[House Report 109-455]
[From the U.S. Government Publishing Office]



109th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     109-455
_______________________________________________________________________

                                     

 
                        TAX INCREASE PREVENTION
                         AND RECONCILIATION ACT
                                OF 2005

                               __________

                           CONFERENCE REPORT

                              to accompany

                               H.R. 4297




                  May 9, 2006.--Ordered to be printed
109th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     109-455

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




         TAX INCREASE PREVENTION AND RECONCILIATION ACT OF 2005

                                _______
                                

                  May 9, 2006.--Ordered to be printed

                                _______
                                

 Mr. Thomas, from the Committee of Conference, submitted the following

                           CONFERENCE REPORT

                        [To accompany H.R. 4297]

      The committee of conference on the disagreeing votes of 
the two Houses on the amendment of the Senate to 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 met, after full and free conference, have agreed 
to recommend and do recommend to their respective Houses as 
follows:
      That the House recede from its disagreement to the 
amendment of the Senate and agree to the same with an amendment 
as follows:
      In lieu of the matter proposed to be inserted by the 
Senate amendment, insert the following:

SECTION 1. SHORT TITLE, ETC.

    (a) Short Title.--This Act may be cited as the ``Tax 
Increase Prevention and 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--EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS

Sec. 101. Increased expensing for small business.
Sec. 102. Capital gains and dividends rates.
Sec. 103. Controlled foreign corporations.

                       TITLE II--OTHER PROVISIONS

Sec. 201. Clarification of taxation of certain settlement funds.
Sec. 202. Modification of active business definition under section 355.
Sec. 203. Veterans' mortgage bonds.
Sec. 204. Capital gains treatment for certain self-created musical 
          works.
Sec. 205. Vessel tonnage limit.
Sec. 206. Modification of special arbitrage rule for certain funds.
Sec. 207. Amortization of expenses incurred in creating or acquiring 
          music or music copyrights.
Sec. 208. Modification of effective date of disregard of certain capital 
          expenditures for purposes of qualified small issue bonds.
Sec. 209. Modification of treatment of loans to qualified continuing 
          care facilities.

                TITLE III--ALTERNATIVE MINIMUM TAX RELIEF

Sec. 301. Increase in alternative minimum tax exemption amount for 2006.
Sec. 302. Allowance of nonrefundable personal credits against regular 
          and alternative minimum tax liability.

              TITLE IV--CORPORATE ESTIMATED TAX PROVISIONS

Sec. 401. Time for payment of corporate estimated taxes.

                   TITLE V--REVENUE OFFSET PROVISIONS

Sec. 501. Application of earnings stripping rules to partners which are 
          corporations.
Sec. 502. Reporting of interest on tax-exempt bonds.
Sec. 503. 5-year amortization of geological and geophysical expenditures 
          for certain major integrated oil companies.
Sec. 504. Application of FIRPTA to regulated investment companies.
Sec. 505. Treatment of distributions attributable to FIRPTA gains.
Sec. 506. Prevention of avoidance of tax on investments of foreign 
          persons in United States real property through wash sale 
          transactions.
Sec. 507. Section 355 not to apply to distributions involving 
          disqualified investment companies.
Sec. 508. Loan and redemption requirements on pooled financing 
          requirements.
Sec. 509. Partial payments required with submission of offers-in-
          compromise.
Sec. 510. Increase in age of minor children whose unearned income is 
          taxed as if parent's income.
Sec. 511. Imposition of withholding on certain payments made by 
          government entities.
Sec. 512. Conversions to Roth IRAs.
Sec. 513. Repeal of FSC/ETI binding contract relief.
Sec. 514. Only wages attributable to domestic production taken into 
          account in determining deduction for domestic production.
Sec. 515. Modification of exclusion for citizens living abroad.
Sec. 516. Tax involvement of accommodation parties in tax shelter 
          transactions.

       TITLE I--EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS

SEC. 101. INCREASED EXPENSING FOR SMALL BUSINESS.

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

SEC. 102. 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. 103. 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.--
            (1) In general.--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.''.
            (2) Effective date.--The amendment made by this 
        subsection shall apply to taxable years of foreign 
        corporations beginning after December 31, 2005, and to 
        taxable years of United States shareholders with or 
        within which such taxable years of foreign corporations 
        end.

                       TITLE II--OTHER PROVISIONS

SEC. 201. 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. 202. 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 on or 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 on or 
                before the date of the enactment of this 
                paragraph as a result of an acquisition, 
                disposition, or other restructuring after such 
                date and on or before December 31, 2010, such 
                distribution shall be treated as made on the 
                date of such acquisition, disposition, or 
                restructuring for purposes of applying 
                subparagraphs (A) through (C) of this 
                paragraph.''.

SEC. 203. VETERANS' MORTGAGE BONDS.

    (a) Expansion of Definition of 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 to read as 
        follows:
            ``(4) Qualified veteran.--For purposes of this 
        subsection, the term `qualified veteran' means--
                    ``(A) in the case of the States of Alaska, 
                Oregon, and Wisconsin, any veteran--
                            ``(i) who served on active duty, 
                        and
                            ``(ii) who applied for the 
                        financing before the date 25 years 
                        after the last date on which such 
                        veteran left active service, and
                    ``(B) in the case of any other State, any 
                veteran--
                            ``(i) who served on active duty at 
                        some time before January 1, 1977, and
                            ``(ii) 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.''.
            (2) Effective date.--The amendments made by this 
        subsection shall apply to bonds issued on or 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--
                    (A) by redesignating clauses (i) and (ii) 
                as subclauses (I) and (II), respectively, and 
                moving such clauses 2 ems to the right,
                    (B) by amending the matter preceding 
                subclause (I), as designated by subparagraph 
                (A), to read as follows:
                    ``(B) State veterans limit.--
                            ``(i) In general.--In the case of 
                        any State to which clause (ii) does not 
                        apply, the State veterans limit for any 
                        calendar year is the amount equal to--
                        '', and
                    (C) by adding at the end the following new 
                clauses:
                            ``(ii) Alaska, oregon, and 
                        wisconsin.--In the case of the 
                        following States, the State veterans 
                        limit for any calendar year is the 
                        amount equal to--
                                    ``(I) $25,000,000 for the 
                                State of Alaska,
                                    ``(II) $25,000,000 for the 
                                State of Oregon, and
                                    ``(III) $25,000,000 for the 
                                State of Wisconsin.
                            ``(iii) Phasein.--In the case of 
                        calendar years beginning before 2010, 
                        clause (ii) shall be applied by 
                        substituting for each of the dollar 
                        amounts therein an amount equal to the 
                        applicable percentage of such dollar 
                        amount. For purposes of the preceding 
                        sentence, the applicable percentage 
                        shall be determined in accordance with 
                        the following table:

``For Calendar Year:                           Applicable percentage is:
2006....................................................      20 percent
2007....................................................      40 percent
2008....................................................      60 percent
2009....................................................     80 percent.

                            ``(iv) Termination.--The State 
                        veterans limit for the States specified 
                        in clause (ii) for any calendar year 
                        after 2010 is zero.''.
            (2) Effective date.--The amendments made by this 
        subsection shall apply to allocations of State volume 
        limit after April 5, 2006.

SEC. 204. 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 to musical 
        compositions or copyrights in musical works sold or 
        exchanged before January 1, 2011, 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. 205. 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. 206. 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.

SEC. 207. AMORTIZATION OF EXPENSES INCURRED IN CREATING OR ACQUIRING 
                    MUSIC OR MUSIC COPYRIGHTS.

    (a) In General.--Section 167(g) (relating to depreciation 
under income forecast method) is amended by adding at the end 
the following new paragraph:
            ``(8) Special rules for certain musical works and 
        copyrights.--
                    ``(A) In general.--If an election is in 
                effect under this paragraph for any taxable 
                year, then, notwithstanding paragraph (1), any 
                expense which--
                            ``(i) is paid or incurred by the 
                        taxpayer in creating or acquiring any 
                        applicable musical property placed in 
                        service during the taxable year, and
                            ``(ii) is otherwise properly 
                        chargeable to capital account,
                shall be amortized ratably over the 5-year 
                period beginning with the month in which the 
                property was placed in service. The preceding 
                sentence shall not apply to any expense which, 
                without regard to this paragraph, would not be 
                allowable as a deduction.
                    ``(B) Exclusive method.--Except as provided 
                in this paragraph, no depreciation or 
                amortization deduction shall be allowed with 
                respect to any expense to which subparagraph 
                (A) applies.
                    ``(C) Applicable musical property.--For 
                purposes of this paragraph--
                            ``(i) In general.--The term 
                        `applicable musical property' means any 
                        musical composition (including any 
                        accompanying words), or any copyright 
                        with respect to a musical composition, 
                        which is property to which this 
                        subsection applies without regard to 
                        this paragraph.
                            ``(ii) Exceptions.--Such term shall 
                        not include any property--
                                    ``(I) with respect to which 
                                expenses are treated as 
                                qualified creative expenses to 
                                which section 263A(h) applies,
                                    ``(II) to which a 
                                simplified procedure 
                                established under section 
                                263A(j)(2) applies, or
                                    ``(III) which is an 
                                amortizable section 197 
                                intangible (as defined in 
                                section 197(c)).
                    ``(D) Election.--An election under this 
                paragraph shall be made at such time and in 
                such form as the Secretary may prescribe and 
                shall apply to all applicable musical property 
                placed in service during the taxable year for 
                which the election applies.
                    ``(E) Termination.--An election may not be 
                made under this paragraph for any taxable year 
                beginning after December 31, 2010.''.
    (b) Effective Date.--The amendments made by this section 
shall apply to expenses paid or incurred with respect to 
property placed in service in taxable years beginning after 
December 31, 2005.

SEC. 208. MODIFICATION OF EFFECTIVE DATE OF DISREGARD OF CERTAIN 
                    CAPITAL EXPENDITURES FOR PURPOSES OF QUALIFIED 
                    SMALL ISSUE BONDS.

    (a) In General.--Section 144(a)(4)(G) is amended by 
striking ``September 30, 2009'' and inserting ``December 31, 
2006''.
    (b) Conforming Amendment.--Section 144(a)(4)(F) is amended 
by striking ``September 30, 2009'' and inserting ``December 31, 
2006''.

SEC. 209. MODIFICATION OF TREATMENT OF LOANS TO QUALIFIED CONTINUING 
                    CARE FACILITIES.

    (a) In General.--Section 7872 is amended by redesignating 
subsection (h) as subsection (i) and inserting after subsection 
(g) the following new subsection:
    ``(h) Exception for Loans to Qualified Continuing Care 
Facilities.--
            ``(1) In general.--This section shall not apply for 
        any calendar year to any below-market loan owed by a 
        facility which on the last day of such year is a 
        qualified continuing care facility, if such loan was 
        made pursuant to a continuing care contract and if the 
        lender (or the lender's spouse) attains age 62 before 
        the close of such year.
            ``(2) Continuing care contract.--For purposes of 
        this section, the term `continuing care contract' means 
        a written contract between an individual and a 
        qualified continuing care facility under which--
                    ``(A) the individual or individual's spouse 
                may use a qualified continuing care facility 
                for their life or lives,
                    ``(B) the individual or individual's spouse 
                will be provided with housing, as appropriate 
                for the health of such individual or 
                individual's spouse--
                            ``(i) in an independent living unit 
                        (which has additional available 
                        facilities outside such unit for the 
                        provision of meals and other personal 
                        care), and
                            ``(ii) in an assisted living 
                        facility or a nursing facility, as is 
                        available in the continuing care 
                        facility, and
                    ``(C) the individual or individual's spouse 
                will be provided assisted living or nursing 
                care as the health of such individual or 
                individual's spouse requires, and as is 
                available in the continuing care facility.

        The Secretary shall issue guidance which limits such 
        term to contracts which provide only facilities, care, 
        and services described in this paragraph.
            ``(3) Qualified continuing care facility.--
                    ``(A) In general.--For purposes of this 
                section, the term `qualified continuing care 
                facility' means 1 or more facilities--
                            ``(i) which are designed to provide 
                        services under continuing care 
                        contracts,
                            ``(ii) which include an independent 
                        living unit, plus an assisted living or 
                        nursing facility, or both, and
                            ``(iii) substantially all of the 
                        independent living unit residents of 
                        which are covered by continuing care 
                        contracts.
                    ``(B) Nursing homes excluded.--The term 
                `qualified continuing care facility' shall not 
                include any facility which is of a type which 
                is traditionally considered a nursing home.
            ``(4) Termination.--This subsection shall not apply 
        to any calendar year after 2010.''.
    (b) Conforming Amendments.--
            (1) Section 7872(g) is amended by adding at the end 
        the following new paragraph:
            ``(6) Suspension of application.--Paragraph (1) 
        shall not apply for any calendar year to which 
        subsection (h) applies.''.
            (2) Section 142(d)(2)(B) is amended by striking 
        ``Section 7872(g)'' and inserting ``Subsections (g) and 
        (h) of section 7872''.
    (c) Effective Date.--The amendment made by this section 
shall apply to calendar years beginning after December 31, 
2005, with respect to loans made before, on, or after such 
date.

               TITLE III--ALTERNATIVE MINIMUM TAX RELIEF

SEC. 301. INCREASE IN ALTERNATIVE MINIMUM TAX EXEMPTION AMOUNT FOR 
                    2006.

    (a) In General.--Section 55(d)(1) (relating to exemption 
amount for taxpayers other than corporations) is amended--
            (1) by striking ``$58,000'' and all that follows 
        through ``2005'' in subparagraph (A) and inserting 
        ``$62,550 in the case of taxable years beginning in 
        2006'', and
            (2) by striking ``$40,250'' and all that follows 
        through ``2005'' in subparagraph (B) and inserting 
        ``$42,500 in the case of taxable years beginning in 
        2006''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2005.

SEC. 302. ALLOWANCE OF NONREFUNDABLE PERSONAL CREDITS AGAINST REGULAR 
                    AND ALTERNATIVE MINIMUM TAX LIABILITY.

    (a) In General.--Paragraph (2) of section 26(a) is 
amended--
            (1) by striking ``2005'' in the heading thereof and 
        inserting ``2006'', and
            (2) by striking ``or 2005'' and inserting ``2005, 
        or 2006''.
    (b) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2005.

              TITLE IV--CORPORATE ESTIMATED TAX PROVISIONS

SEC. 401. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.

    Notwithstanding section 6655 of the Internal Revenue Code 
of 1986--
            (1) in the case of a corporation with assets of not 
        less than $1,000,000,000 (determined as of the end of 
        the preceding taxable year)--
                    (A) the amount of any required installment 
                of corporate estimated tax which is otherwise 
                due in July, August, or September of 2006 shall 
                be 105 percent of such amount,
                    (B) the amount of any required installment 
                of corporate estimated tax which is otherwise 
                due in July, August, or September of 2012 shall 
                be 106.25 percent of such amount,
                    (C) the amount of any required installment 
                of corporate estimated tax which is otherwise 
                due in July, August, or September of 2013 shall 
                be 100.75 percent of such amount, and
                    (D) the amount of the next required 
                installment after an installment referred to in 
                subparagraph (A), (B), or (C) shall be 
                appropriately reduced to reflect the amount of 
                the increase by reason of such subparagraph,
            (2) 20.5 percent of the amount of any required 
        installment of corporate estimated tax which is 
        otherwise due in September 2010 shall not be due until 
        October 1, 2010, and
            (3) 27.5 percent of the amount of any required 
        installment of corporate estimated tax which is 
        otherwise due in September 2011 shall not be due until 
        October 1, 2011.

                   TITLE V--REVENUE OFFSET PROVISIONS

SEC. 501. APPLICATION OF EARNINGS STRIPPING RULES TO PARTNERS WHICH ARE 
                    CORPORATIONS.

    (a) In General.--Section 163(j) (relating to limitation on 
deduction for interest on certain indebtedness) is amended by 
redesignating paragraph (8) as paragraph (9) and by inserting 
after paragraph (7) the following new paragraph:
            ``(8) Treatment of corporate partners.--Except to 
        the extent provided by regulations, in applying this 
        subsection to a corporation which owns (directly or 
        indirectly) an interest in a partnership--
                    ``(A) such corporation's distributive share 
                of interest income paid or accrued to such 
                partnership shall be treated as interest income 
                paid or accrued to such corporation,
                    ``(B) such corporation's distributive share 
                of interest paid or accrued by such partnership 
                shall be treated as interest paid or accrued by 
                such corporation, and
                    ``(C) such corporation's share of the 
                liabilities of such partnership shall be 
                treated as liabilities of such corporation.''.
    (b) Additional Regulatory Authority.--Section 163(j)(9) 
(relating to regulations), as redesignated by subsection (a), 
is amended by striking ``and'' at the end of subparagraph (B), 
by striking the period at the end of subparagraph (C) and 
inserting ``, and'', and by adding at the end the following new 
subparagraph:
                    ``(D) regulations providing for the 
                reallocation of shares of partnership 
                indebtedness, or distributive shares of the 
                partnership's interest income or interest 
                expense.''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning on or after the date of 
the enactment of this Act.

SEC. 502. REPORTING OF INTEREST ON TAX-EXEMPT BONDS.

    (a) In General.--Section 6049(b)(2) (relating to 
exceptions) is amended by striking subparagraph (B) and by 
redesignating subparagraphs (C) and (D) as subparagraphs (B) 
and (C), respectively.
    (b) Conforming Amendment.--Section 6049(b)(2)(C), as 
redesignated by subsection (a), is amended by striking 
``subparagraph (C)'' and inserting ``subparagraph (B)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to interest paid after December 31, 2005.

SEC. 503. 5-YEAR AMORTIZATION OF GEOLOGICAL AND GEOPHYSICAL 
                    EXPENDITURES FOR CERTAIN MAJOR INTEGRATED OIL 
                    COMPANIES.

    (a) In General.--Section 167(h) (relating to amortization 
of geological and geophysical expenditures) is amended by 
adding at the end the following new paragraph:
            ``(5) Special rule for major integrated oil 
        companies.--
                    ``(A) In general.--In the case of a major 
                integrated oil company, paragraphs (1) and (4) 
                shall be applied by substituting `5-year' for 
                `24 month'.
                    ``(B) Major integrated oil company.--For 
                purposes of this paragraph, the term `major 
                integrated oil company' means, with respect to 
                any taxable year, a producer of crude oil--
                            ``(i) which has an average daily 
                        worldwide production of crude oil of at 
                        least 500,000 barrels for the taxable 
                        year,
                            ``(ii) which had gross receipts in 
                        excess of $1,000,000,000 for its last 
                        taxable year ending during calendar 
                        year 2005, and
                            ``(iii) to which subsection (c) of 
                        section 613A does not apply by reason 
                        of paragraph (4) of section 613A(d), 
                        determined--
                                    ``(I) by substituting `15 
                                percent' for `5 percent' each 
                                place it occurs in paragraph 
                                (3) of section 613A(d), and
                                    ``(II) without regard to 
                                whether subsection (c) of 
                                section 613A does not apply by 
                                reason of paragraph (2) of 
                                section 613A(d).
                For purposes of clauses (i) and (ii), all 
                persons treated as a single employer under 
                subsections (a) and (b) of section 52 shall be 
                treated as 1 person and, in case of a short 
                taxable year, the rule under section 
                448(c)(3)(B) shall apply.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to amounts paid or incurred after the date of the 
enactment of this Act.

SEC. 504. APPLICATION OF FIRPTA TO REGULATED INVESTMENT COMPANIES.

    (a) In General.--Subclause (II) of section 897(h)(4)(A)(i) 
(defining qualified investment entity) is amended by inserting 
``which is a United States real property holding corporation or 
which would be a United States real property holding 
corporation if the exceptions provided in subsections (c)(3) 
and (h)(2) did not apply to interests in any real estate 
investment trust or regulated investment company'' after 
``regulated investment company''.
    (b) Effective Date.--The amendment made by this section 
shall take effect as if included in the provisions of section 
411 of the American Jobs Creation Act of 2004 to which it 
relates.

SEC. 505. TREATMENT OF DISTRIBUTIONS ATTRIBUTABLE TO FIRPTA GAINS.

    (a) Qualified Investment Entity.--
            (1) In general.--Section 897(h)(1) is amended--
                    (A) by striking ``a nonresident alien 
                individual or a foreign corporation'' in the 
                first sentence and inserting ``a nonresident 
                alien individual, a foreign corporation, or 
                other qualified investment entity'',
                    (B) by striking ``such nonresident alien 
                individual or foreign corporation'' in the 
                first sentence and inserting ``such nonresident 
                alien individual, foreign corporation, or other 
                qualified investment entity'', and
                    (C) by striking the second sentence and 
                inserting the following new sentence: 
                ``Notwithstanding the preceding sentence, any 
                distribution by a qualified investment entity 
                to a nonresident alien individual or a foreign 
                corporation with respect to any class of stock 
                which is regularly traded on an established 
                securities market located in the United States 
                shall not be treated as gain recognized from 
                the sale or exchange of a United States real 
                property interest if such individual or 
                corporation did not own more than 5 percent of 
                such class of stock at any time during the 1-
                year period ending on the date of such 
                distribution.''.
            (2) Exception to termination of application of 
        section 897 rules to regulated investment companies.--
        Clause (ii) of section 897(h)(4)(A) is amended by 
        adding at the end the following new sentence: 
        ``Notwithstanding the preceding sentence, an entity 
        described in clause (i)(II) shall be treated as a 
        qualified investment entity for purposes of applying 
        paragraphs (1) and (5) and section 1445 with respect to 
        any distribution by the entity to a nonresident alien 
        individual or a foreign corporation which is 
        attributable directly or indirectly to a distribution 
        to the entity from a real estate investment trust.''.
    (b) Withholding on Distributions Treated as Gain From 
United States Real Property Interests.--Section 1445(e) 
(relating to special rules for distributions, etc. by 
corporations, partnerships, trusts, or estates) is amended by 
redesignating paragraph (6) as paragraph (7) and by inserting 
after paragraph (5) the following new paragraph:
            ``(6) Distributions by regulated investment 
        companies and real estate investment trusts.--If any 
        portion of a distribution from a qualified investment 
        entity (as defined in section 897(h)(4)) to a 
        nonresident alien individual or a foreign corporation 
        is treated under section 897(h)(1) as gain realized by 
        such individual or corporation from the sale or 
        exchange of a United States real property interest, the 
        qualified investment entity shall deduct and withhold 
        under subsection (a) a tax equal to 35 percent (or, to 
        the extent provided in regulations, 15 percent (20 
        percent in the case of taxable years beginning after 
        December 31, 2010)) of the amount so treated.''.
    (c) Treatment of Certain Distributions as Dividends.--
            (1) In general.--Section 852(b)(3) (relating to 
        capital gains) is amended by adding at the end the 
        following new subparagraph:
                    ``(E) Certain distributions.--In the case 
                of a distribution to which section 897 does not 
                apply by reason of the second sentence of 
                section 897(h)(1), the amount of such 
                distribution which would be included in 
                computing long-term capital gains for the 
                shareholder under subparagraph (B) or (D) 
                (without regard to this subparagraph)--
                            ``(i) shall not be included in 
                        computing such shareholder's long-term 
                        capital gains, and
                            ``(ii) shall be included in such 
                        shareholder's gross income as a 
                        dividend from the regulated investment 
                        company.''.
            (2) Conforming amendment.--Section 871(k)(2) 
        (relating to short-term capital gain dividends) is 
        amended by adding at the end the following new 
        subparagraph:
                    ``(E) Certain distributions.--In the case 
                of a distribution to which section 897 does not 
                apply by reason of the second sentence of 
                section 897(h)(1), the amount which would be 
                treated as a short-term capital gain dividend 
                to the shareholder (without regard to this 
                subparagraph)--
                            ``(i) shall not be treated as a 
                        short-term capital gain dividend, and
                            ``(ii) shall be included in such 
                        shareholder's gross income as a 
                        dividend from the regulated investment 
                        company.''.
    (d) Effective Dates.--The amendments made by this section 
shall apply to taxable years of qualified investment entities 
beginning after December 31, 2005, except that no amount shall 
be required to be withheld under section 1441, 1442, or 1445 of 
the Internal Revenue Code of 1986 with respect to any 
distribution before the date of the enactment of this Act if 
such amount was not otherwise required to be withheld under any 
such section as in effect before such amendments.

SEC. 506. PREVENTION OF AVOIDANCE OF TAX ON INVESTMENTS OF FOREIGN 
                    PERSONS IN UNITED STATES REAL PROPERTY THROUGH WASH 
                    SALE TRANSACTIONS.

    (a) In General.--Section 897(h) (relating to special rules 
for certain investment entities) is amended by adding at the 
end the following new paragraph:
            ``(5) Treatment of certain wash sale 
        transactions.--
                    ``(A) In general.--If an interest in a 
                domestically controlled qualified investment 
                entity is disposed of in an applicable wash 
                sale transaction, the taxpayer shall, for 
                purposes of this section, be treated as having 
                gain from the sale or exchange of a United 
                States real property interest in an amount 
                equal to the portion of the distribution 
                described in subparagraph (B) with respect to 
                such interest which, but for the disposition, 
                would have been treated by the taxpayer as gain 
                from the sale or exchange of a United States 
                real property interest under paragraph (1).
                    ``(B) Applicable wash sales transaction.--
                For purposes of this paragraph--
                            ``(i) In general.--The term 
                        `applicable wash sales transaction' 
                        means any transaction (or series of 
                        transactions) under which a nonresident 
                        alien individual, foreign corporation, 
                        or qualified investment entity--
                                    ``(I) disposes of an 
                                interest in a domestically 
                                controlled qualified investment 
                                entity during the 30-day period 
                                preceding the ex-dividend date 
                                of a distribution which is to 
                                be made with respect to the 
                                interest and any portion of 
                                which, but for the disposition, 
                                would have been treated by the 
                                taxpayer as gain from the sale 
                                or exchange of a United States 
                                real property interest under 
                                paragraph (1), and
                                    ``(II) acquires, or enters 
                                into a contract or option to 
                                acquire, a substantially 
                                identical interest in such 
                                entity during the 61-day period 
                                beginning with the 1st day of 
                                the 30-day period described in 
                                subclause (I).
                        For purposes of subclause (II), a 
                        nonresident alien individual, foreign 
                        corporation, or qualified investment 
                        entity shall be treated as having 
                        acquired any interest acquired by a 
                        person related (within the meaning of 
                        section 267(b) or 707(b)(1)) to the 
                        individual, corporation, or entity, and 
                        any interest which such person has 
                        entered into any contract or option to 
                        acquire.
                            ``(ii) Application to substitute 
                        dividend and similar payments.--
                        Subparagraph (A) shall apply to--
                                    ``(I) any substitute 
                                dividend payment (within the 
                                meaning of section 861), or
                                    ``(II) any other similar 
                                payment specified in 
                                regulations which the Secretary 
                                determines necessary to prevent 
                                avoidance of the purposes of 
                                this paragraph.
                        The portion of any such payment treated 
                        by the taxpayer as gain from the sale 
                        or exchange of a United States real 
                        property interest under subparagraph 
                        (A) by reason of this clause shall be 
                        equal to the portion of the 
                        distribution such payment is in lieu of 
                        which would have been so treated but 
                        for the transaction giving rise to such 
                        payment.
                            ``(iii) Exception where 
                        distribution actually received.--A 
                        transaction shall not be treated as an 
                        applicable wash sales transaction if 
                        the nonresident alien individual, 
                        foreign corporation, or qualified 
                        investment entity receives the 
                        distribution described in clause (i)(I) 
                        with respect to either the interest 
                        which was disposed of, or acquired, in 
                        the transaction.
                            ``(iv) Exception for certain 
                        publicly traded stock.--A transaction 
                        shall not be treated as an applicable 
                        wash sales transaction if it involves 
                        the disposition of any class of stock 
                        in a qualified investment entity which 
                        is regularly traded on an established 
                        securities market within the United 
                        States but only if the nonresident 
                        alien individual, foreign corporation, 
                        or qualified investment entity did not 
                        own more than 5 percent of such class 
                        of stock at any time during the 1-year 
                        period ending on the date of the 
                        distribution described in clause 
                        (i)(I).''.
    (b) No Withholding Required.--Section 1445(b) (relating to 
exemptions) is amended by adding at the end the following new 
paragraph:
            ``(8) Applicable wash sales transactions.--No 
        person shall be required to deduct and withhold any 
        amount under subsection (a) with respect to a 
        disposition which is treated as a disposition of a 
        United States real property interest solely by reason 
        of section 897(h)(5).''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2005, 
except that such amendments shall not apply to any 
distribution, or substitute dividend payment, occurring before 
the date that is 30 days after the date of the enactment of 
this Act.

SEC. 507. SECTION 355 NOT TO APPLY TO DISTRIBUTIONS INVOLVING 
                    DISQUALIFIED INVESTMENT COMPANIES.

    (a) In General.--Section 355 (relating to distributions of 
stock and securities of a controlled corporation) is amended by 
adding at the end the following new subsection:
    ``(g) Section Not to Apply to Distributions Involving 
Disqualified Investment Corporations.--
            ``(1) In general.--This section (and so much of 
        section 356 as relates to this section) shall not apply 
        to any distribution which is part of a transaction if--
                    ``(A) either the distributing corporation 
                or controlled corporation is, immediately after 
                the transaction, a disqualified investment 
                corporation, and
                    ``(B) any person holds, immediately after 
                the transaction, a 50-percent or greater 
                interest in any disqualified investment 
                corporation, but only if such person did not 
                hold such an interest in such corporation 
                immediately before the transaction.
            ``(2) Disqualified investment corporation.--For 
        purposes of this subsection--
                    ``(A) In general.--The term `disqualified 
                investment corporation' means any distributing 
                or controlled corporation if the fair market 
                value of the investment assets of the 
                corporation is--
                            ``(i) in the case of distributions 
                        after the end of the 1-year period 
                        beginning on the date of the enactment 
                        of this subsection, \2/3\ or more of 
                        the fair market value of all assets of 
                        the corporation, and
                            ``(ii) in the case of distributions 
                        during such 1-year period, \3/4\ or 
                        more of the fair market value of all 
                        assets of the corporation.
                    ``(B) Investment assets.--
                            ``(i) In general.--Except as 
                        otherwise provided in this 
                        subparagraph, the term `investment 
                        assets' means--
                                    ``(I) cash,
                                    ``(II) any stock or 
                                securities in a corporation,
                                    ``(III) any interest in a 
                                partnership,
                                    ``(IV) any debt instrument 
                                or other evidence of 
                                indebtedness,
                                    ``(V) any option, forward 
                                or futures contract, notional 
                                principal contract, or 
                                derivative,
                                    ``(VI) foreign currency, or
                                    ``(VII) any similar asset.
                            ``(ii) Exception for assets used in 
                        active conduct of certain financial 
                        trades or businesses.--Such term shall 
                        not include any asset which is held for 
                        use in the active and regular conduct 
                        of--
                                    ``(I) a lending or finance 
                                business (within the meaning of 
                                section 954(h)(4)),
                                    ``(II) a banking business 
                                through a bank (as defined in 
                                section 581), a domestic 
                                building and loan association 
                                (within the meaning of section 
                                7701(a)(19)), or any similar 
                                institution specified by the 
                                Secretary, or
                                    ``(III) an insurance 
                                business if the conduct of the 
                                business is licensed, 
                                authorized, or regulated by an 
                                applicable insurance regulatory 
                                body.
                        This clause shall only apply with 
                        respect to any business if 
                        substantially all of the income of the 
                        business is derived from persons who 
                        are not related (within the meaning of 
                        section 267(b) or 707(b)(1)) to the 
                        person conducting the business.
                            ``(iii) Exception for securities 
                        marked to market.--Such term shall not 
                        include any security (as defined in 
                        section 475(c)(2)) which is held by a 
                        dealer in securities and to which 
                        section 475(a) applies.
                            ``(iv) Stock or securities in a 20-
                        percent controlled entity.--
                                    ``(I) In general.--Such 
                                term shall not include any 
                                stock and securities in, or any 
                                asset described in subclause 
                                (IV) or (V) of clause (i) 
                                issued by, a corporation which 
                                is a 20-percent controlled 
                                entity with respect to the 
                                distributing or controlled 
                                corporation.
                                    ``(II) Look-thru rule.--The 
                                distributing or controlled 
                                corporation shall, for purposes 
                                of applying this subsection, be 
                                treated as owning its ratable 
                                share of the assets of any 20-
                                percent controlled entity.
                                    ``(III) 20-percent 
                                controlled entity.--For 
                                purposes of this clause, the 
                                term `20-percent controlled 
                                entity' means, with respect to 
                                any distributing or controlled 
                                corporation, any corporation 
                                with respect to which the 
                                distributing or controlled 
                                corporation owns directly or 
                                indirectly stock meeting the 
                                requirements of section 
                                1504(a)(2), except that such 
                                section shall be applied by 
                                substituting `20 percent' for 
                                `80 percent' and without regard 
                                to stock described in section 
                                1504(a)(4).
                            ``(v) Interests in certain 
                        partnerships.--
                                    ``(I) In general.--Such 
                                term shall not include any 
                                interest in a partnership, or 
                                any debt instrument or other 
                                evidence of indebtedness, 
                                issued by the partnership, if 1 
                                or more of the trades or 
                                businesses of the partnership 
                                are (or, without regard to the 
                                5-year requirement under 
                                subsection (b)(2)(B), would be) 
                                taken into account by the 
                                distributing or controlled 
                                corporation, as the case may 
                                be, in determining whether the 
                                requirements of subsection (b) 
                                are met with respect to the 
                                distribution.
                                    ``(II) Look-thru rule.--The 
                                distributing or controlled 
                                corporation shall, for purposes 
                                of applying this subsection, be 
                                treated as owning its ratable 
                                share of the assets of any 
                                partnership described in 
                                subclause (I).
            ``(3) 50-percent or greater interest.--For purposes 
        of this subsection--
                    ``(A) In general.--The term `50-percent or 
                greater interest' has the meaning given such 
                term by subsection (d)(4).
                    ``(B) Attribution rules.--The rules of 
                section 318 shall apply for purposes of 
                determining ownership of stock for purposes of 
                this paragraph.
            ``(4) Transaction.--For purposes of this 
        subsection, the term `transaction' includes a series of 
        transactions.
            ``(5) Regulations.--The Secretary shall prescribe 
        such regulations as may be necessary to carry out, or 
        prevent the avoidance of, the purposes of this 
        subsection, including regulations--
                    ``(A) to carry out, or prevent the 
                avoidance of, the purposes of this subsection 
                in cases involving--
                            ``(i) the use of related persons, 
                        intermediaries, pass-thru entities, 
                        options, or other arrangements, and
                            ``(ii) the treatment of assets 
                        unrelated to the trade or business of a 
                        corporation as investment assets if, 
                        prior to the distribution, investment 
                        assets were used to acquire such 
                        unrelated assets,
                    ``(B) which in appropriate cases exclude 
                from the application of this subsection a 
                distribution which does not have the character 
                of a redemption which would be treated as a 
                sale or exchange under section 302, and
                    ``(C) which modify the application of the 
                attribution rules applied for purposes of this 
                subsection.''.
    (b) Effective Dates.--
            (1) In general.--The amendments made by this 
        section shall apply to distributions after the date of 
        the enactment of this Act.
            (2) Transition rule.--The amendments made by this 
        section shall not apply to any distribution pursuant to 
        a transaction which is--
                    (A) made pursuant to an agreement which was 
                binding on such date of enactment and at all 
                times thereafter,
                    (B) described in a ruling request submitted 
                to the Internal Revenue Service on or before 
                such date, or
                    (C) described on or before such date in a 
                public announcement or in a filing with the 
                Securities and Exchange Commission.

SEC. 508. LOAN AND REDEMPTION REQUIREMENTS ON POOLED FINANCING 
                    REQUIREMENTS.

    (a) Strengthened Reasonable Expectation Requirement.--
Subparagraph (A) of section 149(f)(2) (relating to reasonable 
expectation requirement) is amended to read as follows:
                    ``(A) In general.--The requirements of this 
                paragraph are met with respect to an issue if 
                the issuer reasonably expects that--
                            ``(i) as of the close of the 1-year 
                        period beginning on the date of 
                        issuance of the issue, at least 30 
                        percent of the net proceeds of the 
                        issue (as of the close of such period) 
                        will have been used directly or 
                        indirectly to make or finance loans to 
                        ultimate borrowers, and
                            ``(ii) as of the close of the 3-
                        year period beginning on such date of 
                        issuance, at least 95 percent of the 
                        net proceeds of the issue (as of the 
                        close of such period) will have been so 
                        used.''.
    (b) Written Loan Commitment and Redemption Requirements.--
Section 149(f) (relating to treatment of certain pooled 
financing bonds) is amended by redesignating paragraphs (4) and 
(5) as paragraphs (6) and (7), respectively, and by inserting 
after paragraph (3) the following new paragraphs:
            ``(4) Written loan commitment requirement.--
                    ``(A) In general.--The requirement of this 
                paragraph is met with respect to an issue if 
                the issuer receives prior to issuance written 
                loan commitments identifying the ultimate 
                potential borrowers of at least 30 percent of 
                the net proceeds of such issue.
                    ``(B) Exception.--Subparagraph (A) shall 
                not apply with respect to any issuer which--
                            ``(i) is a State (or an integral 
                        part of a State) issuing pooled 
                        financing bonds to make or finance 
                        loans to subordinate governmental units 
                        of such State, or
                            ``(ii) is a State-created entity 
                        providing financing for water-
                        infrastructure projects through the 
                        federally-sponsored State revolving 
                        fund program.
            ``(5) Redemption requirement.--The requirement of 
        this paragraph is met if to the extent that less than 
        the percentage of the proceeds of an issue required to 
        be used under clause (i) or (ii) of paragraph (2)(A) is 
        used by the close of the period identified in such 
        clause, the issuer uses an amount of proceeds equal to 
        the excess of--
                    ``(A) the amount required to be used under 
                such clause, over
                    ``(B) the amount actually used by the close 
                of such period,
        to redeem outstanding bonds within 90 days after the 
        end of such period.''.
    (c) Elimination of Disregard of Pooled Bonds in Determining 
Eligibility for Small Issuer Exception to Arbitrage Rebate.--
Section 148(f)(4)(D)(ii) (relating to aggregation of issuers) 
is amended by striking subclause (II) and by redesignating 
subclauses (III) and (IV) as subclauses (II) and (III), 
respectively.
    (d) Conforming Amendments.--
            (1) Section 149(f)(1) is amended by striking 
        ``paragraphs (2) and (3)'' and inserting ``paragraphs 
        (2), (3), (4), and (5)''.
            (2) Section 149(f)(7)(B), as redesignated by 
        subsection (b), is amended by striking ``paragraph 
        (4)(A)'' and inserting ``paragraph (6)(A)''.
            (3) Section 54(l)(2) is amended by striking 
        ``section 149(f)(4)(A)'' and inserting ``section 
        149(f)(6)(A)''.
    (e) Effective Date.--The amendments made by this section 
shall apply to bonds issued after the date of the enactment of 
this Act.

SEC. 509. PARTIAL PAYMENTS REQUIRED WITH SUBMISSION OF OFFERS-IN-
                    COMPROMISE.

    (a) In General.--Section 7122 (relating to compromises) is 
amended by redesignating subsections (c) and (d) as subsections 
(d) and (e), respectively, and by inserting after subsection 
(b) the following new subsection:
    ``(c) Rules for Submission of Offers-in-Compromise.--
            ``(1) Partial payment required with submission.--
                    ``(A) Lump-sum offers.--
                            ``(i) In general.--The submission 
                        of any lump-sum offer-in-compromise 
                        shall be accompanied by the payment of 
                        20 percent of the amount of such offer.
                            ``(ii) Lump-sum offer-in-
                        compromise.--For purposes of this 
                        section, the term `lump-sum offer-in-
                        compromise' means any offer of payments 
                        made in 5 or fewer installments.
                    ``(B) Periodic payment offers.--
                            ``(i) In general.--The submission 
                        of any periodic payment offer-in-
                        compromise shall be accompanied by the 
                        payment of the amount of the first 
                        proposed installment.
                            ``(ii) Failure to make installment 
                        during pendency of offer.--Any failure 
                        to make an installment (other than the 
                        first installment) due under such 
                        offer-in-compromise during the period 
                        such offer is being evaluated by the 
                        Secretary may be treated by the 
                        Secretary as a withdrawal of such 
                        offer-in-compromise.
            ``(2) Rules of application.--
                    ``(A) Use of payment.--The application of 
                any payment made under this subsection to the 
                assessed tax or other amounts imposed under 
                this title with respect to such tax may be 
                specified by the taxpayer.
                    ``(B) Application of user fee.--In the case 
                of any assessed tax or other amounts imposed 
                under this title with respect to such tax which 
                is the subject of an offer-in-compromise to 
                which this subsection applies, such tax or 
                other amounts shall be reduced by any user fee 
                imposed under this title with respect to such 
                offer-in-compromise.
                    ``(C) Waiver authority.--The Secretary may 
                issue regulations waiving any payment required 
                under paragraph (1) in a manner consistent with 
                the practices established in accordance with 
                the requirements under subsection (d)(3).''.
    (b) Additional Rules Relating to Treatment of Offers.--
            (1) Unprocessable offer if payment requirements are 
        not met.--Paragraph (3) of section 7122(d) (relating to 
        standards for evaluation of offers), as redesignated by 
        subsection (a), is amended by striking ``; and'' at the 
        end of subparagraph (A) and inserting a comma, 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 offer-in-compromise which does 
                not meet the requirements of subparagraph 
                (A)(i) or (B)(i), as the case may be, of 
                subsection (c)(1) may be returned to the 
                taxpayer as unprocessable.''.
            (2) Deemed acceptance of offer not rejected within 
        certain period.--Section 7122, as amended by subsection 
        (a), is amended by adding at the end the following new 
        subsection:
    ``(f) Deemed Acceptance of Offer Not Rejected Within 
Certain Period.--Any offer-in-compromise submitted under this 
section shall be deemed to be accepted by the Secretary if such 
offer is not rejected by the Secretary before the date which is 
24 months after the date of the submission of such offer. For 
purposes of the preceding sentence, any period during which any 
tax liability which is the subject of such offer-in-compromise 
is in dispute in any judicial proceeding shall not be taken 
into account in determining the expiration of the 24-month 
period.''.
    (c) Conforming Amendment.--Section 6159(f) is amended by 
striking ``section 7122(d)'' and inserting ``section 7122(e)''.
    (d) Effective Date.--The amendments made by this section 
shall apply to offers-in-compromise submitted on and after the 
date which is 60 days after the date of the enactment of this 
Act.

SEC. 510. INCREASE IN AGE OF MINOR CHILDREN WHOSE UNEARNED INCOME IS 
                    TAXED AS IF PARENT'S INCOME.

    (a) In General.--Section 1(g)(2)(A) (relating to child to 
whom subsection applies) is amended by striking ``age 14'' and 
inserting ``age 18''.
    (b) Treatment of Distributions From Qualified Disability 
Trusts.--Section 1(g)(4) (relating to net unearned income) is 
amended by adding at the end the following new subparagraph:
                    ``(C) Treatment of distributions from 
                qualified disability trusts.--For purposes of 
                this subsection, in the case of any child who 
                is a beneficiary of a qualified disability 
                trust (as defined in section 642(b)(2)(C)(ii)), 
                any amount included in the income of such child 
                under sections 652 and 662 during a taxable 
                year shall be considered earned income of such 
                child for such taxable year.''.
    (c) Conforming Amendment.--Section 1(g)(2) 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 inserting after subparagraph (B) the following 
new subparagraph:
                    ``(C) such child does not file a joint 
                return for the taxable year.''.
    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2005.

SEC. 511. IMPOSITION OF WITHHOLDING ON CERTAIN PAYMENTS MADE BY 
                    GOVERNMENT ENTITIES.

    (a) In General.--Section 3402 is amended by adding at the 
end the following new subsection:
    ``(t) Extension of Withholding to Certain Payments Made by 
Government Entities.--
            ``(1) General rule.--The Government of the United 
        States, every State, every political subdivision 
        thereof, and every instrumentality of the foregoing 
        (including multi-State agencies) making any payment to 
        any person providing any property or services 
        (including any payment made in connection with a 
        government voucher or certificate program which 
        functions as a payment for property or services) shall 
        deduct and withhold from such payment a tax in an 
        amount equal to 3 percent of such payment.
            ``(2) Property and services subject to 
        withholding.--Paragraph (1) shall not apply to any 
        payment--
                    ``(A) except as provided in subparagraph 
                (B), which is subject to withholding under any 
                other provision of this chapter or chapter 3,
                    ``(B) which is subject to withholding under 
                section 3406 and from which amounts are being 
                withheld under such section,
                    ``(C) of interest,
                    ``(D) for real property,
                    ``(E) to any governmental entity subject to 
                the requirements of paragraph (1), any tax-
                exempt entity, or any foreign government,
                    ``(F) made pursuant to a classified or 
                confidential contract described in section 
                6050M(e)(3),
                    ``(G) made by a political subdivision of a 
                State (or any instrumentality thereof) which 
                makes less than $100,000,000 of such payments 
                annually,
                    ``(H) which is in connection with a public 
                assistance or public welfare program for which 
                eligibility is determined by a needs or income 
                test, and
                    ``(I) to any government employee not 
                otherwise excludable with respect to their 
                services as an employee.
            ``(3) Coordination with other sections.--For 
        purposes of sections 3403 and 3404 and for purposes of 
        so much of subtitle F (except section 7205) as relates 
        to this chapter, payments to any person for property or 
        services which are subject to withholding shall be 
        treated as if such payments were wages paid by an 
        employer to an employee.''.
    (b) Effective Date.--The amendment made by this section 
shall apply to payments made after December 31, 2010.

SEC. 512. CONVERSIONS TO ROTH IRAS.

    (a) Repeal of Income Limitations.--
            (1) In general.--Paragraph (3) of section 408A(c) 
        (relating to limits based on modified adjusted gross 
        income) is amended by striking subparagraph (B) and 
        redesignating subparagraphs (C) and (D) as 
        subparagraphs (B) and (C), respectively.
            (2) Conforming amendment.--Clause (i) of section 
        408A(c)(3)(B) (as redesignated by paragraph (1)) is 
        amended by striking ``except that--'' and all that 
        follows and inserting ``except that any amount included 
        in gross income under subsection (d)(3) shall not be 
        taken into account, and''.
    (b) Rollovers to a Roth IRA From an IRA Other Than a Roth 
IRA.--
            (1) In general.--Clause (iii) of section 
        408A(d)(3)(A) (relating to rollovers from an IRA other 
        than a Roth IRA) is amended to read as follows:
                            ``(iii) unless the taxpayer elects 
                        not to have this clause apply, any 
                        amount required to be included in gross 
                        income for any taxable year beginning 
                        in 2010 by reason of this paragraph 
                        shall be so included ratably over the 
                        2-taxable-year period beginning with 
                        the first taxable year beginning in 
                        2011.''.
            (2) Conforming amendments.--
                    (A) Clause (i) of section 408A(d)(3)(E) is 
                amended to read as follows:
                            ``(i) Acceleration of inclusion.--
                                    ``(I) In general.--The 
                                amount otherwise required to be 
                                included in gross income for 
                                any taxable year beginning in 
                                2010 or the first taxable year 
                                in the 2-year period under 
                                subparagraph (A)(iii) shall be 
                                increased by the aggregate 
                                distributions from Roth IRAs 
                                for such taxable year which are 
                                allocable under paragraph (4) 
                                to the portion of such 
                                qualified rollover contribution 
                                required to be included in 
                                gross income under subparagraph 
                                (A)(i).
                                    ``(II) Limitation on 
                                aggregate amount included.--The 
                                amount required to be included 
                                in gross income for any taxable 
                                year under subparagraph 
                                (A)(iii) shall not exceed the 
                                aggregate amount required to be 
                                included in gross income under 
                                subparagraph (A)(iii) for all 
                                taxable years in the 2-year 
                                period (without regard to 
                                subclause (I)) reduced by 
                                amounts included for all 
                                preceding taxable years.''.
                    (B) The heading for section 408A(d)(3)(E) 
                is amended by striking ``4-year'' and inserting 
                ``2-year''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2009.

SEC. 513. REPEAL OF FSC/ETI BINDING CONTRACT RELIEF.

    (a) FSC Provisions.--Paragraph (1) of section 5(c) of the 
FSC Repeal and Extraterritorial Income Exclusion Act of 2000 is 
amended by striking ``which occurs--'' and all that follows and 
inserting ``which occurs before January 1, 2002.''.
    (b) ETI Provisions.--Section 101 of the American Jobs 
Creation Act of 2004 is amended by striking subsection (f).
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 514. ONLY WAGES ATTRIBUTABLE TO DOMESTIC PRODUCTION TAKEN INTO 
                    ACCOUNT IN DETERMINING DEDUCTION FOR DOMESTIC 
                    PRODUCTION.

    (a) In General.--Paragraph (2) of section 199(b) (relating 
to W-2 wages) is amended to read as follows:
            ``(2) W-2 wages.--For purposes of this section--
                    ``(A) In general.--The term `W-2 wages' 
                means, with respect to any person for any 
                taxable year of such person, the sum of the 
                amounts described in paragraphs (3) and (8) of 
                section 6051(a) paid by such person with 
                respect to employment of employees by such 
                person during the calendar year ending during 
                such taxable year.
                    ``(B) Limitation to wages attributable to 
                domestic production.--Such term shall not 
                include any amount which is not properly 
                allocable to domestic production gross receipts 
                for purposes of subsection (c)(1).
                    ``(C) Return requirement.--Such term shall 
                not include any amount which is not properly 
                included in a return filed with the Social 
                Security Administration on or before the 60th 
                day after the due date (including extensions) 
                for such return.''.
    (b) Simplification of Rules for Determining W-2 Wages of 
Partners and S Corporation Shareholders.--
            (1) In general.--Clause (iii) of section 
        199(d)(1)(A) is amended to read as follows:
                            ``(iii) each partner or shareholder 
                        shall be treated for purposes of 
                        subsection (b) as having W-2 wages for 
                        the taxable year in an amount equal to 
                        such person's allocable share of the W-
                        2 wages of the partnership or S 
                        corporation for the taxable year (as 
                        determined under regulations prescribed 
                        by the Secretary).''.
            (2) Conforming amendment.--Paragraph (2) of section 
        199(a) is amended by striking ``and subsection 
        (d)(1)''.
    (c) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after the date of the 
enactment of this Act.

SEC. 515. MODIFICATION OF EXCLUSION FOR CITIZENS LIVING ABROAD.

