Code)
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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill with
modifications. Under the provision as modified, the rate of
excise tax imposed on fishing tackle boxes is reduced to three
percent.
11. Repeal of excise tax on sonar devices suitable for finding fish
(sec. 291 of the House 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.\154\ A three percent rate, however, applies
to the sale of electric outboard motors and sonar devices
suitable for finding fish.\155\ 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.\156\
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\154\ Sec. 4161(a)(1).
\155\ Sec. 4161(a)(2).
\156\ 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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
12. Income tax credit for cost of carrying tax-paid distilled spirits
in wholesale inventories (sec. 292 of the House bill)
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.
HOUSE BILL
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 \157\ 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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\157\ 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
13. Suspension of occupational taxes relating to distilled spirits,
wine, and beer (sec. 293 of the House 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: \158\
Distilled spirits and wines (sec. $1,000 per year, per
5081). premise.
Brewers (sec. 5091)................... $1,000 per year, per
premise.
Wholesale dealers (sec. 5111): Liquors, $500 per year.
wines, or beer.
Retail dealers (sec. 5121): Liquors, $250 per year.
wines, or beer.
Nonbeverage use of distilled spirits (sec. $500 per year.
5131).
Industrial use of distilled spirits (sec. $250 per year.
5276).
The Code requires every wholesale or retail dealer in
liquors, wine or beer to keep records of their
transactions.\159\ A delegate of the Secretary of the Treasury
is authorized to inspect the records of any dealer during
business hours.\160\ There are penalties for failing to comply
with the recordkeeping requirements.\161\
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\158\ A reduced rate of tax in the amount of $500 is imposed on
small proprietors. Secs. 5081(b), 5091(b).
\159\ Secs. 5114, 5124.
\160\ Sec. 5146.
\161\ 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.\162\
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\162\ 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.\163\
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\163\ Sec. 5117(b).
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Violation of this restriction is punishable by $1,000
fine, imprisonment of one year, or both.\164\ A violation also
makes the alcohol subject to seizure and forfeiture.\165\
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\164\ Sec. 5687.
\165\ Sec. 7302.
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HOUSE BILL
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
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill except as
follows. Under the provision as modified, the three-year
suspension period is July 1, 2005 through June 30, 2008.
14. Modification of unrelated business income limitation on investment
in certain small business investment companies (sec. 294 of the
House bill, sec. 642 of the Senate amendment, 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
regularly carried on that is not substantially related 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.
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.
HOUSE BILL
The House bill 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill except
that the Senate amendment does not contain any individual or
aggregate ownership percentage limitations with respect to
exempt organizations or government units.
Effective date.--The provision is effective for
acquisitions made on or after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, modified
to apply to small business investment companies licensed after
(rather than formed after) the date of enactment.
Effective date.--The conference agreement provision is
effective for debt incurred after the date of enactment by
small business investment companies licensed after the date of
enactment.
15. Election to determine taxable income from certain international
shipping activities using per ton rate (sec. 295 of the House
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 section 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.
HOUSE BILL
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 \166\ 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
\167\ from the operation of the qualifying vessel in United
States foreign trade,\168\ 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.\169\ 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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\166\ 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)).
\167\ 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.
\168\ ``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.
\169\ 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.\170\
Generally, the corporate loss percentage \171\ 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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\170\ ``Qualifying shipping assets'' means any qualifying vessel
and other assets which are used in core qualifying activities.
\171\ ``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.'' \172\ 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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\172\ 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill with
modifications.
In general
The proposal generally allows corporations to elect a
``tonnage tax'' in lieu of the corporate income tax on taxable
income from certain shipping activities. Accordingly, an
electing corporation's gross income does not include its income
from qualifying shipping activities, and electing corporations
are only subject to tax on these activities at the maximum
corporate income tax rate on their notional shipping income,
which is based on the net tonnage of the corporation's
qualifying vessels. An electing corporation is treated as a
separate trade or business activity distinct from all other
activities conducted by such corporation.
Notional shipping income
An electing corporation's notional shipping income for
the taxable year is the sum of the following amounts for each
of the qualifying vessels it operates: (1) the daily notional
shipping income \173\ from the operation of the qualifying
vessel in United States foreign trade,\174\ and (2) the number
of days during the taxable year that the electing corporation
operated such vessel as a qualifying vessel in United States
foreign trade.\175\ However, in the case of a qualifying vessel
any of the income of which is not included in gross income, the
amount of notional shipping income from such vessel is equal to
the notional shipping income from such vessel (determined
without regard to this provision) that bears the same ratio as
the gross income from the operation of such vessel in the
United States foreign trade bears to the sum of such gross
income and the income so excluded. Generally, a ``qualifying
vessel'' is described as a self-propelled U.S.-flag vessel of
not less than 10,000 deadweight tons used exclusively in U.S.
foreign trade.
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\173\ The daily notional shipping 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.
\174\ ``United States foreign trade'' means the transportation of
goods or passengers between a place in the United States and a foreign
place or between foreign places. The temporary use in the United States
domestic trade (i.e., the transportation of goods or passengers between
places in the United States) of any qualifying vessel is deemed to be
the use in the United States foreign trade of such vessel, if such use
does not exceed 30 days in a taxable year.
\175\ Special rules apply in the case of multiple operators of a
vessel.
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Items not subject to corporate income tax
Generally, a corporate member of an electing group \176\
does not include in gross income its income from qualifying
shipping activities. Qualifying shipping activities consist of
(1) core qualifying activities, (2) qualifying secondary
activities, and (3) qualifying incidental activities. All of an
electing entity's core qualifying activities are excluded from
gross income. However, only a portion of an electing
corporation's secondary and incidental activities are treated
as qualifying income and thus, are excluded from gross income.
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\176\ An electing group means any group that would be treated as a
single employer under subsection (a) or (b) of section 52 if paragraphs
(1) and (2) of section 52(a) did not apply.
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Core qualifying activities consist of the operation of
qualifying vessels.\177\ Secondary activities generally consist
of (1) the active management or operation of vessels in U.S.
foreign trade; (2) the provision of vessels, barge, container
or cargo-related facilities or services; and (3) other
activities of the electing corporation and other members of its
electing group that are an integral part of its business of
operating qualifying vessels in United States foreign trade.
Secondary activities do not include any core qualifying
activities. In addition, any activities that would otherwise
constitute core qualifying activities of a corporation, who is
a member of an electing group but is not an electing
corporation, are treated as qualifying secondary activities.
Incidental activities are activities that are incidental to
core qualifying activities and are not qualifying secondary
activities.
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\177\ It is intended that the operation of a lighter-aboard-ship be
treated as the operation of a vessel and not the operation of a barge.
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Denial of credits, income and deductions
Each item of loss, deduction, or credit of any taxpayer
is disallowed with respect to the income that is excluded from
gross income under the proposal. An electing corporation's
interest expense is disallowed in the ratio that the fair
market value of its qualifying vessels bears to the fair market
value of its total assets; special rules apply for disallowing
interest expense in the context of an electing group.
No deductions are allowed against the notional shipping
income of an electing corporation, and no credit is allowed
against the notional tax imposed under the tonnage tax regime.
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.
Dispositions of qualifying vessels
Generally, if an qualifying vessel operator sells or
disposes of a qualifying vessel in an otherwise taxable
transaction, at the election of the operator no gain is
recognized if a replacement qualifying vessel is 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 vessels. Generally, in the
case of the replacement of a qualifying vessel that results in
the nonrecognition of any part of the gain under the rule
above, the basis of the replacement vessel is the cost of such
replacement property decreased in the amount of gain not
recognized.
Generally, a qualifying vessel operator is a corporation
that (1) operates one or more qualifying vessels and (2) meets
certain requirements with respect to its shipping
activities.\178\ Special rules apply in determining whether
corporate partners in pass-through entities are treated as
qualifying vessel operators.
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\178\ A person is generally treated as operating and using any
vessel owned by or chartered to it and that is used as a qualifying
vessel during such period. Special rules apply in the case of pass-
through entities, and special rules apply in an instance in which an
electing entity temporarily ceases to operate a qualifying vessel due
to dry-docking, surveying, inspection, repairs and the like.
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Election
Generally, any qualifying vessel operator may elect into
the tonnage tax regime and such election is made in the form
prescribed by Treasury. An election is only effective if made
before the due date (including extensions) for filing the
corporation's return for such taxable year. However, a
qualifying vessel operator, which is a member of a controlled
group, may only make an election into the tonnage tax regime if
all qualifying vessel operators 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.
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 House
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.\179\ 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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\179\ Treas. Reg. sec. 1.170A-1(g).
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HOUSE BILL
The House bill 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. It is intended 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement includes the House bill
provision, modified to provide that the Secretary shall issue
guidance regarding substantiation of amounts claimed as
deductible whaling expenses.
I. General Provisions
1. Modification to qualified small issue bonds (sec. 301 of the Senate
amendment and sec. 144 of the Code)
PRESENT LAW
Qualified small-issue bonds are tax-exempt State and
local government bonds used to finance private business
manufacturing facilities (including certain directly related
and ancillary facilities) or the acquisition of land and
equipment by certain farmers. In both instances, these bonds
are subject to limits on the amount of financing that may be
provided, both for a single borrowing and in the aggregate. In
general, no more than $1 million of small-issue bond financing
may be outstanding at any time for property of a business
(including related parties) located in the same municipality or
county. Generally, this $1 million limit may be increased to
$10 million if all other capital expenditures of the business
in the same municipality or county are counted toward the limit
over a six-year period that begins three years before the issue
date of the bonds and ends three years after such date.
Outstanding aggregate borrowing is limited to $40 million per
borrower (including related parties) regardless of where the
property is located.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment increases the maximum allowable
amount of total capital expenditures by an eligible business or
a related party in the same municipality or county during the
six-year measurement period from $10 million to $20 million. As
under present law, no more than $10 million of bond financing
may be outstanding at any time for property of an eligible
business (including related parties) located in the same
municipality or county. Other present-law limits (e.g., the $40
million per borrower limit) continue to apply.
Effective date.--The provision is effective for bonds
issued after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
except with respect to the effective date. The conference
agreement increases the maximum allowable amount of total
capital expenditures by an eligible business (or related party)
in the same municipality or county from $10 million to $20
million for bonds issued after September 30, 2009.
Effective date.--The provision is effective for bonds
issued after September 30, 2009.
2. Expensing of investment in broadband equipment (sec. 302 of the
Senate amendment and new sec. 191 of the Code)
PRESENT LAW
Under 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) of
section 168, which determines depreciation by applying specific
recovery periods, placed-in-service conventions, and
depreciation methods to the cost of various types of
depreciable property.
Personal property is classified under MACRS based on the
property's ``class life'' unless a different classification is
specifically provided in section 168. The class life applicable
for personal property is the asset guideline period (midpoint
class life as of January 1, 1986). Based on the property's
classification, a recovery period is prescribed under MACRS. In
general, there are six classes of recovery periods to which
personal property can be assigned. For example, personal
property that has a class life of four years or less has a
recovery period of three years, whereas personal property with
a class life greater than four years but less than 10 years has
a recovery period of five years. The class lives and recovery
periods for most property are contained in Revenue Procedure
87-56.\180\
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\180\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that the taxpayer may elect
to treat qualified broadband expenditures paid or incurred
during the one-year period beginning after the date of
enactment as a deduction in the taxable year in which the
equipment is placed in service.
Qualified expenditures are expenditures incurred with
respect to equipment with which the taxpayer offers current
generation broadband services to qualified subscribers. In
addition, qualified expenditures include qualified expenditures
incurred by the taxpayer with respect to qualified equipment
with which the taxpayer offers next generation broadband
services to qualified subscribers. Current generation broadband
services are defined as the transmission of signals at a rate
of at least 1 million bits per second to the subscriber and at
a rate of at least 128,000 bits per second from the subscriber.
Next generation broadband services are defined as the
transmission of signals at a rate of at least 22 million bits
per second to the subscriber and at a rate of at least 5
million bits per second from the subscriber.
Qualified subscribers for the purposes of the current
generation broadband deduction include nonresidential
subscribers in rural or underserved areas that are not in a
saturated market. A saturated market is defined as a census
tract in which current generation broadband services have been
provided by a single provider to 85 percent or more of the
total number of potential residential subscribers residing
within such census tracts. For the purposes of the next
generation broadband deduction, qualified subscribers include
nonresidential subscribers in rural or underserved areas or any
residential subscriber. In the case of a taxpayer who incurs
expenditures for equipment capable of serving both subscribers
in qualifying areas and other areas, qualifying expenditures
are determined by multiplying otherwise qualifying expenditures
by the ratio of the number of potential qualifying subscribers
to all potential subscribers the qualifying equipment would be
capable of serving.
Qualifying equipment must be capable of providing
broadband services a majority of the time during periods of
maximum demand. Qualifying equipment is equipment that extends
from (1) the last point of switching to the outside of the
building in which the subscriber is located, (2) the customer
side of a mobile telephone switching office to a transmission/
reception antenna (including the antenna) of the subscriber,
(3) the customer side of the headend to the outside of the
building in which the subscriber is located, or (4) a
transmission/reception antenna to a transmission/reception
antenna on the outside of the building used by the subscriber.
Any packet switching equipment deployed in connection with
other qualifying equipment is qualifying equipment, regardless
of location, provided that it is the last such equipment in a
series as part of transmission of a signal to a subscriber or
the first in a series in the transmission of a signal from a
subscriber. Also, multiplexing and demultiplexing equipment are
qualified equipment.
A rural area is any census tract which is not within 10
miles of any incorporated or census designated place with a
population of more than 25,000 and which is not within a county
with a population density of more than 500 people per square
mile. An underserved area is any census tract located in an
empowerment zone or enterprise community or any census tract in
which the poverty level is greater than or equal to 30 percent
and in which the median family income is less than 70 percent
of the greater of metropolitan area median family income or
Statewide median family income. A residential subscriber is any
individual who purchases broadband service to be delivered to
his or her dwelling.
Effective date.--The provision is effective for
expenditures incurred after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
3. Exemption for natural aging process from interest capitalization
(sec. 303 of the Senate amendment and sec. 263A of the Code)
PRESENT LAW
Section 263A provides uniform rules for capitalization of
certain costs. In general, section 263A requires the
capitalization of the direct costs and an allocable portion of
the indirect costs of real or tangible personal property
produced by a taxpayer or real or personal property that is
acquired by a taxpayer for resale. Costs attributable to
producing or acquiring property generally must be capitalized
by charging such costs to basis or, in the case of property
which is inventory in the hands of the taxpayer, by including
such costs in inventory.
Special rules apply for the allocation of interest
expense to property produced by the taxpayer.\181\ In general,
interest paid or incurred during the production period of
certain types of property that is allocable to the production
of the property must be capitalized. Property subject to the
interest capitalization requirement includes property produced
by the taxpayer for use in its trade or business or in an
activity for profit, but only if it (1) is real property, (2)
has an estimated production period exceeding two years (one
year if the cost of the property exceeds $1 million), or (3)
has a class life of 20 years or more (as defined under section
168). The production period of property for this purpose begins
when construction or production is commenced and ends when the
property is ready to be placed in service or is ready to be
held for sale. For example, in the case of property such as
tobacco, wine, or whiskey that is aged before it is sold, the
production period includes the aging period. Activities such as
planning or design generally do not cause the production period
to begin.
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\181\ Sec. 263A(f).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that for purposes of
determining the production period for purposes of
capitalization of interest expense under section 263A(f) that
the production period for distilled spirits shall be determined
without regard to any period allocated to the natural aging
process.\182\
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\182\ It is intended that, for purposes of the provision, the
natural aging process begin when the distilled spirits are placed in
charred barrels to lie for an extended period of time to allow such
product to obtain its color, much of its distinctive flavor, and to
mellow. The natural aging process concludes when the distilled spirits
are removed from the barrel.
---------------------------------------------------------------------------
Effective date.--The Senate amendment applies to
production periods beginning after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
4. Section 355 ``active business test'' applied to chains of affiliated
corporations (sec. 304 of the Senate amendment and sec. 355 of
the Code)
PRESENT LAW
A corporation generally is required to recognize gain on
the distribution of property (including stock of a subsidiary)
to its shareholders as if such property had been sold for its
fair market value. An exception to this rule applies if the
distribution of the stock of a controlled corporation satisfies
the requirements of section 355 of the Code. To qualify for
tax-free treatment under section 355, both the distributing
corporation and the controlled corporation must be engaged
immediately after the distribution in the active conduct of a
trade or business that has been conducted for at least five
years and was not acquired in a taxable transaction during that
period.\183\ For this purpose, a corporation is engaged in the
active conduct of a trade or business only if (1) the
corporation is directly engaged in the active conduct of a
trade or business, or (2) the corporation is not directly
engaged in an active business, but substantially all of its
assets consist of stock and securities of a corporation it
controls that is engaged in the active conduct of a trade or
business.\184\
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\183\ Section 355(b).
\184\ Section 355(b)(2)(A).
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In determining whether a corporation satisfies the active
trade or business requirement, the IRS position for advance
ruling purposes is that the value of the gross assets of the
trade or business being relied on must ordinarily constitute at
least 5 percent of the total fair market value of the gross
assets of the corporation directly conducting the trade or
business.\185\ However, if the corporation is not directly
engaged in an active trade or business, then the IRS takes the
position that the ``substantially all'' test requires that at
least 90 percent of the fair market value of the corporation's
gross assets consist of stock and securities of a controlled
corporation that is engaged in the active conduct of a trade or
business.\186\
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\185\ Rev. Proc. 2003-3, sec. 4.01(30), 2003-1 I.R.B. 113.
\186\ Rev. Proc. 96-30, sec. 4.03(5), 1996-1 C.B. 696; Rev. Proc.
77-37, sec. 3.04, 1977-2 C.B. 568.
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HOUSE BILL
No provision.
SENATE AMENDMENT
Under the bill, the active business test is determined by
reference to the relevant affiliated group. For the
distributing corporation, the relevant affiliated group
consists of the distributing corporation as the common parent
and all corporations affiliated with the distributing
corporation through stock ownership described in section
1504(a)(1)(B) (regardless of whether the corporations are
includible corporations under section 1504(b)), immediately
after the distribution. The relevant affiliated group for a
controlled corporation is determined in a similar manner (with
the controlled corporation as the common parent).
Effective date.--The bill applies to distributions after
the date of enactment, with three exceptions. The bill does not
apply to distributions (1) made pursuant to an agreement which
is binding on the date of enactment and at all times
thereafter, (2) described in a ruling request submitted to the
IRS on or before the date of enactment, or (3) described on or
before the date of enactment in a public announcement or in a
filing with the Securities and Exchange Commission. The
distributing corporation may irrevocably elect not to have the
exceptions described above apply.
The bill also applies to any distribution prior to the
date of enactment, but solely for the purpose of determining
whether, after the date of enactment, the taxpayer continues to
satisfy the requirements of section 355(b)(2)(A).\187\
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\187\ For example, a holding company taxpayer that had distributed
a controlled corporation in a spin-off prior to the date of enactment,
in which spin-off the taxpayer satisfied the ``substantially all''
active business stock test of present law section 355(b)(2)(A)
immediately after the distribution, would not be deemed to have failed
to satisfy any requirement that it continue that same qualified
structure for any period of time after the distribution, solely because
of a restructuring that occurs after the date of enactment and that
would satisfy the requirements of new section 355(b)(2)(A).
---------------------------------------------------------------------------
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
5. Modification to cooperative marketing rules to include value-added
processing involving animals (sec. 306 of the Senate amendment
and sec. 1388 of the Code)
PRESENT LAW
Under present law, cooperatives generally are treated
similarly to pass-through entities in that the cooperative is
not subject to corporate income tax to the extent the
cooperative timely pays patronage dividends. Farmers'
cooperatives are tax-exempt and include cooperatives of
farmers, fruit growers, and like organizations that are
organized and operated on a cooperative basis for the purpose
of marketing the products of members or other producers and
remitting the proceeds of sales, less necessary marketing
expenses, on the basis of either the quantity or the value of
products furnished by them (sec. 521). Farmers' cooperatives
may claim a limited amount of additional deductions for
dividends on capital stock and patronage-based distributions of
nonpatronage income.
In determining whether a cooperative qualifies as a tax-
exempt farmers' cooperative, the IRS has apparently taken the
position that a cooperative is not marketing certain products
of members or other producers if the cooperative adds value
through the use of animals (e.g., farmers sell corn to a
cooperative which is fed to chickens that produce eggs sold by
the cooperative).
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that marketing products of
members or other producers includes feeding products of members
or other producers to cattle, hogs, fish, chickens, or other
animals and selling the resulting animals or animal products.
Effective date.--The Senate amendment provision is
effective for taxable years beginning after the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
6. Extension of declaratory judgment procedures to farmers' cooperative
organizations (sec. 307 of the Senate amendment and sec. 7428
of the Code)
PRESENT LAW
In limited circumstances, the Code provides declaratory
judgment procedures, which generally permit a taxpayer to seek
judicial review of an IRS determination prior to the issuance
of a notice of deficiency and prior to payment of tax. Examples
of declaratory judgment procedures that are available include
disputes involving the initial or continuing classification of
a tax-exempt organization described in section 501(c)(3), a
private foundation described in section 509(a), or a private
operating foundation described in section 4942(j)(3), the
qualification of retirement plans, the value of gifts, the
status of certain governmental obligations, or eligibility of
an estate to pay tax in installments under section 6166.\188\
In such cases, taxpayers may challenge adverse determinations
by commencing a declaratory judgment action. For example, where
the IRS denies an organization's application for recognition of
exemption under section 501(c)(3) or fails to act on such
application, or where the IRS informs a section 501(c)(3)
organization that it is considering revoking or adversely
modifying its tax-exempt status, present law authorizes the
organization to seek a declaratory judgment regarding its tax
exempt status.
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\188\ For disputes involving the initial or continuing
qualification of an organization described in sections 501(c)(3),
509(a), or 4942(j)(3), declaratory judgment actions may be brought in
the U.S. Tax Court, a U.S. district court, or the U.S. Court of Federal
Claims. For all other Federal tax declaratory judgment actions,
proceedings may be brought only in the U.S. Tax Court.
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Declaratory judgment procedures are not available under
present law to a cooperative with respect to an IRS
determination regarding its status as a farmers' cooperative
under section 521.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment extends the declaratory judgment
procedures to cooperatives. Such a case may be commenced in the
U.S. Tax Court, a U.S. district court, or the U.S. Court of
Federal Claims, and such court would have jurisdiction to
determine a cooperative's initial or continuing qualification
as a farmers' cooperative described in section 521.
Effective date.--The Senate amendment provision is
effective for pleadings filed after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
7. Temporary suspension of personal holding company tax (sec. 308 of
the Senate amendment and sec. 541 of the Code)
PRESENT LAW
Under present law, a tax is imposed on the taxable income
of corporations. The rates are as follows:
TABLE 1.--MARGINAL FEDERAL CORPORATE INCOME TAX RATES
------------------------------------------------------------------------
If taxable income is: Then the income tax rate is:
------------------------------------------------------------------------
$0-$50,000................................ 15 percent of taxable income
$50,001-$75,000........................... 25 percent of taxable income
$75,001-$10,000,000....................... 34 percent of taxable income
Over $10,000,000.......................... 35 percent of taxable income
------------------------------------------------------------------------
The first two graduated rates described above are phased
out by a five-percent surcharge for corporations with taxable
income between $100,000 and $335,000. Also, the application 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.
When a corporation distributes its after-tax earnings to
individual shareholders as dividends, a tax is imposed on the
shareholders at rates up to 15 percent.\189\ If a corporation
receives a dividend from another corporation, the recipient
corporation is entitled to a dividends-received deduction that
excludes a significant part of the dividend from the
recipient's income. The percentage of a dividend received that
is deducted varies from 70 percent to 100 percent, depending on
the level of ownership of the recipient corporation in the
distributing corporation.\190\ Thus, with a 70 percent
dividends received deduction, the tax rate imposed on a
dividend received by a corporation in the 35-percent tax
bracket is 10.5 percent.\191\ For corporations at lower rate
brackets, the tax rates on these dividends are lower.
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\189\ The 15-percent rate applies to dividends received in taxable
years beginning before January 1, 2009. Dividends received on or after
that date are scheduled to be taxed at the rates applicable to ordinary
income, which range up to 35 percent (39.6 percent for taxable years
beginning after December 31, 2010).
\190\ If the recipient corporation owns less than 20 percent of the
distributing corporation, the dividends-received deduction is 70
percent. If the recipient corporation owns less than 80 percent but at
least 20 percent of the distributing corporation, the dividends-
received deduction is 80 percent. If the recipient corporation owns 80
percent or more of the distributing corporation, the dividends received
deduction is generally 100 percent.
\191\ This is the 35 percent tax rate, applied to the 30 percent of
the dividend that is taxable after a 70 percent dividends-received
deduction.
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In addition to the regular corporate income tax, a
corporate level penalty tax, the ``personal holding company
tax'' is currently imposed at 15 percent \192\ on certain
corporate earnings of personal holding companies that are not
distributed to shareholders. The personal holding company tax
was originally enacted to prevent so-called ``incorporated
pocketbooks'' that could be formed by individuals to hold
assets that could have been held directly by the individuals,
such as passive investment assets, and retain the income at
corporate rates that were then significantly lower than
individual tax rates.
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\192\ This rate is scheduled to return to the highest individual
tax rate when the lower dividend tax rate expires.
---------------------------------------------------------------------------
Corporations are personal holding companies only if they
are closely held and have substantial passive income. A
corporation is closely held if, at any time during the last
half of the taxable year, more than 50 percent of the value of
the stock of the corporation is owned, directly or indirectly,
by five or fewer individuals (determined with the application
of specified attribution rules). A corporation has substantial
passive income if at least 60 percent of the corporation's
adjusted ordinary gross income (as defined for this purpose) is
``personal holding company income,'' generally, income from
interest, dividends, rents, royalties, compensation for use of
corporate property by certain shareholders, and income under
contracts giving someone other than the corporation the right
to designate the individual service provider. Numerous
adjustments apply in specified situations where there are
specified indicia that the income is active rather than
passive.
A corporation that otherwise would be subject to personal
holding company tax can distribute, or can agree to be deemed
to have distributed, its modified taxable income and avoid the
tax. A corporation may make such an actual dividend
distribution during its taxable year or, up to a specified
limited amount, until the 15th day of the third month following
the close of its taxable year. In addition, if an election is
filed with its return for the year, its shareholders may agree
to include a deemed amount in their income as if a dividend had
been paid (``consent dividend''). A corporation may also make a
``deficiency dividend'' distribution within 90 days following a
determination by the IRS or a court that personal holding
company tax liability is due. That distribution can eliminate
the personal holding company tax itself, though interest (and
penalties, if any) with respect to such tax would still be owed
to the IRS.\193\
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\193\ Section 547.
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HOUSE BILL
No provision.
SENATE AMENDMENT
The provision repeals the personal holding company tax
until 2009, the period of time the 15 percent rate on dividends
received by individuals is scheduled to be in effect.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2003.
The provision would be treated, for purposes of section
303 of the Jobs and Growth Tax Relief Reconciliation Act of
2003 as enacted by Title III of that Act (relating to lower
rates on capital gains and dividends), so that the provision
terminates when those provisions terminate (currently scheduled
to be for taxable years beginning after December 31, 2008).
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
8. 5-year NOL carryback for 2003 NOLs if taxpayer elects out of bonus
depreciation as modified; extend temporary suspension of 90-
percent limit on minimum tax NOLs (sec. 310 of the Senate
amendment and sec. 172 of the Code)
PRESENT LAW
In general, a net operating loss (``NOL'') may be carried
back two years and carried forward 20 years to offset taxable
income in such years. The Job Creation and Worker Assistance
Act of 2002 (``JCWAA'') provides a temporary extension of the
general NOL carryback period to five years (from two years) for
NOLs arising in taxable years ending in 2001 and 2002.
The alternative minimum tax (``AMT'') rules provide that
a taxpayer's NOL deduction cannot reduce the taxpayer's
alternative minimum taxable income (``AMTI'') by more than 90
percent of the AMTI (determined without regard to the NOL
deduction). JCWAA also provides that an NOL deduction
attributable to NOL carrybacks arising in taxable years ending
in 2001 and 2002, as well as NOL carryforwards to these taxable
years, may offset 100 percent of a taxpayer's AMTI.
JCWAA provides generally for an elective 30-percent
additional first-year depreciation deduction. 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).
The Jobs and Growth Tax Relief Reconciliation Act of 2003
(``JGTRRA'') provides an elective 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.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment extends the application of the five-
year carryback period to NOLs arising in taxable years ending
in 2003, provided that the taxpayer elects not to apply the
bonus depreciation provisions of section 168(k). Under the
provision, taxpayers with taxable years ending during January
are permitted to apply the provision to tax years ending during
January of 2004 rather than tax years ending during January of
2003. The provision also allows an NOL deduction attributable
to NOL carrybacks arising in taxable years ending in 2003, as
well as NOL carryforwards to these taxable years, to offset 100
percent of a taxpayer's AMTI.
Effective date.--The Senate amendment applies to net
operating losses for taxable years ending after December 31,
2002.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
9. Manufacturer's jobs credit (sec. 313 of the Senate amendment)
PRESENT LAW
There is no present law credit for a manufacturer's
employment of eligible Trade Adjustment Act (``TAA'')
recipients.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides a 50-percent tax credit for
W-2 wages paid by the taxpayer to eligible TAA recipients (as
defined in sec. 35(c)(2) of the Code). The credit may not
exceed 50 percent of the lesser of: (1) the excess of the W-2
wages paid by the taxpayer during the taxable year over the W-2
wages paid by the taxpayer during the preceding taxable year,
(2) the W-2 wages paid by the taxpayer during the taxable year
to any employee who is an eligible TAA recipient for any month
during such taxable year, or (3) 22.4 percent of the W-2 wages
paid by the taxpayer during the taxable year. The amount of W-2
wages taken into account with respect to any employee for any
taxable year shall not exceed $50,000.
The otherwise allowable credit is limited if the value of
the taxpayer's non-domestic production increased from the
preceding taxable year. In such case, the credit is (1) reduced
to zero for taxpayers whose value of domestic production does
not exceed that from the preceding taxable year, or (2) reduced
by a percentage equal to the non-domestic share of the increase
in the value of worldwide production from the preceding taxable
year.
A taxpayer eligible for the credit is any taxpayer that
has domestic production gross receipts for the taxable year and
the preceding taxable year, and is not treated at any time
during the taxable year as an inverted domestic corporation
under section 7874 of the Senate amendment.
Effective date.--The provision applies to taxable years
beginning after December 31, 2003, and before January 1, 2006.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment.
10. Brownfields demonstration program for qualified green building and
sustainable design projects (sec. 314 of the Senate amendment
and secs. 142 and 146 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. 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.
Private activities eligible for financing with tax-exempt private
activity bonds
Present law includes several exceptions permitting States
or local governments to act as conduits providing tax-exempt
financing for private activities. For example, interest on
bonds issued to benefit section 501(c)(3) organizations is
generally tax-exempt (``qualified 501(c)(3) bonds''). Both
capital expenditures and limited working capital expenditures
of section 501(c)(3) organizations may be financed with
qualified 501(c)(3) bonds.
In addition, States or local governments may issue tax-
exempt ``exempt-facility bonds'' to finance property for
certain private businesses.\194\ Business facilities eligible
for this financing include transportation (airports, ports,
local mass commuting, and high speed intercity rail
facilities); privately owned and/or privately operated public
works facilities (sewage, solid waste disposal, local district
heating or cooling, hazardous waste disposal facilities, and
public educational facilities); privately owned and/or operated
low-income rental housing;\195\ and certain private facilities
for the local furnishing of electricity or gas. 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 private activity bonds also may be
issued to finance limited non-business purposes: certain
student loans and mortgage loans for owner-occupied housing
(``qualified mortgage bonds'' and ``qualified veterans'
mortgage bonds'').
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\194\ Secs. 141(e) and 142(a).
\195\ Residential rental projects must satisfy low-income tenant
occupancy requirements for a minimum period of 15 years.
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Generally, tax-exempt private activity bonds are subject
to restrictions that do not apply to other bonds issued by
State or local governments. For example, most tax-exempt
private activity bonds are subject to annual volume limits on
the aggregate face amount of such bonds that may be
issued.\196\
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\196\ Sec. 146.
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HOUSE BILL
No provision.
SENATE AMENDMENT
In general
The Senate amendment creates a new category of exempt-
facility bond, the qualified green building and sustainable
design project bond (``qualified green bond''). A qualified
green bond is defined as any bond issued as part of an issue
that finances a project designated by the Secretary, after
consultation with the Administrator of the Environmental
Protection Agency (the ``Administrator'') as a green building
and sustainable design project that meets the following
eligibility requirements: (1) at least 75 percent of the square
footage of the commercial buildings that are part of the
project is registered for the U.S. Green Building Council's
LEED \197\ certification and is reasonably expected (at the
time of designation) to meet such certification; (2) the
project includes a brownfield site; \198\ (3) the project
receives at least $5 million dollars in specific State or local
resources; and (4) the project includes at least one million
square feet of building or at least 20 acres of land.
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\197\ The LEED (``Leadership in Energy and Environmental Design'')
Green Building Rating System is a voluntary, consensus-based national
standard for developing high-performance sustainable buildings.
Registration is the first step toward LEED certification. Actual
certification requires that the applicant project satisfy a number of
requirements. Commercial buildings, as defined by standard building
codes are eligible for certification. Commercial occupancies include,
but are not limited to, offices, retail and service establishments,
institutional buildings (e.g. libraries, schools, museums, churches,
etc.), hotels, and residential buildings of four or more habitable
stories.
\198\ For this purpose, a brownfield site is defined by section
101(39) of the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (42 U.S.C. 9601), including a site described in
subparagraph (D)(ii)(II)(aa) thereof (relating to a site that is
contaminated by petroleum or a petroleum product excluded from the
definition of `hazardous substance' under section 101).
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Under the provision, qualified green bonds are not
subject to the State bond volume limitations. Rather, there is
a national limitation of $2 billion of qualified green bonds
that the Secretary may allocate, in the aggregate, to qualified
green building and sustainable design projects. Qualified green
bonds may be currently refunded if certain conditions are met,
but cannot be advance refunded. The authority to issue
qualified green bonds terminates after September 30, 2009.
Application and designation process
The provision requires the submission of an application
that meets certain requirements before a project may be
designated for financing with qualified green bonds. In
addition to the eligibility requirements listed above, each
project application must demonstrate that the net benefit of
the tax-exempt financing provided will be allocated for (i) the
purchase, construction, integration or other use of energy
efficiency, renewable energy and sustainable design features of
the project, (ii) compliance with LEED certification standards,
and/or (iii) the purchase, remediation, foundation
construction, and preparation of the brownfield site. The
application also must demonstrate that the project is expected,
based on independent analysis, to provide the equivalent of at
least 1,500 full-time permanent employees (150 full-time
employees in rural States) when completed and the equivalent of
at least 1,000 construction employees (100 full-time employees
in rural States). In addition, each project application shall
contain a description of: (1) the amount of electric
consumption reduced as compared to conventional construction;
(2) the amount of sulfur dioxide daily emissions reduced
compared to coal generation; (3) the amount of gross installed
capacity of the project's solar photovoltaic capacity measured
in megawatts; and (4) the amount of the project's fuel cell
energy generation, measured in megawatts.
Under the Senate Amendment, each project must be
nominated by a State or local government within 180 days of
enactment of this Act and such State or local government must
provide written assurances that the project will satisfy
certain eligibility requirements. Within 60 days after the end
of the application period, the Secretary, after consultation
with the Administrator, will designate the qualified green
building and sustainable design projects eligible for financing
with qualified green bonds. At least one of the projects must
be in or within a ten-mile radius of an empowerment zone (as
defined under section 1391 of the Code) and at least one
project must be in a rural State.\199\ No more than one project
is permitted in a State. A project shall not be designated for
financing with qualified green bonds if such project includes a
stadium or arena for professional sports exhibitions or games.
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\199\ The term ``rural State'' means any State that has (1) a
population of less than 4.5 million according to the 2000 census; (2) a
population density of less than 150 people per square mile according to
the 2000 census; and (3) increased in population by less than half the
rate of the national increase between the 1990 and 2000 censuses.
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The provision requires the Secretary, after consultation
with the Administrator, to ensure that the projects designated
shall, in the aggregate: (1) reduce electric consumption by
more than 150 megawatts annually as compared to conventional
construction; (2) reduce daily sulfur dioxide emissions by at
least 10 tons compared to coal generation power; (3) expand by
75 percent the domestic solar photovoltaic market in the United
States (measured in megawatts) as compared to the expansion of
that market from 2001 to 2002; and (4) use at least 25
megawatts of fuel cell energy generation.
Each project must certify to the Secretary, no later than
30 days after the completion of the project, that the net
benefit of the tax-exempt financing was used for the purposes
described in the project application. In addition, no bond
proceeds can be used to provide any facility the principal
business of which is the sale of food or alcoholic beverages
for consumption on the premises.
Special rules
The provision requires each issuer to maintain, on behalf
of each project, an interest bearing reserve account equal to
one percent of the net proceeds of any qualified green bond
issued for such project. Not later than five years after the
date of issuance, the Secretary, after consultation with the
Administrator, shall determine whether the project financed
with the proceeds of qualified green bonds has substantially
complied with the requirements and goals described in the
project application. If the Secretary, after such consultation,
certifies that the project has substantially complied with the
requirements and goals, amounts in the reserve account,
including all interest, shall be released to the project. If
the Secretary determines that the project has not substantially
complied with such requirements and goals, amounts in the
reserve account, including all interest, shall be paid to the
United States Treasury.
Effective date.--The provision is effective for bonds
issued after December 31, 2004, and before October 1, 2009.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
J. Manufacturing Relating to Films
1. Special rules for certain film and television production (sec. 321
of the Senate amendment and new sec. 181 of the Code)
PRESENT LAW
The modified Accelerated Cost Recovery System (``MACRS'')
does not apply to certain property, including any motion
picture film, video tape, or sound recording, or to any other
property if the taxpayer elects to exclude such property from
MACRS and the taxpayer properly applies a unit-of-production
method or other method of depreciation not expressed in a term
of years. Section 197 does not apply to certain intangible
property, including property produced by the taxpayer or any
interest in a film, sound recording, video tape, book or
similar property not acquired in a transaction (or a series of
related transactions) involving the acquisition of assets
constituting a trade or business or substantial portion
thereof. Thus, the recovery of the cost of a film, video tape,
or similar property that is produced by the taxpayer or is
acquired on a ``stand-alone'' basis by the taxpayer may not be
determined under either the MACRS depreciation provisions or
under the section 197 amortization provisions. The cost
recovery of such property may be determined under section 167,
which allows a depreciation deduction for the reasonable
allowance for the exhaustion, wear and tear, or obsolescence of
the property. A taxpayer is allowed to recover, through annual
depreciation deductions, the cost of certain property used in a
trade or business or for the production of income. Section
167(g) provides that the cost of motion picture films, sound
recordings, copyrights, books, and patents are eligible to be
recovered using the income forecast method of depreciation.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment permits qualifying film and
television productions to elect to deduct certain production
expenditures in the year the expenditure is incurred in lieu of
capitalizing the cost and recovering it through depreciation
allowances.\200\
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\200\ An election to deduct such costs shall be made in such manner
as prescribed by the Secretary and by the due date (including
extensions of time) for filing the taxpayer's return of tax for the
taxable year in which production costs of such property are first
incurred. An election may not be revoked without the consent of the
Secretary. The Committee intends that, in the absence of specific
guidance by the Secretary, deducting qualifying costs on the
appropriate tax return shall constitute a valid election.
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The provision limits the amount of production
expenditures that may be expensed to $15 million for each
qualifying production.\201\ An additional $5 million of
production expenditures may be deducted (up to $20 million in
total) if a significant amount of the production expenditures
are incurred in areas eligible for designation as a low-income
community or eligible for designation by the Delta Regional
Authority as a distressed county or isolated area of distress.
Expenditures in excess of $15 million ($20 million in
distressed areas) are required to be recovered over a three-
year period using the straight-line method beginning in the
month such property is placed in service.
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\201\ Thus, a qualifying film that is co-produced is limited to $15
million of deduction. The benefits of this provision shall be allocated
among the owners of a film in a manner that reasonably reflects each
owner's proportionate investment in and economic interest in the film.
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The provision defines a qualified film or television
production as any production of a motion picture (whether
released theatrically or directly to video cassette or any
other format); miniseries; scripted, dramatic television
episode; or movie of the week if at least 75 percent of the
total compensation expended on the production are for services
performed in the United States.\202\ With respect to property
which is one or more episodes in a television series, only the
first 44 episodes qualify under the provision. Qualified
property does not include sexually explicit productions as
defined by section 2257 of title 18 of the U.S. Code.
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\202\ The term compensation does not include participations and
residuals.
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Effective date.--The Senate amendment is effective for
qualified productions commencing after the date of enactment
and sunsets for qualifying productions commencing after
December 31, 2008.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
except that the provision does not apply to qualified
productions the aggregate cost of which exceeds the $15 million
threshold. The threshold is increased to $20 million if a
significant amount of the production expenditures are incurred
in areas eligible for designation as a low-income community or
eligible for designation by the Delta Regional Authority as a
distressed county or isolated area of distress.
Effective date.--The provision is effective for qualified
productions commencing after the date of enactment and before
January 1, 2009.\203\
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\203\ For this purpose, a production is treated as commencing on
the first date of principal photography.
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2. Modification of application of income forecast method of
depreciation (sec. 322 of the Senate amendment and sec. 167 of
the Code)
PRESENT LAW
The modified Accelerated Cost Recovery System (``MACRS'')
does not apply to certain property, including any motion
picture film, video tape, or sound recording, or to any other
property if the taxpayer elects to exclude such property from
MACRS and the taxpayer properly applies a unit-of-production
method or other method of depreciation not expressed in a term
of years. Section 197 does not apply to certain intangible
property, including property produced by the taxpayer or any
interest in a film, sound recording, video tape, book or
similar property not acquired in a transaction (or a series of
related transactions) involving the acquisition of assets
constituting a trade or business or substantial portion
thereof. Thus, the recovery of the cost of a film, video tape,
or similar property that is produced by the taxpayer or is
acquired on a ``stand-alone'' basis by the taxpayer may not be
determined under either the MACRS depreciation provisions or
under the section 197 amortization provisions. The cost
recovery of such property may be determined under section 167,
which allows a depreciation deduction for the reasonable
allowance for the exhaustion, wear and tear, or obsolescence of
the property. A taxpayer is allowed to recover, through annual
depreciation deductions, the cost of certain property used in a
trade or business or for the production of income. Section
167(g) provides that the cost of motion picture films, sound
recordings, copyrights, books, and patents are eligible to be
recovered using the income forecast method of depreciation.
Income forecast method of depreciation
Under the income forecast method, a property's
depreciation deduction for a taxable year is determined by
multiplying the adjusted basis of the property by a fraction,
the numerator of which is the income generated by the property
during the year and the denominator of which is the total
forecasted or estimated income expected to be generated prior
to the close of the tenth taxable year after the year the
property was placed in service. Any costs that are not
recovered by the end of the tenth taxable year after the
property was placed in service may be taken into account as
depreciation in such year.
The adjusted basis of property that may be taken into
account under the income forecast method only includes amounts
that satisfy the economic performance standard of section
461(h). In addition, taxpayers that claim depreciation
deductions under the income forecast method are required to pay
(or receive) interest based on a recalculation of depreciation
under a ``look-back'' method.
The ``look-back'' method is applied in any
``recomputation year'' by (1) comparing depreciation deductions
that had been claimed in prior periods to depreciation
deductions that would have been claimed had the taxpayer used
actual, rather than estimated, total income from the property;
(2) determining the hypothetical overpayment or underpayment of
tax based on this recalculated depreciation; and (3) applying
the overpayment rate of section 6621 of the Code. Except as
provided in Treasury regulations, a ``recomputation year'' is
the third and tenth taxable year after the taxable year the
property was placed in service, unless the actual income from
the property for each taxable year ending with or before the
close of such years was within 10 percent of the estimated
income from the property for such years.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment clarifies that, solely for purposes
of computing the allowable deduction for property under the
income forecast method of depreciation, participations and
residuals may be included in the adjusted basis of the property
beginning in the year such property is placed in service, but
only if such participations and residuals relate to income to
be derived from the property before the close of the tenth
taxable year following the year the property is placed in
service (as defined in section 167(g)(1)(A)). For purposes of
the provision, participations and residuals are defined as
costs the amount of which, by contract, varies with the amount
of income earned in connection with such property. The
provision also clarifies that the income from the property to
be taken into account under the income forecast method is the
gross income from such property.
The provision also grants authority to the Treasury
Department to prescribe appropriate adjustments to the basis of
property (and the look-back method) to reflect the treatment of
participations and residuals under the provision.
In addition, the provision clarifies that, in the case of
property eligible for the income forecast method that the
holding in the Associated Patentees \204\ decision will
continue to constitute a valid method. Thus, rather than
accounting for participations and residuals as a cost of the
property under the income forecast method of depreciation, the
taxpayer may deduct those payments as they are paid as under
the Associated Patentees decision. This may be done on a
property-by-property basis and shall be applied consistently
with respect to a given property thereafter. The provision also
clarifies that distribution costs are not taken into account
for purposes of determining the taxpayer's current and total
forecasted income with respect to a property.
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\204\ Associated Patentees, Inc. v. Commissioner, 4 T.C. 979
(1945).
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Effective date.--The Senate amendment applies to property
placed in service after date of enactment. No inference is
intended as to the appropriate treatment under present law. It
is intended that the Treasury Department and the IRS expedite
the resolution of open cases. In resolving these cases in an
expedited and balanced manner, the Treasury Department and IRS
are encouraged to take into account the principles of the
provision.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
TITLE III--PROVISIONS RELATING TO TAX REFORM AND SIMPLIFICATION FOR
UNITED STATES BUSINESSES
1. Interest expense allocation rules (sec. 301 of the House bill, sec.
205 of the Senate amendment, 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.\205\ 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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\205\ 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.\206\ 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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\206\ 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.
HOUSE BILL
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,\207\ 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.\208\
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\207\ 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.
\208\ 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) \209\ as
well as all controlled foreign corporations that, in the
aggregate, either directly or indirectly,\210\ 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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\209\ 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)).
\210\ 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 10-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.\211\ 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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\211\ 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 House bill provision is effective
for taxable years beginning after December 31, 2008.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
2. Recharacterize overall domestic loss (sec. 302 of the House bill,
sec. 204 of the Senate amendment, 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.
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
3. Foreign tax credit baskets and ``base differences'' (sec. 303 of the
House bill, sec. 225 of the Senate amendment, 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''),\212\ (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.\213\
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\212\ 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 the conference agreement, these
dividends are subject to a look-through approach, irrespective of when
the underlying earnings and profits arose.
\213\ 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.'' \214\ 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.'' \215\ 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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\214\ Treas. Reg. sec. 1.904-4(e)(3)(i) and (2)(i).
\215\ 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.\216\ 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.\217\
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\216\ Treas. Reg. sec. 1.904-6.
\217\ Treas. Reg. sec. 1.904-6(a)(1)(iv).
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HOUSE BILL
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.'' \218\ 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.\219\ The present-law meaning of
``predominantly engaged'' for purposes of section 952(c)(1)(B)
remains unchanged under the provision.
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\218\ See Treas. Reg. sec. 1.904-4(e).
\219\ 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).
SENATE AMENDMENT
Under the provision, creditable foreign taxes that are
imposed on amounts that do not constitute income under U.S. tax
principles are treated as imposed either on general limitation
income or on financial services income, at the taxpayer's
election. Once made, this election applies to all such taxes
and is revocable only with the consent of the Secretary.
Effective date.--The provision is effective for taxable
years ending after date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, with a
modification relating to base differences. As in the House
bill, 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, as of the general
effective date of the House bill provision. The conference
agreement adds a provision under which any such taxes arising
in taxable years beginning after December 31, 2004, but before
January 1, 2007 (when the number of limitation categories is
reduced to two), are treated as imposed on either general
limitation income or financial services income, at the
taxpayer's election. Once made, this election applies to all
such taxes for the taxable years described above and is
revocable only with the consent of the Treasury Secretary.
4. Apply look-through rules for dividends from noncontrolled section
902 corporations (sec. 304 of the House bill, sec. 202 of the
Senate amendment, 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).\220\ 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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\220\ 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.
HOUSE BILL
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.\221\ 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.\222\
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\221\ 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.
\222\ 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
5. Attribution of stock ownership through partnerships in determining
section 902 and 960 credits (sec. 305 of the House bill, sec.
213 of the Senate amendment, and sec. 902 of the Code)
PRESENT LAW
Under section 902, a domestic corporation that receives a
dividend from a foreign corporation in which it owns 10 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 10
percent or more of the voting stock of a foreign corporation
through a partnership is entitled to a deemed-paid foreign tax
credit.\223\ In Rev. Rul. 71-141,\224\ 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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\223\ 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.
\224\ 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.'' \225\ 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 10
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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\225\ T.D. 8708, 1997-1 C.B. 137.
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HOUSE BILL
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) 10
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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
6. Foreign tax credit treatment of deemed payments under section 367(d)
of the Code (sec. 306 of the House bill, sec. 229 of the Senate
amendment, and sec. 367(d) 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.\226\
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\226\ 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.\227\ 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).\228\
---------------------------------------------------------------------------
\227\ Sec. 904(d).
\228\ Sec. 904(d)(3).
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HOUSE BILL
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).
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
7. United States property not to include certain assets of controlled
foreign corporations (sec. 307 of the House bill, sec. 227 of
the Senate amendment, and sec. 956 of the Code)
PRESENT LAW
In general, the subpart F rules \229\ 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.\230\
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\229\ Secs. 951-964.
\230\ 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.\231\ 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.\232\ 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.\233\
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\231\ Sec. 956(a).
\232\ Secs. 956 and 959.
\233\ 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.\234\
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\234\ 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.\235\
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\235\ Sec. 956(c)(2).
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HOUSE BILL
The House bill 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 House bill 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
8. Election not to use average exchange rate for foreign tax paid other
than in functional currency (sec. 308 of the House bill, sec.
224 of the Senate amendment, 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.\236\ 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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\236\ 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.\237\
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\237\ Sec. 986(a)(2).
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HOUSE BILL
For taxpayers that are required under present law to
translate foreign income tax payments at the average exchange
rate, the House bill 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.\238\ 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 House bill authorizes the Secretary to
issue regulations that apply the election to foreign income
taxes attributable to a qualified business unit.
---------------------------------------------------------------------------
\238\ 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 House bill provision is effective
with respect to taxable years beginning after December 31,
2004.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
Effective date.--The Senate amendment provision is
effective with respect to taxable years beginning after
December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment. In addition, the conference agreement
provides that the election does not apply to regulated
investment companies that take into account income on an
accrual basis. Instead, the conference agreement provides that
foreign income taxes paid or accrued by a regulated investment
company with respect to such income are translated into U.S.
dollar amounts using the exchange rate as of the date the
income accrues.
9. Eliminate secondary withholding tax with respect to dividends paid
by certain foreign corporations (sec. 309 of the House bill,
sec. 215 of the Senate amendment, 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.
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
10. Equal treatment for interest paid by foreign partnerships and
foreign corporations (sec. 310 of the House bill, sec. 228 of
the Senate amendment, 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.\239\
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.\240\ Therefore,
any interest received from such a foreign partnership is U.S.-
source income.
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\239\ Sec. 861(a)(1).
\240\ 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).\241\
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\241\ Sec. 884(f)(1).
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HOUSE BILL
The House bill 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 House bill 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 House bill provision is effective
for taxable years beginning after December 31, 2003.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
11. Look-through treatment of payments between related controlled
foreign corporations (sec. 311 of the House bill, sec. 222 of
the Senate amendment, 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.
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or Senate amendment provision.
12. Look-through treatment under subpart F for sales of partnership
interests (sec. 312 of the House bill, sec. 223 of the Senate
amendment, 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 real estate mortgages investment conduits (``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.
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
13. Repeal of foreign personal holding company rules and foreign
investment company rules (sec. 313 of the House bill, sec. 211
of the Senate amendment, 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).
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment provision is the same as the House
bill provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
14. Determination of foreign personal holding company income with
respect to transactions in commodities (sec. 314 of the House
bill, sec. 206 of the Senate amendment, 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.\242\ 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.\243\
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\242\ 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)).
\243\ 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).\244\ 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.\245\
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\244\ Sec. 1221(a)(7).
\245\ Sec. 1221(b)(2)(A).
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HOUSE BILL
The House bill 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
House bill, 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
the House bill, 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).\246\
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\246\ Sec. 1221(a)(7) and (b)(2)(B).
---------------------------------------------------------------------------
The House bill 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 House bill,
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.\247\
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\247\ 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 House bill) continue to apply.
---------------------------------------------------------------------------
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 House bill 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 House bill provision is effective
with respect to transactions entered into after December 31,
2004.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
15. Modifications to treatment of aircraft leasing and shipping income
(sec. 315 of the House bill, sec. 221 of the Senate amendment,
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 real estate mortgage investment
conduits (``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 \248\ equal at least 25 percent of the adjusted
leasing profit.\249\
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\248\ ``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).
\249\ 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).
---------------------------------------------------------------------------
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.
HOUSE BILL
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 section
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 is 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.
It is expected 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).
It is anticipated 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 matter of sound business
judgment, to restructure their business operations to take into
account the tax law changes brought about by the bill. It is
noted that courts have recognized the validity of structuring
operations for the purpose of obtaining the benefit of tax
regimes expressly intended by Congress. It is intended 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, it
is intended that a restructuring undertaken to transfer
aircraft subject to existing FSC or ETI leases to a CFC lessor,
to take advantage of the amendments made by this bill, would
serve 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. It is intended, 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.
SENATE AMENDMENT
The provision provides that ``qualified leasing income''
derived from or in connection with the leasing or rental of any
aircraft or vessel is not treated as foreign personal holding
company income or foreign base company shipping income of a
controlled foreign corporation. The provision defines
``qualified leasing income'' as rents or gains derived in the
active conduct of a leasing trade or business with respect to
which the controlled foreign corporation conducts substantial
activity, provided that the leased property is used by the
lessee or other end-user in foreign commerce and predominantly
outside the United States, and such lessee or other end-user is
not related to the controlled foreign corporation (within the
meaning of sec. 954(d)(3)).
In determining whether an aircraft or vessel is used in
foreign commerce, it is intended that foreign commerce
encompass the use of an aircraft or vessel in the
transportation of property or passengers: (1) between an
airport or port in the United States (including for this
purpose any possession of the United States) and an airport or
port in a foreign country; (2) between an airport or port in a
foreign country and another in the same country; or (3) between
an airport or port in a foreign country and another in a
different foreign country. It is intended that an aircraft or
vessel be considered as used predominantly outside the United
States if more than 70 percent of its miles traveled during the
taxable year are traveled outside the United States, or if the
aircraft or vessel is located outside the United States for
more than 70 percent of the time during the taxable year.
Effective date.--The provision is effective for taxable
years of foreign corporations beginning after December 31,
2006, and taxable years of U.S. shareholders with or within
which such taxable years of such foreign corporations end.
CONFERENCE AGREEMENT
The conference agreement follows the House bill with the
following clarifications. First, the terms ``aircraft or
vessels'' include engines that are leased separately from an
aircraft or vessel. Second, if a lessor acquires (from a
related or unrelated party) or aircraft or vessel subject to an
existing lease, the requirements of section 954(c)(2)(A) are
satisfied if, following the acquisition, the lessor performs
active and substantial management, operational, and remarketing
functions with respect to the leased property. However, if an
existing FSC or ETI lease is transferred to a CFC lessor, the
lease will no longer be eligible for FSC or ETI benefits.
16. Modification of exceptions under subpart F for active financing
(sec. 316 of the House bill, sec. 226 of the Senate amendment,
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 real estate mortgage
investment conduits (``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'').\250\
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\250\ 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.
HOUSE BILL
The House bill 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 House bill 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 House bill 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
17. Ten-year foreign tax credit carryover; one-year foreign tax credit
carryback (sec. 201 of the Senate amendment and sec. 904 of the
Code)
PRESENT LAW
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. The amount of foreign tax
credits generally is limited to a portion of the taxpayer's
U.S. tax which portion is calculated by multiplying the
taxpayer's total U.S. tax by a fraction, the numerator of which
is the taxpayer's foreign-source taxable income (i.e., foreign-
source gross income less allocable expenses or deductions) and
the denominator of which is the taxpayer's worldwide taxable
income for the year.\251\
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\251\ Section 904(a).
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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.
The amount of creditable taxes paid or accrued (or deemed
paid) in any taxable year which exceeds the foreign tax credit
limitation is permitted to be carried back to the two
immediately preceding taxable years (to the earliest year
first) and carried forward five taxable years (in chronological
order) and credited (not deducted) to the extent that the
taxpayer otherwise has excess foreign tax credit limitation for
those years. Excess credits that are carried back or forward
are usable only to the extent that there is excess foreign tax
credit limitation in such carryover or carryback year.
Consequently, foreign tax credits arising in a taxable year are
utilized before excess credits from another taxable year may be
carried forward or backward. In addition, excess credits are
carried forward or carried back on a separate limitation basis.
Thus, if a taxpayer has excess foreign tax credits in one
separate limitation category for a taxable year, those excess
credits may be carried back and forward only as taxes allocable
to that category, notwithstanding the fact that the taxpayer
may have excess foreign tax credit limitation in another
category for that year. If credits cannot be so utilized, they
are permanently disallowed.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision extends the excess foreign tax credit
carryforward period to twenty years and limits the carryback
period to one year.
Effective date.--The extension of the carryforward period
is effective for excess foreign tax credits that may be carried
to any taxable years ending after the date of enactment of the
provision; the limited carryback period is effective for excess
foreign tax credits arising in taxable years beginning after
the date of enactment of the provision.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
with the modification that the foreign tax credit carryforward
period is extended to 10 years.
18. Expand the subpart F de minimis rule to the lesser of five percent
of gross income or $5 million (sec. 212 of the Senate amendment
and sec. 954 of the Code)
PRESENT LAW
Under the rules of subpart F (secs. 951-964), U.S. 10-
percent shareholders of a controlled foreign corporation are
required 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 base company income and certain
insurance income. Foreign base company income includes five
categories of income: foreign personal holding company income,
foreign base company sales income, foreign base company
services income, foreign base company shipping income, and
foreign base company oil-related income (sec. 954(a)). Under a
de minimis rule, if the gross amount of a controlled foreign
corporation's foreign base company income and insurance income
for a taxable year is less than the lesser of five percent of
the controlled foreign corporation's gross income or $1
million, then no part of the controlled foreign corporation's
gross income is treated as foreign base company income or
insurance income (sec. 954(b)(3)(A)).
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision expands the subpart F de minimis rule to
provide that, if the gross amount of a controlled foreign
corporation's foreign base company income and insurance income
for a taxable year is less than the lesser of five percent of
the controlled foreign corporation's gross income or $5
million, then no part of the controlled foreign corporation's
gross income is treated as foreign base company income or
insurance income.
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.
CONFERENCE AGREEMENT
The conference agreement does not contain the Senate
amendment provision.
19. Limit application of uniform capitalization rules in the case of
foreign persons (sec. 214 of the Senate amendment and sec. 263A
of the Code)
PRESENT LAW
Taxpayers generally may not currently deduct the costs
incurred in producing property or acquiring property for
resale. In general, the uniform capitalization rules require
that a portion of the direct and indirect costs of producing
property or acquiring property for resale be capitalized or
included in the cost of inventory (sec. 263A). Consequently,
such costs must be recovered through an offset to the sales
price if the property is produced for sale, or through
depreciation or amortization if the property is produced for
the taxpayer's own use in a business or investment activity.
The purpose of this requirement is to match the costs of
producing or acquiring goods with the revenues realized from
their sale or use in the business or investment activity.
The uniform capitalization rules apply to foreign
corporations, whether or not engaged in business in the United
States. In the case of a foreign corporation carrying on a U.S.
trade or business, for example, the uniform capitalization
rules apply for purposes of computing the corporation's U.S.
effectively connected taxable income, as well as computing its
effectively connected earnings and profits for purposes of the
branch profits tax.
When a foreign corporation is not engaged in a trade or
business in the United States, its taxable income and earnings
and profits may nonetheless be relevant under the Code. For
example, the subpart F income of a controlled foreign
corporation may be currently includible on the return of a U.S.
shareholder of the controlled foreign corporation. Regardless
of whether or not a foreign corporation is U.S.-controlled, its
accumulated earnings and profits must be computed in order to
determine the amount of taxable dividends and the indirect
foreign tax credit carried by distributions from the foreign
corporation to any domestic corporation that owns at least 10
percent of its voting stock.
The earnings and profits surplus or deficit of any
foreign corporation for any taxable year generally is
determined according to rules substantially similar to those
applicable to domestic corporations. However, proposed
regulations provide that, for purposes of computing a foreign
corporation's earnings and profits, the amount of expenses that
must be capitalized into inventory under the uniform
capitalization rules may not exceed the amount capitalized in
keeping the taxpayer's books and records.\252\ For this
purpose, the taxpayer's books and records must be prepared in
accordance with U.S. generally accepted accounting principles
for purposes of reflecting in the financial statements of a
domestic corporation the operations of its foreign affiliates.
This proposed regulation applies only for purposes of
determining a foreign corporation's earnings and profits and
does not apply for purposes of determining subpart F income or
income effectively connected with a U.S. trade or business of a
foreign corporation.
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\252\ Treas. Prop. Reg. sec. 1.964-1(c)(1)(ii)(B).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The provision provides that, in lieu of the uniform
capitalization rules, costs incurred in producing property or
acquiring property for resale are capitalized using U.S.
generally accepted accounting principles (i.e., the method used
to ascertain income, profit, or loss for purposes of reports or
statements to shareholders, partners, other proprietors, or
beneficiaries, or for credit purposes) for purposes of
determining a U.S.-owned foreign corporation's earnings and
profits and subpart F income. The uniform capitalization rules
continue to apply to foreign corporations for purposes of
determining income effectively connected with a U.S. trade or
business and the related earnings and profits therefrom. Any
change in the taxpayer's method of accounting required as a
result of this provision is treated as a voluntary change
initiated by the taxpayer and is deemed made with the consent
of the Secretary of the Treasury (i.e., no application for
change in method of accounting is required to be filed with the
Secretary). Any resultant section 481(a) adjustment required to
be taken into account is to be taken into account in the first
year.
Effective date.--The provision applies to taxable years
beginning after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not contain the Senate
amendment provision.
20. Eliminate the 30-percent tax on certain U.S.-source capital gains
of nonresident individuals (sec. 216 of the Senate amendment
and sec. 871 of the Code)
PRESENT LAW
In general, resident aliens are taxed in the same manner
as U.S. citizens. Nonresident aliens are subject to (1) U.S.
tax on income from U.S. sources that are effectively connected
with a U.S. trade or business, and (2) a 30-percent withholding
tax on the gross amount of certain types of passive income
derived from U.S. sources, such as interest, dividends, rents,
and other fixed or determinable annual or periodical income
(sec. 871(a)(1)). Bilateral income tax treaties may modify
these tax rules.
Income derived from the sale of personal property other
than inventory property generally is sourced based on the
residence of the seller (sec. 865(a)). Thus, nonresident aliens
generally are not taxable on capital gains because the gains
generally are considered to be foreign-source income.\253\
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\253\ Nonresident individuals are subject to the 30-percent gross
withholding tax, for example, with respect to gains from the sale or
exchange of intangible property if the payments are contingent on the
productivity, use, or disposition of the property. Secs. 871(a)(1)(D)
and 881(a)(4).
---------------------------------------------------------------------------
Special rules apply in the case of sales of personal
property by certain foreign persons. In this regard, an
individual who is otherwise treated as a nonresident is treated
as a U.S. resident for purposes of sourcing income from the
sale of personal property if the individual has a tax home in
the United States (sec. 865(g)(1)(A)(i)(II)). An individual's
U.S. tax home generally is the place where the individual has
his or her principal place of business. For example, if a
nonresident individual with a tax home in the United States
sells stocks or other securities for a gain, the individual
will be treated as a U.S. resident with respect to the sale
such that the gain will be treated as U.S.-source income
potentially subject to U.S. tax.
Under the special capital gains tax of section 871(a)(2),
a nonresident individual who is physically present in the
United States for 183 days or more during a taxable year is
subject to a 30-percent tax on the excess of U.S.-source
capital gains over U.S.-source capital losses. This 30-percent
tax is not a withholding tax. The tax under section 871(a)(2)
does not apply to gains and losses subject to the gross 30-
percent withholding tax under section 871(a)(1) or to gains
effectively connected with a U.S. trade or business. Capital
gains and losses are taken into account only to the extent that
they would be recognized and taken into account if such gains
and losses were effectively connected with a U.S. trade or
business. Capital loss carryovers are not taken into account.
As a practical matter, the special rule under section
871(a)(2) applies only in a very limited set of cases. In order
for the rule to apply, two conditions must be satisfied: (1)
the individual must spend at least 183 days in the United
States during a taxable year without being treated as a U.S.
resident, and (2) the individual's capital gains must be from
U.S. sources. If these conditions are satisfied, then the 30-
percent tax applies to the excess of U.S.-source capital gains
over U.S.-source capital losses. However, section 871(a)(2)
generally is not applicable because if the individual spends
183 days or more in the United States in most cases he or she
would be treated as a U.S. resident, or if not treated as a
U.S. resident, would generally not have U.S.-source capital
gains.
An individual who is not a citizen and who spends 183
days or more in the United States during a calendar year
generally would be treated as a U.S. resident under the
substantial presence test of section 7701(b). Thus, in most
cases, the individual who spends at least 183 days in the
United States would not be subject to section 871(a)(2).\254\
However, under the substantial presence test under section
7701(b), certain days of physical presence in the United States
are not counted for purposes of meeting the 183-day rule. This
includes days spent in the United States in which the
individual regularly commutes to employment (or self-
employment) in the United States from Canada or Mexico; the
individual is in transit between two points outside the United
States and is physically present in the United States for less
than 24 hours; the individual is temporarily present in the
United States as a regular member of the crew of a foreign
vessel engaged in transportation between the United States and
a foreign country or U.S. possession; and certain exempt
individuals. These exceptions from counting physical presence
in the United States do not apply, however, for purposes of the
special rule under section 871(a)(2). Thus, it is possible in
certain cases for an individual to be present in the United
States for at least 183 days without being treated as a U.S.
resident under the substantial presence test of section
7701(b).\255\
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\254\ See the American Law Institute, Federal Income Tax Project,
International Aspects of United States Income Taxation, Proposals of
the American Law Institute on United States Taxation of Foreign Persons
and of the Foreign Income of United States Persons, at 112-113 (1987)
(recommending that sec. 871(a)(2) be eliminated and stating ``[u]nder
Section 7701(b), enacted in 1984, an individual physically present in
the U.S. for 183 days in a calendar year is considered a resident,
taxable at net income rates on all of his income; and accordingly the
justification for Section 871(a)(2) no longer exists.'' [footnotes
omitted]).
\255\ It should be noted that there also is a difference with
respect to the year over which the 183-day rule is measured for
purposes of the substantial presence test and the rule under sec.
871(a)(2). The sec. 871(a)(2) tax applies to 183 days or more of
presence in the United States during the taxable year, while the
substantial presence test under sec. 7701(b) applies to 183 days or
more of presence in the United States during the calendar year. In most
cases, however, a nonresident individual's taxable year is the calendar
year. Secs. 7701(b)(9) and 871(a)(2).
---------------------------------------------------------------------------
Even if an individual spends at least 183 days in the
United States but is not treated as a U.S. resident under
section 7701(b), the nonresident individual's capital gains
generally will be treated as foreign-source income and, thus,
not subject to section 871(a)(2). In this regard, capital gains
generally are from foreign sources if the individual is a
nonresident, and from U.S. sources if the individual is a U.S.
resident. Under a special rule, an individual is treated as a
U.S. resident for sales of personal property (including sales
giving rise to capital gains) if the individual has a tax home
in the United States. This rule applies even if the individual
is treated as a nonresident for other U.S. tax purposes. An
individual's capital gains would be treated as U.S.-source
income and potentially subject to section 871(a)(2) if the
individual is treated as a U.S. resident under this special
rule.\256\
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\256\ The individual's income also could be treated as U.S.-source
income under sec. 865(e)(2) if the individual derives income from the
sale of personal property that is attributable to an office or other
fixed place of business that the individual maintains in the United
States. However, sec. 871(a)(2) would not apply if the income is
effectively connected with a U.S. trade or business, or if the sale
qualifies for the exception from U.S.-source treatment as a result of a
material participation in the sale by a foreign office of the taxpayer.
---------------------------------------------------------------------------
Even in the limited cases in which the special rule under
section 871(a)(2) could potentially apply, a tax treaty might
prevent its application.\257\
---------------------------------------------------------------------------
\257\ Under Article 13(5) of the U.S. model income tax treaty,
subject to certain exceptions, the capital gains of a nonresident
individual are exempt from U.S. taxation.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision repeals the special tax on certain capital
gains of nonresident aliens under section 871(a)(2).
Effective date.--The provision is effective for taxable
years beginning after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not contain the Senate
amendment provision.
21. Modify FIRPTA rules for real estate investment trusts (sec. 230 of
the Senate amendment and secs. 857 and 897 of the Code)
PRESENT LAW
A real estate investment trust (``REIT'') is a U.S.
entity that derives most of its income from passive real
estate-related investments. A REIT must satisfy a number of
tests on an annual basis that relate to the entity's
organizational structure, the source of its income, and the
nature of its assets. If an electing entity meets the
requirements for REIT status, the portion of its income that is
distributed to its investors each year generally is treated as
a dividend deductible by the REIT, and includible in income by
its investors. In this manner, the distributed income of the
REIT is not taxed at the entity level. The distributed income
is taxed only at the investor level. A REIT generally is
required to distribute 90 percent of its income to its
investors before the end of its taxable year.
Special U.S. tax rules apply to gains of foreign persons
attributable to dispositions of interests in U.S. real
property, including certain transactions involving REITs. The
rules governing the imposition and collection of tax on such
dispositions are contained in a series of provisions that were
enacted in 1980 and that are collectively referred to as the
Foreign Investment in Real Property Tax Act (``FIRPTA'').
In general, FIRPTA provides that gain or loss of a
foreign person from the disposition of a U.S. real property
interest is taken into account for U.S. tax purposes as if such
gain or loss were effectively connected with a U.S. trade or
business during the taxable year. Accordingly, foreign persons
generally are subject to U.S. tax on any gain from a
disposition of a U.S. real property interest at the same rates
that apply to similar income received by U.S. persons. For
these purposes, the receipt of a distribution from a REIT is
treated as a disposition of a U.S. real property interest by
the recipient to the extent that it is attributable to a sale
or exchange of a U.S. real property interest by the REIT. These
capital gains distributions from REITs generally are subject to
withholding tax at a rate of 35 percent (or a lower treaty
rate). In addition, the recipients of these capital gains
distributions are required to file Federal income tax returns
in the United States, since the recipients are treated as
earning income effectively connected with a U.S. trade or
business.
In addition, foreign corporations that have effectively
connected income generally are subject to the branch profits
tax at a 30-percent rate (or a lower treaty rate).
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision removes from treatment as effectively
connected income for a foreign investor a capital gain
distribution from a REIT, provided that (1) the distribution is
received with respect to a class of stock that is regularly
traded on an established securities market located in the
United States and (2) the foreign investor does not own more
than five percent of the class of stock at any time during the
taxable year within which the distribution is received.
Thus, a foreign investor is not required to file a U.S.
Federal income tax return by reason of receiving such a
distribution. The distribution is to be treated as a REIT
dividend to that investor, taxed as a REIT dividend that is not
a capital gain. Also, the branch profits tax no longer applies
to such a distribution.
Effective date.--The provision applies to taxable years
beginning after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
22. Exclusion of certain horse-racing and dog-racing gambling winnings
from the income of nonresident alien individuals (sec. 232 of
the Senate amendment and sec. 872 of the Code)
PRESENT LAW
Under section 871, certain items of gross income received
by a nonresident alien from sources within the United States
are subject to a flat 30-percent withholding tax. Gambling
winnings received by a nonresident alien from wagers placed in
the United States are U.S.-source and thus generally are
subject to this withholding tax, unless exempted by treaty.
Currently, several U.S. income tax treaties exempt U.S.-source
gambling winnings of residents of the other treaty country from
U.S. withholding tax. In addition, no withholding tax is
imposed under section 871 on the non-business gambling income
of a nonresident alien from wagers on the following games
(except to the extent that the Secretary determines that
collection of the tax would be administratively feasible):
blackjack, baccarat, craps, roulette, and big-6 wheel. Various
other (non-gambling-related) items of income of a nonresident
alien are excluded from gross income under section 872(b) and
are thereby exempt from the 30-percent withholding tax, without
any authority for the Secretary to impose the tax by
regulation. In cases in which a withholding tax on gambling
winnings applies, section 1441(a) of the Code requires the
party making the winning payout to withhold the appropriate
amount and makes that party responsible for amounts not
withheld.
With respect to gambling winnings of a nonresident alien
resulting from a wager initiated outside the United States on a
pari-mutuel \258\ event taking place within the United States,
the source of the winnings, and thus the applicability of the
30-percent U.S. withholding tax, depends on the type of
wagering pool from which the winnings are paid. If the payout
is made from a separate foreign pool, maintained completely in
a foreign jurisdiction (e.g., a pool maintained by a racetrack
or off-track betting parlor that is showing in a foreign
country a simulcast of a horse race taking place in the United
States), then the winnings paid to a nonresident alien
generally would not be subject to withholding tax, because the
amounts received generally would not be from sources within the
United States. However, if the payout is made from a ``merged''
or ``commingled'' pool, in which betting pools in the United
States and the foreign country are combined for a particular
event, then the portion of the payout attributable to wagers
placed in the United States could be subject to withholding
tax. The party making the payment, in this case a racetrack or
off-track betting parlor in a foreign country, would be
responsible for withholding the tax.
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\258\ In pari-mutuel wagering (common in horse racing), odds and
payouts are determined by the aggregate bets placed. The money wagered
is placed into a pool, the party maintaining the pool takes a
percentage of the total, and the bettors effectively bet against each
other. Pari-mutuel wagering may be contrasted with fixed-odds wagering
(common in sports wagering), in which odds (or perhaps a point spread)
are agreed to by the bettor and the party taking the bet and are not
affected by the bets placed by other bettors.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision provides an exclusion from gross income
under section 872(b) for winnings paid to a nonresident alien
resulting from a legal wager initiated outside the United
States in a pari-mutuel pool on a live horse or dog race in the
United States, regardless of whether the pool is a separate
foreign pool or a merged U.S.-foreign pool.
Effective date.--The provision is effective for wagers
made after the date of enactment of the provision.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
23. Limitation of withholding on U.S.-source dividends paid to Puerto
Rico corporation (sec. 233 of the Senate amendment and secs.
881 and 1442 of the Code)
PRESENT LAW
In general, dividends paid by corporations organized in
the United States \259\ to corporations organized outside of
the United States and its possessions are subject to U.S.
income tax withholding at the flat rate of 30 percent. The rate
may be reduced or eliminated under a tax treaty. Dividends paid
by U.S. corporations to corporations organized in certain U.S.
possessions are subject to different rules.\260\ Corporations
organized in the U.S. possessions of the Virgin Islands, Guam,
American Samoa or the Northern Mariana Islands are not subject
to withholding tax on dividends from corporations organized in
the United States, provided that certain local ownership and
activity requirements are met. Each of those possessions have
adopted local internal revenue codes that provide a zero rate
of withholding tax on dividends paid by corporations organized
in the possession to corporations organized in the United
States.
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\259\ The term ``United States'' does not include its possessions.
Sec. 7701(a)(9).
\260\ The usual method of effecting a mitigation of the flat 30
percent rate--an income tax treaty providing for a lower rate--is not
possible in the case of a possession. See S. Rep. No. 1707, 89th Cong.,
2d Sess. 34 (1966).
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Under the tax laws of Puerto Rico, which is also a U.S.
possession, a 10 percent withholding tax is imposed on
dividends paid by Puerto Rico corporations to non-Puerto Rico
corporations.\261\ Dividends paid by corporations organized in
the United States to Puerto Rico corporations are subject to
U.S. withholding tax at a 30 percent rate. Under Puerto Rico
law, Puerto Rico corporations may elect to credit their U.S.
income taxes against their Puerto Rico income taxes. Creditable
income taxes include the 30 percent dividend withholding tax
and the underlying U.S. corporate tax attributable to the
dividends. However, a Puerto Rico corporation's tax credit for
U.S. income taxes may be limited because the sum of the U.S.
withholding tax and the underlying U.S. corporate tax generally
exceeds the amount of Puerto Rico corporate income tax imposed
on the dividend. Consequently, Puerto Rico corporations with
subsidiaries organized in the United States may be subject to
some degree of double taxation on their U.S. subsidiaries'
earnings.
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\261\ The 10 percent withholding rate may be subject to exemption
or elimination if the dividend is paid out of income that is subject to
certain tax incentives offered by Puerto Rico. These tax incentives may
also reduce the rate of underlying Puerto Rico corporate tax to a flat
rate of between two and seven percent.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision lowers the withholding income tax rate on
U.S. source dividends paid to a corporation created or
organized in Puerto Rico from 30 percent to 10 percent, to
create parity with the generally applicable 10 percent
withholding tax imposed by Puerto Rico on dividends paid to
U.S. corporations. The lower rate applies only if the same
local ownership and activity requirements are met that are
applicable to corporations organized in other possessions
receiving dividends from corporations organized in the United
States.
Effective date.--The provision is effective for dividends
paid after date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with modifications. Under the provision as modified, if the
generally applicable withholding tax rate imposed by Puerto
Rico on dividends paid to U.S. corporations increases to
greater than 10 percent, the U.S. withholding rate on dividends
to Puerto Rico corporations reverts to 30 percent.
24. Require Commerce Department report on adverse decisions of the
World Trade Organization (sec. 234 of the Senate amendment)
PRESENT LAW
The Secretary of Commerce does not have an obligation to
transmit any future report to the Senate Committee on Finance
and the House of Representatives Committee on Ways and Means,
in consultation with the United States Trade Representative,
regarding whether dispute settlement panels or the Appellate
Body of the World Trade Organization have (1) added to or
diminished the rights of the United States by imposing
obligations and restrictions on the use of antidumping,
countervailing, or safeguard measures not agreed to under the
World Trade Organization Antidumping Agreement, the Agreement
on Subsidies and Countervailing Measures, or the Agreement on
Safeguards; (2) appropriately applied the standard of review
contained in Article 17.6 of the Antidumping Agreement; or (3)
exceeded its authority or terms of reference.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision requires that by no later than March 31,
2004, the Secretary of Commerce, in consultation with the
United States Trade Representative, shall transmit a report to
the Senate Committee on Finance and the House of
Representatives Committee on Ways and Means regarding whether
dispute settlement panels or the Appellate Body of the World
Trade Organization have (1) added to or diminished the rights
of the United States by imposing obligations and restrictions
on the use of antidumping, countervailing, or safeguard
measures not agreed to under the World Trade Organization
Antidumping Agreement, the Agreement on Subsidies and
Countervailing Measures, or the Agreement on Safeguards; (2)
appropriately applied the standard of review contained in
Article 17.6 of the Antidumping Agreement; or (3) exceeded its
authority or terms of reference.
Effective date.--The provision is effective on the date
of enactment.
CONFERENCE AGREEMENT
The conference agreement does not contain the Senate
amendment provision.
25. Study of impact of international tax law on taxpayers other than
large corporations (sec. 235 of the Senate amendment)
PRESENT LAW
The United States employs a ``worldwide'' tax system,
under which U.S. persons (including domestic corporations)
generally are taxed on all income, whether derived in the
United States or abroad. In contrast, foreign persons
(including foreign corporations) are subject to U.S. tax only
on U.S.-source income and income that has a sufficient nexus to
the United States. The United States generally provides a
credit to U.S. persons for foreign income taxes paid or
accrued.\262\ 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 foreign-source income without
offsetting the U.S. tax on U.S.-source income.\263\
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\262\ Sec. 901.
\263\ Secs. 901, 904.
---------------------------------------------------------------------------
Within this basic framework, there are a variety of rules
that affect the U.S. taxation of cross-border transactions.
Detailed rules govern the determination of the source of income
and the allocation and apportionment of expenses between
foreign-source and U.S.-source income. Such rules are relevant
not only for purposes of determining the U.S. taxation of
foreign persons (because foreign persons are subject to U.S.
tax only on income that is from U.S. sources or otherwise has
sufficient U.S. nexus), but also for purposes of determining
the U.S. taxation of U.S. persons (because the U.S. tax on a
U.S. person's foreign-source income may be reduced or
eliminated by foreign tax credits). Authority is provided for
the reallocation of items of income and deductions between
related persons in order to ensure the clear reflection of the
income of each person and to prevent the avoidance of tax.
Although U.S. tax generally is not imposed on a foreign
corporation that operates abroad, several anti-deferral regimes
apply to impose current U.S. tax on certain income from foreign
operations of certain U.S.-owned foreign corporations.
A cross-border transaction potentially gives rise to tax
consequences in two (or more) countries. The tax treatment in
each country generally is determined under the tax laws of the
respective country. However, an income tax treaty between the
two countries may operate to coordinate the two tax regimes and
mitigate the double taxation of the transaction. In this
regard, the United States' network of bilateral income tax
treaties includes provisions affecting both U.S. and foreign
taxation of both U.S. persons with foreign income and foreign
persons with U.S. income.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision requires the Secretary of the Treasury or
the Secretary's delegate to conduct a study of the impact of
Federal international tax rules on taxpayers other than large
corporations, including the burdens placed on such taxpayers in
complying with such rules. In addition, not later than 180 days
after the date of the enactment of this provision, the
Secretary shall report to the Committee on Finance of the
Senate and the Committee on Ways and Means of the House of
Representatives the results of the study conducted as a result
of this provision, including any recommendations for
legislative or administrative changes to reduce the compliance
burden on taxpayers other than large corporations and for such
other purposes as the Secretary determines appropriate.
Effective date.--The provision is effective on the date
of enactment.
CONFERENCE AGREEMENT
The conference agreement does not contain the Senate
amendment provision.
26. Delay in effective date of final regulations governing exclusion of
income from international operations of ships and aircraft
(sec. 236 of the Senate amendment and sec. 883 of the Code)
PRESENT LAW
Section 883 generally provides an exemption from gross
income for earnings of a foreign corporation derived from the
international operation of ships and aircraft if an equivalent
exemption from tax is granted by the applicable foreign country
to corporations organized in the United States.
Treasury has issued regulations implementing the rules of
section 883 that are effective for taxable years beginning 30
days or more after August 26, 2003. The regulations provide, in
general, that a foreign corporation organized in a qualified
foreign country and engaged in the international operation of
ships or aircraft shall exclude qualified income from gross
income for purposes of United States Federal income taxation,
provided that the corporation can satisfy certain ownership and
related documentation requirements. The proposed rules explain
when a foreign country is a qualified foreign country and what
income is considered to be qualified income.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision delays the effective date for the Treasury
regulations so that they apply to taxable years of foreign
corporations seeking qualified foreign corporation status
beginning after December 31, 2004.
Effective date.--The provision is effective after date of
enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
except the regulations apply to taxable years of foreign
corporations seeking qualified foreign corporation status
beginning after September 24, 2004.
27. Interest payments deductible where taxpayer could have borrowed
without a guarantee (sec. 237 of the Senate amendment and sec.
163(j) of the Code)
PRESENT LAW
Present law provides rules to limit the ability of U.S.
corporations to reduce the U.S. tax on their U.S.-source income
through earnings stripping transactions. These rules limit the
deductibility of interest paid to certain related parties
(``disqualified interest''), if the payor's debt-equity ratio
exceeds 1.5 to 1 and the payor's net interest expense exceeds
50 percent of its ``adjusted taxable income'' (generally
taxable income computed without regard to deductions for net
interest expense, net operating losses, and depreciation,
amortization, and depletion).
Disqualified interest for these purposes also may include
interest paid to unrelated parties in certain cases in which a
related party guarantees the debt.
HOUSE BILL
No provision.
SENATE AMENDMENT
Under the provision, a foreign related-party guarantee
does not trigger the earnings stripping rules to the extent of
the amount of debt that the taxpayer establishes (to the
satisfaction of the Treasury Secretary) that it could have
borrowed without the guarantee.
Effective date.--The provision is effective for
guarantees issued on or after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not contain the Senate
amendment provision.
TITLE IV--EXTENSION OF CERTAIN EXPIRING PROVISIONS
28. Nonrefundable personal credits allowed against the alternative
minimum tax (``AMT'') (sec. 401 of the House bill, sec. 713 of
the Senate amendment, and sec. 26 of the Code)
PRESENT LAW
Present law provides for certain nonrefundable personal
tax credits (i.e., the dependent care credit, the credit for
the elderly and disabled, the adoption credit, the child tax
credit,\264\ the credit for interest on certain home mortgages,
the HOPE Scholarship and Lifetime Learning credits, the credit
for savers, and the D.C. first-time homebuyer credit).
---------------------------------------------------------------------------
\264\ A portion of the child credit may be refundable.
---------------------------------------------------------------------------
For taxable years beginning before 2006, 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 2005, the credits
(other than the adoption credit, child credit and credit for
savers) 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.
HOUSE BILL \265\
The House bill allows all nonrefundable personal credits
against the AMT.
---------------------------------------------------------------------------
\265\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--Taxable years beginning in 2004 and
2005.
SENATE AMENDMENT \266\
The Senate amendment allows all nonrefundable personal
credits against the AMT.
---------------------------------------------------------------------------
\266\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--Taxable years beginning in 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
29. Extension and modification of the research credit (sec. 402 of the
House bill, secs. 311 and 312 of the Senate amendment, and sec.
