House Report 109-304 - TAX RELIEF EXTENSION RECONCILIATION ACT OF 2005

[House Report 109-304]
[From the U.S. Government Publishing Office]

109th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 109-304

======================================================================

TAX RELIEF EXTENSION RECONCILIATION ACT OF 2005

_______

November 17, 2005.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed

_______

Mr. Thomas, from the Committee on Ways and Means, submitted the
following

R E P O R T

together with

DISSENTING VIEWS

[To accompany H.R. 4297]

[Including cost estimate of the Congressional Budget Office]

The Committee on Ways and Means, to whom was referred the
bill (H.R. 4297) to provide for reconciliation pursuant to
section 201(b) of the concurrent resolution on the budget for
fiscal year 2006, having considered the same, report favorably
thereon with an amendment and recommend that the bill as
amended do pass.

CONTENTS

Page
I. The Amendment....................................................3
II. Summary and Background..........................................10
III. Explanation of the Bill.........................................12
Title I--Extensions of Certain Provisions Through 2006...........12
A. Allowance of Nonrefundable Personal Credits Against
Regular and Alternative Minimum Tax Liability (sec.
101 of the bill and sec. 26 of the Code)........... 12
B. Tax Incentives for Business Activities on Indian
Reservations....................................... 13
1. Indian employment tax credit (sec. 102(a) of the
bill and sec. 45A of the Code)................. 13
2. Accelerated depreciation for business property
on Indian reservations (sec. 102(b) of the bill
and sec. 168(j) of the Code)................... 14
C. Work Opportunity Tax Credit (sec. 103 of the bill
and sec. 51 of the Code)........................... 15
D. Welfare-To-Work Tax Credit (sec. 104 of the bill and
sec. 51A of the Code).............................. 17
E. Deduction for Corporate Donations of Computer
Technology and Equipment (sec. 105 of the bill and
sec. 170 of the Code).............................. 19
F. Availability of Archer Medical Savings Accounts
(sec. 106 of the bill and sec. 220 of the Code).... 20
G. Fifteen-Year Straight-Line Cost Recovery for
Qualified Leasehold Improvements and Qualified
Restaurant Improvements (secs. 107 and 108 of the
bill and sec. 168(e)(3)(E) of the Code)............ 22
H. Taxable Income Limit on Percentage Depletion for Oil
and Natural Gas Produced from Marginal Properties
(sec. 109 of the bill and sec. 613A(c)(6)(H) of the
Code).............................................. 24
I. Tax Incentives for Investment in the District of
Columbia (sec. 110 of the bill and secs. 1400,
1400A, 1400B, and 1400C of the Code)............... 25
J. Possession Tax Credit with Respect to American Samoa
(sec. 111 of the bill and sec. 936 of the Code).... 28
K. Parity in the Application of Certain Limits to
Mental Health Benefits (sec. 112 of the bill and
sec. 9812 of the Code)............................. 30
L. Research Credit (sec. 113 of the bill and sec. 41 of
the Code).......................................... 31
M. Qualified Zone Academy Bonds (sec. 114 of the bill
and sec. 1397E of the Code)........................ 35
N. Above-the-Line Deduction for Certain Expenses of
Elementary and Secondary School Teachers (sec. 115
of the bill and sec. 62 of the Code)............... 36
O. Above-the-Line Deduction for Higher Education
Expenses (sec. 116 of the bill and sec. 222 of the
Code).............................................. 37
P. Deduction of State and Local General Sales Taxes
(sec. 117 of the bill and sec. 164 of the Code).... 38
Title II--Extensions of Certain Provisions for Two Years, and
Other Modifications.............................................40
A. Extension and Expansion to Petroleum Products of
Expensing for Environmental Remediation Costs (sec.
201 of the bill and sec. 198 of the Code).......... 40
B. Controlled Foreign Corporations..................... 42
1. Subpart F exception for active financing (sec.
202(a) of the bill and secs. 953 and 954 of the
Code).......................................... 42
2. Look-through treatment of payments between
related controlled foreign corporations under
foreign personal holding company income rules
(sec. 202(b) of the bill and sec. 954(c) of the
Code).......................................... 45
C. Reduced Rates for Capital Gains and Dividends of
Individuals (sec. 203 of the bill and sec. 1(h) of
the Code).......................................... 46
D. Credit for Elective Deferrals and IRA Contributions
(the ``Saver's Credit'') (sec. 204 of the bill and
sec. 25B of the Code).............................. 49
E. Extension of Increased Expensing for Small Business
(sec. 205 of the bill and sec. 179 of the Code).... 51
.......................................................
Title III--Other Provisions.....................................52
A. Taxation of Certain Settlement Funds (sec. 301 of
the bill and sec. 468B of the Code)................ 52
B. Modification of Active Business Definition Under
Section 355 (sec. 302 of the bill and sec. 355 of
the Code).......................................... 53
C. Qualified Veteran's Mortgage Bonds (sec. 303 of the
bill and sec. 143 of the Code)..................... 55
D. Capital Gains Treatment for Certain Self-Created
Musical Works (sec. 304 of the bill and sec. 1221
of the Code)....................................... 56
E. Decrease Minimum Vessel Tonnage Limit to 6,000
Deadweight Tons (sec. 305 of the bill and sec. 1355
of the Code)....................................... 57
F. Modification of Special Arbitrage Rule for Certain
Funds (sec. 306 of the bill)....................... 59
IV. Votes of the Committee..........................................60
V. Budget Effects of the Bill......................................64
VI. Other Matters To Be Discussed Under the Rules of the House......72
VII. Changes in Existing Law Made by the Bill, as Reported...........76
VIII.Dissenting Views................................................95

The Amendment

The amendment is as follows:
Strike all after the enacting clause and insert the
following:

SECTION 1. SHORT TITLE, ETC.

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

Sec. 1. Short title, etc.

TITLE I--EXTENSIONS OF CERTAIN PROVISIONS THROUGH 2006

Sec. 101. Allowance of nonrefundable personal credits against regular
and minimum tax liability.
Sec. 102. Tax incentives for business activities on Indian
reservations.
Sec. 103. Work opportunity credit.
Sec. 104. Welfare-to-work credit.
Sec. 105. Deduction for corporate donations of computer technology and
equipment.
Sec. 106. Availability of medical savings accounts.
Sec. 107. 15-year cost recovery for leasehold improvements.
Sec. 108. 15-year cost recovery for restaurant improvements.
Sec. 109. Taxable income limit on percentage depletion for oil and
natural gas produced from marginal properties.
Sec. 110. District of Columbia Enterprise Zone.
Sec. 111. Possession tax credit with respect to American Samoa.
Sec. 112. Parity in the application of certain limits to mental health
benefits.
Sec. 113. Research credit.
Sec. 114. Qualified Zone Academy Bonds.
Sec. 115. Certain expenses of elementary and secondary school teachers.
Sec. 116. Qualified tuition and related expenses.
Sec. 117. State and local general sales taxes.

TITLE II--EXTENSIONS OF CERTAIN PROVISIONS FOR 2 ADDITIONAL YEARS AND
OTHER MODIFICATIONS

Sec. 201. Expensing of environmental remediation costs.
Sec. 202. Controlled foreign corporations.
Sec. 203. Capital gains and dividends rates.
Sec. 204. Saver's credit.
Sec. 205. Increased expensing for small business.

TITLE III--OTHER PROVISIONS

Sec. 301. Clarification of taxation of certain settlement funds.
Sec. 302. Modification of active business definition under section 355.
Sec. 303. Veterans' mortgage bonds.
Sec. 304. Capital gains treatment for certain self-created musical
works.
Sec. 305. Vessel tonnage limit.
Sec. 306. Modification of special arbitrage rule for certain funds.

TITLE I--EXTENSIONS OF CERTAIN PROVISIONS THROUGH 2006

SEC. 101. ALLOWANCE OF NONREFUNDABLE PERSONAL CREDITS AGAINST REGULAR
AND MINIMUM TAX LIABILITY.

(a) In General.--Paragraph (2) of section 26(a) (relating to special
rule for taxable years 2000 through 2005) is amended--
(1) in the text by striking ``or 2005'' and inserting ``2005,
or 2006'', and
(2) in the heading by striking ``2005'' and inserting
``2006''.
(b) Conforming Provisions.--
(1) Subsection (i) of section 904 (relating to coordination
with nonrefundable personal credits) is amended by striking
``or 2005'' and inserting ``2005, or 2006''.
(2) The amendments made by sections 201(b), 202(f), and
618(b) of the Economic Growth and Tax Relief Reconciliation Act
of 2001 shall not apply to taxable years beginning during 2006.
(c) Effective Date.--The amendments made by this section shall apply
to taxable years beginning after December 31, 2005.

SEC. 102. TAX INCENTIVES FOR BUSINESS ACTIVITIES ON INDIAN
RESERVATIONS.

(a) Indian Employment Tax Credit.--
(1) In general.--Subsection (f) of section 45A (relating to
termination) is amended by striking ``December 31, 2005'' and
inserting ``December 31, 2006''.
(2) Effective date.--The amendment made by paragraph (1)
shall apply to taxable years beginning after December 31, 2005.
(b) Accelerated Depreciation for Business Property on Indian
Reservations.--
(1) In general.--Paragraph (8) of section 168(j) (relating to
termination) is amended by striking ``December 31, 2005'' and
inserting ``December 31, 2006''.
(2) Effective date.--The amendment made by paragraph (1)
shall apply with respect to property placed in service after
December 31, 2005.

SEC. 103. WORK OPPORTUNITY CREDIT.

(a) In General.--Subparagraph (B) of section 51(c)(4) (relating to
termination) is amended by striking ``December 31, 2005'' and inserting
``December 31, 2006''.
(b) Increase in Age Limit for Food Stamp Recipients.--Clause (i) of
section 51(d)(8)(A) (relating to qualified food stamp recipient) is
amended by striking ``25'' and inserting ``35''.
(c) Effective Date.--The amendments made by this section shall apply
to individuals who begin work for the employer after December 31, 2005.

SEC. 104. WELFARE-TO-WORK CREDIT.

(a) In General.--Subsection (f) of section 51A (relating to
termination) is amended by striking ``December 31, 2005'' and inserting
``December 31, 2006''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to individuals who begin work for the employer after December 31, 2005.

SEC. 105. DEDUCTION FOR CORPORATE DONATIONS OF COMPUTER TECHNOLOGY AND
EQUIPMENT.

(a) In General.--Subparagraph (G) of section 170(e)(6) (relating to
termination) is amended by striking ``December 31, 2005'' and inserting
``December 31, 2006''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to contributions made in taxable years beginning after December 31,
2005.

SEC. 106. AVAILABILITY OF MEDICAL SAVINGS ACCOUNTS.

(a) In General.--Paragraphs (2) and (3)(B) of section 220(i)
(defining cut-off year) are each amended by striking ``2005'' each
place it appears in the text and headings and inserting ``2006''.
(b) Conforming Amendments.--
(1) Paragraph (2) of section 220(j) is amended--
(A) in the text by striking ``or 2004'' each place it
appears and inserting ``2004, or 2005'', and
(B) in the heading by striking ``or 2004'' and
inserting ``2004, or 2005''.
(2) Subparagraph (A) of section 220(j)(4) is amended by
striking ``and 2004'' and inserting ``2004, and 2005''.
(c) Effective Date.--The amendments made by this section shall take
effect on the date of the enactment of this Act.
(d) Time for Filing Reports, Etc.--
(1) The report required by section 220(j)(4) of the Internal
Revenue Code of 1986 to be made on August 1, 2005, shall be
treated as timely if made before the close of the 90-day period
beginning on the date of the enactment of this Act.
(2) The determination and publication required by section
220(j)(5) of such Code with respect to calendar year 2005 shall
be treated as timely if made before the close of the 120-day
period beginning on the date of the enactment of this Act. If
the determination under the preceding sentence is that 2005 is
a cut-off year under section 220(i) of such Code, the cut-off
date under such section 220(i) shall be the last day of such
120-day period.

SEC. 107. 15-YEAR COST RECOVERY FOR LEASEHOLD IMPROVEMENTS.

(a) In General.--Clause (iv) of section 168(e)(3)(E) (relating to 15-
year property) is amended by striking ``January 1, 2006'' and inserting
``January 1, 2007''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to property placed in service after December 31, 2005.

SEC. 108. 15-YEAR COST RECOVERY FOR RESTAURANT IMPROVEMENTS.

(a) In General.--Clause (v) of section 168(e)(3)(E) (relating to 15-
year property) is amended by striking ``January 1, 2006'' and inserting
``January 1, 2007''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to property placed in service after December 31, 2005.

SEC. 109. TAXABLE INCOME LIMIT ON PERCENTAGE DEPLETION FOR OIL AND
NATURAL GAS PRODUCED FROM MARGINAL PROPERTIES.

(a) In General.--Subparagraph (H) of section 613A(c)(6) (relating to
oil and natural gas produced from marginal properties) is amended by
striking ``January 1, 2006'' and inserting ``January 1, 2007''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 2005.

SEC. 110. DISTRICT OF COLUMBIA ENTERPRISE ZONE.

(a) Period for Which Designation Applicable.--Subsection (f) of
section 1400 (relating to time for which designation applicable) is
amended by striking ``December 31, 2005'' both places it appears and
inserting ``December 31, 2006''.
(b) Tax-Exempt Economic Development Bonds.--Subsection (b) of section
1400A (relating to period of applicability) is amended by striking
``December 31, 2005'' and inserting ``December 31, 2006''.
(c) Zero Percent Capital Gains Rate.--
(1) In general.--Subsection (b) of section 1400B (relating to
DC Zone Asset) is amended by striking ``January 1, 2006'' each
place it appears and inserting ``January 1, 2007''.
(2) Conforming amendments.--
(A) Paragraph (2) of section 1400B(e) (relating to
gain before 1998 and after 2010 not qualified) is
amended--
(i) by striking ``December 31, 2010'' and
inserting ``December 31, 2011'', and
(ii) by striking ``2010'' in the heading and
inserting ``2011''.
(B) Paragraph (2) of section 1400B(g) (relating to
sales and exchanges of interests in partnerships and S
corporations which are DC Zone businesses) is amended
by striking ``December 31, 2010'' and inserting
``December 31, 2011''.
(C) Subsection (d) of section 1400F (relating to
certain rules to apply) is amended by striking
``December 31, 2010'' and inserting ``December 31,
2011''.
(d) First-Time Homebuyer Credit for District of Columbia.--Subsection
(i) of section 1400C (relating to application of section) is amended by
striking ``January 1, 2006'' and inserting ``January 1, 2007''.
(e) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall take effect on January 1,
2006.
(2) Tax-exempt economic development bonds.--The amendment
made by subsection (b) shall apply to obligations issued after
the date of the enactment of this Act.

SEC. 111. POSSESSION TAX CREDIT WITH RESPECT TO AMERICAN SAMOA.

(a) In General.--Subparagraph (A) of section 936(j)(8) (relating to
special rules for certain possessions) is amended by inserting before
the period at the end the following: ``(before January 1, 2007, in the
case of American Samoa)''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 2005.

SEC. 112. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL HEALTH
BENEFITS.

(a) In General.--Paragraph (3) of section 9812(f) (relating to
application of section) is amended by striking ``December 31, 2005''
and inserting ``December 31, 2006''.
(b) Effective Dates.--The amendment made by subsection (a) shall take
effect on the date of the enactment of this Act.

SEC. 113. RESEARCH CREDIT.

(a) Extension.--
(1) In general.--Subparagraph (B) of section 41(h)(1)
(relating to termination) is amended by striking ``December 31,
2005'' and inserting ``December 31, 2006''.
(2) Conforming amendment.--Subparagraph (D) of section
45C(b)(1) (relating to special rule) is amended by striking
``December 31, 2005'' and inserting ``December 31, 2006''.
(3) Effective date.--The amendments made by this subsection
shall apply to amounts paid or incurred after December 31,
2005.
(b) Increase in Rates of Alternative Incremental Credit.--
(1) In general.--Subparagraph (A) of section 41(c)(4)
(relating to election of alternative incremental credit) is
amended--
(A) by striking ``2.65 percent'' and inserting ``3
percent'',
(B) by striking ``3.2 percent'' and inserting ``4
percent'', and
(C) by striking ``3.75 percent'' and inserting ``5
percent''.
(2) Effective date.--The amendments made by this subsection
shall apply to taxable years ending after the date of the
enactment of this Act.
(c) Alternative Simplified Credit for Qualified Research Expenses.--
(1) In general.--Subsection (c) of section 41 (relating to
base amount) is amended by redesignating paragraphs (5) and (6)
as paragraphs (6) and (7), respectively, and by inserting after
paragraph (4) the following new paragraph:
``(5) Election of alternative simplified credit.--
``(A) In general.--At the election of the taxpayer,
the credit determined under subsection (a)(1) shall be
equal to 12 percent of so much of the qualified
research expenses for the taxable year as exceeds 50
percent of the average qualified research expenses for
the 3 taxable years preceding the taxable year for
which the credit is being determined.
``(B) Special rule in case of no qualified research
expenses in any of 3 preceding taxable years.--
``(i) Taxpayers to which subparagraph
applies.--The credit under this paragraph shall
be determined under this subparagraph if the
taxpayer has no qualified research expenses in
any one of the 3 taxable years preceding the
taxable year for which the credit is being
determined.
``(ii) Credit rate.--The credit determined
under this subparagraph shall be equal to 6
percent of the qualified research expenses for
the taxable year.
``(C) Election.--An election under this paragraph
shall apply to the taxable year for which made and all
succeeding taxable years unless revoked with the
consent of the Secretary. An election under this
paragraph may not be made for any taxable year to which
an election under paragraph (4) applies.''.
(2) Coordination with election of alternative incremental
credit.--
(A) In general.--Section 41(c)(4)(B) (relating to
election) is amended by adding at the end the
following: ``An election under this paragraph may not
be made for any taxable year to which an election under
paragraph (5) applies.''.
(B) Transition rule.--In the case of an election
under section 41(c)(4) of the Internal Revenue Code of
1986 which applies to the taxable year which includes
the date of the enactment of this Act, such election
shall be treated as revoked with the consent of the
Secretary of the Treasury if the taxpayer makes an
election under section 41(c)(5) of such Code (as added
by subsection (a)) for such year.
(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. 114. QUALIFIED ZONE ACADEMY BONDS.

(a) In General.--Paragraph (1) of section 1397E(e) (relating to
national limit) is amended by striking ``and 2005'' and inserting
``2005, and 2006''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to obligations issued after December 31, 2005.

SEC. 115. CERTAIN EXPENSES OF ELEMENTARY AND SECONDARY SCHOOL TEACHERS.

(a) In General.--Subparagraph (D) of section 62(a)(2) (relating to
certain expenses of elementary and secondary school teachers) is
amended by striking ``or 2005'' and inserting ``2005, or 2006''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to expenses paid or incurred in taxable years beginning after December
31, 2005.

SEC. 116. QUALIFIED TUITION AND RELATED EXPENSES.

(a) In General.--Subsection (e) of section 222 (relating to
termination) is amended by striking ``December 31, 2005'' and inserting
``December 31, 2006''.
(b) Limitations.--Paragraph (2) of section 222(b) (relating to
applicable dollar limit) 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:
``(A) 2006.--In the case of a taxable year beginning
in 2006, the applicable dollar amount shall be equal
to--
``(i) in the case of a taxpayer whose
adjusted gross income for the taxable year does
not exceed $65,000 ($130,000 in the case of a
joint return), $4,000,
``(ii) in the case of a taxpayer not
described in clause (i) whose adjusted gross
income for the taxable year does not exceed
$80,000 ($160,000 in the case of a joint
return), $2,000, and
``(iii) in the case of any other taxpayer,
zero.''.
(c) Effective Date.--The amendments made by this section shall apply
to payments made in taxable years beginning after December 31, 2005.

SEC. 117. STATE AND LOCAL GENERAL SALES TAXES.

(a) In General.--Subparagraph (I) of section 164(b)(5) (relating to
application of paragraph) is amended by striking ``January 1, 2006''
and inserting ``January 1, 2007''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to taxable years beginning after December 31, 2005.

TITLE II--EXTENSIONS OF CERTAIN PROVISIONS FOR 2 ADDITIONAL YEARS AND
OTHER MODIFICATIONS

SEC. 201. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

(a) Extension of Termination Date.--Subsection (h) of section 198
(relating to termination) is amended by striking ``December 31, 2005''
and inserting ``December 31, 2007''.
(b) Petroleum Products Treated as Hazardous Substance.--Paragraph (1)
of section 198(d) (relating to hazardous substance) 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) any petroleum product (as defined in section
4612(a)(3)).''.
(c) Effective Date.--The amendments made by this section shall apply
to expenditures paid or incurred after December 31, 2005.

SEC. 202. CONTROLLED FOREIGN CORPORATIONS.

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

SEC. 203. CAPITAL GAINS AND DIVIDENDS RATES.

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

SEC. 204. SAVER'S CREDIT.

Subsection (h) of section 25B (relating to elective deferrals and IRA
contributions by certain individuals) is amended by striking ``December
31, 2006'' and inserting ``December 31, 2008''.

SEC. 205. INCREASED EXPENSING FOR SMALL BUSINESS.

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

TITLE III--OTHER PROVISIONS

SEC. 301. CLARIFICATION OF TAXATION OF CERTAIN SETTLEMENT FUNDS.