    (a) Inflation Adjustment of Foreign Earned Income 
Limitation.--Clause (ii) of section 911(b)(2)(D) (relating to 
inflation adjustment) is amended--
            (1) by striking ``2007'' and inserting ``2005'', 
        and
            (2) by striking ``2006'' in subclause (II) and 
        inserting ``2004''.
    (b) Modification of Housing Cost Amount.--
            (1) Modification of housing cost floor.--Clause (i) 
        of section 911(c)(1)(B) is amended to read as follows:
                            ``(i) 16 percent of the amount 
                        (computed on a daily basis) in effect 
                        under subsection (b)(2)(D) for the 
                        calendar year in which such taxable 
                        year begins, multiplied by''.
            (2) Maximum amount of exclusion.--
                    (A) In general.--Subparagraph (A) of 
                section 911(c)(1) is amended by inserting ``to 
                the extent such expenses do not exceed the 
                amount determined under paragraph (2)'' after 
                ``the taxable year''.
                    (B) Limitation.--Subsection (c) of section 
                911 is amended by redesignating paragraphs (2) 
                and (3) as paragraphs (3) and (4), 
                respectively, and by inserting after paragraph 
                (1) the following new paragraph:
            ``(2) Limitation.--
                    ``(A) In general.--The amount determined 
                under this paragraph is an amount equal to the 
                product of--
                            ``(i) 30 percent (adjusted as may 
                        be provided under subparagraph (B)) of 
                        the amount (computed on a daily basis) 
                        in effect under subsection (b)(2)(D) 
                        for the calendar year in which the 
                        taxable year of the individual begins, 
                        multiplied by
                            ``(ii) the number of days of such 
                        taxable year within the applicable 
                        period described in subparagraph (A) or 
                        (B) of subsection (d)(1).
                    ``(B) Regulations.--The Secretary may issue 
                regulations or other guidance providing for the 
                adjustment of the percentage under subparagraph 
                (A)(i) on the basis of geographic differences 
                in housing costs relative to housing costs in 
                the United States.''.
                    (C) Conforming amendments.--
                            (i) Section 911(d)(4) is amended by 
                        striking ``and (c)(1)(B)(ii)'' and 
                        inserting ``, (c)(1)(B)(ii), and 
                        (c)(2)(A)(ii)''.
                            (ii) Section 911(d)(7) is amended 
                        by striking ``subsection (c)(3)'' and 
                        inserting ``subsection (c)(4)''.
    (c) Rates of Tax Applicable to Nonexcluded Income.--Section 
911 (relating to exclusion of certain income of citizens and 
residents of the United States living abroad) is amended by 
redesignating subsection (f) as subsection (g) and by inserting 
after subsection (e) the following new subsection:
    ``(f) Determination of Tax Liability on Nonexcluded 
Amounts.--For purposes of this chapter, if any amount is 
excluded from the gross income of a taxpayer under subsection 
(a) for any taxable year, then, notwithstanding section 1 or 
55--
            ``(1) the tax imposed by section 1 on the taxpayer 
        for such taxable year shall be equal to the excess (if 
        any) of--
                    ``(A) the tax which would be imposed by 
                section 1 for the taxable year if the 
                taxpayer's taxable income were increased by the 
                amount excluded under subsection (a) for the 
                taxable year, over
                    ``(B) the tax which would be imposed by 
                section 1 for the taxable year if the 
                taxpayer's taxable income were equal to the 
                amount excluded under subsection (a) for the 
                taxable year, and
            ``(2) the tentative minimum tax under section 55 
        for such taxable year shall be equal to the excess (if 
        any) of--
                    ``(A) the amount which would be such 
                tentative minimum tax for the taxable year if 
                the taxpayer's taxable excess were increased by 
                the amount excluded under subsection (a) for 
                the taxable year, over
                    ``(B) the amount which would be such 
                tentative minimum tax for the taxable year if 
                the taxpayer's taxable excess were equal to the 
                amount excluded under subsection (a) for the 
                taxable year.
For purposes of this subsection, the amount excluded under 
subsection (a) shall be reduced by the aggregate amount of any 
deductions or exclusions disallowed under subsection (d)(6) 
with respect to such excluded amount.''.
    (d) Effective Date.--The amendments made by this section 
shall apply to taxable years beginning after December 31, 2005.

SEC. 516. TAX INVOLVEMENT OF ACCOMMODATION PARTIES IN TAX SHELTER 
                    TRANSACTIONS.

    (a) Imposition of Excise Tax.--
            (1) In general.--Chapter 42 (relating to private 
        foundations and certain other tax-exempt organizations) 
        is amended by adding at the end the following new 
        subchapter:


                ``Subchapter F--Tax Shelter Transactions


``Sec. 4965. Excise tax on certain tax-exempt entities entering into 
          prohibited tax shelter transactions.

``SEC. 4965. EXCISE TAX ON CERTAIN TAX-EXEMPT ENTITIES ENTERING INTO 
                    PROHIBITED TAX SHELTER TRANSACTIONS.

    ``(a) Being a Party to and Approval of Prohibited 
Transactions.--
            ``(1) Tax-exempt entity.--
                    ``(A) In general.--If a transaction is a 
                prohibited tax shelter transaction at the time 
                any tax-exempt entity described in paragraph 
                (1), (2), or (3) of subsection (c) becomes a 
                party to the transaction, such entity shall pay 
                a tax for the taxable year in which the entity 
                becomes such a party and any subsequent taxable 
                year in the amount determined under subsection 
                (b)(1).
                    ``(B) Post-transaction determination.--If 
                any tax-exempt entity described in paragraph 
                (1), (2), or (3) of subsection (c) is a party 
                to a subsequently listed transaction at any 
                time during a taxable year, such entity shall 
                pay a tax for such taxable year in the amount 
                determined under subsection (b)(1).
            ``(2) Entity manager.--If any entity manager of a 
        tax-exempt entity approves such entity as (or otherwise 
        causes such entity to be) a party to a prohibited tax 
        shelter transaction at any time during the taxable year 
        and knows or has reason to know that the transaction is 
        a prohibited tax shelter transaction, such manager 
        shall pay a tax for such taxable year in the amount 
        determined under subsection (b)(2).
    ``(b) Amount of Tax.--
            ``(1) Entity.--In the case of a tax-exempt entity--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the amount of the tax imposed 
                under subsection (a)(1) with respect to any 
                transaction for a taxable year shall be an 
                amount equal to the product of the highest rate 
                of tax under section 11, and the greater of--
                            ``(i) the entity's net income 
                        (after taking into account any tax 
                        imposed by this subtitle (other than by 
                        this section) with respect to such 
                        transaction) for such taxable year 
                        which--
                                    ``(I) in the case of a 
                                prohibited tax shelter 
                                transaction (other than a 
                                subsequently listed 
                                transaction), is attributable 
                                to such transaction, or
                                    ``(II) in the case of a 
                                subsequently listed 
                                transaction, is attributable to 
                                such transaction and which is 
                                properly allocable to the 
                                period beginning on the later 
                                of the date such transaction is 
                                identified by guidance as a 
                                listed transaction by the 
                                Secretary or the first day of 
                                the taxable year, or
                            ``(ii) 75 percent of the proceeds 
                        received by the entity for the taxable 
                        year which--
                                    ``(I) in the case of a 
                                prohibited tax shelter 
                                transaction (other than a 
                                subsequently listed 
                                transaction), are attributable 
                                to such transaction, or
                                    ``(II) in the case of a 
                                subsequently listed 
                                transaction, are attributable 
                                to such transaction and which 
                                are properly allocable to the 
                                period beginning on the later 
                                of the date such transaction is 
                                identified by guidance as a 
                                listed transaction by the 
                                Secretary or the first day of 
                                the taxable year.
                    ``(B) Increase in tax for certain knowing 
                transactions.--In the case of a tax-exempt 
                entity which knew, or had reason to know, a 
                transaction was a prohibited tax shelter 
                transaction at the time the entity became a 
                party to the transaction, the amount of the tax 
                imposed under subsection (a)(1)(A) with respect 
                to any transaction for a taxable year shall be 
                the greater of--
                            ``(i) 100 percent of the entity's 
                        net income (after taking into account 
                        any tax imposed by this subtitle (other 
                        than by this section) with respect to 
                        the prohibited tax shelter transaction) 
                        for such taxable year which is 
                        attributable to the prohibited tax 
                        shelter transaction, or
                            ``(ii) 75 percent of the proceeds 
                        received by the entity for the taxable 
                        year which are attributable to the 
                        prohibited tax shelter transaction.
                This subparagraph shall not apply to any 
                prohibited tax shelter transaction to which a 
                tax-exempt entity became a party on or before 
                the date of the enactment of this section.
            ``(2) Entity manager.--In the case of each entity 
        manager, the amount of the tax imposed under subsection 
        (a)(2) shall be $20,000 for each approval (or other act 
        causing participation) described in subsection (a)(2).
    ``(c) Tax-Exempt Entity.--For purposes of this section, the 
term `tax-exempt entity' means an entity which is--
            ``(1) described in section 501(c) or 501(d),
            ``(2) described in section 170(c) (other than the 
        United States),
            ``(3) an Indian tribal government (within the 
        meaning of section 7701(a)(40)),
            ``(4) described in paragraph (1), (2), or (3) of 
        section 4979(e),
            ``(5) a program described in section 529,
            ``(6) an eligible deferred compensation plan 
        described in section 457(b) which is maintained by an 
        employer described in section 4457(e)(1)(A), or
            ``(7) an arrangement described in section 4973(a).
    ``(d) Entity Manager.--For purposes of this section, the 
term `entity manager' means--
            ``(1) in the case of an entity described in 
        paragraph (1), (2), or (3) of subsection (c)--
                    ``(A) the person with authority or 
                responsibility similar to that exercised by an 
                officer, director, or trustee of an 
                organization, and
                    ``(B) with respect to any act, the person 
                having authority or responsibility with respect 
                to such act, and
            ``(2) in the case of an entity described in 
        paragraph (4), (5), (6), or (7) of subsection (c), the 
        person who approves or otherwise causes the entity to 
        be a party to the prohibited tax shelter transaction.
    ``(e) Prohibited Tax Shelter Transaction; Subsequently 
Listed Transaction.--For purposes of this section--
            ``(1) Prohibited tax shelter transaction.--
                    ``(A) In general.--The term `prohibited tax 
                shelter transaction' means--
                            ``(i) any listed transaction, and
                            ``(ii) any prohibited reportable 
                        transaction.
                    ``(B) Listed transaction.--The term `listed 
                transaction' has the meaning given such term by 
                section 6707A(c)(2).
                    ``(C) Prohibited reportable transaction.--
                The term `prohibited reportable transaction' 
                means any confidential transaction or any 
                transaction with contractual protection (as 
                defined under regulations prescribed by the 
                Secretary) which is a reportable transaction 
                (as defined in section 6707A(c)(1)).
            ``(2) Subsequently listed transaction.--The term 
        `subsequently listed transaction' means any transaction 
        to which a tax-exempt entity is a party and which is 
        determined by the Secretary to be a listed transaction 
        at any time after the entity has become a party to the 
        transaction. Such term shall not include a transaction 
        which is a prohibited reportable transaction at the 
        time the entity became a party to the transaction.
    ``(f) Regulatory Authority.--The Secretary is authorized to 
promulgate regulations which provide guidance regarding the 
determination of the allocation of net income or proceeds of a 
tax-exempt entity attributable to a transaction to various 
periods, including before and after the listing of the 
transaction or the date which is 90 days after the date of the 
enactment of this section.
    ``(g) Coordination With Other Taxes and Penalties.--The tax 
imposed by this section is in addition to any other tax, 
addition to tax, or penalty imposed under this title.''.
            (2) Conforming amendment.--The table of subchapters 
        for chapter 42 is amended by adding at the end the 
        following new item:

               ``Subchapter F. Tax Shelter Transactions.''.

    (b) Disclosure Requirements.--
            (1) Disclosure by entity to the internal revenue 
        service.--
                    (A) In general.--Section 6033(a) (relating 
                to organizations required to file) is amended 
                by redesignating paragraph (2) as paragraph (3) 
                and by inserting after paragraph (1) the 
                following new paragraph:
            ``(2) Being a party to certain reportable 
        transactions.--Every tax-exempt entity described in 
        section 4965(c) shall file (in such form and manner and 
        at such time as determined by the Secretary) a 
        disclosure of--
                    ``(A) such entity's being a party to any 
                prohibited tax shelter transaction (as defined 
                in section 4965(e)), and
                    ``(B) the identity of any other party to 
                such transaction which is known by such tax-
                exempt entity.''.
                    (B) Conforming amendment.--Section 
                6033(a)(1) is amended by striking ``paragraph 
                (2)'' and inserting ``paragraph (3)''.
            (2) Disclosure by other taxpayers to the tax-exempt 
        entity.--Section 6011 (relating to general requirement 
        of return, statement, or list) is amended by 
        redesignating subsection (g) as subsection (h) and by 
        inserting after subsection (f) the following new 
        subsection:
    ``(g) Disclosure of Reportable Transaction to Tax-Exempt 
Entity.--Any taxable party to a prohibited tax shelter 
transaction (as defined in section 4965(e)(1)) shall by 
statement disclose to any tax-exempt entity (as defined in 
section 4965(c)) which is a party to such transaction that such 
transaction is such a prohibited tax shelter transaction.''.
    (c) Penalty for Nondisclosure.--
            (1) In general.--Section 6652(c) (relating to 
        returns by exempt organizations and by certain trusts) 
        is amended by redesignating paragraphs (3) and (4) as 
        paragraphs (4) and (5), respectively, and by inserting 
        after paragraph (2) the following new paragraph:
            ``(3) Disclosure under section 6033(a)(2).--
                    ``(A) Penalty on entities.--In the case of 
                a failure to file a disclosure required under 
                section 6033(a)(2), there shall be paid by the 
                tax-exempt entity (the entity manager in the 
                case of a tax-exempt entity described in 
                paragraph (4), (5), (6), or (7) of section 
                4965(c)) $100 for each day during which such 
                failure continues. The maximum penalty under 
                this subparagraph on failures with respect to 
                any 1 disclosure shall not exceed $50,000.
                    ``(B) Written demand.--
                            ``(i) In general.--The Secretary 
                        may make a written demand on any entity 
                        or manager subject to penalty under 
                        subparagraph (A) specifying therein a 
                        reasonable future date by which the 
                        disclosure shall be filed for purposes 
                        of this subparagraph.
                            ``(ii) Failure to comply with 
                        demand.--If any entity or manager fails 
                        to comply with any demand under clause 
                        (i) on or before the date specified in 
                        such demand, there shall be paid by 
                        such entity or manager failing to so 
                        comply $100 for each day after the 
                        expiration of the time specified in 
                        such demand during which such failure 
                        continues. The maximum penalty imposed 
                        under this subparagraph on all entities 
                        and managers for failures with respect 
                        to any 1 disclosure shall not exceed 
                        $10,000.
                    ``(C) Definitions.--Any term used in this 
                section which is also used in section 4965 
                shall have the meaning given such term under 
                section 4965.''.
            (2) Conforming amendment.--Paragraph (1) of section 
        6652(c) is amended by striking ``6033'' each place it 
        appears in the text and heading thereof and inserting 
        ``6033(a)(1)''.
    (d) Effective Dates.--
            (1) In general.--Except as provided in paragraph 
        (2), the amendments made by this section shall apply to 
        taxable years ending after the date of the enactment of 
        this Act, with respect to transactions before, on, or 
        after such date, except that no tax under section 
        4965(a) of the Internal Revenue Code of 1986 (as added 
        by this section) shall apply with respect to income or 
        proceeds that are properly allocable to any period 
        ending on or before the date which is 90 days after 
        such date of enactment.
            (2) Disclosure.--The amendments made by subsections 
        (b) and (c) shall apply to disclosures the due date for 
        which are after the date of the enactment of this Act.
      And the Senate agree to the same.

                                   William Thomas,
                                   Jim McCrery,
                                   Dave Camp,
                                 Managers on the Part of the House.

                                   Chuck Grassley,
                                   Jon Kyl,
                                Managers on the Part of the Senate.
       JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE

      The managers on the part of the House and the Senate at 
the conference on the disagreeing votes of the two Houses on 
the amendment of the Senate to the bill (H.R. 4297), to provide 
for reconciliation pursuant to section 201(b) of the concurrent 
resolution on the budget for fiscal year 2006, submit the 
following joint statement to the House and the Senate in 
explanation of the effect of the action agreed upon by the 
managers and recommended in the accompanying conference report:
      The Senate amendment struck all of the House bill after 
the enacting clause and inserted a substitute text.
      The House recedes from its disagreement to the amendment 
of the Senate with an amendment that is a substitute for the 
House bill and the Senate amendment. The differences between 
the House bill, the Senate amendment, and the substitute agreed 
to in conference are noted below, except for clerical 
corrections, conforming changes made necessary by agreements 
reached by the conferees, and minor drafting and clarifying 
changes.

                                CONTENTS

                                                                   Page
TITLE I--EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS........    36
    A. Allowance of Nonrefundable Personal Credits Against 
      Regular and Alternative Minimum Tax Liability (sec. 101 of 
      the House bill, sec. 107 of the Senate amendment, and sec. 
      26 of the Code)............................................    36
    B. Tax Incentives for Business Activities on Indian 
      Reservations...............................................    37
        1. Indian employment tax credit (sec. 102(a) of the House 
          bill, sec. 115 of the Senate amendment, and sec. 45A of 
          the Code)..............................................    37
        2. Accelerated depreciation for business property on 
          Indian reservations (sec. 102(b) of the House bill, 
          sec. 116 of the Senate amendment, and sec. 168(j) of 
          the Code)..............................................    39
    C. Work Opportunity Tax Credit and Welfare-To-Work Tax Credit 
      (secs. 103 and 104 of the House bill, sec. 109 of the 
      Senate amendment and secs. 51 and 51A of the Code).........    40
    D. Deduction for Corporate Donations of Computer Technology 
      and Equipment (sec. 105 of the House bill, sec. 111 of the 
      Senate amendment and sec. 170 of the Code).................    45
    E. Availability of Archer Medical Savings Accounts (sec. 106 
      of the House bill and sec. 220 of the Code)................    46
    F. Fifteen-Year Straight-Line Cost Recovery for Qualified 
      Leasehold Improvements and Qualified Restaurant 
      Improvements (sec. 107 and sec. 108 of the House bill, sec. 
      117 of the Senate amendment, and sec. 168 of the Code).....    48
    G. Taxable Income Limit on Percentage Depletion for Oil and 
      Natural Gas Produced from Marginal Properties (sec. 109 of 
      the House bill and sec. 613A(c)(6)(H) of the Code).........    50
    H. Tax Incentives for Investment in the District of Columbia 
      (sec. 110 of the House bill, sec. 114 of the Senate 
      amendment and secs. 1400, 1400A, 1400B, and 1400C of the 
      Code)......................................................    51
    I. Possession Tax Credit with Respect to American Samoa (sec. 
      111 of the House bill and sec. 936 of the Code)............    54
    J. Parity in the Application of Certain Limits to Mental 
      Health Benefits (sec. 112 of the House bill and sec. 9812 
      of the Code)...............................................    56
    K. Research Credit (sec. 113 of the House bill, sec. 108 of 
      the Senate amendment, and sec. 41 of the Code).............    57
    L. Qualified Zone Academy Bonds (sec. 114 of the House bill, 
      sec. 110 of the Senate amendment and sec. 1397E of the 
      Code)......................................................    62
    M. Above-the-Line Deduction for Certain Expenses of 
      Elementary and Secondary School Teachers (sec. 115 of the 
      House bill, sec. 112 of the Senate amendment and sec. 62 of 
      the Code)..................................................    64
    N. Above-the-Line Deduction for Higher Education Expenses 
      (sec. 116 of the House bill, sec. 103 of the Senate 
      amendment and sec. 222 of the Code)........................    65
    O. Deduction of State and Local General Sales Taxes (sec. 117 
      of the House bill, sec. 105 of the Senate amendment, and 
      sec. 164 of the Code)......................................    66
    P. Extension and Expansion to Petroleum Products of Expensing 
      for Environmental Remediation Costs (sec. 201 of the House 
      bill, sec. 113 of the Senate amendment, and sec. 198 of the 
      Code)......................................................    68
    Q. Controlled Foreign Corporations...........................    70
        1. Subpart F exception for active financing (sec. 202(a) 
          of the House bill and secs. 953 and 954 of the Code)...    70
        2. Look-through treatment of payments between related 
          controlled foreign corporations under foreign personal 
          holding company income rules (sec. 202(b) of the House 
          bill and sec. 954(c) of the Code)......................    73
    R. Reduced Rates for Capital Gains and Dividends of 
      Individuals (sec. 203 of the House bill and sec. 1(h) of 
      the Code)..................................................    74
    S. Credit for Elective Deferrals and IRA Contributions (the 
      ``Saver's Credit'') (sec. 204 of the House bill, sec. 102 
      of the Senate amendment, and sec. 25B of the Code).........    77
    T. Extension of Increased Expensing for Small Business (sec. 
      205 of the House bill, sec. 101 of the Senate amendment, 
      and sec. 179 of the Code)..................................    79
    U. Extend and Increase Alternative Minimum Tax Exemption 
      Amount for Individuals (sec. 106 of the Senate amendment 
      and sec. 55 of the Code)...................................    80
    V. Extension and Modification of the New Markets Tax Credit 
      (sec. 204 of the Senate amendment and sec. 45D of the Code)    81
    W. Phasedown of Credit for Electric Vehicles (sec. 118 of the 
      Senate amendment and sec. 30 of the Code)..................    83
    X. Application of EGTRRA Sunset to Title II of the Senate 
      Amendment (sec. 231 of the Senate amendment)...............    84
TITLE II--OTHER PROVISIONS.......................................    85
    A. Taxation of Certain Settlement Funds (sec. 301 of the 
      House bill and sec. 468B of the Code)......................    85
    B. Modifications to Rules Relating to Taxation of 
      Distributions of Stock and Securities of a Controlled 
      Corporation (sec. 302 of the House bill, sec. 467 of the 
      Senate amendment and sec. 355 of the Code).................    86
    C. Qualified Veteran's Mortgage Bonds (sec. 303 of the House 
      bill and sec. 143 of the Code).............................    91
    D. Capital Gains Treatment for Certain Self-Created Musical 
      Works (sec. 304 of the House bill and sec. 1221 of the 
      Code)......................................................    93
    E. Decrease Minimum Vessel Tonnage Limit to 6,000 Deadweight 
      Tons (sec. 305 of the House bill and sec. 1355 of the Code)    94
    F. Modification of Special Arbitrage Rule for Certain Funds 
      (sec. 306 of the House bill and sec. 307 of the Senate 
      amendment).................................................    96
    G. Amortization of Expenses Incurred in Creating or Acquiring 
      Music or Music Copyrights (sec. 468 of the Senate amendment 
      and secs. 167(g) and 263A of the Code).....................    97
TITLE III--CHARITABLE PROVISIONS.................................    99
    A. Charitable Giving Incentives..............................    99
        1. Charitable deduction for nonitemizers; floor on 
          deductions for itemizers (sec. 201 of the Senate 
          amendment and secs. 63 and 170 of the Code)............    99
        2. Tax-free distributions from individual retirement 
          plans for charitable purposes (sec. 202 of the Senate 
          amendment and secs. 408, 6034, 6104, and 6652 of the 
          Code)..................................................   101
        3. Charitable deduction for contributions of food 
          inventory (sec. 203 of the Senate amendment and sec. 
          170 of the Code).......................................   109
        4. Basis adjustment to stock of S corporation 
          contributing property (sec. 204 of the Senate amendment 
          and sec. 1367 of the Code).............................   111
        5. Charitable deduction for contributions of book 
          inventory (sec. 205 of the Senate amendment and sec. 
          170 of the Code).......................................   112
        6. Modify tax treatment of certain payments to 
          controlling exempt organizations and public disclosure 
          of information relating to UBIT (sec. 206 of the Senate 
          amendment and secs. 512, 6011, 6104, and new sec. 6720C 
          of the Code)...........................................   114
        7. Encourage contributions of real property made for 
          conservation purposes (sec. 207 of the Senate amendment 
          and sec. 170 of the Code)..............................   117
        8. Enhanced deduction for charitable contributions of 
          literary, musical, artistic, and scholarly compositions 
          (sec. 208 of the Senate amendment and sec. 170 of the 
          Code)..................................................   120
        9. Mileage reimbursements to charitable volunteers 
          excluded from gross income (sec. 209 of the Senate 
          amendment and new sec. 139B of the Code)...............   122
        10. Alternative percentage limitation for corporate 
          charitable contributions to the mathematics and science 
          partnership program (sec. 210 of the Senate amendment 
          and sec. 170 of the Code)..............................   124
    B. Reforming Charitable Organizations........................   125
        1. Tax involvement of accommodation parties in tax-
          shelter transactions (sec. 211 of the Senate amendment 
          and secs. 6011, 6033, 6652, and new sec. 4965 of the 
          Code)..................................................   125
        2. Apply an excise tax to acquisitions of interests in 
          insurance contracts in which certain exempt 
          organizations hold interests (sec. 212 of the Senate 
          amendment and new secs. 4966 and 6050V of the Code)....   132
        3. Increase the amounts of excise taxes imposed on public 
          charities, social welfare organizations, and private 
          foundations (sec. 213 of the Senate amendment and secs. 
          4941, 4942, 4943, 4944, 4945, and 4958 of the Code)....   138
        4. Reform rules for charitable contributions of easements 
          on buildings in registered historic districts (sec. 214 
          of the Senate amendment and sec. 170 of the Code)......   142
        5. Reform rules relating to charitable contributions of 
          taxidermy and recapture tax benefit on property not 
          used for an exempt use (secs. 215 and 216 of the Senate 
          amendment and secs. 170, 6050L, and new sec. 6720B of 
          the Code)..............................................   146
        6. Limit charitable deduction for contributions of 
          clothing and household items and modify recordkeeping 
          and substantiation requirements for certain charitable 
          contributions (secs. 217 and 218 of the Senate 
          amendment and sec. 170 of the Code)....................   150
        7. Contributions of fractional interests in tangible 
          personal property (sec. 219 of the Senate amendment and 
          sec. 170 of the Code)..................................   154
        8. Provisions relating to substantial and gross 
          overstatement of valuations of property (sec. 220 of 
          the Senate amendment and secs. 6662 and 6664 of the 
          Code)..................................................   156
        9. Establish additional exemption standards for credit 
          counseling organizations (sec. 221 of the Senate 
          amendment and secs. 501 and 513 of the Code)...........   159
        10. Expand the base of the tax on private foundation net 
          investment income (sec. 222 of the Senate amendment and 
          sec. 4940 of the Code).................................   165
        11. Definition of convention or association of churches 
          (sec. 223 of the Senate amendment and sec. 7701 of the 
          Code)..................................................   169
        12. Notification requirement for exempt entities not 
          currently required to file an annual information return 
          (sec. 224 of the Senate amendment and secs. 6033, 6104, 
          6652, and 7428 of the Code)............................   170
        13. Disclosure to state officials of proposed actions 
          related to section 501(c) organizations (sec. 225 of 
          the Senate amendment and secs. 6103, 6104, 7213, 7213A, 
          and 7431 of the Code)..................................   172
        14. Improve accountability of donor advised funds (secs. 
          231 through 234 of the Senate amendment and secs. 170 
          and 4958 and new secs. 4967, 4968, and 4969 of the 
          Code)..................................................   174
        15. Improve accountability of supporting organizations 
          (secs. 241-246 of the Senate amendment and secs. 509, 
          4942, 4943, 4945, 4958, and 6033 and new sec. 4959 of 
          the Code)..............................................   187
TITLE IV--MISCELLANEOUS PROVISIONS...............................   197
    A. Restructure New York Liberty Zone Tax Incentives (sec. 301 
      of the Senate amendment)...................................   197
    B. Modification of S Corporation Passive Investment Income 
      Rules (sec. 302 of the Senate amendment and secs. 1362 and 
      1375 of the Code)..........................................   202
    C. Capital Expenditure Limitation For Qualified Small Issue 
      Bonds (sec. 303 of the Senate amendment and sec. 144 of the 
      Code)......................................................   203
    D. Premiums for Mortgage Insurance (sec. 304 of the Senate 
      amendment and secs. 163(h) and 6050H of the Code)..........   204
    E. Sense of the Senate on Use of No-Bid Contracting by 
      Federal Emergency Management Agency (sec. 305 of the Senate 
      amendment).................................................   205
    F. Sense of Congress Regarding Doha Round (sec. 306 of the 
      Senate amendment)..........................................   205
    G. Treatment of Certain Stock Option Plans Under Nonqualified 
      Deferred Compensation Rules (sec. 308 of the Senate 
      amendment).................................................   206
    H. Sense of the Senate Regarding the Dedication of Excess 
      Funds (sec. 309 of the Senate amendment)...................   207
    I. Modification of Treatment of Loans to Qualified Continuing 
      Care Facilities (sec. 310 of the Senate amendment and sec. 
      7872(g) of the Code).......................................   208
    J. Exclusion of Gain on Sale of a Principal Residence by a 
      Member of the Intelligence Community (sec. 311 of the 
      Senate amendment and sec. 121 of the Code).................   210
    K. Sense of the Senate Regarding the Permanent Extension of 
      EGTRRA and JGTRRA Provisions Relating to the Child Tax 
      Credit (sec. 312 of the Senate amendment)..................   212
    L. Partial Expensing for Advanced Mine Safety Equipment (sec. 
      313 of the Senate amendment)...............................   212
    M. Mine Rescue Team Training Credit (sec. 314 of the Senate 
      amendment and new sec. 45N of the Code)....................   214
    N. Funding for Veterans Health Care and Disability 
      Compensation and Hospital Infrastructure for Veterans (sec. 
      315 of the Senate Amendment)...............................   215
    O. Sense of the Senate Regarding Protecting Middle-Class 
      Families From the Alternative Minimum Tax (sec. 316 of the 
      Senate amendment)..........................................   215
TITLE V--REVENUE OFFSET PROVISIONS...............................   216
    A. Provisions Designed to Curtail Tax Shelters...............   216
        1. Understatement of taxpayer's liability by income tax 
          return preparer (sec. 401 of the Senate amendment and 
          sec. 6694 of the Code).................................   216
        2. Frivolous tax submissions (sec. 402 of the Senate 
          amendment and sec. 6702 of the Code)...................   217
        3. Penalty for promoting abusive tax shelters (sec. 403 
          of the Senate amendment and sec. 6700 of the Code).....   218
        4. Penalty for aiding and abetting the understatement of 
          tax liability (sec. 404 of the Senate amendment and 
          sec. 6701 of the Code).................................   219
    B. Economic Substance Doctrine...............................   220
        1. Clarification of the economic substance doctrine (sec. 
          411 of the Senate amendment)...........................   220
        2. Penalty for understatements attributable to 
          transactions lacking economic substance, etc. (sec. 412 
          of the Senate amendment)...............................   225
        3. Denial of deduction for interest on underpayments 
          attributable to noneconomic substance transactions 
          (sec. 413 of the Senate amendment and sec. 163(m) of 
          the Code)..............................................   231
    C. Improvements in Efficiency and Safeguards in Internal 
      Revenue Service Collections................................   232
        1. Waiver of user fee for installment agreements using 
          automated withdrawals (sec. 421 of the Senate amendment 
          and sec. 6159 of the Code).............................   232
        2. Termination of installment agreements (sec. 422 of the 
          Senate amendment and sec. 6159 of the Code)............   233
        3. Partial payments required with submissions of offers-
          in-compromise (sec. 423 of the Senate amendment and 
          sec. 7122 of the Code).................................   234
    D. Penalties and Fines.......................................   235
        1. Increase in criminal monetary penalty limitation for 
          the underpayment or overpayment of tax due to fraud 
          (sec. 431 of the Senate amendment and secs. 7201, 7203, 
          and 7206 of the Code)..................................   235
        2. Doubling of certain penalties, fines, and interest on 
          underpayments related to certain offshore financial 
          arrangements (sec. 432 of the Senate amendment)........   237
        3. Denial of deduction for certain fines, penalties, and 
          other amounts (sec. 433 of the Senate Amendment and 
          sec. 162 of the Code)..................................   241
        4. Denial of deduction for punitive damages (sec. 434 of 
          the Senate amendment and sec. 162 of the Code).........   244
        5. Increase in penalty for bad checks and money orders 
          (sec. 435 of the Senate amendment and sec. 6657 of the 
          Code)..................................................   245
    E. Provisions to Discourage Expatriation.....................   245
        1. Tax treatment of inverted corporate entities (sec. 441 
          of the Senate amendment and sec. 7874 of the Code).....   245
        2. Revision of tax rules on expatriation of individuals 
          (sec. 442 of the Senate amendment and secs. 102, 877, 
          2107, 2501, 7701, and 6039G of the Code)...............   250
    F. Miscellaneous Provisions..................................   261
        1. Treatment of contingent payment convertible debt 
          instruments (sec. 451 of the Senate amendment and sec. 
          1275 of the Code)......................................   261
        2. Grant Treasury regulatory authority to address foreign 
          tax credit transactions involving inappropriate 
          separation of foreign taxes from related foreign income 
          (sec. 452 of the Senate amendment and sec. 901 of the 
          Code)..................................................   263
        3. Modifications of effective dates of leasing provisions 
          of the American Jobs Creation Act of 2004 (sec. 453 of 
          the Senate amendment and sec. 470 of the Code).........   264
        4. Application of earnings stripping rules to partners 
          which are corporations (sec. 454 of the Senate 
          amendment and sec. 163 of the Code)....................   265
        5. Limitation on employer deduction for certain 
          entertainment expenses (sec. 455 of the Senate 
          amendment and sec. 274(e) of the Code).................   266
        6. Increase in age of minor children whose unearned 
          income is taxed as if parent's income (sec. 456 of the 
          Senate amendment and sec. 1(g) of the Code)............   268
        7. Impose loan and redemption requirements on pooled 
          financing bonds (sec. 457 of the Senate amendment and 
          sec. 149 of the Code)..................................   272
        8. Amend information reporting requirements to include 
          interest on tax-exempt bonds (sec. 458 of the Senate 
          amendment and sec. 6049 of the Code)...................   275
        9. Modification of credit for fuel from a non-
          conventional source (sec. 459 of the Senate amendment 
          and sec. 45K of the Code)..............................   276
        10. Modification of individual estimated tax safe harbor 
          (sec. 460 of the Senate Amendment and sec. 6654 of the 
          Code)..................................................   278
        11. Revaluation of LIFO inventories of large integrated 
          oil companies (sec. 461 of the Senate amendment).......   279
        12. Amortization of geological and geophysical 
          expenditures (sec. 462 of the Senate amendment and sec. 
          167(h) of the Code)....................................   280
        13. Valuation of employee personal use of noncommercial 
          aircraft (sec. 463 of the Senate amendment)............   281
        14. Application of Foreign Investment in Real Property 
          Tax Act (``FIRPTA'') to Regulated Investment Companies 
          (``RICs'') (sec. 464 of the Senate amendment and sec. 
          897(h)(4) of the Code).................................   282
        15. Treatment of REIT and RIC distributions attributable 
          to FIRPTA gains (secs. 465 and 466 of the Senate 
          amendment and secs. 897, 852, and 871 of the Code).....   285
        16. Credit to holders of rural renaissance bonds (sec. 
          469 of the Senate amendment)...........................   291
        17. Modify foreign tax credit rules for large integrated 
          oil companies which are dual capacity taxpayers (sec. 
          470 of the Senate amendment and sec. 901 of the Code)..   294
        18. Disability preference program for tax collection 
          contracts (sec. 471 of the Senate amendment)...........   296
TITLE VI--SUNSET OF CERTAIN PROVISIONS AND AMENDMENT (sec. 501 of 
  the Senate amendment)..........................................   297
TITLE VII--FUNDING FOR MILITARY OPERATION (secs. 601 and 602 of 
  the Senate amendment)..........................................   298
TITLE VIII--OTHER REVENUE OFFSET PROVISIONS......................   299
    A. Imposition of Withholding on Certain Payments Made by 
      Government Entities (sec. 3402 of the Code)................   299
    B. Eliminate Income Limitations on Roth IRA Conversions (sec. 
      408A of the Code)..........................................   301
    C. Repeal of FSC/ETI Binding Contract Relief.................   304
    D. Modification of Wage Limit for Purposes of Domestic 
      Production Activities Deduction (sec. 199 of the Code).....   306
    E. Modification of Exclusion for Citizens Living Abroad (sec. 
      911 of the Code)...........................................   307
TITLE IX--CORPORATE ESTIMATED TAX PROVISIONS.....................   310
TITLE X--COMPLEXITY ANALYSIS.....................................   310
TITLE XI--UNFUNDED MANDATES......................................   312

       TITLE I--EXTENSION AND MODIFICATION OF CERTAIN PROVISIONS


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


(Sec. 101 of the House bill, sec. 107 of the Senate amendment, and sec. 
        26 of the Code)

                              PRESENT LAW

      Present law provides for certain nonrefundable personal 
tax credits (i.e., the dependent care credit, the credit for 
the elderly and disabled, the adoption credit, the child tax 
credit, 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). The Energy Tax Incentives Act of 
2005 enacted, effective for 2006, nonrefundable tax credits for 
alternative motor vehicles, and alternative motor vehicle 
refueling property.\1\
---------------------------------------------------------------------------
    \1\ The portion of these credits relating to personal use property 
is subject to the same tax liability limitation as the nonrefundable 
personal tax credits (other than the adoption credit, child credit, and 
saver's 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.

                               HOUSE BILL

      The House bill 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.

                            SENATE AMENDMENT

      The Senate amendment extends for two years 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, 2007).
      The provision also applies to the personal credits for 
alternative motor vehicles, and alternative motor vehicle 
refueling property.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill 
provision.

    B. Tax Incentives for Business Activities on Indian Reservations

1. Indian employment tax credit (Sec. 102(a) of the House bill, sec. 
        115 of the Senate amendment, and sec. 45A of the Code)

                              PRESENT LAW

      In general, a credit against income tax liability is 
allowed to employers for the first $20,000 of qualified wages 
and qualified employee health insurance costs paid or incurred 
by the employer with respect to certain employees (sec. 
45A).\2\ 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.
---------------------------------------------------------------------------
    \2\ All section references are to the Internal Revenue Code of 
1986, unless otherwise indicated.
---------------------------------------------------------------------------
      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.

                               HOUSE BILL

      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.

                            SENATE AMENDMENT

      The Senate amendment extends for two years the present-
law employment credit provision (through taxable years 
beginning on or before December 31, 2007).
      Effective date.--Same as the House bill provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.
2. Accelerated depreciation for business property on Indian 
        reservations (Sec. 102(b) of the House bill, sec. 116 of the 
        Senate amendment, 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 CFR. 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.

                               HOUSE BILL

      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.

                            SENATE AMENDMENT

      The Senate amendment extends for two years the present-
law incentive relating to depreciation of qualified Indian 
reservation property (to apply to property placed in service 
through December 31, 2007).
      Effective date.--The Senate amendment is the same as the 
House bill.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.

     C. Work Opportunity Tax Credit and Welfare-To-Work Tax Credit

(Secs. 103 and 104 of the House bill, sec. 109 of the Senate amendment 
        and secs. 51 and 51A 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 18 but not aged 
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 such 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 18 but not 
aged 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.

Welfare-to-work tax credit
            Targeted group eligible for the credit
      The welfare-to-work tax credit is available on an 
elective basis to employers of qualified long-term family 
assistance recipients. Qualified long-term family assistance 
recipients are: (1) members of a family that has received 
family assistance for at least 18 consecutive months ending on 
the hiring date; (2) members of a family that has received such 
family assistance for a total of at least 18 months (whether or 
not consecutive) after August 5, 1997 (the date of enactment of 
the welfare-to-work tax credit) if they are hired within 2 
years after the date that the 18-month total is reached; and 
(3) members of a family who are no longer eligible for family 
assistance because of either Federal or State time limits, if 
they are hired within 2 years after the Federal or State time 
limits made the family ineligible for family assistance.

            Qualified wages
      Qualified wages for purposes of the welfare-to-work tax 
credit are defined more broadly than the work opportunity tax 
credit. Unlike the definition of wages for the work opportunity 
tax credit which includes simply cash wages, the definition of 
wages for the welfare-to-work tax credit includes cash wages 
paid to an employee plus amounts paid by the employer for: (1) 
educational assistance excludable under a section 127 program 
(or that would be excludable but for the expiration of sec. 
127); (2) health plan coverage for the employee, but not more 
than the applicable premium defined under section 4980B(f)(4); 
and (3) dependent care assistance excludable under section 129. 
The employer's deduction for wages is reduced by the amount of 
the credit.

            Calculation of the credit
      The welfare-to-work tax credit is available on an 
elective basis to employers of qualified long-term family 
assistance recipients during the first two years of employment. 
The maximum credit is 35 percent of the first $10,000 of 
qualified first-year wages and 50 percent of the first $10,000 
of qualified second-year wages. Qualified first-year wages are 
defined as qualified wages (not in excess of $10,000) 
attributable to service rendered by a member of the targeted 
group during the one-year period beginning with the day the 
individual began work for the employer. Qualified second-year 
wages are defined as qualified wages (not in excess of $10,000) 
attributable to service rendered by a member of the targeted 
group during the one-year period beginning immediately after 
the first year of that individual's employment for the 
employer. The maximum credit is $8,500 per qualified employee.

            Minimum employment period
      No credit is allowed for qualified wages paid to a member 
of the targeted group unless they work at least 400 hours or 
180 days in the first year of employment.

            Coordination of the work opportunity tax credit and the 
                    welfare-to-work tax credit
      An employer cannot claim the work opportunity tax credit 
with respect to wages of any employee on which the employer 
claims the welfare-to-work tax credit.

            Other rules
      The welfare-to-work tax credit incorporates directly or 
by reference many of these other rules contained on the work 
opportunity tax credit.

            Expiration
      The welfare-to-work credit is not available for 
individuals who begin work for an employer after December 31, 
2005.

                               HOUSE BILL

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

Welfare-to-work tax credit
      The House 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.

                            SENATE AMENDMENT

In general
      The Senate amendment combines the work opportunity and 
welfare-to-work tax credits and extends the combined credit for 
one year. The welfare-to-work credit is repealed.

Targeted groups eligible for the combined credit
      The combined credit is available on an elective basis for 
employers hiring individuals from one or more of all nine 
targeted groups. The nine targeted groups are the present-law 
eight groups with the addition of the welfare-to-work credit/
long-term family assistance recipient as the ninth targeted 
group.
      The Senate amendment raises the age limit for the high-
risk youth category to include individuals aged 18 but not aged 
40 on the hiring date. The Senate amendment also renames the 
high-risk youth category to be the designated community 
resident category.
      The Senate amendment repeals the requirement that a 
qualified ex-felon be an individual certified as a member of an 
economically disadvantaged family.
      The Senate amendment raises the age limit for the food 
stamp recipient category to include individuals aged 18 but not 
aged 40 on the hiring date.


Qualified wages
      Qualified first-year wages for the eight work opportunity 
tax credit categories remain capped at $6,000 ($3,000 for 
qualified summer youth employees). No credit is allowed for 
second-year wages. In the case of long-term family assistance 
recipients, the cap is $10,000 for both qualified first-year 
wages and qualified second-year wages. The combined credit 
follows the work opportunity tax credit definition of wages 
which does not include 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. 
For all targeted groups, the employer's deduction for wages is 
reduced by the amount of the credit.

Calculation of the credit
      First-year wages.--For the eight work opportunity tax 
credit categories, 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 for members of any 
of the eight work opportunity tax credit targeted groups 
generally 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 remains $1,200 (40 percent 
of the first $3,000 of qualified first-year wages). For the 
welfare-to-work/long-term family assistance recipients, the 
maximum credit equals $4,000 per employee (40 percent of 
$10,000 of wages).
      Second-year wages.--In the case of long-term family 
assistance recipients the maximum credit is $5,000 (50 percent 
of the first $10,000 of qualified second-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
      Coordination is no longer necessary once the two credits 
are combined.
      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.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.

    D. Deduction for Corporate Donations of Computer Technology and 
                               Equipment

(Sec. 105 of the House bill, sec. 111 of the Senate amendment 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.

                               HOUSE BILL

      The present-law provision is extended for one year to 
apply to contributions made during any taxable year beginning 
after December 31, 2005, and before January 1, 2007.
      Effective date.--The provision is effective for 
contributions made in taxable years beginning after December 
31, 2005.

                            SENATE AMENDMENT

      Same as House bill.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.

           E. Availability of Archer Medical Savings Accounts

(Sec. 106 of the House 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 $1,800 and no more than $2,700 in the 
case of individual coverage and at least $3,650 and no more 
than $5,450 in the case of family coverage (for 2006). In 
addition, the maximum out-of-pocket expenses with respect to 
allowed costs (including the deductible) must be no more than 
$3,650 in the case of individual coverage and no more than 
$6,650 in the case of family coverage (for 2006). A plan does 
not fail to qualify as a high deductible plan merely because it 
does not have a deductible for preventive care as required by 
State law. A plan does not qualify as a high deductible health 
plan if substantially all of the coverage under the plan is for 
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 
provided by Archer MSAs. HSAs were established on a permanent 
basis.

                               HOUSE BILL

      The House bill 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.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.

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

(Sec. 107 and sec. 108 of the House bill, sec. 117 of the Senate 
        amendment, and sec. 168 of the Code)

                              PRESENT LAW

In general
      A taxpayer generally must capitalize the cost of property 
used in a trade or business and recover such cost over time 
through annual deductions for depreciation or amortization. 
Tangible property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of 
various types of depreciable property (sec. 168). The cost of 
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years. 
Nonresidential real property is subject to the mid-month 
placed-in-service convention. Under the mid-month convention, 
the depreciation allowance for the first year property is 
placed in service is based on the number of months the property 
was in service, and property placed in service at any time 
during a month is treated as having been placed in service in 
the middle of the month.

Depreciation of leasehold improvements
      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 was 
first placed in service. Qualified leasehold improvement 
property does not include any improvement for which the 
expenditure is attributable to the enlargement of the building, 
any elevator or escalator, any structural component benefiting 
a common area, or the internal structural framework of the 
building. 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.

                               HOUSE BILL

      Under the House bill, the present-law provisions relating 
to qualified leasehold improvement property and qualified 
restaurant improvement property are extended for one year 
(through December 31, 2006).
      Effective date.--The House bill applies to property 
placed in service after December 31, 2005.

                            SENATE AMENDMENT

      Under the Senate amendment, the present-law provisions 
are extended for two years (through December 31, 2007).
      Effective date.--The Senate amendment applies to property 
placed in service after December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.

G. Taxable Income Limit on Percentage Depletion for Oil and Natural Gas 
                   Produced From Marginal Properties

(Sec. 109 of the House 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 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).

                               HOUSE BILL

      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.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.

      H. Tax Incentives for Investment in the District of Columbia

(Sec. 110 of the House bill, sec. 114 of the Senate amendment 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.'' \3\
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    \3\ 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.\4\ 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.\5\ 
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.\6\ The wage credit may be used to 
offset up to 25 percent of alternative minimum tax 
liability.\7\
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    \4\ Sec. 280C(a).
    \5\ Secs. 1400H(a), 1396(c)(3)(A) and 51A(d)(2).
    \6\ Secs. 1400H(a), 1396(c)(3)(B) and 51A(d)(2).
    \7\ Sec. 38(c)(2).
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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.\8\ 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.\9\ Special rules are provided in 
the case of property that is substantially renovated by the 
taxpayer.
---------------------------------------------------------------------------
    \8\ Sec. 1397A.
    \9\ 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.\10\ Such bonds are subject to the District of 
Columbia's annual private activity bond volume limitation. 
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.
---------------------------------------------------------------------------
    \10\ 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.\11\ 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.
---------------------------------------------------------------------------
    \11\ 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.\12\ However, no gain attributable to periods before 
January 1, 1998, and after December 31, 2010, is qualified 
capital gain.
---------------------------------------------------------------------------
    \12\ 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.\13\
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    \13\ Sec. 1400C(i).
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                               HOUSE BILL

      The provision extends the designation of the D.C. Zone 
for one year (through December 31, 2006), thus extending the 
wage credit and section 179 expensing for one year.
      The provision extends the tax-exempt financing authority 
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 of certain qualified 
D.C. Zone assets for one year.
      The provision extends the first-time homebuyer credit for 
one year, through December 31, 2006.
      Effective date.--The amendment generally is effective on 
January 1, 2006, except the provision relating to bonds is 
effective for obligations issued after the date of enactment.

                            SENATE AMENDMENT

      The Senate amendment is the same as the House bill.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.

        I. Possession Tax Credit With Respect to American Samoa

(Sec. 111 of the House 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.\14\ This credit offsets the U.S. tax imposed on certain 
income related to operations in the U.S. possessions.\15\ 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.
---------------------------------------------------------------------------
    \14\ Secs. 27(b), 936.
    \15\ 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.\16\ 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.
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    \16\ 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.
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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.

                               HOUSE BILL

      The House bill 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.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.

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

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

                            PRESENT LAW \17\

      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.
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    \17\ This description of present law refers to the law in effect at 
the time the bill passed the House of Representatives, which was before 
the enactment of Pub. L. No. 109-151, which extended the mental health 
parity requirements of the Code, ERISA, and the PHSA through December 
31, 2006.
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      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.

                               HOUSE BILL

      The House bill 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.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision.