41 of the Code)
PRESENT LAW
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. Taxpayers may elect an alternative incremental research
credit regime in which the taxpayer is assigned a three-tiered
fixed-base percentage 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 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.
The research tax credit generally applies to amounts paid
or incurred before January 1, 2006.
HOUSE BILL \267\
The House bill extends the present-law research credit to
qualified amounts paid or incurred before January 1, 2006.
---------------------------------------------------------------------------
\267\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision is effective for amounts
paid or incurred after June 30, 2004.
SENATE AMENDMENT \268\
The Senate amendment is the same as the House bill with
respect to extension of the present-law research credit. In
addition, the Senate amendment makes the following
modifications:
---------------------------------------------------------------------------
\268\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
(4) Increases the credit rates of the alternative
incremental credit to three percent, four percent, and
five percent.
(5) Creates a third alternative for taxpayers, the
alternative simplified credit. The taxpayer may elect
to claim a credit equal to 12 percent of qualified
research expenses in excess of 50 percent of the
average qualified research expenses for the preceding
three taxable years.
(6) Permits taxpayers to claim a credit equal to 20
percent of amounts paid to certain research consortia.
The provision also permits taxpayers to include 100
percent of contract research expenses (rather than 65 percent)
if the contractor is an eligible small business, a college or
university, or a Federal laboratory.
Effective date.--With respect to extension of the
present-law research credit, the provision is effective for
amounts paid or incurred after the date of enactment.
With respect to the increase in the alternative
incremental credit and the alternative simplified credit, the
provisions are effective for taxable years beginning after
December 31, 2004.
With respect to payments to research consortia and
certain contract research, the provisions are effective for
amounts paid or incurred after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or Senate amendment provision.
30. Extension of credit for electricity produced from certain renewable
resources (sec. 403 of the House bill, secs. 714 and 801 of the
Senate amendment, 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.
The amount of the credit is 1.8 cents per kilowatt hour for
2004. The credit amount is indexed for inflation.
The credit applies to electricity produced by a wind
energy facility placed in service after December 31, 1993, and
before January 1, 2006, to electricity produced by a closed-
loop biomass facility placed in service after December 31,
1992, and before January 1, 2006, and to a poultry waste
facility placed in service after December 31, 1999, and before
January 1, 2006. The credit is allowable for production during
the 10-year period after a facility is originally placed in
service.
HOUSE BILL \269\
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.
Does not extend the placed-in-service date for poultry waste
facilities.
---------------------------------------------------------------------------
\269\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision is effective for
facilities placed in service after December 31, 2003.
SENATE AMENDMENT \270\
With respect to extension of the present-law credit, the
Senate amendment extends the placed-in-service date for wind,
closed-loop biomass, and poultry waste facilities to facilities
placed in service prior to January 1, 2007.
---------------------------------------------------------------------------
\270\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
(The Senate amendment would also expand the definition of
qualified facilities and make certain other modifications to
the operation of credit. These expansions and modifications are
described later in this document.)
Effective date.--With respect to the extension of the
placed-in-service dates, the provision is generally effective
for facilities placed in service after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or Senate amendment provision with respect to the extension of
present law, but it does make modifications to present law that
are described later in this document.
31. Indian employment tax credit (sec. 404 of the House bill, sec. 716
of the Senate amendment, and sec. 45A of the Code)
PRESENT LAW
In general, a credit against income tax liability is
allowed to employers for the first $20,000 of qualified wages
and qualified employee health insurance costs paid or incurred
by the employer with respect to certain employees. 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, 2006.
HOUSE BILL \271\
The provision extends the Indian employment credit
incentive for one year (to taxable years beginning before
January 1, 2006).
---------------------------------------------------------------------------
\271\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision is effective on the date
of enactment.
SENATE AMENDMENT \272\
Same as the House bill.
---------------------------------------------------------------------------
\272\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
32. Extension of the work opportunity tax credit (sec. 405 of the House
bill, sec. 702 of the Senate amendment, and sec. 51 of the
Code)
PRESENT LAW
Work opportunity tax credit
Targeted groups eligible for the credit
The work opportunity tax credit is available on an
elective basis for employers hiring individuals from one or
more of eight targeted groups. The eight targeted groups are:
(1) certain families eligible to receive benefits under the
Temporary Assistance for Needy Families Program; (2) high-risk
youth; (3) qualified ex-felons; (4) vocational rehabilitation
referrals; (5) qualified summer youth employees; (6) qualified
veterans; (7) families receiving food stamps; and (8) persons
receiving certain Supplemental Security Income (SSI) benefits.
A qualified ex-felon is an individual certified as: (1)
having been convicted of a felony under State or Federal law;
(2) being a member of an economically disadvantaged family; and
(3) having a hiring date within one year of release from prison
or conviction.
Qualified wages
Generally, qualified wages are defined as cash wages paid
by the employer to a member of a targeted group. The employer's
deduction for wages is reduced by the amount of the credit.
Calculation of the credit
The credit equals 40 percent (25 percent for employment
of 400 hours or less) of qualified first-year wages. Generally,
qualified first-year wages are qualified wages (not in excess
of $6,000) attributable to service rendered by a member of a
targeted group during the one-year period beginning with the
day the individual began work for the employer. Therefore, the
maximum credit per employee is $2,400 (40 percent of the first
$6,000 of qualified first-year wages). With respect to
qualified summer youth employees, the maximum credit is $1,200
(40 percent of the first $3,000 of qualified first-year wages).
Minimum employment period
No credit is allowed for qualified wages paid to
employees who work less than 120 hours in the first year of
employment.
Coordination of the work opportunity tax credit and the welfare-to-work
tax credit
An employer cannot claim the work opportunity tax credit
with respect to wages of any employee on which the employer
claims the welfare-to-work tax credit.
Other rules
The work opportunity tax credit is not allowed for wages
paid to a relative or dependent of the taxpayer. Similarly
wages paid to replacement workers during a strike or lockout
are not eligible for the work opportunity tax credit. Wages
paid to any employee during any period for which the employer
received on-the-job training program payments with respect to
that employee are not eligible for the work opportunity tax
credit. The work opportunity tax credit generally is not
allowed for wages paid to individuals who had previously been
employed by the employer. In addition, many other technical
rules apply.
Expiration
The credit is effective for wages paid or incurred to a
qualified individual who begins work for an employer before
January 1, 2006.
HOUSE BILL \273\
The House bill extends the WOTC for two years (through
December 31, 2005).
---------------------------------------------------------------------------
\273\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--Wages paid or incurred for individuals
beginning work after December 31, 2003.
SENATE AMENDMENT \274\
The Senate amendment permanently extends the WOTC.
---------------------------------------------------------------------------
\274\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of
2004''),which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
The Senate amendment also makes the following
modifications to the WOTC:
(1) repeals the requirement that a qualified ex-
felon be a member of an economically disadvantaged
family for purposes of eligibility for the tax credit;
(2) expands the category of vocational
rehabilitation referrals to include certain individuals
who have a physical or mental disability that
constitutes a substantial handicap to employment and
who are receiving vocational services or have completed
an individual work plan developed by a private
employment network as defined under section 1148(f) of
the Social Security Act qualify as members of the
vocational rehabilitation referral targeted group.
(3) increases the age limit for qualified food
stamp recipients. Therefore a food stamp recipient is
an individual aged 18 but not aged 40 certified as
being a member of a family either currently or recently
receiving assistance under an eligible food stamp
program.
(4) increases the age limit for high-risk youths.
Therefore a high-risk youth is an individual aged 18
but not aged 40 having a principal place of abode
within an empowerment zone, enterprise community, or
renewal community.
Effective date.--The extension is effective for wages
paid or incurred for individuals beginning work after December
31, 2003. The modifications are effective for wages paid or
incurred for individuals beginning work after December 31,
2004.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
33. Extension of the welfare-to-work tax credit (sec. 406 of the House
bill, sec. 702 of the Senate amendment, and sec. 51A of the
Code)
PRESENT LAW
Welfare-to-work tax credit
Targeted group eligible for the credit
The welfare-to-work tax credit is available on an
elective basis to employers of qualified long-term family
assistance recipients. Qualified long-term family assistance
recipients are: (1) members of a family that has received
family assistance for at least 18 consecutive months ending on
the hiring date; (2) members of a family that has received such
family assistance for a total of at least 18 months (whether or
not consecutive) after August 5, 1997 (the date of enactment of
the welfare-to-work tax credit) if they are hired within 2
years after the date that the 18-month total is reached; and
(3) members of a family who are no longer eligible for family
assistance because of either Federal or State time limits, if
they are hired within 2 years after the Federal or State time
limits made the family ineligible for family assistance.
Qualified wages
Qualified wages for purposes of the welfare-to-work tax
credit are defined more broadly than the work opportunity tax
credit. Unlike the definition of wages for the work opportunity
tax credit which includes simply cash wages, the definition of
wages for the welfare-to-work tax credit includes cash wages
paid to an employee plus amounts paid by the employer for: (1)
educational assistance excludable under a section 127 program
(or that would be excludable but for the expiration of sec.
127); (2) health plan coverage for the employee, but not more
than the applicable premium defined under section 4980B(f)(4);
and (3) dependent care assistance excludable under section 129.
The employer's deduction for wages is reduced by the amount of
the credit.
Calculation of the credit
The welfare-to-work tax credit is available on an
elective basis to employers of qualified long-term family
assistance recipients during the first two years of employment.
The maximum credit is 35 percent of the first $10,000 of
qualified first-year wages and 50 percent of the first $10,000
of qualified second-year wages. Qualified first-year wages are
defined as qualified wages (not in excess of $10,000)
attributable to service rendered by a member of the targeted
group during the one-year period beginning with the day the
individual began work for the employer. Qualified second-year
wages are defined as qualified wages (not in excess of $10,000)
attributable to service rendered by a member of the targeted
group during the one-year period beginning immediately after
the first year of that individual's employment for the
employer. The maximum credit is $8,500 per qualified employee.
Minimum employment period
No credit is allowed for qualified wages paid to a member
of the targeted group unless they work at least 400 hours or
180 days in the first year of employment.
Coordination of the work opportunity tax credit and the welfare-to-work
tax credit
An employer cannot claim the work opportunity tax credit
with respect to wages of any employee on which the employer
claims the welfare-to-work tax credit.
Other rules
The welfare-to-work tax credit incorporates directly or
by reference many of these other rules contained on the work
opportunity tax credit.
Expiration
The welfare to work credit is effective for wages paid or
incurred to a qualified individual who begins work for an
employer before January 1, 2006.
HOUSE BILL \275\
---------------------------------------------------------------------------
\275\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
The House bill extends the WWTC for two years (through
December 31, 2005).
Effective date.--The provision is effective for wages
paid or incurred for individuals beginning work after December
31, 2003.
SENATE AMENDMENT \276\
---------------------------------------------------------------------------
\276\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
The Senate amendment permanently extends the WWTC.
Effective date.--Wages paid or incurred for individuals
beginning work after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
34. Combination and modification of the work opportunity tax credit and
the welfare-to-work tax credit (sec. 703 of the Senate
amendment and sec. 51 of the Code)
PRESENT LAW
Same as items 5 and 6, above.
HOUSE BILL \277\
---------------------------------------------------------------------------
\277\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
No provision.
SENATE AMENDMENT \278\
---------------------------------------------------------------------------
\278\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
The Senate amendment combines and modifies the work
opportunity and welfare-to-work tax credits with the following
modifications:
The combined credit uses the WOTC definition of wages; in
the case of first-year wages for long-term family assistance
recipients the maximum credit is increased to $4,000 (40
percent of the first $10,000 of qualified first-year wages);
The combined credit uses the WOTC definition for the
minimum employment period (i.e., the combined credit is not
allowed for qualified wages paid to employees who work less
than 120 hours in the first year of employment).
Effective date.--The provision is effective for wages
paid or incurred for individuals beginning work after December
31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
35. Certain expenses of elementary and secondary school teachers (sec.
407 of the House bill, sec. 707 of the Senate amendment, and
sec. 62 of the Code)
PRESENT LAW
In general, ordinary and necessary business expenses are
deductible (sec. 162). However, in general, unreimbursed
employee business expenses are deductible only as an itemized
deduction and only to the extent that the individual's total
miscellaneous deductions (including employee business expenses)
exceed two percent of adjusted gross income. An individual's
otherwise allowable itemized deductions may be further limited
by the overall limitation on itemized deductions, which reduces
itemized deductions for taxpayers with adjusted gross income in
excess of $142,700 (for 2004). In addition, miscellaneous
itemized deductions are not allowable under the alternative
minimum tax.
Certain expenses of eligible educators are allowed an
above-the-line deduction. Specifically, for taxable years
beginning prior to January 1, 2006, an above-the-line deduction
is allowed for up to $250 annually of expenses paid or incurred
by an eligible educator for books, supplies (other than
nonathletic supplies for courses of instruction in health or
physical education), computer equipment (including related
software and services) and other equipment, and supplementary
materials used by the eligible educator in the classroom. To be
eligible for this deduction, the expenses must be otherwise
deductible under 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), section 529(c)(1)
(relating to qualified tuition programs), and section 530(d)(2)
(relating to Coverdell education savings accounts).
An eligible educator is a kindergarten through grade 12
teacher, instructor, counselor, principal, or aide in a school
for at least 900 hours during a school year. A school means any
school which provides elementary education or secondary
education, as determined under State law.
The above-the-line deduction for eligible educators is
not allowed for taxable years beginning after December 31,
2005.
HOUSE BILL \279\
---------------------------------------------------------------------------
\279\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
The House bill allows the above-the-line deduction for
taxable years beginning prior to January 1, 2006.
Effective date.--The provision is effective for taxable
years beginning in 2004 and 2005.
SENATE AMENDMENT \280\
---------------------------------------------------------------------------
\280\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
36. Accelerated depreciation for business property on Indian
reservations (sec. 408 of the House bill, sec. 717 of the
Senate amendment, and sec. 168 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,
2006.
HOUSE BILL \281\
The provision extends eligibility for the special
depreciation periods to property placed in service before
January 1, 2006.
---------------------------------------------------------------------------
\281\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision is effective on the date
of enactment.
SENATE AMENDMENT \282\
Same as the House bill.
---------------------------------------------------------------------------
\282\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
37. Charitable contributions of computer technology and equipment used
for educational purposes and of scientific property used for
research (sec. 409 of the House bill, sec. 706 of the Senate
amendment, and sec. 170 of the Code)
PRESENT LAW
A deduction for charitable contributions of computer
technology and equipment and of scientific property used for
research generally is limited to the taxpayer's basis in the
property. However, certain corporations may claim a deduction
in excess of basis for a qualified computer contribution or a
qualified research contribution. To be eligible for the
enhanced deduction, the contributed property must be
constructed by the taxpayer, among other requirements. The
enhanced deduction for qualified computer contributions expires
for contributions made during any taxable year beginning after
December 31, 2005.
HOUSE BILL \283\
---------------------------------------------------------------------------
\283\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
The House bill extends the enhanced deduction for
qualified computer contributions to contributions made during
any taxable year beginning before January 1, 2006.
Effective date.--Taxable years beginning after December
31, 2003.
SENATE AMENDMENT \284\
---------------------------------------------------------------------------
\284\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
The Senate amendment expands the enhanced deduction for
qualified computer contributions and qualified research
contributions to apply to property assembled by the taxpayer as
well as property constructed by the taxpayer.
The extension of the enhanced deduction for qualified
computer contributions is the same as the House bill.
Effective date.--The Senate amendment is effective for
taxable years beginning after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
38. Expensing of environmental remediation costs (sec. 410 of the House
bill, sec. 708 of the Senate amendment, 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. 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 (so called ``brownfields'').
Eligible expenditures are those paid or incurred before
January 1, 2006.
HOUSE BILL \285\
---------------------------------------------------------------------------
\285\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
The House bill 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.
SENATE AMENDMENT \286\
---------------------------------------------------------------------------
\286\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or Senate amendment provision.
39. Availability of Archer medical savings accounts (sec. 411 of the
House bill and sec. 220 of the Code)
PRESENT LAW
In general
Within limits, contributions to an Archer medical savings
account (``Archer MSA'') are deductible in determining adjusted
gross income if made by an eligible individual and are
excludable from gross income and wages for employment tax
purposes if made by the employer of an eligible individual.
Earnings on amounts in an Archer MSA are not currently taxable.
Distributions from an Archer MSA for medical expenses are not
includible in gross income. Distributions not used for 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.\287\ 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.
---------------------------------------------------------------------------
\287\ Self-employed individuals include more than two-percent
shareholders of S corporations who are treated as partners for purposes
of fringe benefit rules pursuant to section 1372.
---------------------------------------------------------------------------
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.\288\ 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.
---------------------------------------------------------------------------
\288\ These dollar amounts are for 2004. These amounts are indexed
for inflation, rounded to the nearest $50.
---------------------------------------------------------------------------
Cap on taxpayers utilizing Archer MSAs and expiration of pilot program
The number of taxpayers benefiting annually from an
Archer MSA contribution is limited to a threshold level
(generally 750,000 taxpayers). The number of Archer MSAs
established has not exceeded the threshold level.
After 2005, no new contributions may be made to Archer
MSAs except by or on behalf of individuals who previously made
(or had made on their behalf) Archer MSA contributions and
employees who are employed by a participating employer.
Trustees of Archer MSAs are generally required to make
reports to the Treasury by August 1 regarding Archer MSAs
established by July 1 of that year. If any year is a cut-off
year, the Secretary is required to make and publish such
determination by October 1 of such year.
The reports required by MSA trustees for 2004 are treated
as timely if made within 90 days after October 4, 2004. 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 October 4, 2004. If 2004 is a cut-off year, the
cut-off date will be the last day of such 120-day period.
HOUSE BILL \289\
The House bill extends Archer MSAs through December 31,
2005.
---------------------------------------------------------------------------
\289\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision is effective for January
1, 2004.
SENATE AMENDMENT \290\
No provision.
---------------------------------------------------------------------------
\290\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or Senate amendment provision.
40. Suspension of 100-percent-of-net-income limitation on percentage
depletion for oil and gas from marginal wells (sec. 412 of the
House bill, secs. 715 and 846 of the Senate amendment, 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.\291\ 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.
---------------------------------------------------------------------------
\291\ Treas. Reg. sec. 1.611-1(b)(1).
---------------------------------------------------------------------------
Cost depletion
Two methods of depletion are currently allowable under
the Code: (1) the cost depletion method, and (2) the percentage
depletion method.\292\ 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 the 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.
---------------------------------------------------------------------------
\292\ Secs. 611-613.
---------------------------------------------------------------------------
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.\293\ 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.\294\ The amount deducted generally may not exceed 100
percent of the net income from that property in any year (the
``net-income limitation'').\295\ The 100-percent net-income
limitation for marginal wells has been suspended for taxable
years beginning after December 31, 1997, and before January 1,
2006.
---------------------------------------------------------------------------
\293\ Sec. 613A.
\294\ Sec. 613A(c).
\295\ Sec. 613(a).
---------------------------------------------------------------------------
HOUSE BILL \296\
The provision extends the suspension of the net-income
limitation for marginal wells for taxable years beginning
before January 1, 2006.
---------------------------------------------------------------------------
\296\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision is effective for taxable
years beginning after December 31, 2003.
SENATE AMENDMENT \297\
The Senate amendment extends the suspension of the net-
income limitation for marginal wells for taxable years
beginning before January 1, 2007.
---------------------------------------------------------------------------
\297\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--Same as the House bill.
CONFERENCE AGREEMENT
The conference agreement does not contain the House bill
or Senate amendment provision.
41. Qualified zone academy bonds (sec. 413 of the House bill, secs. 612
and 704 of the Senate amendment, and sec. 1397E of the Code)
PRESENT LAW
Generally, ``qualified zone academy bonds'' are bonds
issued by a State or local government, provided that at least
95 percent of the proceeds are used for one or more qualified
purposes with respect to a ``qualified zone academy'' and
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.
Qualified purposes with respect to any qualified zone academy
are: (1) rehabilitating or repairing the public school facility
in which the academy is established; (2) providing equipment
for use at such academy; (3) developing course materials for
education at such academy, and (4) training teachers and other
school personnel. A total of $400 million of qualified zone
academy bonds may be issued annually in calendar years 1998
through 2005.
HOUSE BILL \298\
The House bill authorizes $400 million of qualified zone
academy bonds to be issued in 2004 and 2005.
---------------------------------------------------------------------------
\298\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The House bill provision is effective
for obligations issued after the date of enactment.
SENATE AMENDMENT \299\
The Senate amendment expands the qualified purposes for
which qualified zone academy bonds may be issued to include
construction of the public school facility in which the
qualified zone academy is established, and the acquisition of
land on which the facility is to be constructed.
---------------------------------------------------------------------------
\299\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
The Senate amendment authorizes $400 million of qualified
zone academy bonds to be issued in 2004 and 2005.
Effective date.--The Senate amendment is effective for
obligations issued after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
42. Tax Incentives for Investment in the District of Columbia (sec. 414
of the House bill, sec. 711 of the Senate amendment, and secs.
1400, 1400A, and 1400C of the Code)
PRESENT LAW
Certain economically depressed census tracts within the
District of Columbia are designated as the District of Columbia
Enterprise Zone (the ``D.C. Zone'') within which businesses and
individual residents are eligible for special tax incentives.
The designation expires on December 31, 2005.
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
credit expires for property purchased after December 31, 2005.
HOUSE BILL \300\
The House bill extends the D.C. Zone designation and
related tax incentives for two years, and extends the first-
time homebuyer credit for two years.
---------------------------------------------------------------------------
\300\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision takes effect on the date
of enactment, except that the provision relating to tax-exempt
financing incentives, which applies to obligations issued after
December 31, 2003.
SENATE AMENDMENT \301\
Same as the House bill.
---------------------------------------------------------------------------
\301\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision takes effect on January 1,
2004, except that the provision relating to tax-exempt
financing incentives applies to obligations issued after the
date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
43. Modifications to New York Liberty Zone bond provisions (sec. 415 of
the House bill, secs. 611 and 709 of the Senate amendment, and
sec. 1400L of the Code)
PRESENT LAW
An aggregate of $8 billion in tax-exempt private activity
bonds is authorized for the purpose of financing the
construction and repair of infrastructure in New York City
(``Liberty Zone bonds''). The bonds must be issued before
January 1, 2010.
Certain bonds used to fund facilities located in New York
City are permitted one additional advance refunding before
January 1, 2006 (``advance refunding bonds''). In addition to
satisfying other requirements, the bond refunded must be (1) a
State or local bond that is a general obligation of New York
City, (2) a State or local bond issued by the New York
Municipal Water Finance Authority or Metropolitan
Transportation Authority of the City of New York, or (3) a
qualified 501(c)(3) bond which is a qualified hospital bond
issued by or on behalf of the State of New York or the City of
New York.\302\ The maximum amount of advance refunding bonds is
$9 billion.
---------------------------------------------------------------------------
\302\ On July 8, 2002, the IRS issued Notice 2002-42, which
provides that bonds issued by the Municipal Assistance Corporation for
the City of New York are eligible for the advance refunding provisions
of section 1400L(e) if they otherwise satisfy the requirements of that
section.
---------------------------------------------------------------------------
HOUSE BILL \303\
The House bill provision extends authority to issue
Liberty Zone bonds through December 31, 2009.
---------------------------------------------------------------------------
\303\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision is effective for bonds
issued after the date of enactment and before January 1, 2010.
SENATE AMENDMENT \304\
The Senate amendment extends authority to issue Liberty
Zone bonds through December 31, 2009, and extends the
additional advance refunding authority through December 31,
2005. The Senate amendment provides that bonds issued by the
Municipal Assistance Corporation are eligible for advance
refunding.
---------------------------------------------------------------------------
\304\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provisions extending authority to
issue Liberty Zone bonds and an additional advance refunding
are effective on the date of enactment. The provision relating
to the advance refunding of bonds of the Municipal Assistance
Corporation is effective as if included in the amendments made
by section 301 of the Job Creation and Worker Assistance Act of
2002.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
44. Qualified New York Liberty Zone leasehold improvement election out
(sec. 709(c) of the Senate amendment)
PRESENT LAW
Qualified New York Liberty Zone leasehold improvements
placed in service after September 10, 2001 and before January
1, 2007 are depreciable over five years (rather than 39 years)
using the straight line method of depreciation. There is no
election out of this provision.
Liberty Zone leasehold improvements that are eligible for
a five-year recovery period are not also eligible for the 30-
percent first-year bonus depreciation under section 168(k) or
1400L(b). A taxpayer may elect out of bonus depreciation. The
election out is made at the property class level. Section
168(k)(2)(C)(iii) provides that the election applies to all
property in the class or classes for which the election out is
made that is placed in service for the tax year of the
election.
HOUSE BILL \305\
No provision.
---------------------------------------------------------------------------
\305\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
SENATE AMENDMENT \306\
The Senate amendment permits a taxpayer to elect out of
the five-year recovery period for qualified New York Liberty
Zone leasehold improvement property under rules similar to
section 168(k)(2)(C)(iii).
---------------------------------------------------------------------------
\306\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The Senate amendment is effective as if
included in the amendments made by section 301 of the Job
Creation and Worker Assistance Act of 2002.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
45. Disclosures relating to terrorist activities (sec. 416 of the House
bill and sec. 6103 of the Code)
PRESENT LAW
In connection with terrorist activities, the IRS is
permitted to disclose return information, other than taxpayer
return information, to officers and employees of Federal law
enforcement upon a written request. The Code requires the
request to 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. Disclosure of the information is permitted to
officers and employees of the Federal law enforcement agency
who are 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.\307\ A taxpayer's
identity is not treated as taxpayer return information for
purposes of disclosures to law enforcement agencies regarding
terrorist activities.
---------------------------------------------------------------------------
\307\ Sec. 6103(i)(7)(A).
---------------------------------------------------------------------------
The Code permits the head of the Federal law enforcement
agency to 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 is required to be part of an investigative
or response team with the Federal law enforcement agency for
these disclosures to be made.\308\
---------------------------------------------------------------------------
\308\ Sec. 6103(i)(7)(A)(ii).
---------------------------------------------------------------------------
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.\309\
Taxpayer identity information for this purpose is not
considered taxpayer return information. Such written request is
required to set forth the specific reason or reasons why such
disclosure may be relevant to a terrorist incident, threat, or
activity. Disclosures under this authority are permitted to 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 are permitted solely for the use of
such officers and employees in such investigation, collection,
or analysis.
---------------------------------------------------------------------------
\309\ Sec. 6103(i)(7)(B).
---------------------------------------------------------------------------
The IRS, on its own initiative, is permitted to 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.\310\ Taxpayer identity information for this purpose is
not considered taxpayer return information. The head of the
agency is permitted to 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.
---------------------------------------------------------------------------
\310\ Sec. 6103(i)(3)(C).
---------------------------------------------------------------------------
If taxpayer return information is sought, the disclosure
is required to 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, 2005.
HOUSE BILL \311\
The House bill provision extends all disclosure authority
relating to terrorist activities through December 31, 2005. The
House bill provision permits the disclosure of taxpayer
identity upon receiving a proper written request from the head
of a Federal law enforcement agency.
---------------------------------------------------------------------------
\311\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The House bill generally applies to
disclosures made on or after the date of enactment. The
provision permitting the disclosure of taxpayer identity upon
receiving a proper written request from the head of a Federal
law enforcement agency is effective as if included in section
201 of the Victims of Terrorism Tax Relief Act of 2001.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
46. Disclosure of return information relating to student loans (sec.
417 of the House bill, sec. 718 of the Senate amendment, 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.\312\ 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.\313\ The Department of Education disclosure authority is
scheduled to expire after December 31, 2005.\314\
---------------------------------------------------------------------------
\312\ Sec. 6103.
\313\ Sec. 6103(l)(13).
\314\ Pub. L. No. 108-311 (2004).
---------------------------------------------------------------------------
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.\315\ 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.\316\ The
Department of Treasury has reported that the Internal Revenue
Service processes approximately 100,000 consents per year for
this purpose.\317\
---------------------------------------------------------------------------
\315\ Sec. 6103(c).
\316\ 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.
\317\ Department of Treasury, General Explanations of the
Administration's Fiscal Year 2004 Revenue Proposals (February 2003) at
133.
---------------------------------------------------------------------------
HOUSE BILL \318\
The House bill extends the disclosure authority relating
to the disclosure of return information to carry out income-
contingent repayment of student loans. No disclosures can be
made after December 31, 2005.
---------------------------------------------------------------------------
\318\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision is effective on the date
of enactment.
SENATE AMENDMENT \319\
Same as the House bill.
---------------------------------------------------------------------------
\319\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
47. Extension of cover over of excise tax on distilled spirits to
Puerto Rico and Virgin Islands (sec. 418 of the House bill,
sec. 705 of the Senate amendment, and sec. 7652 of the Code)
PRESENT LAW
A $13.50 per proof gallon (a proof gallon is a liquid
gallon consisting of 50 percent alcohol) excise tax is imposed
on distilled spirits produced in or imported into the United
States.
The Code provides for cover over (payment) to Puerto Rico
and the Virgin Islands of the excise tax imposed on rum
imported into the United States, without regard to the country
of origin. 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).
Thus, tax amounts attributable to rum produced in Puerto
Rico are covered over to Puerto Rico. Tax amounts attributable
to rum produced in the Virgin Islands are covered over to the
Virgin Islands. Tax amounts attributable to rum produced in
neither Puerto Rico nor the Virgin Islands are divided and
covered over to the two possessions under a formula. All of the
amounts covered over are subject to the limitation.
Section 305 of H.R. 1308, Pub. L. No. 108-311 (the
``Working Families Tax Relief Act of 2004'') temporarily
suspended the $10.50 per proof gallon limitation on the amount
of excise taxes on rum covered over to Puerto Rico and the
Virgin Islands. That law extended the cover over amount of
$13.25 per proof gallon 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.
HOUSE BILL \320\
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.
---------------------------------------------------------------------------
\320\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision applies to articles
brought into the United States after December 31, 2003.
SENATE AMENDMENT \321\
Same as the House bill.
---------------------------------------------------------------------------
\321\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
and the Senate amendment provision.
48. Joint review of strategic plans and budget for the IRS (sec. 419 of
the House bill and secs. 8021 and 8022 of the Code)
PRESENT LAW
The Joint Committee on Taxation is required to conduct a
joint review \322\ of the strategic plans and budget of the IRS
from 1999 through 2004.\323\ The joint review required in 2004
is considered as timely if conducted before June 1, 2005. The
Joint Committee was required to provide an annual report \324\
from 1999 through 2003 with respect to:
---------------------------------------------------------------------------
\322\ The joint review is 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.
\323\ Sec. 8021(f).
\324\ Sec. 8022(3)(C).
---------------------------------------------------------------------------
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.
With respect to the annual report for the joint review required
in 2004, the report must cover the matters addressed in the
joint review.
HOUSE BILL \325\
The Joint Committee on Taxation is required to conduct a
joint review before June 1, 2005, and to provide an annual
report with respect to such joint review. The content of the
annual report is the matters addressed in the joint review.
---------------------------------------------------------------------------
\325\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision is effective on the date
of enactment.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
49. Extension of parity in the application of certain limits to mental
health benefits (sec. 420 of the House bill, sec. 701 of the
Senate amendment, sec. 9812 of the Code, sec. 712 of ERISA, and
section 2705 of the PHSA)
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 were most recently
extended to apply with respect to benefits for services
furnished before January 1, 2006, by the Working Families Tax
Relief Act of 2004 (``WFTRA'').\326\
---------------------------------------------------------------------------
\326\ Pub. L. No. 108-311 (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 mental health parity requirements in the Code 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 the Code have been
extended on more than one occasion and were most recently
extended to apply with respect to benefits for services
furnished before January 1, 2006, by the WFTRA.
HOUSE BILL \327\
The House bill extends the Code provisions relating to
mental health parity to benefits for services furnished on or
after the date of enactment and before January 1, 2006. 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.
---------------------------------------------------------------------------
\327\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision is effective for benefits
for services furnished on or after December 31, 2003.
SENATE AMENDMENT \328\
The Senate amendment extends the ERISA and PHSA
provisions relating to mental health parity to benefits for
services furnished before January 1, 2006. The Senate amendment
also extends the Code provisions relating to mental health
parity to benefits for services furnished on or after the date
of enactment and before January 1, 2006. 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.
---------------------------------------------------------------------------
\328\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The Senate amendment provision extending
the Code provision applies to benefits for services furnished
on or after December 31, 2003. The ERISA and PHSA provisions
apply to benefits for services furnished on or after December
31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
50. Combined employment tax reporting (sec. 421 of the House bill and
sec. 712 of the Senate amendment)
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 permits implementation of
a limited demonstration project to assess the feasibility and
desirability of expanding combined Federal and State reporting.
As enacted, it was limited to the sharing of information
between the State of Montana and the IRS, but any State may
participate in a combined reporting program under present law.
However, the project is limited to employment tax reporting. In
addition, it is limited to disclosure of the name, address,
TIN, and signature of the taxpayer. The authority for the
demonstration project expired on the date five years after the
date of enactment (August 5, 2002).
The Working Families Tax Relief Act of 2004 expanded to
all States the authority to participate in a combined Federal
and State employment tax reporting program. The authority for
this expanded program expires December 31, 2005.
HOUSE BILL \329\
The House bill provision extends the demonstration
project through December 31, 2005.
---------------------------------------------------------------------------
\329\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The House bill provision takes effect on
the date of enactment.
SENATE AMENDMENT \330\
The Senate amendment provides permanent authority for any
State to participate in a combined Federal and State employment
tax reporting program, provided that the program has been
approved by the Secretary.
---------------------------------------------------------------------------
\330\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The Senate amendment takes effect on the
date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
51. Deduction for qualified clean-fuel vehicle property (sec. 422 of
the House bill, sec. 721 of the Senate amendment, and sec. 179
of the Code)
PRESENT LAW
Certain costs of qualified clean-fuel vehicles may be
expensed and deducted when such property is placed in service.
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. The deduction is
one quarter of the otherwise allowable amount in 2006, and is
unavailable for purchases after December 31, 2006.
HOUSE BILL \331\
The House bill repeals the phase down of the allowable
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 deduction for vehicles
purchased in 2004 and 2005. For vehicles purchased in 2006 the
deduction remains at 25 percent of the otherwise allowable
amount as under present law.
---------------------------------------------------------------------------
\331\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision is effective for vehicles
placed in service after December 31, 2003.
SENATE AMENDMENT \332\
The Senate amendment repeals the phase down for each of
2004, 2005, and 2006.
---------------------------------------------------------------------------
\332\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
(Other sections of the Senate amendment create new
credits for the purchase of certain vehicles that would be
qualified clean-fuel vehicles under present law. These
modifications are not described in this document.)
Effective date.--The provision is effective for vehicles
placed in service after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
52. Credit for qualified electric vehicles (sec. 422 of the House bill,
sec. 720 of the Senate amendment, and sec. 30 of the Code)
PRESENT LAW
A ten-percent tax credit is provided for the cost of a
qualified electric vehicle, up to a maximum credit of $4,000. A
qualified electric vehicle generally is a motor vehicle that is
powered primarily by an electric motor drawing current from
rechargeable batteries, fuel cells, or other portable sources
of electrical current. The full amount of the credit is
available for purchases prior to 2006. The credit is reduced
for purchases in 2006, and is unavailable for purchases after
December 31, 2006.
HOUSE BILL \333\
---------------------------------------------------------------------------
\333\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
The House bill repeals the phase down of allowable tax
credit for electric vehicles in 2004 and 2005. Thus, a taxpayer
who purchases a qualifying vehicle may claim 100 percent of the
otherwise allowable credit for vehicles purchased in 2004 and
2005. For vehicles purchased in 2006 the credit 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.
SENATE AMENDMENT \334\
---------------------------------------------------------------------------
\334\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
The Senate amendment repeals the phase down for each of
2004, 2005, and 2006.
(Other sections of the Senate amendment modify the
credit. These modifications are not described in this
document.)
Effective date.--The provision is effective for vehicles
placed in service after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
or the Senate amendment provision.
53. Repeal of reduction of deductions for mutual life insurance
companies (sec. 710 of the Senate amendment and sec. 809 of the
Code)
PRESENT LAW
The Pension Funding Equity Act of 2004 \335\ repealed the
rule requiring reduction in certain deductions of a mutual life
insurance company (sec. 809), effective for taxable years
beginning after 2004.
---------------------------------------------------------------------------
\335\ Pub. L. No. 108-218.
---------------------------------------------------------------------------
For taxable years beginning in 2004, under section 809, a
mutual life insurance company is required to reduce its
deduction for policyholder dividends by the company's
differential earnings amount. If the company's differential
earnings amount exceeds the amount of its deductible
policyholder dividends, the company is required to reduce its
deduction for changes in its reserves by the excess of its
differential earnings amount over the amount of its deductible
policyholder dividends. The differential earnings amount is the
product of the differential earnings rate and the average
equity base of a mutual life insurance company.
The differential earnings rate is based on the difference
between the average earnings rate of the 50 largest stock life
insurance companies and the earnings rate of all mutual life
insurance companies. The mutual earnings rate applied under the
provision is the rate for the second calendar year preceding
the calendar year in which the taxable year begins. Under
present law, the differential earnings rate cannot be a
negative number.
A company's equity base equals the sum of: (1) its
surplus and capital increased by 50 percent of the amount of
any provision for policyholder dividends payable in the
following taxable year; (2) the amount of its nonadmitted
financial assets; (3) the excess of its statutory reserves over
its tax reserves; and (4) the amount of any mandatory security
valuation reserves, deficiency reserves, and voluntary
reserves. A company's average equity base is the average of the
company's equity base at the end of the taxable year and its
equity base at the end of the preceding taxable year.
A recomputation or ``true-up'' in the succeeding year is
required if the differential earnings amount for the taxable
year either exceeds, or is less than, the recomputed
differential earnings amount. The recomputed differential
earnings amount is calculated taking into account the average
mutual earnings rate for the calendar year (rather than the
second preceding calendar year, as above). The amount of the
true-up for any taxable year is added to, or deducted from, the
mutual company's income for the succeeding taxable year.
For taxable years beginning in 2001, 2002, or 2003, the
differential earnings amount is treated as zero for purposes of
computing both the differential earnings amount and the
recomputed differential earnings amount (true-up).
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision repeals the rule requiring reduction in
certain deductions of a mutual life insurance company (sec.
809) for taxable years beginning in 2004.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
54. Study of earnings stripping provisions (sec. 163(j) of the Code)
PRESENT LAW
Present law provides rules to limit the ability of U.S.
corporations to reduce the U.S. tax on their U.S.-source income
through certain earnings stripping transactions. These rules
limit the deductibility of interest paid to certain related
parties (``disqualified interest''), if the payor's debt-equity
ratio exceeds 1.5 to 1 and the payor's net interest expense
exceeds 50 percent of its ``adjusted taxable income''
(generally taxable income computed without regard to deductions
for net interest expense, net operating losses, and
depreciation, amortization, and depletion). Disqualified
interest for these purposes also may include interest paid to
unrelated parties in certain cases in which a related party
guarantees the debt.
HOUSE BILL
No provision.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement requires the Treasury Department
to conduct a study of the earnings stripping rules, including a
study of the effectiveness of these rules in preventing the
shifting of income outside the United States, whether any
deficiencies in these rules have the effect of placing U.S.-
based businesses at a competitive disadvantage relative to
foreign-based businesses, the impact of earnings stripping
activities on the U.S. tax base, whether laws of foreign
countries facilitate the stripping of earnings out of the
United States, and whether changes to the earnings stripping
rules would affect jobs in the United States. This study is to
include specific recommendations for improving these rules and
is to be submitted to the Congress not later than June 30,
2005.
Effective date.--The provision is effective on the date
of enactment.
TITLE V--DEDUCTION OF STATE AND LOCAL GENERAL SALES TAXES
A. Deduction of State and Local General Sales Taxes
(Sec. 501 of the House bill and sec. 164 of the Code)
PRESENT LAW
An itemized deduction is permitted for certain State and
local 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.
HOUSE BILL
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 allowable deduction would be determined under tables
prescribed by the Secretary. The tables would be based on the
average consumption of taxpayers on a State-by-State basis, and
would take into account filing status, number of dependents,
adjusted gross income, and rates of State and local general
sales 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 complementary 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill with the
following modification.
Rather than requiring that taxpayers use tables
prescribed by the Secretary to determine their allowable sales
tax deduction, taxpayers would instead have two options with
respect to the determination of the sales tax deduction amount.
Taxpayers would be able to deduct the total amount of general
State and local sales taxes paid by accumulating receipts
showing general sales taxes paid. Alternatively, taxpayers may
use tables created by the Secretary of the Treasury. The tables
are to be based on average consumption by taxpayers on a State-
by-State basis, taking into account filing status, number of
dependents, adjusted gross income and rates of State and local
general sales taxation. Taxpayers who use the tables created by
the Secretary may, in addition to the table amounts, deduct
eligible general sales taxes paid with respect to the purchase
of motor vehicles, boats and other items specified by the
Secretary. Sales taxes for items that may be added to the
tables would not be reflected in the tables themselves.
The IRS is currently in the process of finalizing tax
forms for 2004. The Code has not contained an itemized
deduction for State and local sales taxes for a number of
years. Developing the tables required by the provision will in
general require a significant amount of time and effort. The
conferees anticipate that IRS will do the best they can to
reasonably and accurately implement this statutory provision in
order to effectuate the deduction for the 2005 filing season.
TITLE VI--FAIR AND EQUITABLE TOBACCO REFORM
A. Tobacco Reform
(Secs. 701-725 of the House bill and title XI of the Senate amendment)
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'' \336\ that assured the tobacco program would run
at no-net-cost to the Federal government.
---------------------------------------------------------------------------
\336\ 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
$0.10 per pound; the burley assessment is $0.02 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.
HOUSE BILL
The House bill repeals the Federal tobacco support
program, including marketing quotas and nonrecourse marketing
loans. The House bill also provides quota holders $7.00 per
pound based on their 2002 quota allotment paid in equal
installments over five years. Additionally, the House bill
provides producers transition payments of $3.00 per pound based
on their 2002 quota levels paid in equal installments over five
years. The House bill caps payments to quota holders and
growers at $9.6 billion over fiscal years 2005 through 2009.
The House bill applies to the 2005 and subsequent crops of
tobacco.
Effective date.--The House bill is effective on the date
of enactment.
SENATE AMENDMENT
The Senate amendment ends the current Federal tobacco
program. The Senate amendment also provides quota holders $8.00
per pound based on their 2002 quota levels paid over a 10-year
period. Additionally, the Senate amendment provides tobacco
growers with $4.00 per pound based on their 2002 quota levels,
paid over a 10-year period. The payments are funded by
assessments on tobacco companies. The Senate amendment also
restricts tobacco production to traditional tobacco producing
counties and provides poundage and acreage limitations on how
much tobacco can be produced in the future as determined by
production boards for each type of tobacco. The Senate
amendment applies to the 2004 and subsequent crops of tobacco.
Additionally, the Senate amendment gives the Food and
Drug Administration regulatory authority over the content and
marketing of tobacco products.
Effective date.--The Senate amendment is effective on the
date of enactment.
CONFERENCE AGREEMENT
The conference agreement repeals all aspects of the
Federal tobacco support program, including marketing quotas and
nonrecourse marketing loans. The conference agreement provides
eligible quota holders $7 per pound on their basic quota
allotment paid in equal installments over 10 years.
Additionally, the conference agreement provides eligible
producers transition payments of $3 per pound based on their
effective quota paid in equal installments over 10 years.
The Managers intend the payments to producers and quota
holders to be made as quickly and effectively as possible. The
Managers expect the Secretary to evaluate and consider the
utilization of the proven financial and administrative
expertise of the Phase II settlement system to achieve
effective and prompt payment. The Managers further expect the
Secretary to use the facilities of the Farm Service Agency to
furnish information relating to accelerated payment options
offered by financial institutions.
Manufacturers and importers of tobacco products will pay
a quarterly assessment into a newly formed Tobacco Trust Fund.
These assessments will be on the following classes of tobacco:
Cigarettes, Snuff, Chewing Tobacco, Pipe Tobacco, Roll-your-own
tobacco, and Cigars. Assessment allocations will then be
divided into manufacturers' and importers' market share. Funds
from the Tobacco Trust Fund will be used to provide payments to
quota holders and eligible producers as well as pay for program
losses incurred by the U.S. Department of Agriculture.
The conference agreement applies to the 2005 and
subsequent crops of tobacco.
Effective date.--The conference agreement is effective on
the date of enactment.
TITLE VII--PROTECTION OF UNITED STATES WORKERS FROM COMPETITION OF
FOREIGN WORKFORCES
The Senate amendment contained a provision relating to
protection of United States workers from competition of foreign
workforces. The conference agreement does not include the
Senate amendment provision.
TITLE VIII--OTHER PROVISIONS
A. Provisions Relating to Housing
1. Treatment of qualified mortgage revenue bonds (sec. 601 of the
Senate amendment and sec. 143 of the Code)
PRESENT LAW
Under present law, qualified mortgage bonds are tax-
exempt bonds used to finance owner-occupied residences. Among
other requirements, these bonds are subject to income and
purchase price limitations, as well as a requirement that the
homebuyer not have an ownership interest in the principal
residence in the preceding three years.
Generally, in order for a bond to be a qualified mortgage
bond, the mortgagor's family income cannot exceed 115 percent
of the applicable median family income. Adjustments are made
for targeted area residences, for areas that have high housing
costs in relation to income, and for family size. Further, 95
percent or more of the net proceeds of qualified mortgage bonds
must be used to finance residences for first-time homebuyers.
Exceptions are made for financing of targeted area residences,
qualified home improvement loans, and qualified rehabilitation
loans.
A residence financed with a mortgage funded by qualified
mortgage bonds may not have a purchase price in excess of 90
percent of the average area purchase price for that residence.
Adjustments are made for residences located in certain low-
income or economically distressed areas, and for the number of
families for which a residence is designed.
Part or all of the interest subsidy provided by qualified
mortgage bonds is recaptured if the borrower experiences
substantial increases in income and disposes of the subsidized
residence within nine years after purchase. The annual volume
limitations imposed on most qualified private activity bonds
limits the aggregate face amount of qualified mortgage bonds
that may be issued. In addition, repayments of mortgage
principal received after 10 years from the date of issue must
be used to retire outstanding bonds (the ``10-year rule'').
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment suspends the 10-year rule for one
year for outstanding bonds, allowing repayments of principal
received during this period to be used to finance new mortgage
loans rather than retiring outstanding bonds. The Senate
amendment repeals the 10-year rule for bonds originally issued
after the date of enactment.
Effective date.--The provision repeals the 10-year rule
for bonds issued after the date of enactment and suspends the
10-year rule for outstanding bonds for a one-year period
beginning on the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
2. Premiums for mortgage insurance (sec. 602 of the Senate amendment
and secs. 163(h) and 6050H of the Code)
PRESENT LAW
Present law provides that qualified residence interest is
deductible notwithstanding the general rule that personal
interest is nondeductible (sec. 163(h)).
Qualified residence interest is interest on acquisition
indebtedness and home equity indebtedness with respect to a
principal and a second residence of the taxpayer. The maximum
amount of home equity indebtedness is $100,000. The maximum
amount of acquisition indebtedness is $1 million. Acquisition
indebtedness means debt that is incurred in acquiring
constructing, or substantially improving a qualified residence
of the taxpayer, and that is secured by the residence. Home
equity indebtedness is debt (other than acquisition
indebtedness) that is secured by the taxpayer's principal or
second residence, to the extent the aggregate amount of such
debt does not exceed the difference between the total
acquisition indebtedness with respect to the residence, and the
fair market value of the residence.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provision provides that premiums
paid or accrued for qualified mortgage insurance by a taxpayer
during the taxable year in connection with acquisition
indebtedness on a qualified residence of the taxpayer are
treated as qualified residence interest and thus deductible.
The amount allowable as a deduction under the provision is
phased out ratably by 10 percent for each $1,000 by which the
taxpayer's adjusted gross income exceeds $100,000 ($500 and
$50,000, respectively, in the case of a married individual
filing a separate return). Thus, the deduction is not allowed
if the taxpayer's adjusted gross income exceeds $110,000
($55,000 in the case of married individual filing a separate
return).
For this purpose, qualified mortgage insurance means the
Home Loan Guaranty Program of the Department of Veterans
Affairs, and mortgage insurance provided by the Federal Housing
Administration, or the Rural Housing Administration, and
private mortgage insurance (defined in section 2 of the
Homeowners Protection Act of 1998).
Amounts paid for qualified mortgage insurance that are
properly allocable to periods after the close of the taxable
year are treated as paid in the period to which it is
allocated. No deduction is allowed for the unamortized balance
if the mortgage is paid before its term (except in the case of
qualified mortgage insurance provided by the Department of
Veterans Affairs or Rural Housing Administration).
Reporting rules apply under the provision.
Effective date.--The Senate amendment provision is
effective for amounts paid or accrued after the date of
enactment in taxable years beginning after December 31, 2004,
and ending before January 1, 2006.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
3. Increase in historic rehabilitation credit for residential housing
for the elderly (sec. 603 of the Senate amendment and secs. 42
and 47 of the Code)
PRESENT LAW
Rehabilitation credit
Present law provides a credit for rehabilitation
expenditures (sec. 47). A 20-percent credit is provided for
rehabilitation expenditures with respect to a certified
historic structure. For this purpose, a certified historic
structure means any building that is listed in the National
Register, or that is located in a registered historic district
and is certified by the Secretary of the Interior to the
Secretary of the Treasury as being of historic significance to
the district.
A building is treated as having been substantially
rehabilitated only if the rehabilitation expenditures during
the 24-month period selected by the taxpayer and ending within
the taxable year exceed the greater of the adjusted basis of
the building (and its structural components), or $5,000. The
taxpayer's depreciable basis in the property is reduced by any
rehabilitation credit claimed.
Low-income housing credit
The low-income housing tax credit (sec. 42) may be
claimed over a 10-year period for the cost of rental housing
occupied by tenants having incomes below specified levels. The
credit percentage for newly constructed or substantially
rehabilitated housing that is not Federally subsidized is
adjusted monthly by the Internal Revenue Service so that the 10
annual installments have a present value of 70 percent of the
total qualified expenditures. The credit percentage for new
substantially rehabilitated housing that is Federally
subsidized and for existing housing that is substantially
rehabilitated is calculated to have a present value of 30
percent of qualified expenditures. The aggregate credit
authority provided annually to each State is $1.75 per
resident, except in the case of projects that also receive
financing with proceeds of tax-exempt bonds issued subject to
the private activity bond volume limit and certain carry-over
amounts. The $1.75 per resident cap is indexed for inflation.
Qualified basis with respect to which the credit may be
computed is generally determined as the portion of the eligible
basis of the qualified low-income building attributable to the
low-income rental units. Qualified basis generally is the
taxpayer's depreciable basis in a qualified low-income
building. In the case of a taxpayer who claims the
rehabilitation credit for a qualified low-income building, the
taxpayer's depreciable basis in the building is reduced by the
amount of the rehabilitation credit claimed. In addition,
eligible basis is reduced by any Federal grant received with
respect to the building. A qualified low-income building is a
building that meets certain compliance criteria and is
depreciable under the modified accelerated cost recovery system
(``MACRS'').
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment increases the present-law 20-percent
credit for historic rehabilitation expenses to 25 percent in
the case of rehabilitation expenses incurred with respect to a
building which is also a low-income housing credit property in
which substantially all of the tenants, both those tenants in
rent-restricted units and in other residential units, are age
65 or greater. The Senate amendment permits the 25-percent
rehabilitation credit to be claimed with respect to all parts
of the building, not only those parts on which the taxpayer
also claims the low-income housing credit.\337\
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\337\ The Senate amendment also repeals a transition rule to the
Tax Reform Act of 1986 permitting the taxpayers who own the property
described as the Warrior Hotel, Ltd., the first two floors of the
Martin Hotel, and the 105,000 square foot warehouse constructed in
1910, all in Sioux City, Iowa, to use ACRS depreciation, in lieu of
MACRS depreciation. This change enables such property to qualify for
the provision.
---------------------------------------------------------------------------
Effective date.--The Senate amendment provision is
effective for property placed in service after the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
B. Provisions Relating to Bonds
1. Modification of the authority of Indian tribal governments to issue
tax-exempt bonds (sec. 613 of the Senate amendment and sec.
7871 of the Code)
PRESENT LAW
Under present law, the interest on bonds issued by an
Indian tribal government is tax-exempt if substantially all of
the proceeds of are to be used in the exercise of an essential
government function. The term essential government function
does not include any function that is not customarily performed
by State or local governments with general taxing powers. In
addition, Indian tribal governments are prohibited from issuing
private activity bonds, with the exception of bonds issued to
finance certain manufacturing facilities.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment expands the tax-exemption for Indian
tribal government bonds to include obligations 95 percent or
more of the proceeds of which are used to finance any facility
located on an Indian reservation. The tax-exemption does not
include any obligations used to finance any portion of a
building in which class II or class III gaming (as defined in
section 4 of the Indian Gaming Regulatory Act) is conducted or
housed.
For purposes of the Senate amendment, an Indian
reservation means: (1) a reservation as defined in section
4(10) of the Indian Child Welfare Act of 1978, and (2) lands
held under the provisions of the Alaska Native Claims
Settlement Act by a Native corporation as defined in section
3(m) of that Act.
Effective date.--The provision is effective for bonds
issued after the date of enactment and before January 1, 2006.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
2. Definition of manufacturing facility for qualified small issue bonds
(sec. 614 of the Senate amendment and sec. 144 of the Code)
PRESENT LAW
Qualified small-issue bonds are bonds used to finance
private business manufacturing facilities or the acquisition of
land and equipment by certain farmers. Generally, no more than
$1 million of small-issue bond financing may be outstanding at
any time for property of a business (including related parties)
in the same municipality or county. This $1 million limit may
be increased to $10 million if all other capital expenditures
of the business (including related parties) in the same
municipality or county over a six-year period are counted
toward the limit. In addition, 95 percent or more of the net
proceeds of qualified small-issue bonds must be used for the
acquisition, construction, reconstruction, or improvement of
land or property of a character subject to the allowance for
depreciation, or to redeem a prior issue that was used for
those purposes.
Under present law, a manufacturing facility is defined as
any facility used in the manufacturing or production of
tangible personal property. Facilities that are directly
related and ancillary to a manufacturing facility may be
financed with small-issue bonds if such facilities are located
on the same site as the manufacturing facility and no more than
25 percent of the net proceeds of the bonds are used to finance
such facilities.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment expands the definition of
manufacturing facilities eligible for small-issue bond
financing to include facilities: (1) used in the manufacture or
development of software products or processes, if it takes more
than six months to manufacture or develop such products or
processes, such manufacture or development could not with due
diligence be reasonably expected to occur in less than six
months, and the software product or process comprises programs,
routines, and attendant documentation developed and maintained
for use in computer and telecommunications technology; and (2)
used in the manufacture or development of any biobased product
or bioenergy, if it takes more than six months to manufacture
or develop and the manufacture or development could not with
due diligence be reasonably expected to occur in less than six
months. The term biobased product means a commercial or
industrial product which utilizes biological products or
renewable domestic agricultural or forestry materials. The term
bioenergy means biomass used in the production of energy,
including liquid, solid, or gaseous fuels, electricity, and
heat.
The Senate amendment expands the definition of eligible
facilities to include directly and functionally related offices
and research and development facilities located on the same
site as the manufacturing facilities. Such office and research
and development facilities may not constitute more than 40
percent of the net proceeds of the issue used to finance the
facility.
Effective date.--The provision is effective for bonds
issued after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
3. Qualified forest conservation bonds (sec. 615 of the Senate
amendment and sec. 142 of the Code)
PRESENT LAW
Tax-exempt bonds
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. 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.
Private activities eligible for financing with tax-exempt
private activity bonds
Present law includes several exceptions permitting States
or local governments to act as conduits providing tax-exempt
financing for private activities. Generally, interest on bonds
issued to benefit section 501(c)(3) organizations is tax-exempt
(``qualified 501(c)(3) bonds''). In addition, States or local
governments may issue tax-exempt ``exempt-facility bonds'' to
finance property for certain private businesses. Business
facilities eligible for this financing include transportation
(airports, ports, local mass commuting, and high speed
intercity rail facilities); privately owned and/or privately
operated public works facilities (sewage, solid waste disposal,
local district heating or cooling, hazardous waste disposal
facilities and public educational facilities); privately owned
and/or operated low-income rental housing; and certain private
facilities for the local furnishing of electricity or gas.
Tax-exempt private activity bonds are subject to
restrictions that generally do not apply to other bonds issued
by State or local governments. In most cases, the aggregate
face amount of tax-exempt private activity bonds that may be
issued is restricted by annual volume limits. Moreover, most
tax-exempt private activity bonds are subject to a term-to-
maturity rule. Under that rule, the average maturity of most
tax-exempt private activity bonds cannot exceed 120-percent of
the economic life of the property being financed.
Section 501(c)(3) organizations generally may not obtain
the benefits of exempt facility bonds for debt issued and used
to acquire forests and forest lands. In addition, qualified
501(c)(3) bonds may not be issued to acquire forests and forest
lands to the extent such lands are used to finance a trade or
business that is unrelated to the exempt purposes of the
organization. Whether income derived by a section 501(c)(3)
organization from timber harvesting is unrelated trade or
business income depends upon a variety of factors.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that qualified forest
conservation bonds are treated as exempt facility bonds.
Qualified forest conservation bonds are bonds issued for a
qualified organization if 95 percent or more of the net
proceeds of such bonds are used for qualified project costs,
including acquisition of forests and forest land, capitalized
interest, and credit enhancement fees that constitute qualified
guarantee fees (within the meaning of section 148 of the Code).
The costs of acquiring forests and forest land are qualified
project costs if such land is acquired by a qualified
organization from an unrelated party and at the time of
acquisition or immediately thereafter such land is subject to a
conservation restriction. Among other requirements, a qualified
organization must be a nonprofit organization more than half
the value of which consists of forests and forest land acquired
with the proceeds of qualified forest conservation bonds.
The volume limitation on tax-exempt private activity
bonds does not apply to qualified forest conservation bonds.
Rather, the maximum aggregate face amount of qualified forest
conservation bonds that may be issued is $1.5 billion, to be
allocated by the Secretary of Treasury among qualified
organizations. For purposes of the term-to-maturity rule, the
land and timber acquired with qualified forest conservation
bonds shall have an economic life of 35 years.
The Senate amendment provides that certain timber
harvesting income derived by a qualified organization from
forest lands acquired with proceeds from the qualified forest
conservation bonds is excludable from income to the extent such
income is used to pay debt service on the bonds and satisfies
other conservation restrictions.
Effective date.--The provision is effective for bonds
issued on or after the date that is 180 days after the date of
enactment and before December 31, 2006.
CONFERENCE AGREEMENT
The conference agreement does not contain the Senate
amendment provision.
4. Qualified tribal school modernization bonds (sec. 616 of the Senate
amendment)
PRESENT LAW
Under present law, the interest on bonds issued by an
Indian tribal government is tax-exempt if substantially all of
the proceeds are to be used in the exercise of an essential
government function. The term essential government function
does not include any function that is not customarily performed
by State or local governments with general taxing powers. In
addition, Indian tribal governments are prohibited from issuing
private activity bonds, with the exception of bonds issued for
certain manufacturing facilities.
There is no present law provision that permits Indian
tribal governments to issue tax-credit bonds.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment authorizes the Secretary of the
Interior to establish a program under which eligible Indian
tribes may issue qualified tribal school modernization bonds
(``tribal school bonds''). A tribal school bond means any bond
issued under the program if: (1) 95 percent of the proceeds of
the issue are used for the construction, rehabilitation, or
repair of a school facility funded by the Bureau of Indian
Affairs of the Department of the Interior or for the
acquisition of land on which such a school facility is to be
constructed; (2) the bond is issued by an Indian tribe; (3) the
issuer designates the bond for purposes of the program; and (4)
the term of each bond that is part of such an issue does not
exceed 15 years. For purposes of the provision, the term Indian
tribe has the same meaning as the term Indian tribal government
under section 7701(a)(40) of the Code (including the
application of section 7871(d)) and any consortium of tribes
approved by the Secretary of the Interior.
Under the provision, the holder of a tribal school bond
receives a nonrefundable tax credit, in lieu of interest. The
amount of the credit allowed is included in the holder's gross
income as interest income. Unused credits may be carried
forward to the succeeding taxable year.
The Senate amendment authorizes the Secretary of the
Interior to establish an escrow fund to secure repayment of
tribal school bonds. Principal payments on tribal school bonds
may only be made from amounts in the escrow fund and such bonds
are not guaranteed by the United States, the issuing Indian
tribe, or the tribal school for which the bond was issued.
The Senate amendment establishes a national limitation of
$200 million on the amount of tribal school bonds that may be
designated in each of the years 2005 and 2006. The authority to
issue tribal school bonds shall be allocated to Indian tribes
by the Secretary of the Interior.
Effective date.--The provision is effective on the date
of enactment with respect to bonds issued after December 31,
2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
C. Provisions Relating to Depreciation
1. 7-year recovery period for certain track facilities (sec. 623 of the
Senate amendment and sec. 168 of the Code)
PRESENT LAW
A taxpayer generally must capitalize the cost of property
used in a trade or business 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. Land improvements (such as roads and
fences) are recovered over 15 years. An exception exists for
the theme and amusement park industry, whose assets are
assigned a recovery period of seven years.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides a statutory 7-year recovery
period for permanent motorsports racetrack complexes. For this
purpose, motorsports racetrack complexes include land
improvements and support facilities but do not include
transportation equipment, warehouses, administrative buildings,
hotels, or motels.
Effective date.--The Senate amendment is effective for
property placed in service after date of enactment and before
January 1, 2008. No inference is intended with respect to the
treatment of expenses incurred prior to the effective date.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with the following modification to the effective date
provisions.
Effective date.--The conference agreement is effective
for property placed in service after the date of enactment and
before January 1, 2008. The conference agreement also excludes
racetrack facilities placed in service after the date of
enactment from the definition of theme and amusement facilities
classified under Asset Class 80.0. The conferees do not intend
for this provision to create any inference as to the treatment
of property placed in service on or before the date of
enactment. Accordingly, the conferees do not intend for the
provision to affect the interpretation of the scope of Asset
Class 80.0 for assets placed in service prior to the date of
enactment. The conferees strongly urge the Secretary to resolve
expeditiously any taxpayer disputes with respect to the scope
of Class 80.0.
2. Alternative minimum tax and credits (sec. 624 of the Senate
amendment and secs. 38 and 53 of the Code)
PRESENT LAW
Election to Increase Minimum Tax Credit Limitation in Lieu of Bonus
Depreciation
Under present law, corporations are entitled to a minimum
tax credit for the minimum tax imposed in prior taxable years.
The amount of the credit is limited to the excess of the
taxpayer's regular tax over the tentative minimum tax
(``minimum tax credit limitation'').
Under present law, certain property is allowed an
additional depreciation allowance for the taxable year placed
in service. This additional allowance is known as ``bonus
depreciation''. Bonus depreciation is a temporary provision.
Use of General Business Credits Against the Alternative Minimum Tax
Under present law, the general business credit for any
taxable year is limited to the excess of the taxpayer's income
tax over the tentative minimum tax (or, if greater, 25 percent
of the regular tax liability in excess of $25,000).\338\
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\338\ Special rules apply to the empowerment zone employment
credit and the New York Liberty Zone business credit.
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HOUSE BILL
No provision.
SENATE AMENDMENT
Election to Increase Minimum Tax Credit Limitation in Lieu of Bonus
Depreciation
The Senate amendment provides an election by a
corporation to increase its minimum tax credit limitation for a
taxable year by one half of the bonus depreciation amount. If a
corporation makes an election for any taxable year, no bonus
depreciation is allowed with respect to any property placed in
service by the corporation for the taxable year. The bonus
depreciation amount for a taxable year is an amount (not in
excess of $25 million) equal to 30 percent of the aggregate
bonus depreciation that would have been allowable but for the
election. Any minimum tax credit allowable by reason of the
election may be refundable to the extent it exceeds the
corporation's tax liability.
Effective date.--Taxable years ending after December 31,
2003.
Use of General Business Credits Against the Alternative Minimum Tax
The Senate amendment provides that the general business
credit for any taxable year beginning in 2004 shall not be less
than 50 percent of the lesser of (1) the amount of credit that
would be allowed if the tentative minimum tax were zero for the
taxable year or (2) the current year business credit. In no
event shall the credit be less than the amount otherwise
allowable under present law.
Effective date.--Taxable years beginning in 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the provisions
in the Senate amendment.
D. Expansion of Business Credit
1. New markets tax credit for Native American reservations (sec. 631 of
the Senate amendment)
PRESENT LAW
Section 45D provides a new markets tax credit for
qualified equity investments made to acquire stock in a
corporation, or a capital interest in a partnership, that is a
qualified community development entity (``CDE'').\339\ The
amount of the credit allowed to the investor (either the
original purchaser or a subsequent holder) is (1) a five-
percent credit for the year in which the equity interest is
purchased from the CDE and for each of the following two years,
and (2) a six-percent credit on each anniversary date
thereafter for the following four years. The credit is
determined by applying the applicable percentage (five or six
percent) to the amount paid to the CDE for the investment at
its original issue, and is available to the taxpayer who holds
the qualified equity investment on the date of the initial
investment or on the respective anniversary dates. The credit
is recaptured if at any time during the seven-year period that
begins on the date of the initial issue of the investment the
entity ceases to be a qualified CDE, the proceeds of the
investment cease to be used as required, or the interest is
redeemed.
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\339\ Section 45D was added by section 121(a) of the Community
Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 21, 2000).
---------------------------------------------------------------------------
A qualified CDE is any domestic corporation or
partnership: (1) whose primary mission is serving or providing
investment capital for low-income communities or low-income
persons; (2) that maintains accountability to residents of low-
income communities by their representation on any governing
board or any advisory board of the CDE; and (3) that is
certified by the Secretary as being a qualified CDE. A
qualified equity investment means stock or a similar equity
interest acquired directly from a CDE for cash. Substantially
all of the investment proceeds must be used by the CDE to make
qualified low-income community investments. For this purpose,
qualified low-income community investments include: (1) capital
or equity investments in, or loans to, qualified active
businesses located in low-income communities; (2) certain
financial counseling and other services to businesses and
residents in low-income communities; (3) the purchase from
another CDE of any loan made by such entity that is a qualified
low-income community investment; or (4) an equity investment
in, or loan to, another CDE.
A ``low-income community'' is defined as a census tract
with either (1) a poverty rate of at least 20 percent or (2)
median family income which does not exceed 80 percent of the
greater of metropolitan area median family income or statewide
median family income (for a non-metropolitan census tract, does
not exceed 80 percent of statewide median family income). The
Secretary may designate any area within any census tract as a
low-income community provided that (1) the boundary is
continuous, (2) the area (if it were a census tract) would
otherwise satisfy the poverty rate or median income
requirements, and (3) an inadequate access to investment
capital exists in the area.
A qualified active business is defined as a business that
satisfies, with respect to a taxable year, the following
requirements: (1) at least 50 percent of the total gross income
of the business is derived from the active conduct of trade or
business activities in low-income communities; (2) a
substantial portion of the tangible property of such business
is used in a low-income community; (3) a substantial portion of
the services performed for such business by its employees is
performed in a low-income community; and (4) less than five
percent of the average of the aggregate unadjusted bases of the
property of such business is attributable to certain financial
property or to certain collectibles.
The maximum annual amount of qualified equity investments
is capped at $2.0 billion per year for calendar years 2004 and
2005, and $3.5 billion per year for calendar years 2006 and
2007.
No special rules apply to investments in community
development entities that serve or provide investment capital
with respect to low-income Native American reservations.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides special new markets tax
credit rules for qualified equity investments in a
``reservation development entity.'' In general, the present-law
requirements applicable to the new markets tax credit apply for
purposes of the new credit, with special requirements
established to define the qualified investment entity (i.e.,
for purposes of this credit, the present-law ``community
development entity'' is replaced with ``reservation development
entity''). Under the Senate amendment, a reservation
development entity is a domestic corporation or partnership if:
(A) the primary mission of the entity is serving, or providing
investment capital for, low-income reservations; (B) the entity
maintains accountability to residents of low-income
reservations through their representation on any governing
board or any advisory board of the entity; and (C) the entity
is certified by the Secretary as being a reservation
development entity. A low-income reservation means an Indian
reservation (as defined in section 168(j)(6)) that has a
poverty rate of at least 40 percent.
The maximum annual amount of qualified equity investments
in reservation development entities is $50 million for each of
calendar years 2004 through 2007. The limitation shall be
allocated by the Secretary among reservation development
entities selected by the Secretary, giving priority to any
entity with a record of having successfully provided capital or
technical assistance to disadvantaged businesses or
communities, or that intends to make qualified low-income
reservation investments in one or more unrelated businesses.
The Senate amendment provides that not later than January
31 of 2007 and 2010, the Comptroller General of the United
States shall, pursuant to an audit, report to Congress on the
new credit program, including all reservation development
entities that receive an allocation under the program. In
addition, the Senate amendment authorizes the Secretary to
award a grant of not more than one million dollars to the First
Nations Oweesta Corporation, and authorizes appropriations of
one million dollars for fiscal years 2004 through 2014.
Effective date.--The provision is effective for
investments made after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment.
2. Ready Reserve-National Guard employee credit and Ready Reserve-
National Guard replacement employee credit (sec. 632 of the
Senate amendment)
PRESENT LAW
There is no employer tax credit for wages paid to Ready
Reserve and National Guard employees called to active duty, or
for wages paid to their replacements.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides an employer credit for
wages paid to Ready Reserve-National Guard employees called to
active duty. A Ready Reserve-National Guard employee means an
employee who is a member of the Ready Reserve of a reserve
component of an Armed Force of the United States as described
in sections 10142 and 10101 of title 10, United States Code.
The credit equals 50 percent of the compensation paid while the
employee is called up to active duty up to a maximum of $30,000
of compensation. Special rules allowing refundability of the
credit, up to the amount of employer payroll taxes, apply to
employers of first responders called up to active duty.
Qualified first responders are persons employed as a law
enforcement official, a firefighter, or a paramedic, and who
are Ready Reserve-National Guard employees.
In addition, for ``small business employers'' of Ready
Reserve-National Guard employees called up to active duty, the
Senate amendment creates a replacement employee credit equal to
50 percent of the wages paid to any replacement employee up to
a maximum credit of $6,000. Small business employers are
employers that employ an average of 50 or fewer employees on
business days during the taxable year. For small business
manufacturing employers, the credit rate is increased to 100
percent and the maximum credit is increased to $20,000.
Self-employed contract workers called to active duty are
eligible for the self employed portion of the credit, but
businesses purchasing the services of contract workers are not
eligible for the replacement employee credit.
The credits could be carried back 3 years and carried
forward 20 years. Rules similar to section 280C apply to deny a
deduction for the amount of the credits.
Effective date.--The provision is effective for
investments made after September 30, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment.
3. Rural investment tax credit (sec. 633 of the Senate amendment and
new sec. 42A of the Code)
PRESENT LAW
There is no present-law provision specifically targeted
to encourage investment in high-migration rural areas.
HOUSE BILL
No provision.
SENATE AMENDMENT
The proposal provides a tax credit that may be claimed by
owners of certain rural residential property (i.e., qualified
rural investment buildings). The credit is claimed annually,
generally for a period of ten years. Taxpayers are eligible for
a maximum present-value tax credit equal to 70 percent of the
eligible basis of a new building and qualified rehabilitation
expenses (30 percent in the case of an existing building).
A qualified rural investment building is defined as any
building that is part of a qualified rural investment project
at all times during the credit period. A qualified rural
investment project is defined as any investment project of one
or more buildings; (1) located in a qualifying county (and, if
necessary to the project, a contiguous county); and (2)
selected by the State in which the county is located, according
to the State's qualified rural investment plan. Rehabilitation
expenditures are treated as a separate building for purposes of
the credit. A qualifying county is defined as a county which:
(1) is located outside a metropolitan statistical area (as
defined by the Office of Management and Budget); and (2) during
the 20-year period ending with the year the most recent census
was conducted, has experienced a net out-migration of
inhabitants of the county of at least 10-percent of the
population of the county. Generally, the credit and compliance
periods are each ten years and the credit period for an
existing building may not begin before the credit period for
the related rehabilitation expenditures.
For purposes of this credit, the eligible basis of any
qualified rural investment building shall be determined under
rules similar to the rules of section 42 (the ``low income
rental housing credit'') except that: (1) the determination of
the adjusted basis of any building shall be made at the
beginning of the credit period; and (2) such basis shall
include development costs properly attributable to such
building. Development costs are limited to: (1) site
preparation costs; (2) State and local impact fees; (3)
reasonable development fees; (4) professional fees related to
basis items; (5) construction financing costs related to basis
items other than land; and (6) on-site and adjacent
improvements required by State or local governments.
Generally, any building eligible for the credit must
receive an allocation of rural investment credit authority from
the State rural investment credit agency in whose jurisdiction
the building is located. The aggregate amount of such credits
allocated within a State is limited by the State's annual rural
investment credit ceiling. The ceiling for each calendar year
is the sum of: (1) the unused State rural investment credit
ceiling (if any) of such State for the preceding calendar year;
(2) $185,000 for each qualifying county of the State; (3) the
amount of State rural investment credit ceiling returned in the
calendar year; and (4) the amount (if any) allocated to the
State by the Secretary of the Treasury from the pool of
unallocated rural investment credits unused by other States.
The allocation is made by a formula provided in the statute.
The $185,000 amount is indexed for inflation. At least 10
percent of each State's rural investment credit ceiling is set
aside for projects in which a qualified non-profit organization
is to materially participate (within the meaning of section
469(h) of the Code) in the development and operation of the
project throughout the compliance period. A qualified non-
profit organization generally means any organization if: (1)
the organization is described in section 501(c) and exempt from
tax under 501(a); (2) it is determined by the State rural
investment credit agency not to be affiliated with or
controlled by a for-profit organization; and (3) one or more of
its exempt purposes includes the fostering of rural investment.
Effective date.--The provision is effective for
expenditures made in taxable years beginning after the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
Amendment.
4. Qualified small business rural investment tax credit (sec. 634 of
the Senate amendment and new sec. 42B of the Code)
PRESENT LAW
There is no present-law provision specifically targeted
to encourage rural small business investment.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides a 30-percent tax credit for
certain qualified expenditures paid or incurred by qualified
rural small businesses. A qualified taxpayer's maximum credit
for any taxable year may not exceed the lesser of: (1) $5,000;
or (2) $25,000 minus the sum of the taxpayer's previous
qualified rural small business investment credit claimed for
all prior taxable years. For purposes of this credit, qualified
expenditures are defined as expenditures normally associated
with starting or expanding a business and included in a
qualified business plan, including costs for capital, plant and
equipment, inventory expenses, and wages but not including
interest costs. In the case of a qualified rural small business
with respect to which a small business rural investment credit
was claimed in any previous years, qualified expenditures for
each taxable year are limited to qualified small business
expenditures for the year only to the extent that those total
expenditures exceed the total expenditures for the immediately
preceding taxable year. For example, assume Taxpayer A incurs
qualified expenditures of $3000, in year 1, $0 in year 2, and
$4,000 in year 3. Taxpayer A will be eligible for a qualified
rural investment tax credit of $900 in year 1, $0 in year 2,
and $1,200 in year 3.
A qualified rural small business is defined as any
person, if such person; (1) employed not more than five full-
time employees during the taxable year; (2) materially and
substantially participates in management; (3) is located in a
qualifying county; and (4) submitted a qualified business plan
with respect to which an allocation of a rural investment tax
credit was received. For these purposes, an employee is
considered full-time if such employee is employed at least 30
hours per week for 20 or more calendar weeks in the taxable
year. A qualifying county is defined as a county which: (1) is
located outside a metropolitan statistical area (as defined by
the Office of Management and Budget); and (2) during the 20-
year period ending with the year the most recent census was
conducted, has experienced a net out-migration of inhabitants
of the county of at least 10-percent of the population of the
county. A qualified business plan is a business plan which: (1)
has been approved by the rural investment credit agency with
jurisdiction over the qualifying county in which the qualified
rural small business is located pursuant to such agency's rural
investment plan; and (2) meets such requirements as the agency
may specify.
Any otherwise allowable deduction or credit is reduced by
the amount of this credit.
Effective date.--The provision is effective for
expenditures made in taxable years beginning after the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
Amendment.
5. Provide a tax credit for maintenance of railroad track (sec. 635 of
the Senate amendment and new sec. 45I of the Code)
PRESENT LAW
There is no provision that provides for a railroad track
maintenance tax credit.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides a 30-percent business tax
credit for qualified railroad track maintenance expenditures
paid or incurred in a taxable year by eligible taxpayers. The
credit is limited to the product of $3,500 times the number of
miles of railroad track owned or leased by an eligible taxpayer
as of the close of its taxable year. Qualified railroad track
maintenance expenditures are defined as amounts expended
(whether or not chargeable to a capital account) for
maintaining railroad track (including roadbed, bridges, and
related track structures) owned or leased as of January 1,
2005, by a Class II or Class III railroad. An eligible taxpayer
is defined as: (1) any Class II or Class III railroad; and (2)
any person who transports property using the rail facilities of
a Class II or Class III railroad or who furnishes railroad-
related property or services to such person. The taxpayer's
basis in railroad track is reduced by the amount of the credit
allowed. No portion of the credit may be carried back to any
taxable year beginning before January 1, 2005. Other rules
apply.
This credit applies to qualified railroad track
maintenance expenditures paid or incurred during taxable years
beginning after December 31, 2004, and before January 1, 2008.
Effective date.--The Senate amendment is effective for
taxable years beginning after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
provision with the following modification. The conference
agreement increases the credit percentage from 30-percent to
50-percent. In addition, the conference agreement clarifies
that each mile of railroad track may be taken into account only
once, either by the owner of such mile or by the owner's
assignee, in computing the per-mile limitation.
6. Railroad revitalization and security investment credit (sec. 636 of
the Senate amendment)
PRESENT LAW
There is no provision in present law for railroad
revitalization.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides a 50-percent business tax
credit for qualified project expenditures paid or incurred in a
taxable year by eligible taxpayers. Qualified project
expenditures generally are defined as expenditures (whether or
not chargeable to a capital account) for: (1) planning; (2)
environmental review and environmental impact mitigation; (3)
track and track structure rehabilitation, relocation,
improvement and development; (4) railroad safety and security
improvements; (5) communications and signaling improvements;
(6) intercity passenger rail equipment acquisition; and (7)
rail station and intermodal facilities development. Such
expenditures are limited to expenditures for a project with
respect to intercity passenger rail transportation (as defined
in 49 U.S.C. 24102) that is included in a State rail plan.
The railroad revitalization and security investment
credit is subject to a national cap of $165 million per
calendar year. The annual national cap is allocated pro rata to
the States based on each State's share of the national total
of: (1) railroad and public road grade crossings on intercity
passenger rail routes; (2) intercity passenger train miles; and
(3) intercity embarkations and disembarkations for each
passenger. Any credit allocations unused for a calendar year
will be carried-over and allocated between those States that
used their allocation for the calendar year and requested a
share of the carryover. All projects must have an allocation to
claim the credit.
The taxpayer's basis in such property is reduced by the
amount of the credit allowed. No portion of the credit may be
carried back to any taxable year beginning before January 1,
2005. A credit under this section may be transferred (but no
more than once) if the taxpayer is a tax-exempt entity or if
the credit exceeds the taxpayer's tax liability for the year.
Other rules apply.
Effective date.--The Senate amendment is effective for
taxable years beginning after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
7. Special allocation of the railroad revitalization and security
investment credit for New York city rail projects (sec. 636 of
the Senate amendment)
PRESENT LAW
There is no provision in present law that provides a
special allocation of the railroad revitalization and security
investment credit.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides an additional allocation of
$200 million dollars to New York City for qualified project
expenditures within the New York Liberty Zone (as defined in
Code section 1400L(h). This allocation is in addition to the
allocation allowed under the general railroad revitalization
and security investment credit, described above. Under a
special rule, the $200 million will be allocated as follows:
(1) $100 million to projects designated by the mayor of New
York City; and (2) $100 million to projects designated by the
Governor of New York. Qualified project expenditures are
limited to expenditures for improvements to subway systems, for
commuter rail systems, for rail links to airports, and for
public infrastructure improvements in the vicinity of rail or
subway stations. The taxpayer's basis in such property is
reduced by the amount of the credit for which this credit is
allowed. No portion of the credit may be carried back to any
taxable year beginning before January 1, 2005. A credit under
this section may be transferred (but no more than once) if the
taxpayer is a tax-exempt entity or if the credit exceeds the
taxpayer's tax liability for the year. Other rules apply.
Effective date.--The Senate amendment is effective for
taxable years beginning after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
8. Modification of targeted areas and low-income communities designated
for new markets tax credit (sec. 637 of the Senate amendment
and sec. 45D of the Code)
PRESENT LAW
Section 45D provides a new markets tax credit for
qualified equity investments made to acquire stock in a
corporation, or a capital interest in a partnership, that is a
qualified community development entity (``CDE'').\340\ The
amount of the credit allowable to the investor (either the
original purchaser or a subsequent holder) is (1) a five-
percent credit for the year in which the equity interest is
purchased from the CDE and for each of the following two years,
and (2) a six-percent credit for each of the following four
years. The credit is determined by applying the applicable
percentage (five or six percent) to the amount paid to the CDE
for the investment at its original issue, and is available for
a taxable year to the taxpayer who holds the qualified equity
investment on the date of the initial investment or on the
respective anniversary date that occurs during the taxable
year. The credit is recaptured if at any time during the seven-
year period that begins on the date of the original issue of
the investment the entity ceases to be a qualified CDE, the
proceeds of the investment cease to be used as required, or the
equity investment is redeemed.
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\340\ Section 45D was added by section 121(a) of the Community
Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 21, 2000).
---------------------------------------------------------------------------
A qualified CDE is any domestic corporation or
partnership: (1) whose primary mission is serving or providing
investment capital for low-income communities or low-income
persons; (2) that maintains accountability to residents of low-
income communities by their representation on any governing
board of or any advisory board to the CDE; and (3) that is
certified by the Secretary as being a qualified CDE. A
qualified equity investment means stock (other than
nonqualified preferred stock) in a corporation or a capital
interest in a partnership that is acquired directly from a CDE
for cash, and includes an investment of a subsequent purchaser
if such investment was a qualified equity investment in the
hands of the prior holder. Substantially all of the investment
proceeds must be used by the CDE to make qualified low-income
community investments. For this purpose, qualified low-income
community investments include: (1) capital or equity
investments in, or loans to, qualified active low-income
community businesses; (2) certain financial counseling and
other services to businesses and residents in low-income
communities; (3) the purchase from another CDE of any loan made
by such entity that is a qualified low-income community
investment; or (4) an equity investment in, or loan to, another
CDE.
A ``low-income community'' is defined as a population
census tract with either (1) a poverty rate of at least 20
percent or (2) median family income which does not exceed 80
percent of the greater of metropolitan area median family
income or statewide median family income (for a non-
metropolitan census tract, does not exceed 80 percent of
statewide median family income). The Secretary may designate
any area within any census tract as a low-income community
provided that (1) the boundary is continuous, (2) the area (if
it were a census tract) would otherwise satisfy the poverty
rate or median income requirements, and (3) an inadequate
access to investment capital exists in the area.
A qualified active low-income community business is
defined as a business that satisfies, with respect to a taxable
year, the following requirements: (1) at least 50 percent of
the total gross income of the business is derived from the
active conduct of trade or business activities in any low-
income community; (2) a substantial portion of the tangible
property of such business is used in a low-income community;
(3) a substantial portion of the services performed for such
business by its employees is performed in a low-income
community; and (4) less than five percent of the average of the
aggregate unadjusted bases of the property of such business is
attributable to certain financial property or to certain
collectibles.
The maximum annual amount of qualified equity investments
is capped at $2.0 billion per year for calendar years 2004 and
2005, and at $3.5 billion per year for calendar years 2006 and
2007.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment modifies the Secretary's authority
to designate certain areas as low-income communities to provide
that the Secretary shall prescribe regulations to designate
``targeted populations'' as low-income communities for purposes
of the new markets tax credit. For this purpose, a ``targeted
population'' is defined by reference to section 103(20) of the
Riegle Community Development and Regulatory Improvement Act of
1994 (12 U.S.C. 4702(20)) to mean individuals, or an
identifiable group of individuals, including an Indian tribe,
who (A) are low-income persons; or (B) otherwise lack adequate
access to loans or equity investments. Under the Senate
amendment, ``low-income'' means (1) for a targeted population
within a metropolitan area, less than 80 percent of the area
median family income; and (2) for a targeted population within
a non-metropolitan area, less than the greater of 80 percent of
the area median family income or 80 percent of the statewide
non-metropolitan area median family income.\341\ Under the
Senate amendment, a targeted population is not required to be
within any census tract.
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\341\ 12. U.S.C. 4702(17) (used to define ``low-income'' for
purposes of 12. U.S.C. 4702(20)).
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Effective date.--The provision is effective for
designations made after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with respect to targeted population designations, modified to
provide that a population census tract with a population of
less than 2,000 shall be treated as a low-income community for
purposes of the credit if such tract is within an empowerment
zone, the designation of which is in effect under section 1391,
and is contiguous to one or more low-income communities.
Effective date.--The targeted population provision is
effective for designations made after the date of enactment.
The low-population provision is effective for investments made
after the date of enactment.