(a) In General.--Subsection (g) of section 468B (relating to
clarification of taxation of certain funds) is amended to read as
follows:
``(g) Clarification of Taxation of Certain Funds.--
``(1) In general.--Except as provided in paragraph (2),
nothing in any provision of law shall be construed as providing
that an escrow account, settlement fund, or similar fund is not
subject to current income tax. The Secretary shall prescribe
regulations providing for the taxation of any such account or
fund whether as a grantor trust or otherwise.
``(2) Exemption from tax for certain settlement funds.--An
escrow account, settlement fund, or similar fund shall be
treated as beneficially owned by the United States and shall be
exempt from taxation under this subtitle if--
``(A) it is established pursuant to a consent decree
entered by a judge of a United States District Court,
``(B) it is created for the receipt of settlement
payments as directed by a government entity for the
sole purpose of resolving or satisfying one or more
claims asserting liability under the Comprehensive
Environmental Response, Compensation, and Liability Act
of 1980,
``(C) the authority and control over the expenditure
of funds therein (including the expenditure of
contributions thereto and any net earnings thereon) is
with such government entity, and
``(D) upon termination, any remaining funds will be
disbursed to such government entity for use in
accordance with applicable law.
For purposes of this paragraph, the term `government entity'
means the United States, any State or political subdivision
thereof, the District of Columbia, any possession of the United
States, and any agency or instrumentality of any of the
foregoing.
``(3) Termination.--Paragraph (2) shall not apply to accounts
and funds established after December 31, 2010.''.
(b) Effective Date.--The amendment made by subsection (a) shall apply
to accounts and funds established after the date of the enactment of
this Act.

SEC. 302. MODIFICATION OF ACTIVE BUSINESS DEFINITION UNDER SECTION 355.

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

SEC. 303. VETERANS' MORTGAGE BONDS.

(a) All Veterans Eligible for State Home Loan Programs Funded by
Qualified Veterans' Mortgage Bonds.--
(1) In general.--Paragraph (4) of section 143(l) (defining
qualified veteran) is amended--
(A) by striking ``at some time before January 1,
1977'' in subparagraph (A), and
(B) by striking subparagraph (B) and inserting the
following:
``(B) who applied for the financing before the date
25 years after the last date on which such veteran left
active service.''.
(2) Effective date.--The amendments made by this subsection
shall apply to financing provided after the date of the
enactment of this Act.
(b) Revision of State Veterans Limit.--
(1) In general.--Subparagraph (B) of section 143(l)(3)
(relating to volume limitation) is amended to read as follows:
``(B) State veterans limit.--
``(i) In general.--A State veterans limit for
any calendar year is the amount equal to--
``(I) $53,750,000 for the State of
Texas,
``(II) $66,250,000 for the State of
California,
``(III) $25,000,000 for the State of
Oregon,
``(IV) $25,000,000 for the State of
Wisconsin, and
``(V) $25,000,000 for the State of
Alaska.
``(ii) Phasein.--In the case of calendar
years beginning before 2010, clause (i) shall
be applied by substituting for each of the
dollar amounts therein by the applicable
percentage. For purposes of the preceding
sentence, the applicable percentage shall be
determined in accordance with the following
table:

Applicable percentage
``Calendar Year: is:

2006........................................... 20 percent
2007........................................... 40 percent
2008........................................... 60 percent
2009........................................... 80 percent.

``(iii) Termination.--The State veterans
limit for any calendar year after 2010 is
zero.''.
(2) Effective date.--The amendment made by this subsection
shall apply to bonds issued after December 31, 2005.

SEC. 304. CAPITAL GAINS TREATMENT FOR CERTAIN SELF-CREATED MUSICAL
WORKS.

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

SEC. 305. VESSEL TONNAGE LIMIT.

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

SEC. 306. MODIFICATION OF SPECIAL ARBITRAGE RULE FOR CERTAIN FUNDS.

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

II. SUMMARY AND BACKGROUND

A. Purpose and Summary

The bill, H.R. 4297, as amended, provides for
reconciliation pursuant to section 201(b) of the concurrent
resolution on the budget for fiscal year 2006. The bill: (1)
extends certain expiring provisions through 2006; (2) extends
certain provisions for two additional years, and other
modifications; and (3) makes other modifications to the tax
laws.

Extension of certain expiring provisions through 2006

The bill extends for one year, through December 31, 2006,
the following provisions:
allowance of nonrefundable personal credits
against the alternative minimum tax;
tax incentives for business activities on
Indian reservations;
the work opportunity tax credit (and
increases the age limit for food stamp recipients from
25 to 35);
the welfare-to-work tax credit;
the enhanced deduction for corporate
donations of computer technology and equipment;
the availability of Archer medical savings
accounts;
fifteen-year cost recovery for leasehold
improvements;
fifteen-year cost recovery for restaurant
improvements;
suspension of taxable income limit on
percentage depletion for oil and natural gas produced
from marginal wells;
tax incentives for the District of Columbia
Enterprise Zone;
possession tax credit with respect to
American Samoa;
excise tax provisions relating to mental
health parity rules;
an expanded research and experimentation
credit;
authority to issue qualified zone academy
bonds;
the deduction for teacher classroom
expenses;
the deduction for qualified tuition and
related expenses; and
the deduction for State and local sales
taxes.

Extension of certain provisions for two additional years and other
modifications

The bill extends and modifies certain other provisions, as
follows:
Expensing of ``brownfield'' environmental
clean up costs is extended for two years through 2007
(and expanded to include sites contaminated by
petroleum products);
The subpart F active financing exception is
extended for two years, though 2008;
Look-through treatment is provided (through
2008) under the subpart F foreign personal holding
company income rules for certain payments between
related foreign subsidiaries;
The zero- and 15-percent rates on capital
gains and dividend income are extended for two years,
through 2010;
The saver's credit is extended for two
years, though December 31, 2008; and
Enhanced section 179 expensing for small
businesses is extended for two years, through 2009.

Other provisions

The bill contains other provisions, as follows:
Certain settlement funds established after
the date of enactment and on or before December 31,
2010, for the cleanup of hazardous waste sites are not
subject to Federal income tax;
The active business definition under section
355 is modified;
The qualified veterans' mortgage bond
program is expanded to include more recent veterans,
effective for financing provided after the date of
enactment. In addition, new volume caps are provided
for veteran's mortgage bonds for States eligible to
issue such bonds, effective for bonds issued after
December 31, 2005;
Capital gain treatment is provided to
songwriters' sales of their musical compositions or
copyrights in those compositions. This treatment
applies to sales or exchanges (1) in taxable years
beginning after the date of enactment and (2) before
January 1, 2011;
The minimum weight for vessels eligible for
the tonnage tax regime is decreased to 6,000 deadweight
tons through December 31, 2010; and
The modification of a special arbitrage rule
for a certain fund is extended through August 31, 2009.

B. Background and Need for Legislation

Under the Concurrent Resolution on the Budget for Fiscal
Year 2006, the Committee on Ways and Means was instructed to
report revenue reconciliation provisions sufficient to reduce
revenues by not more than $11 billion for fiscal year 2006 and
by not more than $70 billion for the period of fiscal years
2006 through 2010. The instructions further provide that
revenues are not to be reduced by more than $60 billion for the
period of fiscal years 2006 through 2010 prior to action on the
spending reconciliation provisions. The reconciliation
provisions approved by the Committee reflect the need to avoid
tax increases on families and business as a result of
provisions that would otherwise expire, as well as other
purposes.

C. Legislative History

The Committee marked up the bill on November 15, 2005, and
ordered the bill, as amended, favorably reported.
The Committee held the following hearings relating to the
bill:
Hearing on the President's fiscal year 2006
budget with OMB Director Bolton (Feb. 9, 2005); and
Hearing on the President's fiscal year 2006
budget with Treasury Secretary Snow (Feb. 8, 2005).

III. EXPLANATION OF THE BILL

TITLE I--EXTENSIONS OF CERTAIN PROVISIONS THROUGH 2006

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

(sec. 101 of the bill and sec. 26 of the Code)

PRESENT LAW

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

REASONS FOR CHANGE

The Committee believes that the nonrefundable personal
credits should be useable without limitation by reason of the
alternative minimum tax.

EXPLANATION OF PROVISION

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

EFFECTIVE DATE

The provision applies to taxable years beginning after
December 31, 2005.

B. Tax Incentives for Business Activities on Indian Reservations

1. Indian employment tax credit (sec. 102(a) of the bill and sec. 45A
of the Code)

PRESENT LAW

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

REASONS FOR CHANGE

The Committee believes that extending the wage credit tax
incentive will expand employment opportunities for members of
Indian tribes.

EXPLANATION OF PROVISION

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

EFFECTIVE DATE

The provision is effective for taxable years beginning
after December 31, 2005.

2. Accelerated depreciation for business property on Indian
reservations (sec. 102(b) of the bill and sec. 168(j) of the
Code)

PRESENT LAW

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

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

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

REASONS FOR CHANGE

The Committee believes that extending the depreciation
incentive will encourage economic development within Indian
reservations and expand employment opportunities on such
reservations.

EXPLANATION OF PROVISION

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

EFFECTIVE DATE

The provision applies to property placed in service after
December 31, 2005.

C. Work Opportunity Tax Credit

(sec. 103 of the bill 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 high-risk youth is an individual aged at least 18 but
aged under 25 on the hiring date who is certified by a
designated local agency as having a principal place of abode
within an empowerment zone, enterprise community, or renewal
community. The credit is not available if the youth's principal
place of abode ceases to be within an empowerment zone,
enterprise community, or renewal community.
A qualified ex-felon is an individual certified by a
designated local agency as: (1) having been convicted of a
felony under State or Federal law; (2) being a member of an
economically disadvantaged family; and (3) having a hiring date
within one year of release from prison or conviction.
A food stamp recipient is an individual aged at least 18
but aged under 25 on the hiring date certified by a designated
local agency as being a member of a family either currently or
recently receiving assistance under an eligible food stamp
program.
Qualified wages
Generally, qualified wages are defined as cash wages paid
by the employer to a member of a targeted group. The employer's
deduction for wages is reduced by the amount of the credit.
Calculation of the credit
The credit equals 40 percent (25 percent for employment of
400 hours or less) of qualified first-year wages. Generally,
qualified first-year wages are qualified wages (not in excess
of $6,000) attributable to service rendered by a member of a
targeted group during the one-year period beginning with the
day the individual began work for the employer. Therefore, the
maximum credit per employee is $2,400 (40 percent of the first
$6,000 of qualified first-year wages). With respect to
qualified summer youth employees, the maximum credit is $1,200
(40 percent of the first $3,000 of qualified first-year wages).
Minimum employment period
No credit is allowed for qualified wages paid to employees
who work less than 120 hours in the first year of employment.
Coordination of the work opportunity tax credit and the
welfare-to-work tax credit
An employer cannot claim the work opportunity tax credit
with respect to wages of any employee on which the employer
claims the welfare-to-work tax credit.
Other rules
The work opportunity tax credit is not allowed for wages
paid to a relative or dependent of the taxpayer. Similarity
wages paid to replacement workers during a strike or lockout
are not eligible for the work opportunity tax credit. Wages
paid to any employee during any period for which the employer
received on-the-job training program payments with respect to
that employee are not eligible for the work opportunity tax
credit. The work opportunity tax credit generally is not
allowed for wages paid to individuals who had previously been
employed by the employer. In addition, many other technical
rules apply.
Expiration
The work opportunity tax credit is not available for
individuals who begin work for an employer after December 31,
2005.

REASONS FOR CHANGE

The Committee believes that the extension will continue to
lower barriers to employment for the enumerated disadvantaged
target groups while at the same time provide Congress and the
Treasury Department and Labor Department with an opportunity to
study the efficacy, the operation, and the effectiveness of the
credit.

EXPLANATION OF PROVISION

In general

The bill extends the work opportunity credit for one year
(through December 31, 2006).

Targeted groups eligible for the combined credit

The bill raises the maximum age limit for the food stamp
recipient category to include individuals who are at least age
18 but under age 35 on the hiring date.

EFFECTIVE DATE

The provision is effective for wages paid or incurred to a
qualified individual who begins work for an employer after
December 31, 2005, and before January 1, 2007.

D. Welfare-to-Work Tax Credit

(sec. 104 of the bill 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 two
years after the date that the 18-month total is reached; and
(3) members of a family who are no longer eligible for family
assistance because of either Federal or State time limits, if
they are hired within two years after the Federal or State time
limits made the family ineligible for family assistance.
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 the other rules contained on the work
opportunity tax credit.
Expiration
The welfare-to-work credit is not available for individuals
who begin work for an employer after December 31, 2005.

REASONS FOR CHANGE

EXPLANATION OF PROVISION

The bill extends the welfare-to-work tax credit for one
year (through December 31, 2006).

EFFECTIVE DATE

The provision is effective for wages paid or incurred to a
qualified individual who begins work for an employer after
December 31, 2005, and before January 1, 2007.

E. Deduction for Corporate Donations of Computer Technology and
Equipment

(sec. 105 of the bill and sec. 170 of the Code)

PRESENT LAW

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

REASONS FOR CHANGE

The Committee believes that educational organizations and
public libraries continue to have a need for computer equipment
and that it is appropriate to extend the enhanced deduction for
contributions of such equipment to such institutions.

EXPLANATION OF PROVISION

The provision extends for one year the present-law
provision relating to qualified computer contributions (to
apply to contributions made in taxable years beginning on or
before December 31, 2006).

EFFECTIVE DATE

The provision applies to contributions made in taxable
years beginning after December 31, 2005.

F. Availability of Archer Medical Savings Accounts

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

PRESENT LAW

Archer medical savings accounts

In general
Within limits, contributions to an Archer medical savings
account (``Archer MSA'') are deductible in determining adjusted
gross income if made by an eligible individual and are
excludable from gross income and wages for employment tax
purposes if made by the employer of an eligible individual.
Earnings on amounts in an Archer MSA are not currently taxable.
Distributions from an Archer MSA for medical expenses are not
includible in gross income. Distributions not used for medical
expenses are includible in gross income. In addition,
distributions not used for medical expenses are subject to an
additional 15-percent tax unless the distribution is made after
age 65, death, or disability.
Eligible individuals
Archer MSAs are available to employees covered under an
employer-sponsored high deductible plan of a small employer and
self-employed individuals covered under a high deductible
health plan. An employer is a small employer if it employed, on
average, no more than 50 employees on business days during
either the preceding or the second preceding year. An
individual is not eligible for an Archer MSA if he or she is
covered under any other health plan in addition to the high
deductible plan.
Tax treatment of and limits on contributions
Individual contributions to an Archer MSA are deductible
(within limits) in determining adjusted gross income (i.e.,
``above-the-line''). In addition, employer contributions are
excludable from gross income and wages for employment tax
purposes (within the same limits), except that this exclusion
does not apply to contributions made through a cafeteria plan.
In the case of an employee, contributions can be made to an
Archer MSA either by the individual or by the individual's
employer.
The maximum annual contribution that can be made to an
Archer MSA for a year is 65 percent of the deductible under the
high deductible plan in the case of individual coverage and 75
percent of the deductible in the case of family coverage.
Definition of high deductible plan
A high deductible plan is a health plan with an annual
deductible of at least $1,750 and no more than $2,650 in the
case of individual coverage and at least $3,500 and no more
than $5,250 in the case of family coverage (for 2005). In
addition, the maximum out-of-pocket expenses with respect to
allowed costs (including the deductible) must be no more than
$3,500 in the case of individual coverage and no more than
$6,450 in the case of family coverage (for 2005). A plan does
not fail to qualify as a high deductible plan merely because it
does not have adeductible for preventive care as required by
State law. A plan does not qualify as a high deductible health plan if
substantially all of the coverage under the plan is for certain
permitted coverage. In the case of a self-insured plan, the plan must
in fact be insurance (e.g., there must be appropriate risk shifting)
and not merely a reimbursement arrangement.
Cap on taxpayers utilizing Archer MSAs and expiration of
pilot program
The number of taxpayers benefiting annually from an Archer
MSA contribution is limited to a threshold level (generally
750,000 taxpayers). The number of Archer MSAs established has
not exceeded the threshold level.
After 2005, no new contributions may be made to Archer MSAs
except by or on behalf of individuals who previously made (or
had made on their behalf) Archer MSA contributions and
employees who are employed by a participating employer.
Trustees of Archer MSAs are generally required to make
reports to the Treasury by August 1 regarding Archer MSAs
established by July 1 of that year. If the threshold level is
reached in a year, the Secretary is required to make and
publish such determination by October 1 of such year.

Health savings accounts

Health savings accounts (``HSAs'') were enacted by the
Medicare Prescription Drug, Improvement, and Modernization Act
of 2003. Like Archer MSAs, an HSA is a tax-exempt trust or
custodial account to which tax-deductible contributions may be
made by individuals with a high deductible health plan. HSAs
provide tax benefits similar to, but more favorable than, those
provide by Archer MSAs. HSAs were established on a permanent
basis.

REASONS FOR CHANGE

The Committee believes that individuals should be
encouraged to save for future medical care expenses and that
individuals should be allowed to save for such expenses on a
tax-favored basis. The Committee believes that consumers who
spend their own savings on health care will make cost-conscious
decisions, thus reducing the rising cost of health care. The
Committee believes that Archer MSAs have been an important tool
in allowing certain individuals to save for future medical
expenses on a tax-favored basis.
The Committee is aware that recently enacted health savings
accounts (HSAs) offer more advantageous tax treatment than
Archer MSAs and that amounts can be rolled over into a health
savings account from an Archer MSA on a tax-free basis. The
Committee recognizes that the transition from MSAs to HSAs is
still in progress and thus believes an extension of MSAs is
appropriate.
The Committee is also aware that taxpayers in some States
cannot take advantage of MSAs or HSAs because some State law
bars offering high deductible plans and in other cases, State
tax law may undermine the advantages of such accounts for many
savers. Such barriers limit consumer acceptance of these health
care savings vehicles, which now have over one million
participants, many of whom either had no insurance or worked
for small businesses unable to offer health coverage. Because
of the potential benefits of these savings vehicles and
particularly those of HSAs, the Committee would encourage
States to reconsider prohibitions on high deductible plans and
State tax policies so that more Americans would have the option
of preparing for health care needs through a savings plan.

EXPLANATION OF PROVISION

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

EFFECTIVE DATE

The provision is effective on the date of enactment.

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

(secs. 107 and 108 of the bill and sec. 168(e)(3)(E) 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-
inservice conventions, and depreciation methods to the cost of
various types of depreciable property.\1\ 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.
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\1\ Sec. 168.
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Depreciation of leasehold improvements

Generally, depreciation allowances for improvements made on
leased property are determined under MACRS, even if the MACRS
recovery period assigned to the property is longer than the
term of the lease. This rule applies regardless of whether the
lessor or the lessee places the leasehold improvements in
service. If a leasehold improvement constitutes an addition or
improvement to nonresidential real property already placed in
service, the improvement generally is depreciated using the
straight-line method over a 39-year recovery period, beginning
in the month the addition or improvement was placed in service.
However, exceptions exist for certain qualified leasehold
improvements and certain qualified restaurant property.

Qualified leasehold improvement property

Section 168(e)(3)(E)(iv) provides a statutory 15-year
recovery period for qualified leasehold improvement property
placed in service before January 1, 2006. Qualified leasehold
improvement property is recovered using the straight-line
method. Leasehold improvements placed in service in 2006 and
later will be subject to the general rules described above.
Qualified leasehold improvement property is any improvement
to an interior portion of a building that is nonresidential
real property, provided certain requirements are met. The
improvement must be made under or pursuant to a lease either by
the lessee (or sublessee), or by the lessor, of that portion of
the building to be occupied exclusively by the lessee (or
sublessee). The improvement must be placed in service more than
three years after the date the building wasfirst placed in
service. Qualified leasehold improvement property does not include any
improvement for which the expenditure is attributable to the
enlargement of the building, any elevator or escalator, any structural
component benefiting a common area, or the internal structural
framework of the building. However, if a lessor makes an improvement
that qualifies as qualified leasehold improvement property, such
improvement does not qualify as qualified leasehold improvement
property to any subsequent owner of such improvement. An exception to
the rule applies in the case of death and certain transfers of property
that qualify for non-recognition treatment.

Qualified restaurant property

Section 168(e)(3)(E)(v) provides a statutory 15-year
recovery period for qualified restaurant property placed in
service before January 1, 2006. For purposes of the provision,
qualified restaurant property means any improvement to a
building if such improvement is placed in service more than
three years after the date such building was first placed in
service and more than 50 percent of the building's square
footage is devoted to the preparation of, and seating for on-
premises consumption of, prepared meals. Qualified restaurant
property is recovered using the straight-line method.

REASONS FOR CHANGE

Although lease terms differ, the Committee believes that
lease terms for commercial real estate typically are shorter
than a 39-year recovery period. In the interests of simplicity
and administrability, a uniform period for recovery of
leasehold improvements is desirable. The Committee bill
therefore extends the present-law provision allowing taxpayers
to use a recovery period for leasehold improvements of a more
realistic 15 years.
The Committee also believes that restaurant buildings
generally are more specialized structures than other commercial
buildings. The Committee believes that the present-law
provision allowing taxpayers to use a 15-year recovery period
for improvements made to restaurant buildings more accurately
reflects the economic life of the properties than a 39-year
recovery period.