                           K. Research Credit

(Sec. 113 of the House bill, sec. 108 of the Senate amendment, and sec. 
        41 of the Code)

                              PRESENT LAW

General rule
      Prior to January 1, 2006, a taxpayer could claim a 
research credit equal to 20 percent of the amount by which the 
taxpayer's qualified research expenses for a taxable year 
exceeded its base amount for that year.\18\ Thus, the research 
credit was generally available with respect to incremental 
increases in qualified research.
---------------------------------------------------------------------------
    \18\ Sec. 41.
---------------------------------------------------------------------------
      A 20-percent research tax credit was also available with 
respect 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 was commonly referred to as the university basic 
research credit (see sec. 41(e)).
      Finally, a research credit was available for a taxpayer's 
expenditures on research undertaken by an energy research 
consortium. This separate credit computation was commonly 
referred to as the energy research credit. Unlike the other 
research credits, the energy research credit applied 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, expired on 
December 31, 2005.\19\
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    \19\ The research tax credit initially was enacted in the Economic 
Recovery Tax Act of 1981 as a credit equal to 25 percent of the excess 
of qualified research expenses incurred in the current taxable year 
over the average of qualified research expenses incurred in the prior 
three taxable years. The research tax credit was modified in the Tax 
Reform Act of 1986, which (1) extended the credit through December 31, 
1988, (2) reduced the credit rate to 20 percent, (3) tightened the 
definition of qualified research expenses eligible for the credit, and 
(4) enacted the separate university basic credit.
    The Technical and Miscellaneous Revenue Act of 1988 (``1988 Act'') 
extended the research tax credit for one additional year, through 
December 31, 1989. The 1988 Act also reduced the deduction allowed 
under section 174 (or any other section) for qualified research 
expenses by an amount equal to 50 percent of the research tax credit 
determined for the year.
    The Omnibus Budget Reconciliation Act of 1989 (``1989 Act'') 
effectively extended the research credit for nine months (by prorating 
qualified expenses incurred before January 1, 1991). The 1989 Act also 
modified the method for calculating a taxpayer's base amount (i.e., by 
substituting the present-law method which uses a fixed-base percentage 
for the prior-law moving base which was calculated by reference to the 
taxpayer's average research expenses incurred in the preceding three 
taxable years). The 1989 Act further reduced the deduction allowed 
under section 174 (or any other section) for qualified research 
expenses by an amount equal to 100 percent of the research tax credit 
determined for the year.
    The Omnibus Budget Reconciliation Act of 1990 extended the research 
tax credit through December 31, 1991 (and repealed the special rule to 
prorate qualified expenses incurred before January 1, 1991).
    The Tax Extension Act of 1991 extended the research tax credit for 
six months (i.e., for qualified expenses incurred through June 30, 
1992).
    The Omnibus Budget Reconciliation Act of 1993 (``1993 Act'') 
extended the research tax credit for three years--i.e., retroactively 
from July 1, 1992 through June 30, 1995. The 1993 Act also provided a 
special rule for start-up firms, so that the fixed-base ratio of such 
firms eventually will be computed by reference to their actual research 
experience.
    Although the research tax credit expired during the period July 1, 
1995, through June 30, 1996, the Small Business Job Protection Act of 
1996 (``1996 Act'') extended the credit for the period July 1, 1996, 
through May 31, 1997 (with a special 11-month extension for taxpayers 
that elect to be subject to the alternative incremental research credit 
regime). In addition, the 1996 Act expanded the definition of start-up 
firms under section 41(c)(3)(B)(i), enacted a special rule for certain 
research consortia payments under section 41(b)(3)(C), and provided 
that taxpayers may elect an alternative research credit regime (under 
which the taxpayer is assigned a three-tiered fixed-base percentage 
that is lower than the fixed-base percentage otherwise applicable and 
the credit rate likewise is reduced) for the taxpayer's first taxable 
year beginning after June 30, 1996, and before July 1, 1997.
    The Taxpayer Relief Act of 1997 (``1997 Act'') extended the 
research credit for 13 months--i.e, generally for the period June 1, 
1997, through June 30, 1998. The 1997 Act also provided that taxpayers 
are permitted to elect the alternative incremental research credit 
regime for any taxable year beginning after June 30, 1996 (and such 
election will apply to that taxable year and all subsequent taxable 
years unless revoked with the consent of the Secretary of the 
Treasury). The Tax and Trade Relief Extension Act of 1998 extended the 
research credit for 12 months, i.e., through June 30, 1999.
    The Ticket to Work and Work Incentive Improvement Act of 1999 
extended the research credit for five years, through June 30, 2004, 
increased the rates of credit under the alternative incremental 
research credit regime, and expanded the definition of research to 
include research undertaken in Puerto Rico and possessions of the 
United States.
    The Working Families Tax Relief Act of 224 extended the research 
credit through December 31, 2005.
    The Energy Tax Incentives Act of 2005 added the energy research 
credit.
---------------------------------------------------------------------------
Computation of allowable credit
      Except for energy research payments and certain 
university basic research payments made by corporations, the 
research tax credit applied only to the extent that the 
taxpayer's qualified research expenses for the current taxable 
year exceeded its base amount. The base amount for the current 
year generally was 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 was the ratio that its total 
qualified research expenses for the 1984-1988 period bore 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) were assigned a fixed-base percentage of 
three percent.\20\
---------------------------------------------------------------------------
    \20\ The Small Business Job Protection Act of 1996 expanded the 
definition of start-up firms under section 41(c)(3)(B)(i) to include 
any firm if the first taxable year in which such firm had both gross 
receipts and qualified research expenses began after 1983. A special 
rule (enacted in 1993) was designed to gradually recompute a start-up 
firm's fixed-base percentage based on its actual research experience. 
Under this special rule, a start-up firm would be assigned a fixed-base 
percentage of three percent for each of its first five taxable years 
after 1993 in which it incurs qualified research expenses. In the event 
that the research credit is extended beyond its expiration date, a 
start-up date, a start-up firm's fixed-base percentage for its sixth 
through tenth taxable years after 1993 in which it incurs qualified 
research expenses will be a phased-in ratio based on its actual 
research experience. For all subsequent taxable years, the taxpayer's 
fixed-base percentage will be its actual ratio of qualified research 
expenses to gross receipts for any five years selected by the taxpayer 
from its fifth through tenth taxable years after 1993 (sec. 
41(c)(3)(B)).
---------------------------------------------------------------------------
      In computing the credit, a taxpayer's base amount could 
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 provided that all 
members of the same controlled group of corporations were 
treated as a single taxpayer (sec. 41(f)(1)). Under regulations 
prescribed by the Secretary, special rules applied for 
computing the credit when a major portion of a trade or 
business (or unit thereof) changed hands, under which qualified 
research expenses and gross receipts for periods prior to the 
change of ownership of a trade or business were 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 were allowed to elect an alternative 
incremental research credit regime.\21\ If a taxpayer elected 
to be subject to this alternative regime, the taxpayer was 
assigned a three-tiered fixed-base percentage (that was lower 
than the fixed-base percentage otherwise applicable) and the 
credit rate likewise was reduced. Under the alternative 
incremental credit regime, a credit rate of 2.65 percent 
applied to the extent that a taxpayer's current-year research 
expenses exceeded a base amount computed by using a fixed-base 
percentage of one percent (i.e., the base amount equaled one 
percent of the taxpayer's average gross receipts for the four 
preceding years) but did not exceed a base amount computed by 
using a fixed-base percentage of 1.5 percent. A credit rate of 
3.2 percent applied to the extent that a taxpayer's current-
year research expenses exceeded a base amount computed by using 
a fixed-base percentage of 1.5 percent but did not exceed a 
base amount computed by using a fixed-base percentage of two 
percent. A credit rate of 3.75 percent applied to the extent 
that a taxpayer's current-year research expenses exceeded a 
base amount computed by using a fixed-base percentage of two 
percent. An election to be subject to this alternative 
incremental credit regime could be made for any taxable year 
beginning after June 30, 1996, and such an election applied to 
that taxable year and all subsequent years unless revoked with 
the consent of the Secretary of the Treasury.
---------------------------------------------------------------------------
    \21\ Sec. 41(c)(4).
---------------------------------------------------------------------------
Eligible expenses
      Qualified research expenses eligible for the research tax 
credit consisted 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).\22\ Notwithstanding the limitation for contract 
research expenses, qualified research expenses included 100 
percent of amounts paid or incurred by the taxpayer to an 
eligible small business, university, or Federal laboratory for 
qualified energy research.
---------------------------------------------------------------------------
    \22\ Under a special rule enacted as part of the Small Business Job 
Protection Act of 1996, 75 percent of amounts paid to a research 
consortium for qualified research were treated as qualified research 
expenses eligible for the research credit (rather than 65 percent under 
the general rule under section 41(b)(3) governing contract research 
expenses) if (1) such research consortium was a tax-exempt organization 
that is described in section 501(c)(3) (other than a private 
foundation) or section 501(c)(6) and was organized and operated 
primarily to conduct scientific research, and (2) such qualified 
research was conducted by the consortium on behalf of the taxpayer and 
one or more persons not related to the taxpayer. Sec. 41(b)(3)(C).
---------------------------------------------------------------------------
      To be eligible for the credit, the research did not only 
have to satisfy the requirements of present-law section 174 
(described below) but also had to be undertaken for the purpose 
of discovering information that is technological in nature, the 
application of which was 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 had 
to constitute elements of a process of experimentation for 
functional aspects, performance, reliability, or quality of a 
business component. Research did not qualify for the credit if 
substantially all of the activities related to style, taste, 
cosmetic, or seasonal design factors (sec. 41(d)(3)). In 
addition, research did 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 did not qualify for the credit if it was 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.\23\ 
While the research credit was in effect, however, deductions 
allowed to a taxpayer under section 174 (or any other section) 
were reduced by an amount equal to 100 percent of the 
taxpayer's research tax credit determined for the taxable year 
(sec. 280C(c)). Taxpayers could alternatively elect to claim a 
reduced research tax credit amount (13 percent) under section 
41 in lieu of reducing deductions otherwise allowed (sec. 
280C(c)(3)).
---------------------------------------------------------------------------
    \23\ Taxpayers may elect 10-year amortization of certain research 
expenditures allowable as a deduction under section 174(a). Secs. 
174(f)(2) and 59(e).
---------------------------------------------------------------------------

                               HOUSE BILL

      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 5 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 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.

                            SENATE AMENDMENT

      The Senate amendment generally follows the House bill but 
provides for a two-year extension of the modified research 
credit. It also adds a provision that broadens the research 
credit as it applies to research consortia. Under the Senate 
amendment, a 20 percent credit would be available for a 
taxpayer's expenditures on research carried out by any research 
consortium, rather than being limited to research carried out 
by an energy research consortium.
      Effective date.--The Senate amendment applies to amounts 
paid or incurred after December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.

                    L. Qualified Zone Academy Bonds

(Sec. 114 of the House bill, sec. 110 of the Senate amendment 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 these 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 interest-bearing 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'' (``qualified zone academy 
property'') 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.

Arbitrage restrictions on tax-exempt bonds
      To prevent States and local governments from issuing more 
tax-exempt bonds than is necessary for the activity being 
financed or from issuing such bonds earlier than needed for the 
purpose of the borrowing, the Code includes arbitrage 
restrictions limiting the ability to profit from investment of 
tax-exempt bond proceeds. In general, arbitrage profits may be 
earned only during specified periods (e.g., defined ``temporary 
periods'' before funds are needed for the purpose of the 
borrowing) or on specified types of investments (e.g., 
``reasonably required reserve or replacement funds''). Subject 
to limited exceptions, profits that are earned during these 
periods or on such investments must be rebated to the Federal 
Government. Governmental bonds are subject to less restrictive 
arbitrage rules than most private activity bonds. The arbitrage 
rules do not apply to qualified zone academy bonds.

                               HOUSE BILL

      The House bill extends for one year the present-law 
provision relating to qualified zone academy bonds (through 
December 31, 2006).
      Effective date.--The provision is effective for bonds 
issued after December 31, 2005.

                            SENATE AMENDMENT

      The Senate amendment extends for two years the present-
law provision relating to qualified zone academy bonds (through 
December 31, 2007).
      In addition, the Senate amendment imposes the arbitrage 
requirements of section 148 that apply to tax-exempt bonds to 
qualified zone academy bonds. Principles under section 148 and 
the regulations thereunder shall apply for purposes of 
determining the yield restriction and arbitrage rebate 
requirements applicable to qualified zone academy bonds. For 
example, for arbitrage purposes, the yield on an issue of 
qualified zone academy bonds is computed by taking into account 
all payments of interest, if any, on such bonds, i.e., whether 
the bonds are issued at par, premium, or discount. However, for 
purposes of determining yield, the amount of the credit allowed 
to a taxpayer holding qualified zone academy bonds is not 
treated as interest, although such credit amount is treated as 
interest income to the taxpayer.
      The provision imposes new spending requirements for 
qualified zone academy bonds. An issuer of qualified zone 
academy bonds must reasonably expect to and actually spend 95 
percent or more of the proceeds of such bonds on qualified zone 
academy property within the five-year period that begins on the 
date of issuance. To the extent less than 95 percent of the 
proceeds are used to finance qualified zone academy property 
during the five-year spending period, bonds will continue to 
qualify as qualified zone academy bonds if unspent proceeds are 
used within 90 days from the end of such five-year period to 
redeem any ``nonqualified bonds.'' For these purposes, the 
amount of nonqualified bonds is to be determined in the same 
manner as Treasury regulations under section 142. In addition, 
the provision provides that the five-year spending period may 
be extended by the Secretary upon the issuer's request if 
reasonable cause for such extension is established.
      Under the provision, qualified private business 
contributions must be in the form of cash or cash equivalents, 
rather than property or services as permitted under present 
law. The provision also requires an equal amount of principal 
is to be paid by the issuer during each calendar year that the 
issue is outstanding.
      Under the provision, issuers of qualified zone academy 
bonds are required to report issuance to the IRS in a manner 
similar to that required for tax-exempt bonds.
      Effective date.--The provision is effective for bonds 
issued after December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.

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

(Sec. 115 of the House bill, sec. 112 of the Senate amendment and sec. 
        62 of the Code)

                              PRESENT LAW

      In general, ordinary and necessary business expenses are 
deductible (sec. 162). However, in general, unreimbursed 
employee business expenses are deductible only as an itemized 
deduction and only to the extent that the individual's total 
miscellaneous deductions (including employee business expenses) 
exceed two percent of adjusted gross income. An individual's 
otherwise allowable itemized deductions may be further limited 
by the overall limitation on itemized deductions, which reduces 
itemized deductions for taxpayers with adjusted gross income in 
excess of $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 162 as a trade or business expense. A 
deduction is allowed only to the extent the amount of expenses 
exceeds the amount excludable from income under section 135 
(relating to education savings bonds), 529(c)(1) (relating to 
qualified tuition programs), and section 530(d)(2) (relating to 
Coverdell education savings accounts).
      An eligible educator is a kindergarten through grade 12 
teacher, instructor, counselor, principal, or aide in a school 
for at least 900 hours during a school year. A school means any 
school which provides elementary education or secondary 
education, as determined under State law.
      The above-the-line deduction for eligible educators is 
not allowed for taxable years beginning after December 31, 
2005.

                               HOUSE BILL

      The present-law provision is extended for one year, 
through December 31, 2006.
      Effective date.--The provision is effective for expenses 
paid or incurred in taxable years beginning after December 31, 
2005.

                            SENATE AMENDMENT

      The present-law provision is extended for two years, 
through December 31, 2007.
      Effective date.--The provision is effective for expenses 
paid or incurred in taxable years beginning after December 31, 
2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.

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

(Sec. 116 of the House bill, sec. 103 of the Senate amendment 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.

                               HOUSE BILL

      The provision extends the tuition deduction for one year, 
through December 31, 2006.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2005.

                            SENATE AMENDMENT

      The provision extends the tuition deduction for four 
years, through December 31, 2009.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House 
provision or the Senate amendment provision.

          O. Deduction of State and Local General Sales Taxes

(Sec. 117 of the House bill, sec. 105 of the Senate amendment, 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.

                               HOUSE BILL

      The present-law provision allowing taxpayers to elect to 
deduct State and local sales taxes in lieu of State and local 
income taxes is extended for one year (through December 31, 
2006).
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2005.

                            SENATE AMENDMENT

      The present-law provision allowing taxpayers to elect to 
deduct State and local sales taxes in lieu of State and local 
income taxes is extended for two years (through December 31, 
2007).
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.

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

(Sec. 201 of the House bill, sec. 113 of the Senate amendment, 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.\24\ 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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    \24\ 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.\25\ 
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.\26\ and section 263A, are treated as qualified 
environmental remediation expenditures.
---------------------------------------------------------------------------
    \25\ Sec. 198.
    \26\ 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'') \27\ 
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 (except for purposes of determining qualified 
environmental remediation expenditures in the ``Gulf 
Opportunity Zone'' under section 1400N(g), as described 
below).\28\
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    \27\ Pub. L. No. 96-510 (1980).
    \28\ 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.
      Under section 1400N(g), the above provisions apply to 
expenditures paid or incurred to abate contamination at 
qualified contaminated sites in the Gulf Opportunity Zone 
(defined as that portion of the Hurricane Katrina Disaster Area 
determined by the President to warrant individual or individual 
and public assistance from the Federal Government under the 
Robert T. Stafford Disaster Relief and Emergency Assistance Act 
by reason of Hurricane Katrina) before January 1, 2008; in 
addition, within the Gulf Opportunity Zone section 1400N(g) 
broadens the definition of hazardous substance to include 
petroleum products (defined by reference to section 
4612(a)(3)).

                               HOUSE BILL

      The House bill 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 
provision, petroleum products are defined by reference to 
section 4612(a)(3), and thus include crude oil, crude oil 
condensates and natural gasoline.\29\
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    \29\ 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).
---------------------------------------------------------------------------
      Effective date.--The provision applies to expenditures 
paid or incurred after December 31, 2005.

                            SENATE AMENDMENT

      The Senate amendment modifies the House bill to provide 
for only a one-year extension of the present-law provisions 
relating to environmental remediation expenditures (through 
December 31, 2006). The Senate amendment follows the House bill 
in expanding the definition of hazardous substances to include 
petroleum products.
      Effective date.--The provision applies to expenditures 
paid or incurred after December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.

                   Q. Controlled Foreign Corporations

1. Subpart F exception for active financing (Sec. 202(a) of the House 
        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.\30\
---------------------------------------------------------------------------
    \30\ 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'').\31\
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    \31\ Temporary exceptions from the subpart F provisions for certain 
active financing income applied only for taxable years beginning in 
1998. Those exceptions were modified and extended for one year, 
applicable only for taxable years beginning in 1999. The Tax Relief 
Extension Act of 1999 (Pub. L. No. 106-170) clarified and extended the 
temporary exceptions for two years, applicable only for taxable years 
beginning after 1999 and before 2002. The Job Creation and Worker 
Assistance Act of 2002 (Pub. L. No. 107-147) modified and extended the 
temporary exceptions for five years, for taxable years beginning after 
2001 and before 2007.
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      With respect to income derived in the active conduct of a 
banking, financing, or similar business, a CFC is required to 
be predominantly engaged in such business and to conduct 
substantial activity with respect to such business in order to 
qualify for the exceptions. In addition, certain nexus 
requirements apply, which provide that income derived by a CFC 
or a qualified business unit (``QBU'') of a CFC from 
transactions with customers is eligible for the exceptions if, 
among other things, substantially all of the activities in 
connection with such transactions are conducted directly by the 
CFC or QBU in its home country, and such income is treated as 
earned by the CFC or QBU in its home country for purposes of 
such country's tax laws. Moreover, the exceptions apply to 
income derived from certain cross border transactions, provided 
that certain requirements are met. Additional exceptions from 
foreign personal holding company income apply for certain 
income derived by a securities dealer within the meaning of 
section 475 and for gain from the sale of active financing 
assets.
      In the case of insurance, in addition to a temporary 
exception from foreign personal holding company income for 
certain income of a qualifying insurance company with respect 
to risks located within the CFC's country of creation or 
organization, certain temporary exceptions from insurance 
income and from foreign personal holding company income apply 
for certain income of a qualifying branch of a qualifying 
insurance company with respect to risks located within the home 
country of the branch, provided certain requirements are met 
under each of the exceptions. Further, additional temporary 
exceptions from insurance income and from foreign personal 
holding company income apply for certain income of certain CFCs 
or branches with respect to risks located in a country other 
than the United States, provided that the requirements for 
these exceptions are met.
      In the case of a life insurance or annuity contract, 
reserves for such contracts are determined as follows for 
purposes of these provisions. The reserves equal the greater 
of: (1) the net surrender value of the contract (as defined in 
section 807(e)(1)(A)), including in the case of pension plan 
contracts; or (2) the amount determined by applying the tax 
reserve method that would apply if the qualifying life 
insurance company were subject to tax under Subchapter L of the 
Code, with the following modifications. First, there is 
substituted for the applicable Federal interest rate an 
interest rate determined for the functional currency of the 
qualifying insurance company's home country, calculated (except 
as provided by the Treasury Secretary in order to address 
insufficient data and similar problems) in the same manner as 
the mid-term applicable Federal interest rate (within the 
meaning of section 1274(d)). Second, there is substituted for 
the prevailing State assumed rate the highest assumed interest 
rate permitted to be used for purposes of determining statement 
reserves in the foreign country for the contract. Third, in 
lieu of U.S. mortality and morbidity tables, mortality and 
morbidity tables are applied that reasonably reflect the 
current mortality and morbidity risks in the foreign country. 
Fourth, the Treasury Secretary may provide that the interest 
rate and mortality and morbidity tables of a qualifying 
insurance company may be used for one or more of its branches 
when appropriate. In no event may the reserve for any contract 
at any time exceed the foreign statement reserve for the 
contract, reduced by any catastrophe, equalization, or 
deficiency reserve or any similar reserve.
      Present law permits a taxpayer in certain circumstances, 
subject to approval by the IRS through the ruling process or in 
published guidance, to establish that the reserve of a life 
insurance company for life insurance and annuity contracts is 
the amount taken into account in determining the foreign 
statement reserve for the contract (reduced by catastrophe, 
equalization, or deficiency reserve or any similar reserve). 
IRS approval is to be based on whether the method, the interest 
rate, the mortality and morbidity assumptions, and any other 
factors taken into account in determining foreign statement 
reserves (taken together or separately) provide an appropriate 
means of measuring income for Federal income tax purposes. In 
seeking a ruling, the taxpayer is required to provide the IRS 
with necessary and appropriate information as to the method, 
interest rate, mortality and morbidity assumptions and other 
assumptions under the foreign reserve rules so that a 
comparison can be made to the reserve amount determined by 
applying the tax reserve method that would apply if the 
qualifying insurance company were subject to tax under 
Subchapter L of the Code (with the modifications provided under 
present law for purposes of these exceptions). The IRS also may 
issue published guidance indicating its approval. Present law 
continues to apply with respect to reserves for any life 
insurance or annuity contract for which the IRS has not 
approved the use of the foreign statement reserve. An IRS 
ruling request under this provision is subject to the present-
law provisions relating to IRS user fees.

                               HOUSE BILL

      The House bill 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.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill 
provision.

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

                               HOUSE BILL

      Under the House bill, for taxable years beginning after 
2005 and before 2009, dividends, interest,\32\ 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. The 
bill provides that the Secretary shall prescribe such 
regulations as are appropriate to prevent the abuse of the 
purposes of this provision.
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    \32\ Interest for this purpose includes factoring income which is 
treated as equivalent to interest under sec. 954(c)(1)(E).
---------------------------------------------------------------------------
      The provision in the House bill 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.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill 
provision.

    R. Reduced Rates for Capital Gains and Dividends of Individuals

(Sec. 203 of the House 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 generally 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 5-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 8-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, for taxable 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 RIC 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.\33\
---------------------------------------------------------------------------
    \33\ 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 at ordinary income tax 
rates.

                               HOUSE BILL

      The House 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.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill 
provision.

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

(Sec. 204 of the House bill, sec. 102 of the Senate amendment, 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 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.\34\
---------------------------------------------------------------------------
    \34\ 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.
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill extends the saver's credit for two years, 
through December 31, 2008.
      Effective date.--The provision is effective on the date 
of enactment.

                            SENATE AMENDMENT

      The Senate amendment extends the saver's credit for three 
years, through December 31, 2009.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the House bill 
provision or the Senate amendment provision.

         T. Extension of Increased Expensing for Small Business

(Sec. 205 of the House bill, sec. 101 of the Senate amendment, 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.\35\ 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.
---------------------------------------------------------------------------
    \35\ 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.\36\
---------------------------------------------------------------------------
    \36\ 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.\37\
---------------------------------------------------------------------------
    \37\ Sec. 179(c)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      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.

                            SENATE AMENDMENT

      The Senate amendment provision is the same as the House 
bill.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
House bill and the Senate amendment.

  U. Extend and Increase Alternative Minimum Tax Exemption Amount for 
                              Individuals

(Sec. 106 of the Senate amendment and sec. 55 of the Code)

                              PRESENT LAW

      Present law imposes an 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 unmarried individuals other than surviving spouses; (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 estates and trusts. 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 unmarried 
individuals other than surviving spouses, and (3) $75,000 in 
the case of married individuals filing separate returns, 
estates, and trusts. These amounts are not indexed for 
inflation.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the Senate amendment, for taxable years beginning 
in 2006, the exemption amounts are increased to: (1) $62,550 in 
the case of married individuals filing a joint return and 
surviving spouses; (2) $42,500 in the case of unmarried 
individuals other than surviving spouses; and (3) $31,275 in 
the case of married individuals filing a separate return.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
Senate amendment.

      V. Extension and Modification of the New Markets Tax Credit

(Sec. 204 of the Senate amendment and sec. 45D of the Code)

                              PRESENT LAW

      Section 45D provides a new markets tax credit for 
qualified equity investments made to acquire stock in a 
corporation, or a capital interest in a partnership, that is a 
qualified community development entity (``CDE'').\38\ The 
amount of the credit allowable to the investor (either the 
original purchaser or a subsequent holder) is (1) a five-
percent credit for the year in which the equity interest is 
purchased from the CDE and for each of the following two years, 
and (2) a six-percent credit for each of the following four 
years. The credit is determined by applying the applicable 
percentage (five or six percent) to the amount paid to the CDE 
for the investment at its original issue, and is available for 
a taxable year to the taxpayer who holds the qualified equity 
investment on the date of the initial investment or on the 
respective anniversary date that occurs during the taxable 
year. The credit is recaptured if at any time during the seven-
year period that begins on the date of the original issue of 
the investment the entity ceases to be a qualified CDE, the 
proceeds of the investment cease to be used as required, or the 
equity investment is redeemed.
---------------------------------------------------------------------------
    \38\ Section 45D was added by section 121(a) of the Community 
Renewal Tax Relief Act of 2000, P.L. No. 106-554 (December 21, 2000).
---------------------------------------------------------------------------
      A qualified CDE is any domestic corporation or 
partnership: (1) whose primary mission is serving or providing 
investment capital for low-income communities or low-income 
persons; (2) that maintains accountability to residents of low-
income communities by their representation on any governing 
board of or any advisory board to the CDE; and (3) that is 
certified by the Secretary as being a qualified CDE. A 
qualified equity investment means stock (other than 
nonqualified preferred stock) in a corporation or a capital 
interest in a partnership that is acquired directly from a CDE 
for cash, and includes an investment of a subsequent purchaser 
if such investment was a qualified equity investment in the 
hands of the prior holder. Substantially all of the investment 
proceeds must be used by the CDE to make qualified low-income 
community investments. For this purpose, qualified low-income 
community investments include: (1) capital or equity 
investments in, or loans to, qualified active low-income 
community businesses; (2) certain financial counseling and 
other services to businesses and residents in low-income 
communities; (3) the purchase from another CDE of any loan made 
by such entity that is a qualified low-income community 
investment; or (4) an equity investment in, or loan to, another 
CDE.
      A ``low-income community'' is a population census tract 
with either (1) a poverty rate of at least 20 percent or (2) 
median family income which does not exceed 80 percent of the 
greater of metropolitan area median family income or statewide 
median family income (for a non-metropolitan census tract, does 
not exceed 80 percent of statewide median family income). In 
the case of a population census tract located within a high 
migration rural county, low-income is defined by reference to 
85 percent (rather than 80 percent) of statewide median family 
income. For this purpose, a high migration rural county is any 
county that, during the 20-year period ending with the year in 
which the most recent census was conducted, has a net out-
migration of inhabitants from the county of at least 10 percent 
of the population of the county at the beginning of such 
period.
      The Secretary has the authority to designate ``targeted 
populations'' as low-income communities for purposes of the new 
markets tax credit. For this purpose, a ``targeted population'' 
is defined by reference to section 103(20) of the Riegle 
Community Development and Regulatory Improvement Act of 1994 
(12 U.S.C. 4702(20)) to mean individuals, or an identifiable 
group of individuals, including an Indian tribe, who (A) are 
low-income persons; or (B) otherwise lack adequate access to 
loans or equity investments. Under such Act, ``low-income'' 
means (1) for a targeted population within a metropolitan area, 
less than 80 percent of the area median family income; and (2) 
for a targeted population within a non-metropolitan area, less 
than the greater of 80 percent of the area median family income 
or 80 percent of the statewide non-metropolitan area median 
family income.\39\ Under such Act, a targeted population is not 
required to be within any census tract. In addition, a 
population census tract with a population of less than 2,000 is 
treated as a low-income community for purposes of the credit if 
such tract is within an empowerment zone, the designation of 
which is in effect under section 1391, and is contiguous to one 
or more low-income communities.
---------------------------------------------------------------------------
    \39\ 12 U.S.C. 4702(17) (defines ``low-income'' for purposes of 12 
U.S.C. 4702(20)).
---------------------------------------------------------------------------
      A qualified active low-income community business is 
defined as a business that satisfies, with respect to a taxable 
year, the following requirements: (1) at least 50 percent of 
the total gross income of the business is derived from the 
active conduct of trade or business activities in any low-
income community; (2) a substantial portion of the tangible 
property of such business is used in a low-income community; 
(3) a substantial portion of the services performed for such 
business by its employees is performed in a low-income 
community; and (4) less than five percent of the average of the 
aggregate unadjusted bases of the property of such business is 
attributable to certain financial property or to certain 
collectibles.
      The maximum annual amount of qualified equity investments 
is capped at $2.0 billion per year for calendar years 2004 and 
2005, and at $3.5 billion per year for calendar years 2006 and 
2007.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision extends through 2008 the $3.5 billion 
maximum annual amount of qualified equity investments. The 
provision also requires that the Secretary prescribe 
regulations to ensure that non-metropolitan counties receive a 
proportional allocation of qualified equity investments.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

              W. Phasedown of Credit for Electric Vehicles

(Sec. 118 of the Senate amendment and sec. 30 of the Code)

                              PRESENT LAW

      A 10-percent tax credit is provided for the cost of a 
qualified electric vehicle, up to a maximum credit of $4,000. A 
qualified electric vehicle generally is a motor vehicle that is 
powered primarily by an electric motor drawing current from 
rechargeable batteries, fuel cells, or other portable sources 
of electrical current. The full amount of the credit is 
available for purchases prior to 2006. The credit is reduced to 
25 percent of the otherwise allowable amount for purchases in 
2006, and is unavailable for purchases after December 31, 2006.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the Senate amendment, the full amount of the credit 
for qualified electric vehicles is available for purchases 
prior to 2006. As under present law, the credit is unavailable 
for purchases after December 31, 2006.
      Effective date.--The provision is effective for property 
placed in service after December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

  X. Application of EGTRRA Sunset to Title II of the Senate Amendment

(Sec. 231 of the Senate amendment)

                              PRESENT LAW

      Reconciliation is a procedure under the Congressional 
Budget Act of 1974 (the ``Budget Act'') by which Congress 
implements spending and tax policies contained in a budget 
resolution. The Budget Act contains numerous rules enforcing 
the scope of items permitted to be considered under the budget 
reconciliation process. One such rule, the so-called ``Byrd 
rule,'' was incorporated into the Budget Act in 1990. The Byrd 
rule, named after its principal sponsor, Senator Robert C. 
Byrd, is contained in section 313 of the Budget Act. The Byrd 
rule generally permits members to raise a point of order 
against extraneous provisions (those which are unrelated to the 
goals of the reconciliation process) from either a 
reconciliation bill or a conference report on such bill.
      Under the Byrd rule, a provision is considered to be 
extraneous if it falls under one or more of the following six 
definitions:
      1. It does not produce a change in outlays or revenues;
      2. It produces an outlay increase or revenue decrease 
when the instructed committee is not in compliance with its 
instructions;
      3. It is outside of the jurisdiction of the committee 
that submitted the title or provision for inclusion in the 
reconciliation measure;
      4. It produces a change in outlays or revenues which is 
merely incidental to the nonbudgetary components of the 
provision;
      5. It would increase the deficit for a fiscal year beyond 
those covered by the reconciliation measure; and
      6. It recommends changes in Social Security.
      The Economic Growth and Tax Relief Reconciliation Act of 
2001 (EGTRRA) contains sunset provisions to ensure compliance 
with the Budget Act. Under title IX of EGTRRA, the provisions 
of, and amendments made by that Act that are in effect on 
September 30, 2011, shall cease to apply as of the close of 
September 30, 2011, except that all provisions of, and 
amendments made by, the Act generally do not apply for taxable, 
plan or limitation years beginning after December 31, 2010. 
With respect to the estate, gift, and generation-skipping 
provisions of the Act, the provisions do not apply to estates 
of decedents dying, gifts made, or generation-skipping 
transfers, after December 31, 2010. The Code and the Employee 
Retirement Income Security Act of 1974 are applied to such 
years, estates, gifts and transfers after December 31, 2010, as 
if the provisions of and amendments made by the Act had never 
been enacted.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Sunset of provisions
      To ensure compliance with the Budget Act, the Senate 
amendment provides that all provisions of, and amendments made 
by title II of the Senate amendment shall be subject to the 
sunset provisions of EGTRRA to the same extent and in the same 
manner as the provision of such Act to which the Senate 
amendment provision relates.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                       TITLE II--OTHER PROVISONS

                A. Taxation of Certain Settlement Funds

(Sec. 301 of the House 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.

                               HOUSE BILL

      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.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill 
provision.

  B. Modifications to Rules Relating to Taxation of Distributions of 
            Stock and Securities of a Controlled Corporation

(Sec. 302 of the House bill, sec. 467 of the Senate amendment and sec. 
        355 of the Code)

                              PRESENT LAW

      A corporation generally is required to recognize gain on 
the distribution of property (including stock of a subsidiary) 
to its shareholders as if the corporation had sold such 
property for its fair market value. In addition, the 
shareholders receiving the distributed property are ordinarily 
treated as receiving a dividend of the value of the 
distribution (to the extent of the distributing corporation's 
earnings and profits), or capital gain in the case of a stock 
buyback that significantly reduces the shareholder's interest 
in the parent corporation.
      An exception to these rules applies if the distribution 
of the stock of a controlled corporation satisfies the 
requirements of section 355 of the Code. If all the 
requirements are satisfied, there is no tax to the distributing 
corporation or to the shareholders on the distribution.
      One requirement to qualify for tax-free treatment under 
section 355 is that 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 (the ``active 
business test'').\40\ 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 its assets 
consist of stock and securities of one or more corporations 
that it controls that are engaged in the active conduct of a 
trade or business.\41\
---------------------------------------------------------------------------
    \40\ Section 355(b).
    \41\ Section 355(b)(2)(A). The IRS takes the position that the 
statutory 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. 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.
---------------------------------------------------------------------------
      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.\42\ 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.\43\
---------------------------------------------------------------------------
    \42\ Rev. Proc. 2003-3, sec. 4.01(30), 2003-1 I.R.B. 113.
    \43\ 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 as 
applied to that corporation 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.\44\
---------------------------------------------------------------------------
    \44\ 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.
---------------------------------------------------------------------------
      In determining whether assets are part of a five-year 
qualifying active business, assets acquired more recently than 
five years prior to the distribution, in a taxable transaction, 
are permitted to qualify as five-year ``active business'' 
assets if they are considered to have been acquired as part of 
an expansion of an existing business that does so qualify.\45\
---------------------------------------------------------------------------
    \45\ Treas. Reg. sec. 1.355-3(b)(ii).
---------------------------------------------------------------------------
      When a corporation holds an interest in a partnership, 
IRS revenue rulings have allowed an active business of the 
partnership to count as an active business of a corporate 
partner in certain circumstances. One such case involved a 
situation in which the corporation owned at least 20 percent of 
the partnership, was actively engaged in management of the 
partnership, and the partnership itself had an active 
business.\46\
---------------------------------------------------------------------------
    \46\ Rev. Rul. 92-17, 1002-1 C.B. 142; see also, Rev. Rul. 2002-49, 
2002-2 C.B. 50.
---------------------------------------------------------------------------
      In addition to its active business requirements, section 
355 does not apply to any transaction that is a ``device'' for 
the distribution of earnings and profits to a shareholder 
without the payment of tax on a dividend. A transaction is 
ordinarily not considered a ``device'' to avoid dividend tax if 
the distribution would have been treated by the shareholder as 
a redemption that was a sale or exchange of its stock, rather 
than as a dividend, if section 355 had not applied.\47\
---------------------------------------------------------------------------
    \47\ Treas. Reg. sec. 1.355-2(d)(5)(iv).
---------------------------------------------------------------------------

                               HOUSE BILL

      Under the House bill provision, 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 provision applies to distributions 
after the date of enactment and before December 31, 2010, with 
three exceptions. The provision does not apply to distributions 
(1) made pursuant to an agreement which is binding on the date 
of enactment and at all times thereafter, (2) described in a 
ruling request submitted to the IRS on or before the date of 
enactment, or (3) described on or before the date of enactment 
in a public announcement or in a filing with the Securities and 
Exchange Commission. The distributing corporation may 
irrevocably elect not to have the exceptions described above 
apply.
      The provision also applies, solely for the purpose of 
determining whether, after the date of enactment, there is 
continuing qualification under the requirements of section 
355(b)(2)(A) of distributions made before such date, as a 
result of an acquisition, disposition, or other restructuring 
after such date and before December 31, 2010.\48\
---------------------------------------------------------------------------
    \48\ 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 before 
January 1, 2010, and that would satisfy the requirements of new section 
355(b)(2)(A).
---------------------------------------------------------------------------

                            SENATE AMENDMENT

      The Senate amendment provision is the same as the House 
bill with respect to the House bill provision described above, 
except for the date on which that provision sunsets.\49\
---------------------------------------------------------------------------
    \49\ See ``Effective date'' for the Senate Amendment, infra.
---------------------------------------------------------------------------
      In addition, the Senate amendment contains another 
provision that denies section 355 treatment if either the 
distributing or distributed corporation is a disqualified 
investment corporation immediately after the transaction 
(including any series of related transactions) and any person 
that did not hold 50 percent or more of the voting power or 
value of stock of such distributing or controlled corporation 
immediately before the transaction does hold such a 50 percent 
or greater interest immediately after such transaction. The 
attribution rules of section 318 apply for purposes of this 
determination.
      A disqualified investment corporation is any distributing 
or controlled corporation if the fair market value of the 
investment assets of the corporation is 75 percent or more of 
the fair market value of all assets of the corporation. Except 
as otherwise provided, the term ``investment assets'' for this 
purpose means (i) cash, (ii) any stock or securities in a 
corporation, (iii) any interest in a partnership, (iv) any debt 
instrument or other evidence of indebtedness; (v) any option, 
forward or futures contract, notional principal contract, or 
derivative; (vi) foreign currency, or (vii) any similar asset.
      The term ``investment assets'' does not include any asset 
which is held for use in the active and regular conduct of (i) 
a lending or finance business (as defined in section 
954(h)(4)); (ii) a banking business through a bank (as defined 
in section 581), a domestic building and loan association 
(within the meaning of section 7701(a)(19), or any similar 
institution specified by the Secretary; or (iii) an insurance 
business if the conduct of the business is licensed, 
authorized, or regulated by an applicable insurance regulatory 
body. These exceptions only apply with respect to any business 
if substantially all the income of the business is derived from 
persons who are not related (within the meaning of section 
267(b) or 707(b)(1) to the person conducting the business.
      The term ``investment assets'' also does not include any 
security (as defined in section 475(c)(2)) which is held by a 
dealer in securities and to which section 475(a) applies.
      The term ``investment assets'' also does not include any 
stock or securities in, or any debt instrument, evidence of 
indebtedness, option, forward or futures contract, notional 
principal contract, or derivative issued by, a corporation 
which is a 25-percent controlled entity with respect to the 
distributing or controlled corporation. Instead, the 
distributing or controlled corporation is treated as owning its 
ratable share of the assets of any 25-percent controlled 
entity.
      The term 25-percent controlled entity means any 
corporation with respect to which the corporation in question 
(distributing or controlled) owns directly or indirectly stock 
possessing at least 25 percent of voting power and value, 
excluding stock that is not entitled to vote, is limited and 
preferred as to dividends and does not participate in corporate 
growth to any significant extent, has redemption and 
liquidation rights which do not exceed the issue price of such 
stock (except for a reasonable redemption or liquidation 
premium), and is not convertible into another class of stock.
      The term ``investment assets'' also does not include any 
interest in a partnership, or any debt instrument or other 
evidence of indebtedness issued by the partnership, if one or 
more trades or businesses of the partnership are, (or without 
regard to the 5-year requirement of section 355(b)(2)(B), would 
be) taken into account by the distributing or controlled 
corporation, as the case may be, in determining whether the 
active business test of section 355 is met by such corporation.
      The Treasury department shall provide regulations as may 
be necessary to carry out, or prevent the avoidance of, the 
purposes of the provision, including regulations in cases 
involving related persons, intermediaries, pass-through 
entities, or other arrangements; and the treatment of assets 
unrelated to the trade or business of a corporation as 
investment assets if, prior to the distribution, investment 
assets were used to acquire such assets. Regulations may also 
in appropriate cases exclude from the application of the 
provision a distribution which does not have the character of a 
redemption and which would be treated as a sale or exchange 
under section 302, and may modify the application of the 
attribution rules.
      Effective date.--The effective date of the first 
provision of the Senate amendment generally is the same as the 
effective date of the identical provision of the House bill, 
except that the Senate amendment provision sunsets for 
distributions (and for acquisitions, dispositions, or other 
restructurings as relating to continuing qualification of pre-
effective date distributions) after December 31, 2009, rather 
than for distributions (and for acquisitions, dispositions, or 
other restructurings as relating to continuing qualification of 
pre-effective date distributions) on or after December 31, 
2010.
      The second provision of the Senate amendment is effective 
for distributions after the date of enactment, except in 
transactions which are (i) made pursuant to an agreement which 
was binding on such date of enactment 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.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill and the 
Senate amendment with modifications.
      With respect to the provision that applies the active 
business test by reference to the relevant affiliated group, 
the conference agreement provision is the same as the House 
bill and the Senate amendment except for the date on which the 
conference agreement provision sunsets.\50\
---------------------------------------------------------------------------
    \50\ See ``Effective date'' of the conference agreement provision, 
infra.
---------------------------------------------------------------------------
      With respect to the provision that affects transactions 
involving disqualified investment corporations, the conference 
agreement reduces the percentage of investment assets of a 
corporation that will cause such corporation to be a 
disqualified investment corporation, from 75 percent (three-
quarters) to two-thirds of the fair market value of the 
corporation's assets, for distributions occurring after one 
year after the date of enactment.
      The conference agreement also reduces from 25 percent to 
20 percent the percentage stock ownership in a corporation that 
will cause such ownership to be disregarded as an investment 
asset itself, instead requiring ``look-through'' to the ratable 
share of the underlying assets of such corporation attributable 
to such stock ownership.
      The conferees wish to clarify that the disqualified 
investment corporation provision applies when a person directly 
or indirectly holds 50 percent of either the vote or the value 
of a company immediately following a distribution, and such 
person did not hold such 50 percent interest directly or 
indirectly prior to the distribution. As one example, the 
provision applies if a person that held 50 percent or more of 
the vote, but not of the value, of a distributing corporation 
immediately prior to a transaction in which a controlled 
corporation that was 100 percent owned by that distributing 
corporation is distributed, directly or indirectly holds 50 
percent of the value of either the distributing or controlled 
corporation immediately following such transaction.
      The conferees further wish to clarify that the 
enumeration in subsection 355(g)(5)(A) through (C) of specific 
situations that Treasury regulations may address is not 
intended to restrict or limit any other situations that 
Treasury may address under the general authority of new section 
355(g)(5) to carry out, or prevent the avoidance of, the 
purposes of the disqualified investment corporation provision.
      Effective date.--The starting effective date of the 
provision that applies the active business test by reference to 
the relevant affiliated group is the same as that of the House 
bill and the Senate amendment provisions. The conference 
agreement changes the date on which the provision sunsets so 
that the provision does not apply for distributions (or for 
acquisitions, dispositions, or other restructurings as relating 
to continuing qualification of pre-effective date 
distributions) occurring after December 31, 2010.
      The effective date of the provision that affects 
transactions involving disqualified investment corporations is 
the same as that of the Senate amendment provision, except for 
the conference agreement reduction in the amount of investment 
assets of a corporation that will cause it to be a disqualified 
investment corporation, from three-quarters to two-thirds of 
the fair market value of all assets of the corporation. The 
two-thirds test applies for distributions occurring after one 
year after the date of enactment.

                 C. Qualified Veteran's Mortgage Bonds

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

                              PRESENT LAW

      Private activity bonds are bonds that nominally are 
issued by States or local governments, but the proceeds of 
which are used (directly or indirectly) by a private person and 
payment of which is derived from funds of such private person. 
The exclusion from income for State and local bonds does not 
apply to private activity bonds, unless the bonds are issued 
for certain permitted purposes (``qualified private activity 
bonds''). The definition of a qualified private activity bond 
includes both qualified mortgage bonds and qualified veterans' 
mortgage bonds.
      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'').
      Qualified mortgage bonds are issued to make mortgage 
loans to qualified mortgagors for owner-occupied residences. 
The Code imposes several limitations on qualified mortgage 
bonds, including income limitations for homebuyers and purchase 
price limitations for the home financed with bond proceeds. In 
addition, qualified mortgage bonds generally cannot be used to 
finance a mortgage for a homebuyer who had an ownership 
interest in a principal residence in the three years preceding 
the execution of the mortgage (the ``first-time homebuyer'' 
requirement).

                               HOUSE BILL

      The House bill repeals the requirement that veterans 
receiving loans financed with qualified veterans' mortgage 
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
2007..............................................................    40
2008..............................................................    60
2009..............................................................    80

      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 date of enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill with the 
following modifications. The conference agreement does not 
amend present law as it relates to qualified veterans' mortgage 
bonds issued by the States of California and Texas. In the case 
of qualified veterans' mortgage bonds issued by the States of 
Alaska, Oregon, and Wisconsin, (1) the requirement that 
veterans must have served before 1977 is repealed and (2) the 
eligibility period for applying for a loan following release 
from the military service is reduced from 30 years to 25 years.
      In addition, the annual issuance of qualified veterans' 
mortgage bonds in the States of Alaska, Oregon and Wisconsin is 
subject to new State volume limitations which are phased in 
between the years 2006 and 2010. The State volume limit in 
these States for any calendar year after 2010 is zero.
      Effective date.--The provision expanding the definition 
of eligible veterans applies to bonds issued on or after date 
of enactment. The provision amending State volume limitations 
applies to allocations of volume limitation made after April 5, 
2006.

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

(Sec. 304 of the House 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 2006. 
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.

                               HOUSE BILL

      The House bill 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 House 
bill provision does not change the present law limitation on a 
taxpayer's charitable deduction for the contribution of those 
compositions or copyrights.
      Effective date.--The provision is effective for sales or 
exchanges in taxable years beginning after the date of 
enactment.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill 
provision.

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

(Sec. 305 of the House 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'') \51\ generally 
allows corporations that are qualifying vessel operators \52\ 
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.\53\ 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.
---------------------------------------------------------------------------
    \51\ 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).
    \52\ 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.
    \53\ 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 \54\ that is used exclusively in the U.S. foreign trade.
---------------------------------------------------------------------------
    \54\ 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.
---------------------------------------------------------------------------

                               HOUSE BILL

      The House bill 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.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement includes the provision in the 
House bill.

      F. Modification of Special Arbitrage Rule for Certain Funds

(Sec. 306 of the House bill and sec. 307 of the Senate amendment)

                              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.\55\
---------------------------------------------------------------------------
    \55\ H.R. 2661.
---------------------------------------------------------------------------

                               HOUSE BILL

      The provision codifies and extends the IRS agreement 
until 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 
of the value of the Fund. The provision sunsets August 31, 
2009.
      Effective date.--The provision is effective for bonds 
issued after the date of enactment and before August 31, 2009.

                            SENATE AMENDMENT

      The Senate amendment follows the House bill provision, 
and also increases the amount of bonds that may benefit from 
the exception to 30 percent of the value of the Fund.
      Effective date.--The Senate amendment is the same as the 
House bill.

                          CONFERENCE AGREEMENT

      The conference agreement includes the House bill 
provision.

G. Amortization of Expenses Incurred in Creating or Acquiring Music or 
                            Music Copyrights

(Sec. 468 of the Senate amendment and secs. 167(g) and 263A of the 
        Code)

                              PRESENT LAW

      A taxpayer is allowed to recover, through annual 
depreciation deductions, the cost of certain property used in a 
trade or business or for the production of income. Section 
167(g) provides that the cost of motion picture films, sound 
recordings, copyrights, books, patents, and other property 
specified in regulations is eligible to be recovered using the 
income forecast method of depreciation.
      Under the income forecast method, the depreciation 
deduction with respect to eligible property for a taxable year 
is determined by multiplying the adjusted basis of the property 
by a fraction, the numerator of which is the income generated 
by the property during the year, and the denominator of which 
is the total forecasted or estimated income expected to be 
generated prior to the close of the tenth taxable year after 
the year the property was placed in service. Any costs that are 
not recovered by the end of the tenth taxable year after the 
property was placed in service may be taken into account as 
depreciation in such year.
      The adjusted basis of property that may be taken into 
account under the income forecast method includes only amounts 
that satisfy the economic performance standard of section 
461(h) (except in the case of certain participations and 
residuals). In addition, taxpayers that claim depreciation 
deductions under the income forecast method are required to pay 
(or receive) interest based on a recalculation of depreciation 
under a ``look-back'' method.
      The ``look-back'' method is applied in any 
``recomputation year'' by (1) comparing depreciation deductions 
that had been claimed in prior periods to depreciation 
deductions that would have been claimed had the taxpayer used 
actual, rather than estimated, total income from the property; 
(2) determining the hypothetical overpayment or underpayment of 
tax based on this recalculated depreciation; and (3) applying 
the overpayment rate of section 6621 of the Code. Except as 
provided in Treasury regulations, a ``recomputation year'' is 
the third and tenth taxable year after the taxable year the 
property was placed in service, unless the actual income from 
the property for each taxable year ending with or before the 
close of such years was within 10 percent of the estimated 
income from the property for such years.
      A special rule is provided under Treasury guidance in the 
case of certain authors and other taxpayers, with respect to 
their capitalization of costs under section 263A and with 
respect to the recovery or amortization of such costs. 
Specifically, IRS Notice 88-62 (1988-1 C.B. 548) provides an 
elective safe harbor under which eligible taxpayers capitalize 
qualified created costs incurred during the taxable year and 
amortize 50 percent of the costs in the taxable year incurred, 
and 25 percent in each of the two successive taxable years. 
Under the Notice, qualified creative costs generally are those 
incurred by a self-employed individual in the production of 
creative properties (such as films, sound recordings, musical 
and dance compositions including accompanying words, and other 
similar properties), provided the personal efforts of the 
individual predominantly create the properties. An eligible 
taxpayer is an individual, and also a corporation or 
partnership, substantially all of which is owned by one 
qualified employee owner (an individual and family members).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that if any expense is paid 
or incurred by the taxpayer in creating or acquiring any 
musical composition (including accompanying words) or any 
copyright with respect to a musical composition that is 
required to be capitalized, then the income forecast method 
does not apply to such expenses, but rather, the expenses are 
amortized over a five-year period. The five-year period is the 
period beginning with the month in which the composition or 
copyright was acquired (or if created, the five-taxable-year 
period beginning with the taxable year in which the expenses 
were paid or incurred).
      The provision does not apply to certain expenses. The 
expenses to which it does not apply are expenses: (1) that are 
qualified creative expenses under section 263A(h); (2) to which 
a simplified procedure established under section 263A(j)(2) 
applies; (3) that are an amortizable section 197 intangible; or 
(4) that, without regard to this provision, would not be 
allowable as a deduction.
      Effective date.--The provision is effective for expenses 
paid or incurred after December 31, 2005, in taxable years 
ending after that date.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment 
provision with the following modifications. Under the 
conference agreement, the five-year amortization period is 
elective for the taxable year. Thus, a taxpayer that places in 
service any musical composition or copyright with respect to a 
musical composition in a taxable year may elect to apply the 
provision with respect to all musical compositions and musical 
composition copyrights placed in service in that taxable year. 
An eligible taxpayer that does not make the election may 
recover the costs under any method allowable under present law, 
including the income forecast method.
      Under the conference agreement, the election may be made 
for any taxable year which begins before January 1, 2011.
      In addition, the conference agreement provides that the 
five-year amortization period begins in the month the property 
is placed in service.
      Effective date.--The conference agreement is effective 
for expenses paid or incurred with respect to property placed 
in service in taxable years beginning after December 31, 2005 
and before January 1, 2011.