9. Modification of income requirement for census tracts within high
migration rural counties for new markets tax credit (sec. 638
of the Senate amendment and sec. 45D of the Code)
PRESENT LAW
Section 45D provides a new markets tax credit for
qualified equity investments made to acquire stock in a
corporation, or a capital interest in a partnership, that is a
qualified community development entity (``CDE'').\342\ The
amount of the credit allowable to the investor (either the
original purchaser or a subsequent holder) is (1) a five-
percent credit for the year in which the equity interest is
purchased from the CDE and for each of the following two years,
and (2) a six-percent credit for each of the following four
years. The credit is determined by applying the applicable
percentage (five or six percent) to the amount paid to the CDE
for the investment at its original issue, and is available for
the taxable year to the taxpayer who holds the qualified equity
investment on the date of the initial investment or on the
respective anniversary date that occurs during the taxable
year. The credit is recaptured if at any time during the seven-
year period that begins on the date of the original issue of
the investment the entity ceases to be a qualified CDE, the
proceeds of the investment cease to be used as required, or the
equity investment is redeemed.
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\342\ Section 45D was added by section 121(a) of the Community
Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 21, 2000).
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A qualified CDE is any domestic corporation or
partnership: (1) whose primary mission is serving or providing
investment capital for low-income communities or low-income
persons; (2) that maintains accountability to residents of low-
income communities by their representation on any governing
board of or any advisory board to the CDE; and (3) that is
certified by the Secretary as being a qualified CDE. A
qualified equity investment means stock (other than
nonqualified preferred stock) in a corporation or a capital
interest in a partnership that is acquired directly from a CDE
for cash, and includes an investment of a subsequent purchaser
if such investment was a qualified equity investment in the
hands of the prior holder. Substantially all of the investment
proceeds must be used by the CDE to make qualified low-income
community investments. For this purpose, qualified low-income
community investments include: (1) capital or equity
investments in, or loans to, qualified active low-income
community businesses; (2) certain financial counseling and
other services to businesses and residents in low-income
communities; (3) the purchase from another CDE of any loan made
by such entity that is a qualified low-income community
investment; or (4) an equity investment in, or loan to, another
CDE.
A ``low-income community'' is defined as a population
census tract with either (1) a poverty rate of at least 20
percent or (2) median family income which does not exceed 80
percent of the greater of metropolitan area median family
income or statewide median family income (for a non-
metropolitan census tract, does not exceed 80 percent of
statewide median family income). The Secretary may designate
any area within any census tract as a low-income community
provided that (1) the boundary is continuous, (2) the area (if
it were a census tract) would otherwise satisfy the poverty
rate or median income requirements, and (3) an inadequate
access to investment capital exists in the area.
A qualified active low-income community business is
defined as a business that satisfies, with respect to a taxable
year, the following requirements: (1) at least 50 percent of
the total gross income of the business is derived from the
active conduct of trade or business activities in any low-
income community; (2) a substantial portion of the tangible
property of such business is used in a low-income community;
(3) a substantial portion of the services performed for such
business by its employees is performed in a low-income
community; and (4) less than five percent of the average of the
aggregate unadjusted bases of the property of such business is
attributable to certain financial property or to certain
collectibles.
The maximum annual amount of qualified equity investments
is capped at $2.0 billion per year for calendar years 2004 and
2005, and at $3.5 billion per year for calendar years 2006 and
2007.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment modifies the low-income test for
high migration rural counties. Under the Senate amendment, in
the case of a population census tract located within a high
migration rural county, low income is defined by reference to
85 percent (rather than 80 percent) of statewide median family
income. For this purpose, a high migration rural county is any
county that, during the 20-year period ending with the year in
which the most recent census was conducted, has a net out-
migration of inhabitants from the county of at least 10 percent
of the population of the county at the beginning of such
period.
Effective date.--The provision is effective as if
included in the amendment made by section 121(a) of the
Community Renewal Tax Relief Act of 2000.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
10. Provide a tax credit for expenditures on closed captioning
technology in movies (sec. 639 of the Senate amendment and new
sec. 45T of the Code)
PRESENT LAW
There is no provision that allows a tax credit for
expenditures made for closed captioning technology in motion
pictures.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides a 50-percent business tax
credit (the ``motion picture accessibility credit'') for
certain qualified expenditures made in a taxable year by an
eligible taxpayer. Qualified expenditures are defined as
amounts paid or incurred for making motion pictures accessible
to deaf or hard-of-hearing individuals through the use of
captioning technology. An eligible taxpayer is defined as a
taxpayer who is in the business of showing motion pictures to
the public in theaters or producing or distributing those
motion pictures. The taxpayer's basis in property with respect
to which the credit is allowed is reduced by the amount of the
credit allowed. No deduction or credit is permitted under any
other provision of Chapter 1 (Normal Taxes and Surtaxes) of
Subtitle A (Income Taxes) of the Code for the amount of any
motion picture accessibility credit allowed. No portion of the
credit may be carried back to any taxable year beginning before
January 1, 2004. Other rules apply.
Effective date.--The Senate amendment is effective for
taxable years beginning after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
E. Miscellaneous Provisions
1. Exclusion of gain or loss on sale or exchange of certain brownfield
sites from unrelated business taxable income (sec. 641 of the
Senate amendment and secs. 512 and 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
regularly carried on that is not substantially related to the
organization's exempt purposes. Gains or losses from the sale,
exchange, or other disposition of property, other than stock in
trade, inventory, or property held primarily for sale to
customers in the ordinary course of a trade or business,
generally are excluded from unrelated business taxable income.
Gains or losses are treated as unrelated business taxable
income, however, if 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: (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.
Special rules apply in the case of an exempt organization
that owns a partnership interest in a partnership that holds
debt-financed property. An exempt organization's share of
partnership income that is derived from debt-financed property
generally is taxed as debt-financed income unless an exception
provides otherwise.
HOUSE BILL
No provision.
SENATE AMENDMENT
In general
The Senate amendment provides an exclusion from unrelated
business taxable income for the gain or loss from the qualified
sale, exchange, or other disposition of a qualifying brownfield
property by an eligible taxpayer. The exclusion from unrelated
business taxable income generally is available to an exempt
organization that acquires, remediates, and disposes of the
qualifying brownfield property. In addition, the Senate
amendment provides an exception from the debt-financed property
rules for such properties.
In order to qualify for the exclusions from unrelated
business income and the debt-financed property rules, the
eligible taxpayer is required to: (a) acquire from an unrelated
person real property that constitutes a qualifying brownfield
property; (b) pay or incur a minimum level of eligible
remediation expenditures with respect to the property; and (c)
transfer the remediated site to an unrelated person in a
transaction that constitutes a sale, exchange, or other
disposition for purposes of Federal income tax law.\343\
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\343\ For purposes of the provision, a person is related to another
person if (1) such person bears a relationship to such other person
that is described in section 267(b) (determined without regard to
paragraph (9)), or section 707(b)(1), determined by substituting 25
percent for 50 percent each place it appears therein; or (2) if such
other person is a nonprofit organization, if such person controls
directly or indirectly more than 25 percent of the governing body of
such organization.
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Qualifying brownfield properties
Under the Senate amendment, the exclusion from unrelated
business taxable income applies only to real property that
constitutes a qualifying brownfield property. A qualifying
brownfield property means real property that is certified,
before the taxpayer incurs any eligible remediation
expenditures (other than to obtain a Phase I environmental site
assessment), by an appropriate State agency (within the meaning
of section 198(c)(4)) in the State in which the property is
located as a brownfield site within the meaning of section
101(39) of the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (CERCLA) (as in effect
on the date of enactment of the proposal). The Senate amendment
provision requires that the taxpayer's request for
certification include a sworn statement of the taxpayer and
supporting documentation of the presence of a hazardous
substance, pollutant, or contaminant on the property that is
complicating the expansion, redevelopment, or reuse of the
property given the property's reasonably anticipated future
land uses or capacity for uses of the property (including a
Phase I environmental site assessment and, if applicable,
evidence of the property's presence on a local, State, or
Federal list of brownfields or contaminated property) and other
environmental assessments prepared or obtained by the taxpayer.
Eligible taxpayer
An eligible taxpayer with respect to a qualifying
brownfield property is an organization exempt from tax under
section 501(a) that acquired such property from an unrelated
person and paid or incurred a minimum amount of eligible
remediation expenditures with respect to such property. The
exempt organization (or the qualifying partnership of which it
is a partner) is required to pay or incur eligible remediation
expenditures with respect to a qualifying brownfield property
in an amount that exceeds the greater of: (a) $550,000; or (b)
12 percent of the fair market value of the property at the time
such property is acquired by the taxpayer, determined as if the
property were not contaminated.
An eligible taxpayer does not include an organization
that is: (1) potentially liable under section 107 of CERCLA
with respect to the property; (2) affiliated with any other
person that is potentially liable thereunder through any direct
or indirect familial relationship or any contractual,
corporate, or financial relationship (other than a contractual,
corporate, or financial relationship that is created by the
instruments by which title to a qualifying brownfield property
is conveyed or financed by a contract of sale of goods or
services); or (3) the result of a reorganization of a business
entity which was so potentially liable.\344\
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\344\ In general, a person is potentially liable under section 107
of CERCLA if: (1) it is the owner and operator of a vessel or a
facility; (2) at the time of disposal of any hazardous substance it
owned or operated any facility at which such hazardous substances were
disposed of; (3) by contract, agreement, or otherwise it arranged for
disposal or treatment, or arranged with a transporter for transport for
disposal or treatment, of hazardous substances owned or possessed by
such person, by any other party or entity, at any facility or
incineration vessel owned or operated by another party or entity and
containing such hazardous substances; or (4) it accepts or accepted any
hazardous substances for transport to disposal or treatment facilities,
incineration vessels or sites selected by such person, from which there
is a release, or a threatened release which causes the incurrence of
response costs, of a hazardous substance. 42 U.S.C. sec. 9607(a)
(2004).
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Qualified sale, exchange, or other disposition
Under the Senate amendment, a sale, exchange, or other
disposition of a qualifying brownfield property shall be
considered as qualified if such property is transferred by the
eligible taxpayer to an unrelated person, and within one year
of such transfer the taxpayer has received a certification (a
``remediation certification'') from the Environmental
Protection Agency or an appropriate State agency (within the
meaning of section 198(c)(4)) in the State in which the
property is located that, as a result of the taxpayer's
remediation actions, such property would not be treated as a
qualifying brownfield property in the hands of the transferee.
A taxpayer's request for a remediation certification shall be
made no later than the date of the transfer and shall include a
sworn statement by the taxpayer certifying that: (1) remedial
actions that comply with all applicable or relevant and
appropriate requirements (consistent with section 121(d) of
CERCLA) have been substantially completed, such that there are
no hazardous substances, pollutants or contaminants that
complicate the expansion, redevelopment, or reuse of the
property given the property's reasonably anticipated future
land uses or capacity for uses of the property; (2) the
reasonably anticipated future land uses or capacity for uses of
the property are more economically productive or
environmentally beneficial than the uses of the property in
existence on the date the property was certified as a
qualifying brownfield property; \345\ (3) a remediation plan
has been implemented to bring the property in compliance with
all applicable local, State, and Federal environmental laws,
regulations, and standards and to ensure that remediation
protects human health and the environment; (4) the remediation
plan, including any physical improvements required to remediate
the property, is either complete or substantially complete, and
if substantially complete,\346\ sufficient monitoring, funding,
institutional controls, and financial assurances have been put
in place to ensure the complete remediation of the site in
accordance with the remediation plan as soon as is reasonably
practicable after the disposition of the property by the
taxpayer; and (5) public notice and the opportunity for comment
on the request for certification (in the same form and manner
as required for public participation required under section
117(a) of CERCLA (as in effect on the date of enactment of the
provision)) was completed before the date of such request.
Public notice shall include, at a minimum, publication in a
major local newspaper of general circulation.
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\345\ For this purpose, use of the property as a landfill or other
hazardous waste facility shall not be considered more economically
productive or environmentally beneficial.
\346\ For these purposes, substantial completion means any
necessary physical construction is complete, all immediate threats have
been eliminated, and all long-term threats are under control.
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A copy of each of the requests for certification that the
property was a brownfield site, and that it would no longer be
a qualifying brownfield property in the hands of the
transferee, shall be included in the tax return of the eligible
taxpayer (and, where applicable, of the qualifying partnership)
for the taxable year during which the transfer occurs.
Eligible remediation expenditures
Under the Senate amendment, eligible remediation
expenditures means, with respect to any qualifying brownfield
property: (1) expenditures that are paid or incurred by the
taxpayer to an unrelated person to obtain a Phase I
environmental site assessment of the property; (2) amounts paid
or incurred by the taxpayer after receipt of the certification
that the property is a qualifying brownfield property for goods
and services necessary to obtain the remediation certification;
and (3) expenditures to obtain remediation cost-cap or stop-
loss coverage, re-opener or regulatory action coverage, or
similar coverage under environmental insurance policies,\347\
or to obtain financial guarantees required to manage the
remediation and monitoring of the property. Eligible
remediation expenditures include expenditures to (1) manage,
remove, control, contain, abate, or otherwise remediate a
hazardous substance, pollutant, or contaminant on the property;
(2) obtain a Phase II environmental site assessment of the
property, including any expenditure to monitor, sample, study,
assess, or otherwise evaluate the release, threat of release,
or presence of a hazardous substance, pollutant, or contaminant
on the property, or (3) obtain environmental regulatory
certifications and approvals required to manage the remediation
and monitoring of the hazardous substance, pollutant, or
contaminant on the property. Eligible remediation expenditures
do not include (1) any portion of the purchase price paid or
incurred by the eligible taxpayer to acquire the qualifying
brownfield property; (2) environmental insurance costs paid or
incurred to obtain legal defense coverage, owner/operator
liability coverage, lender liability coverage, professional
liability coverage, or similar types of coverage; \348\ (3) any
amount paid or incurred to the extent such amount is
reimbursed, funded or otherwise subsidized by: (a) grants
provided by the United States, a State, or a political
subdivision of a State for use in connection with the property;
(b) proceeds of an issue of State or local government
obligations used to provide financing for the property, the
interest of which is exempt from tax under section 103; or (c)
subsidized financing provided (directly or indirectly) under a
Federal, State, or local program in connection with the
property; or (4) any expenditure paid or incurred before the
date of enactment of the proposal.\349\
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\347\ Cleanup cost-cap or stop-loss coverage is coverage that
places an upper limit on the costs of cleanup that the insured may have
to pay. Re-opener or regulatory action coverage is coverage for costs
associated with any future government actions that require further site
cleanup, including costs associated with the loss of use of site
improvements.
\348\ For this purpose, professional liability insurance is
coverage for errors and omissions by public and private parties dealing
with or managing contaminated land issues, and includes coverage under
policies referred to as owner-controlled insurance. Owner/operator
liability coverage is coverage for those parties that own the site or
conduct business or engage in cleanup operations on the site. Legal
defense coverage is coverage for lawsuits associated with liability
claims against the insured made by enforcement agencies or third
parties, including by private parties.
\349\ The provision authorizes the Secretary of the Treasury to
issue guidance regarding the treatment of government-provided funds for
purposes of determining eligible remediation expenditures.
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Qualified gain or loss
The Senate amendment generally excludes from unrelated
business taxable income the exempt organization's gain or loss
from the sale, exchange, or other disposition of a qualifying
brownfield property. Income, gain, or loss from other transfers
does not qualify under the provision.\350\ The amount of gain
or loss excluded from unrelated business taxable income is not
limited to or based upon the increase or decrease in value of
the property that is attributable to the taxpayer's expenditure
of eligible remediation expenditures. Further, the exclusion
does not apply to an amount treated as gain that is ordinary
income with respect to section 1245 or section 1250 property,
including any amount deducted as a section 198 expense that is
subject to the recapture rules of section 198(e), if the
taxpayer had deducted such amount in the computation of its
unrelated business taxable income.\351\
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\350\ For example, rent income from leasing the property does not
qualify under the proposal.
\351\ Depreciation or section 198 amounts that the taxpayer had not
used to determine its unrelated business taxable income are not treated
as gain that is ordinary income under sections 1245 or 1250 (secs.
1.1245-2(a)(8) and 1.1250-2(d)(6)), and are not recognized as gain or
ordinary income upon the sale, exchange, or disposition of the
property. Thus, an exempt organization would not be entitled to a
double benefit resulting from a section 198 expense deduction and the
proposed exclusion from gain with respect to any amounts it deducts
under section 198.
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Special rules for qualifying partnerships
In general
In the case of a tax-exempt organization that is a
partner of a qualifying partnership that acquires, remediates,
and disposes of a qualifying brownfield property, the Senate
amendment provision applies to the tax-exempt partner's
distributive share of the qualifying partnership's gain or loss
from the disposition of the property.\352\ A qualifying
partnership is a partnership that (1) has a partnership
agreement that satisfies the requirements of section
514(c)(9)(B)(vi) at all times beginning on the date of the
first certification received by the partnership that one of its
properties is a qualifying brownfield property; (2) satisfies
the requirements of the proposal if such requirements are
applied to the partnership (rather than to the eligible
taxpayer that is a partner of the partnership); and (3) is not
an organization that would be prevented from constituting an
eligible taxpayer by reason of it or an affiliate being
potentially liable under CERCLA with respect to the property.
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\352\ The provision's exclusions do not apply to a tax-exempt
partner's gain or loss from the tax-exempt partner's sale, exchange, or
other disposition of its partnership interest. Such transactions
continue to be governed by present-law.
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The exclusion is available to a tax-exempt organization
with respect to a particular property acquired, remediated, and
disposed of by a qualifying partnership only if the exempt
organization is a partner of the partnership at all times
during the period beginning on the date of the first
certification received by the partnership that one of its
properties is a qualifying brownfield property, and ending on
the date of the disposition of the property by the
partnership.\353\
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\353\ The provision subjects a tax-exempt partner to tax on gain
previously excluded by the partner (plus interest) if a property
subsequently becomes ineligible for exclusion under the qualifying
partnership's multiple-property election.
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Under the Senate amendment, the Secretary shall prescribe
such regulations as are necessary to prevent abuse of the
requirements of the provision, including abuse through the use
of special allocations of gains or losses, or changes in
ownership of partnership interests held by eligible taxpayers.
Certifications and multiple property elections
If the property is acquired and remediated by a
qualifying partnership of which the exempt organization is a
partner, it is intended that the certification as to status as
a qualified brownfield property and the remediation
certification will be obtained by the qualifying partnership,
rather than by the tax-exempt partner, and that both the
eligible taxpayer and the qualifying partnership will be
required to make available such copies of the certifications to
the IRS. Any elections or revocations regarding the application
of the eligible remediation expenditure rules to multiple
properties (as described below) acquired, remediated, and
disposed of by a qualifying partnership must be made by the
partnership. A tax-exempt partner is bound by an election made
by the qualifying partnership of which it is a partner.
Special rules for multiple properties
The eligible remediation expenditure determinations
generally are made on a property-by-property basis. An exempt
organization (or a qualifying partnership of which the exempt
organization is a partner) that acquires, remediates, and
disposes of multiple qualifying brownfield properties, however,
may elect to make the eligible remediation expenditure
determinations on a multiple-property basis. In the case of
such an election, the taxpayer satisfies the eligible
remediation expenditures test with respect to all qualifying
brownfield properties acquired during the election period if
the average of the eligible remediation expenditures for all
such properties exceeds the greater of: (a) $550,000; or (b) 12
percent of the average of the fair market value of the
properties, determined as of the dates they were acquired by
the taxpayer and as if they were not contaminated. If the
eligible taxpayer elects to make the eligible remediation
expenditure determination on a multiple property basis, then
the election shall apply to all qualifying sales, exchanges, or
other dispositions of qualifying brownfield properties the
acquisition and transfer of which occur during the period for
which the election remains in effect.\354\
---------------------------------------------------------------------------
\354\ If the taxpayer fails to satisfy the averaging test for the
properties subject to the election, then the taxpayer may not apply the
exclusion on a separate property basis with respect to any of such
properties.
---------------------------------------------------------------------------
An acquiring taxpayer makes a multiple-property election
with its timely filed tax return (including extensions) for the
first taxable year for which it intends to have the election
apply. A timely filed election is effective as of the first day
of the taxable year of the return in which the election is
included or a later day in such taxable year selected by the
taxpayer. An election remains effective until the earliest of a
date selected by the taxpayer, the date which is eight years
after the effective date of the election, the effective date of
a revocation of the election, or, in the case of a partnership,
the date of the termination of the partnership.
A taxpayer may revoke a multiple-property election by
filing a statement of revocation with a timely filed tax return
(including extensions). A revocation is effective as of the
first day of the taxable year of the return in which the
revocation is included or a later day in such taxable year
selected by the eligible taxpayer or qualifying partnership.
Once a taxpayer revokes the election, the taxpayer is
ineligible to make another multiple-property election with
respect to any qualifying brownfield property subject to the
revoked election.\355\
---------------------------------------------------------------------------
\355\ The provision subjects a taxpayer to tax on gain previously
excluded (plus interest) in the event a site subsequently becomes
ineligible for gain exclusion under the multiple-property election.
---------------------------------------------------------------------------
Debt-financed property
The Senate amendment provides that debt-financed
property, as defined by section 514(b), does not include any
property the gain or loss from the sale, exchange, or other
disposition of which is excluded by reason of the provisions of
the proposal that exclude such gain or loss from computing the
gross income of any unrelated trade or business of the
taxpayer. Thus, gain or loss from the sale, exchange, or other
disposition of a qualifying brownfield property that otherwise
satisfies the requirements of the provision is not taxed as
unrelated business taxable income merely because the taxpayer
incurred debt to acquire or improve the site.
Effective date.--The Senate amendment provision applies
to gain or loss on the sale, exchange, or other disposition of
a property acquired by the taxpayer after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
modified to provide a termination date of December 31, 2009.
The conference agreement provision applies to gain or loss on
the sale, exchange, or other disposition of property that is
acquired by the eligible taxpayer or qualifying partnership
during the period beginning January 1, 2005, and ending
December 31, 2009. Property acquired during the five-year
acquisition period need not be disposed of by the termination
date in order to qualify for the exclusion. For purposes of the
multiple property election, gain or loss on property acquired
after December 31, 2009, is not eligible for the exclusion from
unrelated business taxable income, although properties acquired
after the termination date (but during the election period) are
included for purposes of determining average eligible
remediation expenditures.
Effective date.--The conference agreement provision
applies to gain or loss on property that is acquired after
December 31, 2004.
2. Civil rights tax relief (sec. 643 of the Senate amendment and sec.
62 of the Code)
PRESENT LAW
Under present law, gross income generally does not
include the amount of any damages (other than punitive damages)
received (whether by suit or agreement and whether as lump sums
or as periodic payments) by individuals on account of personal
physical injuries (including death) or physical sickness.\356\
Expenses relating to recovering such damages are generally not
deductible.\357\
---------------------------------------------------------------------------
\356\ Sec. 104(a)(2).
\357\ Sec. 265(a)(1).
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Other damages are generally included in gross income. The
related expenses to recover the damages, including attorneys'
fees, are generally deductible as expenses for the production
of income,\358\ subject to the two-percent floor on itemized
deductions.\359\ Thus, such expenses are deductible only to the
extent the taxpayer's total miscellaneous itemized deductions
exceed two percent of adjusted gross income. Any amount
allowable as a deduction is subject to reduction under the
overall limitation of itemized deductions if the taxpayer's
adjusted gross income exceeds a threshold amount.\360\ For
purposes of the alternative minimum tax, no deduction is
allowed for any miscellaneous itemized deduction.
---------------------------------------------------------------------------
\358\ Sec. 212.
\359\ Sec. 67.
\360\ Sec. 68.
---------------------------------------------------------------------------
In some cases, claimants will engage an attorney to
represent them on a contingent fee basis. That is, if the
claimant recovers damages, a prearranged percentage of the
damages will be paid to the attorney; if no damages are
recovered, the attorney is not paid a fee. The proper tax
treatment of contingent fee arrangements with attorneys has
been litigated in recent years. Some courts \361\ have held
that the entire amount of damages is income and that the
claimant is entitled to a miscellaneous itemized deduction
subject to both the two-percent floor as an expense for the
production of income for the portion paid to the attorney and
to the overall limitation on itemized deductions. Other courts
have held that the portion of the recovery that is paid
directly to the attorney is not income to the claimant, holding
that the claimant has no claim of right to that portion of the
recovery.\362\
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\361\ Kenseth v. Commissioner, 114 T.C. 399 (2000), aff'd 259 F.3d
881 (7th Cir. 2001); Coady v. Commissioner, 213 F.3d 1187 (9th Cir.
2000); Benci-Woodward v. Commissioner, 219 F.3d 941 (9th Cir. 2000);
Baylin v. United States, 43 F.3d 1451 (Fed. Cir. 1995).
\362\ Cotnam v. Commissioner, 263 F.2d 119 (5th Cir. 1959); Estate
of Arthur Clarks v. United States, 202 F.3d 854 (6th Cir. 2000);
Srivastava v. Commissioner, 220 F.3d 353 (5th Cir. 2000). In some of
these cases, such as Cotnam, State law has been an important
consideration in determining that the claimant has no claim of right to
the recovery.
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides an above-the-line deduction
for attorneys' fees and costs paid by, or on behalf of, the
taxpayer in connection with any action involving a claim of
unlawful discrimination, certain claims against the Federal
Government, or a private cause of action under the Medicare
Secondary Payer statute. The amount that may be deducted above-
the-line may not exceed the amount includible in the taxpayer's
gross income for the taxable year on account of a judgment or
settlement (whether by suit or agreement and whether as lump
sum or periodic payments) resulting from such claim.
Under the proposal, ``unlawful discrimination'' means an
act that is unlawful under certain provisions of any of the
following: the Civil Rights Act of 1991; the Congressional
Accountability Act of 1995; the National Labor Relations Act;
the Fair Labor Standards Act of 1938; the Age Discrimination in
Employment Act of 1967; the Rehabilitation Act of 1973; the
Employee Retirement Income Security Act of 1974; the Education
Amendments of 1972; the Employee Polygraph Protection Act of
1988; the Worker Adjustment and Retraining Notification Act;
the Family and Medical Leave Act of 1993; chapter 43 of Title
38 of the United States Code; the Revised Statutes; the Civil
Rights Act of 1964; the Fair Housing Act; the Americans with
Disabilities Act of 1990; any provision of Federal law
(popularly known as whistleblower protection provisions)
prohibiting the discharge of an employee, discrimination
against an employee, or any other form of retaliation or
reprisal against an employee for asserting rights or taking
other actions permitted under Federal law; or any provision of
Federal, State or local law, or common law claims permitted
under Federal, State, or local law providing for the
enforcement of civil rights or regulating any aspect of the
employment relationship, including claims for wages,
compensation, or benefits, or prohibiting the discharge of an
employee, discrimination against an employee, or any other form
of retaliation or reprisal against an employee for asserting
rights or taking other actions permitted by law.
Effective date.--The Senate amendment provision applies
to fees and costs paid after December 31, 2002, with respect to
any judgment or settlement occurring after such date.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
except for the effective date.
Effective date.--The conference agreement applies to fees
and costs paid after the date of enactment with respect to any
judgment or settlement occurring after such date.
3. Exclusion from gross income for amounts paid under National Health
Service Corps loan repayment program (sec. 644 of the Senate
amendment and sec. 108 of the Code)
PRESENT LAW
The National Health Service Corps Loan Repayment Program
(the ``NHSC Loan Repayment Program'') provides education loan
repayments to participants on condition that the participants
provide certain services. In the case of the NHSC Loan
Repayment Program, the recipient of the loan repayment is
obligated to provide medical services in a geographic area
identified by the Public Health Service as having a shortage of
health-care professionals. Loan repayments may be as much as
$35,000 per year of service plus a tax assistance payment of 39
percent of the repayment amount.
States may also provide for education loan repayment
programs for persons who agree to provide primary health
services in health professional shortage areas. Under the
Public Health Service Act, such programs may receive Federal
grants with respect to such repayment programs if certain
requirements are satisfied.
Generally, gross income means all income from whatever
source derived including income for the discharge of
indebtedness. However, gross income does not include discharge
of indebtedness income if: (1) the discharge occurs in a Title
11 case; (2) the discharge occurs when the taxpayer is
insolvent; (3) the indebtedness discharged is qualified farm
indebtedness; or (4) except in the case of a C corporation, the
indebtedness discharged is qualified real property business
indebtedness.
Because the loan repayments provided under the NHSC Loan
Repayment Program or similar State programs under the Public
Health Service Act are not specifically excluded from gross
income, they are gross income to the recipient. There is also
no exception from employment taxes (FICA and FUTA) for such
loan repayments.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision excludes from gross income and employment
taxes education loan repayments provided under the NHSC Loan
Repayment Program and State programs eligible for funds under
the Public Health Service Act. The provision also provides that
such repayments are not taken into account as wages in
determining benefits under the Social Security Act.
Effective date.--The provision is effective with respect
to amounts received in taxable years beginning after December
31, 2003.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
4. Certain expenses of rural letter carriers (sec. 645 of the Senate
amendment and sec. 162(o) of the Code)
PRESENT LAW
The deductible automobile expenses of rural letter
carriers equal the reimbursements that such carriers receive
from the U.S. Postal Service. Carriers are not allowed to
document their actual costs and claim itemized deductions for
costs in excess of reimbursements,\363\ nor are carriers
required to include in income reimbursements in excess of their
actual costs.
---------------------------------------------------------------------------
\363\ Section 162(o).
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HOUSE BILL
No provision.
SENATE AMENDMENT
Under the Senate amendment, if the reimbursements a rural
letter carrier receives from the U.S. Postal Service fall short
of the carrier's actual costs, the costs in excess of
reimbursements qualify as a miscellaneous itemized deduction
subject to the two-percent floor. Reimbursements in excess of
their actual costs continue not to be required to be included
in gross income.
Effective date.--The provisions is effective for taxable
years beginning after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
5. Method of accounting for naval shipbuilders (sec. 646 of the Senate
amendment)
PRESENT LAW
Generally, taxpayers must use the percentage-of-
completion method to determine taxable income from long-term
contracts.\364\ Under sec. 10203(b)(2)(B) of the Revenue Act of
1987,\365\ an exception exists for certain ship construction
contracts, which may be accounted for using the 40/60
percentage-of-completion/ capitalized cost method (``PCCM'').
Under the 40/60 PCCM, 60 percent of a taxpayer's long-term
contract income is exempt from the requirement to use the
percentage-of-completion method while 40 percent remains
subject to the requirement. The exempt 60 percent of long-term
contract income must be reported by consistently using the
taxpayer's exempt contract method. Permissible exempt contract
methods include the percentage of completion method, the
exempt-contract percentage-of-completion method, and the
completed contract method.\366\
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\364\ Sec. 460(a).
\365\ Pub. Law No. 100-203 (1987).
\366\ Treas. Reg. 1.460-4(c)(1).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that qualified naval ship
contracts may be accounted for using the 40/60 PCCM during the
first five taxable years of the contract. The cumulative
reduction in tax resulting from the provision over the five-
year period is recaptured and included in the taxpayer's tax
liability in the sixth year. Qualified naval ship contracts are
defined as any contract or portion thereof that is for the
construction in the United States of one ship or submarine for
the Federal Government if the taxpayer reasonably expects the
acceptance date will occur no later than nine years after the
construction commencement date.
Effective date.--The Senate amendment is effective for
contracts with respect to which the construction commencement
date occurs after date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with the following modification. The provision specifies that
the construction commencement date is the date on which the
physical fabrication of any section or component of the ship or
submarine begins in the taxpayer's shipyard.
Effective date.--The provision is effective for contracts
with respect to which the construction commencement date occurs
after date of enactment.
6. Distributions to shareholders from policyholders surplus account of
life insurance companies (sec. 647 of the Senate amendment and
sec. 815 of the Code)
PRIOR AND PRESENT LAW
Under the law in effect from 1959 through 1983, a life
insurance company was subject to a three-phase taxable income
computation under Federal tax law. Under the three-phase
system, a company was taxed on the lesser of its gain from
operations or its taxable investment income (Phase I) and, if
its gain from operations exceeded its taxable investment
income, 50 percent of such excess (Phase II). Federal income
tax on the other 50 percent of the gain from operations was
deferred, and was accounted for as part of a policyholder's
surplus account and, subject to certain limitations, taxed only
when distributed to stockholders or upon corporate dissolution
(Phase III). To determine whether amounts had been distributed,
a company maintained a shareholders surplus account, which
generally included the company's previously taxed income that
would be available for distribution to shareholders.
Distributions to shareholders were treated as being first out
of the shareholders surplus account, then out of the
policyholders surplus account, and finally out of other
accounts.
The Deficit Reduction Act of 1984 included provisions
that, for 1984 and later years, eliminated further deferral of
tax on amounts (described above) that previously would have
been deferred under the three-phase system. Although for
taxable years after 1983, life insurance companies may not
enlarge their policyholders surplus account, the companies are
not taxed on previously deferred amounts unless the amounts are
treated as distributed to shareholders or subtracted from the
policyholders surplus account (sec. 815).
Under present law, any direct or indirect distribution to
shareholders from an existing policyholders surplus account of
a stock life insurance company is subject to tax at the
corporate rate in the taxable year of the distribution. Present
law (like prior law) provides that any distribution to
shareholders is treated as made (1) first out of the
shareholders surplus account, to the extent thereof, (2) then
out of the policyholders surplus account, to the extent
thereof, and (3) finally, out of other accounts.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provision suspends for a stock life
insurance company's taxable years beginning after December 31,
2003, and before January 1, 2006, the application of the rules
imposing income tax on distributions to shareholders from the
policyholders surplus account of a life insurance company (sec.
815). The provision also reverses the order in which
distributions reduce the various accounts, so that
distributions would be treated as first made out of the
policyholders surplus account, to the extent thereof, and then
out of the shareholders surplus account, and lastly out of
other accounts.
Effective date.--The Senate amendment provision is
effective for taxable years beginning after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
with a modification.
The conference agreement provision suspends for a stock
life insurance company's taxable years beginning after December
31, 2004, and before January 1, 2007, the application of the
rules imposing income tax on distributions to shareholders from
the policyholders surplus account of a life insurance company
(sec. 815). The conference agreement includes the Senate
amendment provision reversing the order in which distributions
reduce the various accounts, so that distributions would be
treated as first made out of the policyholders surplus account,
to the extent thereof, and then out of the shareholders surplus
account, and lastly out of other accounts.
Effective date.--The conference agreement provision is
effective for taxable years beginning after December 31, 2004.
7. Motor vehicle dealer transitional assistance (sec. 650 of the Senate
amendment)
PRESENT LAW
Under present law, no gain or loss is recognized on the
exchange of property used in a trade or business or held for
investment if the property is exchanged solely for property of
like kind.\367\ To qualify for nonrecognition treatment, the
replacement property must be identified within 45 days and the
exchange must be completed within 180 days after the transfer
of the exchanged property. The basis of the replacement
property is determined by reference to the basis of the
exchanged property.
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\367\ Sec. 1031(a)(1).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides an election (on either an
original or amended return) to defer the gain on termination
payments received by a taxpayer from a motor vehicle
manufacturer on account of the termination of a motor vehicle
sales and service agreement, provided the proceeds are
reinvested within two years in property used in a domestic
motor vehicle dealership. Under the provision, a dealership in
which the proceeds are reinvested within two years is treated
as like kind replacement property under sec. 1031, without
regard to the time limitations on identification of and
acquisition of such replacement property under present law. The
provision extends the statute of limitations for assessment of
any deficiency attributable to gain on termination payments
until three years after the taxpayer notifies the Secretary of
the like-kind replacement property or an intention not to
replace.
The Senate amendment applies only with respect to
termination payments from a motor vehicle manufacturer who
announced in December 2000 that it would phase out the motor
vehicle brand to which the agreement relates.
Effective date.--The Senate amendment is effective for
amounts received after December 12, 2000, in taxable years
ending after that date.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
8. Expansion of designated renewal community area based on 2000 census
data (sec. 651 of the Senate amendment and sec. 1400E of the
Code)
PRESENT LAW
Section 1400E provides for the designation of certain
communities as renewal communities.\368\ An area designated as
a renewal community is eligible for the following tax
incentives: (1) a zero-percent rate for capital gain from the
sale of qualifying assets; (2) a 15-percent wage credit to
employers for the first $10,000 of qualified wages; (3) a
``commercial revitalization deduction'' that allows taxpayers
(to the extent allocated by the appropriate State agency) to
deduct either (a) 50 percent of qualifying expenditures for the
taxable year in which a qualified building is placed in
service, or (b) all of the qualifying expenditures ratably over
a 10-year period beginning with the month in which such
building is placed in service; (4) an additional $35,000 of
section 179 expensing for qualified property; and (5) an
expansion of the work opportunity tax credit with respect to
individuals who live in a renewal community.
---------------------------------------------------------------------------
\368\ Section 1400E was added by section 101(a) of the Community
Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 21, 2000).
---------------------------------------------------------------------------
To be designated as a renewal community, a nominated area
was required to meet the following criteria: (1) each census
tract must have a poverty rate of at least 20 percent; (2) in
the case of an urban area, at least 70 percent of the
households have incomes below 80 percent of the median income
of households within the local government jurisdiction; (3) the
unemployment rate is at least 1.5 times the national
unemployment rate; and (4) the area is one of pervasive
poverty, unemployment, and general distress. There are no
geographic size limitations placed on renewal communities.
Instead, the boundary of a renewal community must be
continuous. In addition, the renewal community must have a
minimum population of 4,000 if the community is located within
a metropolitan statistical area (at least 1,000 in all other
cases), and a maximum population of not more than 200,000. The
population limitations do not apply to any renewal community
that is entirely within an Indian reservation.
The designations of renewal communities were required to
be made by December 31, 2001, using 1990 census data to
determine relevant populations and poverty rates.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment permits the Secretary of Housing and
Urban Development to expand a renewal community to include: (1)
any census tract that at the time such community was nominated,
satisfied the requirements for inclusion in such community but
for the failure of such tract to satisfy one or more of the
population and poverty rate requirements using 1990 census
data, and that satisfies all failed population and poverty rate
requirements using 2000 census data; or (2) an area that is
adjacent to at least one other area designated as a renewal
community and that has a population less than the generally
applicable population requirement, if the area is one of
pervasive poverty, unemployment, and general distress that is
within the jurisdiction of one or more local governments and
the boundary of the area is continuous, or the area contains a
population of less than 100 people.
Effective date.--The provision is effective as if
included in the amendments made by section 101 of the Community
Renewal Tax Relief Act of 2000.
CONFERENCE AGREEMENT
The conference agreement modifies the Senate amendment to
authorize the Secretary of Housing and Urban Development, at
the request of all of the governments that nominated a renewal
community, to add a contiguous census tract to a renewal
community in the following circumstances. First, the renewal
community, including any tract to be added, would have met the
renewal community eligibility requirements at the time of the
community's original nomination, and any tract to be added has
a poverty rate using 2000 census data that exceeds the poverty
rate of such tract using 1990 census data. Second, a tract may
be added to a renewal community even if the addition of such
tract to such community would have caused the community to fail
one or more eligibility requirements when originally nominated
using 1990 census data, provided that: (1) the renewal
community after the inclusion of such tract does not have a
population that exceeds 200,000 using either 1990 or 2000
census data; (2) such tract has a poverty rate of at least 20
percent using 2000 census data; and (3) such tract has a
poverty rate using 2000 census data that exceeds the poverty
rate of such tract using 1990 census data. Census tracts that
did not have a poverty rate determined by the Bureau of the
Census using 1990 data may be added to an existing renewal
community without satisfying requirement (3) above. Third, a
tract may be added to an existing renewal community if such
tract: (1) has no population using 2000 census data or no
poverty rate for such tract is determined by the Bureau of the
Census using 2000 census data; (2) such tract is one of general
distress; and (3) the renewal community, including such tract,
is within the jurisdiction of one or more local governments and
has a continuous boundary.
Effective date.--The conference agreement provision is
effective as if included in the amendments made by section 101
of the Community Renewal Tax Relief Act of 2000.
9. Reduction of holding period to 12 months for purposes of determining
whether horses are section 1231 assets (sec. 652 of the Senate
amendment and sec. 1231 of the Code)
PRESENT LAW
Under present law, gain from the sale or exchange of
horses held for draft, breeding, or sporting purposes qualify
for long-term capital gain if the horse has been held for 24
months or more.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment reduces the holding period for
horses to 12 months or more.
Effective date.--The Senate amendment is effective for
taxable years beginning after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the provision
in the Senate amendment.
10. Blue ribbon commission on comprehensive tax reform (sec. 653 of the
Senate amendment)
PRESENT LAW
Under present law, there is no specially-appointed
commission designated to study and report on comprehensive tax
reform.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment establishes a commission to study
and report on comprehensive tax reform. Members of the
commission are to be appointed by Congressional leadership and
the President.
Effective date.--Members must be appointed by October 30,
2004. The report is due no later than 18 months after all
members are appointed.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment.
11. Temporary accumulated earnings tax safe harbor (sec. 655 of the
Senate amendment and sec. 537 of the Code)
PRESENT LAW
Present law imposes an accumulated earnings tax on the
accumulated taxable income of a corporation that is formed or
availed of for the purpose of avoiding the income tax with
respect to its shareholders or the shareholders of any other
corporation, by permitting earnings and profits to accumulate
instead of being distributed.\369\
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\369\ Under present law, corporate income is taxed at graduated
rates ranging from 15 percent to 35 percent. A corporation is also
entitled to a dividends-received deduction of at least 70 percent for
dividends received from other corporations. Thus, the maximum corporate
rate on dividends received from other corporations is 10.5 percent.
Individual income is generally taxed at graduated rates up to 35
percent. However, dividends are taxed at a maximum rate of 15 percent.
The maximum individual rates are scheduled to return to 39.6 percent on
dividends as well as on other ordinary income after the year 2009.
---------------------------------------------------------------------------
The accumulated earnings tax is in addition to the
regular corporate level tax and is imposed at the maximum rate
that would be imposed on a dividend to an individual
shareholder. A corporation is generally permitted to accumulate
an exempted amount of $250,000 ($150,000 in the case of certain
service corporations); the tax is then imposed on accumulated
taxable income above that amount.
The fact that earnings and profits are permitted to
accumulate beyond the reasonable needs of the business is
determinative of the purpose to avoid tax with respect to
shareholders, unless the corporation by the preponderance of
the evidence shall prove to the contrary. If a corporation is a
``mere holding or investment company,'' that fact is prima
facie evidence of the prohibited purpose.\370\ Treasury
regulations provide that even in cases of accumulation of
earnings beyond the reasonable needs of the business or where a
corporation is a mere holding or investment company, such facts
are not absolutely conclusive against the taxpayer if the
taxpayer satisfies the Commissioner that the corporation was
neither formed not availed of for the purpose of avoiding
income tax with respect to shareholders.\371\
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\370\ Sec. 533.
\371\ Treas. Reg. sec. 1.533-1(a).
---------------------------------------------------------------------------
The determination whether earnings and profits have been
accumulated beyond the reasonable needs of the business is
based on facts and circumstances. The reasonable needs of the
business include ``reasonably anticipated'' needs of the
business.\372\ Some courts have applied a business cycle
approach in determining the basic working capital needs of a
business, to which additional reasonably anticipated future
needs may be added. Disputes have arisen regarding the choice
of business cycle and the proper addition of future needs.\373\
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\372\ Treas. Reg. secs. 1.537-1, 1.537-2 and 1.537-3.
\373\ See, e.g., Bardahl Manufacturing Corp., 24 TCM 1030 (1965);
Bardahl International Corp., 25 TCM 935 (1966); Empire Steel Castings,
Inc., 33 TCM 155 (1974); Alma-Piston Co. v. Commissioner, 579 F.2d 1000
(6th Cir. 1978); C.E. Hooper, Inc. 76-1 USTC par. 9185 (Ct. Cl. 1976).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The bill provides that the reasonably anticipated needs
of a business for any taxable year shall include working
capital for the business in an amount which is not less than
the sum of the cost of goods, operating expenses, and interest
expense which the business incurred during the preceding
taxable year. Any amounts incurred as part of a plan a
principal purpose of which is to increase the limitation under
this provision is not taken into account.
Effective date.--The provision applies to taxable years
beginning after December 31, 2003 and before January 1, 2009.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
12. Tax Treatment of State Ownership of Railroad REIT (sec. 656 of the
Senate amendment and secs. 103, 115, 336 and 337 of the Code)
PRESENT LAW
A real estate investment trust (``REIT'') is an electing
entity that is engaged primarily in passive real estate
activities (as specifically defined) and that, among other
requirements, must have at least 100 shareholders. If a
qualified entity elects REIT status, it can be taxed
essentially as a pass-through entity, since it can obtain a
deduction for amounts distributed to its shareholders and it is
required to distribute at least 90 percent of its income to
shareholders annually.
If an entity does not qualify to be treated as a REIT, it
would generally be treated as a regular C corporation subject
to tax under subchapter C of the Code and section 11 at the
corporate entity level, unless it elected to be taxed as a
partnership or disregarded entity under Treasury regulations.
Even if it made such an election, the C corporation would be
treated as if it had liquidated and distributed its assets to
shareholders, with a resulting corporate tax on the excess of
fair market value over basis of any corporate assets. A C
corporation that becomes a tax-exempt entity also must pay
corporate tax on the excess of the fair market value over the
basis of its assets.
A State or local government is not subject to Federal
income tax on income from an activity that is an essential
governmental function.\374\
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\374\ Sec. 115.
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Interest on a State or local bond is excluded from gross
income, with certain exceptions.\375\ Special rules are also
provided as requirements for tax exemption for State and local
bonds.\376\
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\375\ Sec. 103.
\376\ Secs. 141-150.
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HOUSE BILL
No provision.
SENATE AMENDMENT
The bill provides that a qualified railroad corporation
that is a REIT that meets certain qualified activity
requirements (described further below) and that becomes 100
percent owned by a State after December 31, 2003 and before
December 31, 2005, will not be treated as a taxable C
corporation, but will be taxed as if its income from the
qualified activities accrued directly to the State. To the
extent its described railroad activities qualify under present
law as essential governmental functions, income from such
activities shall be tax exempt under section 115 of the Code.
Under the bill, no gain or loss shall be recognized from
the deemed conversion of such a REIT to a C corporation which
is tax-exempt, and no change in the basis of the property of
the entity shall occur.
Also, any obligation issued by an entity described above
is treated as an obligation of a State for purposes of applying
the tax exempt bond provisions.
A qualified railroad corporation that is a REIT must be a
non-operating Class III railroad, and substantially all of its
activities must consist of the ownership, leasing, and
operation by such corporation of facilities, equipment, and
other property used by the corporation or other persons in
railroad transportation.
Effective date.--The bill applies on and after the date a
State becomes the owner of all the outstanding stock of a
qualified corporation, provided that the State becomes the
owner of all the voting stock of the corporation on or before
December 31, 2003 and becomes the owner of all the outstanding
stock of the corporation on or before December 31, 2005.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
13. Contribution in aid of construction (sec. 657 of the Senate
amendment and sec. 118 of the Code)
PRESENT LAW
Section 118(a) provides that gross income of a
corporation does not include a contribution to its capital. In
general, section 118(b) provides that a contribution to the
capital of a corporation does not include any contribution in
aid of construction or any other contribution as a customer or
potential customer and, as such, is includible in gross income
of the corporation. However, for any amount of money or
property received by a regulated public utility that provides
water or sewerage disposal services, such amount shall be
considered a contribution to capital (excludible from gross
income) so long as such amount: (1) is a contribution in aid of
construction, and (2) is not included in the taxpayer's rate
base for rate-making purposes. If the contribution is in
property other than water or sewerage disposal facilities, the
amount is generally excludible from gross income only if the
amount is expended to acquire or construct water or sewerage
disposal facilities within a specified time period. A
contribution in aid of construction does not include a customer
connection fee or amounts paid as service charges for starting
or stopping services.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment clarifies that water and sewer
service laterals (amounts paid to connect the customer's water
service line or sewer lateral line to the utility's
distribution or collection system, or to extend a main water or
sewer line to provide service to a customer) received by a
regulated public utility that provides water or sewerage
disposal services is considered a contribution to capital and
excludible from gross income of such utility.
Effective date.--The Senate amendment provision is
effective for contributions made after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
14. Credit for purchase and installation of agricultural water
conservation systems (sec. 658 of the Senate amendment)
PRESENT LAW
There is no provision that provides for a credit for
agricultural water systems.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides a 30-percent credit (not to
exceed $500 per acre) for water conservation system expenses
for taxpayers who normally derive at least 50 percent of their
gross income from land. The term `water conservation system
expenses' means expenses for the purchase and installation of a
water conservation system but only if (1) the land served by
the water conservation system is entirely in a county or
county-equivalent area which has received, in the taxable year
the expenses were paid or incurred or in any of the three
preceding taxable years, a primary-county designation due to
drought by the Secretary of Agriculture, and (2) such system is
certified as saving at least 5 percent more irrigation water
than the irrigation system which was used on such land
immediately prior to the installation of such water
conservation system.
The term `water conservation system' means (1) new or
replacement irrigation equipment and machinery, including
sprinklers, pipes, siphons, nozzles, pumps, motors, and
engines, and (2) computer systems for irrigation and water
management.
The irrigation water savings shall be determined and
certified under regulations prescribed jointly by the Natural
Resources Conservation Service of the Department of Agriculture
and the Bureau of Reclamation of the Department of the
Interior. Such regulations shall include a list of individuals
or organizations qualified to make such certification.
No deduction is allowed with respect to any expenses
taken into account in determining the credit, and any increase
in the basis of any property which would result from such
expense shall be reduced by the amount of credit allowed for
such expense.
Effective date.--The credit is available for expenses
incurred after date of enactment with respect to systems
completed after December 31, 2004 and prior to January 1, 2006.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment.
15. Modification of involuntary conversion rules for businesses
affected by the September 11th terrorist attacks (sec. 659 of
the Senate amendment and sec. 1400L 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 principal 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.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides special rules for property
which is compulsorily or involuntarily converted as a result of
the terrorist attacks on September 11, 2001, in the New York
Liberty Zone. The special rules provide that a corporation
which is a member of an affiliated group filing a consolidated
tax return shall be treated as satisfying the repurchase
requirement of section 1033 with respect to such property to
the extent the requirement is satisfied by another member of
the corporation's affiliated group. In addition, the provision
extends the replacement period for such property to five years
after the close of the first taxable year in which gain is
realized, if substantially all the use of the replacement
property is in New York City.
Effective date.--The Senate amendment is effective for
involuntary conversions occurring on or after September 11,
2001.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
16. Repeal of application of below-market loan rules to amounts paid to
certain continuing care facilities (sec. 660 of the Senate
amendment and sec. 7872 of the Code)
PRESENT LAW
Certain loans that bear interest at a below-market
interest rate are treated as loans bearing interest at the
market rate accompanied by a payment or payments from the
lender to the borrower which are characterized in accordance
with the substance of the particular transaction (e.g., gift,
compensation, dividend, etc.).\377\ The market rate of interest
for purposes of the below-market loan rules is assumed to be
100 percent of the applicable Federal rate (``AFR'') at the
time the loan is made in the case of a term loan or, in the
case of a demand loan, 100 percent of the AFR in effect over
the time that the loan is outstanding.
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\377\ Sec. 7872.
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In general, the below-market loan rules apply to (1)
loans where the foregone (i.e., below-market) interest is in
the nature of a gift, (2) loans between an employee and an
employer or between an independent contractor and one for whom
the independent contractor provides services, (3) loans between
a corporation and a shareholder of the corporation, (4) loans
of which one of the principal purposes of the interest
arrangement is the avoidance of Federal tax, (5) to the extent
provided in Treasury regulations, any other below-market loans
if the interest arrangement of such loan has a significant
effect on any Federal tax liability of either the lender or
borrower, and (6) loans to any qualified continuing care
facility pursuant to a continuing care contract.
In the case of loans made to qualified continuing care
facilities,\378\ an exception from the below-market loan rules
is provided for any loan as of the calendar year in which the
lender has attained age 65, provided the loan is made by the
lender to the qualified continuing care facility pursuant to a
continuing care contract.\379\ However, the exception applies
only to the extent that the principal amount of the loan, when
added to the aggregate outstanding amount of all other previous
loans between the lender (or the lender's spouse) and any
qualified continuing care facility, does not exceed $90,000.
This amount is indexed for inflation, and the amount for
calendar year 2004 is $154,500.\380\
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\378\ A ``qualified continuing care facility'' is defined as one or
more facilities (1) which are designed to provide services under
continuing care contracts, and (2) substantially all of the residents
of which are covered by continuing care contracts. However, a facility
is not a qualified continuing care facility unless substantially all
facilities which are used to provide services that are required to be
provided under a continuing care contract are owned or operated by the
borrower. In addition, nursing homes do not constitute continuing care
facilities (sec. 7872(g)(4)).
\379\ A ``continuing care contract'' is defined as a written
contract between an individual and a qualified continuing care facility
under which (1) the individual or individual's spouse may use a
qualified continuing care facility for their life or lives, (2) the
individual or individual's spouse (a) will first reside in a separate,
independent living unit with additional facilities outside such unit
for the providing of meals and other personal care, and (b) then will
be provided long-term and skilled nursing care as the health of such
individual or individual's spouse requires, and (3) no additional
substantial payment is required if such individual or individual's
spouse requires increased personal care services or long-term and
skilled nursing care.
\380\ Rev. Rul. 2003-118, 2003-47 I.R.B. 1095.
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With regard to continuing care facilities that are not
qualified continuing care facilities, the IRS takes the
position that loans made to such facilities by residents are
not subject to the below-market loan rules until and unless
Treasury regulations are issued that treat such loans as having
a significant effect on any Federal tax liability of either the
facility or the resident.\381\
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\381\ Tech. Adv. Mem. 9521001 (Dec. 7, 1994).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment repeals the application of the
below-market loan rules to loans that are made to any qualified
continuing care facility pursuant to a continuing care
contract, without regard to the principal amount of the loan
(including the aggregate outstanding amount of any other
previous loans between the resident or resident's spouse and
any qualified continuing care facility). The Senate amendment
also clarifies that the determination of whether a facility is
a qualified continuing care facility is to be made on an annual
basis at the end of each calendar year, rather than only when
the continuing care contract is entered into. In addition, the
Senate amendment modifies the definition of a continuing care
contract to (1) not exclude contracts that require additional
substantial payment for increased personal care services
required by the resident or resident's spouse, and (2) provide
authority for the Treasury to issue guidance that limits such
definition to contracts that provide to the resident or
resident's spouse only facilities, care and services that are
customarily offered by continuing care facilities. The Senate
amendment also clarifies that the definition of a qualified
continuing care facility requires substantially all of the
independent living unit residents of the facility to be covered
by continuing care contracts.
The Senate amendment does not affect the present-law
application of the below-market loan rules to loans made to any
continuing care facility that is not a qualified continuing
care facility.
Effective date.--The Senate amendment provision applies
to calendar years beginning after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment.
17. Maximum capital gain rates of individuals for gold, silver,
platinum, and palladium (sec. 661 of the Senate amendment and
sec. 1(h) of the Code)
PRESENT LAW
Under present law, the net capital gain of an individual
is generally taxed at a maximum rate of 15 percent (five
percent for gain otherwise taxed at the 10- or 15-percent
rate). However, the maximum tax rate for individuals from the
sale or exchange of a collectible is 28 percent. Gold, silver,
platinum or palladium bullion is defined as a collectible for
this purpose.
HOUSE BILL
No provision.
SENATE AMENDMENT
Under the Senate amendment, gold, silver, platinum and
palladium bullion is not treated as a ``collectible'' for
purposes of applying the individual capital gain rates. Thus,
gain or loss from the sale of the bullion will qualify for the
lower five- and 15-percent capital gain rates.
Effective date.--Taxable years beginning after December
31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the provision
in the Senate amendment.
18. Inclusion of primary and secondary medical strategies for children
and adults with sickle cell disease as medical assistance under
the medicaid program (sec. 662 of the Senate amendment)
PRESENT LAW
Medicaid programs are generally operated by the States,
in part with funds received from the Federal government. Within
broad Federal guidelines, States can design the scope and
availability of Medicaid benefits. Medicaid law requires States
to provide certain services including, for example, hospital
and physician services. Federal funds are available for
additional optional services if States choose to include them
in their Medicaid plans. Within Federal guidelines, States may
limit the amount, duration of any Medicaid service. Under
present law, States may have covered some of the primary and
secondary medical strategies, treatments, and services for
Sickle Cell Disease, however such services are not specifically
listed in the Medicaid statute as either mandatory or optional
services.
The Federal government shares in States' Medicaid service
costs by means of a statutory formula designed to provide a
higher Federal matching rate to States with lower per capita
incomes. The Federal share is referred to as the Federal
Medical Assistance Percentage (``FMAP''). For some Medicaid
services and activities, such as costs associated with program
administration, the FMAP rate is set in statute. Because
Medicaid is an individual entitlement, there is no annual
ceiling on Federal expenditures; however, in order to continue
receiving Federal payments, States must contribute their share
of the matching funds.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment amends Title XIX of the Social
Security Act to add primary and secondary medical strategies,
treatment and services for individuals who have Sickle Cell
Disease as a new optional medical assistance category under the
Medicaid program. Such strategies, treatment, and services
include: (1) chronic blood transfusion (with deferoxamine
chelation) to prevent stroke in individuals with Sickle Cell
Disease who have been identified as being at high risk for
stroke; (2) genetic counseling, testing, and treatment for
individuals with Sickle Cell Disease or the Sickle Cell trait;
and (3) other treatment and services to prevent individuals who
have Sickle Cell Disease and who have had a stroke having
another stroke. The amendment sets the FMAP rate at 50 percent
for costs attributable to providing: (1) services to identify
and educate likely Medicaid enrollees who have or are carriers
of Sickle Cell Disease; or (2) education regarding the risks of
stroke and other complications, as well as the prevention of
stroke and complications for likely Medicaid enrollees with
Sickle Cell Disease.
The Senate amendment also authorizes an appropriation in
the amount of $10,000,000 for each of fiscal years 2005 through
2009 for a demonstration program under which the Administrator
of the Health Resources and Services Administration (through
the Bureau of Primary Health Care and the Maternal Child Health
Bureau) would make grants up to 40 eligible entities in each
such fiscal year for the development and establishment of
systemic mechanisms for the prevention and treatment of the
Sickle Cell Disease. Eligible entities include Federally-
qualified health centers as defined in the Medicaid statute;
nonprofit hospitals or clinics, or university health centers
that provide primary health care that: (1) have a collaborative
agreement with a community-based Sickle Cell Disease
organization or a nonprofit entity with experience in working
with individuals who have the Sickle Cell Disease; and (2)
demonstrate that they have at least five years of experience in
working with individuals who have the Sickle Cell Disease.
Systematic mechanisms for the prevention and treatment of the
Sickle Cell Disease include: (1) coordination of service
delivery for individuals with the disease; (2) genetic
counseling and testing; (3) bundling of technical services
related to the prevention and treatment of the disease; (4)
training health professionals; and (5) identifying and
establishing efforts related to the expansion and coordination
of education, treatment, and continuity of care programs for
individuals with the disease.
In awarding such grants to eligible entities, the
Administrator of Health Resources and Services Administration
is to take into consideration geographic diversity and to give
priority to: (1) Federally-qualified health centers that have a
partnership or other arrangement with a comprehensive Sickle
Cell Disease treatment center and does not receive funds from
the National Institutes of Health; or (2) Federally-qualified
health centers that intend to develop a partnership or other
arrangement with a comprehensive Sickle Cell Disease treatment
center, and that does not receive funds from the National
Institutes of Health. Eligible entities that are awarded grants
are required to use the funds for the following activities: (1)
to facilitate and coordinate the delivery of education,
treatment, and continuity of care under: (a) the entity's
collaborative agreement with a community-based Sickle Cell
Disease organization or a nonprofit entity that works with
individuals who have Sickle Cell Disease; (b) the Sickle Cell
Disease newborn screening program for the State in which the
entity is located; and (c) the Maternal and Child Health
program for the State in which the entity is located; (2) to
train nursing and other health staff who provide care for
individuals with Sickle Cell Disease; (3) to enter into a
partnership with adult or pediatric hematologists in the region
and other regional experts in the Sickle Cell Disease at
tertiary or academic health centers and State and county health
offices; and (4) to identify and secure resources for ensuring
reimbursement under the Medicaid program, State children's
health insurance program, and other health programs for the
prevention and treatment of Sickle Cell Disease.
The Senate amendment also requires the Administrator of
Health Resources and Services Administration to enter into a
contract with an entity and to serve as a National Coordinating
Center for the demonstration program. The center is to: (1)
collect, coordinate, monitor and distribute data, best
practices, and findings regarding the activities funded under
grants made to eligible entities under the demonstration
program; (2) develop a model protocol for eligible entities
with respect to prevention and treatment of the disease; (3)
develop educational materials regarding the prevention and
treatment of the disease; and (4) submit a written report to
Congress. The written report to Congress should include
recommendations on the effectiveness of the demonstration
program direct outcome measures, such as the number and type of
health care resources utilized (such as emergency room visits,
hospital visits, length of stay, and physician visits for
individuals with Sickle Cell Disease) and the number of
individuals that were tested and subsequently received genetic
counseling for the sickle cell trait.
Effective date.--The Senate amendment is effective on the
date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
provision.
19. Mortgage payment assistance (secs. 901 and 902 of the Senate
amendment)
PRESENT LAW
There is no provision in present law that authorizes the
Secretary of Housing and Urban Development to award low-
interest loans to individuals adversely affected by
international economic activity to enable such individuals to
make mortgage payments with respect to their primary
residences.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment requires the Secretary of Housing
and Urban Development (the ``Secretary'') to establish a
program for awarding low-interest loans to eligible individuals
to enable such individuals to continue making mortgage payments
with respect to their primary residences. The provision
provides that the Secretary shall issue regulations no later
than six weeks after the date of enactment to implement this
program.
An individual eligible to receive a loan under the
program must be: (1) a worker that is adversely affected by
international economic activity, as determined by the
Secretary; (2) a borrower on a loan that requires monthly
mortgage payments with respect to the primary residence of the
individual; and (3) enrolled in a training or assistance
program. The amount of a loan provided under the program cannot
exceed the aggregate amount of monthly mortgage payments the
borrower would owe during a 12-month period. In addition, a
loan provided under the program must have an applicable
interest rate of four percent and must provide for monthly
repayments over a five-year period.
The provision authorizes appropriations of $10 million
for each of the years 2005 through 2009 to carry out the
purposes of the provision.
Effective date.--The provision is effective on the date
of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
20. Protection of overtime pay (secs. 489-490 of the Senate amendment
and sec. 13 of the Fair Labor Standards Act of 1938)
PRESENT LAW
The Fair Labor Standards Act of 1938 (``FLSA'')
establishes minimum wage and overtime pay requirements that
apply to employees, subject to certain exemptions.\382\ On
April 23, 2004, the Department of Labor issued revised
regulations implementing exemptions from the FLSA minimum wage
and overtime pay requirements.\383\ Among other changes, the
regulations increased the salary threshold for employees to be
exempt from these requirements.
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\382\ See, sections 6, 7, and 13 of the FLSA, 29 U.S.C. sections
206, 207, and 213 (2004).
\383\ 69 Fed. Reg. 22,122 (April 23, 2004).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment contains provisions relating to the
authority of the Secretary of Labor to issue regulations
implementing the overtime pay requirement and the effect of
recently issued regulations.
Under the Senate amendment, the Secretary of Labor may
not issue any regulation that exempts from the overtime pay
requirement any employee who earns less than $23,660 per year.
In addition, the Secretary of Labor may not issue any
regulation concerning the right to overtime pay that is not as
protective, or more protective, of the overtime pay rights of
employees in certain specified occupations or job
classifications (as listed in the provision) as the protections
provided for such employees under the regulations in effect on
March 31, 2003. Any portion of a regulation issued after March
31, 2003, that modifies the overtime pay requirement in a
manner that is inconsistent with the provisions of the Senate
amendment will have no force or effect as it relates to the
occupation or job classification involved.
The Senate amendment also provides that, notwithstanding
the Administrative Procedures Act or any other provision of
law, any portion of the Labor regulations issued on April 23,
2004, that exempts from the overtime pay requirement any
employee who would not otherwise be exempt if the regulations
in effect on March 31, 2003, remained in effect, will have no
force or effect. In addition, the portion of the regulations
(as in effect on March 31, 2003) that would prevent any
employee from being exempt shall remain in effect. Nonetheless,
the increased salary requirements provided for in the
regulations issued on April 23, 2004, will remain in effect.
Effective date.--The provision is effective on the date
of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provisions.
21. Report on acquisitions of goods from foreign sources (sec. 1001 of
the Senate amendment and sec. 43 of the Office of Federal
Procurement Policy Act)
PRESENT LAW
Public Law 93-400, ``The Office of Federal Procurement
Policy Act'', as amended, created the Office of Federal
Procurement Policy (``OFPP'') in 1974 and placed it in the
Office of Management and Budget (``OMB''). The OFPP was
created, among other purposes, to provide Government-wide
procurement policies which are to be followed by Executive
agencies in procurement activities.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that, not later than 60
days after the end of each fiscal year, each executive agency
is to submit to the Congress a report on the acquisitions that
were made of articles, materials, or supplies by the agency in
that fiscal year from sources outside the United States. The
report is to separately include the following information: (1)
the dollar value of any articles, materials, or supplies that
were manufactured outside the United States; (2) an itemized
list of all waivers granted with respect to such articles,
materials, or supplies under the Buy American Act; and (2) a
summary of the (a) the total procurement funds expended on
articles, materials and supplies manufactured outside the
United States and (b) the total procurement funds expended on
articles, materials, and supplies manufactured outside the
Untied States. The agency is to make the report publicly
available by posting the report on the Internet.
The reporting requirement does not apply to any
procurement for national security purposes entered into by: (1)
the Department of Defense or any agency or entity thereof; (2)
the Departments of the Army, Navy, and Air Force or any agency
or entity of any of the military departments; (3) the
Department of Homeland Security; (4) the Department of Energy
or any agency or entity thereof, with respect to the national
security programs of the Department of Energy; or (5) any
element of the intelligence community.
The Senate amendment also provides that, not later than
60 days after the end of each fiscal year ending after the date
of enactment, the Secretary of Commerce is to submit to
Congress a report on the acquisitions by foreign governments of
articles, materials, or supplies that were manufactured or
extracted in the United States in that fiscal year. The report
is to indicate the dollar value of such articles, materials, or
supplies and is to be made publicly available by posting on the
Internet.
Effective date.--The provision is effective on the date
of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
22. Minimum cost requirement for excess asset transfers (sec. 719 of
the Senate amendment and sec. 420 of the Code)
PRESENT LAW
Defined benefit plan assets generally may not revert to
an employer prior to termination of the plan and satisfaction
of all plan liabilities. In addition, a reversion may occur
only if the plan so provides. A reversion prior to plan
termination may constitute a prohibited transaction and may
result in plan disqualification. Any assets that revert to the
employer upon plan termination are includible in the gross
income of the employer and subject to an excise tax. The excise
tax rate is 20 percent if the employer maintains a replacement
plan or makes certain benefit increases in connection with the
termination; if not, the excise tax rate is 50 percent. Upon
plan termination, the accrued benefits of all plan participants
are required to be 100-percent vested.
A pension plan may provide medical benefits to retired
employees through a separate account that is part of such plan.
A qualified transfer of excess assets of a defined benefit plan
to such a separate account within the plan may be made in order
to fund retiree health benefits.\384\ A qualified transfer does
not result in plan disqualification, is not a prohibited
transaction, and is not treated as a reversion. Thus,
transferred assets are not includible in the gross income of
the employer and are not subject to the excise tax on
reversions. No more than one qualified transfer may be made in
any taxable year. No qualified transfer may be made after
December 31, 2013.
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\384\ Sec. 420.
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Excess assets generally means the excess, if any, of the
value of the plan's assets\385\ over the greater of (1) the
accrued liability under the plan (including normal cost) or (2)
125 percent of the plan's current liability.\386\ In addition,
excess assets transferred in a qualified transfer may not
exceed the amount reasonably estimated to be the amount that
the employer will pay out of such account during the taxable
year of the transfer for qualified current retiree health
liabilities. No deduction is allowed to the employer for (1) a
qualified transfer or (2) the payment of qualified current
retiree health liabilities out of transferred funds (and any
income thereon).
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\385\ The value of plan assets for this purpose is the lesser of
fair market value or actuarial value.
\386\ In the case of plan years beginning before January 1, 2004,
excess assets generally means the excess, if any, of the value of the
plan's assets over the greater of (1) the lesser of (a) the accrued
liability under the plan (including normal cost) or (b) 170 percent of
the plan's current liability (for 2003), or (2) 125 percent of the
plan's current liability. The current liability full funding limit was
repealed for years beginning after 2003. Under the general sunset
provision of EGTRRA, the limit is reinstated for years after 2010.
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Transferred assets (and any income thereon) must be used
to pay qualified current retiree health liabilities for the
taxable year of the transfer. Transferred amounts generally
must benefit pension plan participants, other than key
employees, who are entitled upon retirement to receive retiree
medical benefits through the separate account. Retiree health
benefits of key employees may not be paid out of transferred
assets.
Amounts not used to pay qualified current retiree health
liabilities for the taxable year of the transfer are to be
returned to the general assets of the plan. These amounts are
not includible in the gross income of the employer, but are
treated as an employer reversion and are subject to a 20-
percent excise tax.
In order for a transfer to be qualified, accrued
retirement benefits under the pension plan generally must be
100-percent vested as if the plan terminated immediately before
the transfer (or in the case of a participant who separated in
the one-year period ending on the date of the transfer,
immediately before the separation).
In order for a transfer to be qualified, the transfer
must meet the minimum cost requirement. To satisfy the minimum
cost requirement, an employer generally must maintain retiree
health benefits at the same level for the taxable year of the
transfer and the following four years (referred to as the cost
maintance period). The applicable employer cost during the cost
maintenance period cannot be less than the higher of the
applicable employer costs for each of the two taxable years
preceding the taxable year of the transfer. The applicable
employer cost is generally determined by dividing the current
retiree health liabilities by the number of individuals
provided coverage for applicable health benefits during the
year. The Secretary is directed to prescribe regulations as may
be necessary to prevent an employer who significantly reduces
retiree health coverage during the period from being treated as
satisfying the minimum cost requirement.
Under Treasury regulations,\387\ the minimum cost
requirement is not satisfied if the employer significantly
reduces retiree health coverage during the cost maintenance
period. Under the regulations, an employer significantly
reduces retiree health coverage for a year (beginning after
2001) during the cost maintenance period if either (1) the
employer-initiated reduction percentage for that taxable year
exceeds 10 percent, or (2) the sum of the employer-initiated
reduction percentages for that taxable year and all prior
taxable years during the cost maintenance period exceeds 20
percent.\388\ The employer-initiated reduction percentage is
percentage of the number of individuals receiving coverage for
applicable health benefits as of the day before the first day
of the taxable year over the total number of such individuals
whose coverage for applicable health benefits ended during the
taxable year by reason of employer action.\389\
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\387\ Treas. Reg. sec. 1.420-1(a).
\388\ Treas. Reg. sec. 1.420-1(b)(1).
\389\ Treas. Reg. sec. 1.420-1(b)(2).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that an eligible employer
does not fail the minimum cost requirement if, in lieu of any
reduction of health coverage permitted by Treasury regulations,
the employer reduces applicable employer cost by an amount not
in excess of the reduction in costs which would have occurred
if the employer had made the maximum permissible reduction in
retiree health coverage under such regulations. An employer is
an eligible employer if, for the preceding taxable year, the
qualified current retiree health liabilities of the employer
were at least five percent of gross receipts.
In applying such regulations to any subsequent taxable
year, any reduction in applicable employer cost under the
proposal is treated as if it were an equivalent reduction in
retiree health coverage.
Effective date.--The provision is effective for taxable
years ending after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
TITLE IX--ENERGY TAX INCENTIVES
A. Credit for Electricity Produced From Certain Sources
(Sec. 801 of the Senate amendment 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, 2006, to electricity produced by a closed-
loop biomass facility placed in service after December 31,
1992, and before January 1, 2006, and to a poultry waste
facility placed in service after December 31, 1999, and before
January 1, 2006. 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.
HOUSE BILL
No provision.
SENATE AMENDMENT
Extension of placed in service date for existing facilities
The Senate amendment extends the placed in service date
for wind facilities, closed-loop biomass facilities, and
poultry waste facilities to facilities placed in service after
December 31, 1993 (December 31, 1992, in the case of closed-
loop biomass facilities and December 31, 1999, in the case of
poultry waste facilities) and before January 1, 2007.
Modification of credit amount
The Senate amendment modifies the credit rate applicable
to electricity produced from after December 31, 2004 from
facilities placed in service after December 31, 2004 to be 1.8
cents per kilowatt hour and repeals the indexing of the credit
amount.
Additional qualifying facilities
The Senate amendment also defines six new qualifying
energy resources: open-loop biomass including agricultural
livestock waste nutrients, geothermal energy, solar energy,
municipal biosolids and sludge, small irrigation, and municipal
solid waste.
Open-loop biomass is defined as any solid, nonhazardous,
cellulosic waste material which is segregated from other waste
materials and which is derived from any of forest-related
resources, solid wood waste materials, or agricultural sources.
Eligible forest-related resources are mill residues, other than
spent chemicals from pulp manufacturing, precommercial
thinnings, slash, and brush. Solid wood waste materials include
waste pallets, crates, dunnage, manufacturing and construction
wood wastes (other than pressure-treated, chemically-treated,
or painted wood wastes), and landscape or right-of-way tree
trimmings. Agricultural sources include orchard tree crops,
vineyard, grain, legumes, sugar, and other crop by-products or
residues. However, qualifying open-loop biomass does not
include municipal solid waste (garbage), gas derived from
biodegradation of solid waste, or paper that is commonly
recycled. In addition, open-loop biomass does not include
closed-loop biomass or any biomass burned in conjunction with
fossil fuel (cofiring) beyond such fossil fuel required for
start up and flame stabilization.
Agricultural livestock waste nutrients are defined as
agricultural livestock manure and litter, including bedding
material for the disposition of manure.
Geothermal energy is energy derived from a geothermal
deposit which is a geothermal reservoir consisting of natural
heat which is stored in rocks or in an aqueous liquid or vapor
(whether or not under pressure).
Municipal biosolids and sludge are the residue or solids
removed by a municipal wastewater treatment facility. Sludge is
the recycled residue byproduct created in the treatment of
commercial, industrial, municipal, or navigational wastewater,
but not including residues from incineration.
A small irrigation power facility is a facility that
generates electric power through an irrigation system canal or
ditch without any dam or impoundment of water. The installed
capacity of a qualified facility is less than five megawatts.
Qualifying open-loop biomass facilities, other than
qualifying agricultural livestock waste nutrient facilities are
facilities using open-loop biomass to produce electricity that
are placed in service prior to January 1, 2005. Qualifying
agricultural livestock waste nutrient facilities are facilities
using agricultural livestock waste nutrients to produce
electricity that are placed in service after December 31, 2004
and before January 1, 2007. Qualifying geothermal energy
facilities are facilities using geothermal deposits to produce
electricity that are placed in service after December 31, 2004
and before January 1, 2007. Qualifying solar energy facilities
are facilities using solar energy to generate electricity that
are placed in service December 31, 2004 and before January 1,
2007. Qualifying municipal biosolids and sludge facilities are
facilities using municipal biosolids or sludge to generate
electricity that are originally placed in service after
December 31, 2004, and before January 1, 2007. Qualifying small
irrigation power facilities are facilities using small
irrigation power systems to generate electricity that are
originally placed in service after December 31, 2004 and before
January 1, 2007. Qualifying municipal solid waste facilities
are facilities or units incinerating municipal solid waste
placed in service after December 31, 2004 and before January 1,
2007.
In the case of qualifying open-loop biomass facilities
placed in service prior to January 1, 2005, taxpayers may claim
a credit of 1.2 cents per kilowatt hour, rather than 1.8 cents
per kilowatt hour for the five-year period beginning on January
1, 2005. the otherwise allowable credit for a three-year
period. For a facility placed in service after the date of
enactment, the three-year period commences when the facility is
placed in service.
In addition, the Senate amendment modifies present law to
provide that qualifying closed-loop biomass facilities include
any facility originally placed in service before December 31,
1992 and modified to use closed-loop biomass to co-fire with
coal, with other biomass, or both, before January 1, 2007. The
amount of credit the taxpayer may claim credit is adjusted for
the thermal value of the qualifying closed-loop biomass
relative to the thermal value of the closed-loop biomass and
the coal. The ten-year credit period for such a qualifying
facility commences no earlier than January 1, 2005.
Credit claimants and treatment of other subsidies
In the case of qualifying open-loop biomass facilities
and qualifying closed-loop biomass facilities modified to use
closed-loop biomass to co-fire with coal, the Senate amendment
permits a lessee operator to claim the credit in lieu of the
owner of the facilities.
The Senate amendment provides that certain persons
(public utilities, electric cooperatives, rural electric
cooperatives, and Indian tribes) may sell, trade, or assign to
any taxpayer any credits that would otherwise be allowable to
that person, if that person were a taxpayer, for production of
electricity from a qualified facility owned by such person.
However, any credit sold, traded, or assigned may only be sold,
traded, or assigned once. Subsequent trades are not permitted.
In addition, any credits that would otherwise be allowable to
such person, to the extent provided by the Administrator of the
Rural Electrification Administration, may be applied as a
prepayment to certain loans or obligations undertaken by such
person under the Rural Electrification Act of 1936.
The Senate amendment repeals the present-law reduction in
allowable credit for facilities financed with tax-exempt bonds
or with certain loans received under the Rural Electrification
Act of 1936.
Effective date.--The Senate amendment is generally is
effective for electricity sold from qualifying facilities after
December 31, 2004. For electricity produced from qualifying
open-loop biomass facilities originally placed in service prior
to the date of enactment, the provision is effective January 1,
2005.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with modifications.
Extension of placed in service date for existing facilities
The conference agreement does not include the provisions
of the Senate amendment with respect to the extension of placed
in service dates for qualifying wind, closed-loop, and poultry
waste facilities.
Modification of placed in service date for existing facilities
The conference agreement includes the Senate amendment
provision with respect to qualifying closed-loop biomass
facilities modified to use closed-loop biomass to co-fire with
coal, to co-fire with other biomass, or to co-fire with coal
and other biomass, with the modification that the 10-year
credit period begin no earlier than the date of enactment of
the provision.
Additional qualifying resource and facilities
The conference agreement also defines five new qualifying
resources for the production of electricity: open-loop biomass
(including agricultural livestock waste nutrients), geothermal
energy, solar energy, small irrigation power, and municipal
solid waste. Two different qualifying facilities use municipal
solid waste as a qualifying resource: landfill gas facilities
and trash combustion facilities. In addition, the conference
agreement defines refined coal as a qualifying resource.
Qualifying open-loop biomass facilities are facilities
using biomass to produce electricity that are placed in service
prior to January 1, 2006. Qualifying agricultural livestock
waste nutrient facilities are facilities using agricultural
livestock waste nutrients to produce electricity that are
placed in service after the date of enactment and before
January 1, 2006. The installed capacity of a qualified
agricultural livestock waste nutrient facility is not less than
150 kilowatts.
Qualifying geothermal energy facilities are facilities
using geothermal deposits to produce electricity that are
placed in service after the date of enactment and before
January 1, 2006. Qualifying solar energy facilities are
facilities using solar energy to generate electricity that are
placed in service after the date of enactment and before
January 1, 2006. A qualifying geothermal energy facility or
solar energy facility may not have claimed any credit under
sec. 48 of the Code.\390\
---------------------------------------------------------------------------
\390\ If a geothermal facility or solar facility claims credit for
any year under section 45 of the Code, the facility is precluded from
claiming any investment credit under section 48 of the Code in the
future.
---------------------------------------------------------------------------
A qualified small irrigation power facility is a facility
originally placed in service after the date of enactment and
before January 1, 2006. A small irrigation power facility is a
facility that generates electric power through an irrigation
system canal or ditch without any dam or impoundment of water.
The installed capacity of a qualified facility is not less than
150 kilowatts and less than five megawatts.
Landfill gas is defined as methane gas derived from the
biodegradation of municipal solid waste. Trash combustion
facilities are facilities that burn municipal solid waste
(garbage) to produce steam to drive a turbine for the
production of electricity. Qualifying landfill gas facilities
and qualifying trash combustion facilities include facilities
used to produce electricity placed in service after the date of
enactment and before January 1, 2006.
Refined coal is a qualifying liquid, gaseous, or solid
synthetic fuel produced from coal (including lignite) or high-
carbon fly ash, including such fuel used as a feedstock. A
qualifying fuel is a fuel that when burned emits 20 percent
less SO2 and nitrogen oxides than the burning of
feedstock coal or comparable coal predominantly available in
the marketplace as of January 1, 2003, and if the fuel sells at
prices at least 50 percent greater than the prices of the
feedstock coal or comparable coal. In addition, to be qualified
refined coal the fuel must be sold by the taxpayer with the
reasonable expectation that it will be used for the primary
purpose of producing steam. A qualifying refined coal facility
is a facility producing refined coal that is placed in service
after the date of enactment and before January 1, 2009.
Credit period and credit rates
In general, as under present law, taxpayers may claim the
credit at a rate of 1.5 cents per kilowatt-hour (indexed for
inflation and currently 1.8 cents per kilowatt-hour) for 10
years of production commencing on the date the facility is
placed in service. In the case of open-loop biomass facilities,
(including agricultural livestock waste nutrients), geothermal
energy, solar energy, small irrigation power, landfill gas
facilities, and trash combustion facilities the 10-year credit
period is reduced to five years commencing on the date the
facility is placed in service. In general, for facilities
placed in service prior to January 1, 2005, the credit period
commences on January 1, 2005. In the case of a closed-loop
biomass facilities modified to co-fire with coal, to co-fire
with other biomass, or to co-fire with coal and other biomass,
the credit period shall begin no earlier than the date of
enactment.
In the case of open-loop biomass facilities (including
agricultural livestock waste nutrients), small irrigation
power, landfill gas facilities, and trash combustion
facilities, the otherwise allowable credit amount is reduced by
one half.
An alternative credit applies for the production of
refined coal. A qualified refined coal facility may claim
credit at a rate of $4.375 per ton (indexed for inflation after
1992) of refined coal sold to a unrelated person. As is the
case for facilities that produce electricity, the credit a
taxpayer may claim for the production of refined coal is phased
out as the market price of refined coal exceeds certain
threshold levels. The threshold is defined by reference to the
price of feedstock fuel used to produce refined coal. Thus if a
producer of refined coal uses Powder River Basin coal as a
feedstock, the threshold price is determined by reference to
prices of Powder River Basin coal. If the producer uses
Appalachian coal, the threshold price is determined by
reference to prices of Appalachian coal.
Credit claimants and treatment of other subsidies
A lessee or operator may claim the credit in lieu of the
owner of the qualifying facility in the case of qualifying
open-loop biomass facilities originally placed in service on or
before the date of enactment and in the case of a closed-loop
biomass facilities modified to co-fire with coal, to co-fire
with other biomass, or to co-fire with coal and other biomass.
In addition, for all qualifying facilities, other than
closed-loop biomass facilities modified to co-fire with coal,
to co-fire with other biomass, or to co-fire with coal and
other biomass, any reduction in credit by reason of grants,
tax-exempt bonds, subsidized energy financing, and other
credits cannot exceed 50 percent. In the case of closed-loop
biomass facilities modified to co-fire with coal, to co-fire
with other biomass, or to co-fire with coal and other biomass,
there is no reduction in credit by reason of grants, tax-exempt
bonds, subsidized energy financing, and other credits.
The amendments made by the conference report do not apply
with respect to any poultry waste facility placed in service
prior to January 1, 2005. Such facilities placed in service
after December 31, 2004 generally may qualify for credit as
animal livestock waste nutrient facilities.
No facility that previously claimed or currently claims
credit under section 29 of the Code is a qualifying facility
for purposes of section 45.
Effective date.--The provision is effective for
electricity produced and sold from qualifying facilities after
the date of enactment in taxable years ending after the date of
enactment. With respect to open-loop biomass facilities placed
in service prior to January 1, 2005, the provisions are
effective for electricity produced and sold after December 31,
2004.
B. Alternative Motor Vehicles and Fuels Incentives
1. Alternative motor vehicle credit (sec. 811 of Senate amendment)
PRESENT LAW
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).\391\ 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 allowed is 25
percent of the otherwise allowable amount in 2006, and is
unavailable for purchases after December 31, 2006.
---------------------------------------------------------------------------
\391\ A hybrid-electric vehicle may qualify as a clean-fuel vehicle
under present law.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
Fuel cell motor vehicles
The Senate amendment provides a credit for the purchase
of qualified fuel cell motor vehicles. The base credit for the
purchase of new qualified fuel cell motor vehicles ranges
between $4,000 and $40,000 depending upon the weight class of
the vehicle. For automobiles and light trucks, the otherwise
allowable credit amount ($4,000) is increased by an amount from
$1,000 to $4,000 if the vehicle meets certain fuel economy
increases compared to a stated standard. Credit may not be
claimed for qualified fuel cell motor vehicles purchased after
December 31, 2011.
Hybrid motor vehicles
The Senate amendment provides a credit for the purchase
of qualified hybrid motor vehicles. The base credit for the
purchase of a new qualified hybrid motor vehicle ranges from
$250 to $10,000 depending upon the weight of the vehicle and
the maximum power available from the vehicle's rechargeable
energy storage system. For automobiles and light trucks, the
otherwise allowable credit amount ($250 to $1,000) is increased
by an amount from $500 to $3,000 if the vehicle meets certain
fuel economy increases. For heavy duty hybrid motor vehicles,
the otherwise allowable credit ($1,000 to $10,000) is increased
depending upon the vehicle's weight and provided the vehicle
meets certain 2007 (and beyond) emissions standards. The amount
of credit is increased by between $2,500 and $10,000 for
vehicles placed in service in 2004; is increased by between
$2,500 and $10,000 for vehicles placed in service in 2004, is
increased by between $2,000 and $8,000 for vehicles placed in
service in 2005, and is increased by between $1,500 and $6,000
for vehicles placed in service in 2006. Credit may not be
claimed for qualified hybrid motor vehicles purchased after
December 31, 2006.