EXPLANATION OF PROVISION

The provision extends for one year the present-law
provisions providing a 15-year recovery period for qualified
leasehold improvement property and for qualified restaurant
property (to apply to property placed in service through
December 31, 2006).

EFFECTIVE DATE

The provision applies to property placed in service after
December 31, 2005.

H. Taxable Income Limit on Percentage Depletion for Oil and Natural Gas
Produced from Marginal Properties

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

Present Law

The Code permits taxpayers to recover their investments in
oil and gas wells through depletion deductions. Two methods of
depletion are currently allowable under the Code: (1) the cost
depletion method, and (2) the percentage depletion method.
Under 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.
The Code generally limits the percentage depletion method
for oil and gas properties to independent producers and royalty
owners. Generally, under the percentage depletion method, 15
percent of the taxpayer's gross income from an oil- or gas-
producing property is allowed as a deduction in each taxable
year. The amount deducted generally may not exceed 100 percent
of the taxable income from that property in any year. For
marginal production, the 100-percent taxable income limitation
has been suspended for taxable years beginning after December
31, 1997, and before January 1, 2006.
Marginal production is defined as domestic crude oil and
natural gas production from stripper well property or from
property substantially all of the production from which during
the calendar year is heavy oil. Stripper well property is
property from which the average daily production is 15 barrel
equivalents or less, determined by dividing the average daily
production of domestic crude oil and domestic natural gas from
producing wells on the property for the calendar year by the
number of wells. Heavy oil is domestic crude oil with a
weighted average gravity of 20 degrees API or less (corrected
to 60 degrees Fahrenheit).

REASONS FOR CHANGE

Domestic production from marginal wells is an appropriate
part of establishing national energy security and reducing
dependence on foreign oil. The Committee believes the
suspension of the 100-percent taxable income limitation for
marginal wells should be extended to encourage continued
operation of such wells.

EXPLANATION OF PROVISION

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

EFFECTIVE DATE

The provision applies to taxable years beginning after
December 31, 2005.

I. Tax Incentives for Investment in the District of Columbia

(sec. 110 of the bill and secs. 1400, 1400A, 1400B, and 1400C of the
Code)

PRESENT LAW IN GENERAL

The Taxpayer Relief Act of 1997 designated certain
economically depressed census tracts within the District of
Columbia as the District of Columbia Enterprise Zone (the
``D.C. Zone''), within which businesses and individual
residents are eligible for special tax incentives. The census
tracts that compose the D.C. Zone are (1) all census tracts
that presently are part of the D.C. enterprise community
designated under section 1391 (i.e., portions of Anacostia, Mt.
Pleasant, Chinatown, and the easternmost part of the District),
and (2) all additional census tracts within the District of
Columbia where the poverty rate is not less than 20 percent.
The D.C. Zone designation remains in effect for the period from
January 1, 1998, through December 31, 2005. In general, the tax
incentives available in connection with the D.C. Zone are a 20-
percent wage credit, an additional $35,000 of section 179
expensing for qualified zone property, expanded tax-exempt
financing for certain zone facilities, and a zero-percent
capital gains rate from the sale of certain qualified D.C. zone
assets.

Wage credit

A 20-percent wage credit is available to employers for the
first $15,000 of qualified wages paid to each employee (i.e., a
maximum credit of $3,000 with respect to each qualified
employee) who (1) is a resident of the D.C. Zone, and (2)
performs substantially all employment services within the D.C.
Zone in a trade or business of the employer.
Wages paid to a qualified employee who earns more than
$15,000 are eligible for the wage credit (although only the
first $15,000 of wages is eligible for the credit). The wage
credit is available with respect to a qualified full-time or
part-time employee (employed for at least 90 days), regardless
of the number of other employees who work for the employer. In
general, any taxable business carrying out activities in the
D.C. Zone may claim the wage credit, regardless of whether the
employer meets the definition of a ``D.C. Zone business.'' \2\
---------------------------------------------------------------------------
\2\ However, the wage credit is not available for wages paid in
connection with certain business activities described in section
144(c)(6)(B) or certain farming activities. In addition, wages are not
eligible for the wage credit if paid to (1) a person who owns more than
five percent of the stock (or capital or profits interests) of the
employer, (2) certain relatives of the employer, or (3) if the employer
is a corporation or partnership, certain relatives of a person who owns
more than 50 percent of the business.
---------------------------------------------------------------------------
An employer's deduction otherwise allowed for wages paid is
reduced by the amount of wage credit claimed for that taxable
year.\3\ Wages are not to be taken into account for purposes of
the wage credit if taken into account in determining the
employer's work opportunity tax credit under section 51 or the
welfare-to-work credit under section 51A.\4\ In addition, the
$15,000 cap is reduced by any wages taken into account in
computing the work opportunity tax credit or the welfare-to-
work credit.\5\ The wage credit may be used to offset up to 25
percent of alternative minimum tax liability.\6\
---------------------------------------------------------------------------
\3\ Sec. 280C(a).
\4\ Secs. 1400H(a), 1396(c)(3)(A) and 51A(d)(2).
\5\ Secs. 1400H(a), 1396(c)(3)(B) and 51A(d)(2).
\6\ Sec. 38(c)(2).
---------------------------------------------------------------------------

Section 179 expensing

In general, a D.C. Zone business is allowed an additional
$35,000 of section 179 expensing for qualifying property placed
in service by a D.C. Zone business.\7\ The section 179
expensing allowed to a taxpayer is phased out by the amount by
which 50 percent of the cost of qualified zone property placed
in service during the year by the taxpayer exceeds $200,000
($400,000 for taxable years beginning after 2002 and before
2008). The term ``qualified zone property'' is defined as
depreciable tangible property (including buildings), provided
that (1) the property is acquired by the taxpayer (from an
unrelated party) after the designation took effect, (2) the
original use of the property in the D.C. Zone commences with
the taxpayer, and (3) substantially all of the use of the
property is in the D.C. Zone in the active conduct of a trade
or business by the taxpayer.\8\ Special rules are provided in
the case of property that is substantially renovated by the
taxpayer.
---------------------------------------------------------------------------
\7\ Sec. 1397A.
\8\ Sec. 1397D.
---------------------------------------------------------------------------

Tax-exempt financing

A qualified D.C. Zone business is permitted to borrow
proceeds from tax-exempt qualified enterprise zone facility
bonds (as defined in section 1394) issued by the District of
Columbia.\9\ Generally, qualified enterprise zone facility
bonds for the District of Columbia are bonds 95 percent or more
of the net proceeds of which are used to finance certain
facilities within the D.C. Zone. The aggregate face amount of
all outstanding qualified enterprise zone facility bonds per
qualified D.C. Zone business may not exceed $15 million and may
be issued only while the D.C. Zone designation is in effect.
---------------------------------------------------------------------------
\9\ Sec. 1400A.
---------------------------------------------------------------------------

Zero-percent capital gains

A zero-percent capital gains rate applies to capital gains
from the sale of certain qualified D.C. Zone assets held for
more than five years.\10\ In general, a qualified ``D.C. Zone
asset'' means stock or partnership interests held in, or
tangible property held by, a D.C. Zone business. For purposes
of the zero-percent capital gains rate, the D.C. Enterprise
Zone is defined to include all census tracts within the
District of Columbia where the poverty rate is not less than 10
percent.
---------------------------------------------------------------------------
\10\ Sec. 1400B.
---------------------------------------------------------------------------
In general, gain eligible for the zero-percent tax rate
means gain from the sale or exchange of a qualified D.C. Zone
asset that is (1) a capital asset or property used in the trade
or business as defined in section 1231(b), and (2) acquired
before January 1, 2006. Gain that is attributable to real
property, or to intangible assets, qualifies for the zero-
percent rate, provided that such real property or intangible
asset is an integral part of a qualified D.C. Zone
business.\11\ However, no gain attributable to periods before
January 1, 1998, and after December 31, 2010, is qualified
capital gain.
---------------------------------------------------------------------------
\11\ However, sole proprietorships and other taxpayers selling
assets directly cannot claim the zero-percent rate on capital gain from
the sale of any intangible property (i.e., the integrally related test
does not apply).
---------------------------------------------------------------------------

District of Columbia homebuyer tax credit

First-time homebuyers of a principal residence in the
District of Columbia are eligible for a nonrefundable tax
credit of up to $5,000 of the amount of the purchase price. The
$5,000 maximum credit applies both to individuals and married
couples. Married individuals filing separately can claim a
maximum credit of $2,500 each. The credit phases out for
individual taxpayers with adjusted gross income between $70,000
and $90,000 ($110,000-$130,000 for joint filers). For purposes
of eligibility, ``first-time homebuyer'' means any individual
if such individual did not have a present ownership interest in
a principal residence in the District of Columbia in the one-
year period ending on the date of the purchase of the residence
to which the credit applies. The credit is scheduled to expire
for residences purchased after December 31, 2005.\12\
---------------------------------------------------------------------------
\12\ Sec. 1400C(i).
---------------------------------------------------------------------------

REASONS FOR CHANGE

The Committee believes that the D.C. Zone incentives should
temporarily be extended to provide the Congress and the
Treasury Department a better opportunity to continue to assess
the overall operation and effectiveness of the tax incentives
to revitalize the D.C. Zone and to promote homeownership
therein.

EXPLANATION OF PROVISION

The provision extends the designation of the D.C. Zone
(through December 31, 2006), thus extending the wage credit and
section 179 expensing.
The provision extends the tax-exempt financing for one
year, applying to bonds issued during the period beginning on
January 1, 1998, and ending on December 31, 2006.
The provision extends the zero-percent capital gains rate
applicable to capital gains from the sale or exchange of
certain qualified D.C. Zone assets to gain recognized before
January 1, 2011, from the sale of assets acquired before
January 1, 2007.
The provision extends the first-time homebuyer credit for
one year, through December 31, 2006.

EFFECTIVE DATE

The provision generally is effective on January 1, 2006.
The extension of tax-exempt financing is effective for
obligations issued after the date of enactment.

J. Possession Tax Credit With Respect to American Samoa

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

PRESENT LAW

In general

Certain domestic corporations with business operations in
the U.S. possessions are eligible for the possession tax
credit.\13\ This credit offsets the U.S. tax imposed on certain
income related to operations in the U.S. possessions.\14\ For
purposes of the section 936 credit, possessions include, among
other places, American Samoa. Income eligible for the section
936 credit includes non-U.S. source income from (1) the active
conduct of a trade or business within a U.S. possession, (2)
the sale or exchange of substantially all of the assets that
were used in such a trade or business, or (3) certain
possessions investments. The section 936 credit expires for
taxable years beginning after December 31, 2005.
---------------------------------------------------------------------------
\13\ Secs. 27(b), 936.
\14\ Domestic corporations with activities in Puerto Rico are
eligible for the section 30A economic activity credit. That credit is
calculated under the rules set forth in section 936.
---------------------------------------------------------------------------
To qualify for the possession tax credit for a taxable
year, a domestic corporation must satisfy two conditions.
First, the corporation must derive at least 80 percent of its
gross income for the three-year period immediately preceding
the close of the taxable year from sources within a possession.
Second, the corporation must derive at least 75 percent of its
gross income for that same period from the active conduct of a
possession business. A domestic corporation that has elected
the possession tax credit and that satisfies these two
conditions for a taxable year generally is entitled to a credit
against the U.S. tax attributable to the taxpayer's income that
is eligible for the section 936 credit.
The possession tax credit applies only to a corporation
that qualifies as an existing credit claimant. The
determination of whether a corporation is an existing credit
claimant is made separately for each possession. The possession
tax credit is computed separately for each possession with
respect to which the corporation is an existing credit
claimant, and the credit is subject to either an economic
activity-based limitation or an income-based limit.

Qualification as existing credit claimant

A corporation is an existing credit claimant with respect
to a possession if (1) the corporation was engaged in the
active conduct of a trade or business within the possession on
October 13, 1995, and (2) the corporation elected the benefits
of the possession tax credit in an election in effect for its
taxable year that included October 13, 1995.\15\ A corporation
that adds a substantial new line of business (other than in a
qualifying acquisition of all the assets of a trade or business
of an existing credit claimant) ceases to be an existing credit
claimant as of the close of the taxable year ending before the
date on which that new line of business is added.
---------------------------------------------------------------------------
\15\ A corporation will qualify as an existing credit claimant if
it acquired all the assets of a trade or business of a corporation that
(1) actively conducted that trade or business in a possession on
October 13, 1995, and (2) had elected the benefits of the possession
tax credit in an election in effect for the taxable year that included
October 13, 1995.
---------------------------------------------------------------------------

Economic activity-based limit

Under the economic activity-based limit, the amount of the
credit determined under the rules described above may not
exceed an amount equal to the sum of (1) 60 percent of the
taxpayer's qualifying possession wage and fringe benefit
expenses, (2) 15 percent of depreciation allowances with
respect to short-life qualifying tangible property, plus 40
percent of depreciation allowances with respect to medium-life
qualifying tangible property, plus 65 percent of depreciation
allowances with respect to long-life tangible property, and (3)
in certain cases, a portion of the taxpayer's possession income
taxes.

Income-based limit

As an alternative to the economic activity-based limit, a
taxpayer may elect to apply a limit equal to the applicable
percentage of the credit that would otherwise be allowable with
respect to possession business income; the applicable
percentage currently is 40 percent.

Repeal and phase out

In 1996, the section 936 credit was repealed for new
claimants for taxable years beginning after 1995 and was phased
out for existing credit claimants over a period including
taxable years beginning before 2006. The amount of the
available credit during the phaseout period generally is
reduced by special limitation rules. These phaseout period
limitation rules do not apply to the credit available to
existing credit claimants for income from activities in Guam,
American Samoa, and the Northern Mariana Islands. The section
936 credit is repealed for all possessions, including Guam,
American Samoa, and the Northern Mariana Islands, for all
taxable years beginning after 2005.

REASONS FOR CHANGE

The Committee understands that the tuna canning industry is
the largest employer in American Samoa\16\ and is the primary
beneficiary of the section 936 credit in American Samoa. The
Committee believes that the expiration of the section 936
credit would negatively impact the economy of American Samoa
and that the credit therefore should be extended for an
additional year to provide time for the development of a
comprehensive long-term policy with respect to American Samoa.
---------------------------------------------------------------------------
\16\ 2002 Statistical Yearbook of American Samoa, p. xiii; The
World Factbook 2005 (Central Intelligence Agency).
---------------------------------------------------------------------------
The Committee is aware that the Government Accountability
Office and the staff of the Joint Committee on Taxation are in
the process of preparing reports regarding the impact of U.S.
Federal tax policy on Puerto Rico, including an analysis of the
tax and economic policy implications of proposed legislative
options and the revenue costs of those options. The Governor of
Puerto Rico has expressed support for the extension of the
section 936 credit to American Samoa while awaiting these
reports concerning Puerto Rico. Pending completion of these
reports, the Committee believes it is appropriate to extend the
section 936 credit to American Samoa in recognition of the
conditions facing that territory.

EXPLANATION OF PROVISION

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

EFFECTIVE DATE

The provision is effective for taxable years beginning
after December 31, 2005.

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

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

PRESENT LAW

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

REASONS FOR CHANGE

The Committee recognizes that the Code provisions relating
to mental health parity are important to carrying out the
purposes of the Mental Health Parity Act. Thus, the Committee
believes that extending the Code provisions relating to mental
health parity is warranted.

EXPLANATION OF PROVISION

The provision extends for one year the present-law Code
excise tax for failure to comply with the mental health parity
requirements (through December 31, 2006).

EFFECTIVE DATE

The provision is effective on the date of enactment.

L. Research Credit

(sec. 113 of the bill and sec. 41 of the Code)

PRESENT LAW

General rule

Generally, a taxpayer may claim a research credit equal to
20 percent of the amount by which the taxpayer's qualified
research expenses for a taxable year exceed its base amount for
that year. (sec. 41). Thus, the research credit is generally
available with respect to incremental increases in qualified
research.
The research credit also applies to the excess of (1) 100
percent of corporate cash expenses (including grants or
contributions) paid for basic research conducted by
universities (and certain nonprofit scientific research
organizations) over (2) the sum of (a) the greater of two
minimum basic research floors plus (b) an amount reflecting any
decrease in nonresearch giving to universities by the
corporation as compared to such giving during a fixed-base
period, as adjusted for inflation. This separate credit
computation is commonly referred to as the university basic
research credit (see sec. 41(e)).
The research credit applies to a taxpayer's expenditures on
research undertaken by an energy research consortium. This
separate credit computation is commonly referred to as energy
research credit. Unlike the general research credit, the energy
research credit applies to all qualified expenditures, not just
those in excess of a base amount.
The research credit (including the university basic
research credit and the energy research credit) is scheduled to
expire and generally will not apply to amounts paid or incurred
after December 31, 2005.

Computation of allowable credit

Except for energy research payments and certain university
basic research payments made by corporations, the research
credit applies only to the extent that the taxpayer's qualified
research expenses for the current taxable year exceed its base
amount. The base amount for the current year generally is
computed by multiplying the taxpayer's fixed-base percentage by
the average amount of the taxpayer's gross receipts for the
four preceding years. If a taxpayer both incurred qualified
research expenses and had gross receipts during each of at
least three years from 1984 through 1988, then its fixed-base
percentage is the ratio that its total qualified research
expenses for the 1984-1988 period bears to its total gross
receipts for that period (subject to a maximum fixed-base
percentage of 16 percent). All other taxpayers (so-called
``start-up firms'') are assigned a fixed-base percentage of
three percent.
In computing the credit, a taxpayer's base amount may not
be less than 50 percent of its current-year qualified research
expenses.
To prevent artificial increases in research expenditures by
shifting expenditures among commonly controlled or otherwise
related entities, a special aggregation rule provides that all
members of the same controlled group of corporations are
treated as a single taxpayer (sec.41(f)(1)). Under regulations
prescribed by the Secretary, special rules apply for computing the
credit when a major portion of a trade or business (or unit thereof)
changes hands, under which qualified research expenses and gross
receipts for periods prior to the change of ownership of a trade or
business are treated as transferred with the trade or business that
gave rise to those expenses and receipts for purposes of recomputing a
taxpayer's fixed-base percentage (sec. 41(f)(3)).

Alternative incremental research credit regime

Taxpayers are allowed to elect an alternative incremental
research credit regime. If a taxpayer elects to be subject to
this alternative regime, the taxpayer is assigned a three-
tiered fixed-base percentage (that is lower than the fixed-base
percentage otherwise applicable under present law) and the
credit rate likewise is reduced. Under the alternative
incremental credit regime, a credit rate of 2.65 percent
applies to the extent that a taxpayer's current-year research
expenses exceed a base amount computed by using a fixed-base
percentage of one percent (i.e., the base amount equals one
percent of the taxpayer's average gross receipts for the four
preceding years) but do not exceed a base amount computed by
using a fixed-base percentage of 1.5 percent. A credit rate of
3.2 percent applies to the extent that a taxpayer's current-
year research expenses exceed a base amount computed by using a
fixed-base percentage of 1.5 percent but do not exceed a base
amount computed by using a fixed-base percentage of two
percent. A credit rate of 3.75 percent applies to the extent
that a taxpayer's current-year research expenses exceed a base
amount computed by using a fixed-base percentage of two
percent. An election to be subject to this alternative
incremental credit regime may be made for any taxable year
beginning after June 30, 1996, and such an election applies to
that taxable year and all subsequent years unless revoked with
the consent of the Secretary of the Treasury.

Eligible expenses

Generally, qualified research expenses eligible for the
research credit consist of: (1) in-house expenses of the
taxpayer for wages and supplies attributable to qualified
research; (2) certain time-sharing costs for computer use in
qualified research; and (3) 65 percent of amounts paid or
incurred by the taxpayer to certain other persons for qualified
research conducted on the taxpayer's behalf (so-called
``contract research expenses''). Notwithstanding the limitation
for contract research expenses, qualified research expenses
include 100 percent of amounts paid or incurred by the taxpayer
to an eligible small business, university, or Federal
laboratory for qualified energy research.
To be eligible for the credit, the research must not only
satisfy the requirements of present-law section 174 (described
below) but must be undertaken for the purpose of discovering
information that is technological in nature, the application of
which is intended to be useful in the development of a new or
improved business component of the taxpayer, and substantially
all of the activities of which must constitute elements of a
process of experimentation for functional aspects, performance,
reliability, or quality of a business component. Research does
not qualify for the credit if substantially all of the
activities relate to style, taste, cosmetic, or seasonal design
factors (sec. 41(d)(3)). In addition, research does not qualify
for the credit: (1) if conducted after the beginning of
commercial production of the business component; (2) if related
to the adaptation of an existing business component to a
particular customer's requirements; (3) if related to the
duplication of an existing business component from a physical
examination of the component itself or certain other
information; or (4) if related to certain efficiency surveys,
management function or technique, market research, market
testing, or market development, routine data collection or
routine quality control (sec. 41(d)(4)). Research does not
qualify for the credit if it is conducted outside the United
States, Puerto Rico, or any U.S. possession.