                    TITLE III--CHARITABLE PROVISIONS

                    A. Charitable Giving Incentives

1. Charitable deduction for nonitemizers; floor on deductions for 
        itemizers (sec. 201 of the Senate amendment and secs. 63 and 
        170 of the Code)

                              PRESENT LAW

      In computing taxable income, an individual taxpayer who 
itemizes deductions generally is allowed to deduct the amount 
of cash and up to the fair market value of property contributed 
to a charity described in section 501(c)(3), to certain 
veterans' organizations, fraternal societies, and cemetery 
companies,\56\ or to a Federal, State, or local governmental 
entity for exclusively public purposes.\57\ The deduction also 
is allowed for purposes of calculating alternative minimum 
taxable income.
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    \56\ Secs. 170(c)(3)-(5).
    \57\ Sec. 170(c)(1).
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      The amount of the deduction allowable for a taxable year 
with respect to a charitable contribution of property may be 
reduced depending on the type of property contributed, the type 
of charitable organization to which the property is 
contributed, and the income of the taxpayer.\58\
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    \58\ Secs. 170(b) and (e).
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      A taxpayer who takes the standard deduction (i.e., who 
does not itemize deductions) may not take a separate deduction 
for charitable contributions.\59\
---------------------------------------------------------------------------
    \59\ Sec. 170(a). The Economic Recovery Tax Act of 1981 adopted a 
temporary provision that permitted individual taxpayers who did not 
itemize income tax deductions to claim a deduction from gross income 
for a specified percentage of their charitable contributions. The 
maximum deduction was $25 for 1982 and 1983, $75 for 1984, 50 percent 
of the amount of the contribution for 1985, and 100 percent of the 
amount of the contribution for 1986. The nonitemizer deduction 
terminated for contributions made after 1986.
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      A payment to a charity (regardless of whether it is 
termed a ``contribution'') in exchange for which the donor 
receives an economic benefit is not deductible, except to the 
extent that the donor can demonstrate that the payment exceeds 
the fair market value of the benefit received from the charity. 
To facilitate distinguishing charitable contributions from 
purchases of goods or services from charities, present law 
provides that no charitable contribution deduction is allowed 
for a separate contribution of $250 or more unless the donor 
obtains a contemporaneous written acknowledgement of the 
contribution from the charity indicating whether the charity 
provided any good or service (and an estimate of the value of 
any such good or service) to the taxpayer in consideration for 
the contribution.\60\ In addition, present law requires that 
any charity that receives a contribution exceeding $75 made 
partly as a gift and partly as consideration for goods or 
services furnished by the charity (a ``quid pro quo'' 
contribution) is required to inform the contributor in writing 
of an estimate of the value of the goods or services furnished 
by the charity and that only the portion exceeding the value of 
the goods or services is deductible as a charitable 
contribution.\61\
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    \60\ Sec. 170(f)(8).
    \61\ Sec. 6115.
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      Under present law, total deductible contributions of an 
individual taxpayer to public charities, private operating 
foundations, and certain types of private nonoperating 
foundations may not exceed 50 percent of the taxpayer's 
contribution base, which is the taxpayer's adjusted gross 
income for a taxable year (disregarding any net operating loss 
carryback). To the extent a taxpayer has not exceeded the 50-
percent limitation, (1) contributions of capital gain property 
to public charities generally may be deducted up to 30 percent 
of the taxpayer's contribution base, (2) contributions of cash 
to private foundations and certain other charitable 
organizations generally may be deducted up to 30 percent of the 
taxpayer's contribution base, and (3) contributions of capital 
gain property to private foundations and certain other 
charitable organizations generally may be deducted up to 20 
percent of the taxpayer's contribution base.
      Contributions by individuals in excess of the 50-percent, 
30-percent, and 20-percent limit may be carried over and 
deducted over the next five taxable years, subject to the 
relevant percentage limitations on the deduction in each of 
those years.
      In addition to the percentage limitations imposed 
specifically on charitable contributions, present law imposes a 
reduction on most itemized deductions, including charitable 
contribution deductions, for taxpayers with adjusted gross 
income in excess of a threshold amount, which is indexed 
annually for inflation. The threshold amount for 2006 is 
$150,500 ($77,250 for married individuals filing separate 
returns). For those deductions that are subject to the limit, 
the total amount of itemized deductions is reduced by three 
percent of adjusted gross income over the threshold amount, but 
not by more than 80 percent of itemized deductions subject to 
the limit. Beginning in 2006, the overall limitation on 
itemized deductions phases-out for all taxpayers. The overall 
limitation on itemized deductions is reduced by one-third in 
taxable years beginning in 2006 and 2007, and by two-thirds in 
taxable years beginning in 2008 and 2009. The overall 
limitation on itemized deductions is eliminated for taxable 
years beginning after December 31, 2009; however, this 
elimination of the limitation sunsets on December 31, 2010.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Deduction for nonitemizers
      In the case of an individual taxpayer who does not 
itemize deductions, the provision allows a ``direct charitable 
deduction'' from adjusted gross income for charitable 
contributions paid in cash during the taxable year. This 
deduction is allowed in addition to the standard deduction. The 
direct charitable deduction is the amount of the deduction 
allowable under section 170(a) for the taxable year for cash 
contributions (determined without regard to any carryover). The 
amount deductible under the provision is subject to the rules 
normally governing charitable contribution deductions, such as 
the substantiation requirements. In addition, the amount of the 
deduction is available only to the extent that the otherwise 
allowable direct charitable deduction exceeds the floor on 
charitable contributions, described below (i.e., $210 ($420 in 
the case of a joint return)). The deduction is allowed in 
computing alternative minimum taxable income.
      The provision does not change the present-law rules 
regarding the carryover of charitable contributions to or from 
a taxable year, including a taxable year in which the taxpayer 
is allowed the direct contribution deduction.
Floor on itemized deductions
      Under the provision, the amount of an individual's 
charitable contribution deduction (cash and noncash) is subject 
to a floor. The floor is $210 ($420 in the case of a joint 
return). In the case of an individual who elects to itemize 
deductions, the floor applies to the deduction otherwise 
allowed under section 170 for all contributions. In the case of 
an individual who does not elect to itemize deductions, the 
floor applies in determining the amount of the direct 
charitable deduction. The provision does not otherwise change 
the present-law rules pertaining to charitable contributions.
      Effective date.--The provision is effective for 
contributions made in taxable years beginning after December 
31, 2005, and before January 1, 2008.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Tax-free distributions from individual retirement plans for 
        charitable purposes (sec. 202 of the Senate amendment and secs. 
        408, 6034, 6104, and 6652 of the Code)

                              PRESENT LAW

In general
      If an amount withdrawn from a traditional individual 
retirement arrangement (``IRA'') or a Roth IRA is donated to a 
charitable organization, the rules relating to the tax 
treatment of withdrawals from IRAs apply to the amount 
withdrawn and the charitable contribution is subject to the 
normally applicable limitations on deductibility of such 
contributions.
Charitable contributions
      In computing taxable income, an individual taxpayer who 
itemizes deductions generally is allowed to deduct the amount 
of cash and up to the fair market value of property contributed 
to a charity described in section 501(c)(3), to certain 
veterans' organizations, fraternal societies, and cemetery 
companies,\62\ or to a Federal, State, or local governmental 
entity for exclusively public purposes.\63\ The deduction also 
is allowed for purposes of calculating alternative minimum 
taxable income.
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    \62\ Secs. 170(c)(3)-(5).
    \63\ Sec. 170(c)(1).
---------------------------------------------------------------------------
      The amount of the deduction allowable for a taxable year 
with respect to a charitable contribution of property may be 
reduced depending on the type of property contributed, the type 
of charitable organization to which the property is 
contributed, and the income of the taxpayer.\64\
---------------------------------------------------------------------------
    \64\ Secs. 170(b) and (e).
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      A taxpayer who takes the standard deduction (i.e., who 
does not itemize deductions) may not take a separate deduction 
for charitable contributions.\65\
---------------------------------------------------------------------------
    \65\ Sec. 170(a).
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      A payment to a charity (regardless of whether it is 
termed a ``contribution'') in exchange for which the donor 
receives an economic benefit is not deductible, except to the 
extent that the donor can demonstrate, among other things, that 
the payment exceeds the fair market value of the benefit 
received from the charity. To facilitate distinguishing 
charitable contributions from purchases of goods or services 
from charities, present law provides that no charitable 
contribution deduction is allowed for a separate contribution 
of $250 or more unless the donor obtains a contemporaneous 
written acknowledgement of the contribution from the charity 
indicating whether the charity provided any good or service 
(and an estimate of the value of any such good or service) to 
the taxpayer in consideration for the contribution.\66\ In 
addition, present law requires that any charity that receives a 
contribution exceeding $75 made partly as a gift and partly as 
consideration for goods or services furnished by the charity (a 
``quid pro quo'' contribution) is required to inform the 
contributor in writing of an estimate of the value of the goods 
or services furnished by the charity and that only the portion 
exceeding the value of the goods or services may be deductible 
as a charitable contribution.\67\
---------------------------------------------------------------------------
    \66\ Sec. 170(f)(8).
    \67\ Sec. 6115.
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      Under present law, total deductible contributions of an 
individual taxpayer to public charities, private operating 
foundations, and certain types of private nonoperating 
foundations may not exceed 50 percent of the taxpayer's 
contribution base, which is the taxpayer's adjusted gross 
income for a taxable year (disregarding any net operating loss 
carryback). To the extent a taxpayer has not exceeded the 50-
percent limitation, (1) contributions of capital gain property 
to public charities generally may be deducted up to 30 percent 
of the taxpayer's contribution base, (2) contributions of cash 
to private foundations and certain other charitable 
organizations generally may be deducted up to 30 percent of the 
taxpayer's contribution base, and (3) contributions of capital 
gain property to private foundations and certain other 
charitable organizations generally may be deducted up to 20 
percent of the taxpayer's contribution base.
      Contributions by individuals in excess of the 50-percent, 
30-percent, and 20-percent limits may be carried over and 
deducted over the next five taxable years, subject to the 
relevant percentage limitations on the deduction in each of 
those years.
      In addition to the percentage limitations imposed 
specifically on charitable contributions, present law imposes a 
reduction on most itemized deductions, including charitable 
contribution deductions, for taxpayers with adjusted gross 
income in excess of a threshold amount, which is indexed 
annually for inflation. The threshold amount for 2006 is 
$150,500 ($75,250 for married individuals filing separate 
returns). For those deductions that are subject to the limit, 
the total amount of itemized deductions is reduced by three 
percent of adjusted gross income over the threshold amount, but 
not by more than 80 percent of itemized deductions subject to 
the limit. Beginning in 2006, the overall limitation on 
itemized deductions phases-out for all taxpayers. The overall 
limitation on itemized deductions is reduced by one-third in 
taxable years beginning in 2006 and 2007, and by two-thirds in 
taxable years beginning in 2008 and 2009. The overall 
limitation on itemized deductions is eliminated for taxable 
years beginning after December 31, 2009; however, this 
elimination of the limitation sunsets on December 31, 2010.
      In general, a charitable deduction is not allowed for 
income, estate, or gift tax purposes if the donor transfers an 
interest in property to a charity (e.g., a remainder) while 
also either retaining an interest in that property (e.g., an 
income interest) or transferring an interest in that property 
to a noncharity for less than full and adequate 
consideration.\68\ Exceptions to this general rule are provided 
for, among other interests, remainder interests in charitable 
remainder annuity trusts, charitable remainder unitrusts, and 
pooled income funds, and present interests in the form of a 
guaranteed annuity or a fixed percentage of the annual value of 
the property.\69\ For such interests, a charitable deduction is 
allowed to the extent of the present value of the interest 
designated for a charitable organization.
---------------------------------------------------------------------------
    \68\ Secs. 170(f), 2055(e)(2), and 2522(c)(2).
    \69\ Sec. 170(f)(2).
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IRA rules
      Within limits, individuals may make deductible and 
nondeductible contributions to a traditional IRA. Amounts in a 
traditional IRA are includible in income when withdrawn (except 
to the extent the withdrawal represents a return of 
nondeductible contributions). Individuals also may make 
nondeductible contributions to a Roth IRA. Qualified 
withdrawals from a Roth IRA are excludable from gross income. 
Withdrawals from a Roth IRA that are not qualified withdrawals 
are includible in gross income to the extent attributable to 
earnings. Includible amounts withdrawn from a traditional IRA 
or a Roth IRA before attainment of age 59\1/2\ are subject to 
an additional 10-percent early withdrawal tax, unless an 
exception applies. Under present law, minimum distributions are 
required to be made from tax-favored retirement arrangements, 
including IRAs. Minimum required distributions from a 
traditional IRA must generally begin by the April 1 of the 
calendar year following the year in which the IRA owner attains 
age 70\1/2\.\70\
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    \70\ Minimum distribution rules also apply in the case of 
distributions after the death of a traditional or Roth IRA owner.
---------------------------------------------------------------------------
      If an individual has made nondeductible contributions to 
a traditional IRA, a portion of each distribution from an IRA 
is nontaxable until the total amount of nondeductible 
contributions has been received. In general, the amount of a 
distribution that is nontaxable is determined by multiplying 
the amount of the distribution by the ratio of the remaining 
nondeductible contributions to the account balance. In making 
the calculation, all traditional IRAs of an individual are 
treated as a single IRA, all distributions during any taxable 
year are treated as a single distribution, and the value of the 
contract, income on the contract, and investment in the 
contract are computed as of the close of the calendar year.
      In the case of a distribution from a Roth IRA that is not 
a qualified distribution, in determining the portion of the 
distribution attributable to earnings, contributions and 
distributions are deemed to be distributed in the following 
order: (1) regular Roth IRA contributions; (2) taxable 
conversion contributions;\71\ (3) nontaxable conversion 
contributions; and (4) earnings. In determining the amount of 
taxable distributions from a Roth IRA, all Roth IRA 
distributions in the same taxable year are treated as a single 
distribution, all regular Roth IRA contributions for a year are 
treated as a single contribution, and all conversion 
contributions during the year are treated as a single 
contribution.
---------------------------------------------------------------------------
    \71\ Conversion contributions refer to conversions of amounts in a 
traditional IRA to a Roth IRA.
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      Distributions from an IRA (other than a Roth IRA) are 
generally subject to withholding unless the individual elects 
not to have withholding apply.\72\ Elections not to have 
withholding apply are to be made in the time and manner 
prescribed by the Secretary.
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    \72\ Sec. 3405.
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Split-interest trust filing requirements
      Split-interest trusts, including charitable remainder 
annuity trusts, charitable remainder unitrusts, and pooled 
income funds, are required to file an annual information return 
(Form 1041A).\73\ Trusts that are not split-interest trusts but 
that claim a charitable deduction for amounts permanently set 
aside for a charitable purpose\74\ also are required to file 
Form 1041A. The returns are required to be made publicly 
available.\75\ A trust that is required to distribute all trust 
net income currently to trust beneficiaries in a taxable year 
is exempt from this return requirement for such taxable year. A 
failure to file the required return may result in a penalty on 
the trust of $10 a day for as long as the failure continues, up 
to a maximum of $5,000 per return.
---------------------------------------------------------------------------
    \73\ Sec. 6034. This requirement applies to all split-interest 
trusts described in section 4947(a)(2).
    \74\ Sec. 642(c).
    \75\ Sec. 6104(b).
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      In addition, split-interest trusts are required to file 
annually Form 5227.\76\ Form 5227 requires disclosure of 
information regarding a trust's noncharitable beneficiaries. 
The penalty for failure to file this return is calculated based 
on the amount of tax owed. A split-interest trust generally is 
not subject to tax and therefore, in general, a penalty may not 
be imposed for the failure to file Form 5227. Form 5227 is not 
required to be made publicly available.
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    \76\ Sec. 6011; Treas. Reg. sec. 53.6011-1(d).
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                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Qualified charitable distributions from IRAs
      The provision provides an exclusion from gross income for 
otherwise taxable IRA distributions from a traditional or a 
Roth IRA in the case of qualified charitable distributions.\77\ 
Special rules apply in determining the amount of an IRA 
distribution that is otherwise taxable. The present-law rules 
regarding taxation of IRA distributions and the deduction of 
charitable contributions continue to apply to distributions 
from an IRA that are not qualified charitable distributions. 
Qualified charitable distributions are taken into account for 
purposes of the minimum distribution rules applicable to 
traditional IRAs to the same extent the distribution would have 
been taken into account under such rules had the distribution 
not been directly distributed under the provision. An IRA does 
not fail to qualify as an IRA merely because qualified 
charitable distributions have been made from the IRA. It is 
intended that the Secretary will prescribe rules under which 
IRA owners are deemed to elect out of withholding if they 
designate that a distribution is intended to be a qualified 
charitable distribution.
---------------------------------------------------------------------------
    \77\ The provision does not apply to distributions from employer-
sponsored retirements plans, including SIMPLE IRAs and simplified 
employee pensions (``SEPs'').
---------------------------------------------------------------------------
      A qualified charitable distribution is any distribution 
from an IRA that is made after December 31, 2005, and before 
January 1, 2008, directly by the IRA trustee either to (1) an 
organization to which deductible contributions can be made (a 
``direct distribution'') or (2) a ``split-interest entity.'' A 
split-interest entity means a charitable remainder annuity 
trust or charitable remainder unitrust (together referred to as 
a ``charitable remainder trust''), a pooled income fund, or a 
charitable gift annuity. Direct distributions are eligible for 
the exclusion only if made on or after the date the IRA owner 
attains age 70\1/2\. Distributions to a split interest entity 
are eligible for the exclusion only if made on or after the 
date the IRA owner attains age 59\1/2\. In the case of 
distributions to split-interest distributions, no person may 
hold an income interest in the amounts in the split-interest 
entity attributable to the charitable distribution other than 
the IRA owner, the IRA owner's spouse, or a charitable 
organization.
      The exclusion applies to direct distributions only if a 
charitable contribution deduction for the entire distribution 
otherwise would be allowable (under present law), determined 
without regard to the generally applicable percentage 
limitations. Thus, for example, if the deductible amount is 
reduced because of a benefit received in exchange, or if a 
deduction is not allowable because the donor did not obtain 
sufficient substantiation, the exclusion is not available with 
respect to any part of the IRA distribution. Similarly, the 
exclusion applies in the case of a distribution directly to a 
split-interest entity only if a charitable contribution 
deduction for the entire present value of the charitable 
interest (for example, a remainder interest) otherwise would be 
allowable, determined without regard to the generally 
applicable percentage limitations.
      If the IRA owner has any IRA that includes nondeductible 
contributions, a special rule applies in determining the 
portion of a distribution that is includible in gross income 
(but for the provision) and thus is eligible for qualified 
charitable distribution treatment. Under the special rule, the 
distribution is treated as consisting of income first, up to 
the aggregate amount that would be includible in gross income 
(but for the provision) if the aggregate balance of all IRAs 
having the same owner were distributed during the same year. In 
determining the amount of subsequent IRA distributions 
includible in income, proper adjustments are to be made to 
reflect the amount treated as a qualified charitable 
distribution under the special rule.
      Special rules apply for distributions to split-interest 
entities. For distributions to charitable remainder trusts, the 
provision provides that subsequent distributions from the 
charitable remainder trust are treated as ordinary income in 
the hands of the beneficiary, notwithstanding how such amounts 
normally are treated under section 664(b). In addition, for a 
charitable remainder trust to be eligible to receive qualified 
charitable distributions, the charitable remainder trust has to 
be funded exclusively by such distributions. For example, an 
IRA owner may not make qualified charitable distributions to an 
existing charitable remainder trust any part of which was 
funded with assets that were not qualified charitable 
distributions.
      Under the provision, a pooled income fund is eligible to 
receive qualified charitable distributions only if the fund 
accounts separately for amounts attributable to such 
distributions. In addition, all distributions from the pooled 
income fund that are attributable to qualified charitable 
distributions are treated as ordinary income to the 
beneficiary. Qualified charitable distributions to a pooled 
income fund are not includible in the fund's gross income.
      In determining the amount includible in gross income by 
reason of a payment from a charitable gift annuity purchased 
with a qualified charitable distribution from an IRA, the 
portion of the distribution from the IRA used to purchase the 
annuity is not an investment in the annuity contract.
      Any amount excluded from gross income by reason of the 
provision is not taken into account in determining the 
deduction for charitable contributions under section 170.
Qualified charitable distribution examples
      The following examples illustrate the determination of 
the portion of an IRA distribution that is a qualified 
charitable distribution and the application of the special 
rules for a qualified charitable distribution to a split-
interest entity. In each example, it is assumed that the 
requirements for qualified charitable distribution treatment 
are otherwise met (e.g., the applicable age requirement and the 
requirement that contributions are otherwise deductible) and 
that no other IRA distributions occur during the year.
      Example 1.--Individual A has a traditional IRA with a 
balance of $100,000, consisting solely of deductible 
contributions and earnings. Individual A has no other IRA. The 
entire IRA balance is distributed in a direct distribution to a 
charitable organization. Under present law, the entire 
distribution of $100,000 would be includible in Individual A's 
income. Accordingly, under the provision, the entire 
distribution of $100,000 is a qualified charitable 
distribution. As a result, no amount is included in Individual 
A's income as a result of the distribution and the distribution 
is not taken into account in determining the amount of 
Individual A's charitable deduction for the year.
      Example 2.--The facts are the same as in Example 1, 
except that the entire IRA balance of $100,000 is distributed 
to a charitable remainder unitrust, which contains no other 
assets and which must be funded exclusively by qualified 
charitable distributions. Under the terms of the trust, 
Individual A is entitled to receive five percent of the net 
fair market value of the trust assets each year. As explained 
in Example 1, the entire $100,000 distribution is a qualified 
charitable distribution, no amount is included in Individual 
A's income as a result of the distribution, and the 
distribution is not taken into account in determining the 
amount of Individual A's charitable deduction for the year. In 
addition, under a special rule in the provision for charitable 
remainder trusts, any distribution from the charitable 
remainder unitrust to Individual A is includible in gross 
income as ordinary income, regardless of the character of the 
distribution under the usual rules for the taxation of 
distributions from such a trust.
      Example 3.--Individual B has a traditional IRA with a 
balance of $100,000, consisting of $20,000 of nondeductible 
contributions and $80,000 of deductible contributions and 
earnings. Individual B has no other IRA. In a direct 
distribution to a charitable organization, $80,000 is 
distributed from the IRA. Under present law, a portion of the 
distribution from the IRA would be treated as a nontaxable 
return of nondeductible contributions. The nontaxable portion 
of the distribution would be $16,000, determined by multiplying 
the amount of the distribution ($80,000) by the ratio of the 
nondeductible contributions to the account balance ($20,000/
$100,000). Accordingly, under present law, $64,000 of the 
distribution ($80,000 minus $16,000) would be includible in 
Individual B's income.
      Under the provision, notwithstanding the present-law tax 
treatment of IRA distributions, the distribution is treated as 
consisting of income first, up to the total amount that would 
be includible in gross income (but for the provision) if all 
amounts were distributed from all IRAs otherwise taken into 
account in determining the amount of IRA distributions. The 
total amount that would be includible in income if all amounts 
were distributed from the IRA is $80,000. Accordingly, under 
the provision, the entire $80,000 distributed to the charitable 
organization is treated as includible in income (before 
application of the provision) and is a qualified charitable 
distribution. As a result, no amount is included in Individual 
B's income as a result of the distribution and the distribution 
is not taken into account in determining the amount of 
Individual B's charitable deduction for the year. In addition, 
for purposes of determining the tax treatment of other 
distributions from the IRA, $20,000 of the amount remaining in 
the IRA is treated as Individual B's nondeductible 
contributions (i.e., not subject to tax upon distribution).
Split-interest trust filing requirements
      The provision increases the penalty on split-interest 
trusts for failure to file a return and for failure to include 
any of the information required to be shown on such return and 
to show the correct information. The penalty is $20 for each 
day the failure continues up to $10,000 for any one return. In 
the case of a split-interest trust with gross income in excess 
of $250,000, the penalty is $100 for each day the failure 
continues up to a maximum of $50,000. In addition, if a person 
(meaning any officer, director, trustee, employee, or other 
individual who is under a duty to file the return or include 
required information) \78\ knowingly failed to file the return 
or include required information, then that person is personally 
liable for such a penalty, which would be imposed in addition 
to the penalty that is paid by the organization. Information 
regarding beneficiaries that are not charitable organizations 
as described in section 170(c) is exempt from the requirement 
to make information publicly available. In addition, the 
provision repeals the present-law exception to the filing 
requirement for split-interest trusts that are required in a 
taxable year to distribute all net income currently to 
beneficiaries. Such exception remains available to trusts other 
than split-interest trusts that are otherwise subject to the 
filing requirement.
---------------------------------------------------------------------------
    \78\ Sec. 6652(c)(4)(C).
---------------------------------------------------------------------------
Effective date
      The provision relating to qualified charitable 
distributions is effective for distributions made in taxable 
years beginning after December 31, 2005, and before January 1, 
2008. The provision relating to information returns of split-
interest trusts is effective for returns for taxable years 
beginning after December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
3. Charitable deduction for contributions of food inventory (sec. 203 
        of the Senate amendment and sec. 170 of the Code)

                              PRESENT LAW

      Under present law, a taxpayer's deduction for charitable 
contributions of inventory generally is limited to the 
taxpayer's basis (typically, cost) in the inventory, or if less 
the fair market value of the inventory.
      For certain contributions of inventory, C corporations 
may claim an enhanced deduction equal to the lesser of (1) 
basis plus one-half of the item's appreciation (i.e., basis 
plus one half of fair market value in excess of basis) or (2) 
two times basis (sec. 170(e)(3)). In general, a C corporation's 
charitable contribution deductions for a year may not exceed 10 
percent of the corporation's taxable income (sec. 170(b)(2)). 
To be eligible for the enhanced deduction, the contributed 
property generally must be inventory of the taxpayer, 
contributed to a charitable organization described in section 
501(c)(3) (except for private nonoperating foundations), and 
the donee must (1) use the property consistent with the donee's 
exempt purpose solely for the care of the ill, the needy, or 
infants, (2) not transfer the property in exchange for money, 
other property, or services, and (3) provide the taxpayer a 
written statement that the donee's use of the property will be 
consistent with such requirements. In the case of contributed 
property subject to the Federal Food, Drug, and Cosmetic Act, 
the property must satisfy the applicable requirements of such 
Act on the date of transfer and for 180 days prior to the 
transfer.
      A donor making a charitable contribution of inventory 
must make a corresponding adjustment to the cost of goods sold 
by decreasing the cost of goods sold by the lesser of the fair 
market value of the property or the donor's basis with respect 
to the inventory (Treas. Reg. sec. 1.170A-4A(c)(3)). 
Accordingly, if the allowable charitable deduction for 
inventory is the fair market value of the inventory, the donor 
reduces its cost of goods sold by such value, with the result 
that the difference between the fair market value and the 
donor's basis may still be recovered by the donor other than as 
a charitable contribution.
      To use the enhanced deduction, the taxpayer must 
establish that the fair market value of the donated item 
exceeds basis. The valuation of food inventory has been the 
subject of disputes between taxpayers and the IRS.\79\
---------------------------------------------------------------------------
    \79\ Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995) 
(holding that the value of surplus bread inventory donated to charity 
was the full retail price of the bread rather than half the retail 
price, as the IRS asserted).
---------------------------------------------------------------------------
      Under the Katrina Emergency Tax Relief Act of 2005, any 
taxpayer, whether or not a C corporation, engaged in a trade or 
business is eligible to claim the enhanced deduction for 
certain donations made after August 28, 2005, and before 
January 1, 2006, of food inventory. For taxpayers other than C 
corporations, the total deduction for donations of food 
inventory in a taxable year generally may not exceed 10 percent 
of the taxpayer's net income for such taxable year from all 
sole proprietorships, S corporations, or partnerships (or other 
entity that is not a C corporation) from which contributions of 
``apparently wholesome food'' are made. ``Apparently wholesome 
food'' is defined as food intended for human consumption that 
meets all quality and labeling standards imposed by Federal, 
State, and local laws and regulations even though the food may 
not be readily marketable due to appearance, age, freshness, 
grade, size, surplus, or other conditions.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Extension of Katrina Emergency Tax Relief Act of 2005
      The provision extends the provision enacted as part of 
the Katrina Emergency Tax Relief Act of 2005. As under such 
Act, under the provision, any taxpayer, whether or not a C 
corporation, engaged in a trade or business is eligible to 
claim the enhanced deduction for donations of food inventory. 
For taxpayers other than C corporations, the total deduction 
for donations of food inventory in a taxable year generally may 
not exceed 10 percent of the taxpayer's net income for such 
taxable year from all sole proprietorships, S corporations, or 
partnerships (or other non C corporation) from which 
contributions of apparently wholesome food are made. For 
example, as under the Katrina Emergency Tax Relief Act of 2005, 
if a taxpayer is a sole proprietor, a shareholder in an S 
corporation, and a partner in a partnership, and each business 
makes charitable contributions of food inventory, the 
taxpayer's deduction for donations of food inventory is limited 
to 10 percent of the taxpayer's net income from the sole 
proprietorship and the taxpayer's interests in the S 
corporation and partnership. However, if only the sole 
proprietorship and the S corporation made charitable 
contributions of food inventory, the taxpayer's deduction would 
be limited to 10 percent of the net income from the trade or 
business of the sole proprietorship and the taxpayer's interest 
in the S corporation, but not the taxpayer's interest in the 
partnership.\80\
---------------------------------------------------------------------------
    \80\ The 10 percent limitation does not affect the application of 
the generally applicable percentage limitations. For example, if 10 
percent of a sole proprietor's net income from the proprietor's trade 
or business was greater than 50 percent of the proprietor's 
contribution base, the available deduction for the taxable year (with 
respect to contributions to public charities) would be 50 percent of 
the proprietor's contribution base. Consistent with present law, such 
contributions may be carried forward because they exceed the 50 percent 
limitation. Contributions of food inventory by a taxpayer that is not a 
C corporation that exceed the 10 percent limitation but not the 50 
percent limitation could not be carried forward.
---------------------------------------------------------------------------
      Under the provision, the enhanced deduction for food is 
available only for food that qualifies as ``apparently 
wholesome food.'' ``Apparently wholesome food'' is defined as 
it is defined under the Katrina Emergency Tax Relief Act of 
2005.
Modifications to enhanced deduction for food inventory
      Under the provision, for purposes of calculating the 
enhanced deduction, taxpayers that do not account for 
inventories under section 471 and that are not required to 
capitalize indirect costs under section 263A are able to elect 
to treat the basis of the contributed food as being equal to 25 
percent of the food's fair market value.\81\
---------------------------------------------------------------------------
    \81\ This includes, for example, taxpayers who are eligible for 
administrative relief under Revenue Procedures 2002-28 and 2001-10.
---------------------------------------------------------------------------
      The provision changes the amount of the enhanced 
deduction for eligible contributions of food inventory to the 
lesser of fair market value or twice the taxpayer's basis in 
the inventory. For example, a taxpayer who makes an eligible 
donation of food that has a fair market value of $10 and a 
basis of $4 could take a deduction of $8 (twice basis). If the 
taxpayer's basis is $6 instead of $4, then the deduction would 
be $10 (fair market value). By contrast, under present law, a C 
corporation's deduction in the first example would be $7 (fair 
market value less half the appreciation) and in the second 
example would be $8. (Except for contributions made after 
August 28, 2005, and before January 1, 2006, taxpayers other 
than C corporations generally could take a deduction for a 
contribution of food inventory only for the $4 basis in either 
example.)
      The provision provides that the fair market value of 
donated apparently wholesome food that cannot or will not be 
sold solely due to internal standards of the taxpayer or lack 
of market is determined without regard to such internal 
standards or lack of market and by taking into account the 
price at which the same or substantially the same food items 
(as to both type and quality) are sold by the taxpayer at the 
time of the contribution or, if not so sold at such time, in 
the recent past.
Effective date
      The provision is effective for contributions made in 
taxable years beginning after December 31, 2005, and before 
January 1, 2008.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
4. Basis adjustment to stock of S corporation contributing property 
        (sec. 204 of the Senate amendment and sec. 1367 of the Code)

                              PRESENT LAW

      Under present law, if an S corporation contributes money 
or other property to a charity, each shareholder takes into 
account the shareholder's pro rata share of the contribution in 
determining its own income tax liability.\82\ A shareholder of 
an S corporation reduces the basis in the stock of the S 
corporation by the amount of the charitable contribution that 
flows through to the shareholder.\83\
---------------------------------------------------------------------------
    \82\ Sec. 1366(a)(1)(A).
    \83\ Sec. 1367(a)(2)(B).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides that the amount of a shareholder's 
basis reduction in the stock of an S corporation by reason of a 
charitable contribution made by the corporation will be equal 
to the shareholder's pro rata share of the adjusted basis of 
the contributed property.\84\
---------------------------------------------------------------------------
    \84\ See Rev. Rul. 96-11 (1996-1 C.B. 140) for a rule reaching a 
similar result in the case of charitable contributions made by a 
partnership.
---------------------------------------------------------------------------
      Thus, for example, assume an S corporation with one 
individual shareholder makes a charitable contribution of stock 
with a basis of $200 and a fair market value of $500. The 
shareholder will be treated as having made a $500 charitable 
contribution (or a lesser amount if the special rules of 
section 170(e) apply), and will reduce the basis of the S 
corporation stock by $200.\85\
---------------------------------------------------------------------------
    \85\ This example assumes that basis of the S corporation stock 
(before reduction) is at least $200.
---------------------------------------------------------------------------
      Effective date.--The provision applies to contributions 
made in taxable years beginning after December 31, 2005, and 
before January 1, 2008.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
5. Charitable deduction for contributions of book inventory (sec. 205 
        of the Senate amendment and sec. 170 of the Code)

                              PRESENT LAW

      Under present law, a taxpayer's deduction for charitable 
contributions of inventory generally is limited to the 
taxpayer's basis (typically, cost) in the inventory, or if less 
the fair market value of the inventory.
      For certain contributions of inventory, C corporations 
may claim an enhanced deduction equal to the lesser of (1) 
basis plus one-half of the item's appreciation (i.e., basis 
plus one half of fair market value in excess of basis) or (2) 
two times basis (sec. 170(e)(3)). In general, a C corporation's 
charitable contribution deductions for a year may not exceed 10 
percent of the corporation's taxable income (sec. 170(b)(2)). 
To be eligible for the enhanced deduction, the contributed 
property generally must be inventory of the taxpayer, 
contributed to a charitable organization described in section 
501(c)(3) (except for private nonoperating foundations), and 
the donee must (1) use the property consistent with the donee's 
exempt purpose solely for the care of the ill, the needy, or 
infants, (2) not transfer the property in exchange for money, 
other property, or services, and (3) provide the taxpayer a 
written statement that the donee's use of the property will be 
consistent with such requirements. In the case of contributed 
property subject to the Federal Food, Drug, and Cosmetic Act, 
the property must satisfy the applicable requirements of such 
Act on the date of transfer and for 180 days prior to the 
transfer.
      A donor making a charitable contribution of inventory 
must make a corresponding adjustment to the cost of goods sold 
by decreasing the cost of goods sold by the lesser of the fair 
market value of the property or the donor's basis with respect 
to the inventory (Treas. Reg. sec. 1.170A-4A(c)(3)). 
Accordingly, if the allowable charitable deduction for 
inventory is the fair market value of the inventory, the donor 
reduces its cost of goods sold by such value, with the result 
that the difference between the fair market value and the 
donor's basis may still be recovered by the donor other than as 
a charitable contribution.
      To use the enhanced deduction, the taxpayer must 
establish that the fair market value of the donated item 
exceeds basis.
      The Katrina Emergency Tax Relief Act of 2005 extended the 
present-law enhanced deduction for C corporations to certain 
qualified book contributions made after August 28, 2005, and 
before January 1, 2006. For such purposes, a qualified book 
contribution means a charitable contribution of books to a 
public school that provides elementary education or secondary 
education (kindergarten through grade 12) and that is an 
educational organization that normally maintains a regular 
faculty and curriculum and normally has a regularly enrolled 
body of pupils or students in attendance at the place where its 
educational activities are regularly carried on. The enhanced 
deduction under the Katrina Emergency Tax Relief Act of 2005 is 
not allowed unless the donee organization certifies in writing 
that the contributed books are suitable, in terms of currency, 
content, and quantity, for use in the donee's educational 
programs and that the donee will use the books in such 
educational programs.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision modifies the present-law enhanced deduction 
for C corporations so that it is equal to the lesser of fair 
market value or twice the taxpayer's basis in the case of 
qualified book contributions. The provision provides that the 
fair market value for this purpose is determined by reference 
to a bona fide published market price for the book. Under the 
provision, a bona fide published market price of a book is a 
price of a book, determined using the same printing and same 
edition, published within seven years preceding the 
contribution, determined as a result of an arm's length 
transaction, and for which the book was customarily sold. For 
example, a publisher's listed retail price for a book would not 
meet the standard if the publisher could not demonstrate to the 
satisfaction of the Secretary that the price was one at which 
the book was customarily sold and was the result of an arm's 
length transaction. If a publisher entered into a contract with 
a local school district to sell newly published textbooks six 
years prior to making a qualified book contribution of such 
textbooks, the publisher could use as a bona fide published 
market price, the price at which such books regularly were sold 
to the school district under the contract. By contrast, if a 
publisher listed in a catalogue or elsewhere a ``suggested 
retail price,'' but books were not in fact customarily sold at 
such price, the publisher could not use the ``suggested retail 
price'' to determine the fair market value of the book for 
purposes of the enhanced deduction. Thus, in general, a bona 
fide published market price must be independently verifiable by 
reference to actual sales within the seven-year period 
preceding the contribution, and not to a publisher's own price 
list.
      As an illustration of the mechanics of calculating the 
enhanced deduction under the provision, a C corporation that 
made a qualified book contribution with a bona fide published 
market price of $10 and a basis of $4 could take a deduction of 
$8 (twice basis). If the taxpayer's basis is $6 instead of $4, 
then the deduction is $10. Also, in such latter case, if the 
book's bona fide published market price was $5 at the time of 
the contribution but was $10 five years before the 
contribution, then the deduction is $10.
      A qualified book contribution means a charitable 
contribution of books to: (1) an educational organization that 
normally maintains a regular faculty and curriculum and 
normally has a regularly enrolled body of pupils or students in 
attendance at the place where its educational activities are 
regularly carried on; (2) a public library; or (3) an 
organization described in section 501(c)(3) (except for private 
nonoperating foundations), that is organized primarily to make 
books available to the general public at no cost or to operate 
a literacy program. The donee must: (1) use the property 
consistent with the donee's exempt purpose; (2) not transfer 
the property in exchange for money, other property, or 
services; and (3) provide the taxpayer a written statement that 
the donee's use of the property will be consistent with such 
requirements and also that the books are suitable, in terms of 
currency, content, and quantity, for use in the donee's 
educational programs and that the donee will use the books in 
such educational programs.
      Effective date.--The provision is effective for 
contributions made in taxable years beginning after December 
31, 2005, and before January 1, 2008.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
6. Modify tax treatment of certain payments to controlling exempt 
        organizations and public disclosure of information relating to 
        UBIT (sec. 206 of the Senate amendment and secs. 512, 6011, 
        6104, and new sec. 6720C of the Code)

                              PRESENT LAW

Payments to controlling exempt organizations
      In general, interest, rents, royalties, and annuities are 
excluded from the unrelated business income of tax-exempt 
organizations. However, section 512(b)(13) generally treats 
otherwise excluded rent, royalty, annuity, and interest income 
as unrelated business income if such income is received from a 
taxable or tax-exempt subsidiary that is 50 percent controlled 
by the parent tax-exempt organization. In the case of a stock 
subsidiary, ``control'' means ownership by vote or value of 
more than 50 percent of the stock. In the case of a partnership 
or other entity, control means ownership of more than 50 
percent of the profits, capital or beneficial interests. In 
addition, present law applies the constructive ownership rules 
of section 318 for purposes of section 512(b)(13). Thus, a 
parent exempt organization is deemed to control any subsidiary 
in which it holds more than 50 percent of the voting power or 
value, directly (as in the case of a first-tier subsidiary) or 
indirectly (as in the case of a second-tier subsidiary).
      Under present law, interest, rent, annuity, or royalty 
payments made by a controlled entity to a tax-exempt 
organization are includable in the latter organization's 
unrelated business income and are subject to the unrelated 
business income tax to the extent the payment reduces the net 
unrelated income (or increases any net unrelated loss) of the 
controlled entity (determined as if the entity were tax 
exempt).
      The Taxpayer Relief Act of 1997 (the ``1997 Act'') made 
several modifications to the control requirement of section 
512(b)(13). In order to provide transitional relief, the 
changes made by the 1997 Act do not apply to any payment 
received or accrued during the first two taxable years 
beginning on or after the date of enactment of the 1997 Act 
(August 5, 1997) if such payment is received or accrued 
pursuant to a binding written contract in effect on June 8, 
1997, and at all times thereafter before such payment (but not 
pursuant to any contract provision that permits optional 
accelerated payments).
Public disclosure of returns
      In general, an organization described in section 501(c) 
or (d) is required to make available for public inspection a 
copy of its annual information return (Form 990) and exemption 
application materials.\86\ A penalty may be imposed on any 
person who does not make an organization's annual returns or 
exemption application materials available for public 
inspection. The penalty amount is $20 for each day during which 
a failure occurs. If more than one person fails to comply, each 
person is jointly and severally liable for the full amount of 
the penalty. The maximum penalty that may be imposed on all 
persons for any one annual return is $10,000. There is no 
maximum penalty amount for failing to make exemption 
application materials available for public inspection. Any 
person who willfully fails to comply with the public inspection 
requirements is subject to an additional penalty of $5,000.\87\
---------------------------------------------------------------------------
    \86\ Sec. 6104(d).
    \87\ Sec. 6685.
---------------------------------------------------------------------------
      These requirements do not apply to an organization's 
annual return for unrelated business income tax (generally Form 
990-T).\88\
---------------------------------------------------------------------------
    \88\ Treas. Reg. sec. 301.6104(d)-1(b)(4)(ii).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Payments to controlling exempt organizations
      The provision provides that the general rule of section 
512(b)(13), which includes interest, rent, annuity, or royalty 
payments made by a controlled entity to a tax-exempt 
organization in the latter organization's unrelated business 
income to the extent the payment reduces the net unrelated 
income (or increases any net unrelated loss) of the controlled 
entity, applies only to the portion of payments received or 
accrued in a taxable year that exceed the amount of the 
specified payment that would have been paid or accrued if such 
payment had been determined under the principles of section 
482. Thus, if a payment of rent by a controlled subsidiary to 
its tax-exempt parent organization exceeds fair market value, 
the excess amount of such payment over fair market value (as 
determined in accordance with section 482) is included in the 
parent organization's unrelated business income, to the extent 
that such excess reduced the net unrelated income (or increased 
any net unrelated loss) of the controlled entity (determined as 
if the entity were tax exempt). In addition, the provision 
imposes a 20-percent penalty on the larger of such excess 
determined without regard to any amendment or supplement to a 
return of tax, or such excess determined with regard to all 
such amendments and supplements.
      The provision provides that if modifications to section 
512(b)(13) made by the 1997 Act did not apply to a contract 
because of the transitional relief provided by the 1997 Act, 
then such modifications also do not apply to amounts received 
or accrued under such contract before January 1, 2001.
Require public availability of unrelated business income tax returns
      The provision extends the present-law public inspection 
and disclosure requirements and penalties applicable to the 
Form 990 to the unrelated business income tax return (Form 990-
T) of organizations described in section 501(c)(3). The 
provision provides that certain information may be withheld by 
the organization from public disclosure and inspection if 
public availability would adversely affect the organization, 
similar to the information that may be withheld under present 
law with respect to applications for tax exemption and the Form 
990 (e.g., information relating to a trade secret, patent, 
process, style of work, or apparatus of the organization, if 
the Secretary determines that public disclosure of such 
information would adversely affect the organization).
Require a UBIT certification for certain large charitable organizations
      Under the provision, a charitable organization that has 
annual total gross income and receipts (including, e.g., 
contributions and grants, program service revenue, investment 
income, and revenues from an unrelated trade or business or 
other sources) or gross assets of at least $10 million on the 
last day of the taxable year must include with its Form 990 and 
Form 990-T filings (if any) a statement by an independent 
auditor or an independent counsel that (1) contains a 
certification that the information contained in the return has 
been reviewed by the auditor or counsel and, to the best of his 
or her knowledge, is accurate; (2) to the best of the auditor's 
or counsel's knowledge, the allocation of expenses between the 
exempt and the unrelated business income activities of the 
organization comply with the requirements set forth by the 
Secretary under section 512; and (3) indicates whether the 
auditor or counsel has provided a tax opinion to the 
organization regarding the classification of any trade or 
business of the organization as an unrelated trade or business 
or the treatment of any income as unrelated business taxable 
income and a description of any material facts with respect to 
any such opinion.
      Failure to file the required statement results in a 
penalty, imposed on the organization, of one half of one 
percent (0.5 percent) of the organization's total gross 
revenues for the taxable year, excluding revenues from 
contributions and grants. No penalty is imposed with respect to 
any failure that is due to reasonable cause.
      Effective date.--The provision related to payments to 
controlling organizations applies to payments received or 
accrued after December 31, 2000. The public availability 
requirements of the provision apply to returns filed after the 
date of enactment. The certification requirement applies to 
returns for taxable years beginning after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
7. Encourage contributions of real property made for conservation 
        purposes (sec. 207 of the Senate amendment and sec. 170 of the 
        Code)

                              PRESENT LAW

Charitable contributions generally
      In general, a deduction is permitted for charitable 
contributions, subject to certain limitations that depend on 
the type of taxpayer, the property contributed, and the donee 
organization. The amount of deduction generally equals the fair 
market value of the contributed property on the date of the 
contribution. Charitable deductions are provided for income, 
estate, and gift tax purposes.\89\
---------------------------------------------------------------------------
    \89\ Secs. 170, 2055, and 2522, respectively.
---------------------------------------------------------------------------
      In general, in any taxable year, charitable contributions 
by a corporation are not deductible to the extent the aggregate 
contributions exceed 10 percent of the corporation's taxable 
income computed without regard to net operating or capital loss 
carrybacks. For individuals, the amount deductible is a 
percentage of the taxpayer's contribution base, which is the 
taxpayer's adjusted gross income computed without regard to any 
net operating loss carryback. The applicable percentage of the 
contribution base varies depending on the type of donee 
organization and property contributed. Cash contributions of an 
individual taxpayer to public charities, private operating 
foundations, and certain types of private nonoperating 
foundations may not exceed 50 percent of the taxpayer's 
contribution base. Cash contributions to private foundations 
and certain other organizations generally may be deducted up to 
30 percent of the taxpayer's contribution base.
      In general, a charitable deduction is not allowed for 
income, estate, or gift tax purposes if the donor transfers an 
interest in property to a charity while also either retaining 
an interest in that property or transferring an interest in 
that property to a noncharity for less than full and adequate 
consideration. Exceptions to this general rule are provided 
for, among other interests, remainder interests in charitable 
remainder annuity trusts, charitable remainder unitrusts, and 
pooled income funds, present interests in the form of a 
guaranteed annuity or a fixed percentage of the annual value of 
the property, and qualified conservation contributions.
Capital gain property
      Capital gain property means any capital asset or property 
used in the taxpayer's trade or business the sale of which at 
its fair market value, at the time of contribution, would have 
resulted in gain that would have been long-term capital gain. 
Contributions of capital gain property to a qualified charity 
are deductible at fair market value within certain limitations. 
Contributions of capital gain property to charitable 
organizations described in section 170(b)(1)(A) (e.g., public 
charities, private foundations other than private non-operating 
foundations, and certain governmental units) generally are 
deductible up to 30 percent of the taxpayer's contribution 
base. An individual may elect, however, to bring all these 
contributions of capital gain property for a taxable year 
within the 50-percent limitation category by reducing the 
amount of the contribution deduction by the amount of the 
appreciation in the capital gain property. Contributions of 
capital gain property to charitable organizations described in 
section 170(b)(1)(B) (e.g., private non-operating foundations) 
are deductible up to 20 percent of the taxpayer's contribution 
base.
      For purposes of determining whether a taxpayer's 
aggregate charitable contributions in a taxable year exceed the 
applicable percentage limitation, contributions of capital gain 
property are taken into account after other charitable 
contributions. Contributions of capital gain property that 
exceed the percentage limitation may be carried forward for 
five years.
Qualified conservation contributions
      Qualified conservation contributions are not subject to 
the ``partial interest'' rule, which generally bars deductions 
for charitable contributions of partial interests in property. 
A qualified conservation contribution is a contribution of a 
qualified real property interest to a qualified organization 
exclusively for conservation purposes. A qualified real 
property interest is defined as: (1) the entire interest of the 
donor other than a qualified mineral interest; (2) a remainder 
interest; or (3) a restriction (granted in perpetuity) on the 
use that may be made of the real property. Qualified 
organizations include certain governmental units, public 
charities that meet certain public support tests, and certain 
supporting organizations. Conservation purposes include: (1) 
the preservation of land areas for outdoor recreation by, or 
for the education of, the general public; (2) the protection of 
a relatively natural habitat of fish, wildlife, or plants, or 
similar ecosystem; (3) the preservation of open space 
(including farmland and forest land) where such preservation 
will yield a significant public benefit and is either for the 
scenic enjoyment of the general public or pursuant to a clearly 
delineated Federal, State, or local governmental conservation 
policy; and (4) the preservation of an historically important 
land area or a certified historic structure.
      Qualified conservation contributions of capital gain 
property are subject to the same limitations and carryover 
rules of other charitable contributions of capital gain 
property.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