Alternative fuel motor vehicles
The Senate amendment provides a credit for the purchase
of qualified alternative fuel motor vehicles. The base credit
for the purchase of a new alternative fuel motor vehicle equals
40 percent of the incremental cost of such vehicle. The
otherwise allowable credit for 40 percent of the incremental
cost is increased by an additional 30 percent of the
incremental cost of the vehicle if the vehicle meets certain
emissions standards. For computation of the credit, the
incremental cost of the vehicle may not exceed between $5,000
and $40,000 (resulting in a maximum total credit of between
$3,500 and $28,000) depending upon the weight of the vehicle.
For this purpose, incremental cost generally is defined as the
amount of the increase of the manufacturer's suggested retail
price of such a vehicle compared to the manufacturer's
suggested retail price of a comparable gasoline or diesel
model. Qualifying alternative fuel motor vehicles are vehicles
that operate only on qualifying alternative fuels and are
incapable of operating on gasoline or diesel (except in the
extent gasoline or diesel fuel is part of a qualified mixed
fuel). Qualifying alternative fuels are compressed natural gas,
liquefied natural gas, liquefied petroleum gas, hydrogen, and
any liquid mixture consisting of at least 85 percent methanol.
Taxpayers purchasing certain mixed-fuel vehicles also may
claim the alternative fuel motor vehicle credit, at a reduced
rate. A mixed-fuel vehicle is a vehicle with gross weight of
seven tons or more and is certified by the manufacturer as
being able to operate on a combination of alternative fuel and
a petroleum-based fuel. A qualifying mixed-fuel vehicle must
use at least 75 percent alternative fuel (a ``75/25 mixed-fuel
vehicle'') or 90 percent alternative fuel (a ``90/10 mixed-fuel
vehicle'') and be incapable of operating on a mixture
containing less than 75 percent alternative fuel in the case of
a 75/25 vehicle (less than 90 percent alternative fuel in the
case of a 90/10 vehicle). A taxpayer purchasing a 75/25 mixed-
fuel vehicle may claim 70 percent of the otherwise allowable
credit. A taxpayer purchasing a 90/10 mixed-fuel vehicle may
claim 90 percent of the otherwise allowable credit.
Credit may not be claimed for qualified alternative fuel
motor vehicles purchased after December 31, 2006. The
taxpayer's basis in the property is reduced by the amount of
credit claimed.
Provisions of general application
The Senate amendment provides that unused credits may be
carried forward for 20 years and three years (but not into
taxable years beginning before January 1, 2005).
If a tax-exempt person purchases or leases a qualifying
vehicle, the seller or lessor may claim the credit.
Effective date.--The Senate amendment is effective for
property placed in service after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
2. Modification of credit for electric vehicles (sec. 812 of Senate
amendment and sec. 30 of the Code)
PRESENT LAW
A 10-percent tax credit is provided for the cost of a
qualified electric vehicle, up to a maximum credit of $4,000
(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 2006. The credit allowed is 25 percent
of the otherwise allowable amount for 2006, and is unavailable
for purchases after December 31, 2006. There is no carry
forward or carryback of the credit for electric vehicles.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment modifies the present-law credit for
electric vehicles to provide that the credit for qualifying
vehicles generally ranges between $3,500 and $40,000 depending
upon the weight of the vehicle and, for certain vehicles, the
driving range of the vehicle. In the case of property purchased
by tax-exempt persons, the seller may claim the credit. The
taxpayer would be ineligible for the deduction allowable under
present-law section 179A for a qualified battery electric
vehicle on which a credit is allowable. The provision would
repeal the reduce rate of credit for vehicles purchased in
2006, permitting taxpayer to claim the full amount of credit
otherwise allowable for 2006. The taxpayer would be able to
carry forward unused credits for 20 years or carry unused
credits back for three years (but not carried back to taxable
years beginning before the January 1, 2005).
Effective date.--The Senate amendment is effective for
property placed in service after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
3. Modifications of deduction for refueling property (sec. 813 of
Senate amendment and sec. 179A of the Code)
PRESENT LAW
Certain costs of qualified clean-fuel vehicle refueling
property may be expensed and deducted when such property is
placed in service (sec. 179A). Up to $100,000 of such property
at each location owned by the taxpayer may be expensed with
respect to that location. Natural gas, liquefied natural gas,
liquefied petroleum gas, hydrogen, electricity and any other
fuel at least 85 percent of which is methanol, ethanol, or any
other alcohol or ether comprise clean-burning fuels.
The deduction is unavailable for property placed in
service after December 31, 2006.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provision permits taxpayers to claim
a 50-percent credit for the cost of installing clean-fuel
vehicle refueling property to be used in a trade or business of
the taxpayer or installed at the principal residence of the
taxpayer. In the case of retail clean-fuel vehicle refueling
property the allowable credit may not exceed $30,000. In the
case of residential clean-fuel vehicle refueling property the
allowable credit may not exceed $1,000. The taxpayer's basis in
the property is reduced by the amount of the credit and the
taxpayer may not claim deductions under section 179A with
respect to property for which the credit is claimed.
In the case of refueling property installed on property
owned or used by a tax-exempt person, the taxpayer that
installs the property may claim the credit. To be eligible for
the credit, the property must be placed in service before
January 1, 2007 (before January 1, 2012 in the hydrogen
refueling property). The credit allowable in the taxable year
cannot exceed the difference between the taxpayer's regular tax
(reduced by certain other credits) and the taxpayer's tentative
minimum tax. The taxpayer may carry forward unused credits for
20 years.
Effective date.--The Senate amendment is effective for
property placed in service after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
4. Credit for retail sale of alternative motor vehicle fuels (sec. 814
of Senate amendment)
PRESENT LAW
There is no retail credit for the sale of alternative
motor vehicle fuels. However, a 52-cents-per-gallon income tax
credit is allowed for alcohol fuels for 2003 and 2004 (51 cents
for 2005-2007). The alcohol fuels credit may be claimed as a
reduction in excise tax payments. Such tax payments generally
are made before the retail level. In the case of ethanol, the
Code provides a separate 10-cents-per-gallon credit for small
producers.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment permits taxpayers to claim a credit
equal to the gasoline gallon equivalent of 50 cents per gallon
of alternative fuel sold in 2005 and 2006. Qualifying
alternative fuels are compressed natural gas, liquefied natural
gas, liquefied petroleum gas, hydrogen, any liquid mixture
consisting of at least 85 percent methanol, and any liquid
mixture consisting of at least 85 percent ethanol. The credit
may be claimed for sales prior to January 1, 2007. Under the
provision, the credit is part of the general business credit.
Effective date.--The Senate amendment is effective for
fuel sold at retail after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
5. Small ethanol producer credit (sec. 815 of the Senate amendment and
sec. 40 of the Code)
PRESENT LAW
Small ethanol producer credit
Present law provides several tax benefits for ethanol and
methanol produced from renewable sources (e.g., biomass) that
are used as a motor fuel or that are blended with other fuels
(e.g., gasoline) for such a use. In the case of ethanol, a
separate 10-cents-per-gallon credit is provided for small
producers, defined generally as persons whose production does
not exceed 15 million gallons per year and whose production
capacity does not exceed 30 million gallons per year. The small
producer credit is part of the alcohol fuels tax credit under
section 40 of the Code. The alcohol fuels tax credits are
includible in income. This credit, like tax credits generally,
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. The alcohol fuels tax credit is
scheduled to expire after December 31, 2007.
Taxation of cooperatives and their patrons
Under present law, cooperatives in essence are treated as
pass-through entities in that the cooperative is not subject to
corporate income tax to the extent the cooperative timely pays
patronage dividends. Under present law (sec. 38(d)(4)), the
only excess credits that may be passed through to cooperative
patrons are the rehabilitation credit (sec. 47), the energy
property credit (sec. 48(a)), and the reforestation credit
(sec. 48(b)).
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment makes several modifications to the
rules governing the small producer ethanol credit. First, the
provision liberalizes the definition of an eligible small
producer to include persons whose production capacity does not
exceed 60 million gallons. Second, the provision allows
cooperatives to elect to pass through the small ethanol
producer credits to its patrons. The credit is apportioned pro
rata among patrons of the cooperative on the basis of the
quantity or value of the business done with or for such patrons
for the taxable year. An election to pass through the credit is
made on a timely filed return for the taxable year and is
irrevocable for such taxable year.
Third, the provision repeals the rule that includes the
small producer credit in income of taxpayers claiming it.
Finally, the provision provides that the small producer ethanol
credit is not treated as derived from a passive activity under
the Code rules restricting credits and deductions attributable
to such activities.
Effective date.--The provision is effective for taxable
years ending after date of enactment.
CONFERENCE AGREEMENT
The conference agreement allows cooperatives to elect to
pass the small ethanol producer credit through to their
patrons. Specifically, the credit is to be apportioned among
patrons eligible to share in patronage dividends on the basis
of the quantity or value of business done with or for such
patrons for the taxable year. The election must be made on a
timely filed return for the taxable year, and once made, is
irrevocable for such taxable year.
The amount of the credit not apportioned to patrons is
included in the organization's credit for the taxable year of
the organization. The amount of the credit apportioned to
patrons is to be included in the patron's credit for the first
taxable year of each patron ending on or after the last day of
the payment period for the taxable year of the organization,
or, if earlier, for the taxable year of each patron ending on
or after the date on which the patron receives notice from the
cooperative of the apportionment.
If the amount of the credit shown on the cooperative's
return for a taxable year is in excess of the actual amount of
the credit for that year, an amount equal to the excess of the
reduction in the credit over the amount not apportioned to
patrons for the taxable year is treated as an increase in the
cooperative's tax. The increase is not treated as tax imposed
for purposes of determining the amount of any tax credit or for
purposes of the alternative minimum tax.
The conference agreement does not contain any of the
other modifications from the Senate amendment.
Effective date.--The provision is effective for taxable
years ending after date of enactment.
C. Conservation and Energy Efficiency Provisions
1. Energy efficient new homes (sec. 821 of the Senate amendment)
PRESENT LAW
A nonrefundable, 10-percent business energy credit is
allowed for the cost of new property that is equipment (1) that
uses solar energy to generate electricity, to heat or cool a
structure, or to provide solar process heat, or (2) used to
produce, distribute, or use energy derived from a geothermal
deposit, but only, in the case of electricity generated by
geothermal power, up to the electric transmission stage.
The business energy tax credits are components of the
general business credit (sec. 38(b)(1)). The business energy
tax credits, 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).
A taxpayer may exclude from income the value of any
subsidy provided by a public utility for the purchase or
installation of an energy conservation measure. An energy
conservation measure means any installation or modification
primarily designed to reduce consumption of electricity or
natural gas or to improve the management of energy demand with
respect to a dwelling unit (sec. 136).
There is no present-law credit for the construction of
new energy-efficient homes.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision provides a credit to an eligible contractor
of an amount equal to the aggregate adjusted bases of all
energy-efficient property installed in a qualified new energy-
efficient home during construction. The credit cannot exceed
$1,000 ($2,000) in the case of a new home that has a projected
level of annual heating and cooling costs that is 30 percent
(50 percent) less than a comparable dwelling constructed in
accordance with the latest standards of chapter 4 of the
International Energy Conservation Code approved by the
Department of Energy before the construction of such qualifying
new home and any applicable Federal minimum efficiency
standards for equipment.
The eligible contractor is the person who constructed the
home, or in the case of a manufactured home, the producer of
such home. Energy efficiency property is any energy-efficient
building envelope component (insulation materials or system
specifically and primarily designed to reduce heat loss or
gain, and exterior windows, including skylights, and doors) and
any energy-efficient heating or cooling equipment or system
that can, individually or in combination with other components,
meet the standards for the home.
To qualify as an energy-efficient new home, the home must
be: (1) a dwelling located in the United States, (2) the
principal residence of the person who acquires the dwelling
from the eligible contractor or manufacturer, and (3) certified
to have a projected level of annual heating and cooling energy
consumption that meets the standards for either the 30-percent
or 50-percent reduction in energy usage. The home may be
certified according to a component-based method, an energy
performance based method, a guarantee-based method, or, in the
case of a qualifying new home which is a manufactured home, by
a method prescribed by the Administrator of the Environmental
Protection Agency under the Energy Star Labeled Homes program.
Manufactured homes certified by a method prescribed by the
Administrator of the Environmental Protection Agency under the
Energy Star Labeled Homes program are eligible for the $1,000
credit provided criteria (1) and (2) are met.
A component-based method of certification is a method
which uses the applicable technical energy efficiency
specifications or ratings (including product labeling
requirements) for the energy efficient building envelope
component or energy efficient heating or cooling equipment. The
Secretary shall, in consultation with the Administrator of the
Environmental Protection Agency, develop prescriptive
component-based packages which are equivalent in energy
performance to properties which qualify under the performance-
based method. The certification under the component-based
method shall be provided by a local building regulatory
authority, a utility, or a home energy rating organization.
A performance-based method of certification is a method
which calculates projected energy usage and cost reductions in
the qualifying new home in relation to a new home heated by the
same fuel type and constructed in accordance with (1) the
latest standards of chapter 4 of the International Energy
Conservation Code approved by the Department of Energy before
the construction of such qualifying new home, and (2) any
applicable Federal minimum efficiency standards for equipment.
Computer software shall be used in support of a performance-
based method certification under clause. Such software shall
meet procedures and methods for calculating energy and cost
savings in regulations promulgated by the Secretary of Energy.
The certification under the performance-based method shall be
provided by an individual recognized by an organization
recognized by the Secretary for such purposes.
A guarantee-based method of certification is a method
that guarantees in writing to the homeowner energy savings of
either 30 percent or 50 percent over the 2000 International
Energy Conservation Code for heating and cooling costs. The
guarantee shall be provided for a minimum of 2 years and shall
fully reimburse the homeowner any heating and cooling costs in
excess of the guaranteed amount. Computer software shall be
selected by the provider of the guarantee to support the
guarantee-based method certification. Such software shall meet
procedures and methods for calculating energy and cost savings
in regulations promulgated by the Secretary of Energy. The
certification under the guarantee-based method shall be
provided by an individual recognized by an organization
recognized by the Secretary for such purposes.
In prescribing regulations for performance-based and
guarantee-based certification methods, the Secretary shall
prescribe procedures for calculating annual energy usage and
cost reductions for heating and cooling and for the reporting
of the results. Such regulations shall provide that any
calculation procedures be fuel neutral such that the same
energy efficiency measures allow a qualifying new home to be
eligible for the credit under this section regardless of
whether such home uses a gas or oil furnace or boiler or an
electric heat pump, and require that any computer software
allow for the printing of the Federal tax forms necessary for
the credit under this section and for the printing of forms for
disclosure to the homebuyer. Other rules apply relating to the
form of the certification and the manner in which it is
provided to the buyer of the home.
In the case of a qualifying new home which is a
manufactured home, certification of compliance with energy
efficiency standards shall be provided by a manufactured home
primary inspection agency.
The credit will be part of the general business credit.
No credits attributable to energy efficient homes may be
carried back to any taxable year ending on or before the
effective date of the credit. No deduction shall be allowed for
that portion of expenses for a qualifying new home otherwise
allowable as a deduction for the taxable year which is equal to
the amount of the credit for such taxable year.
Effective date.--The credit applies to homes whose
construction is substantially completed after December 31,
2004, and which are purchased during the period beginning on
December 31, 2004, and ending on December 31, 2007 (December
31, 2005 in the case of the $1,000 credit).
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
2. Energy efficient appliances (sec. 822 of the Senate amendment)
PRESENT LAW
A nonrefundable, 10-percent business energy credit is
allowed for the cost of new property that is equipment: (1)
that uses solar energy to generate electricity, to heat or cool
a structure, or to provide solar process heat; or (2) used to
produce, distribute, or use energy derived from a geothermal
deposit, but only, in the case of electricity generated by
geothermal power, up to the electric transmission stage.
The business energy tax credits are components of the
general business credit (sec. 38(b)(1)). The business energy
tax credits, 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).
A taxpayer may exclude from income the value of any
subsidy provided by a public utility for the purchase or
installation of an energy conservation measure. An energy
conservation measure means any installation or modification
primarily designed to reduce consumption of electricity or
natural gas or to improve the management of energy demand with
respect to a dwelling unit (sec. 136).
There is no present-law credit for the manufacture of
energy-efficient appliances.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision provides a credit for the production of
certain energy-efficient clothes washers and refrigerators. The
credit equals $50 per appliance for (1) energy-efficient
clothes washers produced before December 31, 2007 with a
modified energy factor (``MEF'') of 1.42 MEF or greater, and
(2) refrigerators produced before December 31, 2005 that
consume 10 percent fewer kilowatt-hours per year than the
energy conservation standards promulgated by the Department of
Energy that took effect on July 1, 2001. The credit equals $100
for (1) energy-efficient clothes washers produced before
December 31, 2007 with a MEF of 1.5 or greater, and (2)
refrigerators produced before December 31, 2007 that consume at
least 15 percent fewer kilowatt-hours per year (at least 20
percent less for production in 2007) than the energy
conservation standards promulgated by the Department of Energy
that took effect on July 1, 2001. The credit is $150 for
refrigerators produced before January 1, 2007 that consume at
least 20 percent fewer kilowatt-hours per year than the energy
conservation standards promulgated by the Department of Energy
that took effect on July 1, 2001. A refrigerator must be an
automatic defrost refrigerator-freezer with an internal volume
of at least 16.5 cubic feet to qualify for the credit. A
clothes washer is any residential clothes washer, including a
residential style coin operated washer, that satisfies the
relevant efficiency standard.
For each category of appliances (e.g., washers that meet
the $50 standard, washers that meet the $100 standard,
refrigerators that meet the $50 standard, refrigerators that
meet the $100 standard, and refrigerators that meet the $150
standard), only production in excess of average production for
each such category during calendar years 2001-2003 would be
eligible for the credit.
The taxpayer may not claim credits in excess of $60
million for all taxable years, and may not claim credits in
excess of $30 million with respect to appliances that only
qualify for the $50 credit. Additionally, the credit allowed
for all appliances may not exceed two percent of the average
annual gross receipts of the taxpayer for the three taxable
years preceding the taxable year in which the credit is
determined.
The credit would be part of the general business credit.
EFFECTIVE DATE
The credit applies to appliances produced after December
31, 2004, and prior to January 1, 2008.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
3. Residential solar hot water, photovoltaics and other energy
efficient property (sec. 823 of the Senate amendment)
PRESENT LAW
A nonrefundable, 10-percent business energy credit is
allowed for the cost of new property that is equipment (1) that
uses solar energy to generate electricity, to heat or cool a
structure, or to provide solar process heat, or (2) used to
produce, distribute, or use energy derived from a geothermal
deposit, but only, in the case of electricity generated by
geothermal power, up to the electric transmission stage.
The business energy tax credits are components of the
general business credit (sec. 38(b)(1)). The business energy
tax credits, 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).
A taxpayer may exclude from income the value of any
subsidy provided by a public utility for the purchase or
installation of an energy conservation measure. An energy
conservation measure means any installation or modification
primarily designed to reduce consumption of electricity or
natural gas or to improve the management of energy demand with
respect to a dwelling unit (sec. 136).
There is no present-law personal tax credit for energy
efficient residential property.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision provides a personal tax credit for the
purchase of qualified wind energy property, qualified
photovoltaic property, and qualified solar water heating
property that is used exclusively for purposes other than
heating swimming pools and hot tubs. The credit is equal to 15
percent for solar water heating property and photovoltaic
property, and 30 percent for wind energy property. The maximum
credit for each of these systems of property is $2,000. The
provision also provides a 30 percent credit for the purchase of
qualified fuel cell power plants. The credit for any fuel cell
may not exceed $500 for each 0.5 kilowatt of capacity.
Qualifying solar water heating property means an
expenditure for property to heat water for use in a dwelling
unit located in the United States and used as a residence if at
least half of the energy used by such property for such purpose
is derived from the sun. Qualified photovoltaic property is
property that uses solar energy to generate electricity for use
in a dwelling unit. Qualified wind energy property is property
that uses wind energy to generate electricity for use in a
dwelling unit located in the United States and used as a
principal residence by the taxpayer. A qualified fuel cell
power plant is an integrated system comprised of a fuel cell
stack assembly and associated balance of plant components that
converts a fuel into electricity using electrochemical means,
and which has an electricity-only generation efficiency of
greater than 30 percent and that generates at least 0.5
kilowatts of electricity. The qualified fuel cell power plant
must be installed on or in connection with a dwelling unit
located in the United States and used by the taxpayer as a
principal residence.
The provision also provides a credit for the purchase of
other qualified energy efficient property, as described below:
Electric heat pump water heater with an energy factor of
at least 1.7. The maximum credit is $150 per unit.
Advanced natural gas, oil, propane furnace, or hot water
boiler that achieves at least 95 percent annual fuel
utilization efficiency. The maximum credit is $125 per unit.
Advanced natural gas, oil, propane water heater that has
an energy factor of at least 0.80 in the standard Department of
Energy test procedure. The maximum credit is $150 per unit.
Natural gas, oil, propane water heater that has an energy
factor of at least 0.65 but less than 0.80 in the standard
Department of Energy test procedure. The maximum credit is $50
per unit.
Advanced main air circulating fan used in a new natural
gas, propane, or oil-fired furnace, including main air
circulating fans that use a brushless permanent magnet motor or
another type of motor which achieves similar or higher
efficiency at half and full speed, as determined by the
Secretary. The maximum credit is $50.
Advanced combination space and water heating system that
has a combined energy factor of at least 0.80 and a combined
annual fuel utilization efficiency (AFUE) of at least 78
percent in the standard Department of Energy test procedure.
The maximum credit is $150.
Combination space and water heating system that has a
combined energy factor of at least 0.65 but less than 0.80 and
a combined annual fuel utilization efficiency (AFUE) of at
least 78 percent in the standard Department of Energy test
procedure. The maximum credit is $50.
Geothermal heat pumps that have an EER of at least 21.
The maximum credit is $250 per unit.
The credit is nonrefundable, and the depreciable basis of
the property is reduced by the amount of the credit.
Expenditures for labor costs allocable to onsite preparation,
assembly, or original installation of property eligible for the
credit are eligible expenditures. The credit is allowed against
the regular and alternative minimum tax.
Certain equipment safety requirements need to be met to
qualify for the credit. Special proration rules apply in the
case of jointly owned property, condominiums, and tenant-
stockholders in cooperative housing corporations. With the
exception of wind energy property, if less than 80 percent of
the property is used for nonbusiness purposes, only that
portion of expenditures that is used for nonbusiness purposes
is taken into account.
EFFECTIVE DATE
The credit applies to expenditures after December 31,
2004, and prior to January 1, 2008.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
4. Credit for business installation of qualified fuel cells and
stationary microturbine power plants (sec. 824 of the Senate
amendment and sec. 48 of the Code)
PRESENT LAW
A nonrefundable, 10-percent business energy credit is
allowed for the cost of new property that is equipment (1) that
uses solar energy to generate electricity, to heat or cool a
structure, or to provide solar process heat, or (2) used to
produce, distribute, or use energy derived from a geothermal
deposit, but only, in the case of electricity generated by
geothermal power, up to the electric transmission stage.
The business energy tax credits are components of the
general business credit (sec. 38(b)(1)). The business energy
tax credits, 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).
There is no present-law credit for fuel cell or
microturbine power plant property.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision provides a 30 percent business energy
credit for the purchase of qualified fuel cell power plants for
businesses. A qualified fuel cell power plant is an integrated
system comprised of a fuel cell stack assembly and associated
balance of plant components that converts a fuel into
electricity using electrochemical means, and which has an
electricity-only generation efficiency of greater than 30
percent and generates at least 0.5 kilowatts of electricity.
The credit for any fuel cell may not exceed $500 for each 0.5
kilowatts of capacity.
Additionally, the provision provides a 10 percent credit
for the purchase of qualifying stationary microturbine power
plants. A qualified stationary microturbine power plant is an
integrated system comprised of a gas turbine engine, a
combustor, a recuperator or regenerator, a generator or
alternator, and associated balance of plant components which
converts a fuel into electricity and thermal energy. Such
system also includes all secondary components located between
the existing infrastructure for fuel delivery and the existing
infrastructure for power distribution, including equipment and
controls for meeting relevant power standards, such as voltage,
frequency and power factors. Such system must have an
electricity-only generation efficiency of not less that 26
percent at International Standard Organization conditions and a
capacity of less than 2,000 kilowatts. The credit is limited to
the lesser of 10 percent of the basis of the property or $200
for each kilowatt of capacity.
The credit is nonrefundable. The taxpayer's basis in the
property is reduced by the amount of the credit claimed.
Effective date.--The credit for businesses applies to
property placed in service after December 31, 2004, and before
January 1, 2008 (January 1, 2007 in the case of microturbines),
under rules similar to rules of section 48(m) of the Code (as
in effect on the day before the date of enactment of the
Revenue Reconciliation Act of 1990).
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
5. Energy efficient commercial building deduction (sec. 825 of Senate
amendment)
PRESENT LAW
No special deduction is currently provided for expenses
incurred for energy-efficient commercial building property.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision provides a deduction equal to energy-
efficient commercial building property expenditures made by the
taxpayer. Energy-efficient commercial building property
expenditures are defined as amounts paid or incurred for
energy-efficient property installed in connection with the
construction or reconstruction of property: (1) which is
depreciable property; (2) which is located in the United
States, and (3) which is the type of structure to which the
Standard 90.1-2001 of the American Society of Heating,
Refrigerating, and Air Conditioning Engineers and the
Illuminating Engineering Society of North America (``ASHRAE/
IESNA'') is applicable. The deduction is limited to an amount
equal to $2.25 per square foot of the property for which such
expenditures are made. The deduction is allowed in the year in
which the property is placed in service.
Energy-efficient commercial building property generally
means any property that reduces total annual energy and power
costs with respect to the lighting, heating, cooling,
ventilation, and hot water supply systems of the building by 50
percent or more in comparison to a building which minimally
meets the requirements of Standard 90.1-2001 of ASHRAE/IESNA.
Because of the requirement that, in order to qualify, a
building must fall within the scope of the ASHRAE/IESNA
Standard 90.1-2001, residential rental property that is less
than four stories does not qualify.
Certain certification requirements must be met in order
to qualify for the deduction. The Secretary, in consultation
with the Secretary of Energy, will promulgate regulations that
describe methods of calculating and verifying energy and power
costs using qualified computer software. The methods for
calculation shall be fuel neutral, such that the same energy
efficiency features shall qualify a building for the deduction
under this subsection regardless of whether the heating source
is a gas or oil furnace or boiler or an electric heat pump.
The Secretary shall prescribe procedures for the
inspection and testing for compliance of buildings that are
comparable, given the difference between commercial and
residential buildings, to the requirements in the Mortgage
Industry National Home Energy Rating Standards. Individuals
qualified to determine compliance shall only be those
recognized by one or more organizations certified by the
Secretary for such purposes.
For energy-efficient commercial building property
expenditures made by a public entity, such as public schools,
the Secretary shall promulgate regulations that will allow the
value of the deduction (determined without regard to the tax-
exempt status of such entity) to be allocated to the person
primarily responsible for designing the property in lieu of the
public entity.
In the case of lighting systems, until such time as the
Secretary issues final regulations, a partial deduction shall
be allowed for a reduction in Lighting Power Density of 40
percent (50 percent in the case of a warehouse) of the minimum
requirements in Table 9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA
Standard 90.1-2001. A pro-rated partial deduction is allowed in
the case of a lighting system that reduces lighting power
density between 25 percent and 40 percent. Certain lighting
level and lighting control requirements must also be met in
order to qualify for the partial lighting deductions.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2004 for expenditures in
connection with a building whose construction is completed on
or before December 31, 2009.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
6. Three-year applicable recovery period for depreciation of qualified
energy management devices and qualified water submetering
devices (secs. 826 and 827 of the Senate amendment and sec. 168
of the Code)
PRESENT LAW
No special recovery period is currently provided for
depreciation of qualified energy management devices or water
submetering devices.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides a three-year recovery
period for qualified energy management devices placed in
service by any taxpayer who is a supplier of electric energy or
is a provider of electric energy services. A qualified energy
management device is any energy management device that is used
by the taxpayer to measure and record electricity usage data on
a time-differentiated basis in at least four separate time
segments per day, and to provide such data on at least a
monthly basis to both consumers and the taxpayer.
Additionally, the Senate amendment provides a three-year
recovery period for qualified water submetering devices placed
in service by any taxpayer who is an eligible resupplier. An
eligible resupplier is any taxpayer who purchases and installs
qualified water submetering devices in every unit in any multi-
unit property. A qualified water submetering device is any
water submetering device that is used by the taxpayer to
measure and record water usage data and to provide such data on
at least a monthly basis to both consumers and the taxpayer.
Effective date.--The provision is effective for any
qualified energy management device or water submetering device
placed in service after December 31, 2004, and before January
1, 2008.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
7. Energy credit for combined heat and power system property (sec. 828
of the Senate amendment and sec. 48 of the Code)
PRESENT LAW
A nonrefundable, 10-percent business energy credit is
allowed for the cost of new property that is equipment (1) that
uses solar energy to generate electricity, to heat or cool a
structure, or to provide solar process heat, or (2) used to
produce, distribute, or use energy derived from a geothermal
deposit, but only, in the case of electricity generated by
geothermal power, up to the electric transmission stage.
The business energy tax credits are components of the
general business credit (sec. 38(b)(1)). The business energy
tax credits, 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).
A taxpayer may exclude from income the value of any
subsidy provided by a public utility for the purchase or
installation of an energy conservation measure. An energy
conservation measure means any installation or modification
primarily designed to reduce consumption of electricity or
natural gas or to improve the management of energy demand with
respect to a dwelling unit (sec. 136).
There is no present-law credit for combined heat and
power (``CHP'') property.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides a 10-percent credit for the
purchase of CHP property.
CHP property is property: (1) that uses the same energy
source for the simultaneous or sequential generation of
electrical power, mechanical shaft power, or both, in
combination with the generation of steam or other forms of
useful thermal energy (including heating and cooling
applications); (2) that has an electrical capacity of not more
than 15 megawatts or a mechanical energy capacity of no more
than 2000 horsepower or an equivalent combination of electrical
and mechanical energy capacities; (3) that produces at least 20
percent of its total useful energy in the form of thermal
energy that is not used to produce electrical or mechanical
power, and produces at least 20 percent of its total useful
energy in the form of electrical or mechanical power (or a
combination thereof); and (4) the energy efficiency percentage
of which exceeds 60 percent. CHP property does not include
property used to transport the energy source to the generating
facility or to distribute energy produced by the facility.
Additionally, the Senate amendment provides that systems
whose fuel source is at least 90 percent bagasse and that would
qualify for the credit but for the failure to meet the
efficiency standard are eligible for a credit that is reduced
in proportion to the degree to which the system fails to meet
the efficiency standard. For example, a system that would
otherwise be required to meet the 60-percent efficiency
standard, but which only achieves 30-percent efficiency, would
be permitted a credit equal to one-half of the otherwise
allowable credit (i.e., a 5-percent credit).
Effective date.--The credit applies to property placed in
service after December 31, 2004, and before January 1, 2007.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
8. Energy efficient improvements to existing homes (sec. 829 of the
Senate amendment)
PRESENT LAW
A taxpayer may exclude from income the value of any
subsidy provided by a public utility for the purchase or
installation of an energy conservation measure. An energy
conservation measure means any installation or modification
primarily designed to reduce consumption of electricity or
natural gas or to improve the management of energy demand with
respect to a dwelling unit (sec. 136).
There is no present law credit for energy efficiency
improvements to existing homes.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision would provide a 10-percent nonrefundable
credit for the purchase of qualified energy efficiency
improvements. The maximum credit for a taxpayer with respect to
the same dwelling for all taxable years is $300. Unused credits
may be carried forward to succeeding taxable years.
A qualified energy efficiency improvement would be any
energy efficiency building envelope component that is certified
to meet or exceed the latest prescriptive criteria for such
component in the International Energy Conservation Code
approved by the Department of Energy before the installation of
such component, or any combination of energy efficiency
measures that is certified to achieve at least a 30-percent
reduction in heating and cooling energy usage for the dwelling
and that is installed in or on a dwelling that (1) is located
in the United States; (2) is owned and used by the taxpayer as
the taxpayer's principal residence; (3) has not been treated as
a qualifying new home for purposes of the energy-efficient new
homes credit. Additionally, the original use of such component
or combination of measures commences with the taxpayer, and
such component or combination of measures can reasonably be
expected to remain in use for at least five years.
Building envelope components are: (1) insulation
materials or systems which are specifically and primarily
designed to reduce the heat loss or gain for a dwelling, and
(2) exterior windows (including skylights) and doors.
Homes shall be certified according to a component-based
method or a performance-based method. The component-based
method shall be based on applicable energy-efficiency ratings,
including current product labeling requirements. Certification
by the component method shall be provided by a third party,
such as a local building regulatory authority, a utility, a
manufactured home primary inspection agency, or a home energy
rating organization. The performance-based method shall be
based on a comparison of the projected energy consumption of
the dwelling in its original condition and after the completion
of energy efficiency measures. The performance-based method of
certification shall be conducted by an individual or
organization recognized by the Secretary of the Treasury for
such purposes.
In prescribing regulations for performance-based
certification methods, the Secretary shall prescribe procedures
for calculating annual energy usage and cost reductions for
heating and cooling and for the reporting of the results. Such
regulations shall provide that any calculation procedures be
fuel neutral such that the same energy efficiency measures
allow a qualifying new home to be eligible for the credit under
this section regardless of whether such home uses a gas or oil
furnace or boiler or an electric heat pump, and require that
any computer software allow for the printing of the Federal tax
forms necessary for the credit under this section and for the
printing of forms for disclosure to the owner of the dwelling.
The taxpayer's basis in the property would be reduced by
the amount of the credit. Special rules would apply in the case
of condominiums and tenant-stockholders in cooperative housing
corporations.
The credit is allowed against the regular and alternative
minimum tax.
Effective date.--The credit is effective for qualified
energy efficiency improvements installed after December 31,
2004, and before January 1, 2007.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
D. Clean Coal Incentives
1. Credit for production from a clean coal technology unit (secs. 831
and 834 of Senate amendment)
PRESENT LAW
Present law does not provide a production credit for
electricity generated at units that use coal as a fuel.
However, an income tax credit is allowed for the production of
electricity from either qualified wind energy, qualified
``closed-loop'' biomass, or qualified poultry waste units
placed in service prior to January 1, 2006 (sec. 45). The
credit allowed equals 1.5 cents per kilowatt-hour of
electricity sold. The 1.5-cent figure is indexed for inflation
and equals 1.8 cents for 2004. The credit is allowable for
production during the 10-year period after a unit is originally
placed in service. The production tax credit is a component of
the general business credit (sec. 38(b)(1)).
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides a production credit for
electricity produced from certain units that have been
retrofitted, repowered, or replaced with a clean coal
technology during the ten-year period beginning on January 1,
2005. The value of the credit is 0.34 cents per kilowatt-hour
of electricity produced and is indexed for inflation for
calendar years after 2005.
A qualifying clean coal technology unit must meet certain
capacity standards, thermal efficiency standards, and emissions
standards for SO2, nitrous oxides, particulate
emissions, and source emissions standards as provided in the
Clean Air Act. To be a qualified clean coal technology unit,
the taxpayer must receive a certificate from the Secretary of
the Treasury. The Secretary may grant certificates to units
only to the point that 4,000 megawatts of electricity
production capacity qualifies for the credit. However, no
qualifying unit would be eligible if the unit's capacity
exceeded 300 megawatts.
Certain persons (public utilities, electric cooperatives,
Indian tribes, and the Tennessee Valley Authority) are eligible
to obtain certifications from the Secretary for these credits
and sell, trade, or assign the credit to any taxpayer. However,
any credit sold, traded, or assigned may only be sold, traded,
or assigned once. Subsequent trades are not permitted.
Effective date.--The Senate amendment is effective for
production after December 31, 2004, in taxable years ending
after such date.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
2. Investment credit for clean coal technology units (secs. 832 and 834
of Senate amendment)
PRESENT LAW
Present law does not provide an investment credit for
electricity generating units that use coal as a fuel. However,
a nonrefundable, 10-percent investment tax credit (``business
energy credit'') is allowed for the cost of new property that
is equipment (1) that uses solar energy to generate
electricity, to heat or cool a structure, or to provide solar
process heat, or (2) that is used to produce, distribute, or
use energy derived from a geothermal deposit, but only, in the
case of electricity generated by geothermal power, up to the
electric transmission stage (sec. 48). The business energy tax
credit is a component of the general business credit (sec.
38(b)(1)).
HOUSE BILL
No provision.
SENATE AMENDMENT
In general
The Senate amendment provides a 10-percent investment tax
credit for qualified investments in advanced clean coal
technology units. Certain persons (public utilities, electric
cooperatives, Indian tribes, and the Tennessee Valley
Authority) will be eligible to obtain certifications from the
Secretary of the Treasury (as described below) for these
credits and sell, trade, or assign the credit to any taxpayer.
However, any credit sold, traded, or assigned may only be sold,
traded, or assigned once. Subsequent trades are not permitted.
Qualifying advanced clean coal technology units
Qualifying advanced clean coal technology units must
utilize advanced pulverized coal or atmospheric fluidized bed
combustion technology, pressurized fluidized bed combustion
technology, integrated gasification combined cycle technology,
or some other technology certified by the Secretary of Energy.
Any qualifying advanced clean coal technology unit must meet
certain capacity standards, thermal efficiency standards, and
emissions standards for SO2, nitrous oxides,
particulate emissions, and source emissions standards as
provided in the Clean Air Act. In addition, a qualifying
advanced clean coal technology unit must meet certain carbon
emissions requirements.
If the advanced clean coal technology unit is an advanced
pulverized coal or atmospheric fluidized bed combustion
technology unit, a pressurized fluidized bed combustion
technology unit, or an integrated gasification combined cycle
technology unit and if the unit uses a design coal with a heat
content of not more than 9,000 Btu per pound, the unit must
have a carbon emission rate less than 0.60 pound of carbon per
kilowatt hour of electricity produced. If the advanced clean
coal technology unit is an advanced pulverized coal or
atmospheric fluidized bed combustion technology unit, a
pressurized fluidized bed combustion technology unit, or an
integrated gasification combined cycle technology unit and if
the unit uses a design coal with a heat content greater than
9,000 Btu per pound, the unit must have a carbon emission rate
less than 0.54 pound of carbon per kilowatt hour of electricity
produced. In the case of an advanced clean coal technology unit
that uses another eligible technology and if the unit uses a
design coal with a heat content of not more than 9,000 Btu per
pound, the unit must have a carbon emission rate less than 0.51
pound of carbon per kilowatt hour of electricity produced. In
the case of an advanced clean coal technology unit that uses
another eligible technology and if the unit uses a design coal
with a heat content greater than 9,000 Btu per pound, the unit
must have a carbon emission rate less than 0.459 pound of
carbon per kilowatt hour of electricity produced.
Allocation of credits
To be a qualified investment in advanced clean coal
technology, the taxpayer must receive a certificate from the
Secretary of the Treasury. The Secretary may grant certificates
to investments only to the point that 4,000 megawatts of
electricity production capacity qualifies for the credit. From
the potential pool of 4,000 megawatts of capacity, not more
than 1,000 megawatts in total and not more than 500 megawatts
in years prior to 2009 shall be allocated to units using
advanced pulverized coal or atmospheric fluidized bed
combustion technology. From the potential pool of 4,000
megawatts of capacity, not more than 500 megawatts in total and
not more than 250 megawatts in years prior to 2009 shall be
allocated to units using pressurized fluidized bed combustion
technology. From the potential pool of 4,000 megawatts of
capacity, not more than 2,000 megawatts in total and not more
than 1,000 megawatts in years prior to 2009 and not more than
1,500 megawatts in year prior to 2013 shall be allocated to
units using integrated gasification combined cycle technology,
with or without fuel or chemical co-production. From the
potential pool of 4,000 megawatts of capacity, not more than
500 in total and not more than 250 megawatts in years prior to
2009 shall be allocated to any other technology certified by
the Secretary of Energy.
Effective date.--The Senate amendment is effective for
periods after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
3. Credit for production from advanced clean coal technology (secs. 833
and 834 of the Senate amendment)
PRESENT LAW
Present law does not provide a production credit for
electricity generated at units that use coal as a fuel.
However, an income tax credit is allowed for the production of
electricity from either qualified wind energy, qualified
``closed-loop'' biomass, or qualified poultry waste units
placed in service prior to January 1, 2006 (sec. 45). The
credit allowed equals 1.5 cents per kilowatt-hour of
electricity sold. The 1.5-cent figure is indexed for inflation
and equals 1.8 cents for 2004. The credit is allowable for
production during the 10-year period after a unit is originally
placed in service. The production tax credit is a component of
the general business credit (sec. 38(b)(1)).
HOUSE BILL
No provision.
SENATE AMENDMENT
In general
The Senate amendment creates a production credit for
electricity produced from any qualified advanced clean coal
technology electricity generation unit that qualifies for the
investment credit for qualifying clean coal technology units,
as described above. Certain persons (public utilities, electric
cooperatives, Indian tribes, and the Tennessee Valley
Authority) will be eligible to obtain certifications from the
Secretary of the Treasury (as described below) for each of
these credits and sell, trade, or assign the credit to any
taxpayer. However, any credit sold, traded, or assigned may
only be sold, traded, or assigned once. Subsequent trades are
not permitted.
Value of production credit for electricity produced from qualifying
advanced clean coal technology
The taxpayer may claim a production credit on the sum of
each kilowatt-hour of electricity produced and the heat value
of other fuels or chemicals produced by the taxpayer at the
unit.\392\ The taxpayer may claim the production credit for the
10-year period commencing with the date the qualifying unit is
placed in service (or the date on which a conventional unit was
retrofitted or repowered). The value of the credit varies
depending upon the year the unit is placed in service, whether
the unit produces solely electricity or electricity and fuels
or chemicals, and the rated thermal efficiency of the unit. In
addition, the value of the credit is reduced for the second
five years of eligible production. The maximum value of the
production credit from any qualifying unit during the first
five years of production is $0.014 per kilowatt-hour and the
minimum value is $0.001. During the second five years of
production from a qualifying unit, the maximum value of the
production credit is $0.0115 and the minimum value is $0.001.
The value of the credit is indexed for inflation for calendar
years after 2005.
---------------------------------------------------------------------------
\392\ Each 3,413 Btu of heat content of the fuel or chemical is
treated as equivalent to one kilowatt-hour of electricity.
---------------------------------------------------------------------------
Effective date.--The Senate amendment is effective for
production after December 31, 2004, in taxable years ending
after such date.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
E. Oil and Gas Provisions
1. Oil and gas production from marginal wells (sec. 841 of the Senate
amendment and new sec. 45I of the Code)
PRESENT LAW
There is no credit for the production of oil and gas from
marginal wells. The costs of such production may be recovered
under the Code's depreciation and depletion rules and in other
cases as a deduction for ordinary and necessary business
expenses.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment would create a new, $3-per-barrel
credit for the production of crude oil and a $0.50 credit per
1,000 cubic feet of qualified natural gas production. In both
cases, the credit is available only for production from a
``qualified marginal well.'' A qualified marginal well is
defined as domestic well: (1) production from which is treated
as marginal production for purposes of the Code percentage
depletion rules; or (2) that during the taxable year had
average daily production of not more than 25 barrel equivalents
and produces water at a rate of not less than 95 percent of
total well effluent. Production from any well during any period
in which such well is not in compliance with applicable Federal
pollution prevention, control, and permit requirements is not
considered a qualified marginal well during such period. The
maximum amount of production on which credit could be claimed
is 1,095 barrels or barrel equivalents.
The credit is not available to production occurring if
the reference price of oil exceeds $18 ($2.00 for natural gas).
The credit is reduced proportionately as for reference prices
between $15 and $18 ($1.67 and $2.00 for natural gas).
Reference prices are determined on a one-year look-back basis.
In the case of production from a qualified marginal well
which is eligible for the credit allowed under section 29 for
the taxable year, no marginal well credit is allowable unless
the taxpayer elects not to claim the credit under section 29
with respect to the well. The credit is treated as a general
business credit.
Effective date.--The Senate amendment is effective for
production in taxable years beginning after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement modifies the Senate amendment.
The conference agreement does not include the Federal pollution
prevention, control, and permit requirement provisions of the
Senate amendment. The conference agreement treats the credit as
part of the general business credit; however, unused credits
can be carried back for up to five years rather than the
generally applicable carryback period of one year. The credit
is indexed for inflation for taxable years beginning in a
calendar year after 2005.
Effective date--The provision is effective for production
in taxable years beginning after December 31, 2004.
2. Natural gas gathering lines treated as seven-year property (sec. 842
of the Senate amendment and sec. 168 of the Code)
PRESENT LAW
The applicable recovery period for assets placed in
service under the Modified Accelerated Cost Recovery System is
based on the ``class life of the property.'' The class lives of
assets placed in service after 1986 are generally set forth in
Revenue Procedure 87-56.\393\ Revenue Procedure 87-56 includes
two asset classes that could describe natural gas gathering
lines owned by nonproducers of natural gas. Asset class 46.0,
describing pipeline transportation, provides a class life of 22
years and a recovery period of 15 years. Asset class 13.2,
describing assets used in the exploration for and production of
petroleum and natural gas deposits, provides a class life of 14
years and a depreciation recovery period of seven years. The
uncertainty regarding the appropriate recovery period of
natural gas gathering lines has resulted in litigation between
taxpayers and the IRS. The 10th Circuit Court of Appeals and
the 6th Circuit Court of Appeals have held that natural gas
gathering lines owned by nonproducers falls within the scope of
Asset class 13.2 (i.e., seven-year recovery period).\394\ The
Tax Court has held that natural gas gathering lines owned by
nonproducers falls within the scope of Asset class 46.0 (i.e.,
15-year recovery period).\395\
---------------------------------------------------------------------------
\393\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
\394\ Duke Energy v. Commissioner, 172 F.3d 1255 (10th Cir. 1999),
rev'g 109 T.C. 416 (1997). Saginaw Bay Pipeline Co. v. United States,
2003 FED App. 0259P (6th Cir.) rev'g 124 F. Supp. 2d 465 (E.D. Mich.
2001). See also True v. United States, 97-2 U.S. Tax Cas. (CCH) par.
50,946 (D. Wyo. 1997).
\395\ Clajon Gas Co., L.P. v. Commissioner, 119 T.C. 197 (2002).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment establishes a statutory seven-year
recovery period and a class life of 14 years for natural gas
gathering lines. A natural gas gathering line is defined to
include any pipe, equipment, and appurtenance that is (1)
determined to be a gathering line by the Federal Energy
Regulatory Commission, or (2) used to deliver natural gas from
the wellhead or a common point to the point at which such gas
first reaches (a) a gas processing plant, (b) an
interconnection with an interstate transmission line, (c) an
interconnection with an intrastate transmission line, or (d) a
direct interconnection with a local distribution company, a gas
storage facility, or an industrial consumer.
Effective date.--The Senate amendment is effective for
property placed in service after December 31, 2004, in taxable
years ending after that date. No inference is intended as to
the proper treatment of natural gas gathering lines placed in
service before the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
3. Expensing of capital costs incurred for production in complying with
environmental protection agency sulfur regulations for small
refiners (sec. 843 of the Senate amendment and new sec. 179B of
the Code)
PRESENT LAW
Taxpayers generally may recover the costs of investments
in refinery property through annual depreciation deductions.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment permits small business refiners to
immediately deduct as an expense up to 75 percent of the costs
paid or incurred for the purpose of complying with the Highway
Diesel Fuel Sulfur Control Requirements of the Environmental
Protection Agency (``EPA''). Costs qualifying for the deduction
are those costs paid or incurred with respect to any facility
of a small business refiner during the period beginning on
January 1, 2003 and ending on the earlier of the date that is
one year after the date on which the taxpayer must comply with
the applicable EPA regulations or December 31, 2009.
For these purposes a small business refiner is a taxpayer
who is in the business of refining petroleum products and
employs not more than 1,500 employees directly in refining and
has less than 205,000 barrels per day (average) of total
refinery capacity. The deduction is reduced, pro rata, for
taxpayers with capacity in excess of 155,000 barrels per day.
Effective date.--The Senate amendment is effective for
expenses paid or incurred after December 31, 2002, in taxable
years ending after that date.
CONFERENCE AGREEMENT
The conference agreement includes the Senate amendment
provision. With respect to the definition of a small business
refiner, the conferees intend that, in any case in which
refinery through-put or retained production of the refinery
differs substantially from its average daily output or refined
product, capacity be measured by reference to the average daily
output of refined product.
4. Credit for small refiners for production of diesel fuel in
compliance with Environmental Protection Agency sulfur
regulations for small refiners (sec. 844 of Senate amendment
and new sec. 45H of the Code)
PRESENT LAW
Present law does not provide a credit for the production
of low-sulfur diesel fuel.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that a small business
refiner may claim credit equal to five cents per gallon for
each gallon of low sulfur diesel fuel produced during the
taxable year that is in compliance with the Highway Diesel Fuel
Sulfur Control Requirements of the Environmental Protection
Agency (``EPA''). The total production credit claimed by the
taxpayer is limited to 25 percent of the capital costs incurred
to come into compliance with the EPA diesel fuel requirements.
Costs qualifying for the credit are those costs paid or
incurred with respect to any facility of a small business
refiner during the period beginning on January 1, 2003 and
ending on the earlier of the date that is one year after the
date on which the taxpayer must comply with the applicable EPA
regulations or December 31, 2009. The taxpayer's basis in
property with respect to which the credit applies is reduced by
the amount of production credit claimed.
In the case of a qualifying small business refiner that
is owned by a cooperative, the cooperative is allowed to elect
to pass any production credits to patrons of the organization.
For these purposes a small business refiner is a taxpayer
who is in the business of refining petroleum products, employs
not more than 1,500 employees directly in refining, and has
less than 205,000 barrels per day (average) of total refinery
capacity. The credit is reduced, pro rata, for taxpayers with
capacity in excess of 155,000 barrels per day.
Effective date.--The Senate amendment is effective for
expenses paid or incurred after December 31, 2002, in taxable
years ending after that date.
CONFERENCE AGREEMENT
The conference agreement includes the Senate amendment
provision with modification as follows. The conference
agreement makes the low sulfur diesel fuel credit a qualified
business credit under section 169(c). Therefore, if any portion
of the credit has not been allowed to the taxpayer as a general
business credit (sec. 38) for any taxable year, an amount equal
to that portion may be deducted by the taxpayer in the first
taxable year following the last taxable year for which such
portion could have been allowed as a credit under the carryback
and carryforward rules (sec. 39). With respect to the
definition of a small business refiner, the conferees intend
that, in any case where refinery through-put or retained
production of the refinery differs substantially from its
average daily output of refined product, capacity be measured
by reference to the average daily output of refined product.
5. Determination of small refiner exception to oil depletion deduction
(sec. 845 of the Senate amendment and sec. 613A of the Code)
PRESENT LAW
Present law classifies oil and gas producers as
independent producers or integrated companies. The Code
provides numerous special tax rules for operations by
independent producers. One such rule allows independent
producers to claim percentage depletion deductions rather than
deducting the costs of their asset, a producing well, based on
actual production from the well (i.e., cost depletion).
A producer is an independent producer only if its
refining and retail operations are relatively small. For
example, an independent producer may not have refining
operations the runs from which exceed 50,000 barrels on any day
in the taxable year during which independent producer status is
claimed.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment increases the current 50,000-barrel-
per-day limitation to 60,000. In addition, the provision
changes the refinery limitation on claiming independent
producer status from a limit based on actual daily production
to a limit based on average daily production for the taxable
year. Accordingly, the average daily refinery run for the
taxable year may not exceed 60,000 barrels. For this purpose,
the taxpayer calculates average daily production by dividing
total production for the taxable year by the total number of
days in the taxable year.
Effective date.--The Senate amendment is effective for
taxable years ending after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
6. Suspension of 100-percent-of-net-income limitation on percentage
depletion for oil and gas from marginal wells (sec. 412 of the
House bill, sec. 846 of the Senate amendment, 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.\396\ 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.
---------------------------------------------------------------------------
\396\ Treas. Reg. sec. 1.611-1(b)(1).
---------------------------------------------------------------------------
Cost depletion
Two methods of depletion are currently allowable under
the Code: (1) the cost depletion method, and (2) the percentage
depletion method.\397\ 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.
---------------------------------------------------------------------------
\397\ Secs. 611-613.
---------------------------------------------------------------------------
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.\398\ 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.\399\ The amount deducted generally may not exceed 100
percent of the net income from that property in any year (the
``net-income limitation'').\400\ The 100-percent net-income
limitation for marginal wells has been suspended for taxable
years beginning after December 31, 1997, and before January 1,
2006.
---------------------------------------------------------------------------
\398\ Sec. 613A.
\399\ Sec. 613A(c).
\400\ Sec. 613(a).
---------------------------------------------------------------------------
HOUSE BILL \401\
The provision extends the suspension of the net-income
limitation for marginal wells for taxable years beginning
before January 1, 2006.
---------------------------------------------------------------------------
\401\ The House bill predated the enactment of H.R. 1308, Pub. L.
No. 108-311 (the ``Working Families Tax Relief Act of 2004''), which
included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--The provision is effective for taxable
years beginning after December 31, 2003.
SENATE AMENDMENT \402\
The Senate amendment extends the suspension of the net-
income limitation for marginal wells for taxable years
beginning before January 1, 2007.
---------------------------------------------------------------------------
\402\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a number of extensions to expiring provisions.
---------------------------------------------------------------------------
Effective date.--Same as the House bill.
CONFERENCE AGREEMENT
The conference agreement does not contain the House bill
or Senate amendment provision.
7. Delay rental payments (sec. 847 of the Senate amendment and sec. 167
of the Code)
PRESENT LAW
Present law generally requires costs associated with
inventory and property held for resale to be capitalized rather
than currently deducted as they are incurred. (sec. 263). Oil
and gas producers typically contract for mineral production in
exchange for royalty payments. If mineral production is
delayed, these contracts provide for ``delay rental payments''
as a condition of their extension. A delay rental is an amount
paid for the privilege of deferring development of the property
and which could have been avoided by abandonment of the lease,
or by commencement of development of operations or by obtaining
production. The Treasury Department has taken the position that
the uniform capitalization rules of section 263A require delay
rental payments to be capitalized.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that delay rental payments
incurred in connection with the development of oil or gas be
amortized over two years. In the case of abandoned property,
remaining basis may no longer be recovered in the year of
abandonment of a property as all basis is recovered over the
two-year amortization period.
Effective date.--The Senate amendment is effective for
amounts paid or incurred in taxable years beginning after
December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
8. Geological and geophysical costs (sec. 848 of the Senate amendment
and sec. 167 of the Code)
PRESENT LAW
Under present law, geological and geophysical
expenditures are costs incurred by a taxpayer for the purpose
of obtaining and accumulating data that will serve as the basis
for the acquisition and retention of mineral properties by
taxpayers exploring for minerals. Capital expenditures are not
currently deductible as ordinary and necessary expenses, but
are allocated to the cost of the property (sec. 263). Courts
have held that geological and geophysical costs are capital,
and therefore are allocable to the cost of property acquired or
retained. The costs attributable to such exploration are
allocable to the cost of the property acquired or retained. In
the case of abandoned property, exploration expenditures are
allowable as a loss when such property is abandoned.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that geological and
geophysical costs incurred in connection with domestic oil and
gas exploration be amortized over two years. In the case of
abandoned property, remaining basis may no longer be recovered
in the year of abandonment of a property as all basis is
recovered over the two-year amortization period.
Effective date.--The Senate amendment is effective for
costs paid or incurred in taxable years beginning after
December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
9. Extension and modification of credit for producing fuel from a non-
conventional source (sec. 849 of the Senate amendment and sec.
29 of the Code)
PRESENT LAW
An income tax credit is allowed for certain fuels
produced from ``non-conventional sources'' and sold to
unrelated parties. The amount of the credit is equal to $3
(generally adjusted for inflation \403\) per barrel or Btu oil
barrel equivalent (sec. 29). Qualified fuels must be produced
within the United States, and include: oil produced from shale
and tar sands; gas produced from geopressured brine, Devonian
shale, coal seams, tight formations (``tight sands''), or
biomass; and liquid, gaseous, or solid synthetic fuels produced
from coal (including lignite).
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\403\ The value of the section 29 credit for production in 2003 was
$6.40 per barrel of oil equivalent. The $3.00 credit for gas from a
tight formation is not adjusted for inflation.
---------------------------------------------------------------------------
The credit applies to fuels produced from wells drilled
or facilities placed in service after December 31, 1979, and
before January 1, 1993. An exception extends the January 1,
1993 expiration date for facilities producing gas from biomass
and synthetic fuel from coal if the facility producing the fuel
is placed in service before July 1, 1998, pursuant to a binding
contract entered into before January 1, 1997.
The credit applies to qualified fuels produced and sold
before January 1, 2003 (in the case of non-conventional sources
subject to the January 1, 1993, expiration date) or January 1,
2008 (in the case of biomass gas and synthetic fuel facilities
eligible for the extension period).
HOUSE BILL
No provision.
SENATE AMENDMENT
Extension of placed in service date for certain new facilities
For new wells or facilities producing qualifying fuels
that are oil from shale or tar sands, and gas from geopressured
brine, Devonian shale, coal seams, a tight formation, or
biomass, the credit can be claimed for production from such new
facilities placed in service after December 31, 2004 and before
January 1, 2007. The credit may be claimed for the three-year
period beginning on the date such well or facility is placed in
service. For all qualifying wells and facilities the value of
the credit is $3.00 per barrel or Btu equivalent for production
in 2003 and is indexed for inflation commencing with the credit
amount for 2004.
Extension and modification for ``refined coal''
The Senate amendment provides a credit for production of
``refined coal'' from facilities placed in service after
December 31, 2004, and before January 1, 2007. Credit may be
claimed for fuel produced during the five-year period beginning
on the date such facility is placed in service. The amount of
the credit is $3.00 per barrel or Btu equivalent for production
in 2003 and is indexed for inflation commencing with the credit
amount for 2004. Refined coal is a fuel that is a liquid,
gaseous, or solid synthetic fuel produced from coal (including
lignite) or high-carbon fly ash, including such fuel used as a
feedstock. A facility qualifies for the credit only if it
produces refined coal that: (1) when burned emits 20 percent
less SO2 and nitrogen oxides than the burning of
feedstock coal or comparable coal predominantly available in
the marketplace as of January 1, 2004, and (2) sells at prices
at least 50 percent greater than the prices of the feedstock
coal or comparable coal. However, no fuel produced at a
qualifying advanced clean coal technology unit (as defined
elsewhere) is a qualifying fuel.
Expansion for ``viscous oil''
The Senate amendment provides a credit for production of
certain viscous oil produced at wells placed in service after
December 31, 2004, and before January 1, 2007. ``Viscous oil''
is domestic crude oil produced from any property if the crude
oil has a weighted average gravity of 22 degrees API or less
(corrected to 60 degrees Fahrenheit). The credit may be claimed
for fuel produced during the three-year period beginning on the
date such well is placed in service. The amount of the credit
is $3.00 per barrel or Btu equivalent for production in 2003
and is indexed for inflation commencing with the credit amount
for 2004. The Senate amendment provides that qualifying sales
to related parties for consumption not in the immediate
vicinity of the wellhead qualify for the credit.
Credit for coalmine methane gas
The Senate amendment provides a credit for production of
``coalmine methane gas'' captured or extracted from a coalmine
and sold after December 31, 2004, and before January 1, 2007.
The amount of the credit is $3.00 (indexed for inflation from
2002) per barrel or Btu oil for gas utilized, captured or sold
during the applicable period. Qualifying coalmine gas is any
methane gas liberated during coal mining operations or
extracted up to ten years in advance of coal mining operations
as part of a specific plan to mine a coal deposit. In the case
of coalmine methane gas that is captured in advance of coal
mining operations, the credit is allowed only after the date
the coal extraction occurs in the immediate area where the
coalmine methane gas was removed. The capture or extraction of
coalmine gas from coal mining operations is required to be in
compliance with applicable State and Federal pollution
prevention, control, and permit requirements in order to
qualify for the credit.
Expansion for agricultural and animal wastes
The Senate amendment adds facilities producing liquid,
gaseous, or solid fuels from agricultural and animal wastes
(including such fuels when used as feedstocks) placed in
service after December 31, 2004, and before January 1, 2007, to
the list of qualified facilities for purposes of the non-
conventional fuel credit. The credit may be claimed for fuel
produced during the three-year period beginning on the date
such facility is placed in service. The amount of the credit is
$3.00 per barrel or Btu equivalent for production in 2003 and
is indexed for inflation commencing with the credit amount for
2004. Agricultural and animal waste includes by-products,
packaging, and any materials associated with processing,
feeding, selling, transporting, or disposal of agricultural or
animal products or wastes.
Extension of credit for certain existing facilities
The Senate amendment extends the present law credit
($3.00 indexed for inflation from 1979) through December 31,
2005, for production from existing facilities producing coke,
coke gas, or natural gas and by-products produced by coal
gasification from lignite. For persons (or subsidiaries of such
persons) engaged in furnishing electric energy, or providing
telephone service, to persons in rural areas, any credit
claimed for this purpose may be applied as a prepayment of any
loan, debt, or other obligation to the extent provided by the
Secretary of Agriculture and to the extent provided by the
Secretary of Energy, as a prepayment not to exceed 50 percent
of any obligation incurred pursuant to an asset purchase
agreement entered into with the Secretary and dated October 7,
1988. Such credit is not considered income for these purposes.
Daily limit
Under the Senate amendment, with respect to qualifying
facilities placed in service under the extended placed in
service dates, a taxpayer would not be able to claim any credit
for production in excess of a daily average \404\ of 200,000
cubic feet of natural gas or barrel of oil equivalent (200,000
cubic feet is equivalent to approximately 35.4 barrels of oil)
of such gas with respect to: (1) oil produced from shale and
tar sands and (2) gas produced from geopressured brine,
Devonian shale, coal seams, or a tight formation. Days before
the date the project is placed in service are not taken into
account in determining such average.
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\404\ The daily average is computed as total production divided by
the total number of days the well or facility was in production during
the year. Days before the date the project is placed in service are not
taken into account in determining the daily average.
---------------------------------------------------------------------------
New phaseout adjustment
In the case of fuels sold after 2003, with the exception
of fuel produced at existing facilities and for any gas from a
tight formation: (1) the dollar amount of the credit is $3.00
indexed for inflation from 2002 (without regard to a phaseout
adjustment), and (2) the threshold for purposes of the phaseout
of the credit is increased from $23.50 to $35.00 (indexed for
inflation from 2002).
General business credit
The provision adds section 29 to the list of general
business credits and re-labels present section 29 of the Code
as new Code section 45R.
Study of coalbed methane gas
The Senate amendment provides that the Secretary of
Treasury undertake a study of the effect of section 29 on the
production of coalbed methane. The study should estimate the
total amount of credit claimed annually and in aggregate
related to the production of coalbed methane since the date of
enactment of section 29. The study should report the annual
value of the credit allowable for coalbed methane compared to
the average annual wellhead price of natural gas (per thousand
cubic feet of natural gas). The study should estimate the
incremental increase in production of coalbed methane that has
resulted from the enactment of section 29. The study should
also estimate the cost to the Federal government, in terms of
the net tax benefits claimed, per thousand cubic feet of
incremental coalbed methane produced annually and in aggregate
since the enactment of section 29.
Effective date
In general, except as provided below, the provision is
effective for fuel sold from qualifying facilities after
December 31, 2004, in taxable years ending after such date.
For existing facilities, the provision is effective for
fuel sold after December 31, 2002, in taxable years ending
after such date.
For application of the general business credit, the
provision is effective for taxable years ending after December
31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
10. Natural gas distribution lines treated as 15-year property (sec.
850 of the Senate amendment and sec. 168 of the Code)
PRESENT LAW
The applicable recovery period for assets placed in
service under the Modified Accelerated Cost Recovery System is
based on the ``class life of the property.'' The class lives of
assets placed in service after 1986 are generally set forth in
Revenue Procedure 87-56.\405\ Natural gas distribution
pipelines are assigned a 20-year recovery period and a class
life of 35 years.
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\405\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment establishes a statutory 15-year
recovery period and a class life of 35 years for natural gas
distribution lines.
Effective date.--The Senate amendment is effective for
property placed in service after December 31, 2004, in taxable
years ending after such date.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
11. Credit for production of Alaska natural gas (sec. 851 of Senate
amendment)
PRESENT LAW
Present law does not provide a credit for conventional
production of natural gas or delivery of fuels to a pipeline.
However, certain fuels produced from ``non-conventional
sources'' and sold to unrelated parties are eligible for an
income tax credit equal to $3 (generally adjusted for
inflation) per barrel or Btu oil barrel equivalent (sec. 29).
Qualified fuels must be produced within the United States.
Qualified fuels include:
(1) gas produced from geopressured brine, Devonian
shale, coal seams, tight formations (``tight sands''),
or biomass; and
(2) liquid, gaseous, or solid synthetic fuels
produced from coal (including lignite).
In general, the credit is available only with respect to
fuels produced from wells drilled or facilities placed in
service after December 31, 1979, and before January 1, 1993. An
exception extends the January 1, 1993 expiration date for
facilities producing gas from biomass and synthetic fuel from
coal if the facility producing the fuel is placed in service
before July 1, 1998, pursuant to a binding contract entered
into before January 1, 1997.
The credit may be claimed for qualified fuels produced
and sold before January 1, 2003 (in the case of non-
conventional sources subject to the January 1, 1993 expiration
date) or January 1, 2008 (in the case of biomass gas and
synthetic fuel facilities eligible for the extension period).
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision provides a credit per million British
thermal units (Btu) of natural gas for Alaska natural gas
entering a pipeline \406\ during the 25-year period beginning
the later of January 1, 2010 or the initial date for the
interstate transportation of Alaska natural gas. Taxpayers may
claim the credit against both the regular and minimum tax.
---------------------------------------------------------------------------
\406\ Natural gas entering a gas processing facility is not
considered to have entered a pipeline. Rather, the credit applies only
to pipeline quality gas at the time of entry into the pipeline.
---------------------------------------------------------------------------
The credit amount for any month is a maximum of 52 cents
per million Btu of natural gas. The credit phases out as the
reference price of Alaska natural gas rises above 83 cents per
million Btu, at a rate of one cent of credit lost per each cent
by which the reference price of Alaska natural gas exceeds 83
cents per million Btu. The credit is not available if the
reference price of Alaska natural gas rises above $1.35 per
million Btu. The 52-cent and 83-cent figures are indexed for
inflation after 2004, with the first adjustment for calendar
year 2006.\407\
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\407\ In practice, the $1.35-figure also is indexed for inflation,
as $1.35 is the sum of the 52-cent credit and the 83-cent price. The
bill provides that the Secretary can compute the inflation adjustment
factor for a calendar year in the fourth quarter of the preceding year.
For example, the adjustment for 2006 is calculated as the 2005 GDP
deflator over the 2004 GDP deflator, where the 2004 GDP deflator is the
value of the GDP deflator on June 30, 2004 (as determined by the latest
available revision from the Department of Commerce prior to October 1,
2004). Likewise, the 2005 deflator is the value of the GDP deflator on
June 30, 2005.
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The bill provides that the Secretary of the Treasury
calculate the reference price of Alaska natural gas as the
average price of natural gas delivered in the lower 48 States
less certain transportation costs and gas processing costs.
Alaska natural gas is any gas derived from an area of the State
of Alaska lying north of 64 degrees North latitude, but not
including the Alaska National Wildlife Refuge.
The credit is part of the general business credit.
Effective date.--The proposal is effective on the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
12. Treat certain Alaska pipeline property as seven-year property (sec.
852 of the Senate amendment and sec. 168 of the Code)
PRESENT LAW
The applicable recovery period for assets placed in
service under the Modified Accelerated Cost Recovery System is
based on the ``class life of the property.'' The class lives of
assets placed in service after 1986 are generally set forth in
Revenue Procedure 87-56.\408\ Asset class 46.0, describing
assets used in the private, commercial, and contract carrying
of petroleum, gas and other products by means of pipes and
conveyors, are assigned a class life of 22 years and a recovery
period of 15 years.
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\408\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment establishes a statutory seven-year
recovery period and a class life of 22 years for any Alaska
natural gas pipeline. The term ``Alaska natural gas pipeline''
is defined as any natural gas pipeline system (including the
pipe, trunk lines, related equipment, and appurtenances used to
carry natural gas, but not any gas processing plant) located in
the State of Alaska that has a capacity of more than 500
billion Btu of natural gas per day and is placed in service
after December 31, 2012. A taxpayer who places an otherwise
qualifying system in service before January 1, 2013 may elect
to treat the system as placed in service on January 1, 2013,
thus qualifying for the seven-year recovery period.
Effective date.--The Senate amendment is effective for
property placed in service after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with the following modification. In order to qualify for the
seven-year recovery period, otherwise qualifying property must
be placed in service after December 31, 2013. A taxpayer who
places an otherwise qualifying system in service before January
1, 2014 may elect to treat the system as placed in service on
January 1, 2014, thus qualifying for the seven-year recovery
period.
Effective date.--The provision is effective for property
placed in service after December 31, 2004.
13. Enhanced oil recovery credit for certain gas processing facilities
(sec. 853 of the Senate amendment and sec. 43 of the Code)
PRESENT LAW
The taxpayer may claim a credit equal to 15 percent of
enhanced oil recovery costs. Qualified enhanced oil recovery
costs include costs of depreciable tangible property that is
part of an enhanced oil recovery project, intangible drilling
and development costs with respect to an enhanced oil recovery
project, and tertiary injectant expenses incurred with respect
to an enhanced oil recovery project. The credit is phased out
when oil prices exceed a threshold amount.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that expenses in connection
with the construction of any qualifying natural gas processing
plant capable of processing two trillion British thermal units
of Alaskan natural gas into a natural gas pipeline system on a
daily basis are qualified enhanced oil recovery costs eligible
for the enhanced oil recovery credit. A qualifying natural gas
processing plant also must produce carbon dioxide for re-
injection into a producing oil or gas field.
Effective date.--The provision is effective for costs
paid or incurred in taxable years beginning after December 31,
2004.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
14. Exempt certain prepayments for natural gas from tax-exempt bond
arbitrage rules (sec. 854 of the Senate amendment and secs. 141
and 148 of the Code)
PRESENT LAW
Interest on bonds issued by States or local governments
to finance activities carried out or paid for by those entities
generally is exempt from income tax. Restrictions are imposed
on the ability of States or local governments to invest the
proceeds of these bonds for profit (the ``arbitrage
restrictions''). One such restriction limits the use of bond
proceeds to acquire ``investment-type property.'' The term
investment-type property includes the acquisition of property
in a transaction involving a prepayment if a principal purpose
of the prepayment is to receive an investment return from the
time the prepayment is made until the time payment otherwise
would be made. A prepayment can produce prohibited arbitrage
profits when the discount received for prepaying the costs
exceeds the yield on the tax-exempt bonds. In general,
prohibited prepayments include all prepayments that are not
customary in an industry by both beneficiaries of tax-exempt
bonds and other persons using taxable financing for the same
transaction.
On August 4, 2003, the Treasury Department issued final
regulations deeming to be customary, and not in violation of
the arbitrage rules, certain prepayments for natural gas and
electricity.\409\ Generally, a qualified prepayment under the
regulations requires that 90 percent of the natural gas or
electricity purchased with the prepayment be used for a
qualifying use. Generally, natural gas is used for a qualifying
use if it is to be (1) furnished to retail gas customers of the
issuing municipal utility who are located in the natural gas
service area of the issuing municipal utility, however, gas
used to produce electricity for sale is not included under this
provision, (2) used by the issuing municipal utility to produce
electricity that will be furnished to retail electric service
area customers of the issuing utility, (3) used by the issuing
municipal utility to produce electricity that will be sold to a
utility owned by a governmental person and furnished to the
service area retail electric customers of the purchaser, (4)
sold to a utility that is owned by a governmental person if the
requirements of (1), (2), or (3) are satisfied by the
purchasing utility (treating the purchaser as the issuing
utility) or (5) used to fuel the pipeline transportation of the
prepaid gas supply. Electricity is used for a qualifying use if
it is to be (1) furnished to retail service area electric
customers of the issuing municipal utility or (2) sold to a
municipal utility and furnished to retail electric customers of
the purchaser who are located in the electricity service area
of the purchaser. Both governmental gas and electric utilities
may take advantage of this regulatory provision.
---------------------------------------------------------------------------
\409\ Treas. Reg. sec. 1.148-1(e)(2)(iii).
---------------------------------------------------------------------------
State and local bonds may be classified as either
governmental bonds or private activity bonds. Governmental
bonds are bonds the proceeds of which are primarily used to
finance governmental functions or the debt is repaid with
governmental funds. Private activity bonds are bonds where the
State or local government serves as a conduit providing
financing to private businesses or individuals. The exclusion
from income for State and local bonds does not apply to private
activity bonds, unless the bonds are issued for certain
purposes permitted by the Code. Section 141(D) of the Code
provides that the term ``private activity bond'' includes any
bond issued as part of an issue if the amount of the proceeds
of the issue which are to be used (directly or indirectly) for
the acquisition by a governmental unit of nongovernmental
output property exceeds the lesser of five percent of such
proceeds or $5 million. ``Nongovernmental output property''
generally means any property (or interest therein) which before
such acquisition was used (or held for use) by a person other
than a governmental unit in connection with an output facility
(other than a facility for the furnishing of water). An
exception applies to output property which is to be used in
connection with an output facility 95 percent or more of the
output of which will be consumed in (1) a qualified service
area of the governmental unit acquiring the property, or (2) a
qualified annexed area of such unit.
HOUSE BILL
No provision.
SENATE AMENDMENT
In general
The provision creates a safe harbor exception to the
general rule that tax-exempt bond-financed prepayments violate
the arbitrage restrictions. The term ``investment type
property'' does not include a prepayment under a qualified
natural gas supply contract. The provision also provides that
such prepayments are not treated as private loans for purposes
of the private business tests.
Under the provision, a prepayment financed with tax-
exempt bond proceeds for the purpose of obtaining a supply of
natural gas for service area customers of a governmental
utility is not treated as the acquisition of investment-type
property. A contract is a qualified natural gas contract if the
volume of natural gas secured for any year covered by the
prepayment does not exceed the sum of (1) the average annual
natural gas purchased (other than for resale) by customers of
the utility within the service area of the utility (``retail
natural gas consumption'') during the testing period, and (2)
the amount of natural gas that is needed to fuel transportation
of the natural gas to the governmental utility. The testing
period is the 5-calendar-year period immediately preceding the
calendar year in which the bonds are issued. A retail customer
is one who does not purchase natural gas for resale. Natural
gas used to generate electricity by a utility owned by a
governmental unit is counted as retail natural gas consumption
if the electricity was sold to retail customers within the
service area of the governmental electric utility.
Adjustments
The volume of gas permitted by the general rule is
reduced by natural gas otherwise available on the date of
issuance. Specifically, the amount of natural gas permitted to
be acquired under a qualified natural gas contract for any
period is to be reduced by natural gas held by the utility on
the date of issuance of the bonds and natural gas that the
utility has a right to acquire for the prepayment period
(determined as of the date of issuance). For purposes of the
preceding sentence, applicable share means, with respect to any
period, the natural gas allocable to such period if the gas
were allocated ratably over the period to which the prepayment
relates.
For purposes of the safe harbor, if after the close of
the testing period and before the issue date of the bonds (1)
the government utility enters into a contract to supply natural
gas (other than for resale) for a commercial person for use at
a property within the service area of such utility and (2) the
gas consumption for such property was not included in the
testing period or the ratable amount of natural gas to be
supplied under the contract is significantly greater than the
ratable amount of gas supplied to such property during the
testing period, then the amount of gas permitted to be
purchased may be increased to accommodate the contract.
The average annual retail natural gas consumption
calculation for purposes of the safe harbor, however, is not to
exceed the annual amount of natural gas reasonably expected to
be purchased (other than for resale) by persons who are located
within the service area of such utility and who, as of the date
of issuance of the issue, are customers of such utility.
Intentional acts
The safe harbor does not apply if the utility engages in
intentional acts to render (1) the volume of natural gas
covered by the prepayment to be in excess of that needed for
retail natural gas consumption, and (2) the amount of natural
gas that is needed to fuel transportation of the natural gas to
the governmental utility.
Definition of service area
Service area is defined as (1) any area throughout which
the governmental utility provided (at all times during the
testing period) in the case of a natural gas utility, natural
gas transmission or distribution service, or in the case of an
electric utility, electric distribution service; (2) limited
areas contiguous to such areas; and (3) any area recognized as
the service area of the governmental utility under State or
Federal law. Contiguous areas are limited to any area within a
county contiguous to the area described in (1) in which retail
customers of the utility are located if such area is not also
served by another utility providing the same service.
Ruling request for higher prepayment amounts
Upon written request, the Secretary may allow an issuer
to prepay for an amount of gas greater than that allowed by the
safe harbor based on objective evidence of growth in gas
consumption or population that demonstrates that the amount
permitted by the exception is insufficient.
Nongovernmental output property restrictions
A qualified natural gas supply contract as defined in the
Senate amendment is not nongovernmental output property for
purposes of subsection (d) of section 141. Subsection (d) of
section 141 does not apply to prepayment contracts for natural
gas or electricity that either under the Treasury regulations
or statutory safe harbor are not investment-type property for
purposes of the arbitrage rules under section 148. No inference
is intended regarding the application of subsection 141(d) to
prepayment contracts not covered by the statutory safe harbor
or Treasury regulations.
Effective date
The provision is effective for obligations issued after
December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
F. Electric Utility Restructuring and Reliability Provisions
1. Modification to special rules for nuclear decommissioning costs
(sec. 855 of the Senate amendment and sec. 468A of the Code)
PRESENT LAW
Overview
Special rules dealing with nuclear decommissioning
reserve funds were adopted by Congress in the Deficit Reduction
Act of 1984 (``1984 Act''), when tax issues regarding the time
value of money were addressed generally. Under general tax
accounting rules, a deduction for accrual basis taxpayers is
deferred until there is economic performance for the item for
which the deduction is claimed. However, the 1984 Act contains
an exception under which a taxpayer responsible for nuclear
powerplant decommissioning may elect to deduct contributions
made to a qualified nuclear decommissioning fund for future
decommissioning costs. Taxpayers who do not elect this
provision are subject to general tax accounting rules.
Qualified nuclear decommissioning fund
A qualified nuclear decommissioning fund (a ``qualified
fund'') is a segregated fund established by a taxpayer that is
used exclusively for the payment of decommissioning costs,
taxes on fund income, management costs of the fund, and for
making investments. The income of the fund is taxed at a
reduced rate of 20 percent for taxable years beginning after
December 31, 1995.\410\
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\410\ As originally enacted in 1984, a qualified fund paid tax on
its earnings at the top corporate rate and, as a result, there was no
present-value tax benefit of making deductible contributions to a
qualified fund. Also, as originally enacted, the funds in the trust
could be invested only in certain low risk investments. Subsequent
amendments to the provision have reduced the rate of tax on a qualified
fund to 20 percent and removed the restrictions on the types of
permitted investments that a qualified fund can make.
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Contributions to a qualified fund are deductible in the
year made to the extent that these amounts were collected as
part of the cost of service to ratepayers (the ``cost of
service requirement'').\411\ Funds withdrawn by the taxpayer to
pay for decommissioning costs are included in the taxpayer's
income, but the taxpayer also is entitled to a deduction for
decommissioning costs as economic performance for such costs
occurs.
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\411\ Taxpayers are required to include in gross income customer
charges for decommissioning costs (sec. 88).
---------------------------------------------------------------------------
Accumulations in a qualified fund are limited to the
amount required to fund decommissioning costs of a nuclear
powerplant for the period during which the qualified fund is in
existence (generally post-1984 decommissioning costs of a
nuclear powerplant). For this purpose, decommissioning costs
are considered to accrue ratably over a nuclear powerplant's
estimated useful life. In order to prevent accumulations of
funds over the remaining life of a nuclear powerplant in excess
of those required to pay future decommissioning costs of such
nuclear powerplant and to ensure that contributions to a
qualified fund are not deducted more rapidly than level funding
(taking into account an appropriate discount rate), taxpayers
must obtain a ruling from the IRS to establish the maximum
annual contribution that may be made to a qualified fund (the
``ruling amount''). In certain instances (e.g., change in
estimates), a taxpayer is required to obtain a new ruling
amount to reflect updated information.
A qualified fund may be transferred in connection with
the sale, exchange or other transfer of the nuclear powerplant
to which it relates. If the transferee is a regulated public
utility and meets certain other requirements, the transfer will
be treated as a nontaxable transaction. No gain or loss will be
recognized on the transfer of the qualified fund and the
transferee will take the transferor's basis in the fund.\412\
The transferee is required to obtain a new ruling amount from
the IRS or accept a discretionary determination by the
IRS.\413\
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\412\ Treas. reg. sec. 1.468A-6.
\413\ Treas. reg. sec. 1.468A-6(f).
---------------------------------------------------------------------------
Nonqualified nuclear decommissioning funds
Federal and State regulators may require utilities to set
aside funds for nuclear decommissioning costs in excess of the
amount allowed as a deductible contribution to a qualified
fund. In addition, taxpayers may have set aside funds prior to
the effective date of the qualified fund rules.\414\ The
treatment of amounts set aside for decommissioning costs prior
to 1984 varies. Some taxpayers may have received no tax benefit
while others may have deducted such amounts or excluded such
amounts from income. Since 1984, taxpayers have been required
to include in gross income customer charges for decommissioning
costs (sec. 88), and a deduction has not been allowed for
amounts set aside to pay for decommissioning costs except
through the use of a qualified fund. Income earned in a
nonqualified fund is taxable to the fund's owner as it is
earned.
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\414\ These funds are generally referred to as ``nonqualified
funds.''
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HOUSE BILL
No provision.
SENATE AMENDMENT
Repeal of cost of service requirement
The Senate amendment repeals the cost of service
requirement for deductible contributions to a nuclear
decommissioning fund. Thus, all taxpayers, including
unregulated taxpayers, would be allowed a deduction for amounts
contributed to a qualified fund.
Permit contributions to a qualified fund for pre-1984 decommissioning
costs
The Senate amendment also repeals the limitation that a
qualified fund only accumulate an amount sufficient to pay for
a nuclear powerplant's decommissioning costs incurred during
the period that the qualified fund is in existence (generally
post-1984 decommissioning costs). Thus, any taxpayer is
permitted to accumulate an amount sufficient to cover the
present value of 100 percent of a nuclear powerplant's
estimated decommissioning costs in a qualified fund. The Senate
amendment does not change the requirement that contributions to
a qualified fund not be deducted more rapidly than level
funding.
Exception to ruling amount for certain decommissioning costs
The Senate amendment permits a taxpayer to make
contributions to a qualified fund in excess of the ruling
amount in one circumstance. Specifically, a taxpayer is
permitted to contribute up to the present value of the amount
required to fund a nuclear powerplant's decommissioning costs
which under present law section 468A(d)(2)(A) is not permitted
to be accumulated in a qualified fund (generally pre-1984
decommissioning costs).\415\ It is anticipated that an amount
that is permitted to be contributed under this special rule
shall be determined using the estimate of total decommissioning
costs used for purposes of determining the taxpayer's most
recent ruling amount. Any amount transferred to the qualified
fund under this special rule that has not previously been
deducted or excluded from gross income is allowed as a
deduction over the remaining useful life of the nuclear
powerplant.\416\ If a qualified fund that has received amounts
under this rule is transferred to another person, the
transferor will be permitted a deduction for any remaining
deductible amounts at the time of transfer.
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\415\ The ability to transfer property into a qualified fund under
this special rule is available only to the extent the taxpayer has not
obtained a new ruling amount incorporating the repeal of the limitation
that a qualified fund only accumulate an amount sufficient to pay for
decommissioning costs of a nuclear powerplant incurred during the
period that the fund is in existence (generally post-1984
decommissioning costs).
\416\ A taxpayer recognizes no gain or loss on the contribution of
property to a qualified fund under this special rule. The qualified
fund will take a transferred (carryover) basis in such property.
Correspondingly, a taxpayer's deduction (over the estimated life of the
nuclear powerplant) is to be based on the adjusted tax basis of the
property contributed rather than the fair market value of such
property.
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Contributions to a qualified fund after useful life of powerplant
The Senate amendment also allows deductible contributions
to a qualified fund subsequent to the end of a nuclear
powerplant's estimated useful life. Such payments are permitted
to the extent they do not cause the assets of the qualified
fund to exceed the present value of the taxpayer's allocable
share (current or former) of the nuclear decommissioning costs
of such nuclear powerplant.
Clarify treatment of transfers of qualified funds
The Senate amendment clarifies the Federal income tax
treatment of the transfer of a qualified fund. No gain or loss
would be recognized to the transferor or the transferee as a
result of the transfer of a qualified fund in connection with
the transfer of the power plant with respect to which such fund
was established.
Effective date.
The Senate amendment is effective for taxable years
beginning after December 31, 2002.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
2. Treatment of certain income of electric cooperatives (sec. 856 of
the Senate amendment and sec. 501 of the Code)
PRESENT LAW
In general
Under present law, an entity must be operated on a
cooperative basis in order to be treated as a cooperative for
Federal income tax purposes. Although not defined by statute or
regulation, the two principal criteria for determining whether
an entity is operating on a cooperative basis are: (1)
ownership of the cooperative by persons who patronize the
cooperative; and (2) return of earnings to patrons in
proportion to their patronage. The Internal Revenue Service
requires that cooperatives must operate under the following
principles: (1) subordination of capital in control over the
cooperative undertaking and in ownership of the financial
benefits from ownership; (2) democratic control by the members
of the cooperative; (3) vesting in and allocation among the
members of all excess of operating revenues over the expenses
incurred to generate revenues in proportion to their
participation in the cooperative (patronage); and (4) operation
at cost (not operating for profit or below cost).\417\
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\417\ Announcement 96-24, ``Proposed Examination Guidelines
Regarding Rural Electric Cooperatives,'' 1996-16 I.R.B. 35.