Relation to deduction

Under section 174, taxpayers may elect to deduct currently
the amount of certain research or experimental expenditures
paid or incurred in connection with a trade or business,
notwithstanding the general rule that business expenses to
develop or create an asset that has a useful life extending
beyond the current year must be capitalized. However,
deductions allowed to a taxpayer under section 174 (or any
other section) are reduced by an amount equal to 100 percent of
the taxpayer's research credit determined for the taxable year
(Sec. 280C(c)). Taxpayers may alternatively elect to claim a
reduced research credit amount under section 41 in lieu of
reducing deductions otherwise allowed (sec. 280C(c)(3)).

REASONS FOR CHANGE

The Committee acknowledges that research is important to
the economy. Research is the basis of new products, new
services, new industries, and new jobs for the domestic
economy. Therefore the Committee believes it is appropriate to
extend the present-law research credit. In addition, the
Committee is concerned that a number of U.S. companies that
engage in research activities are unable to use the current
research credit. To encourage these companies to continue and
expand their research activities, the Committee believes that
the rate of the alternative incremental credit should be
increased and that a new alternative simplified credit should
be available.

EXPLANATION OF PROVISION

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

EFFECTIVE DATE

The extension of the research credit applies to amounts
paid or incurred after December 31, 2005. The modification of
the alternative incremental credit and the creation of the
alternative simplified credit are effective for taxable years
ending after date of enactment.

M. Qualified Zone Academy Bonds

(sec. 114 of the bill and sec. 1397E of the Code)

PRESENT LAW

Tax-exempt bonds

Interest on State and local governmental bonds generally is
excluded from gross income for Federal income tax purposes if
the proceeds of the bonds are used to finance direct activities
of these governmental units or if the bonds are repaid with
revenues of the governmental units. Activities that can be
financed with these tax-exempt bonds include the financing of
public schools (sec. 103).

Qualified zone academy bonds

As an alternative to traditional tax-exempt bonds, States
and local governments are given the authority to issue
``qualified zone academy bonds'' (sec. 1397E). A total of $400
million of qualified zone academy bonds may be issued annually
in calendar years 1998 through 2005. The $400 million aggregate
bond cap is allocated each year to the States according to
their respective populations of individuals below the poverty
line. Each State, in turn, allocates the credit authority to
qualified zone academies within such State.
Financial institutions that hold qualified zone academy
bonds are entitled to a nonrefundable tax credit in an amount
equal to a credit rate multiplied by the face amount of the
bond. A taxpayer holding a qualified zone academy bond on the
credit allowance date is entitled to a credit. The credit is
includable in gross income (as if it were a taxable interest
payment on the bond), and may be claimed against regular income
tax and AMT liability.
The Treasury Department sets the credit rate at a rate
estimated to allow issuance of qualified zone academy bonds
without discount and without interest cost to the issuer. The
maximum term of the bond is determined by the Treasury
Department, so that the present value of the obligation to
repay the bond is 50 percent of the face value of the bond.
``Qualified zone academy bonds'' are defined as any bond
issued by a State or local government, provided that: (1) at
least 95 percent of the proceeds are used for the purpose of
renovating, providing equipment to, developing course materials
for use at, or training teachers and other school personnel in
a ``qualified zone academy'', and (2) private entities have
promised to contribute to the qualified zone academy certain
equipment, technical assistance or training, employee services,
or other property or services with a value equal to at least 10
percent of the bond proceeds.
A school is a ``qualified zone academy'' if: (1) the school
is a public school that provides education and training below
the college level, (2) the school operates a special academic
program in cooperation with businesses to enhance the academic
curriculum and increase graduation and employment rates, and
(3) either (a) the school is located in an empowerment zone or
enterprise community designated under the Code, or (b) it is
reasonably expected that at least 35 percent of the students at
the school will be eligible for free or reduced-cost lunches
under the school lunch program established under the National
School Lunch Act.

REASONS FOR CHANGE

The Committee believes that the extension of authority to
issue qualified zone academy bonds is appropriate in light of
the educational needs that exist today.

EXPLANATION OF PROVISION

The provision extends for one year the present-law
provision relating to qualified zone academy bonds (through
December 31, 2006).

EFFECTIVE DATE

The provision applies to bonds issued after December 31,
2005.

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

(sec. 115 of the bill and sec. 62 of the Code)

PRESENT LAW

In general, ordinary and necessary business expenses are
deductible (sec. 162). However, in general, unreimbursed
employee business expenses are deductible only as an itemized
deduction and only to the extent that the individual's total
miscellaneous deductions (including employee business expenses)
exceed two percent of adjusted gross income. An individual's
otherwise allowable itemized deductions may be further limited
by the overall limitation on itemized deductions, which reduces
itemized deductions for taxpayers with adjusted gross income in
excess of $145,950 (for 2005). In addition, miscellaneous
itemized deductions are not allowable under the alternative
minimum tax.
Certain expenses of eligible educators are allowed an
above-the-line deduction. Specifically, for taxable years
beginning prior to January 1, 2006, an above-the-line deduction
is allowed for up to $250 annually of expenses paid or incurred
by an eligible educator for books, supplies (other than
nonathletic supplies for courses of instruction in health or
physical education), computer equipment (including related
software and services) and other equipment, and supplementary
materials used by the eligible educator in the classroom. To be
eligible for this deduction, the expenses must be otherwise
deductible under 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.

REASONS FOR CHANGE

The Committee recognizes that elementary and secondary
educators often incur substantial unreimbursed expenses in the
course of their teaching duties, and believes that an extension
of the deduction of such expenses is warranted to continue to
provide tax relief to educators who incur such expenses on
behalf of their students.

EXPLANATION OF PROVISION

The provision extends for one year the present-law
deduction for expenses of eligible educators (through taxable
years beginning on or before December 31, 2006).

EFFECTIVE DATE

The provision is effective for expenses paid or incurred in
taxable years beginning after December 31, 2005.

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

(sec. 116 of the bill and sec. 222 of the Code)

PRESENT LAW

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

REASONS FOR CHANGE

The Committee recognizes that in some cases a deduction for
education expenses may provide greater tax relief than the
present-law education tax credits. In order to provide families
with a range of options for education, the Committee believes
that extending the deduction for higher education expenses is
warranted.

EXPLANATION OF PROVISION

The provision extends the present-law tuition deduction for
one year (through taxable years beginning on or before December
31, 2006).

EFFECTIVE DATE

The provision is effective for payments made in taxable
years beginning after December 31, 2005.

P. Deduction of State and Local General Sales Taxes

(sec. 117 of the bill and sec. 164 of the Code)

PRESENT LAW

For purposes of determining regular tax liability, an
itemized deduction is permitted for certain State and local
taxes paid, including individual income taxes, real property
taxes, and personal property taxes. The itemized deduction is
not permitted for purposes of determining a taxpayer's
alternative minimum taxable income. For taxable years beginning
in 2004 and 2005, at the election of the taxpayer, an itemized
deduction may be taken for State and local general sales taxes
in lieu of the itemized deduction provided under present law
for State and local income taxes. As is the case for State and
local income taxes, the itemized deduction for State and local
general sales taxes is not permitted for purposes of
determining a taxpayer's alternative minimum taxable income.
Taxpayers have two options with respect to the determination of
the sales tax deduction amount. Taxpayers may deduct the total
amount of general State and local sales taxes paid by
accumulating receipts showing general sales taxes paid.
Alternatively, taxpayers may use tables created by the
Secretary of the Treasury that show the allowable deduction.
The tables are based on average consumption by taxpayers on a
State-by-State basis taking into account filing status, number
of dependents, adjusted gross income and rates of State and
local general sales taxation. Taxpayers who use the tables
created by the Secretary may, in addition to the table amounts,
deduct eligible general sales taxes paid with respect to the
purchase of motor vehicles, boats and other items specified by
the Secretary. Sales taxes for items that may be added to the
tables are not reflected in the tables themselves.
The term ``general sales tax'' means a tax imposed at one
rate with respect to the sale at retail of a broad range of
classes of items. However, in the case of items of food,
clothing, medical supplies, and motor vehicles, the fact that
the tax does not apply with respect to some or all of such
items is not taken into account in determining whether the tax
applies with respect to a broad range of classes of items, and
the fact that the rate of tax applicable with respect to some
or all of such items is lower than the general rate of tax is
not taken into account in determining whether the tax is
imposed at one rate. Except in the case of a lower rate of tax
applicable with respect to food, clothing, medical supplies, or
motor vehicles, no deduction is allowed for any general sales
tax imposed with respect to an item at a rate other than the
general rate of tax. However, in the case of motor vehicles, if
the rate of tax exceeds the general rate, such excess shall be
disregarded and the general rate is treated as the rate of tax.
A compensating use tax with respect to an item is treated
as a general sales tax, provided such tax is complimentary to a
general sales tax and a deduction for sales taxes is allowable
with respect to items sold at retail in the taxing jurisdiction
that are similar to such item.

REASONS FOR CHANGE

The Committee recognizes that not all States rely on income
taxes as a primary source of revenue, and that allowing a
deduction for State and local income taxes, but not sales
taxes, may create inequities across States and may also create
bias in the types of taxes that States and localities choose to
impose. The Committee believes that the provision of an
itemized deduction for State and local general sales taxes in
lieu of the deduction for State and local income taxes provides
more equitable Federal tax treatment across States, and will
cause the Federal tax laws to have a more neutral effect on the
types of taxes that State and local governments utilize. For
these reasons, the Committee believes the extension of this
provision is warranted.

EXPLANATION OF PROVISION

The provision extends for one year the present-law
provision allowing taxpayers to elect to deduct State and local
sales taxes in lieu of State and local income taxes (through
taxable years beginning on or before December 31, 2006).

EFFECTIVE DATE

The provision applies to taxable years beginning after
December 31, 2005.

TITLE II--EXTENSIONS OF CERTAIN PROVISIONS FOR TWO YEARS, AND OTHER
MODIFICATIONS

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

(sec. 201 of the bill and sec. 198 of the Code)

PRESENT LAW

Present law allows a deduction for ordinary and necessary
expenses paid or incurred in carrying on any trade or
business.\17\ Treasury regulations provide that the cost of
incidental repairs that neither materially add to the value of
property nor appreciably prolong its life, but keep it in an
ordinarily efficient operating condition, may be deducted
currently as a business expense. Section 263(a)(1) limits the
scope of section 162 by prohibiting a current deduction for
certain capital expenditures. Treasury regulations define
``capital expenditures'' as amounts paid or incurred to
materially add to the value, or substantially prolong the
useful life, of property owned by the taxpayer, or to adapt
property to a new or different use. Amounts paid for repairs
and maintenance do not constitute capital expenditures. The
determination of whether an expense is deductible or
capitalizable is based on the facts and circumstances of each
case.
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\17\ Sec. 162.
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Taxpayers may elect to treat certain environmental
remediation expenditures that would otherwise be chargeable to
capital account as deductible in the year paid or incurred.\18\
The deduction applies for both regular and alternative minimum
tax purposes. The expenditure must be incurred in connection
with the abatement or control of hazardous substances at a
qualified contaminated site. In general, any expenditure for
the acquisition of depreciable property used in connection with
the abatement or control of hazardous substances at a qualified
contaminated site does not constitute a qualified environmental
remediation expenditure. However, depreciation deductions
allowable for such property, which would otherwise be allocated
to the site under the principles set forth in Commissioner v.
Idaho Power Co.\19\ and section 263A, are treated as qualified
environmental remediation expenditures.
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\18\ Sec. 198.
\19\ 418 U.S. 1 (1974).
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A ``qualified contaminated site'' (a so-called
``brownfield'') generally is any property that is held for use
in a trade or business, for the production of income, or as
inventory and is certified by the appropriate State
environmental agency to be an area at or on which there has
been a release (or threat of release) or disposal of a
hazardous substance. Both urban and rural property may qualify.
However, sites that are identified on the national priorities
list under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (``CERCLA'') cannot
qualify as targeted areas. Hazardous substances generally are
defined by reference to sections 101(14) and 102 of CERCLA,
subject to additional limitations applicable to asbestos and
similar substances within buildings, certain naturally
occurring substances such as radon, and certain other
substances released into drinking water supplies due to
deterioration through ordinary use. Petroleum products
generally are not regarded as hazardous substances for purposes
of section 198.\20\
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\20\ Section 101(14) of CERCLA specifically excludes ``petroleum,
including crude oil or any fraction thereof which is not otherwise
specifically listed or designated as a hazardous substance under
subparagraphs (A) through (F) of this paragraph,'' from the definition
of ``hazardous substance.''
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In the case of property to which a qualified environmental
remediation expenditure otherwise would have been capitalized,
any deduction allowed under section 198 is treated as a
depreciation deduction and the property is treated as section
1245 property. Thus, deductions for qualified environmental
remediation expenditures are subject to recapture as ordinary
income upon a sale or other disposition of the property. In
addition, sections 280B (demolition of structures) and 468
(special rules for mining and solid waste reclamation and
closing costs) do not apply to amounts that are treated as
expenses under this provision.
Eligible expenditures are those paid or incurred before
January 1, 2006.

REASONS FOR CHANGE

The Committee observes that by lowering the net capital
cost of a development project, the expensing of brownfields
remediation costs promotes the goal of environmental
remediation and promotes new investment and employment
opportunities. In addition, the Committee believes that the
increased investment in the qualifying areas has spillover
effects that are beneficial to the neighboring communities.
Finally, the Committee recognizes that similar principles apply
with respect to contamination by petroleum products. Therefore,
the Committee believes it is appropriate to extend the present-
law provision permitting the expensing of environmental
remediation costs, and to expand the scope of the present-law
provision to include petroleum products.

EXPLANATION OF PROVISION

The provision extends for two years the present-law
provisions relating to environmental remediation expenditures
(through December 31, 2007).
In addition, the provision expands the definition of
hazardous substance to include petroleum products. Under the
proposal, petroleum products are defined by reference to
section 4612(a)(3), and thus include crude oil, crude oil
condensates and natural gasoline.\21\
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\21\ The present law exceptions for sites on the national
priorities list under CERCLA, and for substances with respect to which
a removal or remediation is not permitted under section 104 of CERCLA
by reason of subsection (a)(3) thereof, would continue to apply to all
hazardous substances (including petroleum products).
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EFFECTIVE DATE

The provision applies to expenditures paid or incurred
after December 31, 2005.

B. Controlled Foreign Corporations

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

PRESENT LAW

Under the subpart F rules, 10-percent U.S. shareholders of
a controlled foreign corporation (``CFC'') are subject to U.S.
tax currently on certain income earned by the CFC, whether or
not such income is distributed to the shareholders. The income
subject to current inclusion under the subpart F rules
includes, among other things, insurance income and foreign base
company income. Foreign base company income includes, among
other things, foreign personal holding company income and
foreign base company services income (i.e., income derived from
services performed for or on behalf of a related person outside
the country in which the CFC is organized).
Foreign personal holding company income generally consists
of the following: (1) dividends, interest, royalties, rents,
and annuities; (2) net gains from the sale or exchange of (a)
property that gives rise to the preceding types of income, (b)
property that does not give rise to income, and (c) interests
in trusts, partnerships, and REMICs; (3) net gains from
commodities transactions; (4) net gains from certain foreign
currency transactions; (5) income that is equivalent to
interest; (6) income from notional principal contracts; (7)
payments in lieu of dividends; and (8) amounts received under
personal service contracts.
Insurance income subject to current inclusion under the
subpart F rules includes any income of a CFC attributable to
the issuing or reinsuring of any insurance or annuity contract
in connection with risks located in a country other than the
CFC's country of organization. Subpart F insurance income also
includes income attributable to an insurance contract in
connection with risks located within the CFC's country of
organization, as the result of an arrangement under which
another corporation receives a substantially equal amount of
consideration for insurance of other country risks. Investment
income of a CFC that is allocable to any insurance or annuity
contract related to risks located outside the CFC's country of
organization is taxable as subpart F insurance income.\22\
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\22\ Prop. Treas. Reg. sec. 1.953-1(a).
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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'').\23\
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\23\ Temporary exceptions from the subpart F provisions for certain
active financing income applied only for taxable years beginning in
1998. Those exceptions were modified and extended for one year,
applicable only for taxable years beginning in 1999. The Tax Relief
Extension Act of 1999 (Pub. L. No. 106-170) clarified and extended the
temporary exceptions for two years, applicable only for taxable years
beginning after 1999 and before 2002. The Job Creation and Worker
Assistance Act of 2002 (Pub. L. No. 107-147) modified and extended the
temporary exceptions for five years, for taxable years beginning after
2001 and before 2007.
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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 a temporary
exception from foreign personal holding company income for
certain income of a qualifying insurance company with respect
to risks located within the CFC's country of creation or
organization, certain temporary exceptions from insurance
income and from foreign personal holding company income apply
for certain income of a qualifying branch of a qualifying
insurance company with respect to risks located within the home
country of the branch, provided certain requirements are met
under each of the exceptions. Further, additional temporary
exceptions from insurance income and from foreign personal
holding company income apply for certain income of certain CFCs
or branches with respect to risks located in a country other
than the United States, provided that the requirements for
these exceptions are met.
In the case of a life insurance or annuity contract,
reserves for such contracts are determined as follows for
purposes of these provisions. The reserves equal the greater
of: (1) the net surrender value of the contract (as defined in
section 807(e)(1)(A)), including in the case of pension plan
contracts; or (2) the amount determined by applying the tax
reserve method that would apply if the qualifying life
insurance company were subject to tax under Subchapter L of the
Code, with the following modifications. First, there is
substituted for the applicable Federal interest rate an
interest rate determined for the functional currency of the
qualifying insurance company's home country, calculated (except
as provided by the Treasury Secretary in order to address
insufficient data and similar problems) in the same manner as
the mid-term applicable Federal interest rate (within the
meaning of section 1274(d)). Second, there is substituted for
the prevailing State assumed rate the highest assumed interest
rate permitted to be used for purposes of determining statement
reserves in the foreign country for the contract. Third, in
lieu of U.S. mortality and morbidity tables, mortality and
morbidity tables are applied that reasonably reflect the
current mortality and morbidity risks in the foreign country.
Fourth, the Treasury Secretary may provide that the interest
rate and mortality and morbidity tables of a qualifying
insurance company may be used for one or more of its branches
when appropriate. In no event may the reserve for any contract
at any time exceed the foreign statement reserve for the
contract, reduced by any catastrophe, equalization, or
deficiency reserve or any similar reserve.
Present law permits a taxpayer in certain circumstances,
subject to approval by the IRS through the ruling process or in
published guidance, to establish that the reserve of a life
insurance company for life insurance and annuity contracts is
the amount taken into account in determining the foreign
statement reserve for the contract (reduced by catastrophe,
equalization, or deficiency reserve or any similar reserve).
IRS approval is to be based on whether the method, the interest
rate, the mortality and morbidity assumptions, and any other
factors taken into account in determining foreign statement
reserves (taken together or separately) provide an appropriate
means of measuring income for Federal income tax purposes. In
seeking a ruling, the taxpayer is required to provide the IRS
with necessary and appropriate information as to the method,
interest rate, mortality and morbidity assumptions and other
assumptions under the foreign reserve rules so that a
comparison can be made to the reserve amount determined by
applying the tax reserve method that would apply if the
qualifying insurance company were subject to tax under
Subchapter L of the Code (with the modifications provided under
present law for purposes of these exceptions). The IRS also may
issue published guidance indicating its approval. Present law
continues to apply with respect to reserves for any life
insurance or annuity contract for which the IRS has not
approved the use of the foreign statement reserve. An IRS
ruling request under this provision is subject to the present-
law provisions relating to IRS user fees.

REASONS FOR CHANGE

In the Taxpayer Relief Act of 1997, one-year temporary
exceptions from foreign personal holding company income were
enacted for income from the active conduct of an insurance,
banking, financing, or similar business.\24\ In 1998, 1999, and
2002, the provisions were extended, and in some cases,
modified.\25\ The Committee believes that it is appropriate to
extend the temporary provisions, as modified by the previous
legislation, for an additional two years.
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\24\ The President canceled this provision in 1997 pursuant to the
Line Item Veto Act. On June 25, 1998, the Supreme Court held that the
cancellation procedures set forth in the Line Item Veto Act are
unconstitutional. Clinton v. City of New York, 524 U.S. 417 (1998).
\25\ The Tax and Trade Relief Extension Act of 1998, Division J,
Making Omnibus Consolidated and Emergency Supplemental Appropriations
for Fiscal Year 1999, Pub. L. No. 105-277, sec. 1005 (1998), provided a
one-year extension, with modifications. The Tax Relief Extension Act of
1999, Pub.L. No. 106-170, sec. 503 (1999), provided an additional two-
year extension, with a clarification. The Job Creation and Worker
Assistance Act of 2002 (Pub. L. No. 107-147, sec. 614) provided an
additional five-year extension and provided that in certain
circumstances an insurance company may establish reserves taking into
account foreign statement reserves. The House bill, H.R. 3090, the
``Economic Security and Recovery Act of 2001,'' had provided for a
permanent extension (H. R. Rep. No. 107-251 at 50 (2001)), while the
Senate bill, the ``Economic Recovery and Assistance for American
Workers Act of 2001,'' had provided for a one-year extension. See S.
Prt. No. 107-49 at 58-60 (2001).
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EXPLANATION OF PROVISION

The provision extends for two years (for taxable years
beginning before 2009) the present-law temporary exceptions
from subpart F foreign personal holding company income, foreign
base company services income, and insurance income for certain
income that is derived in the active conduct of a banking,
financing, or similar business, or in the conduct of an
insurance business.