In general
      Under the provision, the 30-percent contribution base 
limitation on contributions of capital gain property by 
individuals does not apply to qualified conservation 
contributions (as defined under present law). Instead, 
individuals may deduct the fair market value of any qualified 
conservation contribution to an organization described in 
section 170(b)(1)(A) to the extent of the excess of 50-percent 
of the contribution base over the amount of all other allowable 
charitable contributions. These contributions are not taken 
into account in determining the amount of other allowable 
charitable contributions.
      Individuals are allowed to carryover any qualified 
conservation contributions that exceed the 50-percent 
limitation for up to 15 years.
      For example, assume an individual with a contribution 
base of $100 makes a qualified conservation contribution of 
property with a fair market value of $80 and makes other 
charitable contributions subject to the 50-percent limitation 
of $60. The individual is allowed a deduction of $50 in the 
current taxable year for the non-conservation contributions (50 
percent of the $100 contribution base) and is allowed to 
carryover the excess $10 for up to 5 years. No current 
deduction is allowed for the qualified conservation 
contribution, but the entire $80 qualified conservation 
contribution may be carried forward for up to 15 years.
Farmers and ranchers
            Individuals
      In the case of an individual who is a qualified farmer or 
rancher for the taxable year in which the contribution is made, 
a qualified conservation contribution is allowable up to 100 
percent of the excess of the taxpayer's contribution base over 
the amount of all other allowable charitable contributions.
      In the above example, if the individual is a qualified 
farmer or rancher, in addition to the $50 deduction for non-
conservation contributions, an additional $50 for the qualified 
conservation contribution is allowed and $30 may be carried 
forward for up to 15 years as a contribution subject to the 
100-percent limitation.
            Corporations
      In the case of a corporation (other than a publicly 
traded corporation) that is a qualified farmer or rancher for 
the taxable year in which the contribution is made, any 
qualified conservation contribution is allowable up to 100 
percent of the excess of the corporation's taxable income (as 
computed under section 170(b)(2)) over the amount of all other 
allowable charitable contributions. Any excess may be carried 
forward for up to 15 years as a contribution subject to the 
100-percent limitation.
            Definition
      A qualified farmer or rancher means a taxpayer whose 
gross income from the trade of business of farming (within the 
meaning of section 2032A(e)(5)) is greater than 50 percent of 
the taxpayer's gross income for the taxable year.
Effective date.
      The provision applies to contributions made in taxable 
years beginning after December 31, 2005, and before January 1, 
2008.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
8. Enhanced deduction for charitable contributions of literary, 
        musical, artistic, and scholarly compositions (sec. 208 of the 
        Senate amendment 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 deduction generally is limited to the taxpayer's 
basis in the property.\90\ 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 of tangible personal property to a private 
foundation (other than certain private foundations),\91\ the 
amount of the deduction is limited to the taxpayer's basis in 
the property.
---------------------------------------------------------------------------
    \90\ Sec. 170(e)(1).
    \91\ Sec. 170(e)(1)(B)(ii).
---------------------------------------------------------------------------
      Under present law, charitable contributions of literary, 
musical, and artistic compositions created or prepared by the 
donor are considered ordinary income property and a taxpayer's 
deduction of such property is limited to the taxpayer's basis 
(typically, cost) in the property. A charitable contribution of 
a literary, musical, or artistic composition by a person other 
than the person who created or prepared the work generally is 
eligible for a fair market value deduction if the donee 
organization's use of the property is related to such 
organization's exempt purposes.
      To be eligible for the deduction, the contribution must 
be of an undivided portion of the donor's entire interest in 
the property.\92\ For purposes of the charitable income tax 
deduction, the copyright and the work in which the copyright is 
embodied are not treated as separate property interests. 
Accordingly, if a donor owns a work of art and the copyright to 
the work of art, a gift of the artwork without the copyright or 
the copyright without the artwork will constitute a gift of a 
``partial interest'' and will not qualify for the income tax 
charitable deduction.
---------------------------------------------------------------------------
    \92\ Sec. 170(f)(3).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides that a deduction for ``qualified 
artistic charitable contributions'' generally is increased from 
the value under present law (generally, basis) to the fair 
market value of the property contributed, measured at the time 
of the contribution. However, the amount of the increase of the 
deduction provided by the provision may not exceed the amount 
of the donor's adjusted gross income for the taxable year 
attributable to: (1) income from the sale or use of property 
created by the personal efforts of the donor that is of the 
same type as the donated property; and (2) income from 
teaching, lecturing, performing, or similar activities with 
respect to such property. In addition, the increase to the 
present-law deduction provided by the provision may not be 
carried over and deducted in other taxable years.
      The provision defines a qualified artistic charitable 
contribution to mean a charitable contribution of any literary, 
musical, artistic, or scholarly composition, or similar 
property, or the copyright thereon (or both) that meets certain 
requirements. First, the contributed property must have been 
created by the personal efforts of the donor at least 18 months 
prior to the date of contribution. Second, the donor must 
obtain a qualified appraisal of the contributed property, a 
copy of which is required to be attached to the donor's income 
tax return for the taxable year in which such contribution is 
made. The appraisal must include evidence of the extent (if 
any) to which property created by the personal efforts of the 
taxpayer and of the same type as the donated property is or has 
been owned, maintained, and displayed by certain charitable 
organizations and sold to or exchanged by persons other than 
the taxpayer, donee, or any related person. Third, the 
contribution must be made to a public charity or to certain 
limited types of private foundations (i.e., an organization 
described in section 170(b)(1)(A)). Finally, the use of donated 
property by the recipient organization must be related to the 
organization's charitable purpose or function, and the donor 
must receive a written statement from the organization 
verifying such use.
      Under the provision, the tangible property and the 
copyright on such property are treated as separate properties 
for purposes of the ``partial interest'' rule; thus, a gift of 
artwork without the copyright or a copyright without the 
artwork does not constitute a gift of a partial interest and is 
deductible. Contributions of letters, memoranda, or similar 
property that are written, prepared, or produced by or for an 
individual while the individual is an officer or employee of 
any person (including a government agency or instrumentality) 
do not qualify for a fair market value deduction unless the 
contributed property is entirely personal.
      Effective date.--The deduction for qualified artistic 
charitable contributions applies to contributions made after 
December 31, 2005, and before January 1, 2008.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
9. Mileage reimbursements to charitable volunteers excluded from gross 
        income (sec. 209 of the Senate amendment and new sec. 139B of 
        the Code)

                              PRESENT LAW

      In general, an itemized deduction is permitted for 
charitable contributions, subject to certain limitations that 
depend on the type of taxpayer, the property contributed, and 
the donee organization. Unreimbursed out-of-pocket expenditures 
made incident to providing donated services to a qualified 
charitable organization--such as out-of-pocket transportation 
expenses necessarily incurred in performing donated services--
may qualify as a charitable contribution.\93\ No charitable 
contribution deduction is allowed for traveling expenses 
(including expenses for meals and lodging) while away from 
home, whether paid directly or by reimbursement, unless there 
is no significant element of personal pleasure, recreation, or 
vacation in such travel.\94\
---------------------------------------------------------------------------
    \93\ Treas. Reg. sec. 1.170A-1(g).
    \94\ Sec. 170(j).
---------------------------------------------------------------------------
      In determining the amount treated as a charitable 
contribution where a taxpayer operates a vehicle to provide 
donated services to a charity, the taxpayer either may deduct 
actual out-of-pocket expenditures or, in the case of a 
passenger automobile, may use the charitable standard mileage 
rate. The charitable standard mileage rate is set by statute at 
14 cents per mile.\95\ The taxpayer may also deduct (under 
either computation method), any parking fees and tolls incurred 
in rendering the services, but may not deduct any amount 
(regardless of the computation method used) for general repair 
or maintenance expenses, depreciation, insurance, registration 
fees, etc. Regardless of the computation method used, the 
taxpayer must keep reliable written records of expenses 
incurred. For example, where a taxpayer uses the charitable 
standard mileage rate to determine a deduction, the IRS has 
stated that the taxpayer generally must maintain records of 
miles driven, time, place (or use), and purpose of the mileage. 
If the charitable standard mileage rate is not used to 
determine the deduction, the taxpayer generally must maintain 
reliable written records of actual expenses incurred.
---------------------------------------------------------------------------
    \95\ Sec. 170(i).
---------------------------------------------------------------------------
      In lieu of actual operating expenses, an optional 
standard mileage rate may be used in computing the deductible 
costs of business use of an automobile. The business standard 
mileage rate is determined by the IRS and updated periodically. 
For business use occurring on or after January 1, 2006, the 
business standard mileage rate specified by the IRS is 44.5 
cents per mile.
      The standard mileage rate for charitable purposes is 
lower than the standard business rate because the charitable 
rate covers only the out-of-pocket operating expenses 
(including gasoline and oil) directly related to the use of the 
automobile in performing the donated services that a taxpayer 
may deduct as a charitable contribution. The charitable rate 
does not include costs that are not deductible as a charitable 
contribution such as general repair or maintenance expenses, 
depreciation, insurance, and registration fees. Such costs are, 
however, included in computing the business standard mileage 
rate.
      Volunteer drivers who are reimbursed for mileage expenses 
have taxable income to the extent the reimbursement exceeds 
deductible travel expenses. Employees who are reimbursed for 
mileage expenses under a qualified arrangement that pays a 
mileage allowance in lieu of reimbursing actual expenses 
generally have taxable income to the extent the reimbursement 
exceeds the amount of the business standard mileage rate 
multiplied by the actual business miles.
      Under section 6041, information reporting generally is 
required with respect to payments of $600 or more in any 
taxable year.
      Under the Katrina Emergency Tax Relief Act of 2005, 
reimbursement by an organization described in section 170(c) 
(including public charities and private foundations) to a 
volunteer for the costs of using a passenger automobile in 
providing donated services to charity solely for the provision 
of relief related to Hurricane Katrina is excludable from the 
gross income of the volunteer up to an amount that does not 
exceed the business standard mileage rate prescribed for 
business use (as periodically adjusted), provided that 
recordkeeping requirements applicable to deductible business 
expenses are satisfied. The Katrina Emergency Tax Relief Act of 
2005 does not permit a volunteer to claim a deduction or credit 
with respect to such amounts excluded. The provision applies 
for purposes of use of a passenger automobile during the period 
beginning on August 25, 2005, and ending on December 31, 2006.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision extends the provision enacted as part of 
the Katrina Emergency Tax Relief Act of 2005. Under the 
provision, reimbursement by an organization described in 
section 170(c) (including public charities and private 
foundations) to a volunteer for the costs of using a passenger 
automobile in providing donated services to charity is 
excludable from the gross income of the volunteer up to an 
amount that does not exceed the business standard mileage rate 
prescribed for business use (as periodically adjusted), 
provided that recordkeeping requirements applicable to 
deductible business expenses are satisfied. Unlike the 
provision enacted as part of the Katrina Emergency Tax Relief 
Act of 2005, the provision is not limited to use solely for the 
provision of relief related to Hurricane Katrina. The provision 
does not permit a volunteer to claim a deduction or credit with 
respect to amounts excluded under the provision. Information 
reporting required by section 6041 is not required with respect 
to reimbursements excluded under the provision.
      Effective date.--The provision applies for taxable years 
beginning after December 31, 2005, and beginning before January 
1, 2008.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
10. Alternative percentage limitation for corporate charitable 
        contributions to the mathematics and science partnership 
        program (sec. 210 of the Senate amendment and sec. 170 of the 
        Code)

                              PRESENT LAW

      Under present law, a corporation is allowed to deduct 
charitable contributions up to 10 percent of the corporation's 
modified taxable income for the year. For this purpose, taxable 
income is determined without regard to (1) the charitable 
contributions deduction, (2) any net operating loss carryback, 
(3) deductions for dividends received, and (4) any capital loss 
carryback for the taxable year.\96\ Any charitable contribution 
by a corporation that is not currently deductible because of 
the percentage limitation may be carried forward for up to five 
taxable years.
---------------------------------------------------------------------------
    \96\ Sec. 170(b)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the provision, the corporate percentage limitation 
is applied separately to eligible mathematics and science 
contributions and to all other charitable contributions. In 
addition, the applicable percentage limitation for purposes of 
eligible mathematics and science contributions is 15 percent; 
the applicable percentage limitation for all other corporate 
charitable contributions remains 10 percent.
      In general, an eligible mathematics and science 
contribution is a charitable contribution (other than a 
contribution of used equipment) to a qualified partnership for 
the purpose of an activity described in section 2202(c) of the 
Elementary and Secondary Education Act of 1965. Such activities 
include, for example, creating opportunities for enhanced and 
ongoing professional development of mathematics and science 
teachers and promoting strong teaching skills for mathematics 
and science teachers and teacher educators. A qualified 
partnership is an eligible partnership within the meaning of 
section 2201(b)(1) of the Elementary and Secondary Education 
Act of 1965, but only to the extent that such partnership does 
not include a person other than a person described in section 
170(b)(1)(A) (describing organizations to which individuals may 
make charitable contributions deductible up to 50 percent of 
such individual's contribution base).
      Effective date.--The provision applies for contributions 
made in taxable years beginning after December 31, 2005, and 
beginning before January 1, 2007.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                 B. Reforming Charitable Organizations

1. Tax involvement of accommodation parties in tax-shelter transactions 
        (sec. 211 of the Senate amendment and secs. 6011, 6033, 6652, 
        and new sec. 4965 of the Code)

                              PRESENT LAW

Disclosure of listed and other reportable transactions by taxpayers
      Present law provides that a taxpayer that participates in 
a reportable transaction (including a listed transaction) and 
that is required to file a tax return must attach to its return 
a disclosure statement in the form prescribed by the 
Secretary.\97\ For this purpose, the term taxpayer includes any 
person, including an individual, trust, estate, partnership, 
association, company, or corporation.\98\
---------------------------------------------------------------------------
    \97\ Treas. Reg. sec. 1.6011-4(a).
    \98\ Sec. 7701(a)(1); Treas. Reg. sec. 1.6011-4(c)(1).
---------------------------------------------------------------------------
      Under present Treasury regulations, a reportable 
transaction includes a listed transaction and five other 
categories of transactions: (1) confidential transactions, 
which are transactions offered to a taxpayer under conditions 
of confidentiality and for which the taxpayer has paid an 
advisor a minimum fee; (2) transactions with contractual 
protection, which include transactions for which the taxpayer 
or a related party has the right to a full or partial refund of 
fees if all or part of the intended tax consequences from the 
transaction are not sustained, or for which fees are contingent 
on the taxpayer's realization of tax benefits from the 
transaction; (3) loss transactions, which are transactions 
resulting in the taxpayer claiming a loss under section 165 
that exceeds certain thresholds, depending upon the type of 
taxpayer; (4) transactions with a significant book-tax 
difference; and (5) transactions involving a brief asset 
holding period.\99\ A listed transaction means a reportable 
transaction which is the same as, or substantially similar to, 
a transaction specifically identified by the Secretary as a tax 
avoidance transaction for purposes of section 6011 (relating to 
the filing of returns and statements), and identified by 
notice, regulation, or other form of published guidance as a 
listed transaction.\100\ The fact that a transaction is a 
reportable transaction does not affect the legal determination 
of whether the taxpayer's treatment of the transaction is 
proper.\101\ Present law authorizes the Secretary to define a 
reportable transaction on the basis of such transaction being 
of a type which the Secretary determines as having a potential 
for tax avoidance or evasion.\102\
---------------------------------------------------------------------------
    \99\ Treas. Reg. sec. 1.6011-4(b). In Notice 2006-6 (January 6, 
2006), the Service indicated that it was removing transactions with a 
significant book-tax difference from the categories of reportable 
transactions.
    \100\ Sec. 6707A(c)(2); Treas. Reg. sec. 1.6011-4(b)(2).
    \101\ Treas. Reg. sec. 1.6011-4(a).
    \102\ Sec. 6707A(c)(1).
---------------------------------------------------------------------------
      Treasury regulations provide guidance regarding the 
determination of when a taxpayer participates in a transaction 
for these purposes.\103\ A taxpayer has participated in a 
listed transaction if the taxpayer's tax return reflects tax 
consequences or a tax strategy described in the published 
guidance that lists the transaction, or if the taxpayer knows 
or has reason to know that the taxpayer's tax benefits are 
derived directly or indirectly from tax consequences of a tax 
strategy described in published guidance that lists a 
transaction. A taxpayer has participated in a confidential 
transaction if the taxpayer's tax return reflects a tax benefit 
from the transaction and the taxpayer's disclosure of the tax 
treatment or tax structure of the transaction is limited under 
conditions of confidentiality. A taxpayer has participated in a 
transaction with contractual protection if the taxpayer's tax 
return reflects a tax benefit from the transaction, and the 
taxpayer has the right to the full or partial refund of fees or 
the fees are contingent.
---------------------------------------------------------------------------
    \103\ Treas. Reg. sec. 1.6011-4(c)(3).
---------------------------------------------------------------------------
      Present law provides a penalty for any person who fails 
to include on any return or statement any required information 
with respect to a reportable transaction.\104\ The penalty 
applies without regard to whether the transaction ultimately 
results in an understatement of tax, and applies in addition to 
any other penalty that may be imposed.
---------------------------------------------------------------------------
    \104\ Sec. 6707A.
---------------------------------------------------------------------------
      The penalty for failing to disclose a reportable 
transaction is $10,000 in the case of a natural person and 
$50,000 in any other case. The amount is increased to $100,000 
and $200,000, respectively, if the failure is with respect to a 
listed transaction. The penalty cannot be waived with respect 
to a listed transaction. As to reportable transactions, the IRS 
Commissioner may rescind all or a portion of the penalty if 
rescission would promote compliance with the tax laws and 
effective tax administration.
Disclosure of listed and other reportable transactions by material 
        advisors
      Present law requires each material advisor with respect 
to any reportable transaction (including any listed 
transaction) to timely file an information return with the 
Secretary (in such form and manner as the Secretary may 
prescribe).\105\ The information return must include (1) 
information identifying and describing the transaction, (2) 
information describing any potential tax benefits expected to 
result from the transaction, and (3) such other information as 
the Secretary may prescribe. The return must be filed by the 
date specified by the Secretary.
---------------------------------------------------------------------------
    \105\ Sec. 6707(a), as added by the American Jobs Creation Act of 
2004, Pub. L. No. 108-357, sec. 816(a).
---------------------------------------------------------------------------
      A ``material advisor'' means any person (1) who provides 
material aid, assistance, or advice with respect to organizing, 
managing, promoting, selling, implementing, insuring, or 
carrying out any reportable transaction, and (2) who directly 
or indirectly derives gross income in excess of $250,000 
($50,000 in the case of a reportable transaction substantially 
all of the tax benefits from which are provided to natural 
persons) or such other amount as may be prescribed by the 
Secretary for such advice or assistance.\106\
---------------------------------------------------------------------------
    \106\ Sec. 6707(b)(1).
---------------------------------------------------------------------------
      The Secretary may prescribe regulations which provide (1) 
that only one material advisor is required to file an 
information return in cases in which two or more material 
advisors would otherwise be required to file information 
returns with respect to a particular reportable transaction, 
(2) exemptions from the requirements of this section, and (3) 
other rules as may be necessary or appropriate to carry out the 
purposes of this section.\107\
---------------------------------------------------------------------------
    \107\ Sec. 6707(c).
---------------------------------------------------------------------------
      Present law imposes a penalty on any material advisor who 
fails to timely file an information return, or who files a 
false or incomplete information return, with respect to a 
reportable transaction (including a listed transaction).\108\ 
The amount of the penalty is $50,000. If the penalty is with 
respect to a listed transaction, the amount of the penalty is 
increased to the greater of (1) $200,000, or (2) 50 percent of 
the gross income derived by such person with respect to aid, 
assistance, or advice which is provided with respect to the 
transaction before the date the information return that 
includes the transaction is filed. An intentional failure or 
act by a material advisor with respect to the requirement to 
disclose a listed transaction increases the penalty to 75 
percent of the gross income derived from the transaction.
---------------------------------------------------------------------------
    \108\ Sec. 6707(b).
---------------------------------------------------------------------------
      The penalty cannot be waived with respect to a listed 
transaction. As to reportable transactions, the IRS 
Commissioner can rescind all or a portion of the penalty if 
rescission would promote compliance with the tax laws and 
effective tax administration.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

In general
      In general, under the provision, certain tax-exempt 
entities are subject to penalties for being a party to a 
prohibited tax shelter transaction. A prohibited tax shelter 
transaction is a transaction that the Secretary determines is a 
listed transaction (as defined in section 6707A(c)(2)) or a 
prohibited transaction. A prohibited reportable transaction is 
a confidential transaction or a transaction with contractual 
protection (as defined by the Secretary in regulations) which 
is a reportable transaction as defined in sec. 6707A(c)(1). 
Under the provision, a tax-exempt entity is an entity that is 
described in section 501(c), 501(d), or 170(c) (not including 
the United States), Indian tribal governments, and tax 
qualified pension plans, individual retirement arrangements 
(``IRAs''), and similar tax-favored savings arrangements (such 
as Coverdell education savings accounts, health savings 
accounts, and qualified tuition plans).
Entity level tax
      Under the provision, if a tax-exempt entity is a party at 
any time to a transaction during a taxable year and knows or 
has reason to know that the transaction is a prohibited tax 
shelter transaction, the entity is subject to a tax for such 
year equal to the greater of (1) 100 percent of the entity's 
net income (after taking into account any tax imposed with 
respect to the transaction) for such year that is attributable 
to the transaction or (2) 75 percent of the proceeds received 
by the entity that are attributable to the transaction.
      In addition, if a transaction is not a listed transaction 
at the time a tax-exempt entity enters into the transaction 
(and is not otherwise a prohibited tax shelter transaction), 
but the transaction subsequently is determined by the Secretary 
to be a listed transaction (a ``subsequently listed 
transaction''), the entity must pay each taxable year an excise 
tax at the highest unrelated business taxable income rate times 
the greater of (1) the entity's net income (after taking into 
account any tax imposed) that is attributable to the 
subsequently listed transaction and that is properly allocable 
to the period beginning on the later of the date such 
transaction is listed by the Secretary or the first day of the 
taxable year or (2) 75 percent of the proceeds received by the 
entity that are attributable to the subsequently listed 
transaction and that are properly allocable to the period 
beginning on the later of the date such transaction is listed 
by the Secretary or the first day of the taxable year. The 
Secretary has the authority to promulgate regulations that 
provide guidance regarding the determination of the allocation 
of net income of a tax-exempt entity that is attributable to a 
transaction to various periods, including before and after the 
listing of the transaction or the date which is 90 days after 
the date of enactment of the provision.
      The entity level tax does not apply if the entity's 
participation is not willful and is due to reasonable cause, 
except that the willful and reasonable cause exception does not 
apply to the tax imposed for subsequently listed transactions. 
The entity level taxes do not apply to tax qualified pension 
plans, IRAs, and similar tax-favored savings arrangements (such 
as Coverdell education savings accounts, health savings 
accounts, and qualified tuition plans).
Disclosure of participation in prohibited tax shelter transactions
      The provision requires that a taxable party to a 
prohibited tax shelter transaction disclose to the tax-exempt 
entity that the transaction is a prohibited tax shelter 
transaction. Failure to make such disclosure is subject to the 
present-law penalty for failure to include reportable 
transaction information under section 6707A. Thus, the penalty 
is $10,000 in the case of a natural person or $50,000 in any 
other case, except that if the transaction is a listed 
transaction, the penalty is $100,000 in the case of a natural 
person and $200,000 in any other case.\109\
---------------------------------------------------------------------------
    \109\ The IRS Commissioner may rescind all or any portion of any 
such penalty if the violation is with respect to a prohibited tax 
shelter transaction other than a listed transaction and doing so would 
promote compliance with the requirements of the Code and effective tax 
administration. See sec. 6707A(d).
---------------------------------------------------------------------------
      The provision requires disclosure by a tax-exempt entity 
to the IRS of each participation in a prohibited tax shelter 
transaction and disclosure of other known parties to the 
transaction. The penalty for failure to disclose is imposed on 
the entity (or entity manager, in the case of qualified pension 
plans and similar tax favored retirement arrangements) at $100 
per day the failure continues, not to exceed $50,000. If any 
person fails to comply with a demand on the tax-exempt entity 
by the Secretary for disclosure, such person or persons shall 
pay a penalty of $100 per day (beginning on the date of the 
failure to comply) not to exceed $10,000 per prohibited tax 
shelter transaction. As under present-law section 6652, no 
penalty is imposed with respect to any failure if it is shown 
that the failure is due to reasonable cause.
Penalty on entity managers
      A tax of $20,000 is imposed on an entity manager that 
approves or otherwise causes a tax-exempt entity to be a party 
to a prohibited tax shelter transaction at any time during the 
taxable year, knowing or with reason to know that the 
transaction is a prohibited tax shelter transaction. An entity 
manager is defined as a person with authority or responsibility 
similar to that exercised by an officer, director, or trustee 
of an organization, except: (1) in the case of an entity 
described in section 501(c)(3) or (c)(4) (other than a private 
foundation), an entity manager is an organization manager as 
defined in section 4958(f)(2); and (2) in the case of a private 
foundation, an entity manager is a foundation manager as 
defined in section 4946(b). The reasonable cause (or no willful 
participation) exception applies to this tax.
Effective date.
      The provision generally is effective for transactions 
after the date of enactment, except that no tax applies with 
respect to income that is properly allocable to any period on 
or before the date that is 90 days after the date of enactment. 
The disclosure provisions apply to disclosures the due date for 
which are after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment 
provision, with modifications.
      The conference agreement does not include the provision 
that the entity level or entity manager tax does not apply if 
the entity's participation is not willful and is due to 
reasonable cause.
      In addition, the conference agreement adds a tax in the 
event that a tax-exempt entity becomes a party to a prohibited 
tax shelter transaction without knowing or having reason to 
know that the transaction is a prohibited tax shelter 
transaction. In that case, the tax-exempt entity is subject to 
a tax in the taxable year the entity becomes a party and any 
subsequent taxable year of the highest unrelated business 
taxable income rate times the greater of (1) the entity's net 
income (after taking into account any tax imposed with respect 
to the transaction) for such year that is attributable to the 
transaction or (2) 75 percent of the proceeds received by the 
entity that are attributable to the transaction for such 
year.\110\
---------------------------------------------------------------------------
    \110\ The conference agreement clarifies that in all cases the 75 
percent of proceeds received by the entity that are attributable to the 
transaction are with respect to the taxable year.
---------------------------------------------------------------------------
      The conference agreement clarifies that the entity level 
tax rate that applies if the entity knows or has reason to know 
that a transaction is a prohibited tax shelter transaction does 
not apply to subsequently listed transactions.
      The conference agreement modifies the definition of an 
entity manager to provide that: (1) in the case of tax 
qualified pension plans, IRAs, and similar tax-favored savings 
arrangements (such as Coverdell education savings accounts, 
health savings accounts, and qualified tuition plans) an entity 
manager is the person that approves or otherwise causes the 
entity to be a party to a prohibited tax shelter transaction, 
and (2) in all other cases the entity manager is the person 
with authority or responsibility similar to that exercised by 
an officer, director, or trustee of an organization, and with 
respect to any act, the person having authority or 
responsibility with respect to such act.
      In the case of a qualified pension plan, IRA, or similar 
tax-favored savings arrangement (such as a Coverdell education 
savings account, health savings account, or qualified tuition 
plan), the conferees intend that, in general, a person who 
decides that assets of the plan, IRA, or other savings 
arrangement are to be invested in a prohibited tax shelter 
transaction is the entity manager under the provision. Except 
in the case of a fully self-directed plan or other savings 
arrangement with respect to which a participant or beneficiary 
decides to invest in the prohibited tax shelter transaction, a 
participant or beneficiary generally is not an entity manager 
under the provision. Thus, for example, a participant or 
beneficiary is not an entity manager merely by reason of 
choosing among pre-selected investment options (as is typically 
the case if a qualified retirement plan provides for 
participant-directed investments).\111\ Similarly, if an 
individual has an IRA and may choose among various mutual funds 
offered by the IRA trustee, but has no control over the 
investments held in the mutual funds, the individual is not an 
entity manager under the provision.
---------------------------------------------------------------------------
    \111\ Depending on the circumstances, the person who is responsible 
for determining the pre-selected investment options may be an entity 
manager under the provision.
---------------------------------------------------------------------------
      Under the provision, certain taxes are imposed if the 
entity or entity manager knows or has reason to know that a 
transaction is a prohibited tax shelter transaction. In 
general, the conferees intend that in order for an entity or 
entity manager to have reason to know that a transaction is a 
prohibited tax shelter transaction, the entity or entity 
manager must have knowledge of sufficient facts that would lead 
a reasonable person to conclude that the transaction is a 
prohibited tax shelter transaction. If there is justifiable 
reliance on a reasoned written opinion of legal counsel 
(including in-house counsel) or of an independent accountant 
with expertise in tax matters, after making full disclosure of 
relevant facts about a transaction to such counsel or 
accountant, that a transaction is not a prohibited tax shelter 
transaction, then absent knowledge of facts not considered in 
the reasoned written opinion that would lead a reasonable 
person to conclude that the transaction is a prohibited tax 
shelter transaction, the reason to know standard is not met.
      Not obtaining a reasoned written opinion of legal counsel 
does not alone indicate whether a person has reason to know. 
However, if a transaction is extraordinary for the entity, 
promises a return for the organization that is exceptional 
considering the amount invested by, the participation of, or 
the absence of risk to the organization, or the transaction is 
of significant size, either in an absolute sense or relative to 
the receipts of the entity, then, in general, the presence of 
such factors may indicate that the entity or entity manager has 
a responsibility to inquire further about whether a transaction 
is a prohibited tax shelter transaction, or, absent such 
inquiry, that the reason to know standard is satisfied. For 
example, if a tax-exempt entity's investment in a transaction 
is $1,000, and the entity is promised or expects to receive 
$10,000 in the near term, in general, the rate of return would 
be considered exceptional and the entity should make inquiries 
with respect to the transaction. As another example, if a tax-
exempt entity's expected income from a transaction is greater 
than five percent of the entity's annual receipts, or is in 
excess of $1,000,000, and the entity fails to make appropriate 
inquiries with respect to its participation in such 
transaction, such failure is a factor tending to show that the 
reason to know standard is met. Appropriate inquiries need not 
involve obtaining a reasoned written opinion. In general, if a 
transaction does not present the factors described above and 
the organization is small (measured by receipts and assets) and 
described in section 501(c)(3), it is expected that the reason 
to know standard will not be met.
      In general, the conferees intend that in determining 
whether a tax-exempt entity is a ``party'' to a prohibited tax 
shelter transaction all the facts and circumstances should be 
taken into account. Absence of a written agreement is not 
determinative. Certain indirect involvement in a prohibited tax 
shelter transaction would not result in an entity being 
considered a party to the transaction. For example, investment 
by a tax-exempt entity in a mutual fund that in turn invests in 
or participates in a prohibited tax shelter transaction does 
not, in general, make the tax-exempt entity a party to such 
transaction, absent facts or circumstances that indicate that 
the purpose of the tax exempt entity's investment in the mutual 
fund was specifically to participate in such a transaction. 
However, whether a tax-exempt entity is a party to such a 
transaction will be informed by whether the entity or entity 
manager knew or had reason to know that an investment of the 
entity would be used in a prohibited tax shelter transaction. 
Presence of such knowledge or reason to know may indicate that 
the purpose of the investment was to participate in the 
prohibited tax shelter transaction and that the tax-exempt 
entity is a party to such transaction.
      The conference agreement clarifies that a subsequently 
listed transaction means any transaction to which a tax-exempt 
entity is a party and which is determined by the Secretary to 
be a listed transaction at any time after the entity has 
``become a party to'' the transaction, and not, as under the 
Senate amendment, when the entity ``entered into'' the 
transaction. The conference agreement provides that a 
subsequently listed transaction does not include a transaction 
that is a prohibited reportable transaction. The conference 
agreement provides that the Secretary has the authority to 
allocate proceeds as well as income of a tax-exempt entity to 
various periods. The conference agreement also provides that 
the disclosure by tax-exempt entities to the Internal Revenue 
Service required under the provision is based on an entity's 
being a party to a prohibited tax shelter transaction and not, 
as under the Senate amendment, on an entity's ``participation'' 
in a prohibited tax shelter transaction. The conference 
agreement further provides that the Secretary may make a demand 
for disclosure on any entity manager subject to the tax, as 
well as on any tax exempt entity, and also provides that such 
managers and entities and not, as under the Senate amendment, 
``persons'' are subject to the penalty for failure to comply 
with the demand.
      Effective date.--In general, the provision is effective 
for taxable years ending after the date of enactment, with 
respect to transactions before, on, or after such date, except 
that no tax shall apply with respect to income or proceeds that 
are properly allocable to any period ending on or before the 
date that is 90 days after the date of enactment. The tax on 
certain knowing transactions does not apply to any prohibited 
tax shelter transaction to which a tax-exempt entity became a 
party on or before the date of enactment. The disclosure 
provisions apply to disclosures the due date for which are 
after the date of enactment.
2. Apply an excise tax to acquisitions of interests in insurance 
        contracts in which certain exempt organizations hold interests 
        (sec. 212 of the Senate amendment and new secs. 4966 and 6050V 
        of the Code)

                              PRESENT LAW

Amounts received under a life insurance contract
      Amounts received under a life insurance contract paid by 
reason of the death of the insured are not includible in gross 
income for Federal tax purposes.\112\ No Federal income tax 
generally is imposed on a policyholder with respect to the 
earnings under a life insurance contract (inside buildup).\113\
---------------------------------------------------------------------------
    \112\ Sec. 101(a).
    \113\ This favorable tax treatment is available only if a life 
insurance contract meets certain requirements designed to limit the 
investment character of the contract. Sec. 7702.
---------------------------------------------------------------------------
      Distributions from a life insurance contract (other than 
a modified endowment contract) that are made prior to the death 
of the insured generally are includible in income to the extent 
that the amounts distributed exceed the taxpayer's investment 
in the contract (i.e., basis). Such distributions generally are 
treated first as a tax-free recovery of basis, and then as 
income.\114\
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    \114\ Sec. 72(e). In the case of a modified endowment contract, 
however, in general, distributions are treated as income first, loans 
are treated as distributions (i.e., income rather than basis recovery 
first), and an additional 10-percent tax is imposed on the income 
portion of distributions made before age 59\1/2\ and in certain other 
circumstances. Secs. 72(e) and (v). A modified endowment contract is a 
life insurance contract that does not meet a statutory ``7-pay'' test, 
i.e., generally is funded more rapidly than seven annual level 
premiums. Sec. 7702A.
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Transfers for value
      A limitation on the exclusion for amounts received under 
a life insurance contract is provided in the case of transfers 
for value. If a life insurance contract (or an interest in the 
contract) is transferred for valuable consideration, the amount 
excluded from income by reason of the death of the insured is 
limited to the actual value of the consideration plus the 
premiums and other amounts subsequently paid by the acquiror of 
the contract.\115\
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    \115\ Section 101(a)(2). The transfer-for-value rule does not 
apply, however, in the case of a transfer in which the life insurance 
contract (or interest in the contract) transferred has a basis in the 
hands of the transferee that is determined by reference to the 
transferor's basis. Similarly, the transfer-for-value rule generally 
does not apply if the transfer is between certain parties 
(specifically, if the transfer is to the insured, a partner of the 
insured, a partnership in which the insured is a partner, or a 
corporation in which the insured is a shareholder or officer).
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Tax treatment of charitable organizations and donors
      Present law generally provides tax-exempt status for 
charitable, educational and certain other organizations, no 
part of the net earnings of which inures to the benefit of any 
private shareholder or individual, and which meet certain other 
requirements.\116\ Governmental entities, including some 
educational organizations, are exempt from tax on income under 
other tax rules providing that gross income does not include 
income derived from the exercise of any essential governmental 
function and accruing to a State or any political subdivision 
thereof.\117\
---------------------------------------------------------------------------
    \116\ Section 501(c)(3).
    \117\ Section 115.
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      In computing taxable income, a taxpayer who itemizes 
deductions generally is allowed to deduct the amount of cash 
and the fair market value of property contributed to an 
organization described in section 501(c)(3) or to a Federal, 
State, or local governmental entity for exclusively public 
purposes.\118\
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    \118\ Section 170.
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State-law insurable interest rules
      State laws generally provide that the owner of a life 
insurance contract must have an insurable interest in the 
insured person when the life insurance contract is issued. 
State laws vary as to the insurable interest of a charitable 
organization in the life of any individual. Some State laws 
provide that a charitable organization meeting the requirements 
of section 501(c)(3) of the Code is treated as having an 
insurable interest in the life of any donor,\119\ or, in other 
States, in the life of any individual who consents (whether or 
not the individual is a donor).\120\ Other States' insurable 
interest rules permit the purchase of a life insurance contract 
even though the person paying the consideration has no 
insurable interest in the life of the person insured if a 
charitable, benevolent, educational or religious institution is 
designated irrevocably as the beneficiary.\121\
---------------------------------------------------------------------------
    \119\ See, e.g., Mass. Gen. Laws Ann. ch. 175, sec. 123A(2) (West 
2005); Iowa Code Ann. sec. 511.39 (West 2004) (``a person who, when 
purchasing a life insurance policy, makes a donation to the charitable 
organization or makes the charitable organization the beneficiary of 
all or a part of the proceeds of the policy . . . ).
    \120\ See, e.g., Cal. Ins. Code sec. 10110.1(f) (West 2005); 40 Pa. 
Cons. Stat. Ann. sec. 40-512 (2004); Fla. Stat. Ann. sec. 27.404 (2) 
(2004); Mich. Comp. Laws Ann. sec. 500.2212 (West 2004).
    \121\ Or. Rev. Stat. sec. 743.030 (2003); Del. Code Ann. Tit. 18, 
sec. 2705(a) (2004).
---------------------------------------------------------------------------
Transactions involving charities and non-charities acquiring life 
        insurance
      Recently, there has been an increase in transactions 
involving the acquisition of life insurance contracts using 
arrangements in which both exempt organizations, primarily 
charities, and private investors have an interest in the 
contract.\122\ The exempt organization has an insurable 
interest in the insured individuals, either because they are 
donors, because they consent, or otherwise under applicable 
State insurable interest rules. Private investors provide 
capital used to fund the purchase of the life insurance 
contracts, sometimes together with annuity contracts. Both the 
private investors and the charity have an interest in the 
contracts, directly or indirectly, through the use of trusts, 
partnerships, or other arrangements for sharing the rights to 
the contracts. Both the charity and the private investors 
receive cash amounts in connection with the investment in the 
contracts while the life insurance is in force or as the 
insured individuals die.
---------------------------------------------------------------------------
    \122\ Davis, Wendy, ``Death-Pool Donations,'' Trusts and Estates, 
May 2004, 55; Francis, Theo, ``Tax May Thwart Investment Plans 
Enlisting Charities,'' Wall St. J., Feb. 8, 2005, A-10.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision imposes an excise tax, equal to 100 percent 
of the acquisition costs, on the taxable acquisition of any 
interest in an applicable insurance contract. An applicable 
insurance contract is any life insurance, annuity or endowment 
contract in which both an applicable exempt organization and 
any person that is not an applicable exempt organization have, 
directly or indirectly, held an interest in the contract 
(whether or not the interests are held at the same time).
      An applicable exempt organization is any organization 
described in section 170(c), 168(h)(2)(A)(iv), 2055(a), or 
2522(a). Thus, for example, an applicable exempt organization 
generally includes an organization that is exempt from Federal 
income tax by reason of being described in section 501(c)(3) 
(including one organized outside the United States), a 
government or political subdivision of a government, and an 
Indian tribal government.
      A taxable acquisition is the acquisition of any direct or 
indirect interest in an applicable insurance contract by an 
applicable exempt organization, or by any other person if the 
interest in the contract in that person's hands is not 
described in the specific exceptions to ``applicable insurance 
contract.''
      Under the provision, acquisition costs mean the direct or 
indirect costs (including premiums, commissions, fees, charges, 
or other amounts) of acquiring or maintaining an interest in an 
applicable insurance contract. Except as provided in 
regulations, if acquisition costs of any taxable acquisition 
are paid or incurred in more than one calendar year, the excise 
tax under the provision is imposed each time such costs are 
paid or incurred. In the case of an acquisition of an interest 
in an entity that directly or indirectly holds an interest in 
an applicable insurance contract, acquisition costs are 
intended to include the amount of money or value of property 
(including an applicable insurance contract) contributed to an 
entity or otherwise transferred or paid to acquire or increase 
an interest in the entity, that directly or indirectly holds an 
interest in an applicable insurance contract.
      For example, acquisition costs include (1) each premium, 
commission, or fee with respect to the contract, (2) each 
amount paid or incurred to acquire or increase an interest in 
the contract, (3) each amount paid or incurred to acquire or 
increase an interest in an entity (such as a partnership, 
trust, corporation, or other type of entity or arrangement) 
that has a direct or indirect interest in the contract, and (4) 
if the contract is contributed to an entity, the greater of the 
value of the contract or the total amount of premiums, 
commissions, and fees paid or incurred to acquire and maintain 
the insurance contract. It is intended that, under regulatory 
authority provided as necessary to carry out the purposes of 
the provision, any other similar or economically equivalent 
amount paid or incurred is to be treated as acquisition costs.
      Under the provision, an interest in an applicable 
insurance contract includes any right with respect to the 
contract, whether as an owner, beneficiary, or otherwise. An 
indirect interest in a contract includes an interest in an 
entity that, directly or indirectly, holds an interest in the 
contract. In the case of a section 1035 exchange of an 
applicable insurance contract, any interest in any of the 
contracts involved in the exchange is treated as an interest in 
all such contracts. An increase in an interest in an applicable 
insurance contract is treated as a separate acquisition, for 
purposes of application of the excise tax under the provision.
      If an interest of an applicable exempt organization 
exists solely because the organization holds, as part of a 
diversified investment strategy, a de minimis interest in an 
entity which directly or indirectly holds an interest in the 
contract, such interest is not taken into account for purposes 
of the provision. For example, if an applicable exempt 
organization owns a de minimis amount of stock in a corporation 
which in turn owns life insurance contracts covering key 
employees, the excise tax under the provision does not apply 
because the stock ownership is not treated as an indirect 
interest in this circumstance. It is intended that Treasury 
regulations provide guidance as to the application of this rule 
so that it does not permit circumvention of the provision.
      Except as provided in regulations, if a person acquires 
an interest in a contract before the contract is treated as an 
applicable insurance contract, the acquisition is treated as a 
taxable acquisition of an interest in applicable insurance 
contract as of the date the contract becomes an applicable 
insurance contract.
      It is intended that an interest in an applicable 
insurance contract includes, for example, (1) a right with 
respect to the applicable insurance contract pursuant to a side 
contract or other similar arrangement, (2) an interest as a 
trust beneficiary in distributions from or income of a trust 
holding an interest in a contract, and (3) a right to 
distributions, guaranteed payments, or income of a partnership 
that holds an interest in a contract. It is not intended that a 
right with respect to the contract include typical rights of 
issuers of applicable insurance contracts.
      Exceptions to the term ``applicable insurance contract'' 
apply under the provision. First, the term does not apply if 
each person (other than an applicable exempt organization) with 
a direct or indirect interest in the contract has an insurable 
interest in the insured independent of any interest of the 
exempt organization in the contract. Second, the term does not 
apply if the sole interest in the contract of each person other 
than the applicable exempt organization is as a named 
beneficiary. Third, the term does not apply if the sole 
interest in the contract of each person other than the 
applicable exempt organization is either (1) as a beneficiary 
of a trust holding an interest in the contract, but only if the 
person's designation as such a beneficiary was made without 
consideration and solely on a purely gratuitous basis, or (2) 
as a trustee who holds an interest in the contract in a 
fiduciary capacity solely for the benefit of applicable exempt 
organizations or of persons otherwise meeting one of the first 
two exceptions.
      An exception to the term ``applicable insurance 
contract'' also is provided under the provision in certain 
cases in which a person other than an applicable exempt 
organization has an interest solely as a lender \123\ with 
respect to the contract, and the contract covers only one 
individual who is an officer, director, or employee of the 
applicable exempt organization with an interest in the 
contract, provided other requirements are met. This exception 
applies only if the number of insured persons under loans by 
such lenders with respect to such contracts does not exceed the 
greater of: (1) the lesser of five percent of the total 
officers, directors, and employees of the organization or 20, 
or (2) five. Under this exception, the aggregate amount of 
indebtedness with respect to 1 or more contracts covering a 
single individual may not exceed $50,000.
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    \123\ For this purpose, an interest as a lender includes a security 
interest in the insurance contract to which the loan relates.
---------------------------------------------------------------------------
      In addition, Treasury regulatory authority is provided to 
except certain contracts from treatment as applicable insurance 
contracts. Contracts may be excepted based on specific factors 
including (1) whether the transaction is at arms' length, (2) 
whether the economic benefits to the applicable exempt 
organization substantially exceed the economic benefits to all 
other persons with an interest in the contract (determined 
without regard to whether, or the extent to which, such 
organization has paid or contributed with respect to the 
contract), and (3) the likelihood of abuse.
      The application of the exceptions can be illustrated as 
follows. Assume that an individual acquires a life insurance 
contract in which the individual is the insured person, and the 
named beneficiaries are the individual's son and a university 
that is an organization described in section 170(c). The 
contract is not an applicable insurance contract because the 
first exception applies. That is, because both the individual 
and his son have an insurable interest in the individual, all 
persons holding any interest in the contract (other than 
applicable exempt organizations) have an insurable interest in 
the insured independent of any interest of an applicable exempt 
organization in the contract. The second exception also applies 
in this situation.
      As another example, assume that the three named 
beneficiaries are the insured's son, an unrelated friend, and a 
charity. The contract is not an applicable insurance contract 
because the second exception applies. That is, each 
beneficiary's sole interest is as a named beneficiary. In 
addition, the first exception also applies in this situation.
      As a further example, assume that the insured individual 
creates an irrevocable trust for the benefit of the insured's 
descendants, and that the trustee of the trust uses trust funds 
to purchase a life insurance policy on the insured's life, and 
the trust is both the owner and beneficiary of the insurance 
policy. The insured individual's naming of his or her 
descendants as trust beneficiaries is a gratuitous act, done 
without consideration. As a result, the contract is not an 
applicable insurance contract under the third exception.
      No Federal income tax deduction is permitted for the 
excise tax payable under the provision, as provided under the 
rule of Code section 275(a)(6). The amount of the excise tax 
payable under the provision is not included in the investment 
in the contract for purposes of section 72.
      Treasury regulatory authority is provided to carry out 
the purposes of the provision. This includes authority to 
provide appropriate rules in the case in which a person 
acquires an interest before a contract is treated as an 
applicable insurance contract. This also includes authority to 
prevent, in cases the Treasury Secretary determines 
appropriate, the imposition of more than one tax if the same 
interest is acquired more than once (otherwise, the tax under 
the provision applies to each acquisition). Treasury regulatory 
authority is also provided to prevent avoidance of the 
provision, including through the use of intermediaries.
      The provision provides reporting rules requiring an 
applicable exempt organization or other person that makes a 
taxable acquisition of an applicable insurance contract to file 
a return containing required information and such other 
information as is prescribed by the Treasury Secretary. Under 
these rules, a statement is required to be furnished to each 
person whose taxpayer identification information is required to 
be reported on the return. Penalties apply for failure to file 
the return or furnish the statement, including, in the case of 
intentional disregard of the return filing requirement, a 
penalty equal to the amount of the excise tax that has not been 
paid with respect to the items required to be included on the 
return.
      Effective date.--The provision is effective for contracts 
issued after May 3, 2005.
      The application of the effective date with respect to 
prior acquisitions of interests may be illustrated as follows. 
Assume that an exempt organization and a person that is not an 
exempt organization described in section 170(c) form a 
partnership before May 3, 2005. After May 3, 2005, the 
partnership acquires an interest in a life insurance contract 
that is issued after May 3, 2005. The acquisition by the 
partnership of the interest in the contract is treated as a 
taxable acquisition under the provision by each of the partners 
(i.e., the exempt organization and the other person).
      The provision also requires reporting of existing life 
insurance, endowment and annuity contracts issued on or before 
that date, in which an applicable exempt organization holds an 
interest on that date and which would be treated as an 
applicable insurance contract under the provision. This 
reporting is required within one year after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
3. Increase the amounts of excise taxes imposed on public charities, 
        social welfare organizations, and private foundations (sec. 213 
        of the Senate amendment and secs. 4941, 4942, 4943, 4944, 4945, 
        and 4958 of the Code)