---------------------------------------------------------------------------
In general, cooperative members are those who participate
in the management of the cooperative and who share in patronage
capital. As described below, income from the sale of electric
energy by an electric cooperative may be member or non-member
income to the cooperative, depending on the membership status
of the purchaser. A municipal corporation may be a member of a
cooperative.
For Federal income tax purposes, a cooperative generally
computes its income as if it were a taxable corporation, with
one exception-the cooperative may exclude from its taxable
income distributions of patronage dividends. In general,
patronage dividends are the profits of the cooperative that are
rebated to its patrons pursuant to a pre-existing obligation of
the cooperative to do so. The rebate must be made in some
equitable fashion on the basis of the quantity or value of
business done with the cooperative.
Except for tax-exempt farmers' cooperatives, cooperatives
that are subject to the cooperative tax rules of subchapter T
of the Code (sec. 1381, et seq.) are permitted a deduction for
patronage dividends from their taxable income only to the
extent of net income that is derived from transactions with
patrons who are members of the cooperative (sec. 1382). The
availability of such deductions from taxable income has the
effect of allowing the cooperative to be treated like a conduit
with respect to profits derived from transactions with patrons
who are members of the cooperative.
Cooperatives that qualify as tax-exempt farmers'
cooperatives are permitted to exclude patronage dividends from
their taxable income to the extent of all net income, including
net income that is derived from transactions with patrons who
are not members of the cooperative, provided the value of
transactions with patrons who are not members of the
cooperative does not exceed the value of transactions with
patrons who are members of the cooperative (sec. 521).
Taxation of electric cooperatives exempt from subchapter T
In general, the cooperative tax rules of subchapter T
apply to any corporation operating on a cooperative basis
(except mutual savings banks, insurance companies, other tax-
exempt organizations, and certain utilities), including tax-
exempt farmers' cooperatives (described in sec. 521(b)).
However, subchapter T does not apply to an organization that is
``engaged in furnishing electric energy, or providing telephone
service, to persons in rural areas'' (sec. 1381(a)(2)(C)).
Instead, electric cooperatives are taxed under rules that were
generally applicable to cooperatives prior to the enactment of
subchapter T in 1962. Under these rules, an electric
cooperative can exclude patronage dividends from taxable income
to the extent of all net income of the cooperative, including
net income derived from transactions with patrons who are not
members of the cooperative.\418\
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\418\ See Rev. Rul. 83-135, 1983-2 C.B. 149.
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Tax exemption of rural electric cooperatives
Section 501(c)(12) provides an income tax exemption for
rural electric cooperatives if at least 85 percent of the
cooperative's income consists of amounts collected from members
for the sole purpose of meeting losses and expenses of
providing service to its members. The IRS takes the position
that rural electric cooperatives also must comply with the
fundamental cooperative principles described above in order to
qualify for tax exemption under section 501(c)(12).\419\ The
85-percent test is determined without taking into account any
income from qualified pole rentals and cancellation of
indebtedness income from the prepayment of a loan under
sections 306A, 306B, or 311 of the Rural Electrification Act of
1936 (as in effect on January 1, 1987). The exclusion for
cancellation of indebtedness income applies to such income
arising in 1987, 1988, or 1989 on debt that either originated
with, or is guaranteed by, the Federal Government.
---------------------------------------------------------------------------
\419\ Rev. Rul. 72-36, 1972-1 C.B. 151.
---------------------------------------------------------------------------
The receipt by a rural electric cooperative of
contributions in aid of construction and connection charges is
taken into account for purposes of applying the 85-percent
test.
Rural electric cooperatives generally are subject to the
tax on unrelated trade or business income under section 511.
HOUSE BILL
No provision.
SENATE AMENDMENT
Treatment of income from open access transactions
The Senate amendment provides that income received or
accrued by a rural electric cooperative from any ``open access
transaction'' (other than income received or accrued directly
or indirectly from a member of the cooperative) is excluded in
determining whether a rural electric cooperative satisfies the
85-percent test for tax exemption under section 501(c)(12). The
term ``open access transaction'' is defined as
(1) The provision or sale of electric energy
transmission services or ancillary services on a
nondiscriminatory open access basis: (i) pursuant to an
open access transmission tariff filed with and approved
by the Federal Energy Regulatory Commission (``FERC'')
(including acceptable reciprocity tariffs), but only if
(in the case of a voluntarily filed tariff) the
cooperative files a report with FERC within 90 days of
enactment of this provision relating to whether or not
the cooperative will join a regional transmission
organization (``RTO''); or (ii) under an RTO agreement
approved by FERC (including an agreement providing for
the transfer of control-but not ownership-of
transmission facilities); \420\
---------------------------------------------------------------------------
\420\ Under the Senate amendment, references to FERC are treated as
including references to the Public Utility Commission of Texas or the
Rural Utilities Service.
---------------------------------------------------------------------------
(2) The provision or sale of electric energy distribution
services or ancillary services on a nondiscriminatory open
access basis to end-users served by distribution facilities
owned by the cooperative or its members; or (3) The delivery or
sale of electric energy on a nondiscriminatory open access
basis, provided that such electric energy is generated by a
generation facility that is directly connected to distribution
facilities owned by the cooperative (or its members) which owns
the generation facility.
For purposes of the 85-percent test, the Senate amendment
also provides that income received or accrued by a rural
electric cooperative from any ``open access transaction'' is
treated as an amount collected from members for the sole
purpose of meeting losses and expenses if the income is
received or accrued indirectly from a member of the
cooperative.
Treatment of income from nuclear decommissioning transactions
The Senate amendment provides that income received or
accrued by a rural electric cooperative from any ``nuclear
decommissioning transaction'' also is excluded in determining
whether a rural electric cooperative satisfies the 85-percent
test for tax exemption under section 501(c)(12). The term
``nuclear decommissioning transaction'' is defined as--
(1) Any transfer into a trust, fund, or instrument
established to pay any nuclear decommissioning costs if
the transfer is in connection with the transfer of the
cooperative's interest in a nuclear powerplant or
nuclear powerplant unit;
(2) Any distribution from a trust, fund, or
instrument established to pay any nuclear
decommissioning costs; or
(3) Any earnings from a trust, fund, or instrument
established to pay any nuclear decommissioning costs.
Treatment of income from asset exchange or conversion transactions
The Senate amendment provides that gain realized by a
tax-exempt rural electric cooperative from a voluntary exchange
or involuntary conversion of certain property is excluded in
determining whether a rural electric cooperative satisfies the
85-percent test for tax exemption under section 501(c)(12).
This provision only applies to the extent that: (1) the gain
would qualify for deferred recognition under section 1031
(relating to exchanges of property held for productive use or
investment) or section 1033 (relating to involuntary
conversions); and (2) the replacement property that is acquired
by the cooperative pursuant to section 1031 or section 1033 (as
the case may be) constitutes property that is used, or to be
used, for the purpose of generating, transmitting,
distributing, or selling electricity or natural gas.
Treatment of cancellation of indebtedness income from prepayment of
certain loans
The Senate amendment provides that income from the
prepayment of any loan, debt, or obligation of a tax-exempt
rural electric cooperative that is originated, insured, or
guaranteed by the Federal Government under the Rural
Electrification Act of 1936 is excluded in determining whether
the cooperative satisfies the 85-percent test for tax exemption
under section 501(c)(12).
Treatment of income from load loss transactions
Tax-exempt rural electric cooperatives.--The Senate
amendment provides that income received or accrued by a tax-
exempt rural electric cooperative from a ``load loss
transaction'' is treated under 501(c)(12) as income collected
from members for the sole purpose of meeting losses and
expenses of providing service to its members. Therefore, income
from load loss transactions is treated as member income in
determining whether a rural electric cooperative satisfies the
85-percent test for tax exemption under section 501(c)(12). The
bill also provides that income from load loss transactions does
not cause a tax-exempt electric cooperative to fail to be
treated for Federal income tax purposes as a mutual or
cooperative company under the fundamental cooperative
principles described above.
The term ``load loss transaction'' is generally defined
as any wholesale or retail sale of electric energy (other than
to a member of the cooperative) to the extent that the
aggregate amount of such sales during a seven-year period
beginning with the ``start-up year'' does not exceed the
reduction in the amount of sales of electric energy during such
period by the cooperative to members. The ``start-up year'' is
defined as the calendar year which includes the date of
enactment of this provision or, if later, at the election of
the cooperative: (1) the first year that the cooperative offers
nondiscriminatory open access; or (2) the first year in which
at least 10 percent of the cooperative's sales of electric
energy are to patrons who are not members of the cooperative.
The Senate amendment also excludes income received or
accrued by rural electric cooperatives from load loss
transactions from the tax on unrelated trade or business
income.
Taxable electric cooperatives.--The Senate amendment
provides that the receipt or accrual of income from load loss
transactions by taxable electric cooperatives is treated as
income from patrons who are members of the cooperative. Thus,
income from a load loss transaction is excludible from the
taxable income of a taxable electric cooperative if the
cooperative distributes such income pursuant to a pre-existing
contract to distribute the income to a patron who is not a
member of the cooperative. The Senate amendment also provides
that income from load loss transactions does not cause a
taxable electric cooperative to fail to be treated for Federal
income tax purposes as a mutual or cooperative company under
the fundamental cooperative principles described above.
Effective date
The Senate amendment provision is effective for taxable
years beginning after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with the following modifications.
Treatment of income from open access transactions
Income received or accrued by a rural electric
cooperative (other than income received or accrued directly or
indirectly from a member of the cooperative) from the provision
or sale of electric energy transmission services or ancillary
services on a nondiscriminatory open access basis under an open
access transmission tariff approved or accepted by FERC or
under an independent transmission provider agreement approved
or accepted by FERC (including an agreement providing for the
transfer of control--but not ownership--of transmission
facilities) \421\ is excluded in determining whether a rural
electric cooperative satisfies the 85-percent test for tax
exemption under section 501(c)(12).
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\421\ Under the conference agreement, references to FERC are
treated as including references to the Public Utility Commission of
Texas.
---------------------------------------------------------------------------
In addition, income is excluded for purposes of the 85-
percent test if it is received or accrued by a rural electric
cooperative (other than income received or accrued directly or
indirectly from a member of the cooperative) from the provision
or sale of electric energy distribution services or ancillary
services, provided such services are provided on a
nondiscriminatory open access basis to distribute electric
energy not owned by the cooperative: (1) to end-users who are
served by distribution facilities not owned by the cooperative
or any of its members; or (2) generated by a generation
facility that is not owned or leased by the cooperative or any
of its members and that is directly connected to distribution
facilities owned by the cooperative or any of its members.
Treatment of cancellation of indebtedness income from prepayment of
certain loans
The conference agreement does not include this provision.
Treatment of income from load loss transactions
For purposes of this provision, the ``start-up year'' is
defined in the conference agreement as the first year that the
cooperative offers nondiscriminatory open access or, if later
and at the election of the cooperative, the calendar year that
includes the date of enactment of this provision.
Effective date
The conference agreement provision is effective for
taxable years beginning after the date of enactment and before
January 1, 2007.
3. Dispositions of transmission property to implement Federal Energy
Regulatory Commission restructuring policy (no reinvestment
obligation) (sec. 857 of the Senate amendment and sec. 451 of
the Code)
PRESENT LAW
Generally, a taxpayer recognizes gain to the extent the
sales price (and any other consideration received) exceeds the
seller's basis in the property. The recognized gain is subject
to current income tax unless the gain is deferred or not
recognized under a special tax provision.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment permits a taxpayer to elect to
recognize gain from a qualifying electric transmission
transaction ratably over an eight-year period beginning in the
year of sale.
A qualifying electric transmission transaction is the
sale or other disposition of property used by the taxpayer in
the trade or business of providing electric transmission
services, or any stock or partnership interest in a corporation
or partnership whose principal trade or business consists of
providing electrical services. In order to qualify, the
transaction must occur before January 1, 2008 and the sale or
disposition must be to an independent transmission company.
In general, an independent transmission company is
defined as: (1) a regional transmission organization approved
by the Federal Energy Regulatory Commission (``FERC''); (2) a
person (i) who the FERC determines under section 203 of the
Federal Power Act (or by declaratory order) is not a ``market
participant'' and (ii) whose transmission facilities are placed
under the operational control of a FERC-approved independent
transmission provider before the close of the period specified
in such authorization, but not later than January 1, 2008; or
(3) in the case of facilities subject to the jurisdiction of
the Public Utility Commission of Texas, a person which is
approved by that Commission as consistent with Texas State law
regarding an independent transmission organization.
An electing taxpayer is required to attach a statement to
that effect in the tax return for the taxable year in which the
transaction takes place in such manner as the Secretary shall
prescribe. The election shall be binding for that taxable year
and all subsequent taxable years. Finally, the provision
provides that the installment sale rules shall not apply to any
qualifying electric transmission transaction for which a
taxpayer elects the application of this provision.
Effective date.--The Senate amendment is effective for
transactions occurring after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with the following modifications. The provision permits
taxpayers to elect to recognize gain from qualifying electric
transmission transactions ratably over an eight-year period
beginning in the year of sale if the amount realized from such
sale is used to purchase exempt utility property within the
applicable period \422\ (the ``reinvestment property''). If the
amount realized exceeds the amount used to purchase
reinvestment property, any realized gain shall be recognized to
the extent of such excess in the year of the qualifying
electric transmission transaction. Any remaining realized gain
is recognized ratably over the eight-year period.
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\422\ The applicable period for a taxpayer to reinvest the proceeds
is four years after the close of the taxable year in which the
qualifying electric transmission transaction occurs.
---------------------------------------------------------------------------
A qualifying electric transmission transaction is the
sale or other disposition of property used by the taxpayer in
the trade or business of providing electric transmission
services, or an ownership interest in such an entity, to an
independent transmission company prior to January 1, 2007. In
general, an independent transmission company is defined as: (1)
an independent transmission provider \423\ approved by the
FERC; (2) a person (i) who the FERC determines under section
203 of the Federal Power Act (or by declaratory order) is not a
``market participant'' and (ii) whose transmission facilities
are placed under the operational control of a FERC-approved
independent transmission provider before the close of the
period specified in such authorization, but not later than
January 1, 2007; or (3) in the case of facilities subject to
the jurisdiction of the Public Utility Commission of Texas, (i)
a person which is approved by that Commission as consistent
with Texas State law regarding an independent transmission
organization, or (ii) a political subdivision, or affiliate
thereof, whose transmission facilities are under the
operational control of an organization described in (i).
---------------------------------------------------------------------------
\423\ For example, a regional transmission organization, an
independent system operator, or an independent transmission company.
---------------------------------------------------------------------------
Exempt utility property is defined as: (1) property used
in the trade or business of generating, transmitting,
distributing, or selling electricity or producing,
transmitting, distributing, or selling natural gas, or (2)
stock in a controlled corporation whose principal trade or
business consists of the activities described in (1).
If a taxpayer is a member of an affiliated group of
corporations filing a consolidated return, the proposal permits
the reinvestment property to be purchased by any member of the
affiliated group (in lieu of the taxpayer).
If a taxpayer elects the application of the provision,
then the statutory period for the assessment of any deficiency,
for any taxable year in which any part of the gain eligible for
the provision is realized, attributable to such gain shall not
expire prior to the expiration of three years from the date the
Secretary of the Treasury is notified by the taxpayer of the
reinvestment property or an intention not to reinvest.
An electing taxpayer is required to attach a statement to
that effect in the tax return for the taxable year in which the
transaction takes place in the manner as the Secretary shall
prescribe. The election shall be binding for that taxable year
and all subsequent taxable years.\424\ In addition, an electing
taxpayer is required to attach a statement that identifies the
reinvestment property in the manner as the Secretary shall
prescribe.
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\424\ The provision also provides that the installment sale rules
shall not apply to any qualifying electric transmission transaction for
which a taxpayer elects the application of this provision.
---------------------------------------------------------------------------
Effective date.--The provision is effective for
transactions occurring after the date of enactment, in taxable
years ending after such date.
G. Additional Provisions
1. GAO Study (sec. 897 of the Senate amendment)
PRESENT LAW
Present law does not require study of the present law
provisions relating to clean fuel vehicles and electric
vehicles.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment directs the Comptroller General to
undertake an ongoing analysis of the (1) effectiveness of the
amendment's alternative motor vehicles, fuel incentives, and
conservation and energy efficiency provisions and (2) the
recipients of the tax benefits contained in those provisions,
including an identification of the recipients by income and
other appropriate measurements. The analysis must quantify the
effectiveness of the provisions by examining and comparing the
Federal Government's forgone revenue to the aggregate amount of
energy actually conserved and tangible environmental benefits
gained as a result of the provisions.
The Senate amendment directs the Comptroller General to
report the required analysis to Congress not later than
December 31, 2004 and annually thereafter.
Effective date.--The provision is effective on the date
of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
2. Repeal certain excise taxes on rail diesel fuel and inland waterway
barge fuels (sec. 898 of the Senate amendment and secs. 4041,
4042, 6421, and 6427 of the Code)
PRESENT LAW
Under present law, diesel fuel used in trains is subject
to a 4.4-cents-per gallon excise tax. Revenues from 4.3 cents
per gallon of this excise tax are retained in the General Fund
of the Treasury. The remaining 0.1 cent per gallon is deposited
in the Leaking Underground Storage Tank (``LUST'') Trust Fund.
Similarly, fuels used in barges operating on the
designated inland waterways system are subject to a 4.3-cents-
per-gallon General Fund excise tax. This tax is in addition to
the 20.1-cents-per-gallon tax rates that are imposed on fuels
used in these barges to fund the Inland Waterways Trust Fund
and the Leaking Underground Storage Tank Trust Fund.
In both cases, the 4.3-cents-per-gallon excise tax rates
are permanent. The LUST Trust Fund tax is scheduled to expire
after March 31, 2005.
HOUSE BILL
No provision.
SENATE AMENDMENT
The 4.3-cents-per-gallon General Fund excise tax rate on
diesel fuel used in trains and fuels used in barges operating
on the designated inland waterways system is repealed. The 0.1
cent per gallon tax for the LUST Trust Fund is unchanged by the
provision.
Effective date.--The Senate amendment is effective on
October 1, 2004.
CONFERENCE AGREEMENT
The conference agreement repeals the 4.3-cents-per-gallon
General Fund excise tax rates on diesel fuel used in trains and
fuels used in barges operating on the designated inland
waterways system over a prescribed phase-out period. The 4.30-
cent-per-gallon tax is reduced by 1 cent per gallon for the
first six months of calendar year 2005 (January 1, 2005 through
June 30, 2005). The reduction is 2 cents per gallon from July
1, 2005 through December 31, 2006, and 4.3 cents/gallon
thereafter. Thus, the tax would be fully repealed effective
January 1, 2007. The 0.1 cent per gallon tax for the LUST Trust
Fund is unchanged by the provision.
Effective date.--The provision is effective on January 1,
2005.
3. Increase tax limitation on use of business energy credits (secs.
851(c) and 899A of the Senate amendment, and sec. 38 of the
Code)
PRESENT LAW
Generally, business tax credits may not exceed the excess
of the taxpayer's income tax liability over the tentative
minimum tax (or, if greater, 25 percent of the regular tax
liability). Credits in excess of the limitation may be carried
back one year and carried over for up to 20 years.
The tentative minimum tax is an amount equal to specified
rates of tax imposed on the excess of the alternative minimum
taxable income over an exemption amount. To the extent the
tentative minimum tax exceeds the regular tax, a taxpayer is
subject to the alternative minimum tax.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment treats the tentative minimum tax as
being zero for purposes of determining the tax liability
limitation with respect to (1) the Alaska natural gas credit,
(2) for taxable years beginning after December 31, 2004, the
alcohol fuels credit determined under section 40; and (3) the
section 45 credit for electricity produced from a facility
(placed in service after the date of enactment) during the
first four years of production beginning on the date the
facility is placed in service.
Effective date.--The provision is effective for taxable
years ending after the date of enactment of the Act.
CONFERENCE AGREEMENT
The conference agreement includes the provision in the
Senate amendment relating to the credits under sections 40 and
45.
4. Transmission property treated as fifteen-year property (sec. 899C of
the Senate amendment and sec. 168 of the Code)
PRESENT LAW
The applicable recovery period for assets placed in
service under the Modified Accelerated Cost Recovery System is
based on the ``class life of the property.'' The class lives of
assets placed in service after 1986 are generally set forth in
Revenue Procedure 87-56. Assets used in the transmission and
distribution of electricity for sale and related land
improvements are assigned a 20-year recovery period and a class
life of 30 years.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment establishes a statutory 15-year
recovery period and a class life of 30 years for certain assets
used in the transmission of electricity for sale and related
land improvements. For purposes of the provision, section 1245
property used in the transmission of electricity for sale at 69
kilovolts and above, the original use \425\ of which commences
after the date of enactment, will qualify for the new recovery
period.
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\425\ 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. It is intended that, when evaluating whether
property qualifies as ``original use,'' the factors used to determine
whether property qualified as ``new section 38 property'' for purposes
of the investment tax credit would apply. See Treasury Regulation 1.48-
2. Thus, it is intended that additional capital expenditures incurred
to recondition or rebuild acquired property (or owned property) would
satisfy the ``original use'' requirement. However, the cost of
reconditioned or rebuilt property acquired by the taxpayer would not
satisfy the ``original use'' requirement. For example, if on August 11,
2005, a taxpayer buys from RCM for $200,000 transmission lines that
have been previously used by RCM. Subsequent to the purchase, the
taxpayer makes an expenditure on the property of $50,000 of the type
that must be capitalized. Regardless of whether the $50,000 is added to
the basis of such property or is capitalized as a separate asset, such
amount would be treated as satisfying the ``original use'' requirement
and would be eligible for the reduced recovery period. No part of the
$200,000 purchase price qualifies for the reduced recovery period.
---------------------------------------------------------------------------
Effective date.--The Senate amendment is effective for
property placed in service after the date of enactment and
prior to July 1, 2006.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
5. Qualifying pollution control equipment credit (sec. 899B of the
Senate amendment)
PRESENT LAW
The investment credit is the sum of three credits: (1)
the rehabilitation credit, (2) the energy credit, and (3) the
reforestation credit.\426\ The investment credit is part of the
general business credit.\427\
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\426\ Sec. 46.
\427\ Sec. 38(b)(1).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment adds a credit for qualifying
pollution control equipment to the investment credit. The
qualifying pollution control equipment credit provides a 15-
percent tax credit for qualifying pollution control equipment
placed-in-service at a qualifying facility during the taxable
year. Qualifying pollution control equipment means any
technology that is installed in or on a qualifying facility to
reduce air emissions of any pollutant regulated by the
Environmental Protection Agency under the Clean Air Act. A
qualifying facility is a facility that produces not less than
1,000,000 gallons of ethanol during the taxable year. A
qualifying facility includes any facility that produces
ethanol. For depreciation purposes, the basis of qualifying
pollution control equipment would be reduced by 50 percent of
the value of the credit.
Effective date.--The credit would be available for
property placed-in-service after December 31, 2003, in taxable
years ending after such date.\428\
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\428\ Rules similar to the rules of section 48(m) of the Internal
Revenue Code of 1986 (as in effect on the day before the date of
enactment of the Revenue Reconciliation Act of 1990) apply.
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CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment.
TITLE X--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 House bill, sec. 441 of the Senate amendment,
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.
HOUSE BILL
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.
SENATE AMENDMENT
In general
The provision defines two different types of corporate
inversion transactions and establishes a different set of
consequences for each type. Certain partnership transactions
also are covered.
Transactions involving at least 80 percent identity of stock ownership
The first type of inversion is a transaction in which,
pursuant to a plan 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; \429\ (2) the former shareholders
of the U.S. corporation hold (by reason of holding stock in the
U.S. corporation) 80 percent or more (by vote or value) of the
stock of the foreign-incorporated entity after the transaction;
and (3) the foreign-incorporated entity, considered together
with all companies connected to it by a chain of greater than
50 percent ownership (i.e., the ``expanded affiliated group''),
does not have substantial business activities in the entity's
country of incorporation, compared to the total worldwide
business activities of the expanded affiliated group. The
provision denies the intended tax benefits of this type of
inversion by deeming the top-tier foreign corporation to be a
domestic corporation for all purposes of the Code.\430\
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\429\ It is expected that the Treasury Secretary will issue
regulations applying the term ``substantially all'' in this context and
will not be bound in this regard by interpretations of the term in
other contexts under the Code.
\430\ Since the top-tier foreign corporation is treated for all
purposes of the Code as domestic, the shareholder-level ``toll charge''
of sec. 367(a) does not apply to these inversion transactions. However,
with respect to inversion transactions completed before 2004, regulated
investment companies and certain similar entities are allowed to elect
to recognize gain as if sec. 367(a) did apply.
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Except as otherwise provided in regulations, the
provision does not apply to a direct or indirect acquisition of
the properties of a U.S. corporation no class of the stock of
which was traded on an established securities market at any
time within the four-year period preceding the acquisition. In
determining whether a transaction would meet 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. Stock sold in a public offering (whether
initial or secondary) or private placement related to the
transaction also is disregarded for these purposes.
Acquisitions with respect to a domestic corporation or
partnership are deemed to be ``pursuant to a plan'' if they
occur within the four-year period beginning on the date which
is two years before the ownership threshold under the provision
is met with respect to such corporation or partnership.
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, a member of
an expanded affiliated group, or a publicly traded corporation.
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.
Transactions involving greater than 50 percent but less than 80 percent
identity of stock ownership
The second type of inversion is a transaction that would
meet the definition of an inversion transaction described
above, except that the 80-percent ownership threshold is not
met. In such a case, if a greater-than-50-percent ownership
threshold is met, then a second set of rules applies to the
inversion. Under these rules, the inversion transaction is
respected (i.e., the foreign corporation is treated as
foreign), but: (1) any applicable corporate-level ``toll
charges'' for establishing the inverted structure may not be
offset by tax attributes such as net operating losses or
foreign tax credits; (2) the accuracy-related penalty is
increased; and (3) section 163(j), relating to ``earnings
stripping'' through related-party debt, is strengthened. These
measures generally apply for a 10-year period following the
inversion transaction. In addition, inverting entities are
required to provide information to shareholders or partners and
the IRS with respect to the inversion transaction.
With respect to ``toll charges,'' 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 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). To the
extent provided in regulations, this rule will not apply to
certain transfers of inventory and similar transactions
conducted in the ordinary course of the taxpayer's business.
The 20-percent penalty for negligence or disregard of
rules or regulations, substantial understatement of income tax,
and substantial valuation misstatement is increased to 30
percent with respect to taxpayers related to the inverted
entity. In addition, the 40-percent penalty for gross valuation
misstatement is increased to 50 percent with respect to such
taxpayers.
The ``earnings stripping'' rules of section 163(j), which
deny or defer deductions for certain interest paid to foreign
related parties, are strengthened for inverted corporations.
With respect to such corporations, the provision eliminates the
debt-equity threshold generally applicable under section 163(j)
and reduces the 50-percent thresholds for ``excess interest
expense'' and ``excess limitation'' to 25 percent.
In cases in which a U.S. corporate group acquires
subsidiaries or other assets from an unrelated inverted
corporate group, the provisions described above generally do
not apply to the acquiring U.S. corporate group or its related
parties (including the newly acquired subsidiaries or assets)
by reason of acquiring the subsidiaries or assets that were
connected with the inversion transaction. The Treasury
Secretary is given authority to issue regulations appropriate
to carry out the purposes of this provision and to prevent its
abuse.
Partnership transactions
Under the provision, both types of inversion transactions
include certain partnership transactions. Specifically, both
parts of the provision apply to transactions in which a
foreign-incorporated entity acquires substantially all of the
properties constituting a trade or business of a domestic
partnership (whether or not publicly traded), if after the
acquisition at least 80 percent (or more than 50 percent but
less than 80 percent, as the case may be) of the stock of the
entity is held by former partners of the partnership (by reason
of holding their partnership interests), and the ``substantial
business activities'' test is not met. For purposes of
determining whether these tests are met, 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.
Effective date
The regime applicable to transactions involving at least
80 percent identity of ownership applies to inversion
transactions completed after March 20, 2002. The rules for
inversion transactions involving greater-than-50-percent
identity of ownership apply to inversion transactions completed
after 1996 that meet the 50-percent test and to inversion
transactions completed after 1996 that would have met the 80-
percent test but for the March 20, 2002 date.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and
Senate amendment with modifications.
In general
The provision defines two different types of corporate
inversion transactions and establishes a different set of
consequences for each type. Certain partnership transactions
also are covered.
Transactions involving at least 80 percent identity of stock ownership
The first type of inversion is a transaction in which,
pursuant to a plan \431\ or a series of related transactions:
(1) a U.S. corporation becomes a subsidiary of a foreign-
incorporated entity or otherwise transfers substantially all of
its properties to such an entity in a transaction completed
after March 4, 2003; (2) the former shareholders of the U.S.
corporation hold (by reason of holding stock in the U.S.
corporation) 80 percent or more (by vote or value) of the stock
of the foreign-incorporated entity after the transaction; and
(3) the foreign-incorporated entity, considered together with
all companies connected to it by a chain of greater than 50
percent ownership (i.e., the ``expanded affiliated group''),
does not have substantial business activities in the entity's
country of incorporation, compared to the total worldwide
business activities of the expanded affiliated group. The
provision denies the intended tax benefits of this type of
inversion by deeming the top-tier foreign corporation to be a
domestic corporation for all purposes of the Code.\432\
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\431\ Acquisitions with respect to a domestic corporation or
partnership are deemed to be ``pursuant to a plan'' if they occur
within the four-year period beginning on the date which is two years
before the ownership threshold under the provision is met with respect
to such corporation or partnership.
\432\ Since the top-tier foreign corporation is treated for all
purposes of the Code as domestic, the shareholder-level ``toll charge''
of sec. 367(a) does not apply to these inversion transactions.
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In determining whether a transaction meets the definition
of an inversion under the proposal, 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
proposal are disregarded. In addition, the Treasury Secretary
is granted authority to prevent the avoidance of the purposes
of the proposal, 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 proposal.
Transactions involving at least 60 percent but less than 80 percent
identity of stock ownership
The second type of inversion is a transaction that would
meet the definition of an inversion transaction described
above, except that the 80-percent ownership threshold is not
met. In such a case, if at least a 60-percent ownership
threshold is met, then a second set of rules applies to the
inversion. Under these rules, the inversion transaction is
respected (i.e., the foreign corporation is treated as
foreign), but any applicable corporate-level ``toll charges''
for establishing the inverted structure are not offset by tax
attributes such as net operating losses or foreign tax credits.
Specifically, any applicable corporate-level income or gain
required to be recognized under sections 304, 311(b), 367,
1001, 1248, or any other provision with respect to the transfer
of controlled foreign corporation stock or the transfer or
license of other assets by a U.S. corporation as part of the
inversion transaction or after such transaction to a related
foreign person is taxable, without offset by any tax attributes
(e.g., net operating losses or foreign tax credits). This rule
does not apply to certain transfers of inventory and similar
property. These measures generally apply for a 10-year period
following the inversion transaction.
Under the proposal, inversion transactions include
certain partnership transactions. Specifically, the proposal
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'' proposals 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 House bill, sec. 443 of the
Senate amendment, and secs. 162(m), 275(a), and new sec. 4985
of the Code)
PRESENT LAW
The income taxation of a nonstatutory \433\ 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.\434\ 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.\435\
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\433\ 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.
\434\ 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.
\435\ 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.
HOUSE BILL
In general
Under the House bill, 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.
Disqualified individuals
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,\436\ 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)),\437\ directors, and 10-percent-or-greater owners of
private and publicly-held corporations.
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\436\ 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.
\437\ 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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Application of excise tax
The excise tax is imposed on a disqualified individual of
an expatriated corporation (as 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 as previously
defined in the bill.
Specified stock compensation
Specified stock compensation subject to the excise tax
includes any payment \438\ (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 the specified stock
compensation is subject to a substantial risk of forfeiture or
is exercisable at the time of the inversion transaction.
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\438\ 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 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 nonqualified deferred compensation
if company stock is one of the actual or deemed investment
options under the nonqualified deferred compensation plan.
Specified stock compensation includes a compensation
arrangement that gives the disqualified individual an economic
stake substantially similar to that of a corporate shareholder.
A payment directly tied to the value of the stock is specified
stock compensation. The excise tax 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 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.
By contrast, 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.
The excise tax applies to any 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 inversion
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 12-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.
Determination of amount subject to tax
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 (1) the stock price at the valuation date; (2) the
exercise price under the option; (3) the remaining term of the
option; (4) the volatility of the underlying stock and the
expected dividends on it; and (5) 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 guidance
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 guidance issued
under section 280G (except that the full remaining term must be
used and recalculation is not permitted).
Other rules
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.
SENATE AMENDMENT
The Senate amendment follows the House bill except that
excise tax is equal to 20 percent of the value of the specified
stock compensation. Under the Senate amendment, the excise tax
does not apply to executives of the expanded affiliated group.
Effective date.--The Senate amendment is effective as of
July 11, 2002, except that periods before July 11, 2002, 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.
CONFERENCE AGREEMENT
The conference agreement follows the House bill except
that the excise tax is imposed at a rate equal to the maximum
rate of tax on the adjusted net capital gain of an individual
(i.e., the rate of the excise tax would be 15 percent for 2005
through 2008 and 20 percent for taxable years beginning after
December 31, 2008).
3. Reinsurance of U.S. risks in foreign jurisdictions (sec. 603 of the
House bill, sec. 444 of the Senate amendment, 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.\439\ 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.\440\ 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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\439\ Sec. 845(a).
\440\ 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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HOUSE BILL
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 \441\ 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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\441\ 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
Effective date.--The provision is effective for any risk
reinsured after April 11, 2002.
CONFERENCE AGREEMENT
The Conference agreement follows the House bill.
4. Revision of tax rules on expatriation of individuals (sec. 604 of
the House bill, sec. 442 of the Senate amendment, 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 \442\ with a principal purpose of avoiding U.S.
taxes, the individuals 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
\443\ at the rates applicable to U.S. citizens for the 10-year
period.
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\442\ 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).
\443\ 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.\444\ 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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\444\ 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 individual's 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 individual's 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.
HOUSE BILL
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.\445\
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\445\ 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 \446\ generally do
not apply for this purpose. However, for individuals with
certain ties to countries other than the United States \447\
and individuals with minimal prior physical presence in the
United States,\448\ 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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\446\ Secs. 7701(b)(3)(D), 7701(b)(5) and 7701(b)(7)(B)-(D).
\447\ 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.
\448\ 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.
SENATE AMENDMENT
In general
The provision generally subjects certain U.S. citizens
who relinquish their U.S. citizenship and certain long-term
U.S. residents who terminate their U.S. residence to tax on the
net unrealized gain in their property as if such property were
sold for fair market value on the day before the expatriation
or residency termination. Gain from the deemed sale is taken
into account at that time without regard to other Code
provisions; any loss from the deemed sale generally would be
taken into account to the extent otherwise provided in the
Code. Any net gain on the deemed sale is recognized to the
extent it exceeds $600,000 ($1.2 million in the case of married
individuals filing a joint return, both of whom relinquish
citizenship or terminate residency). The $600,000 amount is
increased by a cost of living adjustment factor for calendar
years after 2002.
Individuals covered
Under the provision, the mark-to-market tax applies to
U.S. citizens who relinquish citizenship and long-term
residents who terminate U.S. residency. An individual is a
long-term resident if he or she was a lawful permanent resident
for at least eight out of the 15 taxable years ending with the
year in which the termination of residency occurs. An
individual is considered to terminate long-term residency when
either the individual ceases to be a lawful permanent resident
(i.e., loses his or her green card status), or the individual
is treated as a resident of another country under a tax treaty
and the individual does not waive the benefits of the treaty.
Exceptions from the mark-to-market tax are provided in
two situations. The first exception applies to an individual
who was born with citizenship both in the United States and in
another country; provided that (1) as of the expatriation date
the individual continues to be a citizen of, and is taxed as a
resident of, such other country, and (2) the individual was not
a resident of the United States for the five taxable years
ending with the year of expatriation. The second exception
applies to a U.S. citizen who relinquishes U.S. citizenship
before reaching age 18 and a half, provided that the individual
was a resident of the United States for no more than five
taxable years before such relinquishment.
Election to be treated as a U.S. citizen
Under the provision, an individual is permitted to make
an irrevocable election to continue to be taxed as a U.S.
citizen with respect to all property that otherwise is covered
by the expatriation tax. This election is an ``all or nothing''
election; an individual is not permitted to elect this
treatment for some property but not for other property. The
election, if made, would apply to all property that would be
subject to the expatriation tax and to any property the basis
of which is determined by reference to such property. Under
this election, the individual would continue to pay U.S. income
taxes at the rates applicable to U.S. citizens following
expatriation on any income generated by the property and on any
gain realized on the disposition of the property. In addition,
the property would continue to be subject to U.S. gift, estate,
and generation-skipping transfer taxes. In order to make this
election, the taxpayer would be required to waive any treaty
rights that would preclude the collection of the tax.
The individual also would be required to provide security
to ensure payment of the tax under this election in such form,
manner, and amount as the Secretary of the Treasury requires.
The amount of mark-to-market tax that would have been owed but
for this election (including any interest, penalties, and
certain other items) shall be a lien in favor of the United
States on all U.S.-situs property owned by the individual. This
lien shall arise on the expatriation date and shall continue
until the tax liability is satisfied, the tax liability has
become unenforceable by reason of lapse of time, or the
Secretary is satisfied that no further tax liability may arise
by reason of this provision. The rules of section 6324A(d)(1),
(3), and (4) (relating to liens arising in connection with the
deferral of estate tax under section 6166) apply to liens
arising under this provision.
Date of relinquishment of citizenship
Under the provision, an individual is treated as having
relinquished U.S. citizenship on the earliest of four possible
dates: (1) the date that the individual renounces U.S.
nationality before a diplomatic or consular officer of the
United States (provided that the voluntary relinquishment is
later confirmed by the issuance of a certificate of loss of
nationality); (2) the date that the individual furnishes to the
State Department a signed statement of voluntary relinquishment
of U.S. nationality confirming the performance of an
expatriating act (again, provided that the voluntary
relinquishment is later confirmed by the issuance of a
certificate of loss of nationality); (3) the date that the
State Department issues a certificate of loss of nationality;
or (4) the date that a U.S. court cancels a naturalized
citizen's certificate of naturalization.
Deemed sale of property upon expatriation or residency termination
The deemed sale rule of the provision generally applies
to all property interests held by the individual on the date of
relinquishment of citizenship or termination of residency.
Special rules apply in the case of trust interests, as
described below. U.S. real property interests, which remain
subject to U.S. tax in the hands of nonresident noncitizens,
generally are excepted from the provision. Regulatory authority
is granted to the Treasury to except other types of property
from the provision.
Under the provision, an individual who is subject to the
mark-to-market tax is required to pay a tentative tax equal to
the amount of tax that would be due for a hypothetical short
tax year ending on the date the individual relinquished
citizenship or terminated residency. Thus, the tentative tax is
based on all income, gain, deductions, loss, and credits of the
individual for the year through such date, including amounts
realized from the deemed sale of property. The tentative tax is
due on the 90th day after the date of relinquishment of
citizenship or termination of residency.
Retirement plans and similar arrangements
Subject to certain exceptions, the provision applies to
all property interests held by the individual at the time of
relinquishment of citizenship or termination of residency.
Accordingly, such property includes an interest in an employer-
sponsored retirement plan or deferred compensation arrangement
as well as an interest in an individual retirement account or
annuity (i.e., an IRA).\449\ However, the provision contains a
special rule for an interest in a ``qualified retirement
plan.'' For purposes of the provision, a ``qualified retirement
plan'' includes an employer-sponsored qualified plan (sec.
401(a)), a qualified annuity (sec. 403(a)), a tax-sheltered
annuity (sec. 403(b)), an eligible deferred compensation plan
of a governmental employer (sec. 457(b)), or an IRA (sec. 408).
The special retirement plan rule applies also, to the extent
provided in regulations, to any foreign plan or similar
retirement arrangement or program. An interest in a trust that
is part of a qualified retirement plan or other arrangement
that is subject to the special retirement plan rule is not
subject to the rules for interests in trusts (discussed below).
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\449\ Application of the provision is not limited to an interest
that meets the definition of property under section 83 (relating to
property transferred in connection with the performance of services).
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Under the special rule, an amount equal to the present
value of the individual's vested, accrued benefit under a
qualified retirement plan is treated as having been received by
the individual as a distribution under the plan on the day
before the individual's relinquishment of citizenship or
termination of residency. It is not intended that the plan
would be deemed to have made a distribution for purposes of the
tax-favored status of the plan, such as whether a plan may
permit distributions before a participant has severed
employment. In the case of any later distribution to the
individual from the plan, the amount otherwise includible in
the individual's income as a result of the distribution is
reduced to reflect the amount previously included in income
under the special retirement plan rule. The amount of the
reduction applied to a distribution is the excess of: (1) the
amount included in income under the special retirement plan
rule over (2) the total reductions applied to any prior
distributions. However, under the provision, the retirement
plan, and any person acting on the plan's behalf, will treat
any later distribution in the same manner as the distribution
would be treated without regard to the special retirement plan
rule.
It is expected that the Treasury Department will provide
guidance for determining the present value of an individual's
vested, accrued benefit under a qualified retirement plan, such
as the individual's account balance in the case of a defined
contribution plan or an IRA, or present value determined under
the qualified joint and survivor annuity rules applicable to a
defined benefit plan (sec. 417(e)).
Deferral of payment of tax
Under the provision, an individual is permitted to elect
to defer payment of the mark-to-market tax imposed on the
deemed sale of the property. Interest is charged for the period
the tax is deferred at a rate two percentage points higher than
the rate normally applicable to individual underpayments. Under
this election, the mark-to-market tax attributable to a
particular property is due when the property is disposed of
(or, if the property is disposed of in whole or in part in a
nonrecognition transaction, at such other time as the Secretary
may prescribe). The mark-to-market tax attributable to a
particular property is an amount that bears the same ratio to
the total mark-to-market tax for the year as the gain taken
into account with respect to such property bears to the total
gain taken into account under these rules for the year. The
deferral of the mark-to-market tax may not be extended beyond
the individual's death.
In order to elect deferral of the mark-to-market tax, the
individual is required to provide adequate security to the
Treasury to ensure that the deferred tax and interest will be
paid. Other security mechanisms are permitted provided that the
individual establishes to the satisfaction of the Secretary
that the security is adequate. In the event that the security
provided with respect to a particular property subsequently
becomes inadequate and the individual fails to correct the
situation, the deferred tax and the interest with respect to
such property will become due. As a further condition to making
the election, the individual is required to consent to the
waiver of any treaty rights that would preclude the collection
of the tax.
The deferred amount (including any interest, penalties,
and certain other items) shall be a lien in favor of the United
States on all U.S.-situs property owned by the individual. This
lien shall arise on the expatriation date and shall continue
until the tax liability is satisfied, the tax liability has
become unenforceable by reason of lapse of time, or the
Secretary is satisfied that no further tax liability may arise
by reason of this provision. The rules of section 6324A(d)(1),
(3), and (4) (relating to liens arising in connection with the
deferral of estate tax under section 6166) apply to liens
arising under this provision.
Interests in trusts
Under the provision, detailed rules apply to trust
interests held by an individual at the time of relinquishment
of citizenship or termination of residency. The treatment of
trust interests depends on whether the trust is a qualified
trust. A trust is a qualified trust if a court within the
United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have
the authority to control all substantial decisions of the
trust.
Constructive ownership rules apply to a trust beneficiary
that is a corporation, partnership, trust, or estate. In such
cases, the shareholders, partners, or beneficiaries of the
entity are deemed to be the direct beneficiaries of the trust
for purposes of applying these provision. In addition, an
individual who holds (or who is treated as holding) a trust
instrument at the time of relinquishment of citizenship or
termination of residency is required to disclose on his or her
tax return the methodology used to determine his or her
interest in the trust, and whether such individual knows (or
has reason to know) that any other beneficiary of the trust
uses a different method.
Nonqualified trusts.--If an individual holds an interest
in a trust that is not a qualified trust, a special rule
applies for purposes of determining the amount of the mark-to-
market tax due with respect to such trust interest. The
individual's interest in the trust is treated as a separate
trust consisting of the trust assets allocable to such
interest. Such separate trust is treated as having sold its net
assets as of the date of relinquishment of citizenship or
termination of residency and having distributed the assets to
the individual, who then is treated as having recontributed the
assets to the trust. The individual is subject to the mark-to-
market tax with respect to any net income or gain arising from
the deemed distribution from the trust.
The election to defer payment is available for the mark-
to-market tax attributable to a nonqualified trust interest.
Interest is charged for the period the tax is deferred at a
rate two percentage points higher than the rate normally
applicable to individual underpayments. A beneficiary's
interest in a nonqualified trust is determined under all the
facts and circumstances, including the trust instrument,
letters of wishes, and historical patterns of trust
distributions.
Qualified trusts.--If an individual has an interest in a
qualified trust, the amount of unrealized gain allocable to the
individual's trust interest is calculated at the time of
expatriation or residency termination. In determining this
amount, all contingencies and discretionary interests are
assumed to be resolved in the individual's favor (i.e., the
individual is allocated the maximum amount that he or she could
receive). The mark-to-market tax imposed on such gains is
collected when the individual receives distributions from the
trust, or if earlier, upon the individual's death. Interest is
charged for the period the tax is deferred at a rate two
percentage points higher than the rate normally applicable to
individual underpayments.
If an individual has an interest in a qualified trust,
the individual is subject to the mark-to-market tax upon the
receipt of distributions from the trust. These distributions
also may be subject to other U.S. income taxes. If a
distribution from a qualified trust is made after the
individual relinquishes citizenship or terminates residency,
the mark-to-market tax is imposed in an amount equal to the
amount of the distribution multiplied by the highest tax rate
generally applicable to trusts and estates, but in no event
will the tax imposed exceed the deferred tax amount with
respect to the trust interest. For this purpose, the deferred
tax amount is equal to (1) the tax calculated with respect to
the unrealized gain allocable to the trust interest at the time
of expatriation or residency termination, (2) increased by
interest thereon, and (3) reduced by any mark-to-market tax
imposed on prior trust distributions to the individual.
If any individual's interest in a trust is vested as of
the expatriation date (e.g., if the individual's interest in
the trust is non-contingent and non-discretionary), the gain
allocable to the individual's trust interest is determined
based on the trust assets allocable to his or her trust
interest. If the individual's interest in the trust is not
vested as of the expatriation date (e.g., if the individual's
trust interest is a contingent or discretionary interest), the
gain allocable to his or her trust interest is determined based
on all of the trust assets that could be allocable to his or
her trust interest, determined by resolving all contingencies
and discretionary powers in the individual's favor. In the case
where more than one trust beneficiary is subject to the
expatriation tax with respect to trust interests that are not
vested, the rules are intended to apply so that the same
unrealized gain with respect to assets in the trust is not
taxed to both individuals.
Mark-to-market taxes become due if the trust ceases to be
a qualified trust, the individual disposes of his or her
qualified trust interest, or the individual dies. In such
cases, the amount of mark-to-market tax equals the lesser of
(1) the tax calculated under the rules for nonqualified trust
interests as of the date of the triggering event, or (2) the
deferred tax amount with respect to the trust interest as of
that date.
The tax that is imposed on distributions from a qualified
trust generally is deducted and withheld by the trustees. If
the individual does not agree to waive treaty rights that would
preclude collection of the tax, the tax with respect to such
distributions is imposed on the trust, the trustee is
personally liable for the tax, and any other beneficiary has a
right of contribution against such individual with respect to
the tax. Similar rules apply when the qualified trust interest
is disposed of, the trust ceases to be a qualified trust, or
the individual dies.
Coordination with present-law alternative tax regime
The provision provides a coordination rule with the
present-law alternative tax regime. Under the provision, the
expatriation income tax rules under section 877, and the
expatriation estate and gift tax rules under sections 2107 and
2501(a)(3) (described above), do not apply to a former citizen
or former long-term resident whose expatriation or residency
termination occurs on or after February 5, 2003.
Treatment of gifts and inheritances from a former citizen or former
long-term resident
Under the provision, the exclusion from income provided
in section 102 (relating to exclusions from income for the
value of property acquired by gift or inheritance) does not
apply to the value of any property received by gift or
inheritance from a former citizen or former long-term resident
(i.e., an individual who relinquished U.S. citizenship or
terminated U.S. residency), subject to the exceptions described
above relating to certain dual citizens and minors.
Accordingly, a U.S. taxpayer who receives a gift or inheritance
from such an individual is required to include the value of
such gift or inheritance in gross income and is subject to U.S.
tax on such amount. Having included the value of the property
in income, the recipient would then take a basis in the
property equal to that value. The tax does not apply to
property that is shown on a timely filed gift tax return and
that is a taxable gift by the former citizen or former long-
term resident, or property that is shown on a timely filed
estate tax return and included in the gross U.S. estate of the
former citizen or former long-term resident (regardless of
whether the tax liability shown on such a return is reduced by
credits, deductions, or exclusions available under the estate
and gift tax rules). In addition, the tax does not apply to
property in cases in which no estate or gift tax return is
required to be filed, where no such return would have been
required to be filed if the former citizen or former long-term
resident had not relinquished citizenship or terminated
residency, as the case may be. Applicable gifts or bequests
that are made in trust are treated as made to the beneficiaries
of the trust in proportion to their respective interests in the
trust.
Information reporting
The provision provides that certain information reporting
requirements under present law (sec. 6039G) applicable to
former citizens and former long-term residents also apply for
purposes of the provision.
Immigration rules
The provision amends the immigration rules that deny tax-
motivated expatriates reentry into the United States by
removing the requirement that the expatriation be tax-
motivated, and instead denies former citizens reentry into the
United States if the individual is determined not to be in
compliance with his or her tax obligations under the
provision's expatriation tax provisions (regardless of the
subjective motive for expatriating). For this purpose, the
provision permits the IRS to disclose certain items of return
information of an individual, upon written request of the
Attorney General or his delegate, as is necessary for making a
determination under section 212(a)(10)(E) of the Immigration
and Nationality Act. Specifically, the provision would permit
the IRS to disclose to the agency administering section
212(a)(10)(E) whether such taxpayer is in compliance with
section 877A and identify the items of noncompliance.
Recordkeeping requirements, safeguards, and civil and criminal
penalties for unauthorized disclosure or inspection would apply
to return information disclosed under this provision.
Effective date
The provision generally is effective for U.S. citizens
who relinquish citizenship or long-term residents who terminate
their residency on or after February 5, 2003. The provisions
relating to gifts and inheritances are effective for gifts and
inheritances received from former citizens and former long-term
residents on or after February 5, 2003, whose expatriation or
residency termination occurs on or after such date. The
provisions relating to former citizens under U.S. immigration
laws are effective on or after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
5. Reporting of taxable mergers and acquisitions (sec. 605 of the House
bill, sec. 445 of the Senate amendment, 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)).\450\
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\450\ 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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HOUSE BILL
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 \451\) whose name is required to be
set forth in such return a written statement showing:
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\451\ 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.
SENATE AMENDMENT
Same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows both the House bill and
the Senate amendment.
6. Studies (sec. 606 of the House 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.
HOUSE BILL
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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, except
the inversions study required under the provision is due no
later than December 31, 2006.
B. Provisions Relating to Tax Shelters
1. Penalty for failure to disclose reportable transactions (sec. 611 of
the House bill, sec. 402 of the Senate amendment, 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.\452\
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\452\ 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) \453\ 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'').\454\
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\453\ 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).
\454\ 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).\455\
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\455\ 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.\456\
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\456\ 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.\457\
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\457\ 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 \458\ 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.\459\
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\458\ 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.
\459\ 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.\460\
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\460\ 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.\461\
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\461\ 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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HOUSE BILL
In general
The House bill 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 House bill does not define the terms ``listed
transaction'' \462\ or ``reportable transaction,'' nor does it
explain the type of information that must be disclosed in order
to avoid the imposition of a penalty. Rather, the House bill
authorizes the Treasury Department to define a ``listed
transaction'' and a ``reportable transaction'' under section
6011.
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\462\ The House bill provides 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 IRS
Commissioner or his delegate can rescind (or abate) the penalty
only if rescinding the penalty would promote compliance with
the tax laws and effective tax administration. 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 judicially appeal a refusal
to rescind a penalty.\463\ 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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\463\ 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 House bill provision is effective for returns and
statements the due date for which is after the date of
enactment.
SENATE AMENDMENT
In general
The Senate amendment is the same as the House bill, with
certain modifications.
Transactions to be disclosed
Like the House bill, the Senate amendment does not define
the terms ``listed transaction'' or ``reportable transaction''
but, rather, authorizes the Treasury Department to define a
``listed transaction'' and a ``reportable transaction'' under
section 6011.
Penalty rate
Under the Senate amendment, the penalty for failing to
disclose a reportable transaction generally is $50,000. The
amount is increased to $100,000 if the failure is with respect
to a listed transaction. For large entities and high net worth
individuals, the penalty amount is doubled (i.e., $100,000 for
a reportable transaction and $200,000 for 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: (1) the taxpayer on whom the
penalty is imposed has a history of complying with the Federal
tax laws, (2) it is shown that the violation is due to an
unintentional mistake of fact, (3) imposing the penalty would
be against equity and good conscience, and (4) 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 or the head of the Office of Tax Shelter Analysis.
Thus, the penalty cannot be rescinded by a revenue agent, an
Appeals officer, or any other IRS personnel. 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. 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.
A ``large entity'' is defined as any entity with gross
receipts in excess of $10 million in the year of the
transaction or in the preceding year. A ``high net worth
individual'' is defined as any individual whose net worth
exceeds $2 million, based on the fair market value of the
individual's assets and liabilities immediately before entering
into the transaction.
A public entity that is required to pay a penalty for
failing to disclose a listed transaction (or is subject to an
understatement penalty attributable to a non-disclosed listed
transaction, a non-disclosed reportable avoidance
transaction,\464\ or a transaction that lacks economic
substance) must disclose the imposition of the penalty in
reports to the Securities and Exchange Commission for such
period as the Secretary shall specify. The provision applies
without regard to whether the taxpayer determines the amount of
the penalty to be material to the reports in which the penalty
must appear, and treats any failure to disclose a transaction
in such reports as a failure to disclose a listed transaction.
A taxpayer must disclose a penalty in reports to the Securities
and Exchange Commission once the taxpayer has exhausted its
administrative and judicial remedies with respect to the
penalty (or if earlier, when paid). In addition, the Secretary
is required to make public the name of any person that is
required to pay a penalty for failing to disclose a listed
transaction (or is subject to an understatement penalty
attributable to a non-disclosed listed transaction, a non-
disclosed reportable avoidance transaction, or a transaction
that lacks economic substance), as well as the amount of such
penalty.
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\464\ A reportable avoidance transaction is a reportable
transaction with a significant tax avoidance purpose.
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Effective date
The Senate amendment provision is effective for returns
and statements the due date for which is after the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, with the
following modifications.
In determining whether to rescind (or abate) the penalty
for failing to disclose a reportable transaction on the grounds
that doing so would promote compliance with the tax laws and
effective tax administration, the conferees intend that the IRS
Commissioner take into account whether: (1) the person on whom
the penalty is imposed has a history of complying with the tax
laws; (2) the violation is due to an unintentional mistake of
fact; and (3) imposing the penalty would be against equity and
good conscience.
In addition, the conference agreement provides that a
public entity that is required to pay a penalty for failing to
disclose a listed transaction (or is subject to an
understatement penalty attributable to a non-disclosed listed
transaction or a non-disclosed reportable avoidance
transaction) must disclose the imposition of the penalty in
reports to the Securities and Exchange Commission for such
period as the Secretary shall specify. This requirement applies
without regard to whether the taxpayer determines the amount of
the penalty to be material to the reports in which the penalty
must appear, and treats any failure to disclose a transaction
in such reports as a failure to disclose a listed transaction.
A taxpayer must disclose a penalty in reports to the Securities
and Exchange Commission once the taxpayer has exhausted its
administrative and judicial remedies with respect to the
penalty (or if earlier, when paid). However, the taxpayer is
only required to report the penalty one time. The conference
agreement further provides that this requirement also applies
to a public entity that is subject to a gross valuation
misstatement penalty under section 6662(h) attributable to a
non-disclosed listed transaction or non-disclosed reportable
avoidance transaction.
2. Modifications to the accuracy-related penalties for listed
transactions and reportable transactions having a significant
tax avoidance purpose (sec. 612 of the House bill, sec. 403 of
the Senate amendment, 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.\465\
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.\466\
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\465\ Sec. 6662.
\466\ Sec. 6662(d)(2)(B).
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Special rules apply with respect to tax shelters.\467\
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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\467\ 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.\468\
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.\469\
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\468\ Sec. 6664(c).
\469\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec.
1.6664-4(c).
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HOUSE BILL
In general
The House bill 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'').\470\ The penalty rate and defenses
available to avoid the penalty vary depending on whether the
transaction was adequately disclosed.
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\470\ 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 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),\471\ 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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\471\ 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,\472\ (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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\472\ 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 \473\ 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 \474\ 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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\473\ Under the House bill, 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).
\474\ 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.\475\ 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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\475\ 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
the House bill 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 the House bill shall not apply
to any portion of an understatement to which a fraud penalty is
applied under section 6663.
Effective date
The House bill provision is effective for taxable years
ending after the date of enactment.
SENATE AMENDMENT
In general
The Senate amendment is the same as the House bill, with
certain modifications.
Disclosed transactions
The Senate amendment is the same as the House bill with
regard to accuracy-related penalties for understatements
attributable to an adequately disclosed listed transaction or
reportable avoidance transaction.
Undisclosed transactions
Like the House bill, the Senate amendment provides that a
taxpayer is subject to an increased accuracy-related penalty
equal to 30 percent of the understatement, and the strengthened
reasonable cause exception is not available (i.e., a strict-
liability penalty applies), if the taxpayer does not adequately
disclose the transaction.
Under the Senate amendment, a public entity that is
required to pay the 30-percent penalty also must disclose the
imposition of the penalty in reports to the SEC for such
periods as the Secretary shall specify. The disclosure to the
SEC applies without regard to whether the taxpayer determines
the amount of the penalty to be material to the reports in
which the penalty must appear, and any failure to disclose such
penalty in the reports is treated as a failure to disclose a
listed transaction. A taxpayer must disclose a penalty in
reports to the SEC once the taxpayer has exhausted its
administrative and judicial remedies with respect to the
penalty (or if earlier, when paid).
The Senate amendment also provides that, once the 30-
percent penalty has been included in the Revenue Agent Report,
the penalty cannot be compromised for purposes of a settlement
without approval of the Commissioner personally or the head of
the Office of Tax Shelter Analysis. Furthermore, the IRS is
required to submit an annual report to Congress summarizing the
application of this penalty and providing a description of each
penalty compromised under this provision and the reasons for
the compromise.
Disqualified tax advisor
The Senate amendment provides that a disqualified tax
advisor also includes ad advisor who has an arrangement with
respect to the transaction which provides that contractual
disputes between the taxpayer and the advisor are to be settled
by arbitration or which limits damages by reference to fees
paid to the advisor for such transaction.
Determination of the understatement amount
The Senate amendment is the same as the House bill with
regard to determining the amount of an understatement that is
subject to this provision.
Strengthened reasonable cause exception
The Senate amendment is the same as the House bill with
regard to the reasonable cause exception to accuracy-related
penalties under this provision.\476\
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\476\ Under the Senate amendment, 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, insuring 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).
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Coordination with other penalties
The Senate amendment is the same as the House bill with
regard to coordination between the penalty imposed under this
provision and other penalties.
Effective date
The Senate amendment provision is effective for taxable
years ending after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, except
the conference agreement also provides that any understatement
upon which a penalty is imposed under the conference agreement
is not subject to the valuation misstatement penalties under
sections 6662(e) or 6662(h).
3. Tax shelter exception to confidentiality privileges relating to
taxpayer communications (sec. 613 of the House bill, sec. 406
of the Senate amendment, 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.
HOUSE BILL
The House bill 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 House bill provision is effective
with respect to communications made on or after the date of
enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
4. Statute of limitations for unreported listed transactions (sec. 614
of the House bill, sec. 416 of the Senate amendment, and sec.
6501 of the Code)
PRESENT LAW
In general, the Code requires that taxes be assessed
within three years \477\ after the date a return is filed.\478\
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.\479\ 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.\480\
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\477\ Sec. 6501(a).
\478\ 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)).
\479\ Sec. 6501(e).
\480\ Sec. 6501(c).
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HOUSE BILL
The House bill 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 \481\ 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.\482\
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\481\ The term ``listed transaction'' has the same meaning as
described in a previous provision regarding the penalty for failure to
disclose reportable transactions.
\482\ 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 House bill provision is effective
for taxable years with respect to which the period for
assessing a deficiency did not expire before the date of
enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
5. Disclosure of reportable transactions by material advisors (secs.
615 and 616 of the House bill, secs. 407 and 408 of the Senate
amendment, 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.\483\ A ``tax shelter'' means
any investment with respect to which the tax shelter ratio
\484\ 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).\485\
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\483\ Sec. 6111(a).
\484\ 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.
\485\ 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.\486\
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\486\ 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,'' \487\ 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.\488\
Certain exceptions are provided with respect to the second
category of transactions.\489\
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\487\ Treas. Reg. sec. 301.6111-2(b)(2).
\488\ Treas. Reg. sec. 301.6111-2(b)(3).
\489\ 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.\490\
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\490\ 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.\491\ 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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\491\ 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.
HOUSE BILL
Disclosure of reportable transactions by material advisors
The House bill repeals the present law rules with respect
to registration of tax shelters. Instead, the House bill
requires each material advisor with respect to any reportable
transaction (including any listed transaction) \492\ 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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\492\ 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.\493\
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\493\ 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 for such assistance or advice 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.
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 House bill repeals the present-law penalty for
failure to register tax shelters. Instead, the House bill
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).\494\ 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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\494\ 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.\495\
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 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 judicially 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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\495\ 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 House bill 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 House bill provision imposing a penalty for failing
to disclose reportable transactions applies to returns the due
date for which is after the date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except the Senate amendment also includes in the definition of
a ``material advisor'' any person who provides material aid,
assistance, or advice with respect to insuring any reportable
transaction (and who derives gross income for such assistance
or advice in excess of the amounts specified in the House
bill).
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
6. Investor lists and modification of penalty for failure to maintain
investor lists (secs. 615 and 617 of the House bill, secs. 407
and 409 of the Senate amendment, 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).\496\ Recently issued regulations under section
6112 contain rules regarding the list maintenance
requirements.\497\ In general, the regulations apply to
transactions that are potentially abusive tax shelters entered
into, or acquired after, February 28, 2003.\498\
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\496\ Sec. 6112.
\497\ Treas. Reg. sec. 301.6112-1.
\498\ 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.\499\ 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.\500\ 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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\499\ Treas. Reg. sec. 301.6112-1(c)(1).
\500\ 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).\501\
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\501\ 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.\502\
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\502\ 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).
HOUSE BILL
Investor lists
Each material advisor \503\ with respect to a reportable
transaction (including a listed transaction) \504\ 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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\503\ The term ``material advisor'' has the same meaning as when
used in connection with the requirement to file an information return
under section 6111.
\504\ 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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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.\505\
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\505\ 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 House bill 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 House bill provision imposing a
penalty for failing to maintain investor lists applies to
requests made after the date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill. In
addition, the Senate amendment 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).
Effective date.--The Senate amendment 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.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
7. Penalty on promoters of tax shelters (sec. 618 of the House bill,
sec. 415 of the Senate amendment, and sec. 6700 of the Code)
PRESENT LAW
A penalty is imposed on any person who organizes, assists
in the organization of, or participates in the sale of any
interest in, a partnership or other entity, any investment plan
or arrangement, or any other plan or arrangement, if in
connection with such activity the person makes or furnishes a
qualifying false or fraudulent statement or a gross valuation
overstatement.\506\ 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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\506\ 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.
HOUSE BILL
The House bill 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 House bill provision is effective
for activities occurring after the date of enactment.
SENATE AMENDMENT
The Senate amendment modifies the penalty amount to equal
100 percent of the gross income derived by the person from the
activity for which the penalty is imposed. The new penalty rate
applies to (1) each instance of any activity that involves a
statement (including a gross valuation overstatement) 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, (2) each
instance in which income was derived from such activity, and
(3) each person who participated in such activity. In addition,
the Senate amendment imposes joint and several liability upon
all persons who are subject to a penalty for such activity. The
Senate amendment also provides that the payment of a penalty
under this provision, or the payment of any amount to settle or
avoid the imposition of such a penalty, is not deductible for
tax purposes.
Effective date.--The Senate amendment provision is
effective for activities occurring after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
8. Penalty for aiding and abetting the understatement of tax liability
(sec. 419 of the Senate amendment and sec. 6701 of the Code)
PRESENT LAW
A penalty is imposed on a person who: (1) aids or assists
in or advises with respect to a tax return or other document;
(2) knows (or has reason to believe) that such document will be
used in connection with a material tax matter; and (3) knows
that this would result in an understatement of tax of another
person. In general, the amount of the penalty is $1,000. If the
document relates to the tax return of a corporation, the amount
of the penalty is $10,000.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment expands the scope of this penalty in
several ways. First, it applies the penalty to aiding or
assisting with respect to tax liability. Second, it applies the
penalty to each instance of aiding or abetting. Third, it
increases the amount of the penalty to a maximum of 100 percent
of the gross income derived (or to be derived) from the aiding
or abetting. Fourth, if more than one person is liable for the
penalty, all such persons are jointly and severally liable for
the penalty. Fifth, the penalty, as well as amounts paid to
settle or avoid the imposition of the penalty, is not
deductible for tax purposes.
Effective date.--The Senate amendment provision is
effective for activities after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
9. Modifications of substantial understatement penalty for
nonreportable transactions (sec. 619 of the House bill, sec.
405 of the Senate amendment, 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).\507\
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\507\ Sec. 6662(a) and (d)(1)(A).
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HOUSE BILL
The House bill modifies the definition of ``substantial''
for corporate taxpayers. Under the House bill, 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 House bill provision is effective
for taxable years beginning after date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill with
regard to modifying the definition of ``substantial'' for
corporate taxpayers.
In addition, the Senate amendment elevates the standard
that a taxpayer must satisfy in order to reduce the amount of
an understatement for undisclosed items. With respect to the
treatment of an item whose facts are not adequately disclosed,
a resulting understatement is reduced only if the taxpayer had
a reasonable belief that the tax treatment was more likely than
not the proper treatment.
The Senate amendment also authorizes (but does not
require) the Secretary to publish a list of positions for which
it believes there is not substantial authority or there is no
reasonable belief that the tax treatment is more likely than
not the proper treatment (without regard to whether such
positions affect a significant number of taxpayers). The list
shall be published in the Federal Register or the Internal
Revenue Bulletin.
Effective date.--The Senate amendment provision is
effective for taxable years beginning after the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, except
the conference agreement also modifies the requirement of the
Secretary to prescribe a list of positions that do not have
substantial authority, and authorizes (but does not require)
the Secretary to publish such list.
10. Modification of actions to enjoin certain conduct related to tax
shelters and reportable transactions (sec. 620 of the House
bill, sec. 410 of the Senate amendment, 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.\508\
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\508\ Sec. 7408.
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HOUSE BILL
The House bill expands this rule so that injunctions may
also be sought with respect to the requirements relating to the
reporting of reportable transactions \509\ and the keeping of
lists of investors by material advisors.\510\ Thus, under the
House bill, 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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\509\ Sec. 6707, as amended by other provisions of this bill.
\510\ Sec. 6708, as amended by other provisions of this bill.
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Effective date.--The House bill provision is effective on
the day after the date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except the Senate amendment also permits injunctions to be
sought with respect to violations of any of the rules under
Circular 230, which regulates the practice of representatives
of persons before the Department of the Treasury.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
11. Penalty on failure to report interests in foreign financial
accounts (sec. 621 of the House bill, sec. 412 of the Senate
amendment, 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.\511\ 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.
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\511\ 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.\512\ 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.\513\
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\512\ 31 U.S.C. sec. 5321(a)(5).
\513\ 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.\514\ This
report, which was statutorily required,\515\ 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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\514\ 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.
\515\ Sec. 361(b) of the USA PATRIOT Act of 2001 (Pub. L. 107-56).
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HOUSE BILL
The House bill 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 House bill provision is effective
with respect to failures to report occurring on or after the
date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except the maximum additional civil penalty for a non-willful
act is up to $10,000. In addition, the Senate amendment
increases the present-law penalty for willful behavior to the
greater of $100,000 or 50 percent of the amount of the
transaction or account.
Effective date.--The Senate amendment provision is
effective with respect to failures to report occurring on or
after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
12. Regulation of individuals practicing before the Department of the
Treasury (sec. 622 of the House bill, sec. 414 of the Senate
amendment, 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.\516\ 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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\516\ 31 U.S.C. sec. 330.
---------------------------------------------------------------------------
HOUSE BILL
The House bill makes two modifications to expand the
sanctions that the Secretary may impose pursuant to these
statutory provisions. First, the House bill expressly permits
censure as a sanction. Second, the House bill 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 House bill 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 House bill modifications to expand
the sanctions that the Secretary may impose are effective for
actions taken after the date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill
(except for several technical drafting modifications).
Effective date.--The Senate amendment modifications to
expand the sanctions that the Secretary may impose are
effective for actions taken after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
13. Treatment of stripped bonds to apply to stripped interests in bond
and preferred stock funds (sec. 631 of the House bill, sec. 461
of the Senate amendment, 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 if the right to
receive income is transferred without an accompanying transfer
of the underlying property, the transfer 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.\517\
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\517\ 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).\518\ However, there are no
specific statutory rules that address stripping transactions
with respect to common stock or other equity interests (other
than preferred stock).\519\
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\518\ 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 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 95-53,
1995-2 C.B. 334 (accounting for lease strips and other stripping
transactions).
\519\ 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.\520\ 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.\521\
In general, upon the disposition of either the stripped bond or
the detached interest coupons, the retained portion and the
portion that is disposed of each is treated as a new bond that
is purchased at a discount and is payable at 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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\520\ Sec. 1286.
\521\ 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.\522\ 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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\522\ 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 the
taxpayer's basis, immediately before the disposition, in the
bond (with the coupons attached) between the retained and
disposed items.\523\ 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
the 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.\524\
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\523\ 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.
\524\ 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.\525\ 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.\526\ 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.\527\
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\525\ Sec. 305(e)(5).
\526\ Sec. 305(e)(1).
\527\ Sec. 305(e)(3).
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HOUSE BILL
The House bill 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 House bill 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 the House bill 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 a tax-exempt bond partnership described in
Rev. Proc. 2002-68,\528\ modifying and superceeding Rev. Proc.
2002-16.\529\
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\528\ 2002-43 I.R.B. 753.
\529\ 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 House bill provision is effective
for purchases and dispositions occurring after the date of
enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
14. Minimum holding period for foreign tax credit with respect to
withholding taxes on income other than dividends (sec. 632 of
the House bill, sec. 456 of the Senate amendment, 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.
HOUSE BILL
The House bill 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 House bill does
not apply to foreign tax credits that are subject to the
present-law disallowance with respect to dividends. The House
bill 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 House bill. In addition, the House bill
authorizes the Treasury Department to issue regulations
providing that the House bill does not apply in appropriate
cases.
Effective date.--The House bill provision is effective
for amounts that are paid or accrued more than 30 days after
the date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment provision, except the 30-day testing period is
changed to a 31-day testing period.
In addition, the conferees intend that the Secretary will
prescribe regulations to adapt the holding period and hedging
rules of section 901(k) to property other than stock. It is
anticipated that such regulations will provide that credits are
not disallowed merely because a taxpayer eliminates its risk of
loss from interest rate or currency fluctuations. In addition,
it is intended that such regulations might permit other hedging
activities, such as hedging of credit risk, provided that the
taxpayer does not hedge most of its risk of loss with respect
to the property unless there has been a meaningful and
unanticipated change in circumstances.
15. Treatment of partnership loss transfers and partnership basis
adjustments (sec. 633 of the House bill, sec. 469 of the Senate
amendment, and secs. 704, 734, 743, and 754 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.\530\ The
partnership takes the property at an adjusted basis equal to
the contributing partner's adjusted basis in the property.\531\
The contributing partner increases its basis in its partnership
interest by the adjusted basis of the contributed
property.\532\ 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.\533\ 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.\534\
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\530\ Sec. 721.
\531\ Sec. 723.
\532\ Sec. 722.
\533\ Sec. 704(c)(1)(A).
\534\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.\535\ 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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\535\ Treas. Reg. sec. 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.\536\ 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.\537\ 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).
---------------------------------------------------------------------------
\536\ Sec. 743(a).
\537\ 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.\538\ 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).\539\ 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).\540\
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\538\ Sec. 731(a) and (b).
\539\ Sec. 732(b).
\540\ Sec. 732(a).
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The determination of the basis of individual properties
distributed by a partnership is dependent on the adjusted basis
of the properties in the hands of the partnership.\541\ If a
partnership interest is transferred to a partner and the
partnership has not elected to adjust the basis of partnership
property, a special basis rule provides for the determination
of the transferee partner's basis of properties that are later
distributed by the partnership.\542\ Under this rule, in
determining the basis of property distributed by a partnership
within 2 years following the transfer of the partnership
interest, the transferee may elect to determine its basis as if
the partnership had adjusted the basis of the distributed
property under section 743(b) on the transfer. The special
basis rule also applies to distributed property if, at the time
of the transfer, the fair market value of partnership property
other than money exceeds 110 percent of the partnership's basis
in such property and a liquidation of the partnership interest
immediately after the transfer would have resulted in a shift
of basis to property subject to an allowance of depreciation,
depletion or amortization.\543\
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\541\ Sec. 732 (a)(1) and (c).
\542\ Sec. 732(d).
\543\ Treas. Reg. sec. 1.732-1(d)(4).
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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.\544\ 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).\545\ 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.
---------------------------------------------------------------------------
\544\ Sec. 734(a).
\545\ Sec. 734(b).
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HOUSE BILL
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.\546\
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\546\ 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.
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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 \547\ 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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\547\ 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.
SENATE AMENDMENT
Under the provision, adjustments to the basis of
partnership property in the event of a partnership distribution
or the transfer of a partnership interest are required, not
elective as under present law. However, the basis adjustments
are elective, as under present law, in the case of the transfer
of a partnership interest by reason of the partner's death. Any
election made by a partnership under section 754 that is in
effect when the provision becomes effective is treated as an
election to adjust the basis of partnership property with
respect to the transferee partner in the case of a transfer of
a partnership interest upon the death of a partner. The
provision repeals the special rule of section 732(d) for
determining the transferee partner's basis in property that is
later distributed by the partnership in cases in which the
partnership did not have a section 754 election in effect with
respect to the transfer of the partnership interest.
Effective date.--The provision requiring partnership
basis adjustments applies to transfers and distributions after
the date of enactment.
The provision repealing section 732(d) applies generally
to transfers after the date of enactment, except that it
applies to distributions made after the date which is 2 years
following the date of enactment in the case of any transfer to
which section 732(d) applies that is made on or before the date
of enactment.
CONFERENCE AGREEMENT
The conference agreement generally follows the House
bill, with modifications.
The conference agreement modifies the qualification
requirements for electing investment partnerships that are
subject to a partner-level loss limitation rule in lieu of the
requirement of partnership basis adjustments following certain
transfers of partnership interests. Specifically, the
conference agreement requires that all partnership interests be
issued by such a partnership pursuant to a private offering
prior to the date that is 24 months after the date of the first
capital contribution to the partnership. The conferees intend
that ``dry'' closings in which partnership interests are issued
without the contribution of capital not start the running of
the 24-month period.
It is intended that in applying the requirement (with
respect electing investment partnerships) that the partnership
agreement have substantive restrictions on each partner's
ability to cause a redemption, the following are illustrative
examples of substantive restrictions: a violation of Federal or
State law (such as ERISA or the Bank Holding Company Act); and
imposition of a Federal excise tax on, or a change in the
Federal tax-exempt status of, a tax-exempt partner.
The conferees understand that electing investment
partnerships will generally include venture capital funds,
buyout funds, and funds of funds. These funds are formed to
raise capital from investors pursuant to a private offering and
to make investments during the limited term of the partnership
with the intention of holding the investments for capital
appreciation.
With respect to the requirement that an electing
investment partnership furnish to any transferee partner the
information necessary to enable the partner to compute the
amount of losses disallowed under this rule, it is expected
that in some cases the transferor of the partnership interest
will furnish information relating to the amount of its loss to
the transferee partner. It is intended that the requirement
that the electing investment partnership furnish necessary
information to the transferee partner be administered by the
Treasury Secretary in a manner that (to the greatest extent
feasible) minimizes the need for the partnership to furnish
information to the transferee partner that the transferee
partner has obtained from the transferor.
The conference agreement adds an exception for
securitization partnerships to the rules requiring partnership
basis adjustments in the case of transfers of partnership
interests and distributions of property to a partner. The
exceptions provide that a securitization partnership is not
treated as having a substantial built-in loss in the case of a
transfer of a partnership interest, or as having a substantial
basis reduction in the case of a partnership distribution, and
thus is not required to make basis adjustments to partnership
property. Partnership basis adjustments remain elective for
such a partnership. Unlike in the case of an electing
investment partnership, the partner-level loss limitation rule
does not apply in the case of a securitization partnership. For
this purpose, a securitization partnership is any partnership
the sole business activity of which is to issue securities that
provide for a fixed principal (or similar) amount and that are
primarily serviced by the cash flows of a discrete pool (either
fixed or revolving) of receivables or other financial assets
that by their terms convert into cash in a finite period, but
only if the sponsor of the pool reasonably believes that the
receivables and other financial assets comprising the pool are
not acquired so as to be disposed of. It is intended that rules
similar to those applicable to sponsors of REMICs apply in
determining whether the sponsor's belief is reasonable.\548\ It
is not intended that the rules requiring partnership basis
adjustments on transfers or distributions be avoided through
dispositions of pool assets.
---------------------------------------------------------------------------
\548\ See Treas. Reg. sec. 1.860G-2(a)(3), providing that a
sponsor's belief is not reasonable if the sponsor actually knows or has
reason to know that the requirement is not met, or if the requirement
is later discovered not to have been met.
---------------------------------------------------------------------------
It is intended that an electing investment partnership or
securitization partnership that subsequently fails to meet the
definition of an electing investment partnership or of a
securitization partnership will be subject to the partnership
basis adjustment rules of the provision with respect to the
first transfer of a partnership interest (and, in the case of a
securitization partnership, the first distribution) that occurs
after the partnership ceases to meet the applicable definition
and to each subsequent transfer (and distribution, in the case
of a securitization partnership).
It is not intended that the rules of the conference
agreement provisions be avoided through the use of tiered
partnerships.
It is not intended that the provision relating to
contributions of built-in loss property limit the ability of
master-feeder structures to apply an aggregate method for
making allocations under section 704(c) to the extent the
aggregate method is permitted under present law.\549\
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\549\ See Rev. Proc. 2001-36, 2001-1 C.B. 1326. Definitional
requirements of a master-feeder structure include that there is a
portfolio of assets that is treated as a partnership for Federal tax
purposes and that is registered as an investment company under the
Investment Company Act of 1940, each partner of which is a feeder fund
that is a registered investment company (RIC) for Federal tax purposes,
or is an investment advisor, principal underwriter, or manager of the
portfolio. The conferees believe that these restrictions (and other
applicable restrictions) serve to limit potential avoidance of the
section 704(c) provision of the conference agreement through use of the
aggregate method in the case of master-feeder structures.
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Effective date.--The conference agreement follows the
House bill.
16. No reduction of basis under section 734 in stock held by
partnership in corporate partner (sec. 634 of the House bill,
sec. 432 of the Senate amendment, 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.\550\ Similarly, a partner and the partnership
generally do not recognize gain or loss on the distribution of
partnership property.\551\ This includes current distributions
and distributions in liquidation of a partner's interest.
---------------------------------------------------------------------------
\550\ Sec. 721(a).
\551\ 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).\552\ 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.
---------------------------------------------------------------------------
\552\ Sec. 732(b).
---------------------------------------------------------------------------
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.\553\ 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.
---------------------------------------------------------------------------
\553\ Sec. 754.
---------------------------------------------------------------------------
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.\554\ 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.\555\
---------------------------------------------------------------------------
\554\ Sec. 755(a).
\555\ Sec. 755(b).
---------------------------------------------------------------------------
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except for the effective date.
Effective date.--The provision applies to distributions
after February 13, 2003.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
Effective date.--The conference agreement follows the
House bill.
17. Repeal of special rules for FASITs (sec. 635 of the House bill,
sec. 433 of the Senate amendment, and secs. 860H through 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.\556\ A FASIT generally is not taxable; the FASIT's
taxable income or net loss flows through to the owner of the
FASIT.
---------------------------------------------------------------------------
\556\ Sections 860H through 860L.
---------------------------------------------------------------------------
The ownership interest of a FASIT generally is required
to be entirely held 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.
Instruments issued by a FASIT bearing yields to maturity over
five percentage points above the yield to maturity on specified
United States government obligations (i.e., ``high-yield
interests'') must be held, directly or indirectly, only by
domestic C corporations that are not exempt from income tax.
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; \557\ (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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\557\ 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 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 Treasury Secretary, variable rates permitted with
respect to REMIC 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.
Permitted ownership holder
A permitted holder of the ownership interest in a FASIT
generally is a non-exempt (i.e., taxable) domestic C
corporation, other than a corporation that qualifies as a RIC,
REIT, REMIC, 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 Treasury 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.
HOUSE BILL
The House bill repeals the special rules for FASITs. The
House bill 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 House bill 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 House bill is effective January
1, 2005.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except for the effective date.
Effective date.--Except as provided by the transition
period for existing FASITs, the Senate amendment is effective
on February 14, 2003.
CONFERENCE AGREEMENT
The conference agreement follows the House bill
provision.
18. Limitation on transfer and importation of built-in losses (sec. 636
of the House bill, sec. 431 of the Senate amendment, and secs.
362 and 334 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.\558\ 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.\559\
---------------------------------------------------------------------------
\558\ Sec. 351.
\559\ Sec. 358.
---------------------------------------------------------------------------
The basis of property received by a corporation, whether
from domestic or foreign transferors, in a tax-free
incorporation, reorganization, or liquidation of a subsidiary
corporation is the same as the adjusted basis in the hands of
the transferor, adjusted for gain or loss recognized by the
transferor.\560\
---------------------------------------------------------------------------
\560\ Secs. 334(b) and 362(a) and (b).
---------------------------------------------------------------------------
HOUSE BILL
The House bill 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 House bill provision applies to
transactions after the date of enactment.
SENATE AMENDMENT
Importation of built-in losses
The Senate Amendment provides that if a net built-in loss
is imported into the U.S in a tax-free organization or
reorganization from persons not subject to U.S. tax, the basis
of each property so transferred is its fair market value.\561\
A similar rule applies in the case of the tax-free liquidation
by a domestic corporation of its foreign subsidiary.
---------------------------------------------------------------------------
\561\ The Senate amendment also applies to transfers from a tax-
exempt organization where gain or loss would not be subject to tax if
the property were sold by the organization.
---------------------------------------------------------------------------
Under the Senate amendment, a net built-in loss is
treated as imported into the U.S. if the aggregate adjusted
bases of property received by a transferee corporation exceed
the fair market value of the properties transferred. Thus, for
example, if in a tax-free incorporation, some properties are
received by a corporation from U.S. persons subject to tax, and
some properties are received from foreign persons not subject
to U.S. tax, this provision applies to limit the adjusted basis
of each property received from the foreign persons to the fair
market value of the property. In the case of a transfer by a
partnership (either domestic or foreign), this provision
applies as if the properties had been transferred by each of
the partners in proportion to their interests in the
partnership.
Limitation on transfer of built-in losses in section 351 transactions
The Senate amendment provides that if the aggregate
adjusted bases of property contributed by a transferor (or by a
control group of which the transferor is a member) to a
corporation exceed the aggregate fair market value of the
property transferred in a tax-free incorporation, the
transferee's aggregate basis of the properties is limited to
the aggregate fair market value of the transferred property.
Under the Senate Amendment, any required basis reduction is
allocated among the transferred properties in proportion to
their built-in-loss immediately before the transaction. In the
case of a transfer in which the transferor owns at least 80
percent of the vote and value of the stock of the transferee
corporation, any basis reduction required by the provision is
made to the stock received by the transferor and not to the
assets transferred.
Effective date
The Senate amendment provision applies to transactions
after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
with modifications to the limitation on transfer of built-in
losses in section 351 transactions. The conference agreement
eliminates the provision that requires a basis reduction to be
made to stock received by the transferor (rather than to the
assets transferred) in the case of a transfer in which the
transferor owns at least 80 percent of the vote and value of
the stock of the transferee corporation. Thus, the provision
that limits the transferee's aggregate basis in the transferred
property to the aggregate fair market value of the transferred
property generally applies, regardless of the ownership
percentage of the transferor in the stock of the transferee
corporation.
In addition, the conference agreement permits the
transferor and transferee to elect to limit the basis in the
stock received by the transferor to the aggregate fair market
value of the transferred property, in lieu of limiting the
basis in the assets transferred. Such election shall be
included with the tax returns of the transferor and transferee
for the taxable year in which the transaction occurs and, once
made, shall be irrevocable.
19. Clarification of banking business for purposes of determining
investment of earnings in U.S. property (sec. 637 of the House
bill, sec. 451 of the Senate amendment, and sec. 956 of the
Code)
PRESENT LAW
In general, the subpart F rules \562\ 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.\563\
---------------------------------------------------------------------------
\562\ Secs. 951-964.