EFFECTIVE DATE

The provision is effective for taxable years of foreign
corporations beginning after December 31, 2006, and before
January 1, 2009, and for taxable years of U.S. shareholders
with or within which such taxable years of such foreign
corporations end.

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

PRESENT LAW

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

REASONS FOR CHANGE

Most countries allow their companies to redeploy active
foreign earnings with no additional tax burden. The Committee
believes that this provision will make U.S. companies and U.S.
workers more competitive with respect to such countries. By
allowing U.S. companies to reinvest their active foreign
earnings where they are most needed without incurring the
immediate additional tax that companies based in many other
countries never incur, the Committee believes that the
provision will enable U.S. companies to make more sales
overseas, and thus produce more goods in the United States.

EXPLANATION OF PROVISION

Under the provision, for taxable years beginning after 2005
and before 2009, dividends, interest,\26\ rents, and royalties
received by one CFC from a related CFC are not treated as
foreign personal holding company income to the extent
attributable or properly allocable to non-subpart-F income of
the payor. For this purpose, a related CFC is a CFC that
controls or is controlled by the other CFC, or a CFC that is
controlled by the same person or persons that control the other
CFC. Ownership of more than 50 percent of the CFC's stock (by
vote or value) constitutes control for these purposes.
---------------------------------------------------------------------------
\26\ Interest for this purpose includes factoring income which is
treated as equivalent to interest under sec. 954(c)(1)(E).
---------------------------------------------------------------------------

EFFECTIVE DATE

The provision is effective for taxable years of foreign
corporations beginning after December 31, 2005 but before
January 1, 2009, and for taxable years of U.S. shareholders
with or within which such taxable years of such foreign
corporations end.

C. Reduced Rates for Capital Gains and Dividends of Individuals

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

PRESENT LAW

Capital gains

In general
In general, gain or loss reflected in the value of an asset
is not recognized for income tax purposes until a taxpayer
disposes of the asset. On the sale or exchange of a capital
asset, any gain generally is included in income. Any net
capital gain of an individual is taxed at maximum rates lower
than the rates applicable to ordinary income. Net capital gain
is the excess of the net long-term capital gain for the taxable
year over the net short-term capital loss for the year. Gain or
loss is treated as long-term if the asset is held for more than
one year.
Capital losses generally are deductible in full against
capital gains. In addition, individual taxpayers may deduct
capital losses against up to $3,000 of ordinary income in each
year. Any remaining unused capital losses may be carried
forward indefinitely to another taxable year.
A capital asset generally means any property except (1)
inventory, stock in trade, or property held primarily for sale
to customers in the ordinary course of the taxpayer's trade or
business, (2) depreciable or real property used in the
taxpayer's trade or business, (3) specified literary or
artistic property, (4) business accounts or notes receivable,
(5) certain U.S. publications, (6) certain commodity derivative
financial instruments, (7) hedging transactions, and (8)
business supplies. In addition, the net gain from the
disposition of certain property used in the taxpayer's trade or
business is treated as long-term capital gain. Gain from the
disposition of depreciable personal property is not treated as
capital gain to the extent of all previous depreciation
allowances. Gain from the disposition of depreciable real
property is generally not treated as capital gain to the extent
of the depreciation allowances in excess of the allowances that
would have been available under the straight-line method of
depreciation.
Tax rates before 2009
Under present law, for taxable years beginning before
January 1, 2009, the maximum rate of tax on the adjusted net
capital gain of an individual is 15 percent. Any adjusted net
capital gain which otherwise would be taxed at a 10- or 15-
percent rate is taxed at a five-percent rate (zero for taxable
years beginning after 2007). These rates apply for purposes of
both the regular tax and the alternative minimum tax.
Under present law, the ``adjusted net capital gain'' of an
individual is the net capital gain reduced (but not below zero)
by the sum of the 28-percent rate gain and the unrecaptured
section 1250 gain. The net capital gain is reduced by the
amount of gain that the individual treats as investment income
for purposes of determining the investment interest limitation
under section 163(d).
The term ``28-percent rate gain'' means the amount of net
gain attributable to long-term capital gains and losses from
the sale or exchange of collectibles (as defined in section
408(m) without regard to paragraph (3) thereof), an amount of
gain equal to the amount of gain excluded from gross income
under section 1202 (relating to certain small business stock),
the net short-term capital loss for the taxable year, and any
long-term capital loss carryover to the taxable year.
``Unrecaptured section 1250 gain'' means any long-term
capital gain from the sale or exchange of section 1250 property
(i.e., depreciable real estate) held more than one year to the
extent of the gain that would have been treated as ordinary
income if section 1250 applied to all depreciation, reduced by
the net loss (if any) attributable to the items taken into
account in computing 28-percent rate gain. The amount of
unrecaptured section 1250 gain (before the reduction for the
net loss) attributable to the disposition of property to which
section 1231 (relating to certain property used in a trade or
business) applies may not exceed the net section 1231 gain for
the year.
An individual's unrecaptured section 1250 gain is taxed at
a maximum rate of 25 percent, and the 28-percent rate gain is
taxed at a maximum rate of 28 percent. Any amount of
unrecaptured section 1250 gain or 28-percent rate gain
otherwise taxed at a 10- or 15-percent rate is taxed at the
otherwise applicable rate.
Tax rates after 2008
For taxable years beginning after December 31, 2008, the
maximum rate of tax on the adjusted net capital gain of an
individual is 20 percent. Any adjusted net capital gain which
otherwise would be taxed at a 10- or 15-percent rate is taxed
at a 10-percent rate.
In addition, any gain from the sale or exchange of property
held more than five years that would otherwise have been taxed
at the 10-percent rate is taxed at an eight-percent rate. Any
gain from the sale or exchange of property held more than five
years and the holding period for which began after December 31,
2000, that would otherwise have been taxed at a 20-percent rate
is taxed at an 18-percent rate.
The tax rates on 28-percent gain and unrecaptured section
1250 gain are the same as for taxable years beginning before
2009.

Dividends

In general
A dividend is the distribution of property made by a
corporation to its shareholders out of its after-tax earnings
and profits.
Tax rates before 2009
Under present law, dividends received by an individual from
domestic corporations and qualified foreign corporations are
taxed at the same rates that apply to capital gains. This
treatment applies for purposes of both the regular tax and the
alternative minimum tax. Thus, fortaxable years beginning
before 2009, dividends received by an individual are taxed at rates of
five (zero for taxable years beginning after 2007) and 15 percent.
If a shareholder does not hold a share of stock for more
than 60 days during the 121-day period beginning 60 days before
the ex-dividend date (as measured under section 246(c)),
dividends received on the stock are not eligible for the
reduced rates. Also, the reduced rates are not available for
dividends to the extent that the taxpayer is obligated to make
related payments with respect to positions in substantially
similar or related property.
Qualified dividend income includes otherwise qualified
dividends received from qualified foreign corporations. The
term ``qualified foreign corporation'' includes a foreign
corporation that is eligible for the benefits of a
comprehensive income tax treaty with the United States which
the Treasury Department determines to be satisfactory and which
includes an exchange of information program. In addition, a
foreign corporation is treated as a qualified foreign
corporation with respect to any dividend paid by the
corporation with respect to stock that is readily tradable on
an established securities market in the United States.
Dividends received from a corporation that is a passive
foreign investment company (as defined in section 1297) in
either the taxable year of the distribution, or the preceding
taxable year, are not qualified dividends.
Special rules apply in determining a taxpayer's foreign tax
credit limitation under section 904 in the case of qualified
dividend income. For these purposes, rules similar to the rules
of section 904(b)(2)(B) concerning adjustments to the foreign
tax credit limitation to reflect any capital gain rate
differential will apply to any qualified dividend income.
If a taxpayer receives an extraordinary dividend (within
the meaning of section 1059(c)) eligible for the reduced rates
with respect to any share of stock, any loss on the sale of the
stock is treated as a long-term capital loss to the extent of
the dividend.
A dividend is treated as investment income for purposes of
determining the amount of deductible investment interest only
if the taxpayer elects to treat the dividend as not eligible
for the reduced rates.
The amount of dividends qualifying for reduced rates that
may be paid by a regulated investment company (``RIC'') for any
taxable year in which the qualified dividend income received by
the company is less than 95 percent of its gross income (as
specially computed) may not exceed the sum of (i) the qualified
dividend income of the RIC for the taxable year and (ii) the
amount of earnings and profits accumulated in a non-RIC taxable
year that were distributed by the RIC during the taxable year.
The amount of dividends qualifying for reduced rates that
may be paid by a real estate investment trust (``REIT'') for
any taxable year may not exceed the sum of (i) the qualified
dividend income of the REIT for the taxable year, (ii) an
amount equal to the excess of the income subject to the taxes
imposed by section 857(b)(1) and the regulations prescribed
under section 337(d) for the preceding taxable year over the
amount of these taxes for the preceding taxable year, and (iii)
the amount of earnings and profits accumulated in a non-REIT
taxable year that were distributed by the REIT during the
taxable year.
The reduced rates do not apply to dividends received from
an organization that was exempt from tax under section 501 or
was a tax-exempt farmers' cooperative in either the taxable
year of the distribution or the preceding taxable year;
dividends received from a mutual savings bank that received a
deduction under section 591; or deductible dividends paid on
employer securities.\27\
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\27\ In addition, for taxable years beginning before 2009, amounts
treated as ordinary income on the disposition of certain preferred
stock (sec. 306) are treated as dividends for purposes of applying the
reduced rates; the tax rate for the accumulated earnings tax (sec. 531)
and the personal holding company tax (sec. 541) is reduced to 15
percent; and the collapsible corporation rules (sec. 341) are repealed.
---------------------------------------------------------------------------
Tax rates after 2008
For taxable years beginning after 2008, dividends received
by an individual are taxed as ordinary income at rates of up to
35 percent.

REASONS FOR CHANGE

The Committee believes that the lower capital gain and
dividend rates have had a positive effect on the economy and
should be extended to continue to promote economic growth by
increasing the after-tax return to saving and investment. The
Committee further believes that the extension will encourage
the payment of dividends by corporations.

EXPLANATION OF PROVISION

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

EFFECTIVE DATE

The provision applies to taxable years beginning after
December 31, 2008.

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

(sec. 204 of the bill and sec. 25B of the Code)

PRESENT LAW

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

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

The credit does not apply to taxable years beginning after
December 31, 2006.\28\
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\28\ The saver's credit was enacted as part of the Economic Growth
and Tax Relief Reconciliation Act of 2001 (``EGTRRA''), Pub. L. No.
107-16. The provisions of EGTRRA generally do not apply for years
beginning after December 31, 2010.
---------------------------------------------------------------------------

REASONS FOR CHANGE

Many low- and middle-income individuals have inadequate
savings for retirement. The Committee believes that the saver's
credit provides an incentive for low- and middle-income
individuals to save for retirement. The Committee believes that
the credit should be extended to provide a more consistent
savings incentive.

EXPLANATION OF PROVISION

The provision extends the saver's credit for two years
(through taxable years beginning on or before December 31,
2008).

EFFECTIVE DATE

The provision is effective on the date of enactment.

E. Extension of Increased Expensing for Small Business

(sec. 205 of the bill and sec. 179 of the Code)

PRESENT LAW

In lieu of depreciation, a taxpayer with a sufficiently
small amount of annual investment may elect to deduct (or
``expense'') such costs. Present law provides that the maximum
amount a taxpayer may expense, for taxable years beginning in
2003 through 2007, is $100,000 of the cost of qualifying
property placed in service for the taxable year.\29\ In
general, qualifying property is defined as depreciable tangible
personal property that is purchased for use in the active
conduct of a trade or business. Off-the-shelf computer software
placed in service in taxable years beginning before 2008 is
treated as qualifying property. The $100,000 amount is reduced
(but not below zero) by the amount by which the cost of
qualifying property placed in service during the taxable year
exceeds $400,000. The $100,000 and $400,000 amounts are indexed
for inflation for taxable years beginning after 2003 and before
2008.
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\29\ 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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The amount eligible to be expensed for a taxable year may
not exceed the taxable income for a taxable year that is
derived from the active conduct of a trade or business
(determined without regard to this provision). Any amount that
is not allowed as a deduction because of the taxable income
limitation may be carried forward to succeeding taxable years
(subject to similar limitations). No general business credit
under section 38 is allowed with respect to any amount for
which a deduction is allowed under section 179. An expensing
election is made under rules prescribed by the Secretary.\30\
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\30\ Sec. 179(c)(1). Under Treas. Reg. sec. 179-5, applicable to
property placed in service in taxable years beginning after 2002 and
before 2008, a taxpayer is permitted to make or revoke an election
under section 179 without the consent of the Commissioner on an amended
Federal tax return for that taxable year. This amended return must be
filed within the time prescribed by law for filing an amended return
for the taxable year. T.D. 9209, July 12, 2005.
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For taxable years beginning in 2008 and thereafter (or
before 2003), the following rules apply. A taxpayer with a
sufficiently small amount of annual investment may elect to
deduct up to $25,000 of the cost of qualifying property placed
in service for the taxable year. The $25,000 amount is reduced
(but not below zero) by the amount by which the cost of
qualifying property placed in service during the taxable year
exceeds $200,000. The $25,000 and $200,000 amounts are not
indexed. In general, qualifying property is defined as
depreciable tangible personal property that is purchased for
use in the active conduct of a trade or business (not including
off the-shelf computer software). An expensing election may be
revoked only with consent of the Commissioner.\31\
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\31\ Sec. 179(c)(2).
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REASONS FOR CHANGE

The Committee believes that section 179 expensing provides
two important benefits for small businesses. First, it lowers
the cost of capital for property used in a trade or business.
With a lower cost of capital, the Committee believes small
businesses will invest in more equipment and employ more
workers. Second, it eliminates depreciation recordkeeping
requirements with respect to expensed property. In 2004,
Congress acted to increase the value of these benefits and to
increase the number of taxpayers eligible for taxable years
through 2007. The Committee believes that the changes to
section 179 expensing will continue to provide important
benefits if extended, and the bill therefore extends these
changes for an additional two years.

EXPLANATION OF PROVISION

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

EFFECTIVE DATE

The provision is effective for taxable years beginning
after 2007 and before 2010.

TITLE III--OTHER PROVISIONS

A. Taxation of Certain Settlement Funds

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

PRESENT LAW

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

REASONS FOR CHANGE

The Committee believes that environmental escrow accounts
established under court consent decrees are essential for the
EPA to resolve or satisfy claims under the CERCLA. The tax
treatment of these settlement funds may prevent taxpayers from
entering into prompt settlements with the EPA for the cleanup
of Superfund hazardous waste sites and reduce the ultimate
amount of funds available for the sites' cleanup. Because these
settlement funds are controlled by the government and, upon
termination, any remaining funds belong to the government, the
Committee believes it is appropriate to establish that these
funds are to be treated as beneficially owned by the United
States.

EXPLANATION OF PROVISION

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

EFFECTIVE DATE

The provision is effective for accounts and funds
established after the date of enactment.

B. Modification of Active Business Definition Under Section 355

(sec. 302 of the bill 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.\32\ 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.\33\
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\32\ Section 355(b).
\33\ Section 355(b)(2)(A).
---------------------------------------------------------------------------
In determining whether a corporation is directly engaged in
an active trade or business that satisfies the requirement, old
IRS guidelines for advance ruling purposes required that the
value of the gross assets of the trade or business being relied
on must ordinarily constitute at least five percent of the
total fair market value of the gross assets of the corporation
directly conducting the trade or business.\34\ More recently,
the IRS has suspended this specific rule in connection with its
general administrative practice of moving IRS resources away
from advance rulings on factual aspects of section 355
transactions in general.\35\
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\34\ Rev. Proc. 2003-3, sec. 4.01(30), 2003-1 I.R.B. 113.
\35\ Rev. Proc. 2003-48, 2003-29 I.R.B. 86.
---------------------------------------------------------------------------
If the distributing or controlled corporation is not
directly engaged in an active trade or business, then the IRS
takes the position that the ``substantially all'' test 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.\36\
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\36\ 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.
---------------------------------------------------------------------------

REASONS FOR CHANGE

Prior to a spin-off under section 355 of the Code,
corporate groups that have conducted business in separate
corporate entities often must undergo elaborate restructurings
to place active businesses in the proper entities to satisfy
the five-year active business requirement. If the top-tier
corporation of a chain that is being spun off or retained is a
holding company, then the requirements regarding the activities
of its subsidiaries are more stringent than if the top-tier
corporation itself engaged in some active business. The
Committee believes that it is appropriate to simplify planning
for corporate groups that use a holding company structure to
engage in distributions that qualify for tax-free treatment
under section 355.

EXPLANATION OF PROVISION

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 and before December 31, 2010, 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.
In the case of any distribution prior to the date of
enactment, 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) as a result of an
acquisition, disposition, or other restructuring after such
date and before December 31, 2010, the provisions of the bill
apply as if the distribution had occurred after the date of
enactment.\37\
---------------------------------------------------------------------------
\37\ 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).
---------------------------------------------------------------------------

C. Qualified Veteran's Mortgage Bonds

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

PRESENT LAW

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

REASONS FOR CHANGE

The Committee believes that the qualified veterans'
mortgage bond program should be expanded to more recent
veterans including potentially the men and women serving on
active duty today. The Committee also believes that such an
expansion requires modified volume limits for these bonds.

EXPLANATION OF PROVISION

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

Calendar year: Applicable
percentage is:
2006.................................................... 20 percent
2007.................................................... 40 percent
2008.................................................... 60 percent
2009.................................................... 80 percent

The volume limits are zero for 2011 and each year
thereafter. Unused allocation cannot be carried forward to
subsequent years.

EFFECTIVE DATE

The provision generally applies to bonds issued after
December 31, 2005. The provision expanding the definition of
eligible veterans applies to financing provided after June 30,
2005.

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

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

PRESENT LAW

Capital gains

The maximum tax rate on the net capital gain income of an
individual is 15 percent for taxable years beginning in 2005.
By contrast, the maximum tax rate on an individual's ordinary
income is 35 percent. The reduced 15-percent rate generally is
available for gain from the sale or exchange of a capital asset
for which the taxpayer has satisfied a holding-period
requirement. Capital assets generally include all property held
by a taxpayer with certain specified exclusions.
An exclusion from the definition of a capital asset applies
to inventory property or property held by a taxpayer primarily
for sale to customers in the ordinary course of the taxpayer's
trade or business. Another exclusion from capital asset status
applies to copyrights, literary, musical, or artistic
compositions, letters or memoranda, or similar property held by
a taxpayer whose personal efforts created the property (or held
by a taxpayer whose basis in the property is determined by
reference to the basis of the taxpayer whose personal efforts
created the property). Consequently, when a taxpayer that owns
copyrights in, for example, books, songs, or paintings that the
taxpayer created (or when a taxpayer to which the copyrights
have been transferred by the works' creator in a substituted
basis transaction) sells the copyrights, gain from the sale is
treated as ordinary income, not capital gain.

Charitable contributions

A taxpayer generally is allowed a deduction for the fair
market value of property contributed to a charity. If a
taxpayer makes a contribution of property that would have
generated ordinary income (or short-term capital gain), the
taxpayer's charitable contribution deduction generally is
limited to the property's adjusted basis.

REASONS FOR CHANGE

The Committee believes it is appropriate to allow taxpayers
to treat as capital gain the income from a sale or exchange of
musical compositions or copyrights in musical works the
taxpayer created.

EXPLANATION OF PROVISION

The provision provides that at the election of a taxpayer,
the sale or exchange before January 1, 2011 of musical
compositions or copyrights in musical works created by the
taxpayer's personal efforts (or having a basis determined by
reference to the basis in the hands of the taxpayer whose
personal efforts created the compositions or copyrights) is
treated as the sale or exchange of a capital asset. The
provision does not change the present law limitation on a
taxpayer's charitable deduction for the contribution of such
compositions or copyrights.

EFFECTIVE DATE

The provision is effective for sales or exchanges in
taxable years beginning after the date of enactment.