                              PRESENT LAW

Public charities and social welfare organizations
      The Code imposes excise taxes on excess benefit 
transactions between disqualified persons (as defined in 
section 4958(f)) and charitable organizations (other than 
private foundations) or social welfare organizations (as 
described in section 501(c)(4)).\124\ An excess benefit 
transaction generally is a transaction in which an economic 
benefit is provided by a charitable or social welfare 
organization directly or indirectly to or for the use of a 
disqualified person, if the value of the economic benefit 
provided exceeds the value of the consideration (including the 
performance of services) received for providing such benefit.
---------------------------------------------------------------------------
    \124\ Sec. 4958. The excess benefit transaction tax is commonly 
referred to as ``intermediate sanctions,'' because it imposes penalties 
generally considered to be less punitive than revocation of the 
organization's exempt status.
---------------------------------------------------------------------------
      The excess benefit tax is imposed on the disqualified 
person and, in certain cases, on the organization manager, but 
is not imposed on the exempt organization. An initial tax of 25 
percent of the excess benefit amount is imposed on the 
disqualified person that receives the excess benefit. An 
additional tax on the disqualified person of 200 percent of the 
excess benefit applies if the violation is not corrected. A tax 
of 10 percent of the excess benefit (not to exceed $10,000 with 
respect to any excess benefit transaction) is imposed on an 
organization manager that knowingly participated in the excess 
benefit transaction, if the manager's participation was willful 
and not due to reasonable cause, and if the initial tax was 
imposed on the disqualified person.\125\ If more than one 
person is liable for the tax on disqualified persons or on 
management, all such persons are jointly and severally liable 
for the tax.\126\
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    \125\ Sec. 4958(d)(2). Taxes imposed may be abated if certain 
conditions are met. Secs. 4961 and 4962.
    \126\ Sec. 4958(d)(1).
---------------------------------------------------------------------------
Private foundations
            Self-dealing by private foundations
      Excise taxes are imposed on acts of self-dealing between 
a disqualified person (as defined in section 4946) and a 
private foundation.\127\ In general, self-dealing transactions 
are any direct or indirect: (1) sale or exchange, or leasing, 
of property between a private foundation and a disqualified 
person; (2) lending of money or other extension of credit 
between a private foundation and a disqualified person; (3) the 
furnishing of goods, services, or facilities between a private 
foundation and a disqualified person; (4) the payment of 
compensation (or payment or reimbursement of expenses) by a 
private foundation to a disqualified person; (5) the transfer 
to, or use by or for the benefit of, a disqualified person of 
the income or assets of the private foundation; and (6) certain 
payments of money or property to a government official.\128\ 
Certain exceptions apply.\129\
---------------------------------------------------------------------------
    \127\ Sec. 4941.
    \128\ Sec. 4941(d)(1).
    \129\ See sec. 4941(d)(2).
---------------------------------------------------------------------------
      An initial tax of five percent of the amount involved 
with respect to an act of self-dealing is imposed on any 
disqualified person (other than a foundation manager acting 
only as such) who participates in the act of self-dealing. If 
such a tax is imposed, a 2.5-percent tax of the amount involved 
is imposed on a foundation manager who participated in the act 
of self-dealing knowing it was such an act (and such 
participation was not willful and was due to reasonable cause) 
up to $10,000 per act. Such initial taxes may not be 
abated.\130\ Such initial taxes are imposed for each year in 
the taxable period, which begins on the date the act of self-
dealing occurs and ends on the earliest of the date of mailing 
of a notice of deficiency for the tax, the date on which the 
tax is assessed, or the date on which correction of the act of 
self-dealing is completed. A government official (as defined in 
section 4946(c)) is subject to such initial tax only if the 
official participates in the act of self-dealing knowing it is 
such an act. If the act of self-dealing is not corrected, a tax 
of 200 percent of the amount involved is imposed on the 
disqualified person and a tax of 50 percent of the amount 
involved (up to $10,000 per act) is imposed on a foundation 
manager who refused to agree to correcting the act of self-
dealing. Such additional taxes are subject to abatement.\131\
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    \130\ Sec. 4962(b).
    \131\ Sec. 4961.
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            Tax on failure to distribute income
      Private nonoperating foundations are required to pay out 
a minimum amount each year as qualifying distributions. In 
general, a qualifying distribution is an amount paid to 
accomplish one or more of the organization's exempt purposes, 
including reasonable and necessary administrative 
expenses.\132\ Failure to pay out the minimum results in an 
initial excise tax on the foundation of 15 percent of the 
undistributed amount. An additional tax of 100 percent of the 
undistributed amount applies if an initial tax is imposed and 
the required distributions have not been made by the end of the 
applicable taxable period.\133\ A foundation may include as a 
qualifying distribution the salaries, occupancy expenses, 
travel costs, and other reasonable and necessary administrative 
expenses that the foundation incurs in operating a grant 
program. A qualifying distribution also includes any amount 
paid to acquire an asset used (or held for use) directly in 
carrying out one or more of the organization's exempt purposes 
and certain amounts set-aside for exempt purposes.\134\ Private 
operating foundations are not subject to the payout 
requirements.
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    \132\ Sec. 4942(g)(1)(A).
    \133\ Sec. 4942(a) and (b). Taxes imposed may be abated if certain 
conditions are met. Secs. 4961 and 4962.
    \134\ Sec. 4942(g)(1)(B) and 4942(g)(2). In general, an 
organization is permitted to adjust the distributable amount in those 
cases where distributions during the five preceding years have exceeded 
the payout requirements. Sec. 4942(i).
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            Tax on excess business holdings
      Private foundations are subject to tax on excess business 
holdings.\135\ In general, a private foundation is permitted to 
hold 20 percent of the voting stock in a corporation, reduced 
by the amount of voting stock held by all disqualified persons 
(as defined in section 4946). If it is established that no 
disqualified person has effective control of the corporation, a 
private foundation and disqualified persons together may own up 
to 35 percent of the voting stock of a corporation. A private 
foundation shall not be treated as having excess business 
holdings in any corporation if it owns (together with certain 
other related private foundations) not more than two percent of 
the voting stock and not more than two percent in value of all 
outstanding shares of all classes of stock in that corporation. 
Similar rules apply with respect to holdings in a partnership 
(``profits interest'' is substituted for ``voting stock'' and 
``capital interest'' for ``nonvoting stock'') and to other 
unincorporated enterprises (by substituting ``beneficial 
interest'' for ``voting stock''). Private foundations are not 
permitted to have holdings in a proprietorship. Foundations 
generally have a five-year period to dispose of excess business 
holdings (acquired other than by purchase) without being 
subject to tax.\136\ This five-year period may be extended an 
additional five years in limited circumstances.\137\
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    \135\ Sec. 4943. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \136\ Sec. 4943(c)(6).
    \137\ Sec. 4943(c)(7).
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      The initial tax is equal to five percent of the value of 
the excess business holdings held during the foundation's 
applicable taxable year. An additional tax is imposed if an 
initial tax is imposed and at the close of the applicable 
taxable period, the foundation continues to hold excess 
business holdings. The amount of the additional tax is equal to 
200 percent of such holdings.
            Tax on jeopardizing investments
      Private foundations and foundation managers are subject 
to tax on investments that jeopardize the foundation's 
charitable purpose.\138\ In general, an initial tax of five 
percent of the amount of the investment applies to the 
foundation and to foundation managers who participated in the 
making of the investment knowing that it jeopardized the 
carrying out of the foundation's exempt purposes. The initial 
tax on foundation managers may not exceed $5,000 per 
investment. If the investment is not removed from jeopardy 
(e.g., sold or otherwise disposed of), an additional tax of 25 
percent of the amount of the investment is imposed on the 
foundation and five percent of the amount of the investment on 
a foundation manager who refused to agree to removing the 
investment from jeopardy. The additional tax on foundation 
managers may not exceed $10,000 per investment. An investment, 
the primary purpose of which is to accomplish a charitable 
purpose and no significant purpose of which is the production 
of income or the appreciation of property, is not considered a 
jeopardizing investment.\139\
---------------------------------------------------------------------------
    \138\ Sec. 4944. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \139\ Sec. 4944(c).
---------------------------------------------------------------------------
            Tax on taxable expenditures
      Certain expenditures of private foundations are subject 
to tax.\140\ In general, taxable expenditures are expenses: (1) 
for lobbying; (2) to influence the outcome of a public election 
or carry on a voter registration drive (unless certain 
requirements are met); (3) as a grant to an individual for 
travel, study, or similar purposes unless made pursuant to 
procedures approved by the Secretary; (4) as a grant to an 
organization that is not a public charity or exempt operating 
foundation unless the foundation exercises expenditure 
responsibility \141\ with respect to the grant; or (5) for any 
non-charitable purpose. For each taxable expenditure, a tax is 
imposed on the foundation of 10 percent of the amount of the 
expenditure, and an additional tax of 100 percent is imposed on 
the foundation if the expenditure is not corrected. A tax of 
2.5 percent of the expenditure (up to $5,000) also is imposed 
on a foundation manager who agrees to making a taxable 
expenditure knowing that it is a taxable expenditure. An 
additional tax of 50 percent of the amount of the expenditure 
(up to $10,000) is imposed on a foundation manager who refuses 
to agree to correction of such expenditure.
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    \140\ Sec. 4945. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \141\ In general, expenditure responsibility requires that a 
foundation make all reasonable efforts and establish reasonable 
procedures to ensure that the grant is spent solely for the purpose for 
which it was made, to obtain reports from the grantee on the 
expenditure of the grant, and to make reports to the Secretary 
regarding such expenditures. Sec. 4945(h).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Self-dealing and excess benefit transaction initial taxes and dollar 
        limitations
      For acts of self-dealing other than the payment of 
compensation by a private foundation to a disqualified person, 
the provision increases the initial tax on the self-dealer from 
five percent of the amount involved to 10 percent of the amount 
involved. For acts of self-dealing regarding the payment of 
compensation by a private foundation to a disqualified person, 
the provision increases the initial tax on the self-dealer from 
five percent of the amount involved (none of which is subject 
to abatement) to 25 percent of the amount involved (15 percent 
of which is subject to abatement). The provision increases the 
initial tax on foundation managers from 2.5 percent of the 
amount involved to five percent of the amount involved and 
increases the dollar limitation on the amount of the initial 
and additional taxes on foundation managers per act of self-
dealing from $10,000 per act to $20,000 per act. Similarly, the 
provision doubles the dollar limitation on organization 
managers of public charities and social welfare organizations 
for participation in excess benefit transactions from $10,000 
per transaction to $20,000 per transaction.
Failure to distribute income, excess business holdings, jeopardizing 
        investments, and taxable expenditures
      The provision doubles the amounts of the initial taxes 
and the dollar limitations on foundation managers with respect 
to the private foundation excise taxes on the failure to 
distribute income, excess business holdings, jeopardizing 
investments, and taxable expenditures.
      Specifically, for the failure to distribute income, the 
initial tax on the foundation is increased from 15 percent of 
the undistributed amount to 30 percent of the undistributed 
amount.
      For excess business holdings, the initial tax on excess 
business holdings is increased from five percent of the value 
of such holdings to 10 percent of such value.
      For jeopardizing investments, the initial tax of five 
percent of the amount of the investment that is imposed on the 
foundation and on foundation managers is increased to 10 
percent of the amount of the investment. The dollar limitation 
on the initial tax on foundation managers of $5,000 per 
investment is increased to $10,000 and the dollar limitation on 
the additional tax on foundation managers of $10,000 per 
investment is increased to $20,000.
      For taxable expenditures, the initial tax on the 
foundation is increased from 10 percent of the amount of the 
expenditure to 20 percent, the initial tax on the foundation 
manager is increased from 2.5 percent of the amount of the 
expenditure to five percent, the dollar limitation on the 
initial tax on foundation managers is increased from $5,000 to 
$10,000, and the dollar limitation on the additional tax on 
foundation managers is increased from $10,000 to $20,000.
Effective date
      The provision is effective for taxable years beginning 
after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
4. Reform rules for charitable contributions of easements on buildings 
        in registered historic districts (sec. 214 of the Senate 
        amendment and sec. 170 of the Code)

                              PRESENT LAW

            In general
      Present law provides special rules that apply to 
charitable deductions of qualified conservation contributions, 
which include conservation easements and facade easements.\142\ 
Qualified conservation contributions are not subject to the 
``partial interest'' rule, which generally bars deductions for 
charitable contributions of partial interests in property.\143\ 
Accordingly, qualified conservation contributions are 
contributions of partial interests that are eligible for a fair 
market value charitable deduction.
---------------------------------------------------------------------------
    \142\ Sec. 170(h).
    \143\ Sec. 170(f)(3).
---------------------------------------------------------------------------
      A qualified conservation contribution is a contribution 
of a qualified real property interest to a qualified 
organization exclusively for conservation purposes. A qualified 
real property interest is defined as: (1) the entire interest 
of the donor other than a qualified mineral interest; (2) a 
remainder interest; or (3) a restriction (granted in 
perpetuity) on the use that may be made of the real 
property.\144\ Qualified organizations include certain 
governmental units, public charities that meet certain public 
support tests, and certain supporting organizations.
---------------------------------------------------------------------------
    \144\ Charitable contributions of interests that constitute the 
taxpayer's entire interest in the property are not regarded as 
qualified real property interests within the meaning of section 170(h), 
but instead are subject to the general rules applicable to charitable 
contributions of entire interests of the taxpayer (i.e., generally are 
deductible at fair market value, without regard to satisfaction of the 
requirements of section 170(h)).
---------------------------------------------------------------------------
      Conservation purposes include: (1) the preservation of 
land areas for outdoor recreation by, or for the education of, 
the general public; (2) the protection of a relatively natural 
habitat of fish, wildlife, or plants, or similar ecosystem; (3) 
the preservation of open space (including farmland and forest 
land) where such preservation will yield a significant public 
benefit and is either for the scenic enjoyment of the general 
public or pursuant to a clearly delineated Federal, State, or 
local governmental conservation policy; and (4) the 
preservation of an historically important land area or a 
certified historic structure.\145\
---------------------------------------------------------------------------
    \145\ Sec. 170(h)(4)(A).
---------------------------------------------------------------------------
      In general, no deduction is available if the property may 
be put to a use that is inconsistent with the conservation 
purpose of the gift.\146\ A contribution is not deductible if 
it accomplishes a permitted conservation purpose while also 
destroying other significant conservation interests.\147\
---------------------------------------------------------------------------
    \146\ Treas. Reg. sec. 1.170A-14(e)(2).
    \147\ Treas. Reg. sec. 1.170A-14(e)(2).
---------------------------------------------------------------------------
      Taxpayers are required to obtain a qualified appraisal 
for donated property with a value of $5,000 or more, and to 
attach an appraisal summary to the tax return.\148\ Under 
Treasury regulations, a qualified appraisal means an appraisal 
document that, among other things: (1) relates to an appraisal 
that is made not earlier than 60 days prior to the date of 
contribution of the appraised property and not later than the 
due date (including extensions) of the return on which a 
deduction is first claimed under section 170; \149\ (2) is 
prepared, signed, and dated by a qualified appraiser; (3) 
includes (a) a description of the property appraised; (b) the 
fair market value of such property on the date of contribution 
and the specific basis for the valuation; (c) a statement that 
such appraisal was prepared for income tax purposes; (d) the 
qualifications of the qualified appraiser; and (e) the 
signature and taxpayer identification number of such appraiser; 
and (4) does not involve an appraisal fee that violates certain 
prescribed rules.\150\
---------------------------------------------------------------------------
    \148\ Sec. 170(f)(11)(C).
    \149\ In the case of a deduction first claimed or reported on an 
amended return, the deadline is the date on which the amended return is 
filed.
    \150\ Treas. Reg. sec. 1.170A-13(c)(3).
---------------------------------------------------------------------------
            Valuation
      The value of a conservation restriction granted in 
perpetuity generally is determined under the ``before and after 
approach.'' Such approach provides that the fair market value 
of the restriction is equal to the difference (if any) between 
the fair market value of the property the restriction encumbers 
before the restriction is granted and the fair market value of 
the encumbered property after the restriction is granted.\151\
---------------------------------------------------------------------------
    \151\ Treas. Reg. sec. 1.170A-14(h)(3).
---------------------------------------------------------------------------
      If the granting of a perpetual restriction has the effect 
of increasing the value of any other property owned by the 
donor or a related person, the amount of the charitable 
deduction for the conservation contribution is to be reduced by 
the amount of the increase in the value of the other 
property.\152\ In addition, the donor is to reduce the amount 
of the charitable deduction by the amount of financial or 
economic benefits that the donor or a related person receives 
or can reasonably be expected to receive as a result of the 
contribution.\153\ If such benefits are greater than those that 
will inure to the general public from the transfer, no 
deduction is allowed.\154\ In those instances where the grant 
of a conservation restriction has no material effect on the 
value of the property, or serves to enhance, rather than 
reduce, the value of the property, no deduction is 
allowed.\155\
---------------------------------------------------------------------------
    \152\ Treas. Reg. sec. 1.170A-14(h)(3)(i).
    \153\ Id.
    \154\ Id.
    \155\ Treas. Reg. sec. 1.170A-14(h)(3)(ii).
---------------------------------------------------------------------------
            Preservation of a certified historic structure
      A certified historic structure means any building, 
structure, or land which is (i) listed in the National 
Register, or (ii) located in a registered historic district (as 
defined in section 47(c)(3)(B)) and is certified by the 
Secretary of the Interior to the Secretary of the Treasury as 
being of historic significance to the district.\156\ For this 
purpose, a structure means any structure, whether or not it is 
depreciable, and, accordingly, easements on private residences 
may qualify.\157\ If restrictions to preserve a building or 
land area within a registered historic district permit future 
development on the site, a deduction will be allowed only if 
the terms of the restrictions require that such development 
conform with appropriate local, State, or Federal standards for 
construction or rehabilitation within the district.\158\
---------------------------------------------------------------------------
    \156\ Sec. 170(h)(4)(B).
    \157\ Treas. Reg. sec. 1.170A-14(d)(5)(iii).
    \158\ Treas. Reg. sec. 1.170A-14(d)(5)(i).
---------------------------------------------------------------------------
      The IRS and the courts have held that a facade easement 
may constitute a qualifying conservation contribution.\159\ In 
general, a facade easement is a restriction the purpose of 
which is to preserve certain architectural, historic, and 
cultural features of the facade, or front, of a building. The 
terms of a facade easement might permit the property owner to 
make alterations to the facade of the structure if the owner 
obtains consent from the qualified organization that holds the 
easement.
---------------------------------------------------------------------------
    \159\ Hillborn v. Commissioner, 85 T.C. 677 (1985) (holding the 
fair market value of a facade donation generally is determined by 
applying the ``before and after'' valuation approach); Richmond v. 
U.S., 699 F. Supp. 578 (E.D. La. 1988); Priv. Ltr. Rul. 199933029 (May 
24, 1999) (ruling that a preservation and conservation easement 
relating to the facade and certain interior portions of a fraternity 
house was a qualified conservation contribution).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision revises the rules for qualified 
conservation contributions with respect to property for which a 
charitable deduction is allowable under section 
170(h)(4)(B)(ii) by reason of a property's location in a 
registered historic district. Under the provision, a charitable 
deduction is not allowable with respect to a structure or land 
area located in such a district (by reason of the structure or 
land area's location in such a district). A charitable 
deduction is allowable with respect to buildings (as is the 
case under present law) but the qualified real property 
interest that relates to the exterior of the building must 
preserve the entire exterior of the building, including the 
space above the building, the sides, the rear, and the front of 
the building. In addition, such qualified real property 
interest must provide that no portion of the exterior of the 
building may be changed in a manner inconsistent with the 
historical character of such exterior.
      For any contribution relating to a registered historic 
district made after the date of enactment of the provision, 
taxpayers must include with the return for the taxable year of 
the contribution a qualified appraisal of the qualified real 
property interest (irrespective of the claimed value of such 
interest) and attach the appraisal with the taxpayer's return, 
photographs of the entire exterior of the building, and 
descriptions of all current restrictions on development of the 
building, including, for example, zoning laws, ordinances, 
neighborhood association rules, restrictive covenants, and 
other similar restrictions. Failure to obtain and attach an 
appraisal or to include the required information results in 
disallowance of the deduction. In addition, the donor and the 
donee must enter into a written agreement certifying, under 
penalty of perjury, that the donee is a qualified organization, 
with a purpose of environmental protection, land conservation, 
open space preservation, or historic preservation, and that the 
donee has the resources to manage and enforce the restriction 
and a commitment to do so.
      Taxpayers claiming a deduction for a qualified 
conservation contribution with respect to the exterior of a 
building located in a registered historic district in excess of 
the greater of three percent of the fair market value of the 
underlying property or $10,000 must pay a $500 fee to the 
Internal Revenue Service or the deduction is not allowed. 
Amounts paid are required to be dedicated to Internal Revenue 
Service enforcement of qualified conservation contributions.
      Effective date.--The provision relating to deductions for 
contributions relating to structures and land areas is 
effective for contributions made after the date of enactment. 
The limitation on the amount that may be deducted and the 
filing fee is effective for contributions made 180 days after 
the date of enactment. The rest of the provision is effective 
for contributions made after November 15, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
5. Reform rules relating to charitable contributions of taxidermy and 
        recapture tax benefit on property not used for an exempt use 
        (secs. 215 and 216 of the Senate amendment and secs. 170, 
        6050L, and new sec. 6720B of the Code)

                              PRESENT LAW

Deductibility of charitable contributions
            In general
      In computing taxable income, a taxpayer who itemizes 
deductions generally is allowed to deduct the amount of cash 
and the fair market value of property contributed to an 
organization described in section 501(c)(3) or to a Federal, 
State, or local governmental entity.\160\ The amount of the 
deduction allowable for a taxable year with respect to a 
charitable contribution of property may be reduced or limited 
depending on the type of property contributed, the type of 
charitable organization to which the property is contributed, 
and the income of the taxpayer.\161\ In general, more generous 
charitable contribution deduction rules apply to gifts made to 
public charities than to gifts made to private foundations. 
Within certain limitations, donors also are entitled to deduct 
their contributions to section 501(c)(3) organizations for 
Federal estate and gift tax purposes. By contrast, 
contributions to nongovernmental, non-charitable tax-exempt 
organizations generally are not deductible by the donor,\162\ 
though such organizations are eligible for the exemption from 
Federal income tax with respect to such donations.
---------------------------------------------------------------------------
    \160\ The deduction also is allowed for purposes of calculating 
alternative minimum taxable income.
    \161\ Secs. 170(b) and (e).
    \162\ Exceptions to the general rule of non-deductibility include 
certain gifts made to a veterans' organization or to a domestic 
fraternal society. In addition, contributions to certain nonprofit 
cemetery companies are deductible for Federal income tax purposes, but 
generally are not deductible for Federal estate and gift tax purposes. 
Secs. 170(c)(3), 170(c)(4), 170(c)(5), 2055(a)(3), 2055(a)(4), 
2106(a)(2)(A)(iii), 2522(a)(3), and 2522(a)(4).
---------------------------------------------------------------------------
            Contributions of property
      The amount of the deduction for charitable contributions 
of capital gain property generally equals the fair market value 
of the contributed property on the date of the contribution. 
Capital gain property means any capital asset, or property used 
in the taxpayer's trade or business, the sale of which at its 
fair market value, at the time of contribution, would have 
resulted in gain that would have been long-term capital gain. 
Contributions of capital gain property are subject to different 
percentage limitations (i.e., limitations based on the donor's 
income) than other contributions of property.
      For certain contributions of property, the deductible 
amount is reduced from the fair market value of the contributed 
property by the amount of any gain, generally resulting in a 
deduction equal to the taxpayer's basis. This rule applies to 
contributions of: (1) ordinary income property, e.g., property 
that, at the time of contribution, would not have resulted in 
long-term capital gain if the property was sold by the taxpayer 
on the contribution date; \163\ (2) tangible personal property 
that is used by the donee in a manner unrelated to the donee's 
exempt (or governmental) purpose; and (3) property to or for 
the use of a private foundation (other than a foundation 
defined in section 170(b)(1)(E)).
---------------------------------------------------------------------------
    \163\ For certain contributions of inventory, C corporations may 
claim an enhanced deduction equal to the lesser of (1) basis plus one-
half of the item's appreciation (i.e., basis plus one half of fair 
market value in excess of basis) or (2) two times basis. Sec. 
170(e)(3), 170(e)(4), 170(e)(6).
---------------------------------------------------------------------------
      Charitable contributions of taxidermy are subject to the 
tangible personal property rule (number (2) above). For 
example, for appreciated taxidermy, if the property is used to 
further the donee's exempt purpose, the deduction is fair 
market value. But if the property is not used to further the 
donee's exempt purpose, the deduction is the donor's basis. If 
the taxidermy is depreciated, i.e., the value is less than the 
taxpayer's basis in such property, taxpayers generally deduct 
the fair market value of such contributions, regardless of 
whether the property is used for exempt or unrelated purposes 
by the donee.
            Substantiation
      No charitable deduction is allowed for any contribution 
of $250 or more unless the taxpayer substantiates the 
contribution by a contemporaneous written acknowledgement of 
the contribution by the donee organization.\164\ Such 
acknowledgement must include the amount of cash and a 
description (but not value) of any property other than cash 
contributed, whether the donee provided any goods or services 
in consideration for the contribution (and a good faith 
estimate of the value of any such goods or services).
---------------------------------------------------------------------------
    \164\ Sec. 170(f)(8).
---------------------------------------------------------------------------
      In general, if the total charitable deduction claimed for 
non-cash property is more than $500, the taxpayer must attach a 
completed Form 8283 (Noncash Charitable Contributions) to the 
taxpayer's return or the deduction is not allowed.\165\ C 
corporations (other than personal service corporations and 
closely-held corporations) are required to file Form 8283 only 
if the deduction claimed is more than $5,000. Information 
required on the Form 8283 includes, among other things, a 
description of the property, the appraised fair market value 
(if an appraisal is required), the donor's basis in the 
property, how the donor acquired the property, a declaration by 
the appraiser regarding the appraiser's general qualifications, 
an acknowledgement by the donee that it is eligible to receive 
deductible contributions, and an indication by the donee 
whether the property is intended for an unrelated use.
---------------------------------------------------------------------------
    \165\ Sec. 170(f)(11).
---------------------------------------------------------------------------
      Taxpayers are required to obtain a qualified appraisal 
for donated property with a value of more than $5,000, and to 
attach an appraisal summary to the tax return.\166\ Under 
Treasury regulations, a qualified appraisal means an appraisal 
document that, among other things: (1) relates to an appraisal 
that is made not earlier than 60 days prior to the date of 
contribution of the appraised property and not later than the 
due date (including extensions) of the return on which a 
deduction is first claimed under section 170;\167\ (2) is 
prepared, signed, and dated by a qualified appraiser; (3) 
includes (a) a description of the property appraised; (b) the 
fair market value of such property on the date of contribution 
and the specific basis for the valuation; (c) a statement that 
such appraisal was prepared for income tax purposes; (d) the 
qualifications of the qualified appraiser; and (e) the 
signature and taxpayer identification number of such appraiser; 
and (4) does not involve an appraisal fee that violates certain 
prescribed rules.\168\ In the case of contributions of art 
valued at more than $20,000 and other contributions of more 
than $500,000, taxpayers are required to attach the appraisal 
to the tax return. Taxpayers may request a Statement of Value 
from the Internal Revenue Service in order to substantiate the 
value of art with an appraised value of $50,000 or more for 
income, estate, or gift tax purposes.\169\ The fee for such a 
Statement is $2,500 for one, two, or three items or art plus 
$250 for each additional item.
---------------------------------------------------------------------------
    \166\ Id.
    \167\ In the case of a deduction first claimed or reported on an 
amended return, the deadline is the date on which the amended return is 
filed.
    \168\ Treas. Reg. sec. 1.170A-13(c)(3). Sec. 170(f)(11)(E).
    \169\ Rev. Proc. 96-15, 1996-1 C.B. 627.
---------------------------------------------------------------------------
      If a donee organization sells, exchanges, or otherwise 
disposes of contributed property with a claimed value of more 
than $5,000 (other than publicly traded securities) within two 
years of the property's receipt, the donee is required to file 
a return (Form 8282) with the Secretary, and to furnish a copy 
of the return to the donor, showing the name, address, and 
taxpayer identification number of the donor, a description of 
the property, the date of the contribution, the amount received 
on the disposition, and the date of the disposition.\170\
---------------------------------------------------------------------------
    \170\ Sec. 6050L(a)(1).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Contributions of taxidermy
      For contributions of taxidermy property with a claimed 
value of more than $500, the individual must include with the 
individual's return a photograph of the taxidermy and 
comparable sales data for similar items. It is intended that 
valuation must be based on comparable sales and that a 
deduction is not allowable if sufficient comparable sales are 
not provided.
      For claims of more than $5,000, the taxpayer must notify 
the IRS of the deduction and include with the taxpayer's return 
a statement of value from the IRS, similar to that available 
under present law for items of art, or a request for such a 
statement and a fee of $500. The provision defines taxidermy 
property as a mounted work of art which contains any part of a 
dead animal.
      It is intended that for purposes of the charitable 
contribution deduction, a taxpayer may not include in the 
taxpayer's basis of the contributed taxidermy any costs 
attributable to travel.
Recapture of tax benefit upon subsequent disposition of tangible 
        personal property intended for an exempt use
      In general, the provision recovers the tax benefit for 
charitable contributions of tangible personal property with 
respect to which a fair market value deduction is claimed and 
which is not used for exempt purposes. The provision applies to 
appreciated tangible personal property that is identified by 
the donee organization as for a use related to the purpose or 
function constituting the donee's basis for tax exemption, and 
for which a deduction of more than $5,000 is claimed 
(``applicable property'').\171\
---------------------------------------------------------------------------
    \171\ Present law rules continue to apply to any contribution of 
exempt use property for which a deduction of $5,000 or less is claimed.
---------------------------------------------------------------------------
      Under the provision, if a donee organization disposes of 
applicable property within three years of the contribution of 
the property, the donor is subject to an adjustment of the tax 
benefit. If the disposition occurs in the tax year of the donor 
in which the contribution is made, the donor's deduction 
generally is basis and not fair market value.\172\ If the 
disposition occurs in a subsequent year, the donor must include 
as ordinary income for its taxable year in which the 
disposition occurs an amount equal to the excess (if any) of 
(i) the amount of the deduction previously claimed by the donor 
as a charitable contribution with respect to such property, 
over (ii) the donor's basis in such property at the time of the 
contribution.
---------------------------------------------------------------------------
    \172\ The disposition proceeds are regarded as relevant to a 
determination of fair market value.
---------------------------------------------------------------------------
      There is no adjustment of the tax benefit if the donee 
organization makes a certification to the Secretary, by written 
statement signed under penalties of perjury by an officer of 
the organization. The statement must either (1) certify that 
the use of the property by the donee was related to the purpose 
or function constituting the basis for the donee's exemption, 
and describe how the property was used and how such use 
furthered such purpose or function; or (2) state the intended 
use of the property by the donee at the time of the 
contribution and certify that such use became impossible or 
infeasible to implement. The organization must furnish a copy 
of the certification to the donor.
      A penalty of $10,000 applies to a person that identifies 
applicable property as having a use that is related to a 
purpose or function constituting the basis for the donee's 
exemption knowing that it is not intended for such a use.\173\
---------------------------------------------------------------------------
    \173\ Other present-law penalties also may apply, such as the 
penalty for aiding and abetting the understatement of tax liability 
under section 6701.
---------------------------------------------------------------------------
Reporting of exempt use property contributions
      The provision modifies the present-law information return 
requirements that apply upon the disposition of contributed 
property by a charitable organization (Form 8282, sec. 6050L). 
The return requirement is extended to dispositions made within 
three years after receipt (from two years). The donee 
organization also must provide, in addition to the information 
already required to be provided on the return, a description of 
the donee's use of the property, a statement of whether use of 
the property was related to the purpose or function 
constituting the basis for the donee's exemption, and, if 
applicable, a certification of any such use (described above).
Effective date
      With respect to contributions of taxidermy property, the 
provision is effective for contributions made after November 
15, 2005. With respect to exempt use property generally, the 
provision is effective for contributions made and returns filed 
after June 1, 2006.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
6. Limit charitable deduction for contributions of clothing and 
        household items and modify recordkeeping and substantiation 
        requirements for certain charitable contributions (secs. 217 
        and 218 of the Senate amendment and sec. 170 of the Code)

                              PRESENT LAW

Deductibility of charitable contributions
            In general
      In computing taxable income, a taxpayer who itemizes 
deductions generally is allowed to deduct the amount of cash 
and the fair market value of property contributed to an 
organization described in section 501(c)(3) or to a Federal, 
State, or local governmental entity.\174\ The amount of the 
deduction allowable for a taxable year with respect to a 
charitable contribution of property may be reduced or limited 
depending on the type of property contributed, the type of 
charitable organization to which the property is contributed, 
and the income of the taxpayer.\175\ In general, more generous 
charitable contribution deduction rules apply to gifts made to 
public charities than to gifts made to private foundations. 
Within certain limitations, donors also are entitled to deduct 
their contributions to section 501(c)(3) organizations for 
Federal estate and gift tax purposes. By contrast, 
contributions to nongovernmental, non-charitable tax-exempt 
organizations generally are not deductible by the donor,\176\ 
though such organizations are eligible for the exemption from 
Federal income tax with respect to such donations.
---------------------------------------------------------------------------
    \174\ The deduction also is allowed for purposes of calculating 
alternative minimum taxable income.
    \175\ Secs. 170(b) and (e).
    \176\ Exceptions to the general rule of non-deductibility include 
certain gifts made to a veterans' organization or to a domestic 
fraternal society. In addition, contributions to certain nonprofit 
cemetery companies are deductible for Federal income tax purposes, but 
generally are not deductible for Federal estate and gift tax purposes. 
Secs. 170(c)(3), 170(c)(4), 170(c)(5), 2055(a)(3), 2055(a)(4), 
2106(a)(2)(A)(iii), 2522(a)(3), and 2522(a)(4).
---------------------------------------------------------------------------
            Contributions of property
      The amount of the deduction for charitable contributions 
of capital gain property generally equals the fair market value 
of the contributed property on the date of the contribution. 
Capital gain property means any capital asset or property used 
in the taxpayer's trade or business the sale of which at its 
fair market value, at the time of contribution, would have 
resulted in gain that would have been long-term capital gain. 
Contributions of capital gain property are subject to different 
percentage limitations than other contributions of property.
      For certain contributions of property, the deductible 
amount is reduced from the fair market value of the contributed 
property by the amount of any gain, generally resulting in a 
deduction equal to the taxpayer's basis. This rule applies to 
contributions of: (1) ordinary income property, e.g., property 
that, at the time of contribution, would not have resulted in 
long-term capital gain if the property was sold by the taxpayer 
on the contribution date; \177\ (2) tangible personal property 
that is used by the donee in a manner unrelated to the donee's 
exempt (or governmental) purpose; and (3) property to or for 
the use of a private foundation (other than a foundation 
defined in section 170(b)(1)(E)).
---------------------------------------------------------------------------
    \177\ For certain contributions of inventory and other property, C 
corporations may claim an enhanced deduction equal to the lesser of (1) 
basis plus one-half of the item's appreciation (i.e., basis plus one 
half of fair market value in excess of basis) or (2) two times basis. 
Sec. 170(e)(3), 170(e)(4), 170(e)(6).
---------------------------------------------------------------------------
      Charitable contributions of clothing and household items 
are subject to the tangible personal property rule (number (2) 
above). If such contributed property is appreciated property in 
the hands of the taxpayer, and is not used to further the 
donee's exempt purpose, the deduction is basis. In general, 
however, the value of clothing and household items is less than 
the taxpayer's basis in such property, with the result that 
taxpayers generally deduct the fair market value of such 
contributions, regardless of whether the property is used for 
exempt or unrelated purposes by the donee.
            Substantiation
      A donor who claims a deduction for a charitable 
contribution must maintain reliable written records regarding 
the contribution, regardless of the value or amount of such 
contribution. For a contribution of money, the donor generally 
must maintain one of the following: (1) a cancelled check; (2) 
a receipt (or a letter or other written communication) from the 
donee showing the name of the donee organization, the date of 
the contribution, and the amount of the contribution; or (3) in 
the absence of a cancelled check or a receipt, other reliable 
written records showing the name of the donee, the date of the 
contribution, and the amount of the contribution. For a 
contribution of property other than money, the donor generally 
must maintain a receipt from the donee organization showing the 
name of the donee, the date and location of the contribution, 
and a detailed description (but not the value) of the 
property.\178\ A donor of property other than money need not 
obtain a receipt, however, if circumstances make obtaining a 
receipt impracticable. Under such circumstances, the donor must 
maintain reliable written records regarding the contribution. 
The required content of such a record varies depending upon 
factors such as the type and value of property 
contributed.\179\
---------------------------------------------------------------------------
    \178\ Treas. Reg. sec. 1.170A-13(a).
    \179\ Treas. Reg. sec. 1.170A-13(b).
---------------------------------------------------------------------------
      In addition to the foregoing recordkeeping requirements, 
substantiation requirements apply in the case of charitable 
contributions with a value of $250 or more. No charitable 
deduction is allowed for any contribution of $250 or more 
unless the taxpayer substantiates the contribution by a 
contemporaneous written acknowledgement of the contribution by 
the donee organization. Such acknowledgement must include the 
amount of cash and a description (but not value) of any 
property other than cash contributed, whether the donee 
provided any goods or services in consideration for the 
contribution, and a good faith estimate of the value of any 
such goods or services.\180\ In general, if the total 
charitable deduction claimed for non-cash property is more than 
$500, the taxpayer must attach a completed Form 8283 (Noncash 
Charitable Contributions) to the taxpayer's return or the 
deduction is not allowed.\181\ In general, taxpayers are 
required to obtain a qualified appraisal for donated property 
with a value of more than $5,000, and to attach an appraisal 
summary to the tax return.
---------------------------------------------------------------------------
    \180\ Sec. 170(f)(8).
    \181\ Sec. 170(f)(11).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

General rule relating to clothing and household items
      The provision requires the Secretary to prepare and 
publish an itemized list of clothing and household items and to 
assign an amount to each item on the list. The assigned amount 
is treated as the fair market value of the item for purposes of 
the charitable contribution deduction and is based on an 
assumption that the item is in good used condition or better. 
Any deduction for a charitable contribution of each such item 
may not exceed the item's assigned amount. Any deduction for an 
item not in good used condition or better may not exceed 20 
percent of the item's assigned amount. Any deduction for an 
item that is not functional with respect to the use for which 
it was designed is not allowed. The list must be published by 
the Secretary at least once each calendar year and is 
applicable to contributions of clothing and household items 
made while the list is effective. The Secretary has discretion 
to determine the effective dates for each published list. The 
list should be prepared in consultation with donee 
organizations that accept charitable contributions of clothing 
and household items. In assigning amounts to particular items, 
the Secretary should take into account the sales price of such 
contributed item when sold by the donee organizations, whether 
through an exempt program of such organizations or otherwise. 
If an item of clothing or household item is not included on the 
list published by the Secretary, present law rules apply to the 
contribution of the item.
      The provision does not apply to contributions for which 
the donor has obtained a qualified appraisal. The provision 
also does not apply to contributions for which a deduction of 
more than $500 is claimed if (1) the donee sells the 
contributed item before the earlier of the due date (including 
extensions) for filing the return of tax for the taxable year 
of the donor in which the contribution was made or the date 
such return was filed; (2) the donee reports the sales price of 
the contributed item to the donor; and (3) the amount claimed 
as a deduction with respect to the contributed item does not 
exceed the amount of the sales price reported to the donor.
      The provision does not apply to contributions by C 
corporations. The provision applies to new and used items. 
Household items include furniture, furnishings, electronics, 
appliances, linens, and other similar items. Food, paintings, 
antiques, and other objects of art, jewelry and gems, and 
collections are excluded from the provision.
Substantiation
            Clothing and household items
      As under present law, for contributions with a claimed 
value of $250 or more, the taxpayer must obtain contemporaneous 
substantiation from the donee organization, which must include 
a description of the property contributed. The provision 
provides that, as part of such substantiation, the taxpayer 
obtain an indication of the condition of the item(s), a 
description of the type of item, and either a copy of the 
published list or instructions as to how to find such list.
      Under present law, if a taxpayer claims that the total 
value of charitable contributions of noncash property is more 
than $500, the taxpayer must include with the taxpayer's return 
a description of the property contributed and such other 
information as the Secretary may require in order to claim a 
charitable deduction (sec. 170(f)(11)(B)). This requirement 
presently is satisfied through completion by the taxpayer of 
the Form 8283 and attachment of the form to the taxpayer's 
return. The provision requires that the donor include the 
information about the contribution that is contained in the 
contemporaneous substantiation obtained from the donee 
organization (for gifts of $250 or more) as part of such 
requirement.
            Contributions of cash
      In addition, in the case of a charitable contribution of 
money, regardless of the amount, applicable recordkeeping 
requirements are satisfied under the provision only if the 
donor maintains a cancelled check or a receipt (or a letter or 
other written communication) from the donee showing the name of 
the donee organization, the date of the contribution, and the 
amount of the contribution. The recordkeeping requirements may 
not be satisfied by maintaining other written records.
Effective date
      The provision relating to clothing and household items is 
effective for contributions made after December 31, 2006. The 
provision relating to substantiation more generally is 
effective for contributions made in taxable years beginning 
after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
7. Contributions of fractional interests in tangible personal property 
        (sec. 219 of the Senate amendment and sec. 170 of the Code)

                              PRESENT LAW

      In general, a charitable deduction is not allowable for a 
contribution of a partial interest in property, such as an 
income interest, a remainder interest, or a right to use 
property.\182\ A gift of an undivided portion of a donor's 
entire interest in property generally is not treated as a 
nondeductible gift of a partial interest in property.\183\ For 
this purpose, an undivided portion of a donor's entire interest 
in property must consist of a fraction or percentage of each 
and every substantial interest or right owned by the donor in 
such property and must extend over the entire term of the 
donor's interest in such property.\184\ A gift generally is 
treated as a gift of an undivided portion of a donor's entire 
interest in property if the donee is given the right, as a 
tenant in common with the donor, to possession, dominion, and 
control of the property for a portion of each year appropriate 
to its interest in such property.\185\
---------------------------------------------------------------------------
    \182\ Secs. 170(f)(3)(A) (income tax), 2055(e)(2) (estate tax), and 
2522(c)(2) (gift tax).
    \183\ Sec. 170(f)(3)(B)(ii).
    \184\ Treas. Reg. sec. 1.170A-7(b)(1).
    \185\ Treas. Reg. sec. 1.170A-7(b)(1).
---------------------------------------------------------------------------
      Consistent with these requirements, a charitable 
contribution deduction generally is not allowable for a 
contribution of a future interest in tangible personal 
property.\186\ For this purpose, a future interest is one ``in 
which a donor purports to give tangible personal property to a 
charitable organization, but has an understanding, arrangement, 
agreement, etc., whether written or oral, with the charitable 
organization which has the effect of reserving to, or retaining 
in, such donor a right to the use, possession, or enjoyment of 
the property.'' \187\ Treasury regulations provide that section 
170(a)(3), which generally denies a deduction for a 
contribution of a future interest in tangible personal 
property, ``[has] no application in respect of a transfer of an 
undivided present interest in property. For example, a 
contribution of an undivided one-quarter interest in a painting 
with respect to which the donee is entitled to possession 
during three months of each year shall be treated as made upon 
the receipt by the donee of a formally executed and 
acknowledged deed of gift. However, the period of initial 
possession by the donee may not be deferred in time for more 
than one year.'' \188\
---------------------------------------------------------------------------
    \186\ Sec. 170(a)(3).
    \187\ Treas. Reg. sec. 1.170A-5(a)(4).
    \188\ Treas. Reg. sec. 1.170A-5(a)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Require consistent valuation of fractional interests in the same item 
        of property
      In general, under present law and the provision a donor 
may take a deduction for a charitable contribution of a 
fractional interest in tangible personal property (such as an 
artwork), provided the donor satisfies the requirements for 
deductibility (including the requirements concerning 
contributions of partial interests and future interests in 
property), and in subsequent years make additional charitable 
contributions of interests in the same property.\189\ Under the 
provision, a donor's charitable deduction for the initial 
contribution of a fractional interest in an item of tangible 
personal property (or collection of such items) shall be 
determined as under current law (e.g., based upon the fair 
market value of the artwork at the time of the contribution of 
the fractional interest and considering whether the use of the 
artwork will be related to the donee's exempt purposes). For 
purposes of determining the deductible amount of each 
additional contribution of an interest (whether or not a 
fractional interest) in the same item of property, under the 
provision, the fair market value of the item shall be the 
lesser of: (1) the value used for purposes of determining the 
charitable deduction for the initial fractional contribution; 
or (2) the fair market value of the item at the time of the 
subsequent contribution. This portion of the provision applies 
for income, gift, and estate tax purposes.
---------------------------------------------------------------------------
    \189\ See, e.g., Winokur v. Commissioner, 90 T.C. 733 (1988).
---------------------------------------------------------------------------
Require actual possession by the donee
      The provision provides for recapture of the income tax 
charitable deduction or gift tax charitable deduction under 
certain circumstances. Specifically, if, during any one-year 
period following a contribution of a fractional interest in an 
item of tangible personal property, the donee fails to take 
actual possession of the item for a period of time 
corresponding substantially to the donee's then-existing 
percentage interest in the item, then the donee's charitable 
deduction for all previous contributions of interests in the 
item shall be recaptured (plus interest).
      Under the provision, the Secretary of the Treasury is 
authorized to promulgate rules to prevent the circumvention of 
the provision by, for example, engaging in a transaction in 
which a donor first transfers one or more items of tangible 
personal property to a separate entity in exchange for 
ownership interests in the entity, and subsequently makes 
charitable contributions of such ownership interests.
Effective date
      The provision is applicable for contributions, bequests, 
and gifts made after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
8. Provisions relating to substantial and gross overstatement of 
        valuations of property (sec. 220 of the Senate amendment and 
        secs. 6662 and 6664 of the Code)

                              PRESENT LAW

Taxpayer penalties
      Present law imposes accuracy-related penalties on a 
taxpayer in cases involving a substantial valuation 
misstatement or gross valuation misstatement relating to an 
underpayment of income tax.\190\ For this purpose, a 
substantial valuation misstatement generally means a value 
claimed that is at least twice (200 percent or more) the amount 
determined to be the correct value, and a gross valuation 
misstatement generally means a value claimed that is at least 
four times (400 percent or more) the amount determined to be 
the correct value.
---------------------------------------------------------------------------
    \190\ Sec. 6662(b)(3) and (h).
---------------------------------------------------------------------------
      The penalty is 20 percent of the underpayment of tax 
resulting from a substantial valuation misstatement and rises 
to 40 percent for a gross valuation misstatement. No penalty is 
imposed unless the portion of the underpayment attributable to 
the valuation misstatement exceeds $5,000 ($10,000 in the case 
of a corporation other than an S corporation or a personal 
holding company). Under present law, no penalty is imposed with 
respect to any portion of the understatement attributable to 
any item if (1) the treatment of the item on the return is or 
was supported by substantial authority, or (2) facts relevant 
to the tax treatment of the item were adequately disclosed on 
the return or on a statement attached to the return and there 
is a reasonable basis for the tax treatment. Special rules 
apply to tax shelters.
      In addition, the accuracy-related penalty does not apply 
if a taxpayer shows there was reasonable cause for an 
underpayment and the taxpayer acted in good faith.\191\
---------------------------------------------------------------------------
    \191\ Sec. 6664(c).
---------------------------------------------------------------------------
Penalty for aiding and abetting understatement of tax
      A penalty is imposed on a person who: (1) aids or assists 
in or advises with respect to a tax return or other document; 
(2) knows (or has reason to believe) that such document will be 
used in connection with a material tax matter; and (3) knows 
that this would result in an understatement of tax of another 
person. In general, the amount of the penalty is $1,000. If the 
document relates to the tax return of a corporation, the amount 
of the penalty is $10,000.
Qualified appraisals
      Present law requires a taxpayer to obtain a qualified 
appraisal for donated property with a value of more than 
$5,000, and to attach an appraisal summary to the tax 
return.\192\ Treasury Regulations state that a qualified 
appraisal means an appraisal document that, among other things: 
(1) relates to an appraisal that is made not earlier than 60 
days prior to the date of contribution of the appraised 
property and not later than the due date (including extensions) 
of the return on which a deduction is first claimed under 
section 170; (2) is prepared, signed, and dated by a qualified 
appraiser; (3) includes (a) a description of the property 
appraised; (b) the fair market value of such property on the 
date of contribution and the specific basis for the valuation; 
(c) a statement that such appraisal was prepared for income tax 
purposes; (d) the qualifications of the qualified appraiser; 
and (e) the signature and taxpayer identification number of 
such appraiser; and (4) does not involve an appraisal fee that 
violates certain prescribed rules.\193\
---------------------------------------------------------------------------
    \192\ Sec. 170(f)(11).
    \193\ Treas. Reg. sec. 1.170A-13(c)(3).
---------------------------------------------------------------------------
Qualified appraisers
      Treasury Regulations define a qualified appraiser as a 
person who holds himself or herself out to the public as an 
appraiser or performs appraisals on a regular basis, is 
qualified to make appraisals of the type of property being 
valued (as determined by the appraiser's background, 
experience, education and membership, if any, in professional 
appraisal associations), is independent, and understands that 
an intentionally false or fraudulent overstatement of the value 
of the appraised property may subject the appraiser to civil 
penalties.\194\
---------------------------------------------------------------------------
    \194\ Treas. Reg. sec. 1.170A-13(c)(5)(i).
---------------------------------------------------------------------------
Appraiser oversight
      The Secretary is authorized to regulate the practice of 
representatives of persons before the Department of the 
Treasury (``Department'').\195\ After notice and hearing, the 
Secretary is authorized to suspend or disbar from practice 
before the Department or the Internal Revenue Service (``IRS'') 
a representative who is incompetent, who is disreputable, who 
violates the rules regulating practice before the Department or 
the IRS, or who (with intent to defraud) willfully and 
knowingly misleads or threatens the person being represented 
(or a person who may be represented).
---------------------------------------------------------------------------
    \195\ 31 U.S.C. sec. 330.
---------------------------------------------------------------------------
      The Secretary also is authorized to bar from appearing 
before the Department or the IRS, for the purpose of offering 
opinion evidence on the value of property or other assets, any 
individual against whom a civil penalty for aiding and abetting 
the understatement of tax has been assessed. Thus, an appraiser 
who aids or assists in the preparation or presentation of an 
appraisal will be subject to disciplinary action if the 
appraiser knows that the appraisal will be used in connection 
with the tax laws and will result in an understatement of the 
tax liability of another person. The Secretary has authority to 
provide that the appraisals of an appraiser who has been 
disciplined have no probative effect in any administrative 
proceeding before the Department or the IRS.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Taxpayer penalties
      The provision lowers the thresholds for imposing 
accuracy-related penalties on a taxpayer who claims a deduction 
for donated property for which a qualified appraisal is 
required. Under the provision, a substantial valuation 
misstatement exists when the claimed value of donated property 
is 150 percent or more of the amount determined to be the 
correct value. A gross valuation misstatement occurs when the 
claimed value of donated property is 200 percent or more the 
amount determined to be the correct value. Under the provision, 
the reasonable cause exception to the accuracy-related penalty 
does not apply in the case of gross valuation misstatements.
Appraiser oversight
            Appraiser penalties
      The provision establishes a civil penalty on any person 
who prepares an appraisal that is to be used to support a tax 
position if such appraisal results in a substantial or gross 
valuation misstatement. The penalty is equal to the greater of 
$1,000 or 10 percent of the understatement of tax resulting 
from a substantial or gross valuation misstatement, up to a 
maximum of 125 percent of the gross income derived from the 
appraisal. Under the provision, the penalty does not apply if 
the appraiser establishes that it was ``more likely than not'' 
that the appraisal was correct.
            Disciplinary proceeding
      The provision eliminates the requirement that the 
Secretary assess against an appraiser the civil penalty for 
aiding and abetting the understatement of tax before such 
appraiser may be subject to disciplinary action. Thus, the 
Secretary is authorized to discipline appraisers after notice 
and hearing. Disciplinary action may include, but is not 
limited to, suspending or barring an appraiser from: preparing 
or presenting appraisals on the value of property or other 
assets to the Department or the IRS; appearing before the 
Department or the IRS for the purpose of offering opinion 
evidence on the value of property or other assets; and 
providing that the appraisals of an appraiser who have been 
disciplined have no probative effect in any administrative 
proceeding before the Department or the IRS.
            Qualified appraisers
      The provision defines a qualified appraiser as an 
individual who (1) has earned an appraisal designation from a 
recognized professional appraiser organization or has otherwise 
met minimum education and experience requirements to be 
determined by the IRS in regulations; (2) regularly performs 
appraisals for which he or she receives compensation; (3) can 
demonstrate verifiable education and experience in valuing the 
type of property for which the appraisal is being performed; 
(4) has not been prohibited from practicing before the IRS by 
the Secretary at any time during the three years preceding the 
conduct of the appraisal; and (5) is not excluded from being a 
qualified appraiser under applicable Treasury regulations.
            Qualified appraisals
      The provision defines a qualified appraisal as an 
appraisal of property prepared by a qualified appraiser (as 
defined by the provision) in accordance with generally accepted 
appraisal standards and any regulations or other guidance 
prescribed by the Secretary.
Effective date
      The provision amending the accuracy-related penalty 
applies to returns filed after the date of enactment. The 
provision establishing a civil penalty that may be imposed on 
any person who prepares an appraisal that is to be used to 
support a tax position if such appraisal results in a 
substantial or gross valuation misstatement applies to 
appraisals prepared with respect to returns or submissions 
filed after the date of enactment. The provisions relating to 
appraiser oversight apply to appraisals prepared with respect 
to returns or submissions filed after the date of enactment. 
With respect to any contribution of a qualified real property 
interest which is a restriction with respect to the exterior of 
a building described in section 170(h)(4)(C)(ii) (currently 
designated section 170(h)(4)(B)(ii), relating to certain 
property located in a registered historic district and 
certified as being of historic significance to the district), 
and any appraisal with respect to such contribution, the 
provision generally applies to returns filed after December 16, 
2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
9. Establish additional exemption standards for credit counseling 
        organizations (sec. 221 of the Senate amendment and secs. 501 
        and 513 of the Code)