\563\ 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.\564\ 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.\565\ 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.\566\
---------------------------------------------------------------------------
\564\ Sec. 956(a).
\565\ Secs. 956 and 959.
\566\ Secs. 951(a)(1)(B) and 959.
---------------------------------------------------------------------------
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.\567\
---------------------------------------------------------------------------
\567\ 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.\568\
---------------------------------------------------------------------------
\568\ Sec. 956(c)(2).
---------------------------------------------------------------------------
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 \569\
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.
---------------------------------------------------------------------------
\569\ 286 F.3d 324 (6th Cir. 2002), rev'g 113 T.C. 169 (1999).
---------------------------------------------------------------------------
HOUSE BILL
The House bill 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 the House bill, 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.--The House bill provision is effective on
the date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except the Senate amendment applies the 80-percent test by
reference to financial services income (as defined in section
904(d)(2)(C)(ii) rather than the active conduct of a banking
business.
Effective date.--The Senate amendment provision is
effective on the date of enactment.
CONFERENCE AGREEMENT
The conference agreement 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: (1) any bank (as defined by section 2(c) of the
Bank Holding Company Act of 1956 (12 U.S.C. 1841(c), without
regard to paragraphs (C) and (G) of paragraph (2) of such
section); or (2) any other corporation with respect to which a
bank holding company (as defined by section 2(a) of such Act)
or financial holding company (as defined by section 2(p) of
such Act) owns directly or indirectly more than 80 percent by
vote or value of the stock of such corporation.
No inference is intended as to the meaning of the phrase
``carrying on the banking business'' under present law.
Effective date.--The conference agreement provision is
effective on the date of enactment.
20. Alternative tax for small insurance companies and modification of
exemption from tax for small property and casualty insurance
companies (sec. 638 of the House bill, sec. 493 of the Senate
amendment, and secs. 501(c)(15) and 831(b) 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 foreign and tax-exempt corporations).
A property and casualty insurance company is eligible to
be exempt from Federal income tax if (a) its gross receipts for
the taxable year do not exceed $600,000, and (b) the premiums
received for the taxable year are greater than 50 percent of
its gross receipts.\570\ For purposes of determining gross
receipts, the gross receipts of all members of a controlled
group of corporations of which the company is a part are taken
into account (including gross receipts of foreign and tax-
exempt corporations).
---------------------------------------------------------------------------
\570\ A special rule provides that a mutual property and casualty
insurance company is eligible to be exempt from Federal income tax
under the provision if (a) its gross receipts for the taxable year do
not exceed $150,000, and (b) the premiums received for the taxable year
are greater than 35 percent of its gross receipts, provided certain
requirements are met. The requirements are that no employee of the
company or member of the employee's family is an employee of another
company that is exempt from tax under section 501(c)(15) (or would be,
but for this rule).
---------------------------------------------------------------------------
HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment follows the House bill, except that
the $1.89 million amount is indexed for taxable years beginning
in a calendar year after 2005. In addition, the Senate
amendment modifies one of the present-law requirements for a
property and casualty insurance company to eligible to be
exempt from Federal income tax by requiring that the premiums
received for the taxable year be greater than 60 percent of its
gross receipts (rather than 50 percent as under present law).
Effective date.--The provision is effective for taxable
years beginning after December 31, 2004.\571\
---------------------------------------------------------------------------
\571\ The provision preserves the transition rule that was provided
under section 206(e) of the Pension Funding Equity Act of 2004 (Pub. L.
No. 108-218) relating to companies in receivership or liquidation.
---------------------------------------------------------------------------
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision or the Senate amendment provision.
21. Denial of deduction for interest on underpayments attributable to
nondisclosed reportable transactions (sec. 639 of the House
bill, sec. 417 of the Senate amendment, and sec. 163 of the
Code)
PRESENT LAW
In general, corporations may deduct interest paid or
accrued within a taxable year on indebtedness.\572\ Interest on
indebtedness to the Federal government attributable to an
underpayment of tax generally may be deducted pursuant to this
provision.
---------------------------------------------------------------------------
\572\ Sec. 163(a).
---------------------------------------------------------------------------
HOUSE BILL
The House bill 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).\573\
---------------------------------------------------------------------------
\573\ 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.
---------------------------------------------------------------------------
Effective date.--The House bill provision is effective
for underpayments attributable to transactions entered into in
taxable years beginning after the date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except the Senate amendment also 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 a transaction that lacks economic
substance.
Effective date.--The Senate amendment provision is
effective for underpayments attributable to transactions
entered into in taxable years beginning after the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
22. Clarification of rules for payment of estimated tax for certain
deemed asset sales (sec. 640 of the House bill, sec. 481 of the
Senate amendment, 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.
HOUSE BILL
The bill 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 bill if a 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 a stock sale, estimated tax is
recomputed based on the asset sale election.
No inference is intended as to present law.
Effective date.--The bill is effective for qualified
stock purchase transactions that occur after the date of
enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The Conference agreement follows the House bill and the
Senate amendment.
23. Exclusion of like-kind exchange property from nonrecognition
treatment on the sale or exchange of a principal residence
(sec. 641 of the House bill and sec. 492 of the Senate
amendment)
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. 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.
HOUSE BILL
The House 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.--Sales or exchanges of principal
residences after the date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
24. Prevention of mismatching of interest and original issue discount
deductions and income inclusions in transactions with related
foreign persons (sec. 642 of the House bill, sec. 453 of the
Senate amendment, 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.\574\ 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).\575\
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.\576\
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\574\ Sec. 163(e)(1).
\575\ Sec. 163(e)(3).
\576\ 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.\577\ 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).\578\ 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.\579\
---------------------------------------------------------------------------
\577\ Sec. 267(a)(2).
\578\ Treas. Reg. sec. 1.267(a)-3(b)(1), -3(c).
\579\ Treas. Reg. sec. 1.267(a)-3(c)(4).
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HOUSE BILL
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.\580\ Deductions that have accrued
but are not allowable under this provision are allowed when the
amounts are paid.
---------------------------------------------------------------------------
\580\ Section 413 of the conference agreement 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.
---------------------------------------------------------------------------
For purposes of determining the amount of the deduction
allowable, the extent that an amount attributable to OID or an
item is includible in the income of a U.S. person is determined
without regard to (1) properly allocable deductions of the
related foreign corporation, and (2) qualified deficits of the
related foreign corporation under section 952(c)(1)(B).
Properly allocable deductions of the related foreign
corporation are those expenses, losses, and other deductible
amounts of the related foreign corporation that are properly
allocated or apportioned, under the principles of section
954(b)(5), to the relevant income item of the related foreign
corporation.
The provision grants the Secretary regulatory authority
to exempt transactions from these rules, including any
transactions entered into by the payor in the ordinary course
of a trade or business in which the payor is predominantly
engaged, and (in the case of items other than OID) in which the
payment of the accrued amounts occurs shortly after its
accrual.
Effective date.--The provision is effective for payments
accrued on or after date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
The following examples illustrate the operation of this
provision. Assume the following facts. A U.S. parent
corporation owns 60 percent of the stock of a CFC. An unrelated
foreign corporation owns the remaining 40 percent interest in
the CFC. The U.S. parent accrues an expense item of 100 to the
CFC. The parent would be entitled to a current deduction of 100
for the accrued amount, before taking into account this
provision. The item constitutes gross foreign base company
income in the hands of the CFC. The item is the only gross
income item of the CFC that has the potential to result in the
CFC having subpart F income, and has not been paid by the end
of the taxable year of the parent. The CFC has deductions of 60
that are properly allocated or apportioned to the 100 of gross
foreign base company income under the principles of section
954(b)(5), resulting in 40 (100 - 60) of net foreign base
company income. The CFC has earnings and profits for its
taxable year in excess of 40, and has 40 of subpart F income.
Under these facts, the U.S. parent is allowed a current
deduction of 60 (100 60%) under the provision.
If, in the example above, the CFC has deductions of 100
(or more) properly allocated or apportioned to the sole item of
100 of gross foreign base company income under the principles
of section 954(b)(5), and has no other income or deductions,
the same deduction is allowed to the U.S. parent. Under these
circumstances, the parent is allowed a deduction of 60, whether
the CFC has positive earnings and profits for its taxable year
or has a deficit in earnings and profits for such year.
If the CFC's item of net foreign base company income is
positive, and the earnings and profits limitation of section
952(c)(1)(A) reduces what would otherwise be a U.S.
shareholder's pro rata share of the CFC's subpart F income,
then the deduction will also be reduced under the provision.
For example, assume the facts in the first example above, in
which the CFC has deductions of 60 that are properly allocated
or apportioned to the item of 100 of gross foreign base company
income under the principles of section 954(b)(5), resulting in
40 of net foreign base company income. Further assume that, due
solely to other losses, the CFC's earnings and profits for its
taxable year are 10 instead of 40. In that case, the CFC's
subpart F income is limited to 10, and only six is includible
in the gross income of the U.S. parent as its pro rata share of
subpart F income. Under the provision, the U.S. parent is
allowed a current deduction in that case of 42 ((10 + 60)
60%). The conferees intend that, if as a result of
such other losses, the CFC has no earnings and profits for its
taxable year or has a deficit in earnings and profits for such
year, the U.S. parent is instead allowed a current deduction of
36 ((0 + 60) 60%).
25. Exclusion from gross income for interest on overpayments of income
tax by individuals (sec. 643 of the House bill)
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,
Sixth, 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.
HOUSE BILL
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 taxable year in which the
underpayment interest is paid.
Effective date.--Interest received in calendar years
beginning after the date of enactment.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision.
26. Deposits made to suspend the running of interest on potential
underpayments (sec. 644 of the House bill, sec. 486 of the
Senate amendment, 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.
HOUSE BILL
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.--Deposits made after date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
27. Authorize IRS to enter into installment agreements that provide for
partial payment (sec. 645 of the House bill, sec. 484 of the
Senate amendment, and sec. 6159 of the Code)
PRESENT LAW
The Code authorizes the IRS to enter into written
agreements with any taxpayer under which the taxpayer is
allowed to pay taxes owed, as well as interest and penalties,
in installment payments if the IRS determines that doing so
will facilitate collection of the amounts owed (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.
HOUSE BILL
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.--Installment agreements entered into on
or after the date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
28. Affirmation of consolidated return regulation authority (sec. 646
of the House bill, sec. 421 of the Senate amendment, 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.\581\
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\581\ 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.'' \582\
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\582\ Sec. 1502.
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Under this authority, the Treasury Department has issued
extensive consolidated return regulations.\583\
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\583\ 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,
\584\ 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.\585\ The particular provision, known as
the ``duplicated loss'' provision, \586\ 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.\587\
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\584\ 255 F.3d 1357 (Fed. Cir. 2001), reh'g denied, 2001 U.S. App.
LEXIS 23207 (Fed. Cir. Oct. 3, 2001).
\585\ 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.''
\586\ Treas. Reg. sec. 1.1502-20(c)(1)(iii).
\587\ 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.\588\
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\588\ 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.'' \589\ 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.'' \590\
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\589\ 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).
\590\ 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.
---------------------------------------------------------------------------
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.'' \591\
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\591\ 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.\592\
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\592\ 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, e.g.
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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HOUSE BILL
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 \593\ to the extent the subsidiary had
net operating losses or built in losses that could be used
later outside the group.\594\
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\593\ Treas. Reg. sec. 1.1502-20(c)(1)(iii).
\594\ 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.\595\
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\595\ 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The Conference agreement follows the House bill and the
Senate Amendment.
29. 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. 475 and 476 of the Senate amendment, 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.''
\596\
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\596\ 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.\597\ 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.\598\ For this
purpose, the term ``tax-exempt entity'' includes Federal, State
and local governmental units, charities, and, foreign entities
or persons.\599\
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\597\ 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.
\598\ Sec. 168(h)(1).
\599\ 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.\600\ 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.\601\
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\600\ 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.
\601\ 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.\602\ 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.\603\
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\602\ 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.
\603\ 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.\604\ In addition, tax-
exempt use property does not include computer software because
it is intangible property.
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\604\ Sec. 168(i)(2).
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HOUSE BILL
Overview
The House 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 House bill modifies the recovery period for qualified
technological equipment and computer software leased to a tax-
exempt entity \605\ 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 House 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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\605\ The House 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 House 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.\606\
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\606\ 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 House 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.\607\
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\607\ For purposes of the House 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 House 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 House bill also provides that if a taxpayer leases
property to a tax-exempt entity, the taxpayer may not claim
deductions for a taxable year 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.\608\
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),\609\ 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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\608\ 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.
\609\ 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: \610\
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\610\ 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 \611\
in the leased property at the time the lease is entered
into.\612\ 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.\613\
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\611\ 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.
\612\ 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.
\613\ It is anticipated under the House bill 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 \614\ in the leased property at that
time,\615\ (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.\616\ 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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\614\ 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.
\615\ 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.
\616\ 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.\617\ 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.\618\ 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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\617\ 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.
\618\ 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.\619\ In addition, this provision is
applied before the application of the passive activity loss
rules under section 469.
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\619\ 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 House bill provision generally is effective for
leases entered into after March 12, 2004.\620\ However, the
House bill 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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\620\ 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.
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The House bill 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 the House bill provision. In addition, it
is intended that the House bill 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. The House bill provision
also is not intended to affect the scope of any other present-
law tax rules or doctrines applicable to purported leasing
transactions.
SENATE AMENDMENT
Overview
The Senate amendment is similar to the House bill in that
it 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, 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 Senate amendment provision that modifies the recovery
period for qualified technological equipment and computer
software leased to a tax-exempt entity is the same as the House
bill provision.
Modify definition of lease term
The Senate amendment provision that modifies the
definition of a lease term is the same as the House bill
provision.
Expand short-term lease exception for qualified technological equipment
The Senate amendment does not include the House bill
provision that excludes certain renewals and extensions of up
to 24 months from the determination of 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.
Limit deductions for certain leases of property to tax-exempt parties
The Senate amendment is similar to the House bill in that
it limits a taxpayer's deductions for a taxable year from a
lease transaction with a tax-exempt entity to the taxpayer's
gross income from the lease for that taxable year. However, the
Senate amendment does not exclude transactions involving
property with respect to which the rehabilitation credit is
allowable.
Like the House bill, the Senate amendment provides that a
lease of property to a tax-exempt party is not subject to the
deduction limitations of this provision if the lease satisfies
a series of requirements similar to that provided in the House
bill, with the following modifications:
(1) Leased property is not financed with tax-exempt
bonds or Federal funds
The Senate amendment provides that the leased property
must not have been directly or indirectly financed with tax-
exempt bonds that are outstanding when the lease is entered
into, or with Federal funds. This requirement is not included
in the House bill.
For example, a lease of rolling stock to a municipality
would be subject to the Senate amendment if the proceeds of the
municipality's general obligation bond were used to finance the
acquisition of the rolling stock (in whole or part) and the
bond is outstanding when the lease is entered into.
The Senate amendment permits the Secretary to provide a
de minimis exception from this requirement.
(2) Tax-exempt lessee does not monetize its lease
obligations
The Senate amendment is similar to the House bill in that
it provides that the tax-exempt lessee may not monetize its
lease obligations in an amount that exceeds 20 percent of the
taxpayer's adjusted basis in the leased property at the time
the lease is entered into. However, the Senate amendment also
permits the Secretary to identify arrangements (in addition to
those specified in the provision) to which the requirement
applies.
(3) Taxpayer makes and maintains a substantial
equity investment in the leased property
The Senate amendment is similar to the House bill in that
it requires the taxpayer to make and maintain a substantial
equity investment in the leased property. However, the Senate
amendment does not generally exclude from the application of
this requirement leases with lease terms of 5 years or less.
Instead, the Senate amendment provides that, with respect to
short-term leases as defined under present law, the taxpayer is
required to make a substantial equity investment, but is not
required to maintain a substantial equity investment, and the
leased property is not required to be reasonably expected to
equal 20 percent of the taxpayer's adjusted basis at the time
the lease is entered into.
(4) Tax-exempt lessee does not bear more than a
minimal risk of loss
The Senate amendment is similar to the House bill in that
it provides that the tax-exempt lessee generally may not assume
or retain more than a minimal risk of loss with respect to the
lease. However, the Senate amendment does not exclude from the
application of this requirement leases with lease terms of 5
years or less.
(5) Lease of certain property does not include a
fixed-price purchase option of the tax-exempt lessee
The Senate amendment provides that the tax-exempt lessee
may not have an option to purchase the leased property for any
stated purchase price other than the fair market value of the
property (as determined at the time of exercise of the option).
This requirement does not apply to property with a class life
(as defined in section 168(i)(1)) of seven years or less. This
requirement is not included in the House bill.
(6) Lease meets any other requirement prescribed in
regulations
The Senate amendment requires the lease to meet any other
requirements that the Secretary prescribes by regulations. This
requirement is not included in the House bill.
Coordination with like-kind exchange and involuntary
conversion rules
The Senate amendment does not include the House bill
provisions that coordinate the like-kind exchange and
involuntary conversion rules with the deduction limitation
provision.
Effective date
The Senate amendment provision generally is effective for
leases entered into after November 18, 2003. However, with
respect to tax-exempt use property that is leased to a foreign
tax-exempt entity or person in a transaction entered into on or
before November 18, 2003, the Senate amendment provision is
effective for taxable years beginning after January 31, 2004.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, with the
following modifications.
Definition of tax-exempt entity
The conference agreement expands the present-law
definition of tax-exempt entity for this purpose to include
certain Indian tribal governments in addition to Federal,
State, local, and foreign governmental units, charities,
foreign entities or persons.
Modify the recovery period of certain property leased to a tax-exempt
entity
The conference agreement also modifies the recovery
period for certain intangibles leased to a tax-exempt entity to
be the no less than 125 percent of the lease term.\621\ The
conference agreement modification 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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\621\ In the case of computer software and intangible assets, this
rule is applied by substituting useful life and amortization period,
respectively, for class life.
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Limit deductions for leases of property to tax-exempt parties
The conference agreement provides an additional
requirement that must be satisfied to avoid the deduction
limitations for certain leases of property to tax-exempt
parties. This requirement provides that the tax-exempt lessee
may not have an option to purchase the leased property for any
stated purchase price other than the fair market value of the
property (as determined at the time of exercise of the option).
This requirement does not apply to (1) property with a class
life (as defined in section 168(i)(1)) of seven years or less,
or (2) any fixed-wing aircraft or vessels (i.e., ships).
Effective date
The conference agreement modifies the Federal Transit
Administration approval deadline to January 1, 2006.
In addition, the conference agreement provides that the
provisions relating to intangible assets and Indian tribal
governments are effective for leases entered into after October
3, 2004.
30. Clarification of the economic substance doctrine (sec. 401 of the
Senate amendment and sec. 7701 of the Code)
PRESENT LAW
In general
The Code provides specific rules regarding the
computation of taxable income, including the amount, timing,
source, and character of items of income, gain, loss and
deduction. These rules are designed to provide for the
computation of taxable income in a manner that provides for a
degree of specificity to both taxpayers and the government.
Taxpayers generally may plan their transactions in reliance on
these rules to determine the federal income tax consequences
arising from the transactions.
In addition to the statutory provisions, courts have
developed several doctrines that can be applied to deny the tax
benefits of tax motivated transactions, notwithstanding that
the transaction may satisfy the literal requirements of a
specific tax provision. The common-law doctrines are not
entirely distinguishable, and their application to a given set
of facts is often blurred by the courts and the IRS. Although
these doctrines serve an important role in the administration
of the tax system, invocation of these doctrines can be seen as
at odds with an objective, ``rule-based'' system of taxation.
Nonetheless, courts have applied the doctrines to deny tax
benefits arising from certain transactions.\622\
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\622\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d 231 (3d
Cir. 1998), aff'g 73 T.C.M. (CCH) 2189 (1997), cert. denied 526 U.S.
1017 (1999).
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A common-law doctrine applied with increasing frequency
is the ``economic substance'' doctrine. In general, this
doctrine denies tax benefits arising from transactions that do
not result in a meaningful change to the taxpayer's economic
position other than a purported reduction in federal income
tax.\623\
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\623\ Closely related doctrines also applied by the courts
(sometimes interchangeable with the economic substance doctrine)
include the ``sham transaction doctrine'' and the ``business purpose
doctrine''. See, e.g., Knetsch v. United States, 364 U.S. 361 (1960)
(denying interest deductions on a ``sham transaction'' whose only
purpose was to create the deductions).
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Economic substance doctrine
Courts generally deny claimed tax benefits if the
transaction that gives rise to those benefits lacks economic
substance independent of tax considerations--notwithstanding
that the purported activity actually occurred. The tax court
has described the doctrine as follows: ``The tax law . . .
requires that the intended transactions have economic substance
separate and distinct from economic benefit achieved solely by
tax reduction. The doctrine of economic substance becomes
applicable, and a judicial remedy is warranted, where a
taxpayer seeks to claim tax benefits, unintended by Congress,
by means of transactions that serve no economic purpose other
than tax savings.'' \624\
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\624\ ACM Partnership v. Commissioner, 73 T.C.M. at 2215.
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Business purpose doctrine
Another common law doctrine that overlays and is often
considered together with (if not part and parcel of) the
economic substance doctrine is the business purpose doctrine.
The business purpose test is a subjective inquiry into the
motives of the taxpayer--that is, whether the taxpayer intended
the transaction to serve some useful non-tax purpose. In making
this determination, some courts have bifurcated a transaction
in which independent activities with non-tax objectives have
been combined with an unrelated item having only tax-avoidance
objectives in order to disallow the tax benefits of the overall
transaction.\625\
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\625\ ACM Partnership v. Commissioner, 157 F.3d at 256 n.48.
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Application by the courts
Elements of the doctrine
There is a lack of uniformity regarding the proper
application of the economic substance doctrine.\626\ Some
courts apply a conjunctive test that requires a taxpayer to
establish the presence of both economic substance (i.e., the
objective component) and business purpose (i.e., the subjective
component) in order for the transaction to survive judicial
scrutiny.\627\ A narrower approach used by some courts is to
conclude that either a business purpose or economic substance
is sufficient to respect the transaction).\628\ A third
approach regards economic substance and business purpose as
``simply more precise factors to consider'' in determining
whether a transaction has any practical economic effects other
than the creation of tax benefits.\629\
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\626\ ``The casebooks are glutted with [economic substance] tests.
Many such tests proliferate because they give the comforting illusion
of consistency and precision. They often obscure rather than clarify.''
Collins v. Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988).
\627\ See, e.g., Pasternak v. Commissioner, 990 F.2d 893, 898 (6th
Cir. 1993) (``The threshold question is whether the transaction has
economic substance. If the answer is yes, the question becomes whether
the taxpayer was motivated by profit to participate in the
transaction.'')
\628\ See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 89,
91-92 (4th Cir. 1985) (``To treat a transaction as a sham, the court
must find that the taxpayer was motivated by no business purposes other
than obtaining tax benefits in entering the transaction, and, second,
that the transaction has no economic substance because no reasonable
possibility of a profit exists.''); IES Industries v. United States,
253 F.3d 350, 358 (8th Cir. 2001) (``In determining whether a
transaction is a sham for tax purposes [under the Eighth Circuit test],
a transaction will be characterized as a sham if it is not motivated by
any economic purpose out of tax considerations (the business purpose
test), and if it is without economic substance because no real
potential for profit exists'' (the economic substance test).'') As
noted earlier, the economic substance doctrine and the sham transaction
doctrine are similar and sometimes are applied interchangeably. For a
more detailed discussion of the sham transaction doctrine, see, e.g.,
Joint Committee on Taxation, Study of Present-Law Penalty and Interest
Provisions as Required by Section 3801 of the Internal Revenue Service
Restructuring and Reform Act of 1998 (including Provisions Relating to
Corporate Tax Shelters) (JCS-3-99) at 182.
\629\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 247;
James v. Commissioner, 899 F.2d 905, 908 (10th Cir. 1995); Sacks v.
Commissioner, 69 F.3d 982, 985 (9th Cir. 1995) (``Instead, the
consideration of business purpose and economic substance are simply
more precise factors to consider. . . . We have repeatedly and
carefully noted that this formulation cannot be used as a `rigid two-
step analysis'.'').
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Profit potential
There also is a lack of uniformity regarding the
necessity and level of profit potential necessary to establish
economic substance. Since the time of Gregory v.
Helvering,\630\ several courts have denied tax benefits on the
grounds that the subject transactions lacked profit
potential.\631\ In addition, some courts have applied the
economic substance doctrine to disallow tax benefits in
transactions in which a taxpayer was exposed to risk and the
transaction had a profit potential, but the court concluded
that the economic risks and profit potential were insignificant
when compared to the tax benefits.\632\ Under this analysis,
the taxpayer's profit potential must be more than nominal.
Conversely, other courts view the application of the economic
substance doctrine as requiring an objective determination of
whether a ``reasonable possibility of profit'' from the
transaction existed apart from the tax benefits.\633\ In these
cases, in assessing whether a reasonable possibility of profit
exists, it is sufficient if there is a nominal amount of pre-
tax profit as measured against expected net tax benefits.
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\630\ 293 U.S. 465 (1935).
\631\ See, e.g., Knetsch, 364 U.S. at 361; Goldstein v.
Commissioner, 364 F.2d 734 (2d Cir. 1966) (holding that an
unprofitable, leveraged acquisition of Treasury bills, and accompanying
prepaid interest deduction, lacked economic substance); Ginsburg v.
Commissioner, 35 T.C.M. (CCH) 860 (1976) (holding that a leveraged
cattle-breeding program lacked economic substance).
\632\ See, e.g., Goldstein v. Commissioner, 364 F.2d at 739-40
(disallowing deduction even though taxpayer had a possibility of small
gain or loss by owning Treasury bills); Sheldon v. Commissioner, 94
T.C. 738, 768 (1990) (stating, ``potential for gain . . . is
infinitesimally nominal and vastly insignificant when considered in
comparison with the claimed deductions'').
\633\ See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d at
94 (the economic substance inquiry requires an objective determination
of whether a reasonable possibility of profit from the transaction
existed apart from tax benefits); Compaq Computer Corp. v.
Commissioner, 277 F.3d at 781 (applied the same test, citing Rice's
Toyota World); IES Industries v. United States, 253 F.3d at 354 (the
application of the objective economic substance test involves
determining whether there was a ``reasonable possibility of profit . .
. apart from tax benefits.'').
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment clarifies and enhances the
application of the economic substance doctrine. The Senate
amendment provides that, in a case in which a court determines
that the economic substance doctrine is relevant to a
transaction (or a series of transactions), such transaction (or
series of transactions) has economic substance (and thus
satisfies the economic substance doctrine) only if the taxpayer
establishes that (1) the transaction changes in a meaningful
way (apart from Federal income tax consequences) the taxpayer's
economic position, and (2) the taxpayer has a substantial non-
tax purpose for entering into such transaction and the
transaction is a reasonable means of accomplishing such
purpose.\634\
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\634\ If the tax benefits are clearly contemplated and expected by
the language and purpose of the relevant authority, it is not intended
that such tax benefits be disallowed if the only reason for such
disallowance is that the transaction fails the economic substance
doctrine as defined in this provision.
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The Senate amendment does not change current law
standards used by courts in determining when to utilize an
economic substance analysis.\635\ Also, the Senate amendment
does not alter the court's ability to aggregate, disaggregate
or otherwise recharacterize a transaction when applying the
doctrine.\636\ The Senate amendment provides a uniform
definition of economic substance, but does not alter the
flexibility of the courts in other respects.
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\635\ See, e.g., Treas. Reg. 1.269-2, stating that characteristic
of circumstances in which a deduction otherwise allowed will be
disallowed are those in which the effect of the deduction, credit, or
other allowance would be to distort the liability of the particular
taxpayer when the essential nature of the transaction or situation is
examined in the light of the basic purpose or plan which the deduction,
credit, or other allowance was designed by the Congress to effectuate.
\636\ See, e.g., Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613
(1938) (``A given result at the end of a straight path is not made a
different result because reached by following a devious path.'').
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Conjunctive analysis
The Senate amendment clarifies that the economic
substance doctrine involves a conjunctive analysis--there must
be an objective inquiry regarding the effects of the
transaction on the taxpayer's economic position, as well as a
subjective inquiry regarding the taxpayer's motives for
engaging in the transaction. Under the Senate amendment, a
transaction must satisfy both tests--i.e., it must change in a
meaningful way (apart from Federal income tax consequences) the
taxpayer's economic position, and the taxpayer must have a
substantial non-tax purpose for entering into such transaction
(and the transaction is a reasonable means of accomplishing
such purpose)--in order to satisfy the economic substance
doctrine. This clarification eliminates the disparity that
exists among the circuits regarding the application of the
doctrine, and modifies its application in those circuits in
which either a change in economic position or a non-tax
business purpose (without having both) is sufficient to satisfy
the economic substance doctrine.
Non-tax business purpose
The Senate amendment provides that a taxpayer's non-tax
purpose for entering into a transaction (the second prong in
the analysis) must be ``substantial,'' and that the transaction
must be ``a reasonable means'' of accomplishing such purpose.
Under this formulation, the non-tax purpose for the transaction
must bear a reasonable relationship to the taxpayer's normal
business operations or investment activities.\637\
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\637\ See, e.g., Treas. reg. sec. 1.269-2(b) (stating that a
distortion of tax liability indicating the principal purpose of tax
evasion or avoidance might be evidenced by the fact that ``the
transaction was not undertaken for reasons germane to the conduct of
the business of the taxpayer''). Similarly, in ACM Partnership v.
Commissioner, 73 T.C.M. (CCH) 2189 (1997), the court stated: ``Key to
[the determination of whether a transaction has economic substance] is
that the transaction must be rationally related to a useful nontax
purpose that is plausible in light of the taxpayer's conduct and useful
in light of the taxpayer's economic situation and intentions. Both the
utility of the stated purpose and the rationality of the means chosen
to effectuate it must be evaluated in accordance with commercial
practices in the relevant industry. A rational relationship between
purpose and means ordinarily will not be found unless there was a
reasonable expectation that the nontax benefits would be at least
commensurate with the transaction costs.'' [citations omitted]
See also Martin McMahon Jr., Economic Substance, Purposive
Activity, and Corporate Tax Shelters, 94 Tax Notes 1017, 1023 (Feb. 25,
2002) (advocates ``confining the most rigorous application of business
purpose, economic substance, and purposive activity tests to
transactions outside the ordinary course of the taxpayer's business--
those transactions that do not appear to contribute to any business
activity or objective that the taxpayer may have had apart from tax
planning but are merely loss generators.''); Mark P. Gergen, The Common
Knowledge of Tax Abuse, 54 SMU L. Rev. 131, 140 (Winter 2001) (``The
message is that you can pick up tax gold if you find it in the street
while going about your business, but you cannot go hunting for it.'').
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In determining whether a taxpayer has a substantial non-
tax business purpose, an objective of achieving a favorable
accounting treatment for financial reporting purposes will not
be treated as having a substantial non-tax purpose.\638\
Furthermore, a transaction that is expected to increase
financial accounting income as a result of generating tax
deductions or losses without a corresponding financial
accounting charge (i.e., a permanent book-tax difference) \639\
should not be considered to have a substantial non-tax purpose
unless a substantial non-tax purpose exists apart from the
financial accounting benefits.\640\
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\638\ However, if the tax benefits are clearly contemplated and
expected by the language and purpose of the relevant authority, such
tax benefits should not be disallowed solely because the transaction
results in a favorable accounting treatment. An example is the repealed
foreign sales corporation rules.
\639\ This includes tax deductions or losses that are anticipated
to be recognized in a period subsequent to the period the financial
accounting benefit is recognized. For example, FAS 109 in some cases
permits the recognition of financial accounting benefits prior to the
period in which the tax benefits are recognized for income tax
purposes.
\640\ Claiming that a financial accounting benefit constitutes a
substantial non-tax purpose fails to consider the origin of the
accounting benefit (i.e., reduction of taxes) and significantly
diminishes the purpose for having a substantial non-tax purpose
requirement. See, e.g., American Electric Power, Inc. v. U.S., 136 F.
Supp. 2d 762, 791-92 (S.D. Ohio, 2001) (``AEP's intended use of the
cash flows generated by the [corporate-owned life insurance] plan is
irrelevant to the subjective prong of the economic substance analysis.
If a legitimate business purpose for the use of the tax savings `were
sufficient to breathe substance into a transaction whose only purpose
was to reduce taxes, [then] every sham tax-shelter device might
succeed,' '' citing Winn-Dixie v. Commissioner, 113 T.C. 254, 287
(1999)).
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By requiring that a transaction be a ``reasonable means''
of accomplishing its non-tax purpose, the Senate amendment
reiterates the present-law ability of the courts to bifurcate a
transaction in which independent activities with non-tax
objectives are combined with an unrelated item having only tax-
avoidance objectives in order to disallow the tax benefits of
the overall transaction.\641\
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\641\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 256
n.48.
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Profit potential
Under the Senate amendment, a taxpayer may rely on
factors other than profit potential to demonstrate that a
transaction results in a meaningful change in the taxpayer's
economic position; the Senate amendment merely sets forth a
minimum threshold of profit potential if that test is relied on
to demonstrate a meaningful change in economic position. If a
taxpayer relies on a profit potential, however, the present
value of the reasonably expected pre-tax profit must be
substantial in relation to the present value of the expected
net tax benefits that would be allowed if the transaction were
respected.\642\ Moreover, the profit potential must exceed a
risk-free rate of return. In addition, in determining pre-tax
profit, fees and other transaction expenses and foreign taxes
are treated as expenses.
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\642\ Thus, a ``reasonable possibility of profit'' will not be
sufficient to establish that a transaction has economic substance.
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In applying the profit potential test to a lessor of
tangible property, depreciation, applicable tax credits (such
as the rehabilitation tax credit and the low income housing tax
credit), and any other deduction as provided in guidance by the
Secretary are not taken into account in measuring tax benefits.
Transactions with tax-indifferent parties
The Senate amendment also provides special rules for
transactions with tax-indifferent parties. For this purpose, a
tax-indifferent party means any person or entity not subject to
Federal income tax, or any person to whom an item would have no
substantial impact on its income tax liability. Under these
rules, the form of a financing transaction will not be
respected if the present value of the tax deductions to be
claimed is substantially in excess of the present value of the
anticipated economic returns to the lender. Also, the form of a
transaction with a tax-indifferent party will not be respected
if it results in an allocation of income or gain to the tax-
indifferent party in excess of the tax-indifferent party's
economic gain or income or if the transaction results in the
shifting of basis on account of overstating the income or gain
of the tax-indifferent party.
Other rules
The Secretary may prescribe regulations which provide (1)
exemptions from the application of the Senate amendment, and
(2) other rules as may be necessary or appropriate to carry out
the purposes of the Senate amendment.
No inference is intended as to the proper application of
the economic substance doctrine under present law. In addition,
except with respect to the economic substance doctrine, the
Senate amendment shall not be construed as altering or
supplanting any other common law doctrine (including the sham
transaction doctrine), and the Senate amendment shall be
construed as being additive to any such other doctrine.
Effective date
The Senate amendment provision applies to transactions
entered into after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment.
31. Penalty for understatements attributable to transactions lacking
economic substance, etc. (sec. 404 of the Senate amendment and
sec. 6662B of the Code)
PRESENT LAW
An 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.\643\ The amount of
any understatement is reduced by any portion attributable to an
item if (1) the treatment of the item is supported by
substantial authority, or (2) facts relevant to the tax
treatment of the item were adequately disclosed and there was a
reasonable basis for its tax treatment.
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\643\ Sec. 6662.
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Special rules apply with respect to tax shelters.\644\
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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\644\ Sec. 6662(d)(2)(C).
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The 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.\645\ 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.\646\
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\645\ Sec. 6664(c).
\646\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec.
1.6664-4(c).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment imposes a penalty for an
understatement attributable to any transaction that lacks
economic substance (referred to in the statute as a ``non-
economic substance transaction understatement'').\647\ The
penalty rate is 40 percent (reduced to 20 percent if the
taxpayer adequately discloses the relevant facts in accordance
with regulations prescribed under section 6011). No exceptions
(including the reasonable cause or rescission rules) to the
penalty would be available under the Senate amendment (i.e.,
the penalty is a strict-liability penalty).
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\647\ Thus, unlike the new accuracy-related penalty under section
6662A (which applies only to listed and reportable avoidance
transactions), the new penalty under this provision applies to any
transaction that lacks economic substance.
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A ``non-economic substance transaction'' means any
transaction if (1) the transaction lacks economic substance (as
defined in the earlier Senate amendment provision regarding the
economic substance doctrine),\648\ (2) the transaction was not
respected under the rules relating to transactions with tax-
indifferent parties (as described in the earlier Senate
amendment provision regarding the economic substance
doctrine),\649\ or (3) any similar rule of law. For this
purpose, a similar rule of law would include, for example, an
understatement attributable to a transaction that is determined
to be a sham transaction.
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\648\ The provision provides that a transaction has economic
substance only if: (1) the transaction changes in a meaningful way
(apart from Federal income tax effects) the taxpayer's economic
position, and (2) the transaction has a substantial non-tax purpose for
entering into such transaction and is a reasonable means of
accomplishing such purpose.
\649\ The provision provides that the form of a transaction that
involves a tax-indifferent party will not be respected in certain
circumstances.
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For purposes of the Senate amendment, the calculation of
an ``understatement'' is made in the same manner as in the
separate Senate amendment provision relating to accuracy-
related penalties for listed and reportable avoidance
transactions (new sec. 6662A). Thus, the amount of the
understatement under the Senate amendment provision would be
determined as the sum of (1) the product of the highest
corporate or individual tax rate (as appropriate) and the
increase in taxable income resulting from the difference
between the taxpayer's treatment of the item and the proper
treatment of the item (without regard to other items on the tax
return),\650\ and (2) the amount of any decrease in the
aggregate amount of credits which results from a difference
between the taxpayer's treatment of an item and the proper tax
treatment of such item. In essence, the penalty will apply to
the amount of any understatement attributable solely to a non-
economic substance transaction.
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\650\ For this purpose, any reduction in the excess of deductions
allowed for the taxable year over gross income for such year, and any
reduction in the amount of capital losses that would (without regard to
section 1211) be allowed for such year, would be treated as an increase
in taxable income.
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Except as provided in regulations, the taxpayer's
treatment of an item will not take into account any amendment
or supplement to a return if the amendment or supplement is
filed after the earlier of the date the taxpayer is first
contacted regarding an examination of such return or such other
date as specified by the Secretary.
A public entity that is required to pay a penalty under
the Senate amendment (regardless of whether the transaction was
disclosed) must disclose the imposition of the penalty in
reports to the SEC for such periods as the Secretary shall
specify. The disclosure to the SEC applies without regard to
whether the taxpayer determines the amount of the penalty to be
material to the reports in which the penalty must appear, and
any failure to disclose such penalty in the reports is treated
as a failure to disclose a listed transaction. A taxpayer must
disclose a penalty in reports to the SEC once the taxpayer has
exhausted its administrative and judicial remedies with respect
to the penalty (or if earlier, when paid).
Prior to this penalty being asserted in the first letter
of proposed deficiency that allows the taxpayer an opportunity
for administrative review in the IRS Office of Appeals (e.g., a
Revenue Agent Report), the IRS Chief Counsel or his delegate at
the IRS National Office must approve the inclusion in writing.
Once a penalty (regardless of whether the transaction was
disclosed) has been included in the Revenue Agent Report, the
penalty cannot be compromised for purposes of a settlement
without approval of the Commissioner personally or the head of
the Office of Tax Shelter Analysis. Furthermore, the IRS is
required to submit an annual report to Congress summarizing the
application of this penalty and providing a description of each
penalty compromised under the Senate amendment and the reasons
for the compromise.
Any understatement to which a penalty is imposed under
the Senate amendment will not be subject to the accuracy-
related penalty under section 6662 or under new 6662A
(accuracy-related penalties for listed and reportable avoidance
transactions). However, an understatement under the Senate
amendment would be taken into account for purposes of
determining whether any understatement (as defined in sec.
6662(d)(2)) is a substantial understatement as defined under
section 6662(d)(1). The penalty imposed under the Senate
amendment will not apply to any portion of an understatement to
which a fraud penalty is applied under section 6663.
Effective date.--The Senate amendment provision applies
to transactions entered into after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment.
32. Understatement of taxpayer's liability by income tax return
preparer (sec. 411 of the Senate amendment)
PRESENT LAW
An income tax return preparer who prepares a return with
respect to which there is an understatement of tax that is due
to an undisclosed position for which there was not a realistic
possibility of being sustained on its merits, or a frivolous
position, is liable for a penalty of $250, provided the
preparer knew or reasonably should have known of the position.
An income tax return preparer who prepares a return and engages
in specified willful or reckless conduct with respect to
preparing such a return is liable for a penalty of $1,000.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment alters the standards of conduct that
must be met to avoid imposition of the first penalty by
replacing the realistic possibility standard with a requirement
that there be a reasonable belief that the tax treatment of the
position was more likely than not the proper treatment. The
Senate amendment also replaces the not frivolous standard with
the requirement that there be a reasonable basis for the tax
treatment of the position, increases the present-law $250
penalty to $1,000, and increases the present-law $1,000 penalty
to $5,000.
Effective date.--Documents prepared after the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
33. Frivolous tax submissions (sec. 413 of the Senate amendment and
sec. 6702 of the Code)
PRESENT LAW
The Code provides that an individual who files a
frivolous income tax return is subject to a penalty of $500
imposed by the IRS (sec. 6702). The Code also permits the Tax
Court \651\ to impose a penalty of up to $25,000 if a taxpayer
has instituted or maintained proceedings primarily for delay or
if the taxpayer's position in the proceeding is frivolous or
groundless (sec. 6673(a)).
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\651\ Because in general the Tax Court is the only pre-payment
forum available to taxpayers, it deals with most of the frivolous,
groundless, or dilatory arguments raised in tax cases.
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HOUSE BILL
No provision.
SENATE AMENDMENT
The provision modifies the IRS-imposed penalty by
increasing the amount of the penalty to up to $5,000 and by
applying it to all taxpayers and to all types of Federal taxes.
The provision also modifies present law with respect to
certain submissions that raise frivolous arguments or that are
intended to delay or impede tax administration. The submissions
to which this provision applies are requests for a collection
due process hearing, installment agreements, offers-in-
compromise, and taxpayer assistance orders. First, the
provision permits the IRS to dismiss such requests. Second, the
provision permits the IRS to impose a penalty of up to $5,000
for such requests, unless the taxpayer withdraws the request
after being given an opportunity to do so.
The provision requires the IRS to publish a list of
positions, arguments, requests, and submissions determined to
be frivolous for purposes of these provisions.
Effective date.--Submissions made and issues raised after
the date on which the Secretary first prescribes the required
list of frivolous positions.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
34. Authorization of appropriations for tax law enforcement (sec. 418
of the Senate amendment)
PRESENT LAW
There is no explicit authorization of appropriations to
the IRS to be used to combat abusive tax avoidance
transactions.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision includes an authorization of an additional
$300 million to the IRS to be used to combat abusive tax
avoidance transactions.
Effective date.--Date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
35. Declaration by chief executive officer relating to Federal annual
corporate income tax return (sec. 422 of the Senate amendment)
PRESENT LAW
The Code requires \652\ that the income tax return of a
corporation must be signed by either the president, the vice-
president, the treasurer, the assistant treasurer, the chief
accounting officer, or any other officer of the corporation
authorized by the corporation to sign the return.
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\652\ Sec. 6062.
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The Code also imposes \653\ a criminal penalty on any
person who willfully signs any tax return under penalties of
perjury that that person does not believe to be true and
correct with respect to every material matter at the time of
filing. If convicted, the person is guilty of a felony; the
Code imposes a fine of not more than $100,000 \654\ ($500,000
in the case of a corporation) or imprisonment of not more than
three years, or both, together with the costs of prosecution.
---------------------------------------------------------------------------
\653\ Sec. 7206.
\654\ Pursuant to 18 U.S.C. 3571, the maximum fine for an
individual convicted of a felony is $250,000.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision requires that a corporation's Federal
income tax return include a declaration signed under penalties
of perjury by the chief executive officer of the corporation
that the corporation has in place processes and procedures to
ensure that the return complies with the Internal Revenue Code
and that the CEO was provided reasonable assurance of the
accuracy of all material aspects of the return. This
declaration is part of the income tax return. The provision is
in addition to the requirement of present law as to the signing
of the income tax return itself. Because a CEO's duties
generally do not require a detailed or technical understanding
of the corporation's tax return, it is anticipated that this
declaration of the CEO will be more limited in scope than the
declaration of the officer required to sign the return itself.
The Secretary of the Treasury shall prescribe the matters
to which the declaration of the CEO applies. It is intended
that the declaration help insure that the preparation and
completion of the corporation's tax return be given an
appropriate level of care. For example, it is anticipated that
the CEO would declare that processes and procedures have been
implemented to ensure that the return complies with the
Internal Revenue Code and all regulations and rules promulgated
thereunder. Although appropriate processes and procedures can
vary for each taxpayer depending on the size and nature of the
taxpayer's business, in every case the CEO should be briefed on
all material aspects of the corporation's tax return by the
corporation's chief financial officer (or another person
authorized to sign the return under present law).
If the corporation does not have a chief executive
officer, the IRS may designate another officer of the
corporation; otherwise, no other person is permitted to sign
the declaration. It is intended that the IRS issue general
guidance, such as a revenue procedure, to: (1) address
situations when a corporation does not have a chief executive
officer; and (2) define who the chief executive officer is, in
situations (for example) when the primary official bears a
different title, when a corporation has multiple chief
executive officers, or when the corporation is a foreign
corporation and the CEO is not a U.S. resident.\655\ It is
intended that, in every instance, the highest ranking corporate
officer (regardless of title) sign this declaration.
---------------------------------------------------------------------------
\655\ With respect to foreign corporations, it is intended that the
rules for signing this declaration generally parallel the present-law
rules for signing the return. See Treas. Reg. sec. 1.6062-1(a)(3).
---------------------------------------------------------------------------
The provision does not apply to the income tax returns of
mutual funds; \656\ they are required to be signed as under
present law.
---------------------------------------------------------------------------
\656\ The provision does, however, apply to the income tax returns
of mutual fund management companies and advisors.
---------------------------------------------------------------------------
Effective date.--Federal tax returns for taxable years
ending after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment.
36. Denial of deduction for certain fines, penalties, and other amounts
(sec. 423 of the Senate amendment and sec. 162 of the Code)
PRESENT LAW
Under present law, no deduction is allowed as a trade or
business expense under section 162(a) for the payment of a fine
or similar penalty to a government for the violation of any law
(sec. 162(f)). The enactment of section 162(f) in 1969 codified
existing case law that denied the deductibility of fines as
ordinary and necessary business expenses on the grounds that
``allowance of the deduction would frustrate sharply defined
national or State policies proscribing the particular types of
conduct evidenced by some governmental declaration thereof.''
\657\
---------------------------------------------------------------------------
\657\ S. Rep. 91-552, 91st Cong, 1st Sess., 273-74 (1969),
referring to Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30
(1958).
---------------------------------------------------------------------------
Treasury regulation section 1.162-21(b)(1) provides that
a fine or similar penalty includes an amount: (1) paid pursuant
to conviction or a plea of guilty or nolo contendere for a
crime (felony or misdemeanor) in a criminal proceeding; (2)
paid as a civil penalty imposed by Federal, State, or local
law, including additions to tax and additional amounts and
assessable penalties imposed by chapter 68 of the Code; (3)
paid in settlement of the taxpayer's actual or potential
liability for a fine or penalty (civil or criminal); or (4)
forfeited as collateral posted in connection with a proceeding
which could result in imposition of such a fine or penalty.
Treasury regulation section 1.162-21(b)(2) provides, among
other things, that compensatory damages (including damages
under section 4A of the Clayton Act (15 U.S.C. 15a), as
amended) paid to a government do not constitute a fine or
penalty.
HOUSE BILL
No provision.
SENATE AMENDMENT
The bill modifies the rules regarding the determination
whether payments are nondeductible payments of fines or
penalties under section 162(f). In particular, the bill
generally provides that amounts paid or incurred (whether by
suit, agreement, or otherwise) to, or at the direction of, a
government in relation to the violation of any law or the
investigation or inquiry into the potential violation of any
law \658\ are nondeductible under any provision of the income
tax provisions.\659\ The bill applies to deny a deduction for
any such payments, including those where there is no admission
of guilt or liability and those made for the purpose of
avoiding further investigation or litigation. An exception
applies to payments that the taxpayer establishes are
restitution.\660\
---------------------------------------------------------------------------
\658\ The bill does not affect amounts paid or incurred in
performing routine audits or reviews such as annual audits that are
required of all organizations or individuals in a similar business
sector, or profession, as a requirement for being allowed to conduct
business. However, if the government or regulator raised an issue of
compliance and a payment is required in settlement of such issue, the
bill would affect that payment.
\659\ The bill provides that such amounts are nondeductible under
chapter 1 of the Internal Revenue Code.
\660\ The bill does not affect the treatment of antitrust payments
made under section 4 of the Clayton Act, which will continue to be
governed by the provisions of section 162(g).
---------------------------------------------------------------------------
The bill is intended to apply only where a government (or
other entity treated in a manner similar to a government under
the bill) is a complainant or investigator with respect to the
violation or potential violation of any law.\661\
---------------------------------------------------------------------------
\661\ Thus, for example, the bill would not apply to payments made
by one private party to another in a lawsuit between private parties,
merely because a judge or jury acting in the capacity as a court
directs the payment to be made. The mere fact that a court enters a
judgement or directs a result in a private dispute does not cause a
payment to be made ``at the direction of a government'' for purposes of
the provision.
---------------------------------------------------------------------------
It is intended that a payment will be treated as
restitution only if substantially all of the payment is
required to be paid to the specific persons, or in relation to
the specific property, actually harmed by the conduct of the
taxpayer that resulted in the payment. Thus, a payment to or
with respect to a class substantially broader than the specific
persons or property that were actually harmed (e.g., to a class
including similarly situated persons or property) does not
qualify as restitution.\662\ Restitution is limited to the
amount that bears a substantial quantitative relationship to
the harm caused by the past conduct or actions of the taxpayer
that resulted in the payment in question. If the party harmed
is a government or other entity, then restitution includes
payment to such harmed government or entity, provided the
payment bears a substantial quantitative relationship to the
harm. However, restitution does not include reimbursement of
government investigative or litigation costs, or payments to
whistleblowers.
---------------------------------------------------------------------------
\662\ Similarly, a payment to a charitable organization benefitting
a broader class than the persons or property actually harmed, or to be
paid out without a substantial quantitative relationship to the harm
caused, would not qualify as restitution. Under the provision, such a
payment not deductible under section 162 would also not be deductible
under section 170.
---------------------------------------------------------------------------
Amounts paid or incurred (whether by suit, agreement, or
otherwise) to, or at the direction of, any self-regulatory
entity that regulates a financial market or other market that
is a qualified board or exchange under section 1256(g)(7), and
that is authorized to impose sanctions (e.g., the National
Association of Securities Dealers) are likewise subject to the
provision if paid in relation to a violation, or investigation
or inquiry into a potential violation, of any law (or any rule
or other requirement of such entity). To the extent provided in
regulations, amounts paid or incurred to, or at the direction
of, any other nongovernmental entity that exercises self-
regulatory powers as part of performing an essential
governmental function are similarly subject to the provision.
The exception for payments that the taxpayer establishes are
restitution likewise applies in these cases.
No inference is intended as to the treatment of payments
as nondeductible fines or penalties under present law. In
particular, the Senate amendment is not intended to limit the
scope of present-law section 162(f) or the regulations
thereunder.
Effective date.--The bill is effective for amounts paid
or incurred on or after April 28, 2003; however the proposal
does not apply to amounts paid or incurred under any binding
order or agreement entered into before such date. Any order or
agreement requiring court approval is not a binding order or
agreement for this purpose unless such approval was obtained on
or before April 27, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
37. Denial of deduction for punitive damages (sec. 424 of the Senate
amendment and sec. 162 of the Code)
PRESENT LAW
In general, a deduction is allowed for all ordinary and
necessary expenses that are paid or incurred by the taxpayer
during the taxable year in carrying on any trade or
business.\663\ However, no deduction is allowed for any payment
that is made to an official of any governmental agency if the
payment constitutes an illegal bribe or kickback or if the
payment is to an official or employee of a foreign government
and is illegal under Federal law.\664\ In addition, no
deduction is allowed under present law for any fine or similar
payment made to a government for violation of any law.\665\
Furthermore, no deduction is permitted for two-thirds of any
damage payments made by a taxpayer who is convicted of a
violation of the Clayton antitrust law or any related antitrust
law.\666\
---------------------------------------------------------------------------
\663\ Sec. 162(a).
\664\ Sec. 162(c).
\665\ Sec. 162(f).
\666\ Sec. 162(g).
---------------------------------------------------------------------------
In general, gross income does not include amounts
received on account of personal physical injuries and physical
sickness.\667\ However, this exclusion does not apply to
punitive damages.\668\
---------------------------------------------------------------------------
\667\ Sec. 104(a).
\668\ Sec. 104(a)(2).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment denies any deduction for punitive
damages that are paid or incurred by the taxpayer as a result
of a judgment or in settlement of a claim. If the liability for
punitive damages is covered by insurance, any such punitive
damages paid by the insurer are included in gross income of the
insured person and the insurer is required to report such
amounts to both the insured person and the IRS.
Effective date.--The Senate amendment provision is
effective for punitive damages that are paid or incurred on or
after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
38. Increase in criminal monetary penalty limitation for the
underpayment or overpayment of tax due to fraud (sec. 425 of
the Senate amendment)
PRESENT LAW
Attempt to evade or defeat tax
In general, section 7201 imposes a criminal penalty on
persons who willfully attempt to evade or defeat any tax
imposed by the Code. Upon conviction, the Code provides that
the penalty is up to $100,000 or imprisonment of not more than
five years (or both). In the case of a corporation, the Code
increases the monetary penalty to a maximum of $500,000.
Willful failure to file return, supply information, or pay tax
In general, section 7203 imposes a criminal penalty on
persons required to make estimated tax payments, pay taxes,
keep records, or supply information under the Code who
willfully fails to do so. Upon conviction, the Code provides
that the penalty is up to $25,000 or imprisonment of not more
than one year (or both). In the case of a corporation, the Code
increases the monetary penalty to a maximum of $100,000.
Fraud and false statements
In general, section 7206 imposes a criminal penalty on
persons who make fraudulent or false statements under the Code.
Upon conviction, the Code provides that the penalty is up to
$100,000 or imprisonment of not more than three years (or
both). In the case of a corporation, the Code increases the
monetary penalty to a maximum of $500,000.
Uniform sentencing guidelines
Under the uniform sentencing guidelines established by 18
U.S.C. 3571, a defendant found guilty of a criminal offense is
subject to a maximum fine that is the greatest of: (a) the
amount specified in the underlying provision, (b) for a felony
\669\ $250,000 for an individual or $500,000 for an
organization, or (c) twice the gross gain if a person derives
pecuniary gain from the offense. This Title 18 provision
applies to all criminal provisions in the United States Code,
including those in the Internal Revenue Code. For example, for
an individual, the maximum fine under present law upon
conviction of violating section 7206 is $250,000 or, if
greater, twice the amount of gross gain from the offense.
---------------------------------------------------------------------------
\669\ Section 7206 states that making fraudulent or false
statements under the Code is a felony. In addition, this offense is a
felony pursuant to the classification guidelines of 18 U.S.C.
3559(a)(5).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
Attempt to evade or defeat tax
The bill increases the criminal penalty under section
7201 of the Code for individuals to $250,000 and for
corporations to $1,000,000. The bill increases the maximum
prison sentence to ten years.
Willful failure to file return, supply information, or pay tax
The bill increases the criminal penalty under section
7203 of the Code from a misdemeanor to a felony and increases
the maximum prison sentence to ten years.
Fraud and false statements
The bill increases the criminal penalty under section
7206 of the Code for individuals to $250,000 and for
corporations to $1,000,000. Increases the maximum prison
sentence to five years. The bill provides that in no event
shall the amount of the monetary penalty under this provision
be less than the amount of the underpayment or overpayment
attributable to fraud.
Effective date
Underpayments and overpayments attributable to actions
occurring after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
39. Expanded disallowance of deduction for interest on convertible debt
(sec. 434 of the Senate amendment and sec. 163 of the Code)
PRESENT LAW
Whether an instrument qualifies for tax purposes as debt
or equity is determined under all the facts and circumstances
based on principles developed in case law. If an instrument
qualifies as equity, the issuer generally does not receive a
deduction for dividends paid and the holder generally includes
such dividends in income (although corporate holders generally
may obtain a dividends-received deduction of at least 70
percent of the amount of the dividend). If an instrument
qualifies as debt, the issuer may receive a deduction for
accrued interest and the holder generally includes interest in
income, subject to certain limitations.
Original issue discount (``OID'') on a debt instrument is
the excess of the stated redemption price at maturity over the
issue price of the instrument. An issuer of a debt instrument
with OID generally accrues and deducts the discount as interest
over the life of the instrument even though interest may not be
paid until the instrument matures. The holder of such a debt
instrument also generally includes the OID in income as it
accrues.
Under present law, no deduction is allowed for interest
or OID on a debt instrument issued by a corporation (or issued
by a partnership to the extent of its corporate partners) that
is payable in equity of the issuer or a related party (within
the meaning of sections 267(b) and 707(b)), including a debt
instrument a substantial portion of which is mandatorily
convertible or convertible at the issuer's option into equity
of the issuer or a related party.\670\ In addition, a debt
instrument is treated as payable in equity if a substantial
portion of the principal or interest is required to be
determined, or may be determined at the option of the issuer or
related party, by reference to the value of equity of the
issuer or related party.\671\ A debt instrument also is treated
as payable in equity if it is part of an arrangement that is
designed to result in the payment of the debt instrument with
or by reference to such equity, such as in the case of certain
issuances of a forward contract in connection with the issuance
of debt, nonrecourse debt that is secured principally by such
equity, or certain debt instruments that are paid in, converted
to, or determined with reference to the value of equity if it
may be so required at the option of the holder or a related
party and there is a substantial certainty that option will be
exercised.\672\
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\670\ Sec. 163(l), enacted in the Taxpayer Relief Act of 1997, Pub.
L. No. 105-34, sec. 1005(a).
\671\ Sec. 163(l)(3)(B).
\672\ Sec. 163(l)(3)(C).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment expands the present-law disallowance
of interest deductions on certain convertible or equity-linked
corporate debt that is payable in, or by reference to the value
of, equity. Under the Senate amendment, the disallowance is
expanded to include interest on corporate debt that is payable
in, or by reference to the value of, any equity held by the
issuer (or by any related party) in any other person, without
regard to whether such equity represents more than a 50-percent
ownership interest in such person. However, the Senate
amendment does not apply to debt that is issued by an active
dealer in securities (or by a related party) if the debt is
payable in, or by reference to the value of, equity that is
held by the securities dealer in its capacity as a dealer in
securities.
Effective date.--The Senate amendment provision applies
to debt instruments that are issued after February 13, 2003.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
except the conference agreement applies to debt instruments
that are issued after October 3, 2004.
40. Expand authority to disallow tax benefits under section 269 (sec.
435 of the Senate amendment and sec. 269 of the Code)
PRESENT LAW
Section 269 provides that if a taxpayer acquires,
directly or indirectly, control (defined as at least 50 percent
of vote or value) of a corporation, and the principal purpose
of the acquisition is the evasion or avoidance of Federal
income tax by securing the benefit of a deduction, credit, or
other allowance that would not otherwise have been available,
the Secretary may disallow the tax benefits.\673\ Similarly, if
a corporation acquires, directly or indirectly, property of
another corporation (not controlled, directly or indirectly, by
the acquiring corporation or its stockholders immediately
before the acquisition), the basis of such property is
determined by reference to the basis in the hands of the
transferor corporation, and the principal purpose of the
acquisition is the evasion or avoidance of Federal income tax
by securing a tax benefit that would not otherwise have been
available, the Secretary may disallow such tax benefits.\674\
---------------------------------------------------------------------------
\673\ Sec. 269(a)(1).
\674\ Sec. 269(a)(2).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment expands section 269 by repealing the
requirement that the acquisition of property be from a
corporation not controlled by the acquirer. Thus, under the
Senate amendment, section 269 disallows the tax benefits of (1)
any acquisition of stock sufficient to obtain control of a
corporation (as under present law), and (2) any acquisition by
a corporation of property from a corporation in which the basis
of such property is determined by reference to the basis in the
hands of the transferor corporation, if the principal purpose
of such acquisition is the evasion or avoidance of Federal
income tax.
Effective date.--The Senate amendment applies to stock
and property acquired after February 13, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
41. Modification of coordination rules for controlled foreign
corporation and passive foreign investment company regimes
(sec. 436 of the Senate amendment and sec. 1297 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. 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 \675\ and the passive foreign investment company
rules.\676\ Deferral of U.S. tax is considered appropriate, on
the other hand, with respect to most types of active business
income earned abroad. 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 an actual dividend, or included
under one of the anti-deferral regimes.\677\
---------------------------------------------------------------------------
\675\ Secs. 951-964.
\676\ Secs. 1291-1298.
\677\ Secs. 901, 902, 960, 1291(g).
---------------------------------------------------------------------------
Subpart F,\678\ applicable to controlled foreign
corporations and their shareholders, is the main anti-deferral
regime of relevance to a U.S.-based multinational corporate
group. A controlled foreign corporation generally is defined as
any foreign corporation if U.S. persons own (directly,
indirectly, or constructively) more than 50 percent of the
corporation's stock (measured by vote or value), taking into
account only those U.S. persons that own at least 10 percent of
the stock (measured by vote only).\679\ Under the subpart F
rules, the United States generally taxes the U.S. 10-percent
shareholders of a controlled foreign corporation on their pro
rata shares of certain income of the controlled foreign
corporation (referred to as ``subpart F income''), without
regard to whether the income is distributed to the
shareholders.\680\
---------------------------------------------------------------------------
\678\ Secs. 951-964.
\679\ Secs. 951(b), 957, 958.
\680\ Sec. 951(a).
---------------------------------------------------------------------------
Subpart F income generally includes passive income and
other income that is readily movable from one taxing
jurisdiction to another. Subpart F income consists of foreign
base company income,\681\ insurance income,\682\ and certain
income relating to international boycotts and other violations
of public policy.\683\ Foreign base company income consists of
foreign personal holding company income, which includes passive
income (e.g., dividends, interest, rents, and royalties), as
well as a number of categories of non-passive income, including
foreign base company sales income, foreign base company
services income, foreign base company shipping income and
foreign base company oil-related income.\684\
---------------------------------------------------------------------------
\681\ Sec. 954.
\682\ Sec. 953.
\683\ Sec. 952(a)(3)-(5).
\684\ Sec. 954.
---------------------------------------------------------------------------
In effect, the United States treats the U.S. 10-percent
shareholders of a controlled foreign corporation as having
received a current distribution out of the corporation's
subpart F income. In addition, the U.S. 10-percent shareholders
of a controlled foreign corporation are required to include
currently in income for U.S. tax purposes their pro rata shares
of the corporation's earnings invested in U.S. property.\685\
---------------------------------------------------------------------------
\685\ Secs. 951(a)(1)(B), 956.
---------------------------------------------------------------------------
The Tax Reform Act of 1986 established an additional
anti-deferral regime, for passive foreign investment companies.
A passive foreign investment company generally is defined as
any foreign corporation if 75 percent or more of its gross
income for the taxable year consists of passive income, or 50
percent or more of its assets consists of assets that produce,
or are held for the production of, passive income.\686\
Alternative sets of income inclusion rules apply to U.S.
persons that are shareholders in a passive foreign investment
company, regardless of their percentage ownership in the
company. One set of rules applies to passive foreign investment
companies that are ``qualified electing funds,'' under which
electing U.S. shareholders currently include in gross income
their respective shares of the company's earnings, with a
separate election to defer payment of tax, subject to an
interest charge, on income not currently received.\687\ A
second set of rules applies to passive foreign investment
companies that are not qualified electing funds, under which
U.S. shareholders pay tax on certain income or gain realized
through the company, plus an interest charge that is
attributable to the value of deferral.\688\ A third set of
rules applies to passive foreign investment company stock that
is marketable, under which electing U.S. shareholders currently
take into account as income (or loss) the difference between
the fair market value of the stock as of the close of the
taxable year and their adjusted basis in such stock (subject to
certain limitations), often referred to as ``marking to
market.'' \689\
---------------------------------------------------------------------------
\686\ Sec. 1297.
\687\ Sec. 1293-1295.
\688\ Sec. 1291.
\689\ Sec. 1296.
---------------------------------------------------------------------------
Under section 1297(e), which was enacted in 1997 to
address the overlap of the passive foreign investment company
rules and subpart F, a controlled foreign corporation generally
is not also treated as a passive foreign investment company
with respect to a U.S. shareholder of the corporation. This
exception applies regardless of the likelihood that the U.S.
shareholder would actually be taxed under subpart F in the
event that the controlled foreign corporation earns subpart F
income. Thus, even in a case in which a controlled foreign
corporation's subpart F income would be allocated to a
different shareholder under the subpart F allocation rules, a
U.S. shareholder would still qualify for the exception from the
passive foreign investment company rules under section 1297(e).
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision adds an exception to section 1297(e) for
U.S. shareholders that face only a remote likelihood of
incurring a subpart F inclusion in the event that a controlled
foreign corporation earns subpart F income, thus preserving the
potential application of the passive foreign investment company
rules in such cases.
Effective date.--The provision is effective for taxable
years of foreign corporations beginning after February 13,
2003, and for taxable years of U.S. shareholders with or within
which such taxable years of such foreign corporations end.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
C. Reduction of Fuel Tax Evasion
1. Exemption from certain excise taxes for mobile machinery vehicles
and modification of definition of offhighway vehicle (sec. 651
of the House bill, sec. 896 of the Senate amendment, and secs.
4053, 4072, 4082, 4483, 6421, and 7701 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.\690\ 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.
---------------------------------------------------------------------------
\690\ Secs. 4051, 4071, 4481, 4041 and 4081.
---------------------------------------------------------------------------
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.\691\
---------------------------------------------------------------------------
\691\ See Treas. Reg. sec. 48.4061-1(d)).
---------------------------------------------------------------------------
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.\692\ 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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\692\ Prop. Treas. Reg. sec. 48.4051-1(a), 67 Fed. Reg. 38913,
38914-38915 (2002).
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On June 6, 2002, the Treasury Department put forth
proposed regulations that would modify the off-highway
transportation vehicle exception.\693\ Under the proposed
regulations, a vehicle is not treated as a highway vehicle if
it is specially designed for the primary function of
transporting a particular type of load other than over the
public highway and because of this special design its
capability to transport a load over the public highway is
substantially limited or impaired. A vehicle's design is
determined solely on the basis of its physical characteristics.
In determining whether substantial limitation or impairment
exists, account may be taken of factors such as the size of the
vehicle, whether it is subject to the licensing, safety, and
other requirements applicable to highway vehicles, and whether
it can transport a load at a sustained speed of at least 25
miles per hour. Under the proposed regulation, it is not
material that a vehicle can transport a greater load off the
public highway than it is permitted to transport over the
public highway.
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\693\ Prop. Treas. Reg. sec. 48.4051-1(a)(2)(i).
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The proposed regulation provides an exception to the
definition of a highway vehicle for nontransportation trailers
and semitrailers.\694\ Under the proposed regulation, a trailer
or semitrailer is not treated as a highway vehicle if it is
specially designed to function only as an enclosed stationary
shelter for the carrying on of an offhighway function at an
offhighway site. For example, a trailer that is capable only of
functioning as an office for an offhighway construction
operation is not a highway vehicle.
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\694\ Prop. Treas. Reg. sec. 48.4051-1(a)(2)(ii).
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HOUSE BILL
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.
SENATE AMENDMENT
The Senate amendment provides that mobile machinery
vehicles are subject to tax as highway vehicles. The provision
provides for the recovery of taxes paid (other than fuel taxes)
over a two-year period if such vehicle travels less than 5,000
miles per year. Fuel taxes for mobile machinery vehicles must
be paid and then a refund sought if the mileage requirement is
met. Refunds of fuel taxes are permitted on an annual basis
only. Like the House bill, for purposes of this rule, a
person's taxable year is his taxable year for income tax
purposes. Vehicles owned by an organization described in
section 501(c), exempt from tax under section 501(a), need only
satisfy the three-part design test to recover taxes paid with
respect to such vehicles.
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.
CONFERENCE AGREEMENT
The conference agreement follows the House bill. Vehicles
owned by an organization described in section 501(c), exempt
from tax under section 501(a), need only satisfy the three-part
design test to recover taxes paid with respect to such
vehicles.
The conference agreement adopts the definition of an
offhighway transportation vehicle and a nontransportation
trailer and semitrailer described in Proposed Treasury
Regulation section 48.4051-1(a)(2).
For example, as provided in the proposed
regulations,\695\ Vehicle C consists of a truck chassis on
which an oversize body designed to transport and apply liquid
agricultural chemicals on farms has been installed. It is
capable of transporting a load over the public highway. It is
132 inches in width, which is considerably in excess of
standard highway vehicle width. For travel on uneven and soft
terrain, it is equipped with oversize wheels with high-
flotation tires, and nonstandard axles, brakes, and
transmission. It has a special fuel and carburetor air
filtration system that enable it to perform efficiently in an
environment of dirt and dust. It is not able to maintain a
speed of 25 miles per hour for more than one mile while fully
loaded. Because Vehicle C is a self-propelled vehicle capable
of transporting a load over the public highway, it would meet
the general definition of a highway vehicle. However, its
considerable physical characteristics for transporting its load
other than over the public highway, when compared with its
physical characteristics for transporting the load over the
public highway, establish that it is specially designed for the
primary function of transporting its load other than over the
public highway. Further, the physical characteristics for
transporting its load other than over the public highway
substantially limit its capability to transport a load over the
public highway. Therefore, Vehicle C is an offhighway vehicle
and is not treated as a highway vehicle.
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\695\ Prop. Treas. Reg. sec. 48.4051-1(c), Example (3).
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Effective date.--Generally effective after the date of
enactment. As to the fuel taxes, effective for taxable years
beginning after the date of enactment.
2. Taxation of aviation-grade kerosene (sec. 652 of the House bill,
sec. 871 of the Senate amendment, 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.\696\ Unlike other fuels that generally
are taxed upon removal from a terminal rack,\697\ aviation fuel
is taxed upon sale of the fuel by a producer or importer.\698\
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.\699\
The producer or importer is liable for the tax. The rate of tax
on aviation fuel is 21.9 cents per gallon.\700\
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\696\ Sec. 4093(a).
\697\ 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).
\698\ Sec. 4091(a)(1).
\699\ Sec. 4091(a)(2).
\700\ 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.\701\ 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).\702\
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\701\ 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).
\702\ 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 \703\ 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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\703\ 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.\704\ 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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\704\ 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;\705\ (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.\706\
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\705\ ``Trade'' includes the transportation of persons or property
for hire. Treas. Reg. sec. 48.4221-4(b)(8).
\706\ 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.\707\
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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\707\ 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 \708\ (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.\709\ 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.\710\
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\708\ Sec. 4091(d).
\709\ Treas. Reg. sec. 48.4091-3(b).
\710\ 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.\711\ 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.\712\
Claims for payment not so taken may be allowable as income tax
credits \713\ on Form 4136, Credit for Federal Tax Paid on
Fuels.
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\711\ Sec. 6427(l)(1).
\712\ Treas. Reg. sec. 40.6302(c)-1(a)(3).
\713\ Sec. 34.
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HOUSE BILL
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.\714\ 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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\714\ 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. It is intended 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, it
is intended that under the provision the terminal is located
within the airport. It is intended 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 registered 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.\715\
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\715\ 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.\716\
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\716\ For example, X is a commercial airline subsidiary of airline
Y. If Y sells fuel to X, X can waive its right to a refund to Y as the
ultimate vendor. Y would then be entitled to file for a refund or net
the refund against its excise tax liability.
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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.\717\ 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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\717\ 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.--Effective for aviation fuel removed,
entered, or sold after September 30, 2004.
SENATE AMENDMENT
The Senate amendment is similar to the House bill, except
that refueler trucks, tankers, and tank wagons are not subject
to special rules, and there is no provision for liability for,
and self-assessment of, tax by the person receiving fuel
removed from a refinery or terminal directly into the wing of
an aircraft (whether by refueling vehicle or otherwise).
Effective date.--Effective for aviation fuel removed,
entered, or sold after September 30, 2004.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, with the
following modifications. The rule that permits certain refueler
trucks to be treated as a terminal for purposes of the
provision is modified to require that, in addition to the
requirements specified in the House bill, a qualifying truck,
tanker, or tank wagon must be loaded with aviation fuel from a
terminal that is located within a secured area of an airport.
The Secretary is required to publish, by December 15, 2004, and
maintain a list of airports that include a secured area in
which a terminal is located.\718\ In addition, the conference
agreement modifes the requirement that in order to qualify for
the special rule, a refueler truck, tanker, or tank wagon must
deliver the aviation fuel directly into the wing of the
aircraft at the airport where the terminal is located to a
requirement that a refueler truck, tanker, or tank wagon be
loaded with aviation fuel for delivery into aircraft at the
airport where the terminal is located.
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\718\ The conferees intend that the following airports, subject to
verification by the Secretary, be included on the Secretary's initial
list of airports that include a secured area in which a terminal is
located. The airports are listed by airport name, and the terminal with
respect to the airport is identified by terminal control number. In
maintaining the list of qualified airports, the Secretary has the
discretion to add or remove airports from the list. Ted Stevens
International Airport, T-91-AK-4520; William B. Hartsfield Atlanta
International Airport, T-58-GA-2512; William B. Hartsfield Atlanta
International Airport, T-58-GA-2513; William B. Hartsfield Atlanta
International Airport, T-58-GA-2536; Bradley International Airport, T-
06-CT-1271; Nashville Metropolitan Airport, T-62-TN-2222; Logan
International Airport, T-04-MA-1171; Baltimore/Washington International
Airport, T-52-MD-1569; Cleveland Hopkins International Airport, T-31-
OH-3109; Charlotte/Douglas International Airport, T-56-NC-2032;
Colorado Springs Airport, T-84-CO-4108; Cincinnati/Northern Kentucky
International Airport, T-61-KY-3277; Dallas Love Field Airport, T-75-
TX-2663; Ronald Reagan National Airport, T-54-VA-1686; Denver
International Airport, T-84-CO-4111; Dallas Fort Worth International
Airport, T-75-TX-2673; Wayne County Metropolitan Airport, T-38-MI-3018;
Newark Liberty International Airport, T-22-NJ-1532; Fort Lauderdale/
Hollywood International Airport; T-65-FL-2158; Piedmont Triad
International Airport, T-56-NC-2038; Honolulu International Airport, T-
91-HI-4570; Dulles International Airport, T-54-VA-1676; George Bush
Intercontinental Airport, T-76-TX-2818; Mid Continent Airport, T-43-KS-
3653; John F. Kennedy International Airport, T-11-NY-1334; McCarren
International Airport, T-86-NV-4355; Kansas City International Airport,
T-43-MO-3723; Orlando International Airport, T-59-FL-2111; Midway
Airport, T-36-IL-3376; Memphis International Airport, T-62-TN-2212;
General Mitchell International Airport, T-39-WI-3092; Minneapolis-St.
Paul International Airport, T-41-MN-3419; Minneapolis-St. Paul
International Airport, T-41-MN-3420; Minneapolis-St. Paul International
Airport, T-41-MN-3421; Louis Armstrong New Orleans International
Airport, T-72-LA-2356; Oakland International Airport, T-94-CA-4702;
Eppley Airfield, T-47-NE-3608; Ontario International Airport, T-33-CA-
4792; O'Hare International Airport, T-36-IL-3325; Portland
International Airport, T-91-OR-4450; Philadelphia International
Airport, T-23-PA-1770; Sky Harbor International Airport, T-86-AZ-4302;
Pittsburgh International Airport, T-23-PA-1766; Raleigh/Durham
International, T-56-NC-2045; Reno Cannon International Airport, T-86-
NV-4352; San Diego International Airport, T-33-CA-4788; San Antonio
International Airport, pending; Seattle Tacoma International Airport,
T-91-WA-4425; San Francisco International Airport, T-94-CA-4701; San
Jose Municipal Airport, T-77-CA-4650; Salt Lake City International
Airport, T-84-UT-4207; John Wayne Airport/Orange County, T-33-CA-4772;
Lambert International Airport, T-43-MO-3722; Tampa/St. Petersburg
International Airport, T-59-FL-2110.
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The conference agreement modifies the floor stocks tax.
Under the conference agreement, a floor stocks tax applies to
aviation fuel held by a person (if title for such fuel has
passed to such person) on January 1, 2005. The tax is equal to
the amount of tax that would have been imposed before January
1, 2005, if the proposal was in effect at all times before such
date, reduced by (1) the tax imposed by section 4091, as in
effect on the day before such date and, (2) in the case of
kerosene held exclusively for the holder's own use, the amount
which such holder would reasonably expect under the proposal to
be paid as a refund for a nontaxable use with respect to the
kerosene. The tax does not apply to kerosene held in the fuel
tank of an aircraft on January 1, 2005. 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 conference agreement, 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.
The conferees expect the Secretary to delay the due date
of the excise tax return with respect to aviation fuel for the
quarter beginning on January 1, 2005. It is intended that the
requirement of semi-monthly deposits of aviation fuel taxes
continue unchanged.
Effective date.--Effective for aviation-grade kerosene
removed, entered, or sold after December 31, 2004.
3. Provide for transfer from Airport and Airway Trust Fund to Highway
Trust Fund to adjust for continued highway use of aviation fuel
(sec. 872 of the Senate amendment and secs. 9502 and 9503 of
the Code)
PRESENT LAW
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.\719\ In general, the rate of tax on
aviation fuel is 21.9 cents per gallon.\720\ Aviation fuel sold
for use or used in commercial aviation is taxed at a reduced
rate of 4.4 cents per gallon.\721\ Certain sales of aviation
fuel are exempt from tax.\722\
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\719\ Sec. 4093(a).
\720\ 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) & 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).
\721\ 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), &
4221(d)(3).
\722\ Sec. 4092.
---------------------------------------------------------------------------
Taxes received for aviation fuel, except for the LUST
Trust Fund financing rate, are appropriated to the Airport and
Airway Trust Fund.\723\ Such appropriation occurs even if
aviation fuel is used for non aviation purposes.
---------------------------------------------------------------------------
\723\ Sec. 9502(b).
---------------------------------------------------------------------------
Taxes received on taxable fuel for transportation
purposes generally are appropriated to the Highway Trust
Fund.\724\
---------------------------------------------------------------------------
\724\ Sec. 9503(b).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision directs the Secretary to transfer from the
Airport and Airway Trust Fund to the Highway Trust Fund
annually an amount equivalent to amounts received in the
Airport and Airway Trust Fund which are attributable to fuel
that is used primarily for highway transportation purposes. The
Secretary is directed to transfer 11 percent of such amount to
the Mass Transit Account.
Effective date.--Effective on October 1, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
4. Mechanical dye injection and related penalties (sec. 653 of the
House bill, secs. 873, 874 and 875 of the Senate amendment and
secs. 4082 and 6715 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.\725\ 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,\726\
and (3) the fuel meets marking requirements prescribed by the
Secretary.\727\ 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)).\728\
---------------------------------------------------------------------------
\725\ 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.
\726\ 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).
\727\ Sec. 4082(a).
\728\ Sec. 4082(b)
---------------------------------------------------------------------------
The Secretary is required to prescribe necessary
regulations relating to dyeing, including specifically the
labeling of retail diesel fuel and kerosene pumps.\729\
---------------------------------------------------------------------------
\729\ Sec. 4082(e).
---------------------------------------------------------------------------
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.\730\
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.\731\ 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).\732\ 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.\733\ 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.\734\
---------------------------------------------------------------------------
\730\ Sec. 6715(a).
\731\ Sec. 6715(a).
\732\ Sec. 6715(b).
\733\ Sec. 6715(d).
\734\ Sec. 6715(c)(1).
---------------------------------------------------------------------------
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.\735\ However,
the regulations do not prescribe the time or method of adding
the dye to taxable fuel.\736\ Diesel fuel is usually dyed at a
terminal rack by either manual dyeing or mechanical injection.
The regulations also provide that a terminal operator is
jointly and severally liable for unpaid tax if undyed diesel
fuel or kerosene is removed and the terminal operator provides
any person with documentation that such fuel is dyed.\737\
---------------------------------------------------------------------------
\735\ Treas. Reg. secs. 48.4082-1, -2.
\736\ 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).
\737\ Treas. Reg. sec. 48.4081-2(c).
---------------------------------------------------------------------------
HOUSE BILL
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 upon the operator of a mechanical dye injection system
for each failure to maintain the security standards for such
system.\738\ An additional penalty of $1,000 is imposed upon
such operator 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.
---------------------------------------------------------------------------
\738\ The operator remains liable under current Treas. Reg. sec.
48.4081-2(c) for any unpaid tax on removed undyed fuel.
---------------------------------------------------------------------------
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.
SENATE AMENDMENT
The Senate amendment contains a mechanical dyeing
provision similar to the provision in the House bill, except
that the Secretary of the Treasury is to prescribe regulations
establishing standards by June 30, 2004.
The Senate amendment also contains two additional
provisions not in the House bill.
The Senate amendment denies administrative appeal or
review for repeat offenders (more than two violations) of
present law after a chemical analysis of the fuel, except in
the case of a claim regarding fraud or mistake in the chemical
analysis or error in the mathematical calculation of the amount
of penalty.
The Senate amendment also extends present-law penalties
to any person who knows that the strength or composition of any
dye or marking in any dyed fuel has been altered, chemically or
otherwise, and who sells (or holds for sale) such fuel for any
use that the person knows or has reason to know is a taxable
use of such fuel.
Effective date.--Penalties relating to mechanical dyeing
systems are effective 180 days after the regulations are
issued. The prohibition of certain administrative review is
effective for penalties assessed after date of enactment. The
extension of present law penalties is effective on date of
enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill with
respect to mechanical dye injection systems and related
penalties. The conference agreement follows the Senate
amendment with respect to denying administrative review to
repeat offenders and extending present law penalties to any
person who knows that the strength or composition of any dye or
marking in any dyed fuel has been altered, chemically or
otherwise, and who sells (or holds for sale) such fuel for any
use that the person knows or has reason to know is a taxable
use of such fuel.
5. Terminate dyed diesel use by intercity buses (sec. 876 of the Senate
amendment and secs. 4082 and 6427 of the Code)
PRESENT LAW
A manufacturer's tax of 24.4 cents per gallon applies to
diesel fuel.\739\ Diesel fuel that is to be used for a
nontaxable purpose will not be taxed upon removal from the
terminal if it is dyed to indicate its nontaxable purpose. Use
in an intercity bus is a nontaxable use for purposes of the
manufacturers tax on diesel fuel. However, diesel fuel is
subject to a retail backup tax. The retail tax is 7.4 cents per
gallon for intercity buses, but only applies if no tax was
imposed on the diesel under the manufacturers tax.\739a\ Thus,
dyed diesel removed from the terminal is exempt from the
manufacturers tax but a tax of 7.3 cents per gallon (plus .1
for LUST) is imposed on the delivery of the dyed fuel into the
fuel supply tank of the intercity bus. The operator of the bus
is liable for the tax.
---------------------------------------------------------------------------
\739\ Sec. 4081.
\739a\ Sec. 4041(a)(1)(B) and sec. 4041(a)(1)(C)(III)(i).
---------------------------------------------------------------------------
Under present law, intercity bus operators also may buy
fully taxed undyed diesel and seek a refund of the difference
between the 24.4 cents per gallon rate and the 7.3 cents per
gallon rate.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment eliminates the ability of intercity
buses to buy dyed diesel and self-assess the 7.4 cents per
gallon. Under the provision, operators of such buses must buy
clear fuel and seek a refund of the difference between 24.4 and
7.4 cents per gallon of tax on diesel fuel. The provision
permits refund claimants to obtain interest if they file their
refund claims electronically and the Secretary does not pay
such claims within 20 days. The provision also permits ultimate
vendors to make such refund claims if the bus operator assigns
its right to claim a refund to the ultimate vendor.
Effective date.--The provision is effective for fuel sold
after September 30, 2004.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
except the conference agreement does not include the provision
that deems credit card issuers the ultimate vendor for
purchases made by credit card.
Effective date.--The provision is effective for fuel sold
after January 1, 2005.
6. Authority to inspect on-site records (sec. 654 of the House bill,
sec. 877 of the Senate amendment, and sec. 4083 of the Code)
PRESENT LAW
The IRS is authorized to inspect any place where taxable
fuel \739b\ 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.\740\
---------------------------------------------------------------------------
\739b\ ``Taxable fuel'' means gasoline, diesel fuel, and kerosene.
Sec. 4083(a).
\740\ Sec. 4083(c)(1)(A).
---------------------------------------------------------------------------
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.\741\
---------------------------------------------------------------------------
\741\ Treas. Reg. sec. 48.4083-1(c)(1).
---------------------------------------------------------------------------
HOUSE BILL
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 is effective on the date
of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and
Senate amendment.
7. Assessable penalty for refusal of entry (sec. 878 of the Senate
amendment and new sec. 6717 of the Code)
PRESENT LAW
The Internal Revenue Service is authorized to inspect any
place where taxable fuel is produced or stored (or may be
stored). As part of the inspection, the Internal Revenue
Service 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.\742\
---------------------------------------------------------------------------
\742\ Sec. 4083(c)(1)(A).
---------------------------------------------------------------------------
In conducting the inspection, the Internal Revenue
Service 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 to determine the excise tax
liability under section 4081.\743\ The Internal Revenue Service
is authorized to establish inspection sites. A designated
inspection site includes any State highway inspection station,
weigh station, agricultural inspection station, mobile station
or other location designated by the Internal Revenue
Service.\744\
---------------------------------------------------------------------------
\743\ Treas. Reg. sec. 48.4083-1(b)(2).