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

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

PRESENT LAW

The United States employs a ``worldwide'' tax system, under
which domestic corporations generally are taxed on all income,
including income from shipping operations, whether derived in
the United States or abroad. In order to mitigate double
taxation, a foreign tax credit for income taxes paid to foreign
countries is provided to reduce or eliminate the U.S. tax owed
on such income, subject to certain limitations.
Generally, the United States taxes foreign corporations
only on income that has a sufficient nexus to the United
States. Thus, a foreign corporation is generally subject to
U.S. tax only on income, including income from shipping
operations, which is ``effectively connected'' with the conduct
of a trade or business in the United States (sec. 882). Such
``effectively connected income'' generally is taxed in the same
manner and at the same rates as the income of a U.S.
corporation.
The United States imposes a four percent tax on the amount
of a foreign corporation's U.S. source gross transportation
income (sec. 887). Transportation income includes income from
the use (or hiring or leasing for use) of a vessel and income
from services directly related to the use of a vessel. Fifty
percent of the transportation income attributable to
transportation that either begins or ends (but not both) in the
United States is treated as U.S. source gross transportation
income. The tax does not apply, however, to U.S. source gross
transportation income that is treated as income effectively
connected with the conduct of a U.S. trade or business. U.S.
source gross transportation income is not treated as
effectively connected income unless (1) the taxpayer has a
fixed place of business in the United States involved in
earning the income, and (2) substantially all the income is
attributable to regularly scheduled transportation.
The tax imposed by section 882 or 887 on income from
shipping operations may be limited by an applicable U.S. income
tax treaty or by an exemption of a foreign corporation's
international shipping operations income in instances where a
foreign country grants an equivalent exemption (sec. 883).
Notwithstanding the general rules described above, the
American Jobs Creation Act of 2004 (``AJCA'') \38\ generally
allows corporations that are qualifying vessel operators \39\
to elect a ``tonnage tax'' in lieu of the corporate income tax
on taxable income from certain shipping activities.
Accordingly, an electing corporation's gross income does not
include its income from qualifying shipping activities (and
items of loss, deduction, or credit are disallowed with respect
to such excluded income), and electing corporations are only
subject to tax on these activities at the maximum corporate
income tax rate on their notional shipping income, which is
based on the net tonnage of the corporation's qualifying
vessels.\40\ No deductions are allowed against the notional
shipping income of an electing corporation, and no credit is
allowed against the notional tax imposed under the tonnage tax
regime. In addition, special deferral rules apply to the gain
on the sale of a qualifying vessel, if such vessel is replaced
during a limited replacement period.
---------------------------------------------------------------------------
\38\ Pub. L. No. 108-357, sec. 248. The tonnage tax regime is
effective for taxable years beginning after the date of enactment of
AJCA (October 22, 2004).
\39\ 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.
\40\ An electing corporation's notional shipping income for the
taxable year is the product of the following amounts for each of the
qualifying vessels it operates: (1) the daily notional shipping income
from the operation of the qualifying vessel, and (2) the number of days
during the taxable year that the electing corporation operated such
vessel as a qualifying vessel in the United States foreign trade. The
daily notional shipping income from the operation of a qualifying
vessel is (1) 40 cents for each 100 tons of so much of the net tonnage
of the vessel as does not exceed 25,000 net tons, and (2) 20 cents for
each 100 tons of so much of the net tonnage of the vessel as exceeds
25,000 net tons. ``United States foreign trade'' means the
transportation of goods or passengers between a place in the United
States and a foreign place or between foreign places. The temporary use
in the United States domestic trade (i.e., the transportation of goods
or passengers between places in the United States) of any qualifying
vessel or the temporary ceasing to use a qualifying vessel may be
disregarded, under special rules.
---------------------------------------------------------------------------
Generally, a ``qualifying vessel'' is defined as a self-
propelled (or a combination of self-propelled and non-self-
propelled) U.S.-flag vessel of not less than 10,000 deadweight
tons \41\ that is used exclusively in the U.S. foreign trade.
---------------------------------------------------------------------------
\41\ Deadweight measures the lifting capacity of a ship expressed
in long tons (2,240 lbs.), including cargo, crew, and consumables such
as fuel, lube oil, drinking water, and stores. It is the difference
between the number of tons of water a vessel displaces without such
items on board and the number of tons it displaces when fully loaded.
---------------------------------------------------------------------------

REASONS FOR CHANGE

The Committee believes that the tonnage tax regime provides
operators of qualifying U.S.-flag vessels in the U.S. foreign
trade the opportunity to be competitive with their tax-
advantaged foreign competitors. However, there are a number of
U.S.-flag vessels that are operated in the U.S. foreign trade
but which do not qualify for tonnage tax treatment because
their carrying capacity is less than 10,000 deadweight tons.
The Committee believes that the expansion of the tonnage tax
regime to smaller vessels will permit the operators of such
vessels to be competitive with their foreign competitors as
well as with their larger U.S.-flag competitors.

EXPLANATION OF PROVISION

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

EFFECTIVE DATE

The provision applies to taxable years beginning after
December 31, 2005 and ending before January 1, 2011.

F. Modification of Special Arbitrage Rule for Certain Funds

(sec. 306 of the bill)

PRESENT LAW

In general, present-law tax-exempt bond arbitrage
restrictions provide that interest on a State or local
government bond is not eligible for tax-exemption if the
proceeds are invested, directly or indirectly, in materially
higher yielding investments or if the debt service on the bond
is secured by or paid from (directly or indirectly) such
investments. An exception to the arbitrage restrictions,
enacted in 1984, provides that the pledge of income from
investments in the Texas Permanent University Fund (the
``Fund'') as security for a limited amount of tax-exempt bonds
will not cause interest on those bonds to be taxable. The terms
of this exception are limited to State constitutional or
statutory restrictions continuously in effect since October 9,
1969. In addition, the exception only applies to an amount of
tax-exempt bonds that does not exceed 20 percent of the value
of the Fund.
The Fund consists of certain State lands that were set
aside for the benefit of higher education, the income from
mineral rights to these lands, and certain other earnings on
Fund assets. The Texas constitution directs that monies held in
the Fund are to be invested in interest-bearing obligations and
other securities. Income from the Fund is apportioned between
two university systems operated by the State. Tax-exempt bonds
issued by the university systems to finance buildings and other
permanent improvements were secured by and payable from the
income of the Fund.
Prior to 1999, the constitution did not permit the
expenditure or mortgage of the Fund for any purpose. In 1999,
the State constitutional rules governing the Fund were modified
with regard to the manner in which amounts in the Fund are
distributed for the benefit of the two university systems. The
State constitutional amendments allow for the possibility that
in the event investment earnings are less than annual debt
service on the bonds some of the debt service could be
considered as having been paid with the Fund corpus. The 1984
exception refers only to bonds secured by investment earnings
on securities or obligations held by the Fund. Despite the
constitutional amendments, the IRS has agreed to continue to
apply the 1984 exception to the Fund through August 31, 2007,
if clarifying legislation is introduced in the 109th Congress
prior to August 31, 2005. Clarifying legislation was introduced
in the 109th Congress on May 26, 2005.\42\
---------------------------------------------------------------------------
\42\ H.R. 2661.
---------------------------------------------------------------------------

REASONS FOR CHANGE

The Committee understands that the State constitutional
amendments have the effect of permitting the Fund to make
annual distributions in a manner similar to standard university
endowment funds, rather than tying distributions to annual
income performance, which can create a variable pattern of
distributions. The Committee does not believe that the Fund
should lose the benefits of the 1984 exception from the tax-
exempt bond arbitrage restrictions by adopting a more modern
approach to the management of Fund distributions.

EXPLANATION OF PROVISION

The provision affirms and extends the IRS agreement through
August 31, 2009. The 1984 exception is conformed to the State
constitutional amendments to permit its continued applicability
to bonds of the two university systems. The limitation on the
aggregate amount of bonds which may benefit from the exception
is not modified, and remains at 20 percent. The provision
sunsets after August 31, 2009.

EFFECTIVE DATE

The provision is effective on the date of enactment.

IV. VOTES OF THE COMMITTEE

In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statements are made
concerning the vote of the Committee on Ways and Means in its
consideration of H.R. 4297, to provide for reconciliation
pursuant to section 201(b) of the concurrent resolution on the
budget for fiscal year 2006.

MOTION TO REPORT RECOMMENDATIONS

The Chairman's Amendment in the Nature of a Substitute, as
amended, was ordered favorably reported by a rollcall vote of
24 yeas to 15 nays (with a quorum being present). The vote was
as follows:

----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Thomas....................... X Mr. Rangel......... X
Mr. Shaw......................... X Mr. Stark..........
Mrs. Johnson..................... X Mr. Levin.......... X
Mr. Herger....................... X Mr. Cardin......... X
Mr. McCrery...................... X Mr. McDermott...... X
Mr. Camp......................... X Mr. Lewis (GA)..... X
Mr. Ramstad...................... X Mr. Neal........... X
Mr. Nussle....................... X Mr. McNulty........
Mr. Johnson...................... X Mr. Jefferson...... X
Mr. English...................... X Mr. Tanner......... X
Mr. Hayworth..................... X Mr. Becerra........ X
Mr. Weller....................... X Mr. Doggett........ X
Mr. Hulshof...................... X Mr. Pomeroy........ X
Mr. Lewis (KY)................... X Ms. Tubbs Jones.... X
Mr. Foley........................ X Mr. Thompson....... X
Mr. Brady........................ X Mr. Larson......... X
Mr. Reynolds..................... X Mr. Emanuel........ X
Mr. Ryan......................... X
Mr. Cantor....................... X
Mr. Linder....................... X
Mr. Beauprez..................... X
Ms. Hart......................... X
Mr. Chocola...................... X
Mr. Nunes........................ X
----------------------------------------------------------------------------------------------------------------

VOTES ON AMENDMENTS

A rollcall vote was conducted on the following amendments
to the Chairman's Amendment in the Nature of a Substitute.
A substitute amendment by Mr. Neal was defeated by a
rollcall vote of 15 yeas to 24 nays. The vote was as follows:

An amendment by Mr. Pomeroy, which would expand the child
tax credit to include expenses paid to enforce child support
obligations, was defeated by a rollcall vote of 15 yeas to 24
nays. The vote was as follows:

An amendment by Messrs. Herger, Weller, Brady, and
Beauprez, which would extend increased expensing for small
businesses for 2 years, was agreed to by a rollcall vote of 39
yeas to 0 nays. The vote was as follows:

An amendment by Committee Members Camp, N. Johnson, Herger,
McCrery, S. Johnson, English, Hayworth, Weller, Hulshof, and
Brady, which would extend and expand the research and
experimentation tax credit for 1 year, was agreed to by a
rollcall vote of 39 yeas to 0 nays. The vote was as follows:

An amendment by Mr. Foley, which would extend the saver's
credit for 2 years, was agreed to by a rollcall vote of 39 yeas
to 0 nays. The vote was as follows:

VOTES ON PROCEDURAL MOTIONS

A motion by Mr. Shaw to limit debate for Republicans and
Democrats to 6 minutes per side was agreed to by a rollcall
vote of 24 yeas to 15 nays. The vote was as follows:

V. BUDGET EFFECTS OF THE BILL

A. Committee Estimate of Budgetary Effects

In compliance with clause 3(d)(2) of the rule XIII of the
Rules of the House of Representatives, the following statement
is made concerning the effects on the budget of the revenue
provisions of the bill, H.R. 4297, as reported.
The bill is estimated to have the following effects on
budget receipts for fiscal years 2006-2010:

B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority

In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue reducing tax
provisions involve increased tax expenditures and budget
outlays. (See amounts in table in Part IV.A., above.)

C. Cost Estimate Prepared by the Congressional Budget Office

In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives requires a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, November 17, 2005.
Hon. William ``Bill'' M. Thomas,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: Based on a review of H.R. 4297, the Tax
Relief Extension Reconciliation Act of 2005, as ordered
reported by the Committee on Ways and Means on November 15,
2005, CBO and the Joint Committee on Taxation (JCT) estimate
that enacting this legislation would reduce revenues by $56.1
billion over the 2006-2010 period and by $80.5 billion over the
2006-2015 period. In addition, CBO estimates that this
legislation would have no effect on federal spending. The
estimated revenue effects are summarized below. A table with
additional details is attached.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-----------------------------------------------------------------------------------------------------------------------------------
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006-2010 2006-2015
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Estimated Revenues \1\...................................... -5,773 -11,237 -11,182 -21,394 -6,493 -7,048 -17,430 -207 129 102 -56,082 -80,535
On-Budget............................................... -5,772 -11,224 -11,179 -21,394 -6,493 -7,048 -17,430 -207 129 102 -56,065 -80,518
Off-Budget.............................................. -1 -14 -3 0 0 0 0 0 0 0 -17 -17
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The estimates assume the bill will be enacted by December 1, 2005.
Sources: CBO and the Joint Committee on Taxation.

Most of the reduction in revenues would result from
extending the reduced tax rates for dividends and capital
gains. Those provisions account for $50.8 billion of the
estimated reduction in revenues over the 10-year period, JCT
provided all of the revenue estimates with the exception of the
estimate for the provision that extends increased limits for
mental health parity. CBO estimates that the one-year extension
of those increased limits would reduce revenues by $58 million
over the 2006-2008 period. (Of that reduction, $17 million
would apply to off budget receipts.)
JCT has reviewed H.R. 4297 and has determined that it
contains no intergovernmental or private-sector mandates as
defined in the Unfunded Mandates Reform Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Emily
Schlect.
Sincerely,
Robert A. Sunshine
(For Douglas Holtz-Eakin, Director).
Attachment.

ESTIMATED EFFECTS ON REVENUES FOR S.R. 4297
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-------------------------------------------------------------------------------------------------------------
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
CHANGES IN REVENUES

Extension of the Reduced Tax Rates for 0 0 -860 -4,431 -8,008 -9,368 -6,326 -1,224 -450 -112
Dividends................................
Extension of the Reduced Tax Rates for 0 0 -1,549 -8,375 2,672 -54 -12,698 * * 0
Capital Gains............................
Extension and Modification of the Research -3,330 -3,219 -1,480 -1,097 -740 -192 0 0 0 0
Credit...................................
Extension of the Exception for Active 0 -775 -2,339 -1,682 0 0 0 0 0 0
Financing Income for Controlled Foreign
Corporations.............................
Extension of the Credit for Elective 0 -481 -1,428 -903 -10 -11 -11 -11 -10 -10
Deferrals and IRA Contributions..........
Extension of Non-refundable Personal -565 -2,260 0 0 0 0 0 0 0 0
Credits under the Alternative Minimum Tax
Extension of the Deduction for State and -525 -1,574 0 0 0 0 0 0 0 0
Local Sales Taxes........................
Extension of the Deduction for Qualified -420 -1,260 0 0 0 0 0 0 0 0
Tuition..................................
Extension of Cost Recovery for, Qualified -46 -138 -181 -177 -171 -155 -146 -155 -152 -150
Leasehold Improvements...................
Extension of the Increase in Section 179 0 0 -2,605 -4,459 -209 2,707 1,772 1,222 826 476
Expensing................................
All Other Provisions...................... -887 -1.530 -740 --270 -27 25 -21, -39 -85 -102
-------------------------------------------------------------------------------------------------------------
Total..................................... -5,773 -11,237 -11,182 -21,394 -6,493 -7,048 -17,430 -207 129 102
On-Budget............................. -5,772 -11,224 -11,179 -21,394 -6,493 -7,048 -17,430 -207 129 102
Off-Budget \1\........................ -1 -14 -3 0 0 0 0 0 0 0
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The provision that provides parity in the application of certain limits to mental health benefits, which is included in the estimate for all other
provisions, affects both on- and off-budget revenues.

Sources: CB0 and the Joint Committee on Taxation.
Note: * = Loss of less than $500,000

D. Macroeconomic Impact Analysis

In compliance with clause 3(h)(2) of rule XIII of the Rules
of the House of Representatives, the following statement is
made by the Joint Committee on Taxation with respect to the
provisions of the bill amending the Internal Revenue Code of
1986. In compliance with clause 3(h)(2) of rule XIII of the
Rules of the House of Representatives, the following statement
is made by the staff of the Joint Committee on Taxation with
respect to the provisions of the bill amending the Internal
Revenue Code of 1986.
This bill contains provisions that would temporarily lower
the after-tax cost of capital, providing incentives for
additional investment in productive capital, which will likely
result in a small increase in economic growth. They include the
two-year extensions of reductions in the rate of taxation of
dividends and realized capital gains, the two-year extension of
the changes to section 179 expensing, and the one-year
extension and revision of the tax credit for research and
experimentation. These provisions represent small changes in
the after-tax cost of capital. The temporary nature of these
incentives increases the amount of uncertainty associated with
modeling the effects of these proposals on the macro-economy.
Modeling the effects of such proposals requires making
assumptions about taxpayers' expectations about the future of
these proposals, as well as adjusting their responses in light
of those assumptions. Empirical evidence on taxpayers'
expectations about future tax policy and likely response to
temporary incentives is inconclusive. The expected effects of
these provisions on timing of investment have been incorporated
in the conventional revenue estimates for these proposals.
While we estimate that these provisions would have a positive
effect on economic growth, that effect is small relative to the
amount of uncertainty associated with this estimate.
In addition, this bill contains a number of provisions
differentially affecting both corporate and non-corporate
businesses as well as differentially affecting small sub-
sectors of the economy. The resulting re-allocation of relative
tax burden among these different business sectors could have
positive or negative implications for economic efficiency, and
hence, long-term growth. The size of these provisions is also
small in relation to the U.S. economy. Finally, the net
increase in the U.S. Federal government deficit is likely to
crowd out some domestic investment in the long run.
Thus, we estimate that the effects of the bill on economic
activity are so small relative to the size of the economy and
the degree of uncertainty associated with the estimate as to be
incalculable within the context of a model of the aggregate
economy.

VI. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

A. Committee Oversight Findings and Recommendations

With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives (relating to oversight findings),
the Committee advises that the bill was a result of the
Committee's budget reconciliation instructions.

B. Statement of General Performance Goals and Objectives

With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.

C. Constitutional Authority Statement

With respect to clause 3(d)(1) of the rule XIII of the
Rules of the House of Representatives (relating to
Constitutional Authority), the Committee states that the
Committee's action in reporting this bill is derived from
Article I of the Constitution, Section 8 (``The Congress shall
have Power To lay and collect Taxes, Duties, Imposts and
Excises . . .''), and from the 16th Amendment to the
Constitution.

D. Information Relating to Unfunded Mandates

This information is provided in accordance with section 423
of the Unfunded Mandates Act of 1995 (Pub. L. No. 104-4).
The Committee has determined that the revenue provisions of
the bill do not contain Federal mandates on the private sector.
The Committee has determined that the revenue provision of the
bill do not impose a Federal intergovernmental mandate on
State, local, or tribal governments.

E. Applicability of House Rule XXI 5(b)

Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the provisions of the bill, and states that
the provisions of the bill do not involve any Federal income
tax rate increases within the meaning of the rule.

F. Tax Complexity Analysis

Section 4022(b) of the Internal Revenue Service Reform and
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the
Joint Committee on Taxation (in consultation with the Internal
Revenue Service (``IRS'') and the Department of the Treasury)
to provide a tax complexity analysis. The complexity analysis
is required for all legislation reported by the Senate
Committee on Finance, the House Committee on Ways and Means, or
any committee of conference if the legislation includes a
provision that directly or indirectly amends the Internal
Revenue Code (the ``Code'') and has widespread applicability to
individuals or small businesses. For each such provision
identified by the staff of the Joint Committee on Taxation, a
summary description of the provision is provided along with an
estimate of the number and type of affected taxpayers, and a
discussion regarding the relevant complexity and administrative
issues.
Following the analysis of the staff of the Joint Committee
on Taxation are the comments of the IRS and Treasury regarding
each of the provisions included in the complexity analysis.

Capital gain and dividend rate reduction (sec. 203 of the bill)

Summary description of proposal
The bill extends the zero-and 15-percent capital gain and
dividend rates to taxable years beginning in 2009 and 2010.
Number of affected taxpayers
It is estimated that the provision will affect 33 million
individual tax returns.
Discussion
The extension of the provision means that for 2009 and 2010
individual taxpayers and the IRS will continue to use the same
forms for capital gains and dividends.
The extension of the lower rates for net capital gain will
achieve simplification because the extension prevents the
separate five-year holding periods from going into effect in
2009 and 2010. On the other hand, the extension of the lower
rates for dividends will continue requiring dividends to be
classified as qualified dividends and nonqualified dividends in
2009 and 2010 and will continue to require the tax to be
computed using the capital gains forms.

Department of the Treasury,
Internal Revenue Service,
Washington, DC.
Mr. George K. Yin,
Chief of Staff, Joint Committee on Taxation,
Washington, DC.
Dear Mr. Yin: Enclosed are the combined comments of the
Internal Revenue Service and the Treasury Department on the
provision extending the zero and 15-percent tax rates for
capital gains and qualified dividends of individuals to taxable
years beginning in 2009 and 2010, from the Tax Relief Extension
Act of 2005 (H.R. 4297) approved by the House Committee on Ways
and Means November 15, that you identified for complexity
analysis in your letter of November 16.
Our comments are based on the statutory language for that
provision contained in H.R. 4297 and the description of that
provision provided in your letter. Due to the short turnaround
time, our comments are provisional and subject to change upon a
more complete and in-depth analysis of the provision.
Sincerely,
Mark W. Everson,
Commissioner.
Enclosure.

COMPLEXITY ANALYSIS OF THE TAX RELIEF EXTENSION RECONCILIATION ACT OF
2005 (H.R. 4297)

Extension of the Zero and 15-Percent Tax Rates for Adjusted Net Capital
Gain

Provision: Under present law, for taxable years beginning
before 2009, the maximum rate of tax on the adjusted net
capital gain of an individual is 15%. Any adjusted net capital
gain which otherwise would be taxed at a 10% or 15% rate is
taxed at a 5% rate (zero for taxable years beginning after
2007). Qualified dividends received by an individual from
domestic corporations and qualified foreign corporations are
included in adjusted net capital gain and thus are also taxed
at the 15%, 5%, or zero rates. These rates apply for purposes
of both the regular tax and the alternative minimum tax. For
taxable years beginning after 2008, the tax rates on adjusted
net capital gain will be higher--20% or 10% for net capital
gain and up to 35% for dividends.
The provision extends the zero and 15% tax rates for
adjusted net capital gain (including qualified dividends) of
individuals for two years (to taxable years beginning in 2009
and 2010).