                              PRESENT LAW

      Under present law, a credit counseling organization may 
be exempt as a charitable or educational organization described 
in section 501(c)(3), or as a social welfare organization 
described in section 501(c)(4). The IRS has issued two revenue 
rulings holding that certain credit counseling organizations 
are exempt as charitable or educational organizations or as 
social welfare organizations.
      In Revenue Ruling 65-299,\196\ an organization whose 
purpose was to assist families and individuals with financial 
problems, and help reduce the incidence of personal bankruptcy, 
was determined to be a social welfare organization described in 
section 501(c)(4). The organization counseled people in 
financial difficulties, advised applicants on payment of debts, 
and negotiated with creditors and set up debt repayment plans. 
The organization did not restrict its services to the poor, 
made no charge for counseling services, and made a nominal 
charge for certain services to cover postage and supplies. For 
financial support, the organization relied on voluntary 
contributions from local businesses, lending agencies, and 
labor unions.
---------------------------------------------------------------------------
    \196\ Rev. Rul. 65-299, 1965-2 C.B. 165.
---------------------------------------------------------------------------
      In Revenue Ruling 69-441,\197\ the IRS ruled an 
organization was a charitable or educational organization 
exempt under section 501(c)(3) by virtue of aiding low-income 
people who had financial problems and providing education to 
the public. The organization in that ruling had two functions: 
(1) educating the public on personal money management, such as 
budgeting, buying practices, and the sound use of consumer 
credit through the use of films, speakers, and publications; 
and (2) providing individual counseling to low-income 
individuals and families without charge. As part of its 
counseling activities, the organization established debt 
management plans for clients who required such services, at no 
charge to the clients.\198\ The organization was supported by 
contributions primarily from creditors, and its board of 
directors was comprised of representatives from religious 
organizations, civic groups, labor unions, business groups, and 
educational institutions.
---------------------------------------------------------------------------
    \197\ Rev. Rul. 65-441, 1969-2 C.B. 115.
    \198\ Debt management plans are debt payment arrangements, 
including debt consolidation arrangements, entered into by a debtor and 
one or more of the debtor's creditors, generally structured to reduce 
the amount of a debtor's regular ongoing payment by modifying the 
interest rate, minimum payment, maturity or other terms of the debt. 
Such plans frequently are promoted as a means for a debtor to 
restructure debt without filing for bankruptcy.
---------------------------------------------------------------------------
      In 1976, the IRS denied exempt status to an organization, 
Consumer Credit Counseling Service of Alabama, whose activities 
were distinguishable from those in Revenue Ruling 69-441 in 
that (1) it did not restrict its services to the poor, and (2) 
it charged a nominal fee for its debt management plans.\199\ 
The organization provided free information to the general 
public through the use of speakers, films, and publications on 
the subjects of budgeting, buying practices, and the use of 
consumer credit. It also provided counseling to debt-distressed 
individuals, not necessarily poor or low-income, and provided 
debt management plans at the cost of $10 per month, which was 
waived in cases of financial hardship. Its debt management 
activities were a relatively small part of its overall 
activities. The district court determined the organization 
qualified as charitable and educational within section 
501(c)(3), finding the debt management plans to be an integral 
part of the agency's counseling function, and that its debt 
management activities were incidental to its principal 
functions, as only approximately 12 percent of the counselors' 
time was applied to such programs and the charge for the 
service was nominal. The court also considered the facts that 
the agency was publicly supported, and that it had a board 
dominated by members of the general public, as factors 
indicating a charitable operation.\200\
---------------------------------------------------------------------------
    \199\ Consumer Credit Counseling Services of Alabama, Inc. v. U.S., 
44 A.F.T.R. 2d (RIA) 5122 (D.D.C. 1978). The case involved 24 agencies 
throughout the United States.
    \200\ See also, Credit Counseling Centers of Oklahoma, Inc. v. 
U.S., 45 A.F.T.R. 2d (RIA) 1401 (D.D.C. 1979) (holding the same on 
virtually identical facts).
---------------------------------------------------------------------------
      A recent estimate shows the number of credit counseling 
organizations increased from approximately 200 in 1990 to over 
1,000 in 2002.\201\ During the period from 1994 to late 2003, 
1,215 credit counseling organizations applied to the IRS for 
tax exempt status under section 501(c)(3), including 810 during 
2000 to 2003.\202\ The IRS has recognized more than 850 credit 
counseling organizations as tax exempt under section 
501c)((3).\203\ Few credit counseling organizations have sought 
section 501(c)(4) status, and the IRS reports it has not seen 
any significant increase in the number or activity of such 
organizations operating as social welfare organizations.\204\ 
As of late 2003, there were 872 active tax-exempt credit 
counseling agencies operating in the United States.\205\
---------------------------------------------------------------------------
    \201\ Opening Statement of The Honorable Max Sandlin, Hearing on 
Non-Profit Credit Counseling Organizations, House Ways and Means 
Committee, Subcommittee on Oversight (November 20, 2003).
    \202\ United States Senate Permanent Subcommittee on 
Investigations, Committee on Governmental Affairs, Profiteering in a 
Non-Profit Industry: Abusive Practices in Credit Counseling, Report 
Prepared by the Majority & Minority Staffs of the Permanent 
Subcommittee on Investigations and Released in Conjunction with the 
Permanent Subcommittee Investigations' Hearing on March 24, 2004, p. 3 
(citing letter dated December 18, 2003, to the Subcommittee from IRS 
Commissioner Everson).
    \203\ Testimony of Commissioner Mark Everson before the House Ways 
and Means Committee, Subcommittee on Oversight (November 20, 2003).
    \204\ Testimony of Commissioner Mark Everson before the House Ways 
and Means Committee, Subcommittee on Oversight (November 20, 2003).
    \205\ United States Senate Permanent Subcommittee on 
Investigations, Committee on Governmental Affairs, Profiteering in a 
Non-Profit Industry: Abusive Practices in Credit Counseling, Report 
Prepared by the Majority & Minority Staffs of the Permanent 
Subcommittee on Investigations and Released in Conjunction with the 
Permanent Subcommittee Investigations' Hearing on March 24, 2004, p. 3 
(citing letter dated December 18, 2003 to the Subcommittee from IRS 
Commissioner Everson).
---------------------------------------------------------------------------
      A credit counseling organization described in section 
501(c)(3) is exempt from certain Federal and State consumer 
protection laws that provide exemptions for organizations 
described therein.\206\ Some believe that these exclusions from 
Federal and State regulation may be a primary motivation for 
the recent increase in the number of organizations seeking and 
obtaining exempt status under section 501(c)(3).\207\ Such 
regulatory exemptions generally are not available for social 
welfare organizations described in section 501(c)(4).
---------------------------------------------------------------------------
    \206\ E.g., The Credit Repair Organizations Act, 15 U.S.C. section 
1679 et seq., effective April 1, 1997 (imposing restrictions on credit 
repair organizations that are enforced by the Federal Trade Commission, 
including forbidding the making of untrue or misleading statements and 
forbidding advance payments; section 501(c)(3) organizations are 
explicitly exempt from such regulation). Testimony of Commissioner Mark 
Everson before the House Ways and Means Committee, Subcommittee on 
Oversight (November 20, 2003) (California's consumer protections laws 
that impose strict standards on credit service organizations and the 
credit repair industry do not apply to nonprofit organizations that 
have received a final determination from the IRS that they are exempt 
from tax under section 501(c)(3) and are not private foundations).
    \207\ Testimony of Commissioner Mark Everson before the House Ways 
and Means Committee, Subcommittee on Oversight (November 20, 2003).
---------------------------------------------------------------------------
      Congress recently conducted hearings investigating the 
activities of credit counseling organizations under various 
consumer protection laws,\208\ such as the Federal Trade 
Commission Act.\209\ In addition, the IRS has commenced a broad 
examination and compliance program with respect to the credit 
counseling industry, pursuant to which the IRS has initiated 
audits of 50 credit counseling organizations, including nine of 
the 15 largest in terms of gross receipts.\210\
---------------------------------------------------------------------------
    \208\ United States Senate Permanent Subcommittee on 
Investigations, Committee on Governmental Affairs, Profiteering in a 
Non-Profit Industry: Abusive Practices in Credit Counseling, Report 
Prepared by the Majority & Minority Staffs of the Permanent 
Subcommittee on Investigations and Released in Conjunction with the 
Permanent Subcommittee Investigations' Hearing on March 24, 2004.
    \209\ 15 U.S.C. sec. 45(a) (prohibiting unfair and deceptive acts 
or practices in or affecting commerce; although the Federal Trade 
Commission generally lacks jurisdiction to enforce consumer protection 
laws against bona fide nonprofit organizations, it may assert 
jurisdiction over a nonprofit, including a credit counseling 
organization, if it demonstrates the organization is organized to carry 
on business for profit, is a mere instrumentality of a for-profit 
entity, or operates through a common enterprise with one or more for-
profit entities).
    \210\ United States Senate Permanent Subcommittee on 
Investigations, Committee on Governmental Affairs, Profiteering in a 
Non-Profit Industry: Abusive Practices in Credit Counseling, Report 
Prepared by the Majority & Minority Staffs of the Permanent 
Subcommittee on Investigations and Released in Conjunction with the 
Permanent Subcommittee Investigations' Hearing on March 24, 2004, p. 
31.
---------------------------------------------------------------------------
      Under the Bankruptcy Abuse Prevention and Consumer 
Protection Act of 2005, an individual generally may not be a 
debtor in bankruptcy unless such individual has, within 180 
days of filing a petition for bankruptcy, received from an 
approved nonprofit budget and credit counseling agency an 
individual or group briefing that outlines the opportunities 
for available credit counseling and assists the individual in 
performing a related budget analysis.\211\ The clerk of the 
court must maintain a publicly available list of nonprofit 
budget and credit counseling agencies approved by the U.S. 
Trustee (or bankruptcy administrator). In general, the U.S. 
Trustee (or bankruptcy administrator) shall only approve an 
agency that demonstrates that it will provide qualified 
counselors, maintain adequate provision for safekeeping and 
payment of client funds, provide adequate counseling with 
respect to client credit problems, and deal responsibly and 
effectively with other matters relating to the quality, 
effectiveness, and financial security of the services it 
provides. The minimum qualifications for approval of such an 
agency include: (1) in general, having an independent board of 
directors; (2) charging no more than a reasonable fee, and 
providing services without regard to ability to pay; (3) 
adequate provision for safekeeping and payment of client funds; 
(4) provision of full disclosures to clients; (5) provision of 
adequate counseling with respect to a client's credit problems; 
(6) trained counselors who receive no commissions or bonuses 
based on the outcome of the counseling services; (7) experience 
and background in providing credit counseling; and (8) adequate 
financial resources to provide continuing support services for 
budgeting plans over the life of any repayment plan. An 
individual debtor must file with the court a certificate from 
the approved nonprofit budget and credit counseling agency that 
provided the required services describing the services 
provided, and a copy of the debt management plan, if any, 
developed through the agency.\212\
---------------------------------------------------------------------------
    \211\ This requirement does not apply in certain circumstances, 
such as: (1) in general, where a debtor resides in a district for which 
the U.S. Trustee has determined that the approved counseling agencies 
for such district are not reasonably able to provide adequate services 
to additional individuals; (2) where exigent circumstances merit a 
waiver, the individual seeking bankruptcy protection files an 
appropriate certification with the court, and the certification is 
acceptable to the court; and (3) in general, where a court determines, 
after notice and hearing, that the individual is unable to complete the 
requirement because of incapacity, disability, or active military duty 
in a military combat zone.
    \212\ The Act also requires that, prior to discharge of 
indebtedness under chapter 7 or chapter 13, a debtor complete an 
approved instructional course concerning personal financial management, 
which course need not be conducted by a nonprofit agency.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Requirements for exempt status of credit counseling organizations
      Under the provision, an organization that provides credit 
counseling services as a substantial purpose of the 
organization (``credit counseling organization'') is eligible 
for exemption from Federal income tax only as a charitable or 
educational organization under section 501(c)(3) or as a social 
welfare organization under section 501(c)(4), and only if (in 
addition to present-law requirements) the credit counseling 
organization is organized and operated in accordance with the 
following:
      1. The organization provides credit counseling services 
tailored to the specific needs and circumstances of the 
consumer;
      2. The organization makes no loans to debtors and does 
not negotiate the making of loans on behalf of debtors;
      3. The organization generally does not promote, or charge 
any separate fee for any service for the purpose of improving 
any consumer's credit record, credit history, or credit rating;
      4. The organization does not refuse to provide credit 
counseling services to a consumer due to inability of the 
consumer to pay, the ineligibility of the consumer for debt 
management plan enrollment, or the unwillingness of a consumer 
to enroll in a debt management plan;
      5. The organization establishes and implements a fee 
policy to require that any fees charged to a consumer for its 
services are reasonable, and prohibits charging any fee based 
in whole or in part on a percentage of the consumer's debt, the 
consumer's payments to be made pursuant to a debt management 
plan, or on the projected or actual savings to the consumer 
resulting from enrolling in a debt management plan;
      6. The organization at all times has a board of directors 
or other governing body (a) that is controlled by persons who 
represent the broad interests of the public, such as public 
officials acting in their capacities as such, persons having 
special knowledge or expertise in credit or financial 
education, and community leaders; (b) not more than 20 percent 
of the voting power of which is vested in persons who are 
employed by the organization or who will benefit financially, 
directly or indirectly, from the organization's activities 
(other than through the receipt of reasonable directors' fees 
or the repayment of consumer debt to creditors other than the 
credit counseling organization or its affiliates) and (c) not 
more than 49 percent of the voting power of which is vested in 
persons who are employed by the organization or who will 
benefit financially, directly or indirectly, from the 
organization's activities (other than through the receipt of 
reasonable directors' fees);
      7. The organization receives no amount for providing 
referrals to others for financial services (including debt 
management services) or credit counseling services to be 
provided to consumers, and pays no amount to others for 
obtaining referrals of consumers; and
      8. The organization does not own more than 35 percent of 
the total combined voting power of a corporation (or profits or 
beneficial interest in the case of a partnership or trust or 
estate) that is in the business of lending money, repairing 
credit, or providing debt management plan services, payment 
processing, and similar services.
      The Secretary may require any credit counseling 
organization to submit such information as the Secretary 
requires to verify that such organization meets the 
requirements of the provision.
Additional requirements for charitable and educational organizations
      Under the provision, a credit counseling organization is 
described in section 501(c)(3) only if, in addition to 
satisfying the above requirements, the organization is 
organized and operated such that the organization (1) charges 
no fees (other than nominal fees) for debt management plan 
services and waives any fees if the consumer is unable to pay 
such fees; (2) does not solicit contributions from consumers 
during the initial counseling process or while the consumer is 
receiving services from the organization; (3) normally limits 
debt management plan services (in the aggregate) to 25 percent 
of the organization's total activities (determined by taking 
into account time, resources, source of revenues or effort 
expended by the organization, and any other measures prescribed 
by the Secretary).\213\
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    \213\ If, under any such measure, the organization's debt 
management plan services exceed 25 percent of the organization's total 
activities, the organization is treated as exceeding the 25-percent 
limit. For example, an organization that devotes 30 percent of its 
total staff time to debt management plan services is regarded as 
exceeding the 25-percent limit, even if the organization devotes less 
than 15 percent of its total financial resources to debt management 
plan services.
---------------------------------------------------------------------------
Additional requirements for social welfare organizations
      Under the provision, a credit counseling organization is 
described in section 501(c)(4) only if, in addition to 
satisfying the above requirements applicable to such 
organizations, it is organized and operated such that the 
organization charges no fees (other than nominal fees) for its 
credit counseling services, and waives any fees if the consumer 
is unable to pay such fees. In addition, a credit counseling 
organization shall not be treated as an organization described 
in section 501(c)(4) unless such organization notifies the 
Secretary, in such manner as the Secretary may by regulations 
prescribe, that it is applying for recognition as a credit 
counseling organization.
Debt management plan services treated as an unrelated trade or business
      Under the provision, debt management plan services are 
treated as an unrelated trade or business for purposes of the 
tax on income from an unrelated trade or business to the extent 
such services are not substantially related to the provision of 
credit counseling services to a consumer or are provided by an 
organization that is not a credit counseling organization.
Definitions
            Credit counseling services
      Credit counseling services are (a) the provision of 
educational information to the general public on budgeting, 
personal finance, financial literacy, saving and spending 
practices, and the sound use of consumer credit; (b) the 
assisting of individuals and families with financial problems 
by providing them with counseling; or (c) any combination of 
such activities.
            Debt management plan services
      Debt management plan services are services related to the 
repayment, consolidation, or restructuring of a consumer's 
debt, and includes the negotiation with creditors of lower 
interest rates, the waiver or reduction of fees, and the 
marketing and processing of debt management plans.
Effective date
      In general the provision applies to taxable years 
beginning after the date of enactment. For a credit counseling 
organization that is described in section 501(c)(3) or 
501(c)(4) on the date of enactment, the provision is effective 
for taxable years beginning after the date that is one year 
after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
10. Expand the base of the tax on private foundation net investment 
        income (sec. 222 of the Senate amendment and sec. 4940 of the 
        Code)

                              PRESENT LAW

In general
      Under section 4940(a) of the Code, private foundations 
that are recognized as exempt from Federal income tax under 
section 501(a) of the Code are subject to a two-percent excise 
tax on their net investment income. Private foundations that 
are not exempt from tax, such as certain charitable 
trusts,\214\ also are subject to an excise tax under section 
4940(b) based on net investment income and unrelated business 
income. The two-percent rate of tax is reduced to one-percent 
if certain requirements are met in a taxable year.\215\ Unlike 
certain other excise taxes imposed on private foundations, the 
tax based on investment income does not result from a violation 
of substantive law by the private foundation; it is solely an 
excise tax.
---------------------------------------------------------------------------
    \214\ See sec. 4947(a)(1).
    \215\ Sec. 4940(e).
---------------------------------------------------------------------------
      The tax on taxable private foundations under section 
4940(b) is equal to the excess of the sum of the excise tax 
that would have been imposed under section 4940(a) if the 
foundation were tax exempt and the amount of the unrelated 
business income tax that would have been imposed if the 
foundation were tax exempt, over the income tax imposed on the 
foundation under subtitle A of the Code.
Net investment income
            Internal Revenue Code
      In general, net investment income is defined as the 
amount by which the sum of gross investment income and capital 
gain net income exceeds the deductions relating to the 
production of gross investment income.\216\
---------------------------------------------------------------------------
    \216\ Sec. 4940(c)(1). Net investment income also is determined by 
applying section 103 (generally providing an exclusion for interest on 
certain State and local bonds) and section 265 (generally disallowing 
the deduction for interest and certain other expenses with respect to 
tax-exempt income). Sec. 4940(c)(5).
---------------------------------------------------------------------------
      Gross investment income is the gross amount of income 
from interest, dividends, rents, payments with respect to 
securities loans, and royalties. Gross investment income does 
not include any income that is included in computing a 
foundation's unrelated business taxable income.\217\
---------------------------------------------------------------------------
    \217\ Sec. 4940(c)(2).
---------------------------------------------------------------------------
      Capital gain net income takes into account only gains and 
losses from the sale or other disposition of property used for 
the production of interest, dividends, rents, and royalties, 
and property used for the production of income included in 
computing the unrelated business income tax (except to the 
extent the gain or loss is taken into account for purposes of 
such tax). Losses from sales or other dispositions of property 
are allowed only to the extent of gains from such sales or 
other dispositions, and no capital loss carryovers are 
allowed.\218\
---------------------------------------------------------------------------
    \218\ Sec. 4940(c)(4).
---------------------------------------------------------------------------
            Treasury Regulations and case law
      The Treasury regulations elaborate on the Code definition 
of net investment income. The regulations cite items of 
investment income listed in the Code, and in addition clarify 
that net investment income includes interest, dividends, rents, 
and royalties derived from all sources, including from assets 
devoted to charitable activities. For example, interest 
received on a student loan is includible in the gross 
investment income of a foundation making the loan.\219\
---------------------------------------------------------------------------
    \219\ Treas. Reg. sec. 53.4940-1(d)(1).
---------------------------------------------------------------------------
      The regulations further provide that gross investment 
income includes certain items of investment income that are 
described in the unrelated business income tax 
regulations.\220\ Such additional items include payments with 
respect to securities loans (an item added to the Code in 
1978), annuities, income from notional principal contracts, and 
other substantially similar income from ordinary and routine 
investments to the extent determined by the Commissioner.\221\ 
These latter three categories of income are not enumerated as 
net investment income in the Code.
---------------------------------------------------------------------------
    \220\ Id.
    \221\ Treas. Reg. sec. 1.512(b)-1(a)(1).
---------------------------------------------------------------------------
      The Treasury regulations also elaborate on the Code 
definition of capital gain net income. The regulations provide 
that the only capital gains and losses that are taken into 
account are (1) gains and losses from the sale or other 
disposition of property held by a private foundation for 
investment purposes (other than program related investments), 
and (2) property used for the production of income included in 
computing the unrelated business income tax (except to the 
extent the gain or loss is taken into account for purposes of 
such tax).
      This definition of capital gain net income builds on the 
definition provided in the Code by providing an exception for 
gain and loss from program related investments and by stating, 
in addition, that ``gains and losses from the sale or other 
disposition of property used for the exempt purposes of the 
private foundation are excluded.'' \222\ As an example, the 
regulations provide that gain or loss on the sale of buildings 
used for the foundation's exempt activities are not taken into 
account for purposes of the section 4940 tax. If a foundation 
uses exempt income for exempt purposes and (other than 
incidentally) for investment purposes, then the portion of the 
gain or loss received upon sale or other disposition that is 
allocable to the investment use is taken into account for 
purposes of the tax.
---------------------------------------------------------------------------
    \222\ Treas. Reg. sec. 53.4940-1(f)(1).
---------------------------------------------------------------------------
      The regulations further provide that ``property shall be 
treated as held for investment purposes even though such 
property is disposed of by the foundation immediately upon its 
receipt, if it is property of a type which generally produces 
interest, dividends, rents, royalties, or capital gains through 
appreciation (for example, rental real estate, stock, bonds, 
mineral interest, mortgages, and securities).'' \223\
---------------------------------------------------------------------------
    \223\ Id.
---------------------------------------------------------------------------
      This regulation has been challenged in the courts. The 
regulation says that property is treated as held for investment 
purposes if it is of a type that ``generally produces'' certain 
types of income. By contrast, the Code provides that the 
property be ``used'' to produce such income. In Zemurray 
Foundation v. United States, 687 F.2d 97 (5th Cir. 1982), the 
taxpayer foundation challenged the Treasury's attempt to tax 
under section 4940 capital gain on the sale of timber property. 
The taxpayer asserted that the property was not actually used 
to produce investment income, and that the Treasury Regulation 
was invalid because the regulation would subject to tax 
property that is of a type that could generally be used to 
produce investment income. On this issue, the court upheld the 
Treasury regulation, reasoning that the regulation's use of the 
phrase ``generally used,'' though permitting taxation ``so long 
as the property sold is usable to produce the applicable types 
of income, regardless of whether the property is actually used 
to produce income or not'' was not unreasonable or plainly 
inconsistent with the statute.\224\ However, on remand to the 
district court, the district court concluded that the timber 
property at issue, though a type of property generally used to 
produce investment income, was not susceptible for such 
use.\225\ Thus, the district court concluded that the Treasury 
could not tax the gain under this portion of the regulation.
---------------------------------------------------------------------------
    \224\ Zemurray Foundation v. United States, 687 F.2d 97, 100 (5th 
Cir. 1982).
    \225\ Zemurray Foundation v. United States, 53 A.F.T.R. 2d (RIA) 
842 (E. D. La. 1983).
---------------------------------------------------------------------------
      The question then turned to the taxpayer's second 
challenge to the regulation. At issue was the meaning of the 
regulatory phrase ``capital gains through appreciation.'' The 
regulation provides that if property is of a type that 
generally produces capital gains through appreciation, then the 
gain is subject to tax. The Treasury argued that the timber 
property at issue, although held by the court not to be 
property (in this case) susceptible for use to produce 
interest, dividends, rents, or royalties, still was held by the 
taxpayer to produce capital gain through appreciation and 
therefore the gain should be subject to tax under the 
regulation.
      On this issue, the court held for the taxpayer, reasoning 
that the language of the Code clearly is limited to certain 
gains and losses, e.g., the court cited the Code language 
providing that ``there shall be taken into account only gains 
and losses from the sale or other disposition of property used 
for the production of interest, dividends, rents, and 
royalties. . . .'' \226\ The court noted that ``capital gains 
through appreciation'' is not enumerated in the statute. The 
court used as an example a jade figurine held by a foundation. 
Jade figurines do not generally produce interest, dividends, 
rents, or royalties, but gain on the sale of such a figurine 
would be taxable under the ``capital gains through 
appreciation'' standard, yet such standard does not appear in 
the statute. After Zemurray, the Treasury generally conceded 
this issue.\227\
---------------------------------------------------------------------------
    \226\ Zemurray Foundation v. United States, 755 F.2d 404 (5th Cir. 
1985), 413 (citing Code sec. 4940(c)(4)(A).
    \227\ G.C.M. 39538 (July 23, 1986).
---------------------------------------------------------------------------
      With respect to capital losses, the Code provides that 
carryovers are not permitted, whereas the regulations state 
that neither carryovers nor carrybacks are permitted.\228\
---------------------------------------------------------------------------
    \228\ Treas. Reg. sec. 53.4940-1(f)(3).
---------------------------------------------------------------------------
            Application of Zemurray to the Code and the regulations
      Applying the Zemurray case to the Code and regulations 
results in a general principle for purposes of present law: 
private foundations are subject to tax under section 4940 only 
on the items of income and only on gains and losses 
specifically enumerated therein. Under this principle, private 
foundations generally are not subject to the section 4940 tax 
on other substantially similar types of income from ordinary 
and routine investments, notwithstanding Treasury regulations 
to the contrary. In addition, the regulations provide that gain 
or loss from the sale or other disposition of assets used for 
exempt purposes, with specific reference to program-related 
investments, is excluded. The Code provides for no such blanket 
exclusion; thus, under the language of the Code and the 
reasoning of Zemurray, if a foundation provided office space at 
below market rent to a charitable organization for use in the 
organization's exempt purposes, gain on the sale of the 
building by the foundation should be subject to the section 
4940 tax despite the Treasury regulations.\229\
---------------------------------------------------------------------------
    \229\ See also the example in Treas. Reg. sec. 53.4940-1(f)(1).
---------------------------------------------------------------------------
      In addition, under the logic of Zemurray, capital loss 
carrybacks arguably are permitted, notwithstanding Treasury 
regulations to the contrary, because the Code mentions only a 
bar on use of carryovers and says nothing about carrybacks.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision amends the definition of gross investment 
income (including for purposes of capital gain net income) to 
include items of income that are similar to the items presently 
enumerated in the Code. Such similar items include income from 
notional principal contracts, annuities, and other 
substantially similar income from ordinary and routine 
investments, and, with respect to capital gain net income, 
capital gains from appreciation, including capital gains and 
losses from the sale or other disposition of assets used to 
further an exempt purpose.
      The provision provides that there are no carrybacks of 
losses from sales or other dispositions of property.
      Effective date.--The provision is effective for taxable 
years beginning after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
11. Definition of convention or association of churches (sec. 223 of 
        the Senate amendment and sec. 7701 of the Code)

                              PRESENT LAW

      Under present law, an organization that qualifies as a 
``convention or association of churches'' (within the meaning 
of sec. 170(b)(1)(A)(i)) is not required to file an annual 
return,\230\ is subject to the church tax inquiry and church 
tax examination provisions applicable to organizations claiming 
to be a church,\231\ and is subject to certain other provisions 
generally applicable to churches.\232\ The Internal Revenue 
Code does not define the term ``convention or association of 
churches.''
---------------------------------------------------------------------------
    \230\ Sec. 6033(a)(2)(A)(i).
    \231\ Sec. 7611(h)(1)(B).
    \232\ See, e.g., Sec. 402(g)(8)(B) (limitation on elective 
deferrals); sec. 403(b)(9)(B) (definition of retirement income 
account); sec. 410(d) (election to have participation, vesting, 
funding, and certain other provisions apply to church plans); sec. 
414(e) (definition of church plan); sec. 415(c)(7) (certain 
contributions by church plans); sec. 501(h)(5) (disqualification of 
certain organizations from making the sec. 501(h) election regarding 
lobbying expenditure limits); sec. 501(m)(3) (definition of commercial-
type insurance); sec. 508(c)(1)(A) (exception from requirement to file 
application seeking recognition of exempt status); sec. 512(b)(12) 
(allowance of up to $1,000 deduction for purposes of determining 
unrelated business taxable income); sec. 514(b)(3)(E) (definition of 
debt-financed property); sec. 3121(w)(3)(A) (election regarding 
exemption from social security taxes); sec. 3309(b)(1) (application of 
federal unemployment tax provisions to services performed in the employ 
of certain organizations); sec. 6043(b)(1) (requirement to file a 
return upon liquidation or dissolution of the organization); and sec. 
7702(j)(3)(A) (treatment of certain death benefit plans as life 
insurance).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides that an organization that 
otherwise is a convention or association of churches does not 
fail to so qualify merely because the membership of the 
organization includes individuals as well as churches, or 
because individuals have voting rights in the organization.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
12. Notification requirement for exempt entities not currently required 
        to file an annual information return (sec. 224 of the Senate 
        amendment and secs. 6033, 6104, 6652, and 7428 of the Code)

                              PRESENT LAW

      Under present law, the requirement that an exempt 
organization file an annual information return does not apply 
to several categories of exempt organizations. Organizations 
excepted from the filing requirement include organizations 
(other than private foundations), the gross receipts of which 
in each taxable year normally are not more than $25,000.\233\ 
Also exempt from the requirement are churches, their integrated 
auxiliaries, and conventions or associations of churches; the 
exclusively religious activities of any religious order; 
section 501(c)(1) instrumentalities of the United States; 
section 501(c)(21) trusts; an interchurch organization of local 
units of a church; certain mission societies; certain church-
affiliated elementary and high schools; certain state 
institutions whose income is excluded from gross income under 
section 115; certain governmental units and affiliates of 
governmental units; and other organizations that the IRS has 
relieved from the filing requirement pursuant to its statutory 
discretionary authority.
---------------------------------------------------------------------------
    \233\ Sec. 6033(a)(2); Treas. Reg. sec. 1.6033-2(a)(2)(i); Treas. 
Reg. sec. 1.6033-2(g)(1). Sec. 6033(a)(2)(A)(ii) provides a $5,000 
annual gross receipts exception from the annual reporting requirements 
for certain exempt organizations. In Announcement 82-88, 1982-25 I.R.B. 
23, the IRS exercised its discretionary authority under section 6033 to 
increase the gross receipts exception to $25,000, and enlarge the 
category of exempt organizations that are not required to file Form 
990.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides that organizations that are 
excused from filing an information return by reason of normally 
having gross receipts below a certain specified amount 
(generally, under $25,000) shall furnish to the Secretary 
annually the legal name of the organization, any name under 
which the organization operates or does business, the 
organization's mailing address and Internet web site address 
(if any), the organization's taxpayer identification number, 
the name and address of a principal officer, and evidence of 
the organization's continuing basis for its exemption from the 
generally applicable information return filing requirements. 
Upon such organization's termination of existence, the 
organization is required to furnish notice of such termination.
      The provision provides that if an organization fails to 
provide the required notice for three consecutive years, the 
organization's tax-exempt status is revoked. In addition, if an 
organization that is required to file an annual information 
return under section 6033(a) (Form 990) fails to file such an 
information return for three consecutive years, the 
organization's tax-exempt status is revoked. If an organization 
fails to meet its filing obligation to the IRS for three 
consecutive years in cases where the organization is subject to 
the information return filing requirement in one or more years 
during a three-year period and also is subject to the notice 
requirement for one or more years during the same three-year 
period, the organization's tax-exempt status is revoked.
      A revocation under the provision is effective from the 
date that the Secretary determines was the last day the 
organization could have timely filed the third required 
information return or notice. To again be recognized as tax-
exempt, the organization must apply to the Secretary for 
recognition of tax-exemption, irrespective of whether the 
organization was required to make an application for 
recognition of tax-exemption in order to gain tax-exemption 
originally.
      If upon application for tax-exempt status after a 
revocation under the provision, the organization shows to the 
satisfaction of the Secretary reasonable cause for failing to 
file the required annual notices or returns, the organization's 
tax-exempt status may, in the discretion of the Secretary, be 
reinstated retroactive to the date of revocation. An 
organization may not challenge under the Code's declaratory 
judgment procedures (section 7428) a revocation of tax-
exemption made pursuant to the provision.
      There is no monetary penalty for failure to file the 
notice. The provision does not require that the notices be made 
available to the public under the public disclosure and 
inspection rules generally applicable to exempt organizations. 
The provision does not affect an organization's obligation 
under present law to file required information returns or 
existing penalties for failure to file such returns.
      The Secretary is required to notify in a timely manner 
every organization that is subject to the notice filing 
requirement of the new filing obligation. Notification by the 
Secretary shall be by mail, in the case of any organization the 
identity and address of which is included in the list of exempt 
organizations maintained by the Secretary, and by Internet or 
other means of outreach, in the case of any other organization. 
In addition, the Secretary is required to publicize in a timely 
manner in appropriate forms and instructions and other means of 
outreach the new penalty imposed for consecutive failures to 
file the information return.
      The Secretary is authorized to publish a list of 
organizations whose exempt status is revoked under the 
provision.
      Effective date.--The provision is effective for notices 
and returns with respect to annual periods beginning after 
2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
13. Disclosure to state officials of proposed actions related to 
        section 501(c) organizations (sec. 225 of the Senate amendment 
        and secs. 6103, 6104, 7213, 7213A, and 7431 of the Code)

                              PRESENT LAW

      In the case of organizations that are described in 
section 501(c)(3) and exempt from tax under section 501(a) or 
that have applied for exemption as an organization so 
described, present law (sec. 6104(c)) requires the Secretary to 
notify the appropriate State officer of (1) a refusal to 
recognize such organization as an organization described in 
section 501(c)(3), (2) a revocation of a section 501(c)(3) 
organization's tax-exempt status, and (3) the mailing of a 
notice of deficiency for any tax imposed under section 507, 
chapter 41, or chapter 42.\234\ In addition, at the request of 
such appropriate State officer, the Secretary is required to 
make available for inspection and copying, such returns, filed 
statements, records, reports, and other information relating to 
the above-described disclosures, as are relevant to any State 
law determination. An appropriate State officer is the State 
attorney general, State tax officer, or any State official 
charged with overseeing organizations of the type described in 
section 501(c)(3).
---------------------------------------------------------------------------
    \234\ The applicable taxes include the termination tax on private 
foundations; taxes on public charities for certain excess lobbying 
expenses; taxes on a private foundation's net investment income, self-
dealing activities, undistributed income, excess business holdings, 
investments that jeopardize charitable purposes, and taxable 
expenditures (some of these taxes also apply to certain non-exempt 
trusts); taxes on the political expenditures and excess benefit 
transactions of section 501(c)(3) organizations; and certain taxes on 
black lung benefit trusts and foreign organizations.
---------------------------------------------------------------------------
      In general, returns and return information (as such terms 
are defined in section 6103(b)) are confidential and may not be 
disclosed or inspected unless expressly provided by law.\235\ 
Present law requires the Secretary to keep records of 
disclosures and requests for inspection \236\ and requires that 
persons authorized to receive returns and return information 
maintain various safeguards to protect such information against 
unauthorized disclosure.\237\ Willful unauthorized disclosure 
or inspection of returns or return information is subject to a 
fine and/or imprisonment.\238\ The knowing or negligent 
unauthorized inspection or disclosure of returns or return 
information gives the taxpayer a right to bring a civil 
suit.\239\ Such present-law protections against unauthorized 
disclosure or inspection of returns and return information do 
not apply to the disclosures or inspections, described above, 
that are authorized by section 6104(c).
---------------------------------------------------------------------------
    \235\ Sec. 6103(a).
    \236\ Sec. 6103(p)(3).
    \237\ Sec. 6103(p)(4).
    \238\ Secs. 7213 and 7213A.
    \239\ Sec. 7431.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision provides that upon written request by an 
appropriate State officer, the Secretary may disclose: (1) a 
notice of proposed refusal to recognize an organization as a 
section 501(c)(3) organization; (2) a notice of proposed 
revocation of tax-exemption of a section 501(c)(3) 
organization; (3) the issuance of a proposed deficiency of tax 
imposed under section 507, chapter 41, or chapter 42; (4) the 
names, addresses, and taxpayer identification numbers of 
organizations that have applied for recognition as section 
501(c)(3) organizations; and (5) returns and return information 
of organizations with respect to which information has been 
disclosed under (1) through (4) above.\240\ Disclosure or 
inspection is permitted for the purpose of, and only to the 
extent necessary in, the administration of State laws 
regulating section 501(c)(3) organizations, such as laws 
regulating tax-exempt status, charitable trusts, charitable 
solicitation, and fraud. Such disclosure or inspection may be 
made only to or by an appropriate State officer or to an 
officer or employee of the State who is designated by the 
appropriate State officer, and may not be made by or to a 
contractor or agent. The Secretary also is permitted to 
disclose or open to inspection the returns and return 
information of an organization that is recognized as tax-exempt 
under section 501(c)(3), or that has applied for such 
recognition, to an appropriate State officer if the Secretary 
determines that disclosure or inspection may facilitate the 
resolution of Federal or State issues relating to the tax-
exempt status of the organization. For this purpose, 
appropriate State officer means the State attorney general, the 
State tax official, or any other State official charged with 
overseeing organizations of the type described in section 
501(c)(3).
---------------------------------------------------------------------------
    \240\ Such returns and return information also may be open to 
inspection by an appropriate State officer.
---------------------------------------------------------------------------
      In addition, the provision provides that upon the written 
request by an appropriate State officer, the Secretary may make 
available for inspection or disclosure returns and return 
information of an organization described in section 501(c)(2) 
(certain title holding companies), 501(c)(4) (certain social 
welfare organizations), 501(c)(6) (certain business leagues and 
similar organizations), 501(c)(7) (certain recreational clubs), 
501(c)(8) (certain fraternal organizations), 501(c)(10) 
(certain domestic fraternal organizations operating under the 
lodge system), and 501(c)(13) (certain cemetery companies). 
Such returns and return information are available for 
inspection or disclosure only for the purpose of, and to the 
extent necessary in, the administration of State laws 
regulating the solicitation or administration of the charitable 
funds or charitable assets of such organizations. Such 
disclosure or inspection may be made only to or by an 
appropriate State officer or to an officer or employee of the 
State who is designated by the appropriate State officer, and 
may not be made by or to a contractor or agent. For this 
purpose, appropriate State officer means the State attorney 
general, the State tax officer, and the head of an agency 
designated by the State attorney general as having primary 
responsibility for overseeing the solicitation of funds for 
charitable purposes of such organizations.
      In addition, the provision provides that any returns and 
return information disclosed under section 6104(c) may be 
disclosed in civil administrative and civil judicial 
proceedings pertaining to the enforcement of State laws 
regulating the applicable tax-exempt organization in a manner 
prescribed by the Secretary. Returns and return information are 
not to be disclosed under section 6104(c), or in such an 
administrative or judicial proceeding, to the extent that the 
Secretary determines that such disclosure would seriously 
impair Federal tax administration. The provision makes 
disclosures of returns and return information under section 
6104(c) subject to the disclosure, recordkeeping, and safeguard 
provisions of section 6103, including the requirements that the 
Secretary maintain a permanent system of records of requests 
for disclosure (sec. 6103(p)(3)), and that the appropriate 
State officer maintain various safeguards that protect against 
unauthorized disclosure (sec. 6103(p)(4)). The provision 
provides that the willful unauthorized disclosure of returns or 
return information described in section 6104(c) is a felony 
subject to a fine of up to $5,000 and/or imprisonment of up to 
five years (sec. 7213(a)(2)), the willful unauthorized 
inspection of returns or return information described in 
section 6104(c) is subject to a fine of up to $1,000 and/or 
imprisonment of up to one year (sec. 7213A), and provides the 
taxpayer the right to bring a civil action for damages in the 
case of knowing or negligent unauthorized disclosure or 
inspection of such information (sec. 7431(a)(2)).
      Effective date.--The provision is effective on the date 
of enactment but does not apply to requests made before such 
date.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
14. Improve accountability of donor advised funds (secs. 231 through 
        234 of the Senate amendment and secs. 170 and 4958 and new 
        secs. 4967, 4968, and 4969 of the Code)