\744\ Sec. 4083(c); Treas. Reg. sec. 48.4083-1(b)(1).
---------------------------------------------------------------------------
Any person that refuses to allow an inspection is subject
to a penalty in the amount of $1,000 for each refusal.\745\ The
IRS is not able to assess this penalty in the same manner as it
would a tax. It must first seek the assistance of the
Department of Justice to obtain a judgment. Assessable
penalties are payable upon notice and demand by the Secretary
and are assessed and collected in the same manner as
taxes.\746\
---------------------------------------------------------------------------
\745\ Sec. 4083(c)(3) and 7342.
\746\ Sec. 6671.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
In addition to the $1,000 penalty under present law, the
Senate amendment imposes an assessable penalty with respect to
the refusal of entry. The assessable penalty is $1,000 for such
refusal. The penalty will not apply if it is shown that such
failure is due to reasonable cause. If the penalty is imposed
on a business entity, the proposal provides for joint and
several liability with respect to each officer, employee, or
agent of such entity or other contracting party who willfully
participated in the act giving rise to the penalty. If the
business entity is part of an affiliated group, the parent
corporation also will be jointly and severally liable for the
penalty.
Effective date.--The provision is effective on October 1,
2004.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
except for effective date.
Effective date.--The provision is effective on January 1,
2005.
8. Registration of pipeline or vessel operators required for exemption
of bulk transfers to registered terminals or refineries (sec.
655 of the House bill, sec. 879 of the Senate amendment, 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.\747\ 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.\748\
---------------------------------------------------------------------------
\747\ Sec. 4081(a)(1)(A).
\748\ 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).
---------------------------------------------------------------------------
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.\749\ The refiner is liable for
payment of tax with respect to certain taxable removals from
the refinery.\750\
---------------------------------------------------------------------------
\749\ Treas. Reg. sec. 48.4081-3(e)(2).
\750\ Treas. Reg. sec. 48.4081-3(b).
---------------------------------------------------------------------------
HOUSE BILL
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.--(Effective on October 1, 2004, except
that the Secretary is required to publish the list of
registered persons beginning on July 1, 2004.
SENATE AMENDMENT
Similar to the House bill, except that with respect to a
bulk transfer on which no tax is paid, the Senate amendment
imposes a penalty on any person who knowingly transfers taxable
fuel in bulk to an unregistered person. The penalty is the
greater of $10,000 or $1 per gallon and is increased for
multiple prior violations. No penalty is imposed upon a showing
by the taxpayer of reasonable cause.
Effective date.--Effective on October 1, 2004, except
that the Secretary is required to publish the list of persons
required to register by June 30, 2004.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, modified
to provide that the Secretary shall periodically publish a
current list of persons required to register under the
authority of section 6103(k)(7).
Effective date.--(Effective on March 1, 2005, except that
the Secretary is required to publish the list of persons
required to register beginning on January 1, 2005.
9. Display of registration and penalties for failure to display
registration and to register (secs. 656 and 657 of the House
bill, secs. 880 and 882 of the Senate amendment, and secs.
4101, 7232, 7272 and new secs. 6718 and 6719 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.\751\ A non-assessable
penalty for failure to register is $50.\752\ 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.\753\
---------------------------------------------------------------------------
\751\ Sec. 4101; Treas. Reg. sec. 48.4101-1(a) and (c)(1).
\752\ Sec. 7272(a).
\753\ Sec. 7232.
---------------------------------------------------------------------------
HOUSE BILL
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 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.
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.
SENATE AMENDMENT
The Senate amendment is similar to House bill, except
that the increase in the penalty for multiple prior violations
for failure to display proof of registration is determined
differently.
Effective date.--Effective on October 1, 2004, except
that the penalties for failure to register are effective for
failures pending or occurring after September 30, 2004.
CONFERENCE AGREEMENT
The conference agreement follows the House bill except
that the identification device is not required to be
electronic.
Effective date.--The provision requiring display of
registration is effective on January 1, 2005. The provision
relating to penalties is effective for penalties imposed after
December 31, 2004.
10. Registration of persons within foreign trade zones (sec. 881 of the
Senate amendment and sec. 4101 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.\754\
---------------------------------------------------------------------------
\754\ Sec. 4101; Treas. Reg. sec. 48.4101-1(a) & (c)(1).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Secretary shall require registration by any person
that operates a terminal or refinery within a foreign trade
zone or within a customs bonded storage facility, or holds an
inventory position with respect to a taxable fuel in such a
terminal.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment. It
is intended that the Secretary shall establish a date by which
persons required to register under the provision must be
registered.
Effective date.--Effective on January 1, 2005.
11. Penalties for failure to report (sec. 657 of the House bill, sec.
882 of the Senate amendment, 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.\755\ 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.\756\ 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.\757\
---------------------------------------------------------------------------
\755\ 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.
\756\ 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).
\757\ Sec. 6721(a).
---------------------------------------------------------------------------
HOUSE BILL
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.
Effective date.--Effective for penalties imposed after
September 30, 2004.
SENATE AMENDMENT
Similar to House bill, except for technical wording
differences.
Effective date.--Effective for failures pending or
occurring after September 30, 2004. The electronic reporting
provision is effective on October 1, 2004.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
Effective date.--Effective for penalties imposed after
December 31, 2004.
12. Electronic filing of required information reports (sec. 895 of the
Senate amendment and sec. 4010 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.\758\ 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.\759\ 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.
---------------------------------------------------------------------------
\758\ Sec. 4101(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.
\759\ 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).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment requires information reporting with
respect to taxable fuels removed, entered, or transferred from
any refinery, pipeline, or vessel that is registered. The
proposal also requires that any person who must report under
the ExSTARs systems and who has 25 or more reportable
transactions in a month to report in electronic format.
Effective date.--Effective on October 1, 2005.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
except that the conference agreement does not adopt the
information reporting requirement with respect to taxable fuels
removed, entered, or transferred from any refinery, pipeline,
or vessel that is registered.
Effective date.--Effective on January 1, 2006.
13. Information reporting for persons claiming certain tax benefits
(sec. 883 of the Senate amendment and new sec. 4104 of the
Code)
PRESENT LAW
The Code provides an income tax credit for each gallon of
ethanol and methanol derived from renewable sources (e.g.,
biomass) used or sold as a fuel, or used to produce a qualified
alcohol fuel mixture, such as gasohol. The amount of the credit
is equal to 52 cents per gallon (ethanol) \760\ and 60 cents
per gallon (methanol).\761\ This tax credit is provided to
blenders of the alcohols with other taxable fuels, or to the
retail sellers of unblended alcohol fuels. Part or all of the
benefits of the income tax credit may be claimed through
reduced excise taxes paid, either in reduced-tax sales or by
expedited blender refunds on fully taxed sales of gasoline to
obtain the benefit of the reduced rates. The amount of the
income tax credit determined with respect to any alcohol is
reduced to take into account any benefit provided by the
reduced excise tax rates. To obtain a partial refund on fully
taxed gasoline, the following requirements apply: (1) the claim
must be for gasohol sold or used during a period of at least
one week, (2) the claim must be for at least $200, and (3) the
claim must be filed by the last day of the first quarter
following the earliest quarter included in the claim. If the
blender cannot meet these requirements, the blender must claim
a credit on the blender's income tax return.
---------------------------------------------------------------------------
\760\ The 52-cents-per-gallon credit is scheduled to decline to 51
cents per gallon beginning in calendar year 2005. The credit is
scheduled to expire after the earlier of (1) expiration of the Highway
Trust Fund excise taxes or (2) December 31, 2007.
\761\ Ethanol produced by certain ``small producers'' is eligible
for an additional producer tax credit of 10 cents per gallon. Eligible
small producers are defined as persons whose production capacity does
not exceed 30 million gallons and whose annual production does not
exceed 15 million gallons.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment requires persons claiming the Code
benefits related to alcohol fuels and biodiesel fuels to
provide such information related to such benefits and the
coordination of such benefits as the Secretary may require to
ensure the proper administration and use of such benefits. The
Secretary may deny, revoke or suspend the registration of any
person to enforce this requirement.
Effective date.--The provision is effective October 1,
2004.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
Persons claiming excise tax benefits are to file quarterly
information returns, rather than monthly.
Effective date.--The provision is effective January 1,
2004.
14. Collection from Customs bond where importer not registered (sec.
658 of the House bill and sec. 884 of Senate amendment)
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.\762\
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.\763\
---------------------------------------------------------------------------
\762\ Sec. 4081(a)(1)(A)(iii).
\763\ 19 C.F.R. sec. 141.3 (2004).
---------------------------------------------------------------------------
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.
On July 31, 2004, the Department of Treasury issued
regulations providing that effective September 28, 2004,
importers and enterers are jointly and severally liable for the
tax on imported fuel if the importer is not the enterer and the
enterer is not registered with the Secretary.
HOUSE BILL
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.
SENATE AMENDMENT
Under the Senate amendment, for fuel entering the United
States (other than transfers in bulk) for consumption, use, or
warehousing, the proposal provides that the tax is immediately
due and payable at the time of entry, if the enterer is not
registered with the IRS. Upon the failure to pay tax or post
bond, the Customs Service is authorized under the proposal to
deny entry of the shipment into the United States. The
Secretary also may seize the fuel on which the tax is due or
detain the vehicle transporting such fuel until such tax is
paid. If no tax has been paid or bond filed within five days of
the seizure, the Secretary may sell the fuel.
Effective date.--The provision is effective upon date of
enactment.
CONFERENCE AGREEMENT
The conference agreement does not contain the House bill
or Senate amendment provisions.
15. Reconciliation of on-loaded cargo to entered cargo (sec. 885 of the
Senate amendment)
PRESENT LAW
The Trade Act of 2002 directed the Secretary to
promulgate regulations pertaining to the electronic
transmission to the Bureau of Customs and Border Patrol
(``Customs'') of information pertaining to cargo destined for
importation into the United States or exportation from the
United States, prior to such importation or exportation.\764\
The Department of the Treasury issued final regulations on
October 31, 2002. The regulations require the advance and
accurate presentation of certain manifest information prior to
lading at the foreign port and encourage the presentation of
this information electronically. Customs must receive from the
carrier the vessel's Cargo Declaration (Customs Form 1302) or
the electronic equivalent within 24 hours before such cargo is
laden aboard the vessel at the foreign port.\765\ Certain
carriers of bulk cargo, however, are exempt from these filing
requirements. Such bulk cargo includes that composed of free
flowing articles such as oil, grain, coal, ore and the like,
which can be pumped or run through a chute or handled by
dumping.\766\ Thus, taxable fuels are not covered by the Cargo
Declaration requirement.
---------------------------------------------------------------------------
\764\ Sec. 343(a) of Pub. L. No. 107-210 (2002).
\765\ 19 CFR sec. 4.7(b)(2).
\766\ 19 CFR sec. 4.7(b)(4)(i)(A).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment requires that, not later than one
year after the date of enactment, the Secretary of Homeland
Security, together with the Secretary, promulgate regulations
providing for the transmission to the Internal Revenue Service
of information pertaining to cargo of taxable fuels destined
for importation into the United States, prior to such
importations. The provision requires that imports of taxable
fuels be subject to the Cargo Declaration and electronic
reporting requirements.
Effective date.--The provision is effective upon date of
enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
16. Modification of the use tax on heavy highway vehicles (sec. 659 of
the House bill, sec. 890 of the Senate amendment, 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.\767\
---------------------------------------------------------------------------
\767\ 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.\768\ State governments are required to receive
proof of payment of the use tax as a condition of vehicle
registration.
---------------------------------------------------------------------------
\768\ Sec. 6156.
---------------------------------------------------------------------------
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.\769\ 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.\770\
---------------------------------------------------------------------------
\769\ See generally, sec. 4483.
\770\ Sec. 4483(f): Treas. Reg. sec. 41.4483-7(a).
---------------------------------------------------------------------------
HOUSE BILL
The House bill 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.
SENATE AMENDMENT
The Senate amendment eliminates the ability to pay the
tax in installments and allows no proration of the tax unless
the vehicle is destroyed, stolen, or sold. It also eliminates
the reduced rates for Canadian and Mexican vehicles. In
addition, under regulations to be prescribed by the Secretary,
every taxpayer that pays the heavy highway vehicle use tax to
receive and display on the vehicle an electronic identification
device as prescribed by the Secretary. The device is to be
received and displayed not later than one month after the due
date of the return of tax with respect to each taxable period.
Effective date.--The Senate amendment is generally
effective for taxable periods beginning after the date of
enactment. Requires the Secretary to issue regulations
regarding electronic identification devices no later than
October 1, 2005.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
17. Modification of ultimate vendor refund claims with respect to
farming (sec. 660 of the House bill, sec. 887 of the Senate
amendment, 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.
HOUSE BILL
In the case of diesel fuel or kerosene used on a farm for
farming purposes, the House bill 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.
SENATE AMENDMENT
The Senate amendment provision is the same as the House
bill except the limit on ultimate vendor claims is amounts less
than 500 gallons per farmer per claim.
CONFERENCE AGREEMENT
The conference agreement does not include the House bill
provision or the Senate amendment provision.
18. Dedication of revenue from certain penalties to the Highway Trust
Fund (sec. 661 of the House bill, sec. 891 of the Senate
amendment, 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.
HOUSE BILL
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 for penalties
assessed after October 1, 2004.
SENATE AMENDMENT
The Senate amendment similarly dedicates certain
penalties to the Highway Trust Fund.
Effective date.--The provision is effective for penalties
assessed after October 1, 2004.
CONFERENCE AGREEMENT
The conference agreement generally follows the House bill
and the Senate amendment by dedicating certain penalties to the
Highway Trust Fund. The conference agreement 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 with or failing
to maintain security requirements for mechanical dye injection
systems), 6717 (assessable penalty for refusal of entry), 6718
(penalty for failing to display tax registration on vessels),
6719 (assessable penalty for failure to register), 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 for penalties
assessed on or after the date of enactment.
19. Taxable fuel refunds for certain ultimate vendors (sec. 662 of the
House bill, sec. 888 of the Senate amendment, 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.
HOUSE BILL
The provision provides that for sales of gasoline to 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 the
refund.
For claims for refund of tax paid on diesel fuel or
kerosene sold to State and local governments and for claims for
refund of tax paid on gasoline sold to State and local
governments or to a nonprofit educational organization 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 credit card
company administers claims for refund and is responsible for
supplying documentation required from ultimate vendors.
Effective date.--The provision is effective October 1,
2004.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and
Senate amendment, with modifications. 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, claims for
credits or refund are made by the ultimate vendor.
The conference agreement provides that the rules for
vendor refunds apply to claims made under this provision,
except that the rules 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 are State or local
governments or to a nonprofit educational organizations.\771\
---------------------------------------------------------------------------
\771\ Sec. 6416(b)(2)(C) or (D).
---------------------------------------------------------------------------
The conference agreement does not include the House bill
or Senate amendment provisions that deem the person extending
credit via a credit card to the ultimate purchaser to be the
ultimate vendor for purposes of refund claims.
Effective date.--The provision is effective on January 1,
2005.
20. 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.\772\ 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.\773\
---------------------------------------------------------------------------
\772\ 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.
\773\ 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.
---------------------------------------------------------------------------
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.
HOUSE BILL
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\774\
of tax liability as the position holder) if all of the
following occur:
---------------------------------------------------------------------------
\774\ In the provision, this person is referred to as the
``delivering person.''
---------------------------------------------------------------------------
(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 before or 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and
Senate amendment.
21. Simplification of tax on tires (sec. 664 of the House 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.
HOUSE BILL
The House bill modifies the excise tax applicable to
tires. The House bill 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 House bill 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill with the
following modifications. The conference agreement modifies the
rate of tax applicable to 9.45 cents for each 10 pounds of tire
load capacity in excess of 3,500 pounds. In the case of a
biasply tire, the conference agreement modifies the tax rate is
4.725 cents for each 10 pounds of tire load capacity in excess
of 3,500 pounds. The conference agreement also imposes tax at a
rate of is 4.725 cents for each 10 pounds of tire load capacity
in excess of 3,500 pounds an any super single tire. A super
single tire is a single tire greater than 13 inches in cross
section width designed to replace two tires in a dual fitment.
The conference agreement provides that a biasply tire means a
pneumatic tire on which the ply cords that extend to the beads
are laid at alternate angles substantially less than 90 degrees
to the centerline of the tread.
Nothing in the amendments made by this section shall be
construed to have any effect on subsection (d) of section
48.4701-1 of Title 26, Code of Federal Regulations (relating to
recapped and retreaded tires). The conferees expect that the
Secretary will prescribe regulations implementing the amendment
to section 4071 but that such regulations will not affect
subsection (d). The conferees believe no tax should be imposed
on the recapping of a tire that previously has been subject to
tax.
Effective date.--The provision is effective for sales in
calendar years beginning more than 30 days after the date of
enactment.
22. Tax on sale of diesel fuel whether suitable for use or not in a
diesel-powered vehicle or train (sec. 886 of the Senate
amendment)
PRESENT LAW
Under section 4081(a)(1), an excise tax is imposed upon
(1) the removal of any taxable fuel from a refinery or
terminal, (2) the entry of any taxable fuel into the United
States, or (3) the sale of any taxable fuel to any person who
is not a taxable fuel registrant under section 4101, unless
there was a prior taxable removal or entry.
Under section 4083(a), taxable fuel includes diesel fuel.
Diesel fuel includes any liquid, other than gasoline, that
without further processing or blending, is suitable for use as
a fuel in a diesel-powered highway vehicle or train.\775\ A
liquid is suitable for this use if the liquid has practical and
commercial fitness for use in the propulsion engine of a
diesel-powered highway vehicle or diesel-powered train. A
liquid may possess this practical and commercial fitness even
though the specified use is not the liquid's predominant use.
However, a liquid does not possess this practical and
commercial fitness solely by reason of its possible or rare use
as a fuel in the propulsion engine of a diesel-powered highway
vehicle or diesel-powered train.
---------------------------------------------------------------------------
\775\ Sec. 4083(a)(3).
---------------------------------------------------------------------------
A tax is imposed on the removal or sale of blended
taxable fuel by the blender thereof.\776\ Tax is computed on
the difference between the total number of gallons of blended
taxable fuel removed or sold and the number of gallons of
previously taxed taxable fuel used to produce the blended
taxable fuel.\777\ Blended taxable fuel means any taxable fuel
that is produced outside the bulk transfer/terminal system by
mixing (1) taxable fuel with respect to which tax has been
imposed under section 4041(a)(1) or 4081(a) (other than taxable
fuel for which a credit or payment has been allowed); and (2)
any other liquid on which tax has not been imposed under
section 4081.\778\
---------------------------------------------------------------------------
\776\ Sec. 4081(b).
\777\ Treas. Reg. sec. 48.4081-3(g)(1).
\778\ Treas. Reg. sec. 48.4081-1(c)(1)(i).
---------------------------------------------------------------------------
The blender (the person making the blended taxable fuel)
is liable for the tax on the increased volume. In addition, on
and after April 2, 2003, a person that sells any liquid that is
used to produce blended taxable fuel is jointly and severally
liable for the tax on the removal or sale of that blended
taxable fuel if the liquid is a liquid on which tax has not
been imposed under section 4081; and is sold by that person as
gasoline, diesel fuel, or kerosene that has been taxed under
section 4081.\779\
---------------------------------------------------------------------------
\779\ Treas. Reg. sec. 48.4081-3(g)(2).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision modifies the definition of diesel fuel to
include any liquid which is sold as or offered for sale as a
fuel in a diesel-powered highway vehicle or diesel-powered
train.
Effective date.--The provision is effective on the date
of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
23. Nonapplication of export exemption to delivery of fuel to motor
vehicles removed from United States (sec. 892 of the Senate
amendment)
PRESENT LAW
A manufacturer's excise tax is imposed upon
(1) The removal of any taxable fuel from a refinery
or terminal;
(2) The entry of any taxable fuel into the United
States for consumption, use or warehousing; or
(3) The sale of any taxable fuel to any person who
is not registered, unless there was a prior taxable
removal or entry.\780\
---------------------------------------------------------------------------
\780\ Sec. 4081(a)(1).
---------------------------------------------------------------------------
The term ``taxable fuel'' means gasoline, diesel fuel and
kerosene.
Special provisions under the Code provide for a refund of
tax to any person who sells gasoline to another for
exportation.\781\ Section 6421(c) provides ``If gasoline is
sold to any person for any purpose described in paragraph (2),
(3), (4), or (5) of section 4221(a), the Secretary shall pay
(without interest) to such person an amount equal to the
product of the number of gallons so sold multiplied by the rate
at which tax was imposed on such gasoline by section 4081.''
Section 4221 provides, in pertinent part, ``Under regulations
prescribed by the Secretary, no tax shall be imposed under this
chapter . . . on the sale by the manufacturer . . . of an
article--. . . for export, or for resale by the purchaser to a
second purchaser for export . . . but only if such exportation
or use is to occur before any other use . . .''
---------------------------------------------------------------------------
\781\ Secs. 6421(c) and 4221(a)(2).
---------------------------------------------------------------------------
It is the IRS administrative position that the exemption
from manufacturers excise tax by reason of exportation does not
apply to the sale of motor fuel pumped into a fuel tank of a
vehicle that is to be driven, or shipped, directly out of the
United States.\782\
---------------------------------------------------------------------------
\782\ Rev. Rul. 69-150.
---------------------------------------------------------------------------
A duty-free sales facility that meets certain conditions
may sell and deliver for export from the customs territory of
the United States duty-free merchandise. Duty-free merchandise
is merchandise sold by a duty-free sales facility on which
neither Federal duty nor Federal tax has been assessed pending
exportation from the customs territory of the United States.
The statutes covering duty-free facilities do not contain any
limitation on what goods may qualify for duty-free treatment.
The United States Court of Federal Claims (``Claims
Court'') and a District Court in Michigan have taken different
positions on whether fuel sold from a duty-free facility and
placed into the tank of an automobile that is then driven out
of the country is exported fuel.\783\ Both cases involved the
same duty-free facility, which is near the Canadian border and
is configured in such a way that anyone leaving the facility
must depart the United States and enter into Canada. The
District Court agreed with the IRS position that such fuel is
not exported, while the Claims Court reached the opposite
conclusion. The Claims Court concluded that the act of
exportation began with the consumer's purchase and that the
fuel necessarily enters into the stream of exportation at the
moment it is placed into the fuel supply tank and the customer
drives into Canada.
---------------------------------------------------------------------------
\783\ See, Ammex Inc. v. United States, 52 Fed. Cl. 303 (2002) (on
cross-motions for summary judgment, the court found that plaintiff
established standing to proceed to trial pursuant to sec. 6421(c)
respecting its gasoline purchases only); and Ammex Inc. v. United
States, 2002 U.S. Dist. LEXIS 25771 (E.D. Mich. July 31, 2002)
(granting defendant's motion for summary judgment), reconsideration
denied, Ammex, Inc. v. United States, 2002 U.S. Dist. LEXIS 22893 (E.D.
Mich. Oct. 22, 2002). Although the Claims Court ruled that Ammex had
standing to challenge the excise tax on gasoline, it subsequently held
that Ammex was not entitled to a payment pursuant to sec. 6421(c)
because it failed to prove at trial that it did not pass the tax on to
its customers. Ammex Inc. v. United States, 2003 U.S. Claims LEXIS 63
(Fed. Cl. Mar. 26, 2003).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision reaffirms the long-standing IRS position
taken in Rev. Rul. 69-150 and restates present law by amending
the Code definition of export to exclude the delivery of a
taxable fuel into a fuel tank of a motor vehicle that is
shipped or driven out of the United States. It also imposes a
tax on the sale of taxable fuel at a duty-free sales enterprise
unless there was a prior taxable removal, or entry of such
fuel.
Effective date.--The provision applies to sales or
deliveries made after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
24. Taxation of transmix and diesel fuel blend stocks and Treasury
study on fuel tax compliance (secs. 893, 894 and 895 of the
Senate amendment and sec. 4083 of the Code)
PRESENT LAW
Definition of taxable fuels
A ``taxable fuel'' is gasoline, diesel fuel (including
any liquid, other than gasoline, which is suitable for use as a
fuel in a diesel-powered highway vehicle or train), and
kerosene.\784\
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\784\ Sec. 4083(a).
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Under the regulations, ``gasoline'' includes all products
commonly or commercially known or sold as gasoline and suited
for use as a motor fuel, and that have an octane rating of 75
or more. Gasoline also includes, to the extent provided in
regulations, gasoline blendstocks and products commonly used as
additives in gasoline. The term ``gasoline blendstocks'' does
not include any product that cannot be blended into gasoline
without further processing or fractionation (``off-spec
gasoline'').\785\
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\785\ Treas. Reg. sec. 48.4081-1(c)(3)(ii). The term ``gasoline
blendstocks'' means alkylate; butane; catalytically cracked gasoline;
coker gasoline; ethyl tertiary butyl ether (ETBE); hexane;
hydrocrackate; isomerate; methyl tertiary butyl ether (MTBE); mixed
xylene (not including any separated isomer of xylene); natural
gasoline; pentane; pentane mixture; polymer gasoline; raffinate;
reformate; straight-run gasoline; straight-run naphtha; tertiary amyl
methyl ether (TAME); tertiary butyl alcohol (gasoline grade) (TBA);
thermally cracked gasoline; toluene; and transmix containing gasoline.
Treas. Reg. sec. 48.4081-1(c)(3)(i).
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Diesel fuel is any liquid (other than gasoline) that is
suitable for use as a fuel in a diesel-powered highway vehicle
or diesel-powered train.\786\ By regulation, diesel fuel does
not include kerosene, gasoline, No. 5 and No. 6 fuel oils (as
described in ASTM Specification D 396), or F-76 (Fuel Naval
Distillates MIL-F-16884) any liquid that contains less than
four percent normal parafins, or any liquid that has a
distillation range of 125 degrees Fahrenheit or less, sulfur
content of 10 ppm or less and minimum color of +27 Saybolt
(these are known as ``excluded liquids'').\787\
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\786\ Sec. 4083(a)(3).
\787\ Treas. Reg. sec. 48.4081-1(c)(2)(ii).
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By regulation, kerosene is defined as the kerosene
described in ASTM Specification D 3699 (No. 1-K and No. 2-K),
ASTM Specification D 1655 (kerosene-type jet fuel), and
military specifications MIL-DTL-5624T (Grade JP-5) and MIL-DTL-
83133E (Grade JP-8). Kerosene does not include any liquid that
is an excluded liquid.\788\
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\788\ Treas. Reg. sec. 48.4081-1(b).
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Taxable events and exemptions
An excise tax is imposed upon (1) the removal of any
taxable fuel from a refinery or terminal, (2) the entry of any
taxable fuel into the United States, or (3) the sale of any
taxable fuel to any person who is not registered with the IRS
to receive untaxed fuel, unless there was a prior taxable
removal or entry.\789\ The tax does not apply to any removal or
entry of taxable fuel transferred in bulk to a terminal or
refinery if the person removing or entering the taxable fuel
and the operator of such terminal or refinery are registered
with the Secretary.\790\
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\789\ Sec. 4081(a)(1).
\790\ Sec. 4081(a)(1)(B).
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Gasoline exemptions
If certain conditions are met, the removal, entry, or
sale of gasoline blendstocks is not taxable. Generally, the
exemption from tax applies if a gasoline blendstock is not used
to produce finished gasoline or is received at an approved
terminal or refinery. No tax is imposed on nonbulk removals
from a terminal or refinery, or nonbulk entries into the United
States or on any gasoline blendstocks if the person liable for
the tax is a gasoline registrant, has an unexpired notification
certificate, knows of no false information in the certificate,
and has verified the accuracy of the notification certificate.
The sale of a gasoline blendstock that was not subject to tax
on nonbulk removal or entry is taxable unless the seller has an
unexpired certificate from the buyer and has no reason to
believe that any information in the certificate is false. No
tax is imposed on, or purchaser certification required for,
off-spec gasoline.
Diesel fuel and kerosene exemptions
Diesel fuel and kerosene that is to be used for a
nontaxable purpose will not be taxed upon removal from the
terminal if it is dyed to indicate its nontaxable purpose.
Undyed aviation-grade kerosene also is exempt from tax at the
rack if it is destined for use as a fuel in an aircraft. The
tax does not apply to diesel fuel asserted to be ``not suitable
for use'' or kerosene asserted to qualify as an excluded
liquid.
Feedstock kerosene that a registered industrial user
receives by pipeline or vessel also is exempt from the dyeing
requirement. A kerosene feedstock user is defined as a person
that receives kerosene by bulk transfer for its own use in the
manufacture or production of any substance (other than
gasoline, diesel fuel or special fuels subject to tax). Thus,
for example, kerosene is used for a feedstock purpose when it
is used as an ingredient in the production of paint and is not
used for a feedstock purpose when it is used to power machinery
at a factory where paint is produced. The person receiving the
kerosene must be registered with the IRS and provide a
certificate noting that the kerosene will be used for a
feedstock purpose in order for the exemption to apply.
Information and tax return reporting
The IRS collects data under the ExSTARS reporting system
that tracks all removals across the terminal rack regardless of
whether or not the product is technically excluded from the
definition of gasoline, diesel or blendstocks. ExSTARS
reporting identifies the position holder at the time of
removal. Below the rack, no information is gathered for exempt
or excluded products or uses.
Taxpayers file quarterly excise tax returns showing only
net taxable gallons.\791\ Taxpayers do not account for gallons
they claim to be exempt on such returns. Although the return is
a quarterly return, the excise taxes are paid in semimonthly
deposits.\792\ If deposits are not made as required, a taxpayer
may be required to file returns on a monthly or semimonthly
basis instead of quarterly.\793\
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\791\ Treas. Reg. sec. 406011(a)-1(a); Form 720, Quarterly Federal
Excise Tax Return.
\792\ Treas. Reg. 40.6302(c)-1(a).
\793\ Treas. Reg. 40.6011(a)-1(b).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment creates a new category of taxable
liquids, ``reportable liquids''. A reportable liquid is any
petroleum-based liquid other than a taxable fuel. For purposes
of the imposition of tax, the provision treats ``reportable
liquids'' in a manner similar to taxable fuels. Tax is imposed
upon the removal, entry, or sale of such liquids, unless the
removal, entry, or sale is (1) to a registered person who
certifies that such liquid will not be used as a fuel or in the
production of a fuel, or (2) the sale is to the ultimate
purchaser of such liquid. Under the provision, the current
exclusions for distillates not suitable for use in a highway
vehicle, excluded liquids, and gasoline blendstocks requiring
further processing (off-spec gasoline) are eliminated. The
provision also provides that dyed diesel (a taxable fuel) also
is taxable unless removed by a taxable fuel registrant (a
person registered with the Secretary under section 4101).
The provision authorizes the Secretary to pay (without
interest) an amount equal to the tax imposed, if a person
establishes that the ultimate use of a gasoline blendstock, or
additive, was not to produce gasoline. Similarly, if tax is
imposed on a reportable liquid and the person establishes that
the liquid was not used to produce a taxable, fuel, the
Secretary is authorized to pay (without interest) an amount
equal to the tax imposed on such person with respect to the
reportable liquid.
Taxpayers are to file a monthly fuel excise tax return.
Not earlier than January 1, 2005, such filings shall be in
electronic form as prescribed by the Secretary. In addition,
under the provision, the Secretary is to require that all
persons removing refined product, whether a taxable product or
an untaxed product, over the terminal rack to report such
products on an excise tax return. The return is to specifically
identify the class of product and its quantity.\794\
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\794\ Persons not liable for tax, will make their reports in the
same manner as taxpayers who file fuel excise tax returns as described
above.
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Effective date.--The provision is effective for fuel sold
or used after September 30, 2004.
CONFERENCE AGREEMENT
The conference agreement adds two new categories to the
definition of diesel fuel. Under the conference agreement,
diesel fuel means: (1) any liquid (other than gasoline) which
is suitable for use as a fuel in a diesel-powered highway
vehicle, or a diesel-powered train; (2) transmix; and (3)
diesel fuel blend stocks as identified by the Secretary.
Transmix means a by-product of refined products pipeline
operations created by the mixing of different specification
products during pipeline transportation. Transmix generally
results when one fuel, such as diesel fuel, is placed in a
pipeline followed by another taxable fuel, such as kerosene.
The mixture created between the two fuels when it is neither
all diesel fuel nor all kerosene, is an example of a transmix.
Under the conference agreement, all transmix is taxable as
diesel fuel, regardless of whether it contains gasoline.
Under the conference agreement, it is intended that the
re-refining of tax-paid transmix into gasoline, diesel fuel or
kerosene qualify as a nontaxable off-highway business use of
such transmix, for purposes of the refund and payment
provisions relating to nontaxable uses of diesel fuel.
Not later than January 31, 2005, the Secretary shall
submit to the Committee on Finance of the Senate and the
Committee on Ways and Means of the House of Representatives a
report regarding fuel tax compliance, which shall include
information, and analysis as specified below, and
recommendations to address the issues identified.
The Secretary is to identify chemical products that
should be added to the list of blendstocks. The Secretary is to
identify those chemical products, as identified by lab analysis
of fuel samples taken by the IRS, that have been blended with
taxable fuel but are not currently treated as a blendstock. The
report should indicate, to the extent possible, any statistics
as to the frequency in which such chemical product has been
discovered, and whether the samples contained above-normal
concentrations of such chemical product. The report also shall
include a discussion of IRS findings regarding the addition of
waste products to taxable fuel and any recommendations to
address the taxation of such products. The report shall include
a discussion of IRS findings regarding sales of taxable fuel to
entities claiming exempt status as a State or local government.
Such discussion shall include the frequency of erroneous
certifications as to exempt status determined on audit. The
Secretary shall consult with representatives of State and local
governments in providing recommendations to address this issue,
including the feasibility of State maintained lists of their
exempt governmental entities.
Effective date.--The provision regarding the taxation of
transmix and diesel fuel blendstocks is effective for fuel
removed, sold, or used after December 31, 2004. The requirement
for a Treasury study is effective on the date of enactment.
D. Nonqualified Deferred Compensation Plans
1. Treatment of nonqualified deferred compensation plans (sec. 671 of
the House bill, section 671 of the Senate amendment, and new
sec. 409A and secs. 6040 and 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,\795\ 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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\795\ 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.\796\ 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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\796\ 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.\797\
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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\797\ 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.\798\ 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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\798\ 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.\799\ 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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\799\ 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.
HOUSE BILL
Under the House bill, all amounts deferred under a
nonqualified deferred compensation plan \800\ for all taxable
years are currently includible in gross income to the extent
not subject to a substantial risk of forfeiture \801\ 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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\800\ A plan includes an agreement or arrangement, including an
agreement or arrangement that includes one person.
\801\ 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 \802\ of publicly-traded
corporations.
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\802\ 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 will 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 will 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.\803\ A governmental eligible deferred compensation plan
(sec. 457) is also a qualified employer plan under the
provision.\804\ 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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\803\ A qualified employer plan also includes a section 501(c)(18)
trust.
\804\ 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 is not
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 reasonably
ascertainable only apply to nonaccount balance plans and that
amounts be required to be reported when they first become
reasonably ascertainable.\805\
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\805\ 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 House bill 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.
SENATE AMENDMENT
The Senate amendment follows the House bill with the
following modifications.
Under the Senate amendment, if the requirements of the
provision are not satisfied, in addition to current income
inclusion, interest at the underpayment rate is imposed on the
underpayments that would have occurred had the compensation
been includible in income when first deferred, or if later,
when not subject to a substantial risk of forfeiture. The
amount required to be included in income is also subject to an
additional 10-percent tax.
Under the Senate amendment, in the case of an individual
who, with respect to a corporation, is subject to the
requirements of section 16(a) of the Securities Act of 1934,
distributions upon a change in control may not be made earlier
than one year after the date of the change in control of the
corporation. Such individuals include officers (as defined by
section 16(a)),\806\ directors, or 10-percent owners of
publicly-held corporations. Under the provision, distributions
made to such individuals within one year of the change in
control (``applicable payments'') are treated as excess
parachute payments under section 280G (even if the payment
would not otherwise be treated as an excess parachute payment)
and therefore subject to the excise tax under section 4999. As
under present law, no deduction is allowed for any amount
treated as an excess parachute payment.
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\806\ 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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If, absent the provision, an applicable payment is a
payment in the nature of compensation contingent on a change in
control, section 280G is applied as if the provision had not
been enacted (i.e., the applicable payments continue to be
taken into account under section 280G). Any resulting excess
parachute payment is also subject to the excise tax under
section 4999 (in addition to the tax imposed by the provision).
Under the provision, an applicable payment that, absent the
provision, is not a payment in the nature of compensation
contingent on a change in control is required to be taken into
account in determining if the present value of the payments in
the nature of compensation contingent on a change in control
equal or exceed three times the base amount. Any resulting
excess parachute payment is also subject to the excise tax
under section 4999 (in addition to the tax imposed by the
provision). Applicable payments do not include payments made
upon death or if the participant becomes disabled. Treasury
regulations shall prescribe rules to prevent a deduction from
being disallowed more than once.
Under the Senate amendment, unforeseeable emergency also
includes hardship of a beneficiary. Unforeseeable emergency is
defined as severe financial hardship of the participant or
beneficiary resulting from a sudden and unexpected illness or
accident of the participant or beneficiary, the participant's
or beneficiary's spouse or the participant's or beneficiary's
dependent (as defined in 152(a)); loss of the participant's or
beneficiary's property due to casualty; or other similar
extraordinary and unforeseeable circumstances arising as a
result of events beyond the control of the participant or
beneficiary. Distributions are not allowed to the extent that
the hardship may be relieved by liquidation of the
participant's or beneficiary's assets.
Under the Senate amendment, participants must be limited
to one subsequent election.
The Senate amendment includes restrictions on investment
options. Under the Senate amendment, investment options
(including phantom or notional investment options) which a
participant may elect under the nonqualified deferred
compensation plan must be comparable to those which may be
elected by participants of the qualified defined contribution
plan of the employer that has the fewest investment options. It
is intended that the investment options of the nonqualified
deferred compensation plan may be less favorable or more
limited than those of the qualified defined contribution
employer plan. The Committee intends that open brokerage
windows, hedge funds, and investments in which the employer
guarantees a rate of return above what is commercially
available are prohibited. If there is no qualified defined
contribution employer plan, the investment options of the
nonqualified deferred compensation plan must meet the
requirements prescribed by the Secretary regarding permissible
investment options. It is intended that in cases where there is
no such qualified defined contribution employer plan, the
Secretary issue rules limiting the available investment
options.
The Senate amendment includes an exception to the
provision requiring assets set aside outside of the U.S. for
purposes of paying deferred compensation to be treated as
property transferred in connection with the performance of
services. The provision does not apply to assets located in a
foreign jurisdiction if substantially all of the services to
which the nonqualified deferred compensation relates are
performed in such foreign jurisdiction. The provision is
specifically intended to apply to foreign trusts and
arrangements that effectively shield from the claims of general
creditors any assets intended to satisfy nonqualified deferred
compensation arrangements.
The Senate amendment does not apply to a plan meeting the
requirements of section 457(e)(12) if the plan was in existence
as of May 1, 2004, and was providing nonelective deferred
compensation described in section 457(e)(12) on such date. If
the plan has a material change in the class of individuals
eligible to participate in the plan after May 1, 2004, the
exception does not apply to compensation provided under the
plan after the date of such change.
The Senate amendment does not include an exception from
the reporting requirement for deferrals that are not reasonable
ascertainable.
Effective date.--The provision is effective for amounts
deferred in taxable years beginning after December 31, 2004.
Not later than 90 days after the date of enactment, the
Secretary is directed to issue guidance providing a limited
period during which an individual participating in a
nonqualified deferred compensation plan adopted on or before
December 31, 2004, may, without violating the provision,
terminate participation or cancel an outstanding deferral
election with regard to amounts earned after December 31, 2004,
if such amounts are includible in income as earned.
CONFERENCE AGREEMENT
In general
The conference agreement follows the House bill with the
following modifications. Under the conference agreement, all
amounts deferred under a nonqualified deferred compensation
plan \807\ for all taxable years are currently includible in
gross income to the extent not subject to a substantial risk of
forfeiture \808\ and not previously included in gross income,
unless certain requirements are satisfied.\809\ 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. The amount required to be
included in income is also subject to a 20-percent additional
tax.\810\
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\807\ A plan includes an agreement or arrangement, including an
agreement or arrangement that includes one person. Amounts deferred
also include actual or notional earnings.
\808\ As under section 83, the rights of a person to compensation
are subject to a substantial risk of forefeiture if the person's rights
to such compensation are conditioned upon the performance of
substantial services by any individual.
\809\ It is intended that Treasury regulations will provide
guidance regarding when an amount is deferred. It is intended that
timing of an election to defer is not determinative of when the
deferral is made.
\810\ These consequences apply under the provision to amounts
deferred after the effective date of the provision.
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Current income inclusion, interest, and the additional
tax apply only with respect to the participants with respect to
whom the requirements of the provision are not met. For
example, suppose a plan covering all executives of an employer
(including those subject to section 16(a) of the Securities and
Exchange Act of 1934) allows distributions to individuals
subject to section 16(a) upon a distribution event that is not
permitted under the provision. The individuals subject to
section 16(a), rather than all participants of the plan, would
be required to include amounts deferred in income and would be
subject to interest and the 20-percent additional tax.
Permissible distributions
In general
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 of 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, except as provided in
regulations by the Secretary, may not permit acceleration of a
distribution.
Separation from service
In the case of a specified employee who separates from
service, distributions may not be made earlier than six months
after the date of the separation from service or upon death.
Specified employees are key employees \811\ of publicly-traded
corporations.
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\811\ 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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Specified time
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.
Change in control
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.
Unforeseeable emergency
An unforeseeable emergency is defined as a severe
financial hardship to the participant: (1) resulting from an
illness or accident of the participant, the participant's
spouse, or a dependent (as defined in sec. 152(a)); (2) loss of
the participant's property due to casualty; or (3) 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).
Disability
A participant is considered disabled if he or she (1) 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 (2)
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 three months under an accident and health plan
covering employees of the participant's employer.
Prohibition on acceleration of distributions
As mentioned above, except as provided in regulations by
the Secretary, no accelerations of distributions may be
allowed. In general, changes in the form of distribution that
accelerate payments are subject to the rule prohibiting
acceleration of distributions. However, it is intended that the
rule against accelerations is not violated merely because a
plan provides a choice between cash and taxable property if the
timing and amount of income inclusion is the same regardless of
the medium of distribution. For example, the choice between a
fully taxable annuity contract and a lump-sum payment may be
permitted. It is also intended that the Secretary provide rules
under which the choice between different forms of actuarially
equivalent life annuity payments is permitted.
It is intended that the Secretary will provide other,
limited, exceptions to the prohibition on accelerated
distributions, such as when the accelerated distribution is
required for reasons beyond the control of the participant and
the distribution is not elective. For example, it is
anticipated that an exception could be provided if a
distribution is needed in order to comply with Federal conflict
of interest requirements or a court-approved settlement
incident to divorce. It is intended that Treasury regulations
provide that a plan would not violate the prohibition on
accelerations by providing that withholding of an employee's
share of employment taxes will be made from the employee's
interest in the nonqualified deferred compensation plan. It is
also intended that Treasury regulations provide that a plan
would not violate the prohibition on accelerations by providing
for a distribution to a participant to pay income taxes due
upon a vesting event subject to section 457(f), provided that
such amount is not more than an amount equal to the income tax
withholding that would have been remitted by the employer if
there had been a payment of wages equal to the income
includible by the participant under section 457(f). It is also
intended that Treasury regulations provide that a plan would
not violate the prohibition on accelerations by providing for
automatic distributions of minimal interests in a deferred
compensation plan upon permissible distribution events for
purposes of administrative convenience. For example, a plan
could provide that upon separation from service of a
participant, account balances less than $10,000 will be
automatically distributed (except in the case of specified
employees).
Requirements with respect to elections
The provision requires that a 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.\812\ In the case of any performance-based
compensation based on services performed over a period of at
least 12 months, such election may be made no later than six
months before the end of the service period. It is not intended
that the provision override the constructive receipt doctrine,
as constructive receipt rules continue to apply. It is intended
that the term ``performance-based compensation'' will be
defined by the Secretary to include compensation to the extent
that an amount is: (1) variable and contingent on the
satisfaction of preestablished organizational or individual
performance criteria and (2) not readily ascertainable at the
time of the election. For the purposes of the provision, it is
intended that performance-based compensation may be required to
meet certain requirements similar to those under section
162(m), but would not be required to meet all requirements
under that section. For example, it is expected that the
Secretary will provide that performance criteria would be
considered preestablished if it is established in writing no
later than 90 days after the commencement of the service
period, but the requirement of determination by the
compensation committee of the board of directors would not be
required. It is expected that the Secretary will issue guidance
providing coordination rules, as appropriate, regarding the
timing of elections in the case when the fiscal year of the
employer and the taxable year of the individual are different.
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.
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\812\ 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.
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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. It is
intended that multiple payout events are permissible. For
example, a participant could elect to receive 25 percent of
their account balance at age 50 and the remaining 75 percent at
age 60. A plan could also allow participants to elect different
forms of payment for different permissible distribution events.
For example, a participant could elect to receive a lump-sum
distribution upon disability, but an annuity at age 65.
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 will issue guidance, consistent with the purposes of
the provision, regarding to what extent elections to change a
stream of payments are permissible. The Secretary may issue
regulations regarding elections with respect to payments under
nonelective, supplemental retirement plans.
Foreign trusts
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 (or trust or other arrangement)
are located outside of the United States or at the time
transferred if such assets (or trust or other arrangement) 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 set aside 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.
The amount required to be included in income is also subject to
an additional 20-percent tax.
It is expected that the Secretary will 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 provision does
not apply to assets located in a foreign jurisdiction if
substantially all of the services to which the nonqualified
deferred compensation relates are performed in such foreign
jurisdiction. The provision is specifically intended to apply
to foreign trusts and arrangements that effectively shield from
the claims of general creditors any assets intended to satisfy
nonqualified deferred compensation arrangements. 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.
Triggers upon financial health
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. An amount is treated as restricted even if the
assets are available to satisfy the claims of general
creditors. For example, the provision applies in the case of a
plan that provides that upon a change in financial health,
assets will be transferred to a rabbi trust.
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. The provision is not intended to apply when
assets are restricted for a reason other than change in
financial health (e.g., upon a change in control) or if assets
are periodically restricted under a structured schedule and
scheduled restrictions happen to coincide with a change in
financial status. Any subsequent increases in the value of, or
any earnings with respect to, restricted 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. The amount required to be included in income is
also subject to an additional 20-percent tax.
Definition of nonqualified deferred compensation plan
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.\813\ A qualified employer plan means a qualified
retirement plan, tax-deferred annuity, simplified employee
pension, and SIMPLE.\814\ A qualified governmental excess
benefit arrangement (sec. 415(m)) is a qualified employer plan.
An eligible deferred compensation plan (sec. 457(b)) is also a
qualified employer plan under the provision. A tax-exempt or
governmental deferred compensation plan that is not an eligible
deferred compensation plan is not a qualified employer plan.
The application of the provision is not limited to arrangements
between an employer and employee.
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\813\ The provision does not apply to a plan meeting the
requirements of section 457(e)(12) if the plan was in existence as of
May 1, 2004, was providing nonelective deferred compensation described
in section 457(e)(12) on such date, and is established or maintained by
an organization incorporated on July 2, 1974. If the plan has a
material change in the class of individuals eligible to participate in
the plan after May 1, 2004, the provision applies to compensation
provided under the plan after the date of such change.
\814\ A qualified employer plan also includes a section 501(c)(18)
trust.
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For purposes of the provision, it is not intended that
the term ``nonqualified deferred compensation plan'' include an
arrangement taxable under section 83 providing for the grant of
an option on employer stock with an exercise price that is not
less than the fair market value of the underlying stock on the
date of grant if such arrangement does not include a deferral
feature other than the feature that the option holder has the
right to exercise the option in the future. The provision is
not intended to change the tax treatment of incentive stock
options meeting the requirements of 422 or options granted
under an employee stock purchase plan meeting the requirements
of section 423.
It is intended that the provision does not apply to
annual bonuses or other annual compensation amounts paid within
2\1/2\ months after the close of the taxable year in which the
relevant services required for payment have been performed.
Other rules
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 is 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.
Treasury regulations
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 in
a manner 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. The Secretary may also address in regulations
issues relating to stock appreciation rights.
Aggregation rules
Under the provision, except as provided by the Secretary,
employer aggregation rules apply. It is intended that the
Secretary issue guidance providing aggregation rules as are
necessary to carry out the purposes of the provision. For
example, it is intended that aggregation rules would apply in
the case of separation from service so that the separation from
service from one entity within a controlled group, but
continued service for another entity within the group, would
not be a permissible distribution event. It is also intended
that aggregation rules would not apply in the case of change in
control so that the change in control of one member of a
controlled group would not be a permissible distribution event
for participants of a deferred compensation plan of another
member of the group.
Reporting requirements
Amounts required to be included in income under the
provision are subject to reporting and Federal income tax
withholding requirements. Amounts required to be includible in
income are required to be reported on an individual's Form W-2
(or Form 1099) for the year includible in income.
The provision also 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 (or Form
1099) for the year deferred even if the amount is not currently
includible in income for that taxable year. It is expected that
annual reporting of annual amounts deferred will provide the
IRS greater information regarding such arrangements for
enforcement purposes. It is intended that the information
reported would provide an indication of what arrangements
should be examined and challenged. 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 reasonably
ascertainable only apply to nonaccount balance plans and that
amounts be required to be reported when they first become
reasonably ascertainable.\815\
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\815\ 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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Effective date
The provision is effective for amounts deferred in
taxable years beginning after December 31, 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.
Amounts deferred in taxable years beginning before
January 1, 2005, are subject to the provision if the plan under
which the deferral is made is materially modified after October
3, 2004. The addition of any benefit, right or feature is a
material modification. The exercise or reduction of an existing
benefit, right, or feature is not a material modification. For
example, an amendment to a plan on November 1, 2004, to add a
provision that distributions may be allowed upon request if
participants are required to forfeit 10 percent of the amount
of the distribution (i.e., a ``haircut'') would be a material
modification to the plan so that the rules of the provision
would apply to the plan. Similarly, accelerating vesting under
a plan after October 3, 2004, would be a material modification.
A change in the plan administrator would not be a material
modification. As another example, amending a plan to remove a
distribution provision (e.g., to remove a ``haircut'') would
not be considered a material modification.
Operating under the terms of a deferred compensation
arrangement that complies with current law and is not
materially modified after October 3, 2004, with respect to
amounts deferred before January 1, 2005, is permissible, as
such amounts would not be subject to the requirements of the
provision. For example, subsequent deferrals with respect to
amounts deferred before January 1, 2005, under a plan that is
not materially modified after October 3, 2004, would be subject
to present law and would not be subject to the provision.\816\
No inference is intended that all deferrals before the
effective date are permissible under present law. It is
expected that the IRS will challenge pre-effective date
deferral arrangements that do not comply with present law.
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\816\ There is no inference that all subsequent deferral elections
under plans that are not materially modified are permissible under
present law.
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For purposes of the effective date, an amount is
considered deferred before January 1, 2005, if the amount is
earned and vested before such date. To the extent there is no
material modification after October 3, 2004, present law
applies with respect to vested rights.
No later than 60 days after the date of enactment, the
Secretary shall issue guidance providing a limited period of
time during which a nonqualified deferred compensation plan
adopted before December 31, 2004, may, without violating the
requirements of the provision relating to distributions,
accelerations, and elections be amended (1) to provide that a
participant may terminate participation in the plan, or cancel
an outstanding deferral election with respect to amounts
deferred after December 31, 2004, if such amounts are
includible in income of the participant as earned, or if later,
when not subject to a substantial risk of forfeiture, and (2)
to conform with the provision with respect to amounts deferred
after December 31, 2004. It is expected that the Secretary may
provide exceptions to certain requirements of the provision
during the transition period (e.g., the rules regarding timing
of elections) for plans coming into compliance with the
provision. Moreover, it is expected that the Secretary will
provide a reasonable time, during the transition period but
after the issuance of guidance, for plans to be amended and
approved by the appropriate parties in accordance with this
provision.
2. Denial of deferral of certain stock option and restricted stock
gains (sec. 672 of the Senate amendment and sec. 83 of the
Code)
PRESENT LAW
Section 83 applies to transfers of property in connection
with the performance of services. Under section 83, if, in
connection with the performance of services, property is
transferred to any person other than the person for whom such
services are performed, the excess of the fair market value of
such property over the amount (if any) paid for the property is
includible in income at the first time that the property is
transferable or not subject to substantial risk of forfeiture.
Stock granted to an employee (or other service provider)
is subject to the rules that apply under section 83. When stock
is vested and transferred to an employee, the excess of the
fair market value of the stock over the amount, if any, the
employee pays for the stock is includible in the employee's
income for the year in which the transfer occurs.
The income taxation of a nonqualified stock option is
determined under section 83 and depends on whether the option
has a readily ascertainable fair market value. If the
nonqualified option does not have a readily ascertainable fair
market value at the time of grant, no amount is includible in
the gross income of the recipient with respect to the option
until the recipient exercises the option. The transfer of stock
on exercise of the option is subject to the general rules of
section 83. That is, if vested stock is received on exercise of
the option, the excess of the fair market value of the stock
over the option price is includible in the recipient's gross
income as ordinary income in the taxable year in which the
option is exercised. If the stock received on exercise of the
option is not vested, the excess of the fair market value of
the stock at the time of vesting over the option price is
includible in the recipient's income for the year in which
vesting occurs unless the recipient elects to apply section 83
at the time of exercise.
Other forms of stock-based compensation are also subject
to the rules of section 83.
HOUSE BILL
No provision.
SENATE AMENDMENT
Under the Senate amendment, gains attributable to stock
options (including exercises of stock options), vesting of
restricted stock, and other compensation based on employer
securities (including employer securities) cannot be deferred
by exchanging such amounts for a right to receive a future
payment. Except as provided by the Secretary, if a taxpayer
exchanges (1) an option to purchase employer securities, (2)
employer securities, or (3) any other property based on
employer securities for a right to receive future payments, an
amount equal to the present value of such right (or such other
amount as the Secretary specifies) is required to be included
in gross income for the taxable year of the exchange. The
provision applies even if the future right to payment is
treated as an unfunded and unsecured promise to pay. The
provision applies when there is in substance an exchange, even
if the transaction is not formally structured as an exchange.
The provision is not intended to imply that such
practices result in permissive deferral of income under present
law.
Effective date.--The Senate amendment applies to
exchanges after December 31, 2004.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment.
E. Other Revenue Provisions
1. Permit private sector debt collection companies to collect tax debts
(sec. 681 of the House bill, sec. 487 of the Senate amendment,
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.\817\ 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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\817\ Sec. 7801(a).
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The pilot program was discontinued because of
disappointing results. GAO reported \818\ 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.
---------------------------------------------------------------------------
\818\ 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.\819\ GAO recently reviewed IRS'
planning and preparation for the use of private debt collection
companies.\820\ 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
\821\ 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.'' \822\
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\819\ 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.
\820\ 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).
\821\ Private collection agencies.
\822\ 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.\823\ That provision does not apply to the collection of
debts under the Internal Revenue Code.\824\
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\823\ 31 U.S.C. sec. 3718.
\824\ 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.
HOUSE BILL
The bill permits the IRS to use private debt collection
companies to locate and contact taxpayers owing outstanding tax
liabilities of any type \825\ 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.\826\
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\825\ 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.
\826\ 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.\827\ 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.\828\ 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.
---------------------------------------------------------------------------
\827\ 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.
\828\ The private debt collection company is not permitted to
accept payment directly. Payments are required to be processed by IRS
employees.
---------------------------------------------------------------------------
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, it is intended 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.\829\
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\829\ 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.
---------------------------------------------------------------------------
Effective date.--The provision is effective on the date
of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except that it: (1) sunsets the provision in five years; (2)
provides that, if the taxpayer cannot pay in full immediately,
the private debt collection company may offer the taxpayer an
installment agreement providing for full payment of the taxes
over three years; (3) provides that up to 25 percent of amount
collected may be used for IRS collection enforcement
activities; (4) and requires Treasury to provide a biennial
report to Congress.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, with the
addition of two provisions from the Senate amendment: (1) the
conference agreement provides that up to 25 percent of amount
collected may be used for IRS collection enforcement
activities; and (2) the conference agreement requires Treasury
to provide a biennial report to Congress. The conferees expect
that, consistent with best management practices and sound tax
administration principles, the Secretary will utilize this new
debt collection provision to the maximum extent feasible.
The conferees expect that activities conducted by any
person under a qualified tax collection contract will be in
compliance with the Fair Debt Collection Practices Act, as
required by new section 6306(e) of the Code. Accordingly, the
conferees anticipate that the Secretary will not impose
requirements that would violate this provision of the Code. The
conferees believe that this new debt collection provision will
protect both taxpayers' rights and the confidentiality of tax
information.
2. Modify charitable contribution rules for donations of patents and
other intellectual property (sec. 682 of the House bill, sec.
494 of the Senate amendment, 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.\830\ 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.
---------------------------------------------------------------------------
\830\ Charitable deductions are provided for income, estate, and
gift tax purposes. Secs. 170, 2055, and 2522, respectively.
---------------------------------------------------------------------------
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.\831\
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\831\ 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.\832\ 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.\833\ 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.\834\
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\832\ Sec. 170(f)(3).
\833\ Sec. 1011(b) and Treas. Reg. sec. 1.1011-2.
\834\ 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.\835\
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; \836\ (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.\837\
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\835\ 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.
\836\ 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.
\837\ Treas. Reg. sec. 1.170A-13(c)(3).
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HOUSE BILL
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 100 percent of qualified donee
contribution. income
2nd year ending on or after 100 percent of qualified donee
contribution. income
3rd year ending on or after 90 percent of qualified donee
contribution. income
4th year ending on or after 80 percent of qualified donee
contribution. income
5th year ending on or after 70 percent of qualified donee
contribution. income
6th year ending on or after 60 percent of qualified donee
contribution. income
7th year ending on or after 50 percent of qualified donee
contribution. income
8th year ending on or after 40 percent of qualified donee
contribution. income
9th year ending on or after 30 percent of qualified donee
contribution. income
10th year ending on or after 20 percent of qualified donee
contribution. income
11th year ending on or after 10 percent of qualified donee
contribution. income
12th year ending on or after 10 percent of qualified donee
contribution. 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.\838\ 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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\838\ 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.
---------------------------------------------------------------------------
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.--Effective for contributions made after
June 3, 2004.
SENATE AMENDMENT
The Senate amendment is similar to the House bill, except
that the taxpayer's initial deduction is equal to: the lesser
of the taxpayer's basis in the contributed property or the fair
market value of the property (as in the House bill) or, if
greater, the lesser of 5 percent of the fair market value of
the contributed property or $1 million. Additional charitable
deductions are available as in the House bill, except that such
additional deductions are not required to be offset by the
initial deductible amount.
The Senate amendment imposes a processing fee (credited
to the Exempt Organizations unit with the IRS) equal to 1
percent of the claimed deductible amount for contributions of
applicable intellectual property.
With respect to applicable intellectual property
contributions, the Senate amendment increases the present law
thresholds that trigger application of penalties for
substantial and gross valuation misstatements. The substantial
misstatement penalty applies if the taxpayer's claimed value
exceeds the correct amount by 50 percent or more; the gross
misstatement penalty applies if the taxpayer's claimed value
exceeds the correct amount by 100 percent or more.
The Senate amendment requires that the Secretary shall
prescribe guidance on appraisal standards for charitable
contributions of intellectual property.
Effective date.--Contributions after the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
Effective date.--Effective for contributions made after
June 3, 2004.
3. Require increased reporting for noncash charitable contributions
(sec. 683 of the House 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.\839\ 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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\839\ Charitable deductions are provided for income, estate, and
gift tax purposes. Secs. 170, 2055, and 2522, respectively.
---------------------------------------------------------------------------
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.\840\ 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; \841\ (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.\842\
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\840\ 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 tranded 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.
\841\ 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.
\842\ Treas. Reg. sec. 1.170A-13(c)(3).
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HOUSE BILL
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.--Effective for contributions made after
June 3, 2004.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement follows the House bill, except
that appraisals are not required for charitable contributions
of certain vehicles that are sold by the donee organization
without a significant intervening use or material improvement
of the vehicle by such organization, and for which the
organization provides an acknowledgement to the donor
containing a certification that the vehicle was sold in an
arm's length transaction between unrelated parties, and
providing the gross sales proceeds from the sale, and a
statement that the donor's deductible amount may not exceed the
amount of such gross proceeds.
Effective date.--Effective for contributions made after
June 3, 2004.
4. Limit deduction for charitable contributions of vehicles (sec. 684
of the House bill, sec. 731 of the Senate amendment, and new
sec. 6720 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.\843\ 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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\843\ Charitable deductions are provided for income, estate, and
gift tax purposes. Secs. 170, 2055, and 2522, respectively.
---------------------------------------------------------------------------
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.\844\
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; \845\ (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.\846\
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\844\ 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.
\845\ 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.
\846\ 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.\847\
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\847\ Rev. Rul. 67-461, 1967-2 C.B. 125.
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HOUSE BILL
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.--Effective for contributions made after
June 3, 2004.
SENATE AMENDMENT
Under the Senate amendment, the amount of deduction for
charitable contributions of vehicles (generally including
automobiles, boats, and airplanes for which the claimed value
exceeds $500 and excluding inventory property) depends upon the
use of the vehicle by the donee organization. If the donee
organization sells the vehicle without any significant
intervening use or material improvement of such vehicle by the
organization, the amount of the deduction shall not exceed the
gross proceeds received from the sale.
The proposal imposes new substantiation requirements for
contributions of vehicles for which the claimed value exceeds
$500 (excluding inventory). A deduction is not allowed unless
the taxpayer substantiates the contribution by a
contemporaneous written acknowledgement by the donee. The
acknowledgement must contain the name and taxpayer
identification number of the donor and the vehicle
identification number (or similar number) of the vehicle. In
addition, if the donee sells the vehicle without performing a
significant intervening use or material improvement of such
vehicle, the acknowledgement must provide a certification that
the vehicle was sold in an arm's length transaction between
unrelated parties, and state the gross proceeds from the sale
and that the deductible amount may not exceed such gross
proceeds. In all other cases, the acknowledgement must contain
a certification of the intended use or material improvement of
the vehicle and the intended duration of such use, and a
certification that the vehicle will not be transferred in
exchange for money, other property, or services before
completion of such use or improvement. The donee must notify
the Secretary of the information contained in an
acknowledgement, in a time and manner provided by the
Secretary. An acknowledgement is considered contemporaneous if
provided within 30 days of sale of a vehicle that is not
significantly improved or materially used by the donee, or, in
all other cases, within 30 days of the contribution.
A penalty applies if a donee organization knowingly
furnishes a false or fraudulent acknowledgement, or knowingly
fails to furnish an acknowledgement in the manner, at the time,
and showing the required information. In the case of an
acknowledgement provided within 30 days of sale of a vehicle
which is not significantly used or materially improved by the
donee, the penalty is the greater of the value of the tax
benefit to the donor or the gross proceeds from the sale of the
vehicle. For all other acknowledgements, the penalty is the
greater of the value of the tax benefit to the donor or the
claimed value of the vehicle or $5,000.
The Senate amendment provides that the Secretary shall
prescribe such regulations or other guidance as may be
necessary to carry out the purposes of the proposal.
Effective date.--Contributions after June 30, 2004.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
except that the penalty on the donee organization for knowingly
furnishing a false or fraudulent acknowledgement is determined
differently. With respect to a qualified vehicle sold without a
significant intervening use or material improvement, the
penalty is the greater of the gross proceeds from the sale of
the vehicle or the product of the highest rate of tax specified
in section 1 and the sales price stated on the acknowledgement.
For all other acknowledgements, the penalty is the greater of
$5,000 or the product of the highest rate of tax specified in
section 1 and the claimed value of the vehicle.
The conference agreement also provides that the Secretary
may prescribe regulations or other guidance that exempts sales
of vehicles that are in direct furtherance of the donee's
charitable purposes from the requirement that the donor may not
deduct an amount in excess of the gross proceeds from the sale,
and the requirement that the donee certify that the vehicle
will not be transferred in exchange for money, other property,
or services before completion of a significant use or material
improvement by the donee. The conferees intend that such
guidance may be appropriate, for example, if an organization
directly furthers its charitable purposes by selling
automobiles to needy persons at a price significantly below
fair market value.
The conferees intend that in providing guidance on the
provision, the Secretary shall strictly construe the
requirement of significant use or material improvement. To meet
the significant use test, an organization must actually use the
vehicle to substantially further the organization's regularly
conducted activities and the use must be significant. A donee
will not be considered to significantly use a qualified vehicle
if, under the facts and circumstances, the use is incidental or
not intended at the time of the contribution. Whether a use is
significant also depends on the frequency and duration of use.
With respect to the material improvement test, the conferees
intend that a material improvement would include major repairs
to a vehicle, or other improvements to the vehicle that improve
the condition of the vehicle in a manner that significantly
increases the vehicle's value. Cleaning the vehicle, minor
repairs, and routine maintenance are not considered a material
improvement.
Example 1.--As part of its regularly conducted
activities, an organization delivers meals to needy
individuals. The use requirement would be met if the
organization actually used a donated qualified vehicle to
deliver food to the needy. Use of the vehicle to deliver meals
substantially furthers a regularly conducted activity of the
organization. However, the use also must be significant, which
depends on the nature, extent, and frequency of the use. If the
organization used the vehicle only once or a few times to
deliver meals, the use would not be considered significant. If
the organization used the vehicle to deliver meals every day
for one year the use would be considered significant. If the
organization drove the vehicle 10,000 miles while delivering
meals, such use likely would be considered significant.
However, use of a vehicle in such an activity for one week or
for several hundreds of miles generally would not be considered
a significant use.
Example 2.--An organization uses a donated qualified
vehicle to transport its volunteers. The use would not be
significant merely because a volunteer used the vehicle over a
brief period of time to drive to or from the organization's
premises. On the other hand, if at the time the organization
accepts the contribution of a qualified vehicle, the
organization intends to use the vehicle as a regular and
ongoing means of transport for volunteers of the organization,
and such vehicle is so used, then the significant use test
likely would be met.
Example 3.--The following example is a general
illustration of the provision. A taxpayer makes a charitable
contribution of a used automobile in good running condition and
that needs no immediate repairs to a charitable organization
that operates an elder care facility. The donee organization
accepts the vehicle and immediately provides the donor a
written acknowledgment containing the name and TIN of the
donor, the vehicle identification number, a certification that
the donee intends to retain the vehicle for a year or longer to
transport the facility's residents to community and social
events and deliver meals to the needy, and a certification that
the vehicle will not be transferred in exchange for money,
other property, or services before completion of such use by
the organization. A few days after receiving the vehicle, the
donee organization commences to use the vehicle three times a
week to transport some of its residents to various community
events, and twice a week to deliver food to needy individuals.
The organization continues to regularly use the vehicle for
these purposes for approximately one year and then sells the
vehicle. Under the provision, the donee's use of the vehicle
constitutes a significant intervening use prior to the sale by
the organization, and the donor's deduction is not limited to
the gross proceeds received by the organization.
Effective date.--Effective for contributions made after
December 31, 2004.
5. Extend the present-law intangible amortization provisions to
acquisitions of sports franchises (sec. 685 of the House bill,
sec. 471 of the Senate amendment, 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.\848\ 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.\849\ However, other special rules apply to certain
of these intangible assets.
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\848\ Sec. 197.
\849\ 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.\850\ 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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\850\ P.D.B. Sports, Ltd. v. Comm., 109 T.C. 423 (1997).
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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.
HOUSE BILL
The House bill 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 House bill 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.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
6. Increase continuous levy for certain federal payments (sec. 686 of
the House bill, sec. 734 of the Senate amendment, and sec.
6331(h) 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 \851\ by
the IRS, the IRS may then collect the tax by levy upon all
property and rights to property belonging to the person,\852\
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.\853\
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\851\ 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).
\852\ Code sec. 6331.
\853\ Code secs. 6335-6343.
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A continuous levy is applicable to specified Federal
payments.\854\ 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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\854\ Code sec. 6331(h).
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HOUSE BILL
The bill permits a levy of up to 100 percent of a Federal
payment to a vendor of goods or services to the Federal
Government.
Effective date.--Date of enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill.
CONFERENCE AGREEMENT
The conference agreement follows the House bill and the
Senate amendment.
7. Modification of straddle rules (sec. 687 of the House bill, sec. 464
of the Senate amendment, 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.\855\ 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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\855\ 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.\856\
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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\856\ 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.\857\
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\857\ 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 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.\858\ To date, no such
regulations have been promulgated.
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\858\ 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 corporation--share A with a $30
basis and share B with a $40 basis. When the value of the XYZ
stock is $45 per share, 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.\859\
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.\860\ 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: ``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]''.
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\859\ Priv. Ltr. Rul. 199925044 (Feb. 3, 1999).
\860\ 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.
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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.\861\ 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).\862\ 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.\863\
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\861\ 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 20 percent or
more of the stock, the deduction is increased to 80 percent. If the
recipient owns 80 percent or more of the stock, the deduction is
further increased to 100 percent for qualifying dividends.
\862\ Sec. 246(c).
\863\ Sec. 246(c)(4).
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HOUSE BILL
Straddle rules
The House 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 House 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.\864\
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.\865\ 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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\864\ 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.
\865\ 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 the Secretary
authority to issue 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,\866\ 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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\866\ 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 House 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 House 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.\867\
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\867\ 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 House 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 House bill 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).
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except the Senate amendment also limits the present-law
qualified covered call option exception to options traded on a
national securities exchange that is registered with the
Securities and Exchange Commission.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
8. Add vaccines against Hepatitis A to the list of taxable vaccines
(sec. 688 of the House bill, sec. 491 of the Senate amendment,
and sec. 4132 of the Code)
PRESENT LAW
A manufacturer's excise tax is imposed at the rate of 75
cents per dose \868\ 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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\868\ 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.
HOUSE BILL
The House bill 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.
SENATE AMENDMENT
The Senate amendment adds any vaccine against hepatitis A
to the list of taxable vaccines. The Senate amendment also
makes a conforming amendment to the trust fund expenditure
purposes.
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.
CONFERENCE AGREEMENT
The conference agreement includes the House bill
provision.
9. Add vaccines against influenza to the list of taxable vaccines (sec.
689 of the House bill, sec. 732 of the Senate amendment, and
sec. 4132 of the Code)
PRESENT LAW
A manufacturer's excise tax is imposed at the rate of 75
cents per dose \869\ 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.
---------------------------------------------------------------------------
\869\ 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.
HOUSE BILL
The House bill 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.
SENATE AMENDMENT
The Senate amendment is identical to the House bill.
CONFERENCE AGREEMENT
The conference agreement includes the provision of the
House bill and the Senate amendment.
10. Extension of IRS user fees (sec. 690 of the House bill, sec. 482 of
the Senate amendment, and sec. 7528 of the Code)
PRESENT LAW
The IRS generally charges a fee for requests for a letter
ruling, determination letter, opinion letter, or other similar
ruling or determination.\870\ These user fees are authorized by
statute through December 31, 2004.
---------------------------------------------------------------------------
\870\ Sec. 7528.
---------------------------------------------------------------------------
HOUSE BILL
The House bill extends the statutory authorization for
these user fees through September 30, 2014.
Effective date.--Requests made after the date of
enactment.
SENATE AMENDMENT
The Senate amendment is the same as the House bill,
except that it extends the statutory authorization for these
user fees through September 30, 2013.
CONFERENCE AGREEMENT
The conference agreement follows the House bill.
11. Extension of Customs user fees (sec. 691 of the House bill and sec.
485 of the Senate amendment)
PRESENT LAW
Section 13031 of the Consolidated Omnibus Budget
Reconciliation Act of 1985 (``COBRA'') \871\ authorized the
Secretary of the Treasury to collect certain service fees.
Section 412 of the Homeland Security Act of 2002 \872\
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. No. 108-121, which extended authorization for
the collection of these fees through March 1, 2005.\873\
---------------------------------------------------------------------------
\871\ Pub. L. No. 99-272.
\872\ Pub. L. No. 107-296.
\873\ Sec. 201, 117 Stat. 1335.
---------------------------------------------------------------------------
HOUSE BILL
The House bill extends the passenger and conveyance
processing fees and the merchandise processing fees authorized
under COBRA through September 30, 2014. For fiscal years after
September 30, 2005, the Secretary is to charge fees 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.
The House bill also includes a sense of the Congress
regarding the extent to which fees are 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 House bill further provides that the Secretary
conduct a study of all the fees collected by the Department of
Homeland Security.
Effective date.--The provision is effective on the date
of enactment.
SENATE AMENDMENT
The Senate amendment extends the fees authorized under
the COBRA through September 30, 2013.
CONFERENCE AGREEMENT
The conference agreement follows the House bill
provision.
12. Prohibition on nonrecognition of gain through complete liquidation
of holding company (sec. 452 of the Senate amendment and sec.
332 of the Code)
PRESENT LAW
A U.S. corporation owned by foreign persons is subject to
U.S. income tax on its net income. In addition, the earnings of
the U.S. corporation are subject to a second tax, when
dividends are paid to the corporation's shareholders.
In general, dividends paid by a U.S. corporation to
nonresident alien individuals and foreign corporations that are
not effectively connected with a U.S. trade or business are
subject to a U.S. withholding tax on the gross amount of such
income at a rate of 30 percent. The 30-percent withholding tax
may be reduced pursuant to an income tax treaty between the
United States and the foreign country where the foreign person
is resident.
In addition, the United States imposes a branch profits
tax on U.S. earnings of a foreign corporation that are shifted
out of a U.S. branch of the foreign corporation. The branch
profits tax is comparable to the second-level taxes imposed on
dividends paid by a U.S. corporation to foreign shareholders.
The branch profits tax is 30 percent (subject to possible
income tax treaty reduction) of a foreign corporation's
dividend equivalent amount. The ``dividend equivalent amount''
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.
In general, U.S. withholding tax is not imposed with
respect to a distribution of a U.S. corporation's earnings to a
foreign corporation in complete liquidation of the subsidiary,
because the distribution is treated as made in exchange for
stock and not as a dividend. In addition, detailed rules apply
for purposes of exempting foreign corporations from the branch
profits tax for the year in which it completely terminates its
U.S. business conducted in branch form. The exemption from the
branch profits tax generally applies if, among other things,
for three years after the termination of the U.S. branch, the
foreign corporation has no income effectively connected with a
U.S. trade or business, and the U.S. assets of the terminated
branch are not used by the foreign corporation or a related
corporation in a U.S. trade or business.
Regulations under section 367(e) provide that the
Commissioner may require a domestic liquidating corporation to
recognize gain on distributions in liquidation made to a
foreign corporation if a principal purpose of the liquidation
is the avoidance of U.S. tax. Avoidance of U.S. tax for this
purpose includes, but is not limited to, the distribution of a
liquidating corporation's earnings and profits with a principal
purpose of avoiding U.S. tax.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision treats as a dividend any distribution of
earnings by a U.S. holding company to a foreign corporation in
a complete liquidation, if the U.S. holding company was in
existence for less than five years.
Effective date.--The provision is effective for
distributions occurring on or after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
13. Effectively connected income to include certain foreign source
income (sec. 454 of the Senate amendment and sec. 864 of the
Code)
PRESENT LAW
Nonresident alien individuals 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.\874\ Foreign persons also are subject to a 30-
percent gross-basis tax, collected by withholding, on certain
U.S.-source income, such as interest, dividends and other fixed
or determinable annual or periodical (``FDAP'') income, 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.
---------------------------------------------------------------------------
\874\ Secs. 871(b) and 882.
---------------------------------------------------------------------------
Detailed rules apply for purposes of determining whether
income is treated as effectively connected with a U.S. trade or
business (so-called ``U.S.-effectively connected
income'').\875\ The rules differ depending on whether the
income at issue is U.S.-source or foreign-source income. Under
these rules, U.S.-source FDAP income, such as U.S.-source
interest and dividends, and U.S.-source capital gains are
treated as U.S.-effectively connected income if such income is
derived from assets used in or held for use in the active
conduct of a U.S. trade or business, or from business
activities conducted in the United States. All other types of
U.S.-source income are treated as U.S.-effectively connected
income (sometimes referred to as the ``force of attraction
rule'').
---------------------------------------------------------------------------
\875\ Sec. 864(c).
---------------------------------------------------------------------------
In general, foreign-source income is not treated as U.S.-
effectively connected income.\876\ However, foreign-source
income, gain, deduction, or loss generally is considered to be
effectively connected with a U.S. business only if the person
has an office or other fixed place of business within the
United States to which such income, gain, deduction, or loss is
attributable and such income falls into one of three categories
described below.\877\ For these purposes, income generally is
not considered attributable to an office or other fixed place
of business within the United States unless such office or
fixed place of business is a material factor in the production
of the income, and such office or fixed place of business
regularly carries on activities of the type that generate such
income.\878\
---------------------------------------------------------------------------
\876\ Sec. 864(c)(4).
\877\ Sec. 864(c)(4)(B).
\878\ Sec. 864(c)(5).
---------------------------------------------------------------------------
The first category consists of rents or royalties for the
use of patents, copyrights, secret processes, or formulas, good
will, trademarks, trade brands, franchises, or other similar
intangible properties derived in the active conduct of the U.S.
trade or business.\879\ The second category consists of
interest or dividends derived in the active conduct of a
banking, financing, or similar business within the United
States, or received by a corporation whose principal business
is trading in stocks or securities for its own account.\880\
Notwithstanding the foregoing, foreign-source income consisting
of dividends, interest, or royalties is not treated as
effectively connected if the items are paid by a foreign
corporation in which the recipient owns, directly, indirectly,
or constructively, more than 50 percent of the total combined
voting power of the stock.\881\ The third category consists of
income, gain, deduction, or loss derived from the sale or
exchange of inventory or property held by the taxpayer
primarily for sale to customers in the ordinary course of the
trade or business where the property is sold or exchanged
outside the United States through the foreign person's U.S.
office or other fixed place of business.\882\ Such amounts are
not treated as effectively connected if the property is sold or
exchanged for use, consumption, or disposition outside the
United States and an office or other fixed place of business of
the taxpayer in a foreign country materially participated in
the sale or exchange.
---------------------------------------------------------------------------
\879\ Sec. 864(c)(4)(B)(i).
\880\ Sec. 864(c)(4)(B)(ii).
\881\ Sec. 864(c)(4)(D)(i).
\882\ Sec. 864(c)(4)(B)(iii).
---------------------------------------------------------------------------
The Code provides sourcing rules for enumerated types of
income, including interest, dividends, rents, royalties, and
personal services income.\883\ For example, interest income
generally is sourced based on the residence of the obligor.
Dividend income generally is sourced based on the residence of
the corporation paying the dividend. Thus, interest paid on
obligations of foreign persons and dividends paid by foreign
corporations generally are treated as foreign-source income.
---------------------------------------------------------------------------
\883\ Secs. 861-865.
---------------------------------------------------------------------------
Other types of income are not specifically covered by the
Code's sourcing rules. For example, fees for accepting or
confirming letters of credit have been sourced under principles
analogous to the interest sourcing rules.\884\ In addition,
under regulations, payments in lieu of dividends and interest
derived from securities lending transactions are sourced in the
same manner as interest and dividends, including for purposes
of determining whether such income is effectively connected
with a U.S. trade or business.\885\ Moreover, income from
notional principal contracts (such as interest rate swaps)
generally is sourced based on the residence of the recipient of
the income, but is treated as U.S.-source effectively connected
income if it arises from the conduct of a United States trade
or business.\886\
---------------------------------------------------------------------------
\884\ See Bank of America v. United States, 680 F.2d 142 (Ct. Cl.
1982).
\885\ Treas. Reg. sec. 1.864-5(b)(2)(ii).
\886\ Treas. Reg. sec. 1.863-7(b)(3).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
Under the provision, each category of foreign-source
income that is treated as effectively connected with a U.S.
trade or business is expanded to include economic equivalents
of such income (i.e., economic equivalents of certain foreign-
source (1) rents and royalties, (2) dividends and interest, and
(3) income on sales or exchanges of goods in the ordinary
course of business). Thus, such economic equivalents are
treated as U.S.-effectively connected income in the same
circumstances that foreign-source rents, royalties, dividends,
interest, or certain inventory sales are treated as U.S.-
effectively connected income. For example, foreign-source
interest and dividend equivalents are treated as U.S.-
effectively connected income if the income is attributable to a
U.S. office of the foreign person, and such income is derived
by such foreign person in the active conduct of a banking,
financing, or similar business within the United States, or the
foreign person is a corporation whose principal business is
trading in stocks or securities for its own account.
Effective date.--The provision is effective for taxable
years beginning after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
14. Recapture of overall foreign losses on sale of controlled foreign
corporation stock (sec. 455 of the Senate amendment and sec.
904 of the Code)
PRESENT LAW
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. The amount of foreign tax
credits generally is limited to a portion of the taxpayer's
U.S. tax which portion is calculated by multiplying the
taxpayer's total U.S. tax by a fraction, the numerator of which
is the taxpayer's foreign-source taxable income (i.e., foreign-
source gross income less allocable expenses or deductions) and
the denominator of which is the taxpayer's worldwide taxable
income for the year.\887\ Separate limitations are applied to
specific categories of income.
---------------------------------------------------------------------------
\887\ Sec. 904(a).
---------------------------------------------------------------------------
Special recapture rules apply in the case of foreign
losses for purposes of applying the foreign tax credit
limitation.\888\ Under these rules, losses for any taxable year
in a limitation category which exceed the aggregate amount of
foreign income earned in other limitation categories (a so-
called ``overall foreign loss'') are recaptured by resourcing
foreign-source income earned in a subsequent year as U.S.-
source income.\889\ The amount resourced as U.S.-source income
generally is limited to the lesser of the amount of the overall
foreign losses not previously recaptured, or 50 percent of the
taxpayer's foreign-source income in a given year (the ``50-
percent limit''). Taxpayers may elect to recapture a larger
percentage of such losses.
---------------------------------------------------------------------------
\888\ Sec. 904(f).
\889\ Sec. 904(f)(1).
---------------------------------------------------------------------------
A special recapture rule applies to ensure the recapture
of an overall foreign loss where property which was used in a
trade or business predominantly outside the United States is
disposed of prior to the time the loss has been
recaptured.\890\ In this regard, dispositions of trade or
business property used predominantly outside the United States
are treated as resulting in the recognition of foreign-source
income (regardless of whether gain would otherwise be
recognized upon disposition of the assets), in an amount equal
to the lesser of the excess of the fair market value of such
property over its adjusted basis, or the amount of unrecaptured
overall foreign losses. Such foreign-source income is resourced
as U.S.-source income without regard to the 50-percent limit.
For example, if a U.S. corporation transfers its foreign branch
business assets to a foreign corporation in a nontaxable
section 351 transaction, the taxpayer would be treated for
purposes of the recapture rules as having recognized foreign-
source income in the year of the transfer in an amount equal to
the excess of the fair market value of the property disposed
over its adjusted basis (or the amount of unrecaptured foreign
losses, if smaller). Such income would be recaptured as U.S.-
source income to the extent of any prior unrecaptured overall
foreign losses.\891\
---------------------------------------------------------------------------
\890\ Sec. 904(f)(3).
\891\ Coordination rules apply in the case of losses recaptured
under the branch loss recapture rules. Sec. 367(a)(3)(C).
---------------------------------------------------------------------------
Detailed rules apply in allocating and apportioning
deductions and losses for foreign tax credit limitation
purposes. In the case of interest expense, such amounts
generally are apportioned to all gross income under an asset
method, under which the taxpayer's assets are characterized as
producing income in statutory or residual groupings (i.e.,
foreign-source income in the various limitation categories or
U.S.-source income).\892\ Interest expense is apportioned among
these groupings based on the relative asset values in each.
Taxpayers may elect to value assets based on either tax book
value or fair market value.
---------------------------------------------------------------------------
\892\ Sec. 864(e) and Temp. Treas. Reg. sec. 1.861-9T.
---------------------------------------------------------------------------
Each corporation that is a member of an affiliated group
is required to apportion its interest expense using
apportionment fractions determined by reference to all assets
of the affiliated group. For this purpose, an affiliated group
generally is defined to include only domestic corporations.
Stock in a foreign subsidiary, however, is treated as a foreign
asset that may attract the allocation of U.S. interest expense
for these purposes. If tax basis is used to value assets, the
adjusted basis of the stock of certain 10-percent or greater
owned foreign corporations or other non-affiliated corporations
must be increased by the amount of earnings and profits of such
corporation accumulated during the period the U.S. shareholder
held the stock, for purposes of the interest apportionment.
HOUSE BILL
No provision.
SENATE AMENDMENT
Under the provision, the special recapture rule for
overall foreign losses that currently applies to dispositions
of foreign trade or business assets applies to the disposition
of stock in a controlled foreign corporation controlled by the
taxpayer. Thus, a disposition of controlled foreign corporation
stock by a controlling shareholder results in the recognition
of foreign-source income in an amount equal to the lesser of
the fair market value of the stock over its adjusted basis, or
the amount of prior unrecaptured overall foreign losses. Such
income is resourced as U.S.-source income for foreign tax
credit limitation purposes without regard to the 50-percent
limit.
Although the provision generally extends to all
dispositions of such stock, regardless of whether gain or loss
is recognized on the transfer, exceptions are made for certain
internal restructurings. Contributions to corporations or
partnerships under sections 351 and 721, respectively, and
certain stock and asset reorganizations do not trigger
recapture of overall foreign losses, provided that the
transferor's underlying indirect interest in the disposed
controlled foreign corporation does not change. However, any
gain recognized in connection with a transaction meeting any of
these exceptions, such as boot, triggers recapture of overall
foreign losses to the extent of such gain.