IRS and Treasury comments

Filers of Forms 1040, 1040A, and 1040NR would have
to continue to report qualified dividends on a separate line in
2009 and 2010 that otherwise would have been eliminated.
Two lines used to increase net capital gain by the
amount of qualified dividends would remain on the Qualified
Dividends and Capital Gain Tax Worksheet and the Schedule D Tax
Worksheet in the instructions for the 2009 and 2010 Forms 1040,
1040A, and 1040NR.
Because the 8% and 18% capital gains tax rates on
qualified 5-year gain would not become effective until 2011,
this provision would eliminate the need for: (a) a 12-line
Qualified 5-Year Gain Worksheet to the Instructions for
Schedule D (Form 1040) for 2009 and 2010, (b) eight lines to
the Qualified Dividends and Capital Gain Tax Worksheet, the
Schedule D Tax Worksheet, and Form 6251 for 2009 and 2010, (c)
two lines to Schedule D (Form 1040) for 2009 and 2010, and (d)
eight lines to Form 8801 for 2010 and 2011.
Form 1099-DIV filers would have to continue to
report qualified dividends in 2009 and 2010, thus requiring
retention of a line that otherwise would have been eliminated.
Form 1099-DIV filers would not be required to
report qualified 5-year gain eligible for the 8% and 18% rates
in 2009 or 2010. This would eliminate the need for two
additional lines on Form 1099-DIV for 2009 and 2010.
Form 1041 and its equivalent worksheets would be
affected in a similar manner to that explained above for Form
1040.
The programming changes that IRS would have had to
make to reflect the higher 2009 tax rates applicable to
dividends and capital gains absent the provision would be
deferred to 2011.

VII. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rule of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):

INTERNAL REVENUE CODE OF 1986

* * * * * * *

Subtitle A--Income Taxes

* * * * * * *

CHAPTER 1--NORMAL TAXES AND SURTAXES

* * * * * * *

Subchapter A--Determination of Tax Liability

* * * * * * *

PART IV--CREDITS AGAINST TAX

* * * * * * *

Subpart A--Nonrefundable Personal Credits

* * * * * * *

SEC. 25B. ELECTIVE DEFERRALS AND IRA CONTRIBUTIONS BY CERTAIN
INDIVIDUALS.

(a) * * *

* * * * * * *

(h) Termination.--This section shall not apply to taxable
years beginning after December 31, [2006] 2008.

SEC. 26. LIMITATION BASED ON TAX LIABILITY; DEFINITION OF TAX
LIABILITY.

(a) Limitation Based on Amount of Tax.--
(1) * * *
(2) Special rule for taxable years 2000 through
[2005] 2006.--For purposes of any taxable year
beginning during during 2000, 2001, 2002, 2003, 2004,
[or 2005] 2005, or 2006, the aggregate amount of
credits allowed by this subpart for the taxable year
shall not exceed the sum of--
(A) * * *

* * * * * * *

Subpart D--Business Related Credits

* * * * * * *

SEC. 41. CREDIT FOR INCREASING RESEARCH ACTIVITIES.

(a) * * *

* * * * * * *

(4) Election of alternative incremental credit.--
(A) In general.--At the election of the
taxpayer, the credit determined under
subsection (a)(1) shall be equal to the sum
of--
(i) [2.65] 3 percent of so much of
the qualified research expenses for the
taxable year as exceeds 1 percent of
the average described in subsection
(c)(1)(B) but does not exceed 1.5
percent of such average,
(ii) [3.2] 4 percent of so much of
such expenses as exceeds 1.5 percent of
such average but does not exceed 2
percent of such average, and
(iii) [3.75] 5 percent of so much of
such expenses as exceeds 2 percent of
such average.
(B) Election.--An election under this
paragraph shall apply to the taxable year for
which made and all succeeding taxable years
unless revoked with the consent of the
Secretary. An election under this paragraph may
not be made for any taxable year to which an
election under paragraph (5) applies.

* * * * * * *

(5) Election of alternative simplified credit.--
(A) In general.--At the election of the
taxpayer, the credit determined under
subsection (a)(1) shall be equal to 12 percent
of so much of the qualified research expenses
for the taxable year as exceeds 50 percent of
the average qualified research expenses for the
3 taxable years preceding the taxable year for
which the credit is being determined.
(B) Special rule in case of no qualified
research expenses in any of 3 preceding taxable
years.--
(i) Taxpayers to which subparagraph
applies.--The credit under this
paragraph shall be determined under
this subparagraph if the taxpayer has
no qualified research expenses in any
one of the 3 taxable years preceding
the taxable year for which the credit
is being determined.
(ii) Credit rate.--The credit
determined under this subparagraph
shall be equal to 6 percent of the
qualified research expenses for the
taxable year.
(C) Election.--An election under this
paragraph shall apply to the taxable year for
which made and all succeeding taxable years
unless revoked with the consent of the
Secretary. An election under this paragraph may
not be made for any taxable year to which an
election under paragraph (4) applies.
[(5)] (6) Consistent treatment of expenses
required.--
(A) * * *

* * * * * * *

[(6)] (7) Gross receipts.--For purposes of this
subsection, gross receipts for any taxable year shall
be reduced by returns and allowances made during the
taxable year. In the case of a foreign corporation,
there shall be taken into account only gross receipts
which are effectively connected with the conduct of a
trade or business within the United States, the
Commonwealth of Puerto Rico, or any possession of the
United States.

* * * * * * *

(h) Termination.--
(1) In general.--This section shall not apply to any
amount paid or incurred--
(A) after June 30, 1995, and before July 1,
1996, or
(B) after December 31, [2005] 2006.

* * * * * * *

SEC. 45A. INDIAN EMPLOYMENT CREDIT.

(a) * * *

* * * * * * *

(f) Termination.--This section shall not apply to taxable
years beginning after December 31, [2005] 2006.

* * * * * * *

SEC. 45C. CLINICAL TESTING EXPENSES FOR CERTAIN DRUGS FOR RARE DISEASES
OR CONDITIONS.

(a) * * *
(b) Qualified Clinical Testing Expenses.--For purposes of
this section--
(1) Qualified clinical testing expenses.--
(A) * * *

* * * * * * *

(D) Special rule.--For purposes of this
paragraph, section 41 shall be deemed to remain
in effect for periods after June 30, 1995, and
before July 1, 1996, and periods after December
31, [2005] 2006.

* * * * * * *

Subpart F--Rules for Computing Work Opportunity Credit

* * * * * * *

SEC. 51. AMOUNT OF CREDIT.

(a) * * *

* * * * * * *

(4) Termination.--The term ``wages'' shall not
include any amount paid or incurred to an individual
who begins work for the employer--
(A) * * *
(B) after December 31, [2005] 2006.

* * * * * * *

(d) Members of targeted groups.--For purposes of this
subpart--
(1) * * *

* * * * * * *

(8) Qualified food stamp recipient.--
(A) In general.--The term ``qualified food
stamp recipient'' means any individual who is
certified by the designated local agency--
(i) as having attained age 18 but not
age [25] 35 on the hiring date, and

* * * * * * *

SEC. 51A. TEMPORARY INCENTIVES FOR EMPLOYING LONG-TERM FAMILY
ASSISTANCE RECIPIENTS.

(a) * * *

* * * * * * *

(f) Termination.--This section shall not apply to individuals
who begin work for the employer after December 31, [2005] 2006.

* * * * * * *

Subchapter B--Computation of Taxable Income

* * * * * * *

PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE
INCOME, ETC.

* * * * * * *

SEC. 62. ADJUSTED GROSS INCOME DEFINED.

(a) General Rule.--For purposes of this subtitle, the term
``adjusted gross income'' means, in the case of an individual,
gross income minus the following deductions:
(1) * * *
(2) Certain trade and business deductions of
employees.--
(A) * * *

* * * * * * *

(D) Certain expenses of elementary and
secondary school teachers.--In the case of
taxable years beginning during 2002 , 2003,
2004, [or 2005] 2005, or 2006, the deductions
allowed by section 162 which consist of
expenses, not in excess of $250, paid or
incurred by an eligible educator in connection
with 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.

* * * * * * *

PART IV--TAX EXEMPTION REQUIREMENTS FOR STATE AND LOCAL BONDS

* * * * * * *

Subpart A--Private Activity Bonds

* * * * * * *

SEC. 143. MORTGAGE REVENUE BONDS: QUALIFIED MORTGAGE BOND AND QUALIFIED
VETERANS' MORTGAGE BOND.

(a) * * *

* * * * * * *

(l) Additional Requirements for Qualified Veterans' Mortgage
Bonds.--An issue meets the requirements of this subsection only
if it meets the requirements of paragraphs (1), (2), and (3).
(1) * * *

* * * * * * *

(3) Volume limitation.--
(A) * * *
[(B) State veterans limit.--A State veterans
limit for any calendar year is the amount equal
to--
[(i) the aggregate amount of
qualified veterans bonds issued by such
State during the period beginning on
January 1, 1979, and ending on June 22,
1984 (not including the amount of any
qualified veterans bond issued by such
State during the calendar year (or
portion thereof) in such period for
which the amount of such bonds so
issued was the lowest), divided by
[(ii) the number (not to exceed 5) of
calendar years after 1979 and before
1985 during which the State issued
qualified veterans bonds (determined by
only taking into account bonds issued
on or before June 22, 1984).]
(B) State veterans limit.--
(i) In general.--A State veterans
limit for any calendar year is the
amount equal to--
(I) $53,750,000 for the State
of Texas,
(II) $66,250,000 for the
State of California,
(III) $25,000,000 for the
State of Oregon,
(IV) $25,000,000 for the
State of Wisconsin, and
(V) $25,000,000 for the State
of Alaska.
(ii) Phasein.--In the case of
calendar years beginning before 2010,
clause (i) shall be applied by
substituting for each of the dollar
amounts therein by the applicable
percentage. For purposes of the
preceding sentence, the applicable
percentage shall be determined in
accordance with the following table:

Applicable percentage
Calendar Year: is:

(iii) Termination.--The State
veterans limit for any calendar year
after 2010 is zero.
(4) Qualified veteran.--For purposes of this
subsection, the term ``qualified veteran'' means any
veteran--
(A) who served on active duty [at some time
before January 1, 1977], and
[(B) who applied for the financing before the
later of--
[(i) the date 30 years after the last
date on which such veteran left active
service, or
[(ii) January 31, 1985.]
(B) who applied for the financing before the
date 25 years after the last date on which such
veteran left active service.

* * * * * * *

PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

* * * * * * *

SEC. 164. TAXES.

(a) * * *
(b) Definitions and Special Rules.--For purposes of this
section--
(1) * * *

* * * * * * *

(5) General sales tax.--For purposes of subsection
(a)--
(A) * * *

* * * * * * *

(I) Application of
paragraph.--This paragraph
shall apply to taxable years
beginning after December 31,
2003, and before January 1,
[2006] 2007.

* * * * * * *

SEC. 168. ACCELERATED COST RECOVERY SYSTEM

(a) * * *

* * * * * * *

(e) Classification of Property.--For purposes of this
section--
(1) * * *

* * * * * * *

(3) Classification of certain property.--
(A) * * *

* * * * * * *

(E) 15-year property.--The term ``15-year
property'' includes--
(i) * * *

* * * * * * *

(iv) any qualified leasehold
improvement property placed in service
before January 1, [2006] 2007,
(v) any qualified restaurant property
placed in service before January 1,
[2006] 2007,

* * * * * * *

(j) Property on Indian Reservations.--
(1) * * *

* * * * * * *

(8) Termination.--This subsection shall not apply to
property placed in service after December 31, [2005]
2006.

* * * * * * *

SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.

(a) * * *

* * * * * * *

(e) Certain Contributions of Ordinary Income and Capital Gain
Property.--
(1) General rule.--The amount of any charitable
contribution of property otherwise taken into account
under this section shall be reduced by the sum of--
(A) the amount of gain which would not have
been long-term capital gain (determined without
regard to section 1221(b)(3)) if the property
contributed had been sold by the taxpayer at
its fair market value (determined at the time
of such contribution), and

* * * * * * *

(6) Special rule for contributions of computer
technology and equipment for educational purposes.--
(A) * * *

* * * * * * *

(G) Termination.--This paragraph shall not
apply to any contribution made during any
taxable year beginning after December 31,
[2005] 2006.

* * * * * * *

SEC. 179. ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS ASSETS.

(a) * * *
(b) Limitations.--
(1) Dollar limitation.--The aggregate cost which may
be taken into account under subsection (a) for any
taxable year shall not exceed $25,000 ($100,000 in the
case of taxable years beginning after 2002 and before
[2008] 2010).
(2) Reduction in limitation.--The limitation under
paragraph (1) for any taxable year shall be reduced
(but not below zero) by the amount by which the cost of
section 179 property placed in service during such
taxable year exceeds $200,000 ($400,000 in the case of
taxable years beginning after 2002 and before [2008]
2010).

* * * * * * *

(5) Inflation adjustments.--
(A) In general.--In the case of any taxable
year beginning in a calendar year after 2003
and before [2008] 2010, the $100,000 and
$400,000 amounts in paragraphs (1) and (2)
shall each be increased by an amount equal to--
(i) * * *

* * * * * * *

(c) Election.--
(1) * * *
(2) Election irrevocable.--Any election made under
this section, and any specification contained in any
such election, may not be revoked except with the
consent of the Secretary. Any such election or
specification with respect to any taxable year
beginning after 2002 and before [2008] 2010 may be
revoked by the taxpayer with respect to any property,
and such revocation, once made, shall be irrevocable.
(d) Definitions and Special Rules.--
(1) Section 179 property.--For purposes of this
section, the term ``section 179 property'' means
property--
(A) which is--
(i) * * *
(ii) computer software (as defined in
section 197(e)(3)(B)) which is
described in section 197(e)(3)(A)(i),
to which section 167 applies, and which
is placed in service in a taxable year
beginning after 2002 and before [2008]
2010,

* * * * * * *

PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

* * * * * * *

SEC. 198. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

(a) * * *

* * * * * * *

(d) Hazardous Substance.--For purposes of this section--
(1) In general.--The term ``hazardous substance''
means--
(A) any substance which is a hazardous
substance as defined in section 101(14) of the
Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, [and]
(B) any substance which is designated as a
hazardous substance under section 102 of such
Act[.], and
(C) any petroleum product (as defined in
section 4612(a)(3)).

* * * * * * *

(h) Termination.--This section shall not apply to
expenditures paid or incurred after December 31, [2005] 2007.

* * * * * * *

PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS

* * * * * * *

SEC. 220. ARCHER MSAS.

(a) * * *

* * * * * * *

(i) Limitation on Number of Taxpayers Having Archer MSAs.--
(1) * * *
(2) Cut-off year.--For purposes of paragraph (1), the
term ``cut-off year'' means the earlier of
(A) calendar year [2005] 2006, or
(B) the first calendar year before [2005]
2006 for which the Secretary determines under
subsection (j) that the numerical limitation
for such year has been exceeded.
(3) Active MSA participant.--For purposes of this
subsection--
(A) * * *
(B) Special rule for cut-off years before
[2005] 2006.--In the case of a cut-off year
before [2005] 2006--
(i) * * *

* * * * * * *

(j) Determination of Whether Numerical Limits are Exceeded.--
(1) * * *
(2) Determination of whether limit exceeded for 1998,
1999, 2001, 2002, [or 2004] 2004, or 2005.--
(A) In general.--The numerical limitation for
1998, 1999, 2001, 2002, [or 2004] 2004, or 2005
is exceeded if the sum of--
(i) * * *

* * * * * * *

(B) Alternative computation of limitation.--
The numerical limitation for 1998, 1999, 2001,
2002, [or 2004] 2004, or 2005 is also exceeded
if the sum of--
(i) * * *

* * * * * * *

(4) Reporting by MSA trustees.--
(A) In general.--Not later than August 1 of
1997, 1998, 1999, 2001, 2002, [and 2004] 2004,
and 2005 each person who is the trustee of an
Archer MSA established before July 1 of such
calendar year shall make a report to the
Secretary (in such form and manner as the
Secretary shall specify) which specifies--
(i) * * *

* * * * * * *

SEC. 222. QUALIFIED TUITION AND RELATED EXPENSES.

(a) * * *
(b) Dollar Limitations.--
(1) * * *
(2) Applicable dollar limit.--
[(A) 2002 and 2003.--In the case of a taxable
year beginning in 2002 or 2003, the applicable
dollar limit shall be equal to--
[(i) in the case of a taxpayer whose
adjusted gross income for the taxable
year does not exceed $65,000 ($130,000
in the case of a joint return), $3,000,
and--
[(ii) in the case of any other
taxpayer, zero.
[(B) 2004 and 2005.--In the case of a taxable
year beginning in 2004 or 2005, the applicable
dollar amount shall be equal to--
[(i) in the case of a taxpayer whose
adjusted gross income for the taxable
year does not exceed $65,000 ($130,000
in the case of a joint return), $4,000,
[(ii) in the case of a taxpayer not
described in clause (i) whose adjusted
gross income for the taxable year does
not exceed $80,000 ($160,000 in the
case of a joint return), $2,000, and
[(iii) in the case of any other
taxpayer, zero.]
(A) 2006.--In the case of a taxable year
beginning in 2006, the applicable dollar amount
shall be equal to--
(i) in the case of a taxpayer whose
adjusted gross income for the taxable
year does not exceed $65,000 ($130,000
in the case of a joint return), $4,000,
(ii) in the case of a taxpayer not
described in clause (i) whose adjusted
gross income for the taxable year does
not exceed $80,000 ($160,000 in the
case of a joint return), $2,000, and
(iii) in the case of any other
taxpayer, zero.
[(C)] (B) Adjusted gross income.--For
purposes of this paragraph, adjusted gross
income shall be determined--
(i) * * *

* * * * * * *

(e) Termination.--This section shall not apply to taxable
years beginning after December 31, [2005] 2006.

* * * * * * *

Subchapter C--Corporate Distributions and Adjustments

* * * * * * *

PART III--CORPORATE ORGANIZATIONS AND REORGANIZATIONS

* * * * * * *

Subpart B--Effects on Shareholders and Security Holders

* * * * * * *

SEC. 355. DISTRIBUTION OF STOCK AND SECURITIES OF A CONTROLLED
CORPORATION.

(a) * * *
(b) Requirements as to Active Business.--
(1) * * *

* * * * * * *

(3) Special rule relating to active business
requirement.--
(A) In general.--In the case of any
distribution made after the date of the
enactment of this paragraph and before December
31, 2010, a corporation shall be treated as
meeting the requirement of paragraph (2)(A) if
and only if such corporation is engaged in the
active conduct of a trade or business.
(B) Affiliated group rule.--For purposes of
subparagraph (A), all members of such
corporation's separate affiliated group shall
be treated as one corporation. For purposes of
the preceding sentence, a corporation's
separate affiliated group is the affiliated
group which would be determined under section
1504(a) if such corporation were the common
parent and section 1504(b) did not apply.
(C) Transition rule.--Subparagraph (A) shall
not apply to any distribution pursuant to a
transaction which is--
(i) made pursuant to an agreement
which was binding on the date of the
enactment of this paragraph and at all
times thereafter,
(ii) described in a ruling request
submitted to the Internal Revenue
Service on or before such date, or
(iii) described on or before such
date in a public announcement or in a
filing with the Securities and Exchange
Commission.
The preceding sentence shall not apply if the
distributing corporation elects not to have
such sentence apply to distributions of such
corporation. Any such election, once made,
shall be irrevocable.
(D) Special rule for certain pre-enactment
distributions.--For purposes of determining the
continued qualification under paragraph (2)(A)
of distributions made before the date of the
enactment of this paragraph as a result of an
acquisition, disposition, or other
restructuring after such date and before
December 31, 2010, such distribution shall be
treated as made after the date of the enactment
of this paragraph for purposes of applying
subparagraphs (A) through (C) of this
paragraph.

* * * * * * *

Subchapter E--Accounting Periods and Methods of Accounting

* * * * * * *

PART II--METHODS OF ACCOUNTING

* * * * * * *

Subpart C--Taxable Year for Which Deductions Taken

* * * * * * *

SEC. 468B. SPECIAL RULES FOR DESIGNATED SETTLEMENT FUNDS.

(a) * * *

* * * * * * *

[(g) Clarification of Taxation of Certain Funds.--Nothing in
any provision of law shall be construed as providing that an
escrow account, settlement fund, or similar fund is not subject
to current income tax. The Secretary shall prescribe
regulations providing for the taxation of any such account or
fund whether as a grantor trust or otherwise.]
(g) Clarification of Taxation of Certain Funds.--
(1) In general.--Except as provided in paragraph (2),
nothing in any provision of law shall be construed as
providing that an escrow account, settlement fund, or
similar fund is not subject to current income tax. The
Secretary shall prescribe regulations providing for the
taxation of any such account or fund whether as a
grantor trust or otherwise.
(2) Exemption from tax for certain settlement
funds.--An escrow account, settlement fund, or similar
fund shall be treated as beneficially owned by the
United States and shall be exempt from taxation under
this subtitle if--
(A) it is established pursuant to a consent
decree entered by a judge of a United States
District Court,
(B) it is created for the receipt of
settlement payments as directed by a government
entity for the sole purpose of resolving or
satisfying one or more claims asserting
liability under the Comprehensive Environmental
Response, Compensation, and Liability Act of
1980,
(C) the authority and control over the
expenditure of funds therein (including the
expenditure of contributions thereto and any
net earnings thereon) is with such government
entity, and
(D) upon termination, any remaining funds
will be disbursed to such government entity for
use in accordance with applicable law.
For purposes of this paragraph, the term ``government
entity'' means the United States, any State or
political subdivision thereof, the District of
Columbia, any possession of the United States, and any
agency or instrumentality of any of the foregoing.
(3) Termination.--Paragraph (2) shall not apply to
accounts and funds established after December 31, 2010.

