[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

    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

    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.
---------------------------------------------------------------------------
    \1\ Sec. 168.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------
    \18\ Sec. 198.
    \19\ 418 U.S. 1 (1974).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \22\ Prop. Treas. Reg. sec. 1.953-1(a).
---------------------------------------------------------------------------
    Temporary exceptions from foreign personal holding company 
income, foreign base company services income, and insurance 
income apply for subpart F purposes for certain income that is 
derived in the active conduct of a banking, financing, or 
similar business, or in the conduct of an insurance business 
(so-called ``active financing income'').\23\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
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                           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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \31\ Sec. 179(c)(2).
---------------------------------------------------------------------------

                           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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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:

----------------------------------------------------------------------------------------------------------------
          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
----------------------------------------------------------------------------------------------------------------

    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:

----------------------------------------------------------------------------------------------------------------
          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
----------------------------------------------------------------------------------------------------------------

    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:

----------------------------------------------------------------------------------------------------------------
          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
----------------------------------------------------------------------------------------------------------------

    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:

----------------------------------------------------------------------------------------------------------------
          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
----------------------------------------------------------------------------------------------------------------

    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:

----------------------------------------------------------------------------------------------------------------
          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 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:

----------------------------------------------------------------------------------------------------------------
          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
----------------------------------------------------------------------------------------------------------------

                     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) * * *

           *       *       *       *       *       *       *

  (c) Base Amount.--
          (1) * * *

           *       *       *       *       *       *       *

          (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) * * *

           *       *       *       *       *       *       *

  (c) Wages Defined.--For purposes of this subpart--
          (1) * * *

           *       *       *       *       *       *       *

          (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:

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.
          (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) * * *

           *       *       *       *       *       *       *

  (c) Exemption for Independent Producers and Royalty Owners.--
          (1) * * *

           *       *       *       *       *       *       *

          (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) * * *

           *       *       *       *       *       *       *

  (c) Foreign Personal Holding Company Income.--
          (1) * * *

           *       *       *       *       *       *       *

          (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.

                                  
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