Effective date.--The provision applies to dispositions
after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with modifications. Under the provision as modified, a
disposition of controlled foreign corporation stock in a
transaction in which the taxpayer or a member of its
consolidated group acquires the assets of the controlled
foreign corporation in a liquidation under section 332 or a
reorganization does not trigger the recapture of overall
foreign losses. Any gain recognized in connection with a
transaction meeting this exception triggers recapture of
overall foreign losses to the extent of such gain.
15. Application of earnings-stripping rules to partnerships and S
corporations (sec. 462 of the Senate amendment and sec. 163 of
the Code)
PRESENT LAW
Present law provides rules to limit the ability of U.S.
corporations to reduce the U.S. tax on their U.S.-source income
through earnings stripping transactions. Section 163(j)
specifically addresses earnings stripping involving interest
payments, by limiting the deductibility of interest paid to
certain related parties (``disqualified interest''),\893\ if
the payor's debt-equity ratio exceeds 1.5 to 1 and the payor's
net interest expense exceeds 50 percent of its ``adjusted
taxable income'' (generally taxable income computed without
regard to deductions for net interest expense, net operating
losses, and depreciation, amortization, and depletion).
Disallowed interest amounts can be carried forward
indefinitely. In addition, excess limitation (i.e., any excess
of the 50-percent limit over a company's net interest expense
for a given year) can be carried forward three years.
---------------------------------------------------------------------------
\893\ This interest also may include interest paid to unrelated
parties in certain cases in which a related party guarantees the debt.
---------------------------------------------------------------------------
The present-law earnings stripping provision does not
apply to partnerships. Proposed Treasury regulations provide
that a corporate partner's proportionate share of the
liabilities of a partnership is treated as debt of the
corporate partner for purposes of applying the earnings
stripping limitation to its own interest payments.\894\ In
addition, interest paid or accrued by a partnership is treated
as interest expense of a corporate partner, with the result
that a deduction for the interest expense may be disallowed if
that expense would be disallowed under the earnings stripping
rules if paid by the corporate partner itself.\895\ The
proposed regulations also provide that the earnings stripping
rules do not apply to subchapter S corporations.\896\ Thus,
under present law and the proposed regulations, a partnership
or S corporation generally is allowed a deduction for interest
paid or accrued on indebtedness that it issues that otherwise
would be disallowed under the earnings stripping rules in the
case of a subchapter C corporation.
---------------------------------------------------------------------------
\894\ Prop. Treas. reg. sec. 1.163(j)-3(b)(3).
\895\ Prop. Treas. reg. sec. 1.163(j)-2(c)(5).
\896\ Prop. Treas. reg. sec. 1.163(j)-1(a)(i).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment incorporates a rule attributing
partnership debt to a corporate partner for purposes of
applying the earnings stripping rules to the corporation.\897\
---------------------------------------------------------------------------
\897\ This rule currently is contained in Prop. Treas. reg. sec.
1.163(j)-2(c)(5).
---------------------------------------------------------------------------
Effective date.--The Senate amendment provision generally
is effective for taxable years beginning on or after the date
of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
16. Recognition of cancellation of indebtedness income realized on
satisfaction of debt with partnership interest (sec. 463 of the
Senate amendment and sec. 108 of the Code)
PRESENT LAW
Under present law, a corporation that transfers shares of
its stock in satisfaction of its debt must recognize
cancellation of indebtedness income in the amount that would be
realized if the debt were satisfied with money equal to the
fair market value of the stock.\898\ Prior to enactment of this
present-law provision in 1993, case law provided that a
corporation did not recognize cancellation of indebtedness
income when it transferred stock to a creditor in satisfaction
of debt (referred to as the ``stock-for-debt exception'').\899\
---------------------------------------------------------------------------
\898\ Sec. 108(e)(8).
\899\ E.g., Motor Mart Trust v. Commissioner, 4 T.C. 931 (1945),
aff'd, 156 F.2d 122 (1st Cir. 1946), acq. 1947-1 C.B. 3; Capento Sec.
Corp. v. Commissioner, 47 B.T.A. 691 (1942), nonacq. 1943 C.B. 28,
aff'd, 140 F.2d 382 (1st Cir. 1944); Tower Bldg. Corp. v. Commissioner,
6 T.C. 125 (1946), acq. 1947-1 C.B. 4; Alcazar Hotel, Inc. v.
Commissioner, 1 T.C. 872 (1943), acq. 1943 C.B. 1.
---------------------------------------------------------------------------
When cancellation of indebtedness income is realized by a
partnership, it generally is allocated among the partners in
accordance with the partnership agreement, provided the
allocations under the agreement have substantial economic
effect. A partner who is allocated cancellation of indebtedness
income is entitled to exclude it if the partner qualifies for
one of the various exceptions to recognition of such income,
including the exception for insolvent taxpayers or that for
qualified real property indebtedness of taxpayers other than
subchapter C corporations.\900\ The availability of each of
these exceptions is determined at the partner, rather than the
partnership, level.
---------------------------------------------------------------------------
\900\ Sec. 108(a).
---------------------------------------------------------------------------
In the case of a partnership that transfers to a creditor
a capital or profits interest in the partnership in
satisfaction of its debt, no Code provision expressly requires
the partnership to realize cancellation of indebtedness income.
Thus, it is unclear whether the partnership is required to
recognize cancellation of indebtedness income under either the
case law that established the stock-for-debt exception or the
present-law statutory repeal of the stock-for-debt exception.
It also is unclear whether any requirement to recognize
cancellation of indebtedness income is affected if the
cancelled debt is nonrecourse indebtedness.\901\
---------------------------------------------------------------------------
\901\ See, e.g., Fulton Gold Corp. v. Commissioner, 31 B.T.A. 519
(1934); American Seating Co. v. Commissioner, 14 B.T.A. 328, aff'd in
part and rev'd in part, 50 F.2d 681 (7th Cir. 1931); Hiatt v.
Commissioner, 35 B.T.A. 292 (1937); Hotel Astoria, Inc. v.
Commissioner, 42 B.T.A. 759 (1940); Rev. Rul. 91-31, 1991-1 C.B. 19.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that when a partnership
transfers a capital or profits interest in the partnership to a
creditor in satisfaction of partnership debt, the partnership
generally recognizes cancellation of indebtedness income in the
amount that would be recognized if the debt were satisfied with
money equal to the fair market value of the partnership
interest. The Senate amendment applies without regard to
whether the cancelled debt is recourse or nonrecourse
indebtedness. Any cancellation of indebtedness income
recognized under the Senate amendment is allocated solely among
the partners who held interests in the partnership immediately
prior to the satisfaction of the debt.
Under the Senate amendment, no inference is intended as
to the treatment under present law of the transfer of a
partnership interest in satisfaction of partnership debt.
Effective date.--The Senate amendment is effective for
cancellations of indebtedness occurring on or after the date of
enactment.
CONFERENCE AGREEMENT
The conference agreement includes the Senate amendment.
17. Denial of installment sale treatment for all readily tradable debt
(Sec. 465 of the Senate amendment and sec. 453 of the Code)
PRESENT LAW
Under present law, taxpayers are permitted to recognize
as gain on a disposition of property only that proportion of
payments received in a taxable year which is the same as the
proportion that the gross profit bears to the total contract
price (the ``installment method'').\902\ However, the
installment method is not available if the taxpayer sells
property in exchange for a readily tradable evidence of
indebtedness that is issued by a corporation or a government or
political subdivision.\903\
---------------------------------------------------------------------------
\902\ Sec. 453.
\903\ Sec. 453(f)(3). Instead, the receipt of such indebtedness is
treated as a receipt of payment.
---------------------------------------------------------------------------
No similar provision under present law prohibits the use
of the installment method where the taxpayer sells property in
exchange for readily tradable indebtedness issued by a
partnership or an individual.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment denies installment sale treatment
with respect to all sales in which the taxpayer receives
indebtedness that is readily tradable under present-law rules,
regardless of the nature of the issuer. For example, if the
taxpayer receives readily tradable debt of a partnership in a
sale, the partnership debt is treated as payment on the
installment note, and the installment method is unavailable to
the taxpayer.
Effective date.--The Senate amendment provision is
effective for sales occurring on or after date of enactment.
CONFERENCE AGREEMENT
The conference agreement includes the Senate amendment.
18. Modify treatment of transfers to creditors in divisive
reorganizations (sec. 466 of the Senate amendment and secs. 357
and 361 of the Code)
PRESENT LAW
Section 355 of the Code permits a corporation
(``distributing'') to separate its businesses by distributing a
controlled subsidiary (``controlled'') tax-free, if certain
conditions are met. In cases where the distributing corporation
contributes property to the controlled corporation that is to
be distributed, no gain or loss is recognized if the property
is contributed solely in exchange for stock or securities of
the controlled corporation (which are subsequently distributed
to distributing's shareholders). The contribution of property
to a controlled corporation that is followed by a distribution
of its stock and securities may qualify as a reorganization
described in section 368(a)(1)(D). That section also applies to
certain transactions that do not involve a distribution under
section 355 and that are considered ``acquisitive'' rather than
``divisive'' reorganizations.
The contribution in the course of a divisive section
368(a)(1)(D) reorganization is also subject to the rules of
section 357(c). That section provides that the transferor
corporation will recognize gain if the amount of liabilities
assumed by controlled exceeds the basis of the property
transferred to it.
Because the contribution transaction in connection with a
section 355 distribution is a reorganization under section
368(a)(1)(D), it is also subject to certain rules applicable to
both divisive and acquisitive reorganizations. One such rule,
in section 361(b), states that a transferor corporation will
not recognize gain if it receives money or other property and
distributes that money or other property to its shareholders or
creditors. The amount of property that may be distributed to
creditors without gain recognition is unlimited under this
provision.
HOUSE BILL
No provision.
SENATE AMENDMENT
The bill limits the amount of money plus the fair market
value of other property that a distributing corporation can
distribute to its creditors without gain recognition under
section 361(b) to the amount of the basis of the assets
contributed to a controlled corporation in a divisive
reorganization. In addition, the bill provides that acquisitive
reorganizations under section 368(a)(1)(D) are no longer
subject to the liabilities assumption rules of section 357(c).
Effective date.--The bill is effective for transactions
on or after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
19. Clarify definition of nonqualified preferred stock (sec. 467 of the
Senate amendment and sec. 351(g) of the Code)
PRESENT LAW
The Taxpayer Relief Act of 1997 amended sections 351,
354, 355, 356, and 1036 to treat ``nonqualified preferred
stock'' as boot in corporate transactions, subject to certain
exceptions. For this purpose, preferred stock is defined as
stock that is ``limited and preferred as to dividends and does
not participate in corporate growth to any significant
extent.'' Nonqualified preferred stock is defined as any
preferred stock if (1) the holder has the right to require the
issuer or a related person to redeem or purchase the stock, (2)
the issuer or a related person is required to redeem or
purchase, (3) the issuer or a related person has the right to
redeem or repurchase, and, as of the issue date, it is more
likely than not that such right will be exercised, or (4) the
dividend rate varies in whole or in part (directly or
indirectly) with reference to interest rates, commodity prices,
or similar indices, regardless of whether such varying rate is
provided as an express term of the stock (as in the case of an
adjustable rate stock) or as a practical result of other
aspects of the stock (as in the case of auction stock). For
this purpose, clauses (1), (2), and (3) apply if the right or
obligation may be exercised within 20 years of the issue date
and is not subject to a contingency which, as of the issue
date, makes remote the likelihood of the redemption or
purchase.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision clarifies the definition of nonqualified
preferred stock to ensure that stock for which there is not a
real and meaningful likelihood of actually participating in the
earnings and profits of the corporation is not considered to be
outside the definition of stock that is limited and preferred
as to dividends and does not participate in corporate growth to
any significant extent.
As one example, instruments that are preferred on
liquidation and that are entitled to the same dividends as may
be declared on common stock do not escape being nonqualified
preferred stock by reason of that right if the corporation does
not in fact pay dividends either to its common or preferred
stockholders. As another example, stock that entitles the
holder to a dividend that is the greater of seven percent or
the dividends common shareholders receive does not avoid being
preferred stock if the common shareholders are not expected to
receive dividends greater than seven percent.
No inference is intended as to the characterization of
stock under present law that has terms providing for unlimited
dividends or participation rights but, based on all the facts
and circumstances, is limited and preferred as to dividends and
does not participate in corporate growth to any significant
extent.
Effective date.--The provision is effective for
transactions after May 14, 2003.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
20. Modify definition of controlled group of corporations (sec. 468 of
the Senate amendment and sec. 1563 of the Code)
PRESENT LAW
Under present law, a tax is imposed on the taxable income
of corporations. The rates are as follows:
MARGINAL FEDERAL CORPORATE INCOME TAX RATES
------------------------------------------------------------------------
If taxable income is: Then the income tax rate is:
------------------------------------------------------------------------
$0-$50,000................................ 15 percent of taxable
income.
$50,001-$75,000........................... 25 percent of taxable
income.
$75,001-$10,000,000....................... 34 percent of taxable
income.
Over $10,000,000.......................... 35 percent of taxable
income.
------------------------------------------------------------------------
The first two graduated rates described above are phased
out by a five-percent surcharge for corporations with taxable
income between $100,000 and $335,000. Also, the application 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.
The component members of a controlled group of
corporations are limited to one amount in each of the taxable
income brackets shown above.\904\ For this purpose, a
controlled group of corporations means a parent-subsidiary
controlled group and a brother-sister controlled group.
---------------------------------------------------------------------------
\904\ Component members are also limited to one alternative minimum
tax exemption and one accumulated earnings credit.
---------------------------------------------------------------------------
A brother-sister controlled group means two or more
corporations if five or fewer persons who are individuals,
estates or trusts own (or constructively own) stock possessing
(1) at least 80 percent of the total combined voting power of
all classes of stock entitled to vote and at least 80 percent
of the total value of all stock, and (2) more than 50 percent
of percent of the total combined voting power of all classes of
stock entitled to vote or more than 50 percent of the total
value of all stock, taking into account the stock ownership of
each person only to the extent the stock ownership is identical
with respect to each corporation.\905\
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\905\ Sec. 1563(a)(2). The Supreme Court held in United States v.
Vogel Fertilizer, 455 US 16 (1982), that Treas. Reg. Sec. 1.1563-
1(a)(3), as it was then written, was invalid insofar as it would
require an individual's stock to be taken into account, for purposes of
the 80-percent brother-sister corporation ownership test, where that
individual did not own stock in each of the corporations in the
asserted controlled group. In that case, one corporation was owned
77.49 percent by one shareholder and 22.51 by an unrelated shareholder.
The 77.49 percent shareholder of that first corporation also owned 87.5
percent of the voting stock and more than 90 percent of the value of
the stock of a second corporation. The Supreme Court held the
corporations were not a controlled group, even though they would have
been one had the then applicable Treasury regulations been considered
valid in their application to the case. The Treasury regulations were
subsequently changed to conform to the Supreme Court decision. T.D.
8179, 53 F.R. 6603 (March 2, 1988).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
Under the provision, a brother-sister controlled group
means two or more corporations if five or fewer persons who are
individuals, estates or trusts own (or constructively own)
stock possessing more than 50 percent of the total combined
voting power of all classes of stock entitled to vote, or more
than 50 percent of the total value of all stock, taking into
account the stock ownership of each person only to the extent
the stock ownership is identical with respect to each
corporation.
The provision applies only for purposes of section 1561,
currently relating to corporate tax brackets, the accumulated
earnings credit, and the minimum tax. The provision does not
affect other Code sections or other provisions that utilize or
refer to the section 1563 brother-sister corporation controlled
group test for other purposes.\906\
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\906\ As one example, the provision does not change the present law
standards relating to deferred compensation, contained in subchapter D
of the Code, that refer to section 1563.
---------------------------------------------------------------------------
Effective date.--The provision applies to taxable years
beginning after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
21. Establish specific class lives for utility grading costs (sec. 472
of the Senate amendment and sec. 168 of the Code)
PRESENT LAW
A taxpayer is allowed a depreciation deduction for the
exhaustion, wear and tear, and obsolescence of property that is
used in a trade or business or held for the production of
income. For most tangible property placed in service after
1986, the amount of the depreciation deduction is determined
under the modified accelerated cost recovery system (``MACRS'')
using a statutorily prescribed depreciation method, recovery
period, and placed in service convention. For some assets, the
recovery period for the asset is provided in section 168. In
other cases, the recovery period of an asset is determined by
reference to its class life. The class lives of assets placed
in service after 1986 are generally set forth in Revenue
Procedure 87-56.\907\ If no class life is provided, the asset
is allowed a 7-year recovery period under MACRS.
---------------------------------------------------------------------------
\907\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------
Assets that are used in the transmission and distribution
of electricity for sale are included in asset class 49.14, with
a class life of 30 years and a MACRS recovery period of 20
years. The cost of initially clearing and grading land
improvements are specifically excluded from asset class 49.14.
Prior to adoption of the accelerated cost recovery system, the
IRS ruled that an average useful life of 84 years for the
initial clearing and grading relating to electric transmission
lines and 46 years for the initial clearing and grading
relating to electric distribution lines, would be accepted.
However, the result in this ruling was not incorporated in the
asset classes included in Rev. Proc. 87-56 or its predecessors.
Accordingly such costs are depreciated over a 7-year recovery
period under MACRS as assets for which no class life is
provided.
A similar situation exists with regard to gas utility
pipelines and related storage facilities. Such assets are
included in asset class 49.24, with a class life of 22 years
and a MACRS recovery period of 15 years. Initial clearing and
grade improvements are specifically excluded from the asset
class, and no separate asset class is provided for such costs.
Accordingly such costs are depreciated over a 7-year recovery
period under MACRS as assets for which no class life is
provided.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment assigns a class life to depreciable
electric and gas utility clearing and grading costs incurred to
locate transmission and distribution lines and pipelines. The
provision includes these assets in the asset classes of the
property to which the clearing and grading costs relate
(generally, asset class 49.14 for electric utilities and asset
class 49.24 for gas utilities, giving these assets a recovery
period of 20 years and 15 years, respectively).
Effective date.--The Senate amendment is effective for
property placed in service after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
22. Expansion of limitation on expensing of certain passenger
automobiles (sec. 473 of the Senate amendment and sec. 179 of
the Code)
PRESENT LAW
A taxpayer is allowed to recover, through annual
depreciation deductions, the cost of certain property used in a
trade or business or for the production of income. The amount
of the depreciation deduction allowed with respect to tangible
property for a taxable year is determined under the modified
accelerated cost recovery system (``MACRS''). Under MACRS,
passenger automobiles generally are recovered over five years.
However, section 280F limits the annual depreciation deduction
with respect to certain passenger automobiles.\908\
---------------------------------------------------------------------------
\908\ The limitation is commonly referred to as the ``luxury
automobile depreciation limitation.'' For passenger automobiles
(subject to the such limitation) placed in service in 2002, the maximum
amount of allowable depreciation is $7,660 for the year in which the
vehicle was placed in service, $4,900 for the second year, $2,950 for
the third year, and $1,775 for the fourth and later years. This
limitation applies to the combined depreciation deduction provided
under present law for depreciation, including section 179 expensing and
the temporary 30 percent additional first year depreciation allowance.
For luxury automobiles eligible for the 50% additional first
depreciation allowance, the first year limitation is increased by an
additional $3,050.
---------------------------------------------------------------------------
For purposes of the depreciation limitation, passenger
automobiles are defined broadly to include any 4-wheeled
vehicles that are manufactured primarily for use on public
streets, roads, and highways and which are rated at 6,000
pounds unloaded gross vehicle weight or less.\909\ In the case
of a truck or a van, the depreciation limitation applies to
vehicles that are rated at 6,000 pounds gross vehicle weight or
less. Sports utility vehicles are treated as a truck for the
purpose of applying the section 280F limitation.
---------------------------------------------------------------------------
\909\ Sec. 280F(d)(5). Exceptions are provided for any ambulance,
hearse, or any vehicle used by the taxpayer directly in the trade or
business of transporting persons or property for compensation or hire.
---------------------------------------------------------------------------
In lieu of depreciation, a taxpayer with a sufficiently
small amount of annual investment may elect to expense such
investment (sec. 179). The Jobs and Growth Tax Relief
Reconciliation Act (JGTRRA) of 2003 \910\ 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.\911\ In general,
qualifying property is defined as depreciable tangible personal
property that is purchased for use in the active conduct of a
trade or business. The $100,000 amount is reduced (but not
below zero) by the amount by which the cost of qualifying
property placed in service during the taxable year exceeds
$400,000. 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 may elect to
deduct up to $25,000 of the cost of qualifying property placed
in service for the taxable year. The $25,000 amount is reduced
(but not below zero) by the amount by which the cost of
qualifying property placed in service during the taxable year
exceeds $200,000. Passenger automobiles subject to section 280F
are eligible for section 179 expensing only to the extent of
the applicable limits contained in section 280F.
---------------------------------------------------------------------------
\910\ Pub. L. No. 108-27, sec. 202 (2003).
\911\ 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).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment limits the ability of taxpayers to
claim deductions under section 179 for certain vehicles not
subject to section 280F to $25,000. The provision applies to
sport utility vehicles rated at 14,000 pounds gross vehicle
weight or less (in place of the present law 6,000 pound
rating). For this purpose, a sport utility vehicle is defined
to exclude any vehicle that: (1) is designed for more than nine
individuals in seating rearward of the driver's seat; (2) is
equipped with an open cargo area, or a covered box not readily
accessible from the passenger compartment, of at least six feet
in interior length; or (3) has an integral enclosure, fully
enclosing the driver compartment and load carrying device, does
not have seating rearward of the driver's seat, and has no body
section protruding more than 30 inches ahead of the leading
edge of the windshield.
The following example illustrates the operation of the
provision.
Example.--Assume that during 2004, on a date which is
after the date of enactment a calendar year taxpayer acquires
and places in service a sport utility vehicle subject to the
provision that costs $70,000. In addition, assume that the
property otherwise qualifies for the expensing election under
section 179. Under the provision, the taxpayer is first allowed
a $25,000 deduction under section 179. The taxpayer is also
allowed an additional first-year depreciation deduction (sec.
168(k)) of $22,500 based on $45,000 ($70,000 original cost less
the section 179 deduction of $25,000) of adjusted basis.
Finally, the remaining adjusted basis of $22,500 ($45,000
adjusted basis less $22,500 additional first-year depreciation)
is eligible for an additional depreciation deduction of $4,500
under the general depreciation rules (automobiles are five-year
recovery property). The remaining $18,000 of cost ($70,000
original cost less $52,000 deductible currently) would be
recovered in 2006 and subsequent years pursuant to the general
depreciation rules.
Effective date.--The Senate amendment is effective for
property placed in service after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
23. Provide consistent amortization period for intangibles (sec. 474 of
the Senate amendment and secs. 195, 248, and 709 of the Code)
PRESENT LAW
At the election of the taxpayer, start-up
expenditures\912\ and organizational expenditures\913\ may be
amortized over a period of not less than 60 months, beginning
with the month in which the trade or business begins. Start-up
expenditures are amounts that would have been deductible as
trade or business expenses, had they not been paid or incurred
before business began. Organizational expenditures are
expenditures that are incident to the creation of a corporation
(sec. 248) or the organization of a partnership (sec. 709), are
chargeable to capital, and that would be eligible for
amortization had they been paid or incurred in connection with
the organization of a corporation or partnership with a limited
or ascertainable life.
---------------------------------------------------------------------------
\912\ Sec. 195
\913\ Secs. 248 and 709.
---------------------------------------------------------------------------
Treasury regulations\914\ require that a taxpayer file an
election to amortize start-up expenditures no later than the
due date for the taxable year in which the trade or business
begins. The election must describe the trade or business,
indicate the period of amortization (not less than 60 months),
describe each start-up expenditure incurred, and indicate the
month in which the trade or business began. Similar
requirements apply to the election to amortize organizational
expenditures. A revised statement may be filed to include
start-up and organizational expenditures that were not included
on the original statement, but a taxpayer may not include as a
start-up expenditure any amount that was previously claimed as
a deduction.
---------------------------------------------------------------------------
\914\ Treas. Reg. sec. 1.195-1.
---------------------------------------------------------------------------
Section 197 requires most acquired intangible assets
(such as goodwill, trademarks, franchises, and patents) that
are held in connection with the conduct of a trade or business
or an activity for the production of income to be amortized
over 15 years beginning with the month in which the intangible
was acquired.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment modifies the treatment of start-up
and organizational expenditures. A taxpayer would be allowed to
elect to deduct up to $5,000 of start-up and $5,000 of
organizational expenditures in the taxable year in which the
trade or business begins. However, each $5,000 amount is
reduced (but not below zero) by the amount by which the
cumulative cost of start-up or organizational expenditures
exceeds $50,000, respectively. Start-up and organizational
expenditures that are not deductible in the year in which the
trade or business begins would be amortized over a 15-year
period consistent with the amortization period for section 197
intangibles.
Effective date.--The Senate amendment is effective for
start-up and organizational expenditures incurred after the
date of enactment. Start-up and organizational expenditures
that are incurred on or before the date of enactment would
continue to be eligible to be amortized over a period not to
exceed 60 months. However, all start-up and organizational
expenditures related to a particular trade or business, whether
incurred before or after the date of enactment, would be
considered in determining whether the cumulative cost of start-
up or organizational expenditures exceeds $50,000.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
24. Doubling of certain penalties, fines, and interest on underpayments
related to certain offshore financial arrangements (sec. 483 of
the Senate amendment)
PRESENT LAW
The Code contains numerous civil penalties, such as the
delinquency, accuracy-related and fraud penalties. These civil
penalties are in addition to any interest that may be due.
In January 2003, Treasury announced the Offshore
Voluntary Compliance Initiative (``OVCI'') running through
April 15, 2003, to encourage the voluntary disclosure of
previously unreported income placed by taxpayers in offshore
accounts and accessed through credit card or other financial
arrangements. The taxpayer will pay back taxes, interest and
certain accuracy-related and delinquency penalties.
A taxpayer's timely, voluntary disclosure of a
substantial unreported tax liability has long been an important
factor in deciding whether the taxpayer's case should
ultimately be referred for criminal prosecution. The voluntary
disclosure must be truthful, timely, and complete. A voluntary
disclosure does not guarantee immunity from prosecution.
HOUSE BILL
No provision.
SENATE AMENDMENT
Increases by a factor of two the total amount of civil
penalties, interest and fines applicable for taxpayers who
would have been eligible to participate in either the OVCI or
the Treasury Department's voluntary disclosure initiative but
did not participate in either program.
Effective date.--Taxpayers' open tax years on or after
date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
25. Whistleblower reforms (sec. 488 of the Senate amendment)
PRESENT LAW
Under section 7623, the IRS is authorized to pay such
sums as deemed necessary for: ``(1) detecting underpayments of
tax; and (2) detecting and bringing to trial and punishment
persons guilty of violating the internal revenue laws or
conniving at the same.'' Amounts are paid based on a percentage
of tax, fines, and penalties (but not interest) actually
collected based on the information provided. For specific
information that caused the investigation and resulted in
recovery, the IRS administratively has set the reward in an
amount not to exceed 15 percent of the amounts recovered. For
information, although not specific, that nonetheless caused the
investigation and was of value in the determination of tax
liabilities, the reward is not to exceed 10 percent of the
amount recovered. For information that caused the
investigation, but had no direct relationship to the
determination of tax liabilities, the reward is not to exceed
one percent of the amount recovered. The reward ceiling is $10
million (for payments made after November 7, 2002), and the
reward floor is $100. No reward will be paid if the recovery
was so small as to call for payment of less than $100 under the
above formulas. Both the ceiling and percentages can be
increased with a Special Agreement. The Code permits the IRS to
disclose return information pursuant to a contract for tax
administration services (sec. 6103(n)).
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment creates a reward program for actions
in which the tax, penalties, interest, additions to tax, and
additional amounts in dispute exceed $20,000, and, if the
taxpayer is an individual, the individual's gross income
exceeds $200,000 for any taxable year.
Generally, the Senate amendment establishes a reward
floor of 15 percent of the collected proceeds (including
penalties, interest, additions to tax and additional amounts)
if the IRS proceeds with an administrative or judicial action
based on information brought to the IRS's attention by an
individual. The Senate amendment permits awards of lesser
amounts (but no less than 10 percent) if the action was based
principally on allegations (other than information provided by
the individual) resulting from a judicial or administrative
hearing, government report, hearing, audit, investigation, or
from the news media. The Senate amendment caps the available
reward at 30 percent of the collected proceeds. Any
determination regarding a reward may be appealed to the U.S.
Tax Court.
The Senate amendment creates a Whistleblower Office
within the IRS to administer this reward program. The
Whistleblower Office is funded with amounts equal to rewards
made. The Whistleblower Office may seek the assistance from the
individual providing information or from his legal
representative, and may reimburse the costs incurred by any
legal representative out of the funds of the Whistleblower
Office. To the extent the disclosure of returns or return
information is required to render such assistance, the
disclosure must be pursuant to an IRS tax administration
contract.
Effective date.--Information provided on or after the
date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
26. Increase in age of minor children whose unearned income is taxed as
if parent's income (sec. 495 of the Senate amendment and sec. 1
of the Code)
PRESENT LAW
Filing requirements for children
A single unmarried individual eligible to be claimed as a
dependent on another taxpayer's return generally must file an
individual income tax return if he or she has: (1) earned
income only over $4,850 (for 2004); (2) unearned income only
over the minimum standard deduction amount for dependents ($800
in 2004); or (3) both earned income and unearned income
totaling more than the smaller of (a) $4,850 (for 2004) or (b)
the larger of (i) $800 (for 2004), or (ii) earned income plus
$250.\915\ Thus, if a dependent child has less than $800 in
gross income, the child does not have to file an individual
income tax return for 2004.\916\
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\915\ Sec. 6012(a)(1)(C). Other filing requirements apply to
dependents who are married, elderly, or blind. See, Internal Revenue
Service, Publication 929, Tax Rules for Children and Dependents, at 3,
Table 1 (2003).
\916\ A taxpayer generally need not file a return if he or she has
gross income in an amount less than the standard dedcution (and, if
allowable to the taxpyer, the personal exemption amount). An individual
who may be claimed as a dependent of another taxpyaer is not eligible
to claim the dependency exemption relating to that individual. Sec.
151(d)(2). For taxable years beginning in 2004, the standard deduction
amount for an individual who may be claimed as a dependent by another
taxpyer may not exceed the greater of $800 or the sum of $250 and the
individual's earned income.
---------------------------------------------------------------------------
A child who cannot be claimed as a dependent on another
person's tax return (e.g., because the support test is not
satisfied by any other person) is subject to the generally
applicable filing requirements. That is, such an individual
generally must file a return if the individual's gross income
exceeds the sum of the standard deduction and the personal
exemption amounts applicable to the individual.
Taxation of unearned income under section 1(g)
Special rules (generally referred to as the ``kiddie
tax'') apply to the unearned income of a child who is under age
14.\917\ The kiddie tax applies if: (1) the child has not
reached the age of 14 by the close of the taxable year; (2) the
child's unearned income was more than $1,600 (for 2004); and
(3) the child is required to file a return for the year. The
kiddie tax applies regardless of whether the child may be
claimed as a dependent on the parent's return.
---------------------------------------------------------------------------
\917\ Sec. 1(g).
---------------------------------------------------------------------------
For these purposes, unearned income is income other than
wages, salaries, professional fees, or other amounts received
as compensation for personal services actually rendered.\918\
For children under age 14, net unearned income (for 2004,
generally unearned income over $1,600) is taxed at the parent's
rate if the parent's rate is higher than the child's rate. The
remainder of a child's taxable income (i.e., earned income,
plus unearned income up to $1,600 (for 2004), less the child's
standard deduction) is taxed at the child's rates, regardless
of whether the kiddie tax applies to the child. In general, a
child is eligible to use the preferential tax rates for
qualified dividends and capital gains.\919\
---------------------------------------------------------------------------
\918\ Sec. 1(g)(4) and sec. 911(d)(2).
\919\ Sec. 1(h)
---------------------------------------------------------------------------
The kiddie tax is calculated by computing the ``allocable
parental tax.'' This involves adding the net unearned income of
the child to the parent's income and then applying the parent's
tax rate. A child's ``net unearned income'' is the child's
unearned income less the sum of (1) the minimum standard
deduction allowed to dependents ($800 for 2004), and (2) the
greater of (a) such minimum standard deduction amount or (b)
the amount of allowable itemized deductions that are directly
connected with the production of the unearned income.\920\ A
child's net unearned income cannot exceed the child's taxable
income.
---------------------------------------------------------------------------
\920\ Sec. 1(g)(4).
---------------------------------------------------------------------------
The allocable parental tax equals the hypothetical
increase in tax to the parent that results from adding the
child's net unearned income to the parent's taxable income. If
a parent has more than one child subject to the kiddie tax, the
net unearned income of all children is combined, and a single
kiddie tax is calculated. Each child is then allocated a
proportionate share of the hypothetical increase, based upon
the child's net unearned income relative to the aggregate net
unearned income of all of the parent's children subject to the
tax.
Special rules apply to determine which parent's tax
return and rate is used to calculate the kiddie tax. If the
parents file a joint return, the allocable parental tax is
calculated using the income reported on the joint return. In
the case of parents who are married but file separate returns,
the allocable parental tax is calculated using the income of
the parent with the greater amount of taxable income. In the
case of unmarried parents, the child's custodial parent is the
parent whose taxable income is taken into account in
determining the child's liability. If the custodial parent has
remarried, the stepparent is treated as the child's other
parent. Thus, if the custodial parent and stepparent file a
joint return, the kiddie tax is calculated using that joint
return. If the custodial parent and stepparent file separate
returns, the return of the one with the greater taxable income
is used. If the parents are unmarried but lived together all
year, the return of the parent with the greater taxable income
is used.\921\
---------------------------------------------------------------------------
\921\ Sec. 1(g)(5); Internal Revenue Service, Publication 929, Tax
Rules for Children and Dependents, at 6 (2003).
---------------------------------------------------------------------------
Unless the parent elects to include the child's income on
the parent's return (as described below) the child files a
separate return to report the child's income.\922\ In this
case, items on the parent's return are not affected by the
child's income. The total tax due from a child is the greater
of:
---------------------------------------------------------------------------
\922\ The child must attach to the return Form 8615, Tax for
Children Under Age 14 With Investment Income of More Than $1,500
(2003).
---------------------------------------------------------------------------
(1) The sum of (a) the tax payable by the child on
the child's earned income plus (b) the allocable
parental tax on the child's unearned income, or
(2) The tax on the child's income without regard to
the kiddie tax provisions.
Parental election to include child's dividends and interest on parent's
return
Under certain circumstances, a parent may elect to report
a child's dividends and interest on the parent's return. If the
election is made, the child is treated as having no income for
the year and the child does not have to file a return. The
parent makes the election on Form 8814, Parents' Election To
Report Child's Interest and Dividends. The requirements for the
parent's election are that:
(1) The child has gross income only from interest
and dividends (including capital gains distributions
and Alaska Permanent Fund Dividends); \923\
---------------------------------------------------------------------------
\923\ Internal Revenue Service, Publication 929, Tax Rules
---------------------------------------------------------------------------
(2) Such income is more than the minimum standard
deduction amount for dependents ($800 in 2004) and less
than 10 times that amount ($8000 in 2004);
(3) No estimated tax payments for the year were
made in the child's name and taxpayer identification
number;
(4) No backup withholding occurred; and
(5) The child is required to file a return if the
parent does not make the election.
Only the parent whose return must be used when
calculating the kiddie tax may make the election. The parent
includes in income the child's gross income in excess of twice
the minimum standard deduction amount for dependents (i.e., the
child's gross income in excess of $1,600 for 2004). This amount
is taxed at the parent's rate. The parent also must report an
additional tax liability equal to the lesser of: (1) $80 (in
2004), or (2) 10 percent of the child's gross income exceeding
the child's standard deduction ($800 in 2004).
Including the child's income on the parent's return can
affect the parent's deductions and credits that are based on
adjusted gross income, as well as income-based phaseouts,
limitations, and floors.\924\ In addition, certain deductions
that the child would have been entitled to take on his or her
own return are lost.\925\ Further, if the child received tax-
exempt interest from a private activity bond, that item is
considered a tax preference of the parent for alternative
minimum tax purposes.\926\
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\924\ Internal Revenue Service, Publication 929, Tax Rules for
Children and Dependents, at 7 (2003).
\925\ Internal Revenue Service, Publication 929, Tax Rules for
Children and Dependents, at 7 (2003).
\926\ Sec. 1(g)(7)(B).
---------------------------------------------------------------------------
Taxation of compensation for services under section 1(g)
Compensation for a child's services is considered the
gross income of the child, not the parent, even if the
compensation is not received or retained by the child (e.g., is
the parent's income under local law).\927\ If the child's
income tax is not paid, however, an assessment against the
child will be considered as also made against the parent to the
extent the assessment is attributable to amounts received for
the child's services.\928\
---------------------------------------------------------------------------
\927\ Sec. 73(a).
\928\ Sec. 6201(c).
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment increases the age of minors to which
the kiddie tax provisions apply from under 14 to under 18.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
27. Modify holding period requirement for qualification for reduced tax
rate on dividends on preferred stock (sec. 496 of the Senate
amendment and sec. 1 of the Code)
PRESENT LAW
Section 1(h)(11) provides that if a taxpayer receives
``qualified dividend income,'' the dividend income is taxed as
net capital gain. The maximum rate of tax on qualified dividend
income therefore generally is 15 percent.\929\ Dividends are
treated as qualified dividend income only if certain
conditions, including holding period requirements, are
satisfied. The holding period requirements under section
1(h)(11) are defined by reference, with modifications, to the
holding period requirements under section 246(c) for
qualification for the dividends received deduction. A dividend
paid on a share of common stock is qualified dividend income
only if, among other requirements, the recipient holds the
share for more than 60 days during the 121-day period beginning
on the date that is 60 days before the date on which the share
becomes ex-dividend with respect to the dividend.\930\ A
dividend paid on a share of preferred stock is qualified
dividend income only if the recipient holds the share for more
than 90 days during the 181-day period beginning 90 days before
the ex-dividend date.\931\
---------------------------------------------------------------------------
\929\ Sec. 1(h)(1)(C).
\930\ Secs. 1(h)(11)(B)(iii)(I), 246(c)(1)(A).
\931\ Secs. 1(h)(11)(B)(iii)(I), 246(c)(2).
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HOUSE BILL
No provision.
SENATE AMENDMENT \932\
The Senate amendment changes the holding period
requirement for treatment as qualified dividend income for
dividends paid on preferred stock. Under the Senate amendment,
stock must be held for more than 120 days during the 240-day
period beginning 120 days before the ex-dividend date.
---------------------------------------------------------------------------
\932\ The Senate amendment predated the enactment of H.R. 1308,
Pub. L. No. 108-311 (the ``Working Families Tax Relief Act of 2004''),
which included a technical correction to the holding period
requirements under sections 1(h)(11) and 246(c) (increasing from 120 to
121 days and from 180 to 181 days the periods during which the stock
holding requirements are tested).
---------------------------------------------------------------------------
Effective date.--The Senate amendment provision applies
to taxable years beginning after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
28. Grant Treasury regulatory authority to address foreign tax credit
transactions involving inappropriate separation of foreign
taxes from related foreign income (sec. 661A of Senate
amendment and sec. 901 of the Code)
PRESENT LAW
The United States provides a credit for foreign income
taxes paid or accrued. For purposes of the foreign tax credit,
the taxpayer ``is the person on whom foreign law imposes legal
liability for such tax.'' Treas. Reg. sec. 1.901-2(f)(1). Thus,
if a U.S. corporation owns a foreign partnership, the U.S.
corporation can claim foreign tax credits for the tax that is
imposed on it as a partner in the foreign entity. This is true
even if the U.S. corporation elects to treat the foreign entity
as a corporation for U.S. tax purposes. If the foreign entity
does not meet the definition of a controlled foreign
corporation or does not generate income that is subject to
current inclusion under the rules of an anti-deferral regime,
the income generated by the foreign entity may never be
reported on a U.S. return, despite the fact that the U.S.
corporation can claim credits for taxes imposed on that income.
The Treasury Department and the IRS have expressed
concern about transactions that involve inappropriate foreign
tax credit results, including the second class of transactions
described in Notice 98-5.\933\ The tax benefits claimed in
these transactions are inconsistent with the purposes of the
foreign tax credit provisions.\934\
---------------------------------------------------------------------------
\933\ 1998-1 C.B. 334.
\934\ Notice 2004-19, 2004-11 I.R.B. 606.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision expands existing regulatory authority to
provide Treasury and the IRS additional mechanisms to address
the second class of transactions described in Notice 98-5 as
well as other abusive foreign tax credit schemes that involve
the inappropriate separation of foreign taxes from the related
foreign income in cases where foreign taxes are imposed on any
person with respect to income of an entity.
The regulations may provide for: (1) the disallowance of
a credit for all or a portion of the foreign taxes; or (2) for
the allocation of the foreign taxes among the participants in
the transaction in a manner that is more consistent with the
underlying economics of the transaction.
Effective date.--The provision is effective for
transactions entered into after the date of enactment.
CONFERENCE AGREEMENT
No provision.
29. Freeze of provision regarding suspension of interest where
Secretary fails to contact taxpayer (sec. 662B of the Senate
amendment and sec. 6404(g) of the Code)
PRESENT LAW
In general, interest and penalties accrue during periods
for which taxes were unpaid without regard to whether the
taxpayer was aware that there was tax due. The Code suspends
the accrual of certain penalties and interest after 1 year
after the filing of the tax return \935\ if the IRS has not
sent the taxpayer a notice specifically stating the taxpayer's
liability and the basis for the liability within the specified
period.\936\ With respect to taxable years beginning before
January 1, 2004, the one-year period is increased to 18 months.
Interest and penalties resume 21 days after the IRS sends the
required notice to the taxpayer. The provision is applied
separately with respect to each item or adjustment. The
provision does not apply where a taxpayer has self-assessed the
tax. The suspension only applies to taxpayers who file a timely
tax return. The provision applies only to individuals and does
not apply to the failure to pay penalty, in the case of fraud,
or with respect to criminal penalties.
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\935\ If the return is filed before the due date, for this purpose
it is considered to have been filed on the due date.
\936\ Sec. 6404(g). This provision was added to the Code by sec.
3305 of the IRS Restructuring and Reform Act of 1998 (Pub. L. No. 105-
206, July 22, 1998).
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HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment makes the 18-month rule the
permanent rule. The Senate amendment also adds gross
misstatements \937\ and listed and reportable transactions to
the list of provisions to which the suspension of interest
rules do not apply.
---------------------------------------------------------------------------
\937\ This includes any substantial omission of items to which the
six-year statute of limitations applies (sec. 6051(e)), gross valuation
misstatements (sec. 6662(h)), and similar provisions.
---------------------------------------------------------------------------
Effective date.--The Senate amendment is effective for
taxable years beginning after December 31, 2003,\938\ except
that the addition of listed and reportable transactions applies
to interest accruing after May 5, 2004.
---------------------------------------------------------------------------
\938\ It is intended that this provision apply retroactively to the
period beginning January 1, 2004 and ending on the date of enactment.
The due date for returns for the taxable period beginning January 1,
2004 is generally April 15, 2005; April 15, 2005 is therefore the date
from which the 12-month period that must pass under present-law prior
to the commencement of suspension is calculated. Consequently,
suspension of interest would generally not begin until April 15, 2006.
Accordingly, the provision has no actual retroactive effect.
---------------------------------------------------------------------------
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment,
except: (1) the provision relating to reportable transactions
is made applicable only to reportable avoidance transactions;
\939\ and (2) that the addition of listed and reportable
avoidance transactions applies to interest accruing after
October 3, 2004.
---------------------------------------------------------------------------
\939\ A reportable avoidance transaction is a reportable
transaction with a significant tax avoidance purpose.
---------------------------------------------------------------------------
30. Increase in withholding from supplemental wage payments in excess
of $1 million (sec. 673 of the Senate amendment and sec. 13273
of the Revenue Reconciliation Act of 1993)
PRESENT LAW
An employer must withhold income taxes from wages paid to
employees; there are several possible methods for determining
the amount of income tax to be withheld. The IRS publishes
tables (Publication 15, ``Circular E'') to be used in
determining the amount of income tax to be withheld. The tables
generally reflect the income tax rates under the Code so that
withholding approximates the ultimate tax liability with
respect to the wage payments. In some cases, ``supplemental''
wage payments (e.g., bonuses or commissions) may be subject to
withholding at a flat rate,\940\ based on the third lowest
income tax rate under the Code (25 percent for 2005).\941\
---------------------------------------------------------------------------
\940\ Sec. 13273 of the Revenue Reconciliation Act of 1993.
\941\ Sec. 101(c)(11) of the Economic Growth and Tax Relief
Reconciliation Act of 2001.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
Under the Senate amendment, once annual supplemental wage
payments to an employee exceed $1 million, any additional
supplemental wage payments to the employee in that year are
subject to withholding at the highest income tax rate (35
percent for 2004 and 2005), regardless of any other withholding
rules and regardless of the employee's Form W-4.
This rule applies only for purposes of wage withholding;
other types of withholding (such as pension withholding and
backup withholding) are not affected.
Effective date.--The provision is effective with respect
to payments made after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
except that the conference agreement is effective for payments
made after December 31, 2004.
31. Capital gain treatment on sale of stock acquired from exercise of
statutory stock options to comply with conflict of interest
requirements (sec. 674 of the Senate amendment and sec. 421 of
the Code)
PRESENT LAW
Statutory stock options
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. Upon such
exercise, an employer is allowed a corresponding compensation
deduction. 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.\942\
---------------------------------------------------------------------------
\942\ Sec. 421.
---------------------------------------------------------------------------
If an employee disposes of stock acquired upon the
exercise of a statutory option, the employee generally is taxed
at capital gains rates with respect to the excess of the fair
market value of the stock on the date of disposition over the
option price, and no compensation expense deduction is
allowable to the employer, unless the employee fails to meet a
holding period requirement. The employee fails to meet this
holding period requirement if the disposition occurs within two
years after the date the option is granted or one year after
the date the option is exercised. The gain upon a disposition
that occurs prior to the expiration of the applicable holding
period(s) (a ``disqualifying disposition'') does not qualify
for capital gains treatment. In the event of a disqualifying
disposition, the income attributable to the disposition is
treated by the employee as income received in the taxable year
in which the disposition occurs, and a corresponding deduction
is allowable to the employer for the taxable year in which the
disposition occurs.
Sale of property to comply with conflict of interest requirements
The Code provides special rules for recognizing gain on
sales of property which are required in order to comply with
certain conflict of interest requirements imposed by the
Federal Government.\943\ Certain executive branch Federal
employees (and their spouses and minor or dependent children)
who are required to divest property in order to comply with
conflict of interest requirements may elect to postpone the
recognition of resulting gains by investing in certain
replacement property within a 60-day period. The basis of the
replacement property is reduced by the amount of the gain not
recognized. Permitted replacement property is limited to any
obligation of the United States or any diversified investment
fund approved by regulations issued by the Office of Government
Ethics. The rule applies only to sales under certificates of
divestiture issued by the President or the Director of the
Office of Government Ethics.
---------------------------------------------------------------------------
\943\ Sec. 1043.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
Under the Senate amendment, an eligible person who, in
order to comply with Federal conflict of interest requirements,
is required to sell shares of stock acquired pursuant to the
exercise of a statutory stock option is treated as satisfying
the statutory holding period requirements, regardless of how
long the stock was actually held. An eligible person generally
includes an officer or employee of the executive branch of the
Federal Government (and any spouse or minor or dependent
children whose ownership in property is attributable to the
officer or employee). Because the sale is not treated as a
disqualifying disposition, the individual is afforded capital
gain treatment on any resulting gains. Such gains are eligible
for deferral treatment under section 1043.
The employer granting the option is not allowed a
deduction upon the sale of the stock by the individual.
Effective date.--The Senate amendment is effective for
sales after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment.
32. Application of basis rules to nonresident aliens (sec. 675 of the
Senate amendment and new sec. 72(w) and sec. 83 of the Code)
PRESENT LAW
Distributions from retirement plans
Distributions from retirement plans are includible in
gross income under the rules relating to annuities \944\ and,
thus, are generally includible in income, except to the extent
the amount received represents investment in the contract
(i.e., the participant's basis). The participant's basis
includes amounts contributed by the participant on an after-tax
basis, together with certain amounts contributed by the
employer, minus the aggregate amount (if any) previously
distributed to the extent that such amount was excludable from
gross income. Amounts contributed by the employer are included
in the calculation of the participant's basis only to the
extent that such amounts were includible in the gross income of
the participant, or to the extent that such amounts would have
been excludable from the participant's gross income if they had
been paid directly to the participant at the time they were
contributed.\945\
---------------------------------------------------------------------------
\944\ Secs. 72 and 402.
\945\ Sec. 72(f).
---------------------------------------------------------------------------
Employer contributions to retirement plans and other
payments for labor or personal services performed outside the
United States by a nonresident alien generally are not treated
as U.S. source income. Such contributions, therefore, generally
would not be includible in the nonresident alien's gross income
if they had been paid directly to the nonresident alien at the
time they were contributed. Consequently, the amounts of such
contributions generally are includible in the employee's basis
and are not taxed by the United States if a distribution is
made when the employee is a U.S. citizen or resident.\946\
---------------------------------------------------------------------------
\946\ Rev. Rul. 58-236, 1958-1 C.B. 37.
---------------------------------------------------------------------------
Earnings on contributions are not included in basis
unless previously includible in income. In general, in the case
of a nonexempt trust, earnings are includible in income when
distributed or made available.\947\ In the case of highly
compensated employees, the amount of the vested accrued benefit
under the trust (other than the employee's investment in the
contract) is generally required to be included in income
annually (to the extent not previously includible). That is,
earnings, as well as contributions, that are part of the vested
accrued benefit are currently includible in income.\948\
---------------------------------------------------------------------------
\947\ Sec. 402(b)(2).
\948\ Sec. 402(b)(4).
---------------------------------------------------------------------------
Property transferred in connection with the performance of services
The Code contains rules governing the amount and timing
of income and deductions attributable to transfers of property
in connection with the performance of services. If, in
connection with the performance of services, property is
transferred to any person other than the person for whom such
services are performed, in general, an amount is includible in
the gross income of the person performing the services (the
``service provider'') for the taxable year in which the
property is first vested (i.e., transferable or not subject to
a substantial risk of forfeiture).\949\ The amount includible
in the service provider's income is the excess of the fair
market value of the property over the amount (if any) paid for
the property. Basis in such property includes any amount that
is included in income as a result of the transfer.\950\
---------------------------------------------------------------------------
\949\ Sec. 83(a).
\950\ Treas. Reg. sec. 1.61-2(d)(i).
---------------------------------------------------------------------------
U.S. income tax treaties
Under the 1996 U.S. Model Income Tax Treaty (``U.S.
Model'') and some U.S. income tax treaties in force, retirement
plan distributions beneficially owned by a resident of a treaty
country in consideration for past employment generally are
taxable only by the individual recipient's country of
residence. Under the U.S. Model treaty and some U.S. income tax
treaties, this exclusive residence-based taxation rule is
limited to the taxation of amounts that were not previously
included in taxable income in the other country. For example,
if a treaty country had imposed tax on a resident individual
with respect to some portion of a retirement plan's earnings,
subsequent distributions to that person while a resident of the
United States would not be taxable in the United States to the
extent the distributions were attributable to such previously
taxed amounts.
Compensation of employees of foreign governments or international
organizations
Under section 893, wages, fees, and salaries of any
employee of a foreign government or international organization
(including a consular or other officer or a nondiplomatic
representative) received as compensation for official services
to the foreign government or international organization
generally are excluded from gross income when (1) the employee
is not a citizen of the United States, or is a citizen of the
Republic of the Philippines (whether or not a citizen of the
United States); (2) in the case of an employee of a foreign
government, the services are of a character similar to those
performed by employees of the United States in foreign
countries; and (3) in the case of an employee of a foreign
government, the foreign government grants an equivalent
exemption to employees of the United States performing similar
services in such foreign country. The Secretary of State
certifies the names of the foreign countries which grant an
equivalent exclusion to employees of the United States
performing services in those countries, and the character of
those services.
The exclusion does not apply to employees of controlled
commercial entities or employees of foreign governments whose
services are primarily in connection with commercial activity
(whether within or outside the United States) of the foreign
government.
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment modifies the present-law rules under
which certain contributions and earnings that have not been
previously taxed are treated as basis (under sec. 72). Under
the Senate amendment, employee or employer contributions are
not included in basis if: (1) the employee was a nonresident
alien at the time the services were performed with respect to
which the contribution was made; (2) the contribution is with
respect to compensation for labor or personal services from
sources without the United States; and (3) the contribution was
not subject to income tax under the laws of the United States
or any foreign country.
The Senate amendment authorizes the Secretary of the
Treasury to issue regulations to carry out the purposes of the
Senate amendment, including regulations treating contributions
as not subject to income tax under the laws of any foreign
country under appropriate circumstances.
Effective date.--The Senate amendment is effective for
distributions occurring on or after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with modifications.
Under the conference agreement, employee or employer
contributions are not included in basis (under sec. 72) if: (1)
the employee was a nonresident alien at the time the services
were performed with respect to which the contribution was made;
(2) the contribution is with respect to compensation for labor
or personal services from sources without the United States;
and (3) the contribution was not subject to income tax (and
would have been subject to income tax if paid as cash
compensation when the services were rendered) under the laws of
the United States or any foreign country.
Additionally, earnings on employer or employee
contributions are not included in basis if: (1) the earnings
are paid or accrued with respect to any employer or employee
contributions which were made with respect to compensation for
labor or personal services; (2) the employee was a nonresident
alien at the time the earnings were paid or accrued; and (3)
the earnings were not subject to income tax under the laws of
the United States or any foreign country.
The conference agreement does not change the rules
applicable to calculation of basis with respect to
contributions or earnings while an employee is a U.S. resident.
There is no inference that this conference agreement
applies in any case to create tax jurisdiction with respect to
wages, fees, and salaries otherwise exempt under section 893.
Similarly, there is no inference that the conference agreement
applies where contrary to an agreement of the United States
that has been validly authorized by Congress (or in the case of
a treaty, ratified by the Senate), and which provides an
exemption for income.
Most U.S. tax treaties specifically address the taxation
of pension distributions. The U.S. Model treaty provides for
exclusive residence-based taxation of pension distributions to
the extent such distributions were not previously included in
taxable income in the other country. For purposes of the U.S.
Model treaty, the United States treats any amount that has
increased the recipient's basis (as defined in section 72) as
having been previously included in taxable income. The
following example illustrates how the conference agreement
could affect the amount of a distribution that may be taxed by
the United States pursuant to a tax treaty.
Assume the following facts. A, a nonresident alien
individual, performs services outside the United States, in A's
country of residence, country Z. A's employer makes
contributions on behalf of A to a pension plan established in
country Z. For U.S. tax purposes, no portion of the
contributions or earnings are included in A's income (and would
not be included in income if the amounts were paid as cash
compensation when the services were performed) because such
amounts relate to services performed without the United
States.\951\ Later in time, A retires and becomes a permanent
resident of the United States.
---------------------------------------------------------------------------
\951\ Sec. 872.
---------------------------------------------------------------------------
Under the conference agreement, the employer
contributions to the pension plan would not be taken into
account in determining A's basis if A was not subject to income
tax on the contributions by a foreign country and the
contributions would have been subject to tax by a foreign
country if the contributions had been paid to A as cash
compensation when the services were performed. Thus, in those
circumstances, A would be subject to U.S. tax on the
distribution of all of the contributions, as such distributions
are made. However, if the contributions would not have been
subject to tax in the foreign country if they had been paid to
A as cash compensation when the services were performed, under
the conference agreement, the contributions would be included
in A's basis. Earnings that accrued while A was a nonresident
alien would not result in basis if not taxed under U.S. or
foreign law. Earnings that accrued while A was a permanent
resident of the United States would be subject to present-law
rules. This result generally is consistent with the treatment
of pension distributions under the U.S. Model treaty.
The conference agreement authorizes the Secretary of the
Treasury to issue regulations to carry out the purposes of the
conference agreement, including regulations treating
contributions as not subject to income tax under the laws of
any foreign country under appropriate circumstances. For
example, Treasury could provide that foreign income tax that
was merely nominal would not satisfy the ``subject to income
tax'' requirement.
The conference agreement also changes the rules for
determining basis in property received in connection for the
performance of services in the case of an individual who was a
nonresident alien at the time of the performance of services,
if the property is treated as income from sources outside the
United States. In that case, the individual's basis in the
property does not include any amount that was not subject to
income tax (and would have been subject to income tax if paid
as cash compensation when the services were performed) under
the laws of the United States or any foreign country.
Effective date.--The conference agreement is effective
for distributions occurring on or after the date of enactment.
No inference is intended that the earnings subject to the
conference agreement are included in basis under present law.
33. Residence and source rules related to a United States possession
(sec. 497 of the Senate amendment and new sec. 937 of the Code)
PRESENT LAW
In general
Generally, U.S. citizens are subject to U.S. income
taxation on their worldwide income. Thus, all income earned by
U.S. citizens is subject to U.S. income tax, regardless of its
source.
The U.S. income taxation of alien individuals varies
depending on whether they are resident or non-resident aliens.
A resident alien is generally taxed in the same manner as a
U.S. citizen.\952\ In contrast, a nonresident alien is
generally subject to U.S. tax only on certain gross U.S. source
income at a flat 30 percent rate (unless such rate is
eliminated or reduced by treaty) and on net income that has a
sufficient nexus to the United States at the graduated rates
applicable to U.S. citizens and residents under section 1.
---------------------------------------------------------------------------
\952\ Section 7701(a)(30) defines a citizen or resident of the
United States as ``U.S. persons.''
---------------------------------------------------------------------------
An alien is considered a resident of the United States if
the individual: (1) has entered the United States as a lawful
permanent resident and is such a resident at any time during
the calendar year, (2) is present in the United States for a
substantial period of time (the so-called ``substantial
presence test''), or (3) makes an election to be treated as a
resident of the United States (sec. 7701(b)). An alien who does
not meet the definition of a ``resident alien'' is considered
to be a non-resident alien for U.S. income tax purposes.
Under the substantial presence test, an alien individual
is generally treated as a resident alien if he or she is
present in the United States for 31 days during the taxable
year and the sum of the number of days on which such individual
was present in the United States (when multiplied by the
applicable multiplier) during the current year and the
preceding two calendar years equals or exceeds 183 days. The
applicable multiplier for: the current year is one; the first
preceding year is one-third; and the second preceding year is
one-sixth.
An alien individual who meets the above test may
nevertheless be a nonresident if he or she (1) is present in
the United States for fewer than 183 days during the current
year; (2) has a tax home in a foreign country during the year;
and (3) has a closer connection to that country than to the
United States.
For purposes of the substantial presence test, the United
States includes the states and the District of Columbia, but
does not include U.S. possessions. An individual is present in
the United States for a particular day if he or she is
physically present in the United States during any time during
such day. However, in certain circumstances an individual's
presence in the United States is ignored, including presence in
the United States as a result of certain medical emergencies.
U.S. income taxation of residents of U.S. possessions
Generally, special U.S. income tax rules apply with
respect to U.S. persons who are bona fide residents of certain
U.S. possessions (i.e., Puerto Rico, Virgins Islands, Guam,
Northern Mariana Islands and American Samoa) and who have
possession source income or income effectively connected to the
conduct of a trade or business within a possession.
Generally, a bona fide resident of a U.S. possession
(regardless of whether the individual is a U.S. citizen or
alien) is determined using the principles of a subjective,
facts-and-circumstances test set forth in the regulations under
section 871. Prior to the adoption of present-law section
7701(b), this subjective test was used to determine whether an
alien individual was a resident of the United States. Under
these rules, an individual is generally a resident of the
United States if an individual (1) is actually present in the
United States, and (2) is not a mere transient or
sojourner.\953\ Whether individuals are transients is
determined by their intentions with regard to the length and
nature of their stay. However, the regulations provide that
section 7701(b) (discussed above) provides the basis for
determining whether an alien individual is a resident of a U.S.
possession with a mirror income tax code.\954\
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\953\ Treas. Reg. sec. 1.871-2(b).
\954\ A U.S. possession with a mirror income tax code is ``a United
States possession * * * that administers income tax laws that are
identifical (except for the substitution of the name of the possession
or territory for the term `United States' where appropriate) to those
in the United States.'' Treas. Reg. sec. 7701(b)-1(d)(1).
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Pursuant to regulations, the principles that generally
apply for determining income from sources within and without
the United States also generally apply in determining income
from sources within and without a U.S. possession.\955\ The
Code and regulations do not indicate how to determine whether
income is effectively connected with the conduct of a trade or
business within a U.S. possession. However, section 864(c)
provides rules for determining whether income is effectively
connected to a trade or business conducted within the United
States.
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\955\ Treas. Reg. sec. 1.863-6.
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Information reporting
Section 7654(e) provides that Treasury may require
information reporting with respect to individuals that may take
advantage of certain special U.S. income tax rules with respect
to U.S. possessions. Section 6688 provides that an individual
may be subject to a $100 penalty if the individual fails to
furnish the information required by regulations issued pursuant
to section 7654(e).
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision provides the term ``bona fide resident''
means a person who satisfies a test, determined by the
Secretary, similar to the substantial presence test of section
7701(b)(3) with respect to Guam, American Samoa, the Northern
Mariana Islands, Puerto Rico, or the Virgin Islands.
The provision also requires bona fide residents of the
Virgin Islands to file an informational income tax return with
the United States and imposes a penalty for the failure to file
such a return.
Effective date.--The provision is effective for taxable
years ending after the date of enactment.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
with modifications.
The conferees understand that certain U.S. citizens and
residents are claiming that they are exempt from U.S. income
tax on their worldwide income based on a position that they are
bona fide residents of the Virgin Islands or another
possession. However, these individuals often do not spend a
significant amount of time in the particular possession during
a taxable year and, in some cases, continue to live and work in
the United States. Under the Virgin Island's Economic
Development Program, many of these same individuals secure a
reduction of up to 90 percent of their Virgin Islands income
tax liability on income they take the position is Virgin
Islands source or effectively connected with the conduct of a
Virgin Islands trade or business. The conferees are also aware
that taxpayers are taking the position that income earned for
services performed in the United States is Virgin Islands
source or that their U.S. activities generate income
effectively connected with the conduct of a Virgin Islands
trade or business.
The conferees believe that the various exemptions from
U.S. tax provided to residents of possessions should not be
available to individuals who continue to live and work in the
United States. The conferees also believe that the special U.S.
income tax rules applicable to residents in a possession need
to be rationalized. The conferees are further concerned that
the general rules for determining whether income is effectively
connected with the conduct of a trade or business in a
possession present numerous opportunities for erosion of the
U.S. tax base.
Generally, the provision provides that the term ``bona
fide resident'' means a person who meets a two-part test with
respect to Guam, American Samoa, the Northern Mariana Islands,
Puerto Rico, or the Virgin Islands, as the case may be, for the
taxable year. First, an individual must be present in the
possession for at least 183 days in the taxable year. Second,
an individual must (i) not have a tax home outside such
possession during the taxable year and (ii) not have a closer
connection to the United States or a foreign country during
such year.
The provision also grants authority to Treasury to create
exceptions to these general rules as appropriate. The conferees
intend for such exceptions to cover, in particular, persons
whose presence outside a possession for extended periods of
time lacks a tax avoidance purpose, such as military personnel,
workers in the fisheries trade, and retirees who travel outside
the possession for certain personal reasons.
An individual is present in a possession for a particular
day if he is physically present in such possession during any
time during such day. In certain circumstances an individual's
presence outside a possession is ignored (e.g., certain medical
emergencies) as provided under the principles of section
7701(b).
The provision provides that a taxpayer must file a notice
in the first taxable year they claim bona fide residence in a
possession. The provision imposes a penalty of $1000 for the
failure to file such notice or to comply with any filing
required by regulation under section 7654(e).
The provision generally codifies the existing rules for
determining when income is considered to be from sources within
a possession by providing that, as a general rule, for all
purposes of the Code, the principles for determining whether
income is U.S. source are applicable for purposes of
determining whether income is possession source. In addition,
the provision provides that the principles for determining
whether income is effectively connected with the conduct of a
U.S. trade or business are applicable for purposes of
determining whether income is effectively connected to the
conduct of a possession trade or business. However, the
provision further provides that except as provided in
regulations any income treated as U.S. source income or as
effectively connected with the conduct of a U.S. trade or
business is not treated as income from within any possession or
as effectively connected with a trade or business within any
such possession.
The provision also grants authority to the Secretary of
the Treasury to create exceptions to these general rules
regarding possession source income and income effectively
connected with a possession trade or business as appropriate.
The conferees anticipate that this authority will be used to
continue the existing treatment of income from the sale of
goods manufactured in a possession. The conferees also intend
for this authority to be used to prevent abuse, for example, to
prevent U.S. persons from avoiding U.S. tax on appreciated
property by acquiring residence in a possession prior to its
disposition.
No inference is intended as to the present-law rules for
determining (1) bona fide residence in a possession, (2)
whether income is possession source, and (3) whether income is
effectively connected with the conduct of a trade or business
within a possession.
Effective date.--Generally, the provision is effective
for taxable years ending after the date of enactment. The first
prong of the two-part residency test (i.e., the 183-day test)
is effective for taxable years beginning after date of
enactment. The general effective date applies with respect to
the second prong of such test. The rule providing that income
treated as U.S. source income or as effectively connected with
the conduct of a U.S. trade or business is not treated as
income from within any possession or as effectively connected
with the conduct of a trade or business within any such
possession is effective for income earned after date of
enactment.
34. Include employer provided housing under foreign earned income
exclusion cap (sec. 632 of the Senate amendment and sec. 911 of
the Code)
PRESENT LAW
U.S. citizens generally are subject to U.S. income tax on
all their income, whether derived in the United States or
elsewhere. A U.S. citizen who earns income in a foreign country
also may be taxed on such income by that foreign country.
However, the United States generally cedes the primary right to
tax income derived by a U.S. citizen from sources outside the
United States to the foreign country where such income is
derived. Accordingly, a credit against the U.S. income tax
imposed on foreign source income is generally available for
foreign taxes paid on that income, to the extent of the U.S.
tax otherwise owed on such income. If the foreign income tax
rate is lower than the U.S. income tax rate, then the United
States generally provides a credit up to the amount of the
foreign tax and imposes a residual tax to the extent of the
difference.
U.S. citizens living abroad may be eligible to exclude
from their income for U.S. tax purposes certain foreign earned
income and foreign housing costs, in which case no residual
U.S. tax is imposed to the extent of such exclusion, regardless
of the foreign tax rate. In order to qualify for these
exclusions, an individual must be either: (1) a U.S. citizen
who is a bona fide resident of a foreign country for an
uninterrupted period that includes an entire taxable year;
\956\ or (2) a U.S. citizen or resident present overseas for
330 days out of any 12-consecutive-month period. In addition,
the taxpayer must have his or her tax home in a foreign
country.
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\956\ Only U.S. citizens may qualify under the bona fide residence
test. However, resident aliens of the United States who are citizens of
foreign countries that have a treaty with the United States may qualify
for section 911 exclusions under the bona fide residence test by
application of a nondiscrimination provision.
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The foreign earned income exclusion generally applies to
income earned from sources outside the United States as
compensation for personal services rendered by the taxpayer.
The maximum exclusion amount for foreign earned income is
$80,000 per taxable year for 2002 and thereafter. For taxable
years beginning after 2007, the maximum exclusion amount is
indexed for inflation.
The exclusion for housing costs applies to reasonable
expenses, other than deductible interest and taxes, paid or
incurred by or on behalf of the taxpayer for housing in a
foreign country but only to the extent the housing costs exceed
a base housing amount. The base housing amount is equal to 16
percent of the annual salary earned by a GS-14, Step 1 U.S.
government employee. In the case of housing costs that are not
paid or reimbursed by the taxpayer's employer, the amount that
would be excludible is treated instead as a deduction.
The combined foreign earned income exclusion and housing
cost exclusion may not exceed the taxpayer's total foreign
earned income for the taxable year. The taxpayer's foreign tax
credit is reduced by the amount of such credit that is
attributable to excluded income.
HOUSE BILL
No provision.
SENATE AMENDMENT
The provision applies the annual foreign earned income
exclusion cap to the combined value of foreign earned income
and employer-provided housing amounts.
The present-law provision providing indexation for
inflation for tax years beginning after 2007 remains unchanged.
The present law provision imposing an additional foreign earned
income cap on exclusions and deductions also remains unchanged.
Effective date.--The provision is effective for taxable
years beginning after December 31, 2003.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
35. Deduction for personal use of company aircraft and other
entertainment expenses (sec. 103(b) of the Senate amendment and
sec. 274(e) of the Code)
PRESENT LAW
Under present law, no deduction is allowed with respect
to (1) an activity generally considered to be entertainment,
amusement or recreation, unless the taxpayer establishes that
the item was directly related to (or, in certain cases,
associated with) the active conduct of the taxpayer's trade or
business, or (2) a facility (e.g., an airplane) used in
connection with such activity.\957\ The Code includes a number
of exceptions to the general rule disallowing deductions of
entertainment expenses. Under one exception, the deduction
disallowance rule does not apply to expenses for goods,
services, and facilities to the extent that the expenses are
reported by the taxpayer as compensation and wages to an
employee.\958\ The deduction disallowance rule also does not
apply to expenses paid or incurred by the taxpayer for goods,
services, and facilities to the extent that the expenses are
includible in the gross income of a recipient who is not an
employee (e.g., a nonemployee director) as compensation for
services rendered or as a prize or award.\959\ The exceptions
apply only to the extent that amounts are properly reported by
the company as compensation and wages or otherwise includible
in income. In no event can the amount of the deduction exceed
the amount of the actual cost, even if a greater amount is
includible in income.
---------------------------------------------------------------------------
\957\ Sec. 274(a).
\958\ Sec. 274(e)(2).
\959\ Sec. 274(e)(9).
---------------------------------------------------------------------------
Except as otherwise provided, gross income includes
compensation for services, including fees, commissions, fringe
benefits, and similar items. In general, an employee or other
service provider must include in gross income the amount by
which the fair value of a fringe benefit exceeds the amount
paid by the individual. Treasury regulations provide rules
regarding the valuation of fringe benefits, including flights
on an employer-provided aircraft.\960\ In general, the value of
a non-commercial flight is determined under the base aircraft
valuation formula, also known as the Standard Industry Fare
Level formula or ``SIFL''.\961\ If the SIFL valuation rules do
not apply, the value of a flight on a company-provided aircraft
is generally equal to the amount that an individual would have
to pay in an arm's-length transaction to charter the same or a
comparable aircraft for that period for the same or a
comparable flight.\962\
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\960\ Treas. Reg. sec. 1.61-21.
\961\ Treas. Reg. sec. 1.61-21(g).
\962\ Treas. Reg. sec. 1.61-21(b)(6).
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In the context of an employer providing an aircraft to
employees for nonbusiness (e.g., vacation) flights, the
exception for expenses treated as compensation has been
interpreted as not limiting the company's deduction for
operation of the aircraft to the amount of compensation
reportable to its employees,\963\ which can result in a
deduction multiple times larger than the amount required to be
included in income. In many cases, the individual including
amounts attributable to personal travel in income directly
benefits from the enhanced deduction, resulting in a net
deduction for the personal use of the company aircraft.
---------------------------------------------------------------------------
\963\ Sutherland Lumber-Southwest, Inc. v. Comm., 114 T.C. 197
(2000), aff'd, 255 F.3d 495 (8th Cir. 2001), acq., AOD 2002-02 (Feb.
11, 2002).
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HOUSE BILL
No provision.
SENATE AMENDMENT
Under the Senate amendment, in the case of covered
employees, the exceptions to the general entertainment expense
disallowance rule for expenses treated as compensation or
includible in income apply only to the extent of the amount of
expenses treated as compensation or includible in income.
Covered employees are defined as under section 162(m)(3) and
include the chief executive officer (or individual acting in
such capacity) and the four highest-compensated officers of
publicly-traded corporations. No deduction is allowed with
respect to expenses for (1) a nonbusiness activity generally
considered to be entertainment, amusement or recreation, or (2)
a facility (e.g., an airplane) used in connection with such
activity to the extent that such expenses exceed the amount
treated as compensation or includible in income to the covered
employee. For example, a company's deduction attributable to
aircraft operating costs for a covered employee's vacation use
of a company aircraft is limited to the amount reported as
compensation to the employee. As under present law, the amount
of the deduction cannot exceed the actual cost.
The provision is intended to overturn Sutherland Lumber-
Southwest, Inc. v. Commissioner with respect to covered
employees. As under present law, the exceptions apply only if
amounts are properly reported by the company as compensation
and wages or otherwise includible in income.
Effective date.--The Senate amendment is effective for
expenses incurred after the date of enactment and before
January 1, 2006.
CONFERENCE AGREEMENT
The conference agreement follows the Senate amendment
except that the provision applies with respect to individuals
who, with respect to an employer or other service recipient,
are subject to the requirements of section 16(a) of the
Securities and Exchange Act of 1934, or would be subject to
such requirements if the employer or service recipient were an
issuer of equity securities referred to in section 16(a). Such
individuals generally include officers (as defined by section
16(a)),\964\ directors, and 10-percent-or-greater owners of
private and publicly-held companies.
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\964\ 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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Effective date.--The conference agreement is effective
for amounts deferred after the date of enactment.
36. Treatment of contingent payment convertible debt instruments (sec.
733 of the Senate Amendment and sec. 1275 of the Code)
PRESENT LAW
Under present law, a taxpayer generally deducts the
amount of interest paid or accrued within the taxable year on
indebtedness issued by the taxpayer. In the case of original
issue discount (``OID''), the issuer of a debt instrument
generally accrues and deducts, as interest, the OID over the
life of the obligation, even though the amount of the OID may
not be paid until the maturity of the instrument.
The amount of OID with respect to a debt instrument is
equal to the excess of the stated redemption price at maturity
over the issue price of the debt instrument. The stated
redemption price at maturity includes all amounts that are
payable on the debt instrument by maturity. The amount of OID
with respect to a debt instrument is allocated over the life of
the instrument through a series of adjustments to the issue
price for each accrual period. The adjustment to the issue
price is determined by multiplying the adjusted issue price
(i.e., the issue price increased or decreased by adjustments
prior to the accrual period) by the instrument's yield to
maturity, and then subtracting any payments on the debt
instrument (other than non-OID stated interest) during the
accrual period. Thus, in order to compute the amount of OID and
the portion of OID allocable to a particular period, the stated
redemption price at maturity and the time of maturity must be
known. Issuers of debt instruments with OID accrue and deduct
the amount of OID as interest expense in the same manner as the
holders of such instruments accrue and include in gross income
the amount of OID as interest income.
Treasury regulations provide special rules for
determining the amount of OID allocated to a period with
respect to certain debt instruments that provide for one or
more contingent payments of principal or interest.\965\ The
regulations provide that a debt instrument does not provide for
contingent payments merely because it provides for an option to
convert the debt instrument into the stock of the issuer, into
the stock or debt of a related party, or into cash or other
property in an amount equal to the approximate value of such
stock or debt.\966\ The regulations also provide that a payment
is not a contingent payment merely because of a contingency
that, as of the issue date of the debt instrument, is either
remote or incidental.\967\
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\965\ Treas. reg. sec. 1.1275-4.
\966\ Treas. reg. sec. 1.1275-4(a)(4).
\967\ Treas. reg. sec. 1.1275-4(a)(5).
---------------------------------------------------------------------------
In the case of contingent payment debt instruments that
are issued for money or publicly traded property,\968\ the
regulations provide that interest on a debt instrument must be
taken into account (as OID) whether or not the amount of any
payment is fixed or determinable in the taxable year. The
amount of OID that is taken into account for each accrual
period is determined by constructing a comparable yield and a
projected payment schedule for the debt instrument, and then
accruing the OID on the basis of the comparable yield and
projected payment schedule by applying rules similar to those
for accruing OID on a noncontingent debt instrument (the
``noncontingent bond method''). If the actual amount of a
contingent payment is not equal to the projected amount,
appropriate adjustments are made to reflect the difference. The
comparable yield for a debt instrument is the yield at which
the issuer would be able to issue a fixed-rate noncontingent
debt instrument with terms and conditions similar to those of
the contingent payment debt instrument (i.e., the comparable
fixed-rate debt instrument), including the level of
subordination, term, timing of payments, and general market
conditions.\969\
---------------------------------------------------------------------------
\968\ Treas. reg. sec. 1.1275-4(b).
\969\ Treas. reg. sec. 1.1275-4(b)(4)(i)(A).
---------------------------------------------------------------------------
With respect to certain debt instruments that are
convertible into the common stock of the issuer and that also
provide for contingent payments (other than the conversion
feature)--often referred to as ``contingent convertible'' debt
instruments--the IRS has stated that the noncontingent bond
method applies in computing the accrual of OID on the debt
instrument.\970\ In applying the noncontingent bond method, the
IRS has stated that the comparable yield for a contingent
convertible debt instrument is determined by reference to a
comparable fixed-rate nonconvertible debt instrument, and the
projected payment schedule is determined by treating the issuer
stock received upon a conversion of the debt instrument as a
contingent payment.
---------------------------------------------------------------------------
\970\ Rev. Rul. 2002-31, 2002-1 C.B. 1023.
---------------------------------------------------------------------------
HOUSE BILL
No provision.
SENATE AMENDMENT
The Senate amendment provides that, in the case of a
contingent convertible debt instrument,\971\ any Treasury
regulations which require OID to be determined by reference to
the comparable yield of a noncontingent fixed-rate debt
instrument shall be applied as requiring that such comparable
yield be determined by reference to a noncontingent fixed-rate
debt instrument which is convertible into stock. For purposes
of applying the Senate amendment, the comparable yield shall be
determined without taking into account the yield resulting from
the conversion of a debt instrument into stock. Thus, the
noncontingent bond method in the Treasury regulations shall be
applied in a manner such that the comparable yield for
contingent convertible debt instruments shall be determined by
reference to comparable noncontingent fixed-rate convertible
(rather than nonconvertible) debt instruments.
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\971\ Under the bill, a contingent convertible debt instrument is
defined as a debt instrument that: (1) is convertible into stock of the
issuing corporation, or a corporation in control of, or controlled by,
the issuing corporation; and (2) provides for contingent payments.
---------------------------------------------------------------------------
Effective date.--The Senate amendment provision is
effective for debt instruments issued on or after date of
enactment.
CONFERENCE AGREEMENT
The conference agreement does not include the Senate
amendment provision.
TITLE XI--TRADE PROVISIONS
A. Suspension of Duties on Ceiling Fans
(Sec. 801 of the House bill and Chapter 99, II of the Harmonized Tariff
Schedule of the United States)
PRESENT LAW
A 4.7-percent ad valorem customs duty is collected on
imported ceiling fans from all sources.
HOUSE BILL
The House bill 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement includes the House bill
provision.
B. Temporary Suspension of Certain Customs Duties
1. Suspension of duties on nuclear steam generators (sec. 802(a) of the
House bill and Chapter 99, II of the Harmonized Tariff Schedule
of the United States)
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.
HOUSE BILL
The House bill 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement includes the House bill
provision.
2. Suspension of duties on nuclear reactor vessel heads (sec. 802(b) of
the House bill and Chapter 99, II of the Harmonized Tariff
Schedule of the United States)
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.
HOUSE BILL
The House bill 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.
SENATE AMENDMENT
No provision.
CONFERENCE AGREEMENT
The conference agreement includes the House bill
provision with a modification. The conference agreement also
temporarily suspends the customs duty applicable to nuclear
reactor pressurizers.
XII. TAX COMPLEXITY ANALYSIS
The following tax complexity analysis is provided
pursuant to section 4022(b) of the Internal Revenue Service
Reform and Restructuring Act of 1998, which requires the staff
of the Joint Committee on Taxation (in consultation with the
Internal Revenue Service (``IRS'') and the Treasury Department)
to provide a complexity analysis of tax legislation reported by
the House Committee on Ways and Means, the Senate Committee on
Finance, or a Conference Report containing tax provisions. The
complexity analysis is required to report on the complexity and
administrative issues raised by provisions that directly or
indirectly amend the Internal Revenue Code and that have
widespread applicability to individuals or small businesses.
For each such provision identified by the staff of the Joint
Committee on Taxation, a summary description of the provision
is provided along with an estimate of the number and type of
affected taxpayers, and a discussion regarding the relevant
complexity and administrative issues.
Following the analysis of the staff of the Joint
Committee on Taxation are the comments of the IRS and the
Treasury Department regarding each of the provisions included
in the complexity analysis, including a discussion of the
likely effect on IRS forms and any expected impact on the IRS.
1. Deduction relating to income attributable to United States
production activities (sec. 102 of the House bill, secs. 102
and 103 of the Senate amendment, and sec. 11 of the Code)
Summary description of provision
The conference agreement provides a deduction
attributable to certain qualified production activities in the
United States of a C corporation, S corporation, partnership,
or sole proprietorship. Such activities generally include: (1)
manufacturing, production, growth or extraction of certain
tangible personal property, computer software, property
described in section 168(f)(3) or (4) of the Code, and
electricity, natural gas, or potable water produced by the
taxpayer; (2) construction; and (3) engineering or
architectural services.
The amount of the deduction in taxable years beginning in
2005, 2006, 2007, 2008, 2009, and 2010 and thereafter generally
is three, three, six, six, six, and nine percent, respectively.
The deduction is limited for a taxable year to 50 percent of
the wages paid by the taxpayer during such taxable year. In
addition, the deduction cannot exceed the lesser of the
taxpayer's taxable income (computed without regard to the
deduction) or the taxpayer's qualified production activities
income.
The bill is effective for taxable years beginning after
2004.
Number of affected taxpayers
It is estimated that the provision will affect more than
10 percent of small businesses.
Discussion
It is anticipated that small businesses engaged in
qualified production activities will need to keep additional
records due to this provision, and that extensive additional
regulatory guidance will be necessary to effectively implement
the provision. It is anticipated that the provision will result
in an increase in disputes between small businesses and the
IRS. Reasons for such disputes include the complexity of the
provision and the inherent incentive for small businesses and
other taxpayers to characterize their activities as qualified
production activities to claim the deduction under the
provision.
The provision likely will increase the tax preparation
costs for most small businesses that are, or may be, engaged in
qualified production activities. Small businesses will have to
perform additional analysis and make subjective determinations
concerning whether their activities constitute qualified
production activities and, thus, whether income attributable to
such activities qualifies for the deduction allowed under the
provision. In this regard, the provision does not provide
detailed definitions of the activities that produce income
eligible for the deduction, and it will be difficult for the
Treasury Secretary to define qualified production activities
administratively. It should be noted that a similar provision
in the Canadian tax laws was found to be highly complex and
difficult to administer, which led to numerous disputes and
litigation between affected taxpayers and the Canadian tax
authorities. Canada recently repealed the provision and
provided a general reduction in corporate tax rates.
For income that is determined to be eligible for the
deduction under the provision, small businesses will be
required to perform additional and complex calculations to
determine the amount of the deduction under the provision.
Because the deduction is based upon modified taxable income
rather than gross income, small businesses will be required to
undertake complicated calculations to determine the amount of
costs that are allocable to gross income from qualified
production activities. In many cases, small businesses would
not have been required otherwise to perform these calculations
but for the provision.
The wage limitation on the deduction is likely to impact
small businesses disproportionately. After undertaking the
calculations and analyses to determine the amount of their
potential deduction, many small business will find that such
amount is significantly reduced, or eliminated together, by the
wage limitation.
Under the provision, it may be necessary for small
businesses to make certain allocations of income that are not
required under present law, particularly with respect to
businesses that have both income that is directly attributable
to qualified production activities and income that is
attributable to processes associated with qualified production
activities (e.g., vertically integrated manufacturers that also
engage in the selling, storage, and installation of
manufactured goods). To the extent the reduction under the
provision is not based upon income from processes associated
with qualified production activities, taxpayers that engage in
such processes will be required to allocate their aggregate
income between qualified production activities and processes
associated with qualified production activities. In general, it
is expected that the multiple calculations and analyses
required by this provision will lead to intentional or
inadvertent noncompliance among small businesses, as well as
other taxpayers.
Due to the detailed calculations required by the pvosion,
it is anticipated that the Secretary of the Treasury will have
to make appropriate revisions to several types of income tax
forms, schedules, spreadsheets and instructions.
From the Committee on Ways and Means, for
consideration of the House bill and the Senate
amendment, and modifications committed to
conference:
William M. Thomas,
Phil Crane,
Jim McCrery,
From the Committee on Agriculture, for
consideration of Title VII of the House bill,
and subtitle B of Title XI of the Senate
amendment, and modifications committed to
conference:
Bob Goodlatte,
John Boehner,
Charlie Stenholm,
From the Committee on Education and the
Workforce, for consideration of sections 489,
490, 616, 701, and 719 of the Senate amendment,
and modifications committed to conference:
John Boehner,
Sam Johnson,
From the Committee on Energy and Commerce, for
consideration of section 662 and subtitle A of
Title XI of the Senate amendment, and
modifications committed to conference:
Joe Barton,
Richard Burr,
From the Committee on the Judiciary, for
consideration of sections 422, 442, 1111, 1151,
and 1161 of the Senate amendment, and
modifications committed to conference:
Lamar Smith,
For consideration of the House bill and the
Senate amendment, and modifications committed
to conference:
Tom DeLay,
Managers on the Part of the House.
Chuck Grassley,
Orrin Hatch,
Don Nickles,
Trent Lott,
Olympia Snowe,
Jon Kyl,
Craig Thomas,
Rick Santorum,
Gordon Smith,
Jim Bunning,
Mitch McConnell,
Max Baucus,
Tom Daschle,
John Breaux,
Kent Conrad,
Jeff Bingaman,
Blanche L. Lincoln,
Managers on the Part of the Senate.