* * * * * * *

Subchapter I--Natural Resources

* * * * * * *

PART I--DEDUCTIONS

* * * * * * *

SEC. 613A. LIMITATIONS ON PERCENTAGE DEPLETION IN CASE OF OIL AND GAS
WELLS.

(a) * * *

* * * * * * *

(6) Oil and natural gas produced from marginal
properties.--
(A) * * *

* * * * * * *

(H) Temporary suspension of taxable income
limit with respect to marginal production.--The
second sentence of subsection (a) of section
613 shall not apply to so much of the allowance
for depletion as is determined under
subparagraph (A) for any taxable year beginning
after December 31, 1997, and before January 1,
[2006] 2007.

* * * * * * *

Subchapter N--Tax Based on Income from Sources Within or Without the
United States

* * * * * * *

PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES

* * * * * * *

Subpart A--Foreign Tax Credit

* * * * * * *

SEC. 904. LIMITATION ON CREDIT.

(a) * * *

* * * * * * *

(i) Coordination with Nonrefundable Personal Credits.--In the
case of an individual, for purposes of subsection (a), the tax
against which the credit is taken is such tax reduced by the
sum of the credits allowable under subpart A of part IV of
subchapter A of this chapter (other than sections 23, 24, and
25B). This subsection shall not apply to taxable years
beginning during 2000, 2001, 2002, 2003, 2004, [or 2005] 2005,
or 2006.

* * * * * * *

Subpart D--Possessions of the United States

* * * * * * *

SEC. 936. PUERTO RICO AND POSSESSION TAX CREDIT.

(a) * * *

* * * * * * *

(j) Termination.--
(1) * * *

* * * * * * *

(8) Special rules for certain possessions.--
(A) In general.--In the case of an existing
credit claimant with respect to an applicable
possession, this section (other than the
preceding paragraphs of this subsection) shall
apply to such claimant with respect to such
applicable possession for taxable years
beginning after December 31, 1995, and before
January 1, 2006 (before January 1, 2007, in the
case of American Samoa).

* * * * * * *

Subpart F--Controlled Foreign Corporations

* * * * * * *

SEC. 953. INSURANCE INCOME.

(a) * * *

* * * * * * *

(e) Exempt Insurance Income.--For purposes of this section--
(1) * * *

* * * * * * *

(10) Application.--This subsection and section 954(i)
shall apply only to taxable years of a foreign
corporation beginning after December 31, 1998, and
before [January 1, 2007] January 1, 2009, and to
taxable years of United States shareholders with or
within which any such taxable year of such foreign
corporation ends. If this subsection does not apply to
a taxable year of a foreign corporation beginning after
[December 31, 2006] December 31, 2008 (and taxable
years of United States shareholders ending with or
within such taxable year), then, notwithstanding the
preceding sentence, subsection (a) shall be applied to
such taxable years in the same manner as it would if
the taxable year of the foreign corporation began in
1998.

* * * * * * *

SEC. 954. FOREIGN BASE COMPANY INCOME.

(a) * * *

* * * * * * *

(6) Look-thru rule for related controlled foreign
corporations.--
(A) In general.--For purposes of this
subsection, dividends, interest, rents, and
royalties received or accrued from a controlled
foreign corporation which is a related person
shall not be treated as foreign personal
holding company income to the extent
attributable or properly allocable (determined
under rules similar to the rules of
subparagraphs (C) and (D) of section 904(d)(3))
to income of the related person which is not
subpart F income. For purposes of this
subparagraph, interest shall include factoring
income which is treated as income equivalent to
interest for purposes of paragraph (1)(E). The
Secretary shall prescribe such regulations as
may be appropriate to prevent the abuse of the
purposes of this paragraph.
(B) Application.--Subparagraph (A) shall
apply to taxable years of foreign corporations
beginning after December 31, 2005, and before
January 1, 2009, and to taxable years of United
States shareholders with or within which such
taxable years of foreign corporations end.

* * * * * * *

(h) Special Rule for Income Derived in the Active Conduct of
Banking, Financing, or Similar Businesses.--
(1) * * *

* * * * * * *

(9) Application.--This subsection, subsection
(c)(2)(C)(ii), and the last sentence of subsection
(e)(2) shall apply only to taxable years of a foreign
corporation beginning after December 31, 1998, and
before [January 1, 2007] January 1, 2009, and to
taxable years of United States shareholders with or
within which any such taxable year of such foreign
corporation ends.

* * * * * * *

Subchapter P--Capital Gains and Losses

* * * * * * *

PART III--GENERAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES

* * * * * * *

SEC. 1221. CAPITAL ASSET DEFINED.

(a) * * *
(b) Definitions and Special Rules.--
(1) * * *

* * * * * * *

(3) Sale or exchange of self-created musical works.--
At the election of the taxpayer, paragraphs (1) and (3)
of subsection (a) shall not apply with respect to any
sale or exchange before January 1, 2011, of musical
compositions or copyrights in musical works by a
taxpayer described in subsection (a)(3).
[(3)] (4) Regulations.--The Secretary shall prescribe
such regulations as are appropriate to carry out the
purposes of paragraph (6) and (7) of subsection (a) in
the case of transactions involving related parties.

* * * * * * *

Subchapter R--Election To Determine Corporate Tax on Certain
International Shipping Activities Using Per Ton Rate

* * * * * * *

SEC. 1355. DEFINITIONS AND SPECIAL RULES.

(a) Definitions.--For purposes of this subchapter--
(1) * * *

* * * * * * *

(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 (6,000, in the case
of taxable years beginning after December 31, 2005, and
ending before January 1, 2011) deadweight tons used
exclusively in the United States foreign trade during
the period that the election under this subchapter is
in effect.

* * * * * * *

Subchapter U--Designation and Treatment of Empowerment Zones,
Enterprise Communities, and Rural Development Investment Areas

* * * * * * *

PART IV--INCENTIVES FOR EDUCATION ZONES

* * * * * * *

SEC. 1397E. CREDIT TO HOLDERS OF QUALIFIED ZONE ACADEMY BONDS.

(a) * * *

* * * * * * *

(e) Limitation on Amount of Bonds Designated.--
(1) National limitation.--There is a national zone
academy bond limitation for each calendar year. Such
limitation is $400,000,000 for 1998, 1999, 2000, 2001,
2002, 2003, 2004, [and 2005] 2005, and 2006 and, except
as provided in paragraph (4), zero thereafter.

* * * * * * *

Subchapter W--District of Columbia Enterprise Zone

* * * * * * *

SEC. 1400. ESTABLISHMENT OF DC ZONE.

(a) * * *

* * * * * * *

(f) Time for Which Designation Applicable.--
(1) In general.--The designation made by subsection
(a) shall apply for the period beginning on January 1,
1998, and ending on [December 31, 2005] December 31,
2006.
(2) Coordination with DC enterprise community
designated under subchapter U.--The designation under
subchapter U of the census tracts referred to in
subsection (b)(1) as an enterprise community shall
terminate on [December 31, 2005] December 31, 2006.

* * * * * * *

SEC. 1400A. TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS.

(a) * * *
(b) Period of Applicability.--This section shall apply to
bonds issued during the period beginning on January 1, 1998,
and ending on [December 31, 2005] December 31, 2006.

SEC. 1400B. ZERO PERCENT CAPITAL GAINS RATE.

(a) * * *
(b) DC Zone Asset.--For purposes of this section--
(1) * * *
(2) DC Zone business stock.--
(A) In general.--The term ``DC Zone business
stock'' means any stock in a domestic
corporation which is originally issued after
December 31, 1997, if--
(i) such stock is acquired by the
taxpayer, before [January 1, 2006]
January 1, 2007, at its original issue
(directly or through an underwriter)
solely in exchange for cash,

* * * * * * *

(3) DC Zone partnership interest.--The term ``DC Zone
partnership interest'' means any capital or profits
interest in a domestic partnership which is originally
issued after December 31, 1997, if--
(A) such interest is acquired by the
taxpayer, before [January 1, 2006] January 1,
2007, from the partnership solely in exchange
for cash,

* * * * * * *

(4) DC Zone business property.--
(A) In general.--The term ``DC Zone business
property'' means tangible property if--
(i) such property was acquired by the
taxpayer by purchase (as defined in
section 179(d)(2) after December 31,
1997, and before [January 1, 2006]
January 1, 2007,

* * * * * * *

(B) Special rule for buildings which are
substantially improved.--
(i) In general.--The requirements of
clauses (i) and (ii) of subparagraph
(A) shall be treated as met with
respect to--
(I) property which is
substantially improved by the
taxpayer before [January 1,
2006] January 1, 2007, and

* * * * * * *

(e) Other Definitions and Special Rules.--For purposes of
this section--
(1) * * *
(2) Gain before 1998 or after [2010] 2011 not
qualified.--The term ``qualified capital gain'' shall
not include any gain attributable to periods before
January 1, 1998, or after [December 31, 2010] December
31, 2011.

* * * * * * *

(g) Sales and Exchanges of Interests in Partnerships and S
Corporations Which are DC Zone Businesses.--In the case of the
sale or exchange of an interest in a partnership, or of stock
in an S corporation, which was a DC Zone business during
substantially all of the period the taxpayer held such interest
or stock, the amount of qualified capital gain shall be
determined without regard to--
(1) * * *
(2) any gain attributable to periods before January
1, 1998, or after [December 31, 2010] December 31,
2011.

* * * * * * *

SEC. 1400C. FIRST-TIME HOMEBUYER CREDIT FOR DISTRICT OF COLUMBIA.

(a) * * *

* * * * * * *

(i) Application of Section.--This section shall apply to
property purchased after August 4, 1997, and before [January 1,
2006] January 1, 2007.

* * * * * * *

PART II--RENEWAL COMMUNITY CAPITAL GAIN; RENEWAL COMMUNITY BUSINESS

* * * * * * *

SEC. 1400F. RENEWAL COMMUNITY CAPITAL GAIN.

(a) * * *

* * * * * * *

(d) Certain Rules to Apply.--For purposes of this section,
rules similar to the rules of paragraphs (5), (6), and (7) of
subsection (b), and subsections (f) and (g), of section 1400B
shall apply; except that for such purposes section 1400B(g)(2)
shall be applied by substituting ``January 1, 2002'' for
``January 1, 1998'' and ``December 31, 2014'' for ``[December
31, 2010] December 31, 2011''.

* * * * * * *

Subtitle K--Group Health Plan Requirements

* * * * * * *

CHAPTER 100--GROUP HEALTH PLAN REQUIREMENTS

* * * * * * *

Subchapter B--Other Requirements

* * * * * * *

SEC. 9812. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL HEALTH
BENEFITS.

(a) * * *

* * * * * * *

(f) Application of Section.--This section shall not apply to
benefits for services furnished--
(1) * * *

* * * * * * *

(3) after [December 31, 2005] December 31, 2006.

* * * * * * *

----------

SECTION 303 OF THE JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT OF
2003

SEC. 303. SUNSET OF TITLE.

All provisions of, and amendments made by, this title shall
not apply to taxable years beginning after [December 31, 2008]
December 31, 2010, and the Internal Revenue Code of 1986 shall
be applied and administered to such years as if such provisions
and amendments had never been enacted.

VIII. DISSENTING VIEWS

Several months ago, Hurricane Katrina forced America to see
poverty and its consequences every night on the evening news.
For many in New Orleans, poverty was the difference between the
ability to escape the disaster and being left behind to face
the consequences of the Hurricane with little or no assistance
from the Federal government.
The failure of the Federal government to react quickly and
effectively to the Hurricane forced President Bush to respond.
He made a stirring speech vowing to rebuild New Orleans
regardless of the cost. His speech also expressed concern about
the growing divide in this country between the rich and the
poor.
Both before and after that speech, Americans have been
exposed to the real plight of poverty in this country. The
number of people in poverty has increased by 5.4 million under
Republican policies between 2000 and 2004. The number of
children alone in poverty increased by 1.5 million. The Census
Bureau reported that the number of Americans in poverty
increased by 1.1 million in 2004, and the poverty rate
increased to 12.7%. Today a total of 37 million Americans live
in poverty.
Watching the chilling footage of Hurricane Katrina brought
home a reality that is all too real to poor people in America:
poverty can be a death sentence. Poor children are more likely
to suffer chronic health problems, lower cognitive scores, and
lower school achievement. The real tragedy is that those who
are left to fend for themselves in the most dire conditions
become trapped in a cycle of poverty--children who experience
persistent poverty are more likely to be poor as adults.
President Bush's speech and the evidence of increasing
poverty gave hope that at long last the American people would
see the compassionate side of President Bush's ``compassionate
conservative'' agenda. But a decent interval has passed.
President Bush and his Republican supporters in the Congress
have returned to their true agenda of cutting programs
protecting the most vulnerable in our society and reducing
taxes on the most fortunate.
Even in light of the fact that the number of Americans in
poverty has grown by millions over the last four years,
Congress will soon vote on a budget bill that cuts health
coverage, food assistance, and student aid to needy Americans.
Other programs, including Temporary Assistance for Needy
Families (TANF), the Child Care and Development Block Grant,
and the Social Services Block Grant will not be allowed to keep
pace with inflation, so they too will decline in real terms.
There is no compassion in the Republican agenda for the most
vulnerable Americans.
This nation also is involved in a war in Iraq. This will be
the first war in our country's history where only those in the
military and the poor will be forced to sacrifice. This will be
the only time when we will cut taxes for wealthy individuals
during a war. The Congressional Research Service (CRS) recently
estimated the total cost of military activities in Iraq,
Afghanistan, and for enhanced base security since September 11,
2001. The October 3, 2005, CRS report shows a total budget
authority of $311.7 billion for FY2001-FY2005, and $214.6
billion for Iraq operations alone. This country faces a costly
war, yet this Republican Congress sees fit to shield the
wealthy from those costs, and even reward them with increased
tax cuts. The sense of shared sacrifice that has characterized
our history is missing.
The fact that these are not normal times makes it very easy
to oppose the Committee bill that provides tax reductions
disproportionately benefitting the truly wealthy. But even in
normal times, it would be very easy to oppose the Committee
bill.
The Committee bill is another in a series of
reckless tax cuts that continue to leave this country facing
enormous deficits. The largest unfunded responsibility faced by
this country is not Social Security or Medicare, it is interest
on the national debt. Increasingly, we are ceding control of
our future to foreign investors who have financed our recent
deficits.
The Committee bill also demonstrates that the many
budgetary gimmicks used by the Republicans to hide the cost of
their tax cuts have finally come home to roost. Even the
Republicans now recognize that they cannot afford all of the
tax cuts that they have promised in the big print of their
bills. The Committee Republicans were faced with a choice. They
could extend a tax cut for investors (a tax cut which does not
expire until 2009 and over 50% of which will be enjoyed by
individuals with annual incomes of over $1 million) or they
could avoid a tax increase (of up to $3,380) on 15 million
American families next year. Even we were surprised by their
choice.
A prime example of the flawed Republican
priorities concerns our military. Some of our military serving
in combat in Iraq will face tax increases next year because one
of the few temporary tax benefits not extended by the Committee
bill is a provision that provides a larger earned income tax
credit to low-income families with a mother or father serving
in Iraq. During the markup, the Committee Republicans refused
to extend that tax benefit, hiding behind arcane Senate Budget
rules which do not even apply in the House. But the excuse of
those arcane Senate rules did not prevent the Committee
Republicans from adopting other tax benefits to benefit a
variety of other interests.

EXPLODING DEFICIT

When President Bush took office in January 2001, the
projected ten-year (FY2002-11) budget surplus was $5.6
trillion. Under Bush Administration policies, the budget
outlook has deteriorated into a deficit of $3.5 trillion (over
the same period)--a swing of $9.1 trillion.
The Congressional Budget Office (CBO) now estimates that
the ten-year total budget deficit for FY2006-15 will reach more
than $2.1 trillion, and the on-budget deficit (excluding the
temporary sound security surpluses) nearly $4.6 trillion, based
on current law (the required CBO baseline assumption). In
addition, CBO estimates that the cost of making the tax cuts
permanent would raise the ten-year deficit by nearly $1.9
trillion, to $4.0 trillion. If the higher exemption level in
the AMT were also extended, with no offsetting provision, the
ten-year deficit would increase by $775 billion more.
The current federal debt limit (a gross debt measure) is
$8.184 trillion, and we are now less than $200 billion away
from that limit. Since President Bush took office, the limit
has been raised by more than $2.2 trillion. To make room for
the President's current budget proposals, the Republican fiscal
plan will raise the debt limit by another $781 billion--for a
total increase in the debt of around $3 trillion.
Republicans repeatedly claim that the problem has been
``runaway domestic spending,'' but the fact is that most of the
deterioration in the fiscal outlook has been due to the drop in
revenues. Revenues fell from nearly 20.9 percent of GDP in 2000
to just 16.3 percent in 2004, while outlays increased from 18.4
percent to 19.8 percent (the bulk of which went to the costs of
the war). Revenues had not been that low in 45 years.
One consequence of this out of control, borrow-and-spend
budgeting is the rapid increase in the amount of U.S.
Treasurysecurities sold to foreign interests. Currently, foreign
investors own more than $2 trillion in U.S. bonds and notes.
Furthermore, more than half of that amount is owned by foreign central
banks.
Since 2001, foreign investors purchased close to 90% of the
new debt held by the public. Clearly, foreign ownership of our
publicly held debt has created a financial vulnerability with
national security implications. A country cannot be the world's
leading economic and military power if its government financing
is dependent on funds from foreign countries, many of which
oppose our policies.
Instead of ignoring this threat to our nation, we need
decisive action, and that will not be possible without a
bipartisan agreement. Therefore, the President and
Congressional leaders need to stop discounting this crisis and
come together to confront our fiscal problems. We owe it to the
American people to act responsibly by sitting-down together and
devising a serious plan to keep America from going even deeper
into debt.

TAX INCREASE ON 15 MILLION FAMILIES

In recent years, the Congress has used a variety of budget
gimmicks to hide the true cost of the tax reductions that are
boldly promised in the big print of their tax cut legislation.
Those gimmicks include phase-ins, sunsets, temporary
provisions, and the alternative minimum tax (AMT).
The AMT is probably the largest and the most consequential
of those budget gimmicks. According to the Joint Committee on
Taxation, the 2001 and 2003 tax cuts almost tripled the size of
the AMT problem, from $400 billion over 10 years under prior
law to $1.139 trillion today. Again, according to the Joint
Committee on Taxation, the individual AMT will deny $739
billion of tax relief over the next ten years that was promised
in the big print of the 2001 and 2003 tax cuts.
The individual AMT also dramatically changed the
distribution of the 2001 and 2003 tax cuts. The AMT will limit
the tax cuts provided to middle-income and moderately wealthy
taxpayers while taking away relatively little of the tax cuts
given to the very wealthy. In 2010, the AMT will take back only
9.2 percent of the promised tax cuts from individuals making
more than $1 million per year. In contrast, individuals with
incomes between $75,000 and $100,000 will lose 21 percent of
the tax cuts, and individuals between $100,000 and $200,000
will lose 47 percent of the tax cuts.
Even without the AMT, the recent tax cuts would
disproportionately benefit upper income taxpayers. With the
AMT, they will disproportionately benefit the super wealthy,
those making more than $1 million per year.
Next year, under the Committee bill, approximately 19
million families will be affected by the minimum tax, an
increase from approximately 3.5 million this year. As a result,
over 15 million families will face a tax increase next year
compared to their liability in 2005. The size of the tax
increase could be as much as $3,380.
Even as millions of Americans face a tax increase due to a
provision of law that expires in little more than six weeks,
the Committee's bill instead concentrates on two provisions
that do not expire until 2009.
President Bush and his Republican Congressional allies vow
to make the Bush tax cuts permanent. But they ignore the fact
that the AMT will repeal all or a portion of the Bush tax cuts
for approximately 19 million families next year because of the
choices made by the Committee bill.
There was another alternative. The Democratic substitute
would have totally eliminated the AMT for all families with
incomes under $200,000. If that substitute had been adopted,
the number of AMT taxpayers would drop next year from 19
million under the Committee bill to approximately 3 million.
The substitute wouldhave eliminated the Republican tax increase
on 15 million American families.

CONCLUSION

The Committee bill ignores the reality facing millions of
Americans, and instead chooses to focus on the nation's most
wealthy. The struggles of those in poverty fall into the
shadows of giant tax cuts skewed to the richest of the rich
Americans. The Republicans on this Committee have failed in
their job to legislate responsibly in the interest of all
Americans, especially those who have been left behind to fend
for themselves by conservative Republican policies that offer
no compassion.

Charles B. Rangel.
Xavier Becerra.
Pete Stark.
William J. Jefferson.
John Lewis.
Sander Levin.
John S. Tanner.
Mike Thompson.
Jim McDermott.
Rahm Emanuel.
Earl Pomeroy.
John B. Larson.
Stephanie Tubbs Jones.
Richard E. Neal.
Ben Cardin.
Lloyd Doggett.
Michael R. McNulty.