                              PRESENT LAW

Requirements for section 501(c)(3) tax-exempt status
      Charitable organizations, i.e., organizations described 
in section 501(c)(3), generally are exempt from Federal income 
tax and are eligible to receive tax deductible contributions. A 
charitable organization must operate primarily in pursuance of 
one or more tax-exempt purposes constituting the basis of its 
tax exemption.\241\ In order to qualify as operating primarily 
for a purpose described in section 501(c)(3), an organization 
must satisfy the following operational requirements: (1) the 
net earnings of the organization may not inure to the benefit 
of any person in a position to influence the activities of the 
organization; (2) the organization must operate to provide a 
public benefit, not a private benefit; \242\ (3) the 
organization may not be operated primarily to conduct an 
unrelated trade or business; \243\ (4) the organization may not 
engage in substantial legislative lobbying; and (5) the 
organization may not participate or intervene in any political 
campaign.
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    \241\ Treas. Reg. sec. 1.501(c)(3)-1(c)(1). The Code specifies such 
purposes as religious, charitable, scientific, testing for public 
safety, literary, or educational purposes, or to foster international 
amateur sports competition, or for the prevention of cruelty to 
children or animals. In general, an organization is organized and 
operated for charitable purposes if it provides relief for the poor and 
distressed or the underprivileged. Treas. Reg. sec. 1.501(c)(3)-
1(d)(2).
    \242\ Treas. Reg. sec. 1.501(c)(3)-1(d)(1)(ii).
    \243\ Treas. Reg. sec. 1.501(c)(3)-1(e)(1). Conducting a certain 
level of unrelated trade or business activity will not jeopardize tax-
exempt status.
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Classification of section 501(c)(3) organizations
      Section 501(c)(3) organizations are classified either as 
``public charities'' or ``private foundations.'' \244\ Private 
foundations generally are defined under section 509(a) as all 
organizations described in section 501(c)(3) other than an 
organization granted public charity status by reason of: (1) 
being a specified type of organization (i.e., churches, 
educational institutions, hospitals and certain other medical 
organizations, certain organizations providing assistance to 
colleges and universities, or a governmental unit); (2) 
receiving a substantial part of its support from governmental 
units or direct or indirect contributions from the general 
public; or (3) providing support to another section 501(c)(3) 
entity that is not a private foundation. In contrast to public 
charities, private foundations generally are funded from a 
limited number of sources (e.g., an individual, family, or 
corporation). Donors to private foundations and persons related 
to such donors together often control the operations of private 
foundations.
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    \244\ Sec. 509(a). Private foundations are either private operating 
foundations or private non-operating foundations. In general, private 
operating foundations operate their own charitable programs in contrast 
to private non-operating foundations, which generally are grant-making 
organizations. Most private foundations are non-operating foundations.
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      Because private foundations receive support from, and 
typically are controlled by, a small number of supporters, 
private foundations are subject to a number of anti-abuse rules 
and excise taxes not applicable to public charities.\245\ For 
example, the Code imposes excise taxes on acts of ``self-
dealing'' between disqualified persons (generally, an 
enumerated class of foundation insiders \246\) and a private 
foundation. Acts of self-dealing include, for example, sales or 
exchanges, or leasing, of property; lending of money; or the 
furnishing of goods, services, or facilities between a 
disqualified person and a private foundation.\247\ In addition, 
private non-operating foundations are required to pay out a 
minimum amount each year as qualifying distributions. In 
general, a qualifying distribution is an amount paid to 
accomplish one or more of the organization's exempt purposes, 
including reasonable and necessary administrative 
expenses.\248\ Certain expenditures of private foundations are 
also subject to tax.\249\ In general, taxable expenditures are 
expenditures: (1) for lobbying; (2) to influence the outcome of 
a public election or carry on a voter registration drive 
(unless certain requirements are met); (3) as a grant to an 
individual for travel, study, or similar purposes unless made 
pursuant to procedures approved by the Secretary; (4) as a 
grant to an organization that is not a public charity or exempt 
operating foundation unless the foundation exercises 
expenditure responsibility \250\ with respect to the grant; or 
(5) for any non-charitable purpose. Additional excise taxes may 
also apply in the event a private foundation holds certain 
business interests (``excess business holdings'') \251\ or 
makes an investment that jeopardizes the foundation's exempt 
purposes.\252\
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    \245\ Secs. 4940-4945.
    \246\ See sec. 4946(a).
    \247\ Sec. 4941.
    \248\ Sec. 4942(g)(1)(A). A qualifying distribution also includes 
any amount paid to acquire an asset used (or held for use) directly in 
carrying out one or more of the organization's exempt purposes and 
certain amounts set-aside for exempt purposes. Sec. 4942(g)(1)(B) and 
4942(g)(2).
    \249\ Sec. 4945. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \250\ In general, expenditure responsibility requires that a 
foundation make all reasonable efforts and establish reasonable 
procedures to ensure that the grant is spent solely for the purpose for 
which it was made, to obtain reports from the grantee on the 
expenditure of the grant, and to make reports to the Secretary 
regarding such expenditures. Sec. 4945(h).
    \251\ Sec. 4943.
    \252\ Sec. 4944.
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Supporting organizations
      The Code provides that certain ``supporting 
organizations'' (in general, organizations that provide support 
to another section 501(c)(3) organization that is not a private 
foundation) are classified as public charities rather than 
private foundations.\253\ To qualify as a supporting 
organization, an organization must meet all three of the 
following tests: (1) it must be organized and at all times 
operated exclusively for the benefit of, to perform the 
functions of, or to carry out the purposes of one or more 
``publicly supported organizations'' \254\ (the 
``organizational and operational tests''); \255\ (2) it must be 
operated, supervised, or controlled by or in connection with 
one or more publicly supported organizations (the 
``relationship test''); \256\ and (3) it must not be controlled 
directly or indirectly by one or more disqualified persons (as 
defined in section 4946) other than foundation managers and 
other than one or more publicly supported organizations (the 
``lack of outside control test'').\257\
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    \253\ Sec. 509(a)(3).
    \254\ In general, supported organizations of a supporting 
organization must be publicly supported charities described in sections 
509(a)(1) or (a)(2).
    \255\ Sec. 509(a)(3)(A).
    \256\ Sec. 509(a)(3)(B).
    \257\ Sec. 509(a)(3)(C).
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      To satisfy the relationship test, a supporting 
organization must hold one of three statutorily described close 
relationships with the supported organization. The organization 
must be: (1) operated, supervised, or controlled by a publicly 
supported organization (commonly referred to as ``Type I'' 
supporting organizations); (2) supervised or controlled in 
connection with a publicly supported organization (``Type II'' 
supporting organizations); or (3) operated in connection with a 
publicly supported organization (``Type III'' supporting 
organizations).\258\
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    \258\ Treas. Reg. sec. 1.509(a)-4(f)(2).
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            Type I supporting organizations
      In the case of supporting organizations that are 
operated, supervised, or controlled by one or more publicly 
supported organizations (Type I supporting organizations), one 
or more supported organizations must exercise a substantial 
degree of direction over the policies, programs, and activities 
of the supporting organization.\259\ The relationship between 
the Type I supporting organization and the supported 
organization generally is comparable to that of a parent and 
subsidiary. The requisite relationship may be established by 
the fact that a majority of the officers, directors, or 
trustees of the supporting organization are appointed or 
elected by the governing body, members of the governing body, 
officers acting in their official capacity, or the membership 
of one or more publicly supported organizations.\260\
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    \259\ Treas. Reg. sec. 1.509(a)-4(g)(1)(i).
    \260\ Id.
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            Type II supporting organizations
      Type II supporting organizations are supervised or 
controlled in connection with one or more publicly supported 
organizations. Rather than the parent-subsidiary relationship 
characteristic of Type I organizations, the relationship 
between a Type II organization and its supported organizations 
is more analogous to a brother-sister relationship. In order to 
satisfy the Type II relationship requirement, generally there 
must be common supervision or control by the persons 
supervising or controlling both the supporting organization and 
the publicly supported organizations.\261\ An organization 
generally is not considered to be ``supervised or controlled in 
connection with'' a publicly supported organization merely 
because the supporting organization makes payments to the 
publicly supported organization, even if the obligation to make 
payments is enforceable under state law.\262\
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    \261\ Treas. Reg. sec. 1.509(a)-4(h)(1).
    \262\ Treas. Reg. sec. 1.509(a)-4(h)(2).
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            Type III supporting organizations
      Type III supporting organizations are ``operated in 
connection with'' one or more publicly supported organizations. 
To satisfy the ``operated in connection with'' relationship, 
Treasury regulations require that the supporting organization 
be responsive to, and significantly involved in the operations 
of, the publicly supported organization. This relationship is 
deemed to exist where the supporting organization meets both a 
``responsiveness test'' and an ``integral part test.'' \263\ In 
general, the responsiveness test requires that the Type III 
supporting organization be responsive to the needs or demands 
of the publicly supported organizations. In general, the 
integral part test requires that the Type III supporting 
organization maintain significant involvement in the operations 
of one or more publicly supported organizations, and that such 
publicly supported organizations are in turn dependent upon the 
supporting organization for the type of support which it 
provides.
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    \263\ Treas. Reg. sec. 1.509(a)-4(i)(1).
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Charitable contributions
      Contributions to organizations described in section 
501(c)(3) are deductible, subject to certain limitations, as an 
itemized deduction from Federal income taxes.\264\ Such 
contributions also generally are deductible for estate and gift 
tax purposes.\265\ However, if the taxpayer retains control 
over the assets transferred to charity, the transfer may not 
qualify as a completed gift for purposes of claiming an income, 
estate, or gift tax deduction.
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    \264\ Sec. 170.
    \265\ Secs. 2055 and 2522.
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      Public charities enjoy certain advantages over private 
foundations regarding the deductibility of contributions. For 
example, contributions of appreciated capital gain property to 
a private foundation generally are deductible only to the 
extent of the donor's cost basis.\266\ In contrast, 
contributions to public charities generally are deductible in 
an amount equal to the property's fair market value, except for 
gifts of inventory and other ordinary income property, short-
term capital gain property, and tangible personal property the 
use of which is unrelated to the donee organization's exempt 
purpose. In addition, under present law, a taxpayer's 
deductible contributions generally are limited to specified 
percentages of the taxpayer's contribution base, which 
generally is the taxpayer's adjusted gross income for a taxable 
year. The applicable percentage limitations vary depending upon 
the type of property contributed and the classification of the 
donee organization. In general, contributions to non-operating 
private foundations are limited to a smaller percentage of the 
donor's contribution base (up to 30 percent) than contributions 
to public charities (up to 50 percent).\267\
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    \266\ A special rule in section 170(e)(5) provides that taxpayers 
are allowed a deduction equal to the fair market value of certain 
contributions of appreciated, publicly traded stock contributed to a 
private foundation.
    \267\ Sec. 170(b).
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      In general, taxpayers who make contributions and claim a 
charitable deduction must satisfy recordkeeping and 
substantiation requirements.\268\ The requirements vary 
depending on the type and value of property contributed. A 
deduction generally may be denied if the donor fails to satisfy 
applicable recordkeeping or substantiation requirements.
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    \268\ Sec. 170(f)(8).
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Intermediate sanctions (excess benefit transaction tax)
      The Code imposes excise taxes on excess benefit 
transactions between disqualified persons and public 
charities.\269\ An excess benefit transaction generally is a 
transaction in which an economic benefit is provided by a 
public charity directly or indirectly to or for the use of a 
disqualified person, if the value of the economic benefit 
provided exceeds the value of the consideration (including the 
performance of services) received for providing such benefit.
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    \269\ Sec. 4958. The excess benefit transaction tax is commonly 
referred to as ``intermediate sanctions,'' because it imposes penalties 
generally considered to be less punitive than revocation of the 
organization's exempt status. The tax also applies to transactions 
between disqualified persons and social welfare organizations (as 
described in section 501(c)(4)).
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      For purposes of the excess benefit transaction rules, a 
disqualified person is any person in a position to exercise 
substantial influence over the affairs of the public charity at 
any time in the five-year period ending on the date of the 
transaction at issue.\270\ Persons holding certain powers, 
responsibilities, or interests (e.g., officers, directors, or 
trustees) are considered to be in a position to exercise 
substantial influence over the affairs of the public charity.
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    \270\ Sec. 4958(f)(1). A disqualified person also includes certain 
family members of such a person, and certain entities that satisfy a 
control test with respect to such persons.
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      An excess benefit transaction tax is imposed on the 
disqualified person and, in certain cases, on the organization 
managers, but is not imposed on the public charity. An initial 
tax of 25 percent of the excess benefit amount is imposed on 
the disqualified person that receives the excess benefit. An 
additional tax on the disqualified person of 200 percent of the 
excess benefit applies if the violation is not corrected within 
a specified period. A tax of 10 percent of the excess benefit 
(not to exceed $10,000 with respect to any excess benefit 
transaction) is imposed on an organization manager that 
knowingly participated in the excess benefit transaction, if 
the manager's participation was willful and not due to 
reasonable cause, and if the initial tax was imposed on the 
disqualified person.
Community foundations
      Community foundations generally are broadly supported 
section 501(c)(3) public charities that make grants to other 
charitable organizations located within a community 
foundation's particular geographic area. Donors sometimes make 
contributions to a community foundation through transfers to a 
separate trust or fund, the assets of which are held and 
managed by a bank or investment company.
      Certain community foundations are subject to special 
rules that permit them to treat the separate funds or trusts 
maintained by the community foundation as a single entity for 
tax purposes. This ``single entity'' status allows the 
community foundation to be classified as a public charity. One 
of the requirements that community foundations must meet is 
that funds maintained by the community foundation may not be 
subject by the donor to any material restrictions or 
conditions. The prohibition against material restrictions or 
conditions is designed to prevent a donor from encumbering a 
fund in a manner that prevents the community foundation from 
freely distributing the assets and income from it in 
furtherance of the community foundation's charitable purposes. 
Under Treasury regulations, whether a particular restriction or 
condition placed by the donor on the transfer of assets is 
material must be determined from all of the facts and 
circumstances of the transfer. The regulations set out some of 
the more significant facts and circumstances to be considered 
in making a determination, including: (1) whether the 
transferee public charity is the fee owner of the assets 
received; (2) whether the assets are held and administered by 
the public charity in a manner consistent with its own exempt 
purposes; (3) whether the governing body of the public charity 
has the ultimate authority and control over the assets and the 
income derived from them; and (4) whether the governing body of 
the public charity is independent from the donor. The 
regulations provide several non-adverse factors for determining 
whether a particular restriction or condition placed by the 
donor on the transfer of assets is material. In addition, the 
regulations list numerous factors and subfactors that indicate 
that the community foundation is prevented from freely and 
effectively employing the donated assets and the income 
thereon.
Donor advised funds
      Some charitable organizations (including community 
foundations) establish accounts to which donors may contribute 
and thereafter provide nonbinding advice or recommendations 
with regard to distributions from the fund or the investment of 
assets in the fund. Such accounts are commonly referred to as 
``donor advised funds.'' Donors who make contributions to 
charities for maintenance in a donor advised fund generally 
claim a charitable contribution deduction at the time of the 
contribution. Although sponsoring charities frequently permit 
donors (or other persons appointed by donors) to provide 
nonbinding recommendations concerning the distribution or 
investment of assets in a donor advised fund, sponsoring 
charities generally must have legal ownership and control of 
such assets following the contribution. If the sponsoring 
charity does not have such control (or permits a donor to 
exercise control over amounts contributed), the donor's 
contributions may not qualify for a charitable deduction, and, 
in the case of a community foundation, the contribution may be 
treated as being subject to a material restriction or condition 
by the donor.
      In recent years, a number of financial institutions have 
formed charitable corporations for the principal purpose of 
offering donor advised funds, sometimes referred to as 
``commercial'' donor advised funds. In addition, some 
established charities have begun operating donor advised funds 
in addition to their primary activities. The IRS has recognized 
several organizations that sponsor donor advised funds, 
including ``commercial'' donor advised funds, as section 
501(c)(3) public charities. The term ``donor advised fund'' is 
not defined in statute or regulations.
      Under the Katrina Emergency Tax Relief Act of 2005, 
certain of the above-described percent limitations on 
contributions to public charities are temporarily suspended for 
purposes of certain ``qualified contributions'' to public 
charities. Under the Act, qualified contributions do not 
include a contribution if the contribution is for establishment 
of a new, or maintenance in an existing, segregated fund or 
account with respect to which the donor (or any person 
appointed or designated by such donor) has, or reasonably 
expects to have, advisory privileges with respect to 
distributions or investments by reason of the donor's status as 
a donor.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Definitions
            Donor advised fund
      The provision defines a ``donor advised fund'' as a fund 
or account that is: (1) separately identified by reference to 
contributions of a donor or donors \271\ (2) owned and 
controlled by a sponsoring organization and (3) with respect to 
which a donor (or any person appointed or designated by such 
donor (a ``donor advisor'')) has, or reasonably expects to 
have, advisory privileges with respect to the distribution or 
investment of amounts held in the separately identified fund or 
account by reason of the donor's status as a donor.
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    \271\ The requirement that a donor advised fund be separately 
identified by reference to contributions of a donor or donors is 
intended to exclude from the definition of ``donor advised fund'' 
certain types of funds or accounts maintained by community foundations 
and other charities, such as field-of-interest funds and scholarship 
funds, provided such funds or accounts are not separately identified by 
reference to contributions of a donor or donors.
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      Notwithstanding the foregoing, the term ``donor advised 
fund'' does not include a fund or account from which are made 
grants to individuals for travel, study, or other similar 
purposes by such individual, provided that (1) a donor's or 
donor advisor's advisory privileges are performed exclusively 
by such donor or donor advisor in such person's capacity as a 
member of a committee appointed by the sponsoring organization, 
(2) no combination of a donor and persons related to or 
appointed by such donor, control, directly or indirectly, such 
committee, and (3) all grants from such fund or account satisfy 
requirements similar to those described in section 4945(g) 
(concerning grants to individuals by private foundations). In 
addition, the Secretary may exempt a fund or account from 
treatment as a donor advised fund if such fund or account (1) 
is advised by a committee not directly or indirectly controlled 
by a donor, donor advisor, or persons related to a donor or 
donor advisor or (2) will benefit a single identified 
organization or governmental entity or a single identified 
charitable purpose.
            Sponsoring organization
      The provision defines a ``sponsoring organization'' as an 
organization that: (1) is described in section 170(c) \272\ 
(other than a governmental entity described in section 
170(c)(1), and without regard to any requirement that the 
organization be organized in the United States \273\); and (2) 
maintains one or more donor advised funds.
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    \272\ Section 170(c) describes organizations to which charitable 
contributions that are deductible for income tax purposes can be made.
    \273\ See sec. 170(c)(2)(A).
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            Investment advisor
      Under the provision, the term ``investment advisor'' 
means, with respect to any sponsoring organization, any person 
(other than an employee of the sponsoring organization) 
compensated by the sponsoring organization for managing the 
investment of, or providing investment advice with respect to, 
assets maintained in donor advised funds owned by the 
sponsoring organization.
Deductibility of contributions to a sponsoring organization for 
        maintenance in a donor advised fund
            Contributions to certain sponsoring organizations for 
                    maintenance in a donor advised fund not eligible 
                    for a charitable deduction
      Under the provision, contributions to a sponsoring 
organization for maintenance in a donor advised fund are not 
eligible for a charitable deduction for income tax purposes if 
the sponsoring organization is a veterans' organization 
described in section 170(c)(3), a fraternal society described 
in section 170(c)(4), or a cemetery company described in 
section 170(c)(5); for gift tax purposes if the sponsoring 
organization is a fraternal society described in section 
2522(a)(3) or a veterans' organization described in section 
2522(a)(4); or for estate tax purposes if the sponsoring 
organization is a fraternal society described in section 
2055(a)(3) or a veterans' organization described in section 
2055(a)(4). In addition, contributions to a sponsoring 
organization for maintenance in a donor advised fund are not 
eligible for a charitable deduction if the sponsoring 
organization is a Type III supporting organization; a deduction 
is allowed for such a contribution to a Type I or Type II 
supporting organization to the extent not prohibited by 
regulations. Regulations generally shall prohibit such a 
deduction where the donor of the contribution directly or 
indirectly controls a supported organization of the Type I or 
Type II supporting organization.
            Additional substantiation requirements
      In addition to satisfying present-law substantiation 
requirements under section 170(f), a donor must obtain, with 
respect to each charitable contribution to a sponsoring 
organization to be maintained in a donor advised fund, a 
contemporaneous written acknowledgment from the sponsoring 
organization providing that the sponsoring organization has 
exclusive legal control over the assets contributed.
Minimum distributions
            Aggregate distribution requirement
      Under the provision, a sponsoring organization is 
required, for each taxable year of the organization, to make 
qualifying distributions, from the assets of donor advised 
funds maintained by the organization, equivalent to the 
applicable percentage of the aggregate asset value of donor 
advised funds maintained by the sponsoring organization as 
determined on the last day of the immediately preceding taxable 
year. Such qualifying distributions generally must be made by 
the first day of the second taxable year following the taxable 
year. The provision excludes from the computation of the 
required distributable amount for a taxable year the assets of 
donor advised funds that have been in existence for less than 
one full year as of the end of the immediately preceding 
taxable year.\274\ The aggregate payout rule does not apply in 
the case of a donor advised fund maintained by a private 
foundation that is subject to the requirements of section 4942. 
The applicable percentage is three percent for the first 
taxable year beginning after the date of enactment, four 
percent for the second such taxable year, and five percent for 
any such taxable year thereafter.
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    \274\ Assume, for example, that a sponsoring organization initially 
maintained 10 donor advised funds, each established in Year 1. In Year 
3, a new donor advised fund is established. For purposes of determining 
the sponsoring organization's aggregate payout requirement for Year 4, 
the donor advised fund established in Year 3 is excluded, because it 
was in existence for less than a year as of the end of Year 3. For 
these purposes, a donor advised fund is considered created when the 
account is first established (rather than, for example, when a donor 
achieves the minimum account balance required under the sponsoring 
organization's rules to begin grantmaking).
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            Generally applicable account-level activity requirement
      Under the provision, a sponsoring organization must 
distribute from each of its donor advised funds at least a 
certain amount in qualifying distributions during any 
applicable three-year period by the 181st day of the first 
taxable year following such period. The required distributable 
amount is the greater of (1) $250 or (2) two and one-half 
percent of the sponsoring organization's average required 
minimum initial contribution amount for such period \275\ (or 
average required minimum balance, if greater) for the type of 
donor \276\ at issue. An applicable three-year period must 
correspond with three consecutive taxable years of the 
sponsoring organization. The first applicable three-year period 
for a donor advised fund begins only after the fund has been in 
existence for one full year.\277\
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    \275\ For purposes of the provision, the required minimum initial 
contribution amount is the minimum contribution amount required by the 
sponsoring organization in order to open a donor advised fund.
    \276\ Under some circumstances, for example, a sponsoring 
organization may establish higher minimum initial contribution amounts 
for corporate donors than for individual donors.
    \277\ Applicable three-year periods for any donor advised fund run 
consecutively, such that the second three-year period begins 
immediately after the first three-year period ends. For example, assume 
donor advised fund X is established on March 30 of Year 1, and the 
sponsoring organization's taxable year corresponds to the calendar 
year. As of the end of Year 1, X has not been in existence for one full 
year; therefore, X's first applicable three-year period does not begin 
in Year 2. Instead, the first such period begins on January 1 of Year 3 
and runs through December 31 of Year 5. X's second applicable three-
year period begins on January 1 of Year 6 and ends on December 31 of 
Year 8.
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            Account-level distribution requirement for accounts that 
                    hold illiquid assets
      If, as of the end of any taxable year of the sponsoring 
organization, a donor advised fund holds assets other than cash 
and marketable securities (i.e., ``illiquid assets'') that 
equal more than 10 percent of the total value of assets in the 
fund (determined using the valuation procedures described 
below), the donor advised fund is considered to be an 
``illiquid asset donor advised fund'' for the subsequent 
taxable year of the sponsoring organization. A sponsoring 
organization must distribute from each illiquid asset donor 
advised fund as qualifying distributions by the 181st day of 
the second taxable year following such subsequent taxable year 
an amount equal to the applicable percentage of the value of 
the assets in the donor advised fund as of the end of such year 
(the ``illiquid asset payout requirement''). The applicable 
percentage is three percent for the first taxable year 
beginning after the date of enactment, four percent for the 
second such taxable year, and five percent for any such taxable 
year thereafter.
      If, as of the end of a taxable year of the sponsoring 
organization, an illiquid asset in a donor advised fund has not 
been held for a period of 12 months, such asset is not 
considered an illiquid asset for such year. However, if an 
illiquid asset has been exchanged for another illiquid asset, 
then the holding period for any such other illiquid asset 
includes the period during which the illiquid asset that was 
exchanged was held. The Secretary is authorized to promulgate 
anti-abuse rules to prevent the circumvention of the provision 
through transactions designed to avoid application of illiquid 
asset payout requirement, such as through exchanges of illiquid 
assets for other assets.
            Qualifying distributions
      For purposes of all of the distribution requirements 
described in the provision, qualifying distributions are 
amounts paid to organizations described in section 170(b)(1)(A) 
(other than Type III supporting organizations or a sponsoring 
organization if the amount is for maintenance in a donor 
advised fund). Distributions to Type I or Type II supporting 
organizations may be qualifying distributions if not prohibited 
by regulations.\278\ Distributions to the sponsoring 
organization generally are qualifying distributions; however, a 
distribution to the sponsoring organization in satisfaction of 
the aggregate distribution requirement is a qualifying 
distribution only if the distribution is designated for use in 
connection with a charitable program of the sponsoring 
organization (e.g., if funds are transferred to a scholarship 
fund (that does not meet the definition of donor advised fund 
because, for example, the scholarship fund is not separately 
identified by reference to donors) for the awarding of 
scholarships consistent with the sponsoring organization's 
exempt purposes). Amounts permanently set aside for purposes, 
and under procedures similar to those, described in section 
4942(g) are treated as qualifying distributions. Qualifying 
distributions also include amounts paid during a taxable year 
for reasonable and necessary administrative expenses charged to 
a donor advised fund by a sponsoring organization.
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    \278\ Regulations generally shall prohibit such a distribution 
where the donor or donor advisor of the amounts distributed directly or 
indirectly controls a supported organization of the Type I or Type II 
supporting organization.
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            Valuation
      Special valuation rules apply for purposes of determining 
the required distributable amount for a taxable year under the 
aggregate payout requirement and the account-level payout 
requirement applicable to accounts that hold illiquid assets. 
For such purposes, the fair market values of cash and of 
securities for which market quotations are readily available 
are determined on a monthly basis. All other assets (``illiquid 
assets'') transferred by a donor to a sponsoring organization 
for maintenance in a donor advised fund are valued at the sum 
of (1) the value claimed by the donor for purposes of 
determining the donor's charitable deduction for the 
contribution of such assets to the sponsoring 
organization,\279\ and (2) an assumed annual rate of return of 
five percent. If a donor advised fund purchases an illiquid 
asset, such asset is valued at the sum of (1) the purchase 
price paid for the assets, and (2) an assumed annual rate of 
return of five percent. The Secretary of the Treasury is 
authorized to specify the requirements for making such 
computations. Under the provision, the Secretary of the 
Treasury is also authorized to promulgate rules permitting 
adjustments in the value of an illiquid asset in situations 
where the asset declines significantly in value following a 
contribution or purchase of the asset.
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    \279\ The donor is required to report to the sponsoring 
organization the value of the asset claimed by the donor for charitable 
deduction purposes either by supplying to the sponsoring organization a 
copy of the donor's completed Form 8283 related to the deduction (if 
applicable) or by following any alternative procedures specified by the 
Secretary.
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            Treatment of qualifying distributions
      Distributions made in satisfaction of any of the above-
described distribution requirements are counted for purposes of 
all payout requirements described in the provision. For 
purposes of any distribution requirement described in this 
provision, the taxpayer may designate a qualifying distribution 
as being made out of the undistributed amount remaining from 
any prior taxable year or as being made in satisfaction of the 
distribution requirement for the current taxable year. Amounts 
distributed in excess of the undistributed amount for the 
current year and all previous taxable years may be carried 
forward for up to five taxable years following the taxable year 
in which the excess payment is made.
            Excise tax for failure to distribute
      In the event of a failure to distribute the required 
amount in connection with any of the above-described 
distribution requirements within the prescribed time period, 
the provision imposes excise taxes similar to the private 
foundation excise taxes under section 4942. Specifically, a 
first-tier excise tax equal to 30 percent of the undistributed 
amount is imposed. If the failure is not corrected within the 
taxable period (as defined in existing section 4942(j)(1)), a 
second-tier tax equal to 100 percent of the undistributed 
amount is imposed. The first and second tier taxes are subject 
to abatement under generally applicable present law rules. 
Taxable period means, with respect to any undistributed amount 
for any taxable year or applicable 3-year period, the period 
beginning with the first day of the taxable year or applicable 
period and ending on the earlier of the date of mailing of a 
notice of deficiency with respect to the imposition of the 
initial tax or the date on which such tax is assessed.
Disqualified persons, excess benefit transactions, and other sanctions
            Disqualified persons
      The provision provides that donors, donor advisors, and 
investment advisors to donor advised funds (as well as persons 
related to the foregoing persons \280\) are treated as 
disqualified persons with respect to the sponsoring 
organization under section 4958 or under section 4946(a).
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    \280\ For purposes of the provision, a person is treated as related 
to another person if (1) such person bears a relationship to such other 
person similar to the relationships described in sections 4958(f)(1)(B) 
and 4958(f)(1)(C).
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            Excess benefit transactions
      The provision also provides that distributions from a 
donor advised fund to a person that with respect to such fund 
is a donor, donor adviser, or a person related to a donor or 
donor adviser (though not an investment advisor) is treated as 
an excess benefit transaction under section 4958, with the 
entire amount paid to any such person treated as the amount of 
the excess benefit. This rule applies regardless of whether the 
sponsoring organization is a public charity or a private 
foundation and regardless of whether, but for this rule, the 
transaction would have been subject to the section 4941 self-
dealing rules.\281\
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    \281\ This rule includes any distribution to a donor, donor 
advisor, or a related person, whether in the form of a grant, loan, 
compensation arrangement, expense reimbursement, or other payment. If 
the excess benefit results from the payment of compensation, the entire 
amount paid as compensation will be deemed the amount of the excess 
benefit, whether the sponsoring organization is a private foundation or 
a public charity.
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      Any amount repaid as a result of correcting such an 
excess benefit transaction shall not be held in or credited to 
any donor advised fund.
            Other sanctions
      Under the provision, distributions from a donor advised 
fund (as opposed to a sponsoring organization's non donor 
advised funds or accounts) to any person other than the 
sponsoring organization's non donor advised funds or accounts 
or organizations described in section 170(b)(1)(A) \282\ (other 
than Type III supporting organizations \283\ or sponsoring 
organizations for maintenance in a donor advised fund) are 
prohibited.\284\ The provision provides for a penalty in the 
event a distribution is made from a donor advised fund to an 
ineligible person, such as a private non-operating foundation 
or a Type III supporting organization. In the event of such a 
distribution, an excise tax equal to 20 percent of the amount 
of the distribution is imposed against any donor or donor 
advisor who advised that such distribution be made. In 
addition, an excise tax equal to five percent of the amount of 
the distribution is imposed against any manager of the 
sponsoring organization (defined in a manner similar to the 
term ``foundation manager'' under section 4945) who knowingly 
approved the distribution. The taxes described in this 
paragraph are subject to abatement under generally applicable 
present law rules.
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    \282\ By requiring that distributions from a donor advised fund be 
made only to certain entities, the provision prohibits distributions 
from a donor advised fund to a donor or donor advisor (or person 
related to a donor or donor advisor), whether as compensation, loans, 
or reimbursement of expenses.
    \283\ Distributions to Type I and Type II supporting organizations 
generally are not prohibited unless prohibited under regulations. 
Regulations generally shall prohibit such distributions where the donor 
or donor advisor of the amounts distributed directly or indirectly 
controls a supported organization of the Type I or Type II supporting 
organization.
    \284\ Under the provision, distributions from donor advised funds 
to individuals are prohibited. However, sponsoring organizations may 
make grants to individuals from amounts not held in donor advised funds 
and may establish scholarship funds that are not donor advised funds. A 
donor may choose to make a contribution directly to such a scholarship 
fund (or advise that a donor advised fund make a distribution to such a 
scholarship fund).
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      Under the provision, if a donor, a donor advisor, or a 
person related to a donor or donor advisor of a donor advised 
fund advises as to a distribution that results in any such 
person receiving, directly or indirectly, a more than 
incidental benefit, excise taxes are imposed against any donor 
or donor advisor who advised as to the distribution, and 
against the recipient of the benefit. The amount of the tax is 
determined by multiplying the rate of the initial tax imposed 
against a disqualified person under section 4958 by the amount 
of the distribution that gave rise to the more-than-incidental 
benefit. Persons subject to the tax are jointly and severally 
liable for the entire amount of the tax. In addition, if a 
manager of the sponsoring organization (defined in a manner 
similar to the term ``foundation manager'' under section 4945) 
who agreed to the making of the distribution knowing that the 
distribution would confer a more than incidental benefit on a 
donor, a donor advisor, or a person related to a donor or donor 
advisor of a donor advised fund, the manager also is subject to 
an excise tax, calculated by multiplying the rate of the 
initial tax specified under section 4958 with respect to 
organization managers by the amount of the distribution that 
gave rise to the more than incidental benefit. The taxes on 
more than incidental benefit are subject to abatement under 
generally applicable present law rules.
Reporting and disclosure
      The provision requires each sponsoring organization to 
disclose on its information return: (1) the total number of 
donor advised funds it owns; (2) the aggregate value of assets 
held in those funds at the end of the organization's taxable 
year; and (3) the aggregate contributions to and grants made 
from those funds during the year. The statute of limitations 
for assessing any tax arising under the provision in any year 
with respect to which the required information has not been 
provided shall not expire before three years after the date on 
which the required information is disclosed to the IRS.
      In addition, when seeking recognition of its tax-exempt 
status, a sponsoring organization must disclose whether it 
intends to maintain donor advised funds.
Effective date
      The provision generally is effective for taxable years 
beginning after the date of enactment. Distribution 
requirements are effective for taxable years beginning after 
the date of enactment. Information return requirements are 
effective for taxable years ending after the date of enactment. 
The requirements concerning disclosures on an organization's 
application for tax exemption are effective for organizations 
applying for recognition of exempt status after the date of 
enactment. Requirements relating to charitable contributions to 
donor advised funds are effective for contributions made after 
180 days from the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
15. Improve accountability of supporting organizations (secs. 241-246 
        of the Senate amendment and secs. 509, 4942, 4943, 4945, 4958, 
        and 6033 and new sec. 4959 of the Code)

                              PRESENT LAW

Requirements for section 501(c)(3) tax-exempt status
      Charitable organizations, i.e., organizations described 
in section 501(c)(3), generally are exempt from Federal income 
tax and are eligible to receive tax deductible contributions. A 
charitable organization must operate primarily in pursuance of 
one or more tax-exempt purposes constituting the basis of its 
tax exemption.\285\ In order to qualify as operating primarily 
for a purpose described in section 501(c)(3), an organization 
must satisfy the following operational requirements: (1) the 
net earnings of the organization may not inure to the benefit 
of any person in a position to influence the activities of the 
organization; (2) the organization must operate to provide a 
public benefit, not a private benefit; \286\ (3) the 
organization may not be operated primarily to conduct an 
unrelated trade or business; \287\ (4) the organization may not 
engage in substantial legislative lobbying; and (5) the 
organization may not participate or intervene in any political 
campaign.
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    \285\ Treas. Reg. sec. 1.501(c)(3)-1(c)(1). The Code specifies such 
purposes as religious, charitable, scientific, testing for public 
safety, literary, or educational purposes, or to foster international 
amateur sports competition, or for the prevention of cruelty to 
children or animals. In general, an organization is organized and 
operated for charitable purposes if it provides relief for the poor and 
distressed or the underprivileged. Treas. Reg. sec. 1.501(c)(3)-
1(d)(2).
    \286\ Treas. Reg. sec. 1.501(c)(3)-1(d)(1)(ii).
    \287\ Treas. Reg. sec. 1.501(c)(3)-1(e)(1). Conducting a certain 
level of unrelated trade or business activity will not jeopardize tax-
exempt status.
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      Section 501(c)(3) organizations (with certain exceptions) 
are required to seek formal recognition of tax-exempt status by 
filing an application with the IRS (Form 1023). In response to 
the application, the IRS issues a determination letter or 
ruling either recognizing the applicant as tax-exempt or not.
      In general, organizations exempt from Federal income tax 
under section 501(a) are required to file an annual information 
return with the IRS.\288\ Under present law, the information 
return requirement does not apply to several categories of 
exempt organizations. Organizations exempt from the filing 
requirement include organizations (other than private 
foundations), the gross receipts of which in each taxable year 
normally are not more than $25,000.\289\
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    \288\ Sec. 6033(a)(1).
    \289\ Sec. 6033(a)(2); Treas. Reg. sec. 1.6033-2(a)(2)(i); Treas. 
Reg. sec. 1.6033-2(g)(1). Sec. 6033(a)(2)(A)(ii) provides a $5,000 
annual gross receipts exception from the annual reporting requirements 
for certain exempt organizations. In Announcement 82-88, 1982-25 I.R.B. 
23, the IRS exercised its discretionary authority under section 6033 to 
increase the gross receipts exception to $25,000, and enlarge the 
category of exempt organizations that are not required to file Form 
990.
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Classification of section 501(c)(3) organizations
            In general
      Section 501(c)(3) organizations are classified either as 
``public charities'' or ``private foundations.'' \290\ Private 
foundations generally are defined under section 509(a) as all 
organizations described in section 501(c)(3) other than an 
organization granted public charity status by reason of: (1) 
being a specified type of organization (i.e., churches, 
educational institutions, hospitals and certain other medical 
organizations, certain organizations providing assistance to 
colleges and universities, or a governmental unit); (2) 
receiving a substantial part of its support from governmental 
units or direct or indirect contributions from the general 
public; or (3) providing support to another section 501(c)(3) 
entity that is not a private foundation. In contrast to public 
charities, private foundations generally are funded from a 
limited number of sources (e.g., an individual, family, or 
corporation). Donors to private foundations and persons related 
to such donors together often control the operations of private 
foundations.
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    \290\ Sec. 509(a). Private foundations are either private operating 
foundations or private non-operating foundations. In general, private 
operating foundations operate their own charitable programs in contrast 
to private non-operating foundations, which generally are grant-making 
organizations. Most private foundations are non-operating foundations.
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      Because private foundations receive support from, and 
typically are controlled by, a small number of supporters, 
private foundations are subject to a number of anti-abuse rules 
and excise taxes not applicable to public charities.\291\ For 
example, the Code imposes excise taxes on acts of ``self-
dealing'' between disqualified persons (generally, an 
enumerated class of foundation insiders \292\) and a private 
foundation. Acts of self-dealing include, for example, sales or 
exchanges, or leasing, of property; lending of money; or the 
furnishing of goods, services, or facilities between a 
disqualified person and a private foundation.\293\ In addition, 
private non-operating foundations are required to pay out a 
minimum amount each year as qualifying distributions. In 
general, a qualifying distribution is an amount paid to 
accomplish one or more of the organization's exempt purposes, 
including reasonable and necessary administrative 
expenses.\294\ Certain expenditures of private foundations are 
also subject to tax.\295\ In general, taxable expenditures are 
expenditures: (1) for lobbying; (2) to influence the outcome of 
a public election or carry on a voter registration drive 
(unless certain requirements are met); (3) as a grant to an 
individual for travel, study, or similar purposes unless made 
pursuant to procedures approved by the Secretary; (4) as a 
grant to an organization that is not a public charity or exempt 
operating foundation unless the foundation exercises 
expenditure responsibility \296\ with respect to the grant; or 
(5) for any non-charitable purpose. Additional excise taxes may 
apply in the event a private foundation holds certain business 
interests (``excess business holdings'') \297\ or makes an 
investment that jeopardizes the foundation's exempt 
purposes.\298\
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    \291\ Secs. 4940-4945.
    \292\ See sec. 4946(a).
    \293\ Sec. 4941.
    \294\ Sec. 4942(g)(1)(A). A qualifying distribution also includes 
any amount paid to acquire an asset used (or held for use) directly in 
carrying out one or more of the organization's exempt purposes and 
certain amounts set-aside for exempt purposes. Sec. 4942(g)(1)(B) and 
4942(g)(2).
    \295\ Sec. 4945. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \296\ In general, expenditure responsibility requires that a 
foundation make all reasonable efforts and establish reasonable 
procedures to ensure that the grant is spent solely for the purpose for 
which it was made, to obtain reports from the grantee on the 
expenditure of the grant, and to make reports to the Secretary 
regarding such expenditures. Sec. 4945(h).
    \297\ Sec. 4943.
    \298\ Sec. 4944.
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      Public charities also enjoy certain advantages over 
private foundations regarding the deductibility of 
contributions. For example, contributions of appreciated 
capital gain property to a private foundation generally are 
deductible only to the extent of the donor's cost basis.\299\ 
In contrast, contributions to public charities generally are 
deductible in an amount equal to the property's fair market 
value, except for gifts of inventory and other ordinary income 
property, short-term capital gain property, and tangible 
personal property the use of which is unrelated to the donee 
organization's exempt purpose. In addition, under present law, 
a taxpayer's deductible contributions generally are limited to 
specified percentages of the taxpayer's contribution base, 
which generally is the taxpayer's adjusted gross income for a 
taxable year. The applicable percentage limitations vary 
depending upon the type of property contributed and the 
classification of the donee organization. In general, 
contributions to non-operating private foundations are limited 
to a smaller percentage of the donor's contribution base (up to 
30 percent) than contributions to public charities (up to 50 
percent).\300\
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    \299\ A special rule in section 170(e)(5) provides that taxpayers 
are allowed a deduction equal to the fair market value of certain 
contributions of appreciated, publicly traded stock contributed to a 
private foundation.
    \300\ Sec. 170(b).
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            Supporting organizations (section 509(a)(3))
      The Code provides that certain ``supporting 
organizations'' (in general, organizations that provide support 
to another section 501(c)(3) organization that is not a private 
foundation) are classified as public charities rather than 
private foundations.\301\ To qualify as a supporting 
organization, an organization must meet all three of the 
following tests: (1) it must be organized and at all times 
operated exclusively for the benefit of, to perform the 
functions of, or to carry out the purposes of one or more 
``publicly supported organizations'' \302\ (the 
``organizational and operational tests''); \303\ (2) it must be 
operated, supervised, or controlled by or in connection with 
one or more publicly supported organizations (the 
``relationship test''); \304\ and (3) it must not be controlled 
directly or indirectly by one or more disqualified persons (as 
defined in section 4946) other than foundation managers and 
other than one or more publicly supported organizations (the 
``lack of outside control test'').\305\
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    \301\ Sec. 509(a)(3).
    \302\ In general, supported organizations of a supporting 
organization must be publicly supported charities described in sections 
509(a)(1) or (a)(2).
    \303\ Sec. 509(a)(3)(A).
    \304\ Sec. 509(a)(3)(B).
    \305\ Sec. 509(a)(3)(C).
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      To satisfy the relationship test, a supporting 
organization must hold one of three statutorily described close 
relationships with the supported organization. The organization 
must be: (1) operated, supervised, or controlled by a publicly 
supported organization (commonly referred to as ``Type I'' 
supporting organizations); (2) supervised or controlled in 
connection with a publicly supported organization (``Type II'' 
supporting organizations); or (3) operated in connection with a 
publicly supported organization (``Type III'' supporting 
organizations).\306\
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    \306\  Treas. Reg. sec. 1.509(a)-4(f)(2).
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            Type I supporting organizations
      In the case of supporting organizations that are 
operated, supervised, or controlled by one or more publicly 
supported organizations (Type I supporting organizations), one 
or more supported organizations must exercise a substantial 
degree of direction over the policies, programs, and activities 
of the supporting organization.\307\ The relationship between 
the Type I supporting organization and the supported 
organization generally is comparable to that of a parent and 
subsidiary. The requisite relationship may be established by 
the fact that a majority of the officers, directors, or 
trustees of the supporting organization are appointed or 
elected by the governing body, members of the governing body, 
officers acting in their official capacity, or the membership 
of one or more publicly supported organizations.\308\
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    \307\ Treas. Reg. sec. 1.509(a)-4(g)(1)(i).
    \308\ Id.
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            Type II supporting organizations
      Type II supporting organizations are supervised or 
controlled in connection with one or more publicly supported 
organizations. Rather than the parent-subsidiary relationship 
characteristic of Type I organizations, the relationship 
between a Type II organization and its supported organizations 
is more analogous to a brother-sister relationship. In order to 
satisfy the Type II relationship requirement, generally there 
must be common supervision or control by the persons 
supervising or controlling both the supporting organization and 
the publicly supported organizations.\309\ An organization 
generally is not considered to be ``supervised or controlled in 
connection with'' a publicly supported organization merely 
because the supporting organization makes payments to the 
publicly supported organization, even if the obligation to make 
payments is enforceable under state law.\310\
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    \309\ Treas. Reg. sec. 1.509(a)-4(h)(1).
    \310\ Treas. Reg. sec. 1.509(a)-4(h)(2).
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            Type III supporting organizations
      Type III supporting organizations are ``operated in 
connection with'' one or more publicly supported organizations. 
To satisfy the ``operated in connection with'' relationship, 
Treasury regulations require that the supporting organization 
be responsive to, and significantly involved in the operations 
of, the publicly supported organization. This relationship is 
deemed to exist where the supporting organization meets both a 
``responsiveness test'' and an ``integral part test.'' \311\
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    \311\ Treas. Reg. sec. 1.509(a)-4(i)(1).
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      In general, the responsiveness test requires that the 
Type III supporting organization be responsive to the needs or 
demands of the publicly supported organizations. The 
responsiveness test may be satisfied in one of two ways.\312\ 
First, the supporting organization may demonstrate that: (1)(a) 
one or more of its officers, directors, or trustees are elected 
or appointed by the officers, directors, trustees, or 
membership of the supported organization; (b) one or more 
members of the governing bodies of the publicly supported 
organizations are also officers, directors, or trustees of the 
supporting organization; or (c) the officers, directors, or 
trustees of the supporting organization maintain a close 
continuous working relationship with the officers, directors, 
or trustees of the publicly supported organizations; and (2) by 
reason of such arrangement, the officers, directors, or 
trustees of the supported organization have a significant voice 
in the investment policies of the supporting organization, the 
timing and manner of making grants, the selection of grant 
recipients by the supporting organization, and otherwise 
directing the use of the income or assets of the supporting 
organization.\313\ Alternatively, the responsiveness test may 
be satisfied if the supporting organization is a charitable 
trust under state law, each specified supported organization is 
a named beneficiary under the trust's governing instrument, and 
the beneficiary organization has the power to enforce the trust 
and compel an accounting under state law.\314\
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    \312\ For an organization that was supporting or benefiting one or 
more publicly supported organizations before November 20, 1970, 
additional facts and circumstances, such as an historic and continuing 
relationship between organizations, also may be taken into 
consideration to establish compliance with either of the responsiveness 
tests. Treas. Reg. sec. 1.509(a)-4(i)(1)(ii).
    \313\ Treas. Reg. sec. 1.509(a)-4(i)(2)(ii).
    \314\ Treas. Reg. sec. 1.509(a)-4(i)(2)(iii).
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      In general, the integral part test requires that the Type 
III supporting organization maintain significant involvement in 
the operations of one or more publicly supported organizations, 
and that such publicly supported organizations are in turn 
dependent upon the supporting organization for the type of 
support which it provides. There are two alternative methods 
for satisfying the integral part test. The first alternative is 
to establish that (1) the activities engaged in for or on 
behalf of the publicly supported organization are activities to 
perform the functions of, or carry out the purposes of, such 
organizations; and (2) these activities, but for the 
involvement of the supporting organization, normally would be 
engaged in by the publicly supported organizations 
themselves.\315\ The second method for satisfying the integral 
part test is to establish that: (1) the supporting organization 
pays substantially all of its income to or for the use of one 
or more publicly supported organizations; \316\ (2) the amount 
of support received by one or more of the publicly supported 
organizations is sufficient to insure the attentiveness of the 
organization or organizations to the operations of the 
supporting organization (this is known as the ``attentiveness 
requirement''); \317\ and (3) a significant amount of the total 
support of the supporting organization goes to those publicly 
supported organizations that meet the attentiveness 
requirement.\318\
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    \315\ Treas. Reg. sec. 1.509(a)-4(i)(3)(ii).
    \316\ For this purpose, the IRS has defined the term 
``substantially all'' of an organization's income to mean 85 percent or 
more. Rev. Rul. 76-208, 1976-1 C.B. 161.
    \317\ Although the regulations do not specify the requisite level 
of support in numerical or percentage terms, the IRS has suggested that 
grants that represent less than 10 percent of the beneficiary's support 
likely would be viewed as insufficient to ensure attentiveness. Gen. 
Couns. Mem. 36379 (August 15, 1975). As an alternative to satisfying 
the attentiveness standard by the foregoing method, a supporting 
organization may demonstrate attentiveness by showing that, in order to 
avoid the interruption of the carrying on of a particular function or 
activity, the beneficiary organization will be sufficiently attentive 
to the operations of the supporting organization. Treas. Reg. sec. 
1.509(a)-4(i)(3)(iii)(b).
    \318\ Treas. Reg. sec. 1.509(a)-4(i)(3)(iii).
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Intermediate sanctions (excess benefit transaction tax)
      The Code imposes excise taxes on excess benefit 
transactions between disqualified persons and public 
charities.\319\ An excess benefit transaction generally is a 
transaction in which an economic benefit is provided by a 
public charity directly or indirectly to or for the use of a 
disqualified person, if the value of the economic benefit 
provided exceeds the value of the consideration (including the 
performance of services) received for providing such benefit.
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    \319\ Sec. 4958. The excess benefit transaction tax is commonly 
referred to as ``intermediate sanctions,'' because it imposes penalties 
generally considered to be less punitive than revocation of the 
organization's exempt status. The tax also applies to transactions 
between disqualified persons and social welfare organizations (as 
described in section 501(c)(4)).
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      For purposes of the excess benefit transaction rules, a 
disqualified person is any person in a position to exercise 
substantial influence over the affairs of the public charity at 
any time in the five-year period ending on the date of the 
transaction at issue.\320\ Persons holding certain powers, 
responsibilities, or interests (e.g., officers, directors, or 
trustees) are considered to be in a position to exercise 
substantial influence over the affairs of the public charity.
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    \320\ Sec. 4958(f)(1). A disqualified person also includes certain 
family members of such a person, and certain entities that satisfy a 
control test with respect to such persons.
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      An excess benefit transaction tax is imposed on the 
disqualified person and, in certain cases, on the organization 
managers, but is not imposed on the public charity. An initial 
tax of 25 percent of the excess benefit amount is imposed on 
the disqualified person that receives the excess benefit. An 
additional tax on the disqualified person of 200 percent of the 
excess benefit applies if the violation is not corrected within 
a specified period. A tax of 10 percent of the excess benefit 
(not to exceed $10,000 with respect to any excess benefit 
transaction) is imposed on an organization manager that 
knowingly participated in the excess benefit transaction, if 
the manager's participation was willful and not due to 
reasonable cause, and if the initial tax was imposed on the 
disqualified person.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Provisions relating to all (Type I, Type II, and Type III) supporting 
        organizations
            Excess benefit transactions
      Under the provision, if a supporting organization (Type 
I, Type II, or Type III) makes a grant, loan, payment of 
compensation, or other similar payment to a substantial 
contributor (or person related to the substantial contributor) 
of the supporting organization, for purposes of the excess 
benefit transaction rules (sec. 4958), the substantial 
contributor is treated as a disqualified person and the payment 
is treated as an excess benefit transaction with the entire 
amount of the payment treated as the excess benefit.
      A substantial contributor means any person who 
contributed or bequeathed an aggregate amount of more than 
$5,000 to the organization, if such amount is more than two 
percent of the total contributions and bequests received by the 
organization before the close of the taxable year of the 
organization in which the contribution or bequest is received 
by the organization from such person. In the case of a trust, a 
substantial contributor also includes the creator of the trust. 
A substantial contributor does not include a public charity 
(other than a supporting organization).
      A person is a related person (``related person'') if a 
person is a member of the family (determined under section 
4958(f)(4)) of a substantial contributor, or a 35 percent 
entity, defined as a corporation, partnership, trust, or estate 
in which a substantial contributor or family member thereof own 
more than 35 percent of the total combined voting power, 
profits interest, or beneficial interest, as the case may be.
      In addition, under the provision, loans by any supporting 
organization (Type I, Type II, or Type III) to a disqualified 
person (as defined in section 4958) of the supporting 
organization are treated as an excess benefit transaction under 
section 4958 and the entire amount of the loan is treated as an 
excess benefit. For this purpose, a disqualified person does 
not include a public charity (other than a supporting 
organization).
            Disclosure requirements
      All supporting organizations are required to file an 
annual information return (Form 990 series) with the Secretary, 
regardless of the organization's gross receipts. A supporting 
organization must indicate on such annual information return 
whether it is a Type I, Type II, or Type III supporting 
organization and must identify its supported organizations.
      Supporting organizations must demonstrate annually that 
the organization is not controlled directly or indirectly by 
one or more disqualified persons (other than foundation 
managers and other than one or more publicly supported 
organizations) through a certification on the annual 
information return.
            Disqualified person
      For purposes of the excess benefit transaction rules 
(sec. 4958), a disqualified person of a supporting organization 
is treated as a disqualified person of the supported 
organization.
Provisions that apply to Type III supporting organizations
            Modify payout requirement of Type III supporting 
                    organizations
      A Type III supporting organization must pay each taxable 
year, to or for the use of one or more public charities 
described in section 509(a)(1) or 509(a)(2) (``qualifying 
distributions''), the sum of (1) the greater of (i) 85 percent 
of its adjusted net income (as defined in section 4942(f)) for 
the preceding taxable year or (ii) the applicable percentage 
\321\ of the aggregate fair market value of all of the assets 
of the organization other than assets that are used (or held 
for use) directly in supporting the charitable programs of the 
supporting organization or one or more supported organizations, 
determined as of the last day of the preceding taxable year, 
and (2) any amount received or accrued in such year as 
repayments of amounts that were taken into account as support 
provided by the supporting organization in prior years. 
Qualifying distributions are treated as made first to satisfy 
the pay out requirement of the immediately preceding taxable 
year, and then of the taxable year, unless the taxpayer elects 
to have an amount as satisfying the payout of any prior taxable 
year. Amounts distributed in excess of the required payout for 
the current year and all previous taxable years may be carried 
forward for up to five taxable years following the taxable year 
in which the excess payment is made.
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    \321\ The percentage is three percent for the first taxable year 
beginning after the date of enactment, four percent for the second such 
taxable year, and five percent for any such taxable year thereafter.
---------------------------------------------------------------------------
      A supporting organization's administrative expenses count 
as expenses to or for the use of a supported organization. The 
holding of assets for investment purposes, or to operate an 
unrelated trade or business, is not considered a use or holding 
for use directly to support a supported organization's 
charitable programs. The Secretary may provide guidance as to 
types of uses of assets that are considered to be directly in 
support of a supported organization's charitable programs 
similar to guidance provided under Treasury Regulation section 
53.4942(a)-2(c)(3)(i).
      An organization that fails to meet the payout requirement 
is subject to an initial tax of 30 percent of the unpaid 
amount, increased to 100 percent of the unpaid amount if the 
payout requirement is not met by the earlier of the date of 
mailing of a notice of deficiency with respect to the initial 
tax or the date on which the initial tax is assessed.
            Excess business holdings
      The excess business holdings rules of section 4943 are 
applied to Type III supporting organizations. In applying such 
rules, the term disqualified person has the meaning provided in 
section 4958, and also includes substantial contributors and 
related persons and any organization that is effectively 
controlled by the same person or persons who control the 
supporting organization or any organization substantially all 
of the contributions to which were made by the same person or 
persons who made substantially all of the contributions to the 
supporting organization. The excess business holdings rules do 
not apply if the holdings are held for the benefit of the 
community pursuant to the direction of a State attorney general 
or a State official with jurisdiction over the Type III 
supporting organization. The Secretary has the authority not to 
impose the excess business holding rules if the organization 
establishes to the satisfaction of the Secretary that the 
excess holdings are consistent with the exempt purposes of the 
organization. Transition rules apply to the present holdings of 
an organization similar to those of section 4943(c)(4)-(6).
      The excess business holdings rules also apply to Type II 
supporting organizations but only if such organization accepts 
any gift or contribution from a person (other than a public 
charity, not including a supporting organization) who (1) 
controls, directly or indirectly, either alone or together 
(with persons described below) the governing body of a 
supported organization of the supporting organization; (2) is a 
member of the family of such a person; or (3) is a 35 percent 
controlled entity.
            Organizational and operational requirements
      In general, after the date of enactment of the provision, 
a Type III supporting organization may not support more than 
five organizations. A transition rule applies to Type III 
supporting organizations that support more than five 
organizations on such date. Such organizations are not required 
to reduce the number of supported organizations, but may not 
increase the number of organizations supported above the number 
of organizations supported on the date of enactment, and may 
not add new supported organizations as beneficiaries unless no 
more than five organizations are supported by the supporting 
organization following such addition.
      A Type III supporting organization may not support an 
organization that is not organized in the United States on any 
date after the date which is 180 days after the date of 
enactment,\322\ and may not be a donor with respect to a donor 
advised fund.
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    \322\ U.S. charities established principally to provide financial 
and other assistance to a foreign charity, sometimes referred to as 
``friends of'' organizations, may not be established as supporting 
organizations under the provision. Such organizations may continue to 
obtain public charity status, however, by virtue of demonstrating broad 
public support (as described in sections 509(a)(1) and 509(a)(2)).
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            Relationship to supported organization(s)
      A Type III supporting organization must, as part of its 
exemption application (Form 1023) attach a letter from each 
supported organization acknowledging that the supported 
organization has been designated by such organization as a 
supported organization.
      On the annual information return filed by a Type III 
supporting organization, the organization must indicate that it 
has obtained letters from organizations that received its 
support. It is intended that all such letters must be signed by 
a senior officer or a member of the Board of the supported 
organization. The letters must show (1) that the supported 
organization agrees to be supported by the supporting 
organization, (2) the type of support provided or to be 
provided, and (3) how such support furthers the supported 
organization's charitable purposes.
      A Type III supporting organization must apprise each 
organization it supports of information regarding the 
supporting organization in order to help ensure the supporting 
organization's responsiveness. Such a showing could be 
satisfied, for example, through provision of documentation such 
as a copy of the supporting organization's governing documents, 
any changes made to the governing documents, the organization's 
annual information return filed with the Secretary (Form 990 
series), any tax return (Form 990-T) filed with the Secretary, 
and an annual report (including a description of all of the 
support provided by the supporting organization, how such 
support was calculated, and a projection of the next year's 
support). Failure to make a sufficient showing is a factor in 
determining whether the responsiveness test of present law is 
met.
      A Type III supporting organization that is organized as a 
trust must, in addition to present law requirements, establish 
to the satisfaction of the Secretary, that it has a close and 
continuous relationship with the supported organization such 
that the trust is responsive to the needs or demands of the 
supported organization.
Other provisions
      Under the provision, if a Type I or Type III supporting 
organization accepts any gift or contribution from a person 
(other than a public charity, not including a supporting 
organization) who (1) controls, directly or indirectly, either 
alone or together (with persons described below) the governing 
body of a supported organization of the supporting 
organization; (2) is a member of the family of such a person; 
or (3) is a 35 percent controlled entity, then the supporting 
organization is treated as a private foundation for all 
purposes until such time as the organization can demonstrate to 
the satisfaction of the Secretary that it qualifies as a public 
charity other than as a supporting organization.
      Under the provision, a non-operating private foundation 
may not count as a qualifying distribution under section 4942 
any amount paid to a supporting organization. In addition, any 
such amount is treated as a taxable expenditure under section 
4945.
Effective date
      The provision generally is effective on the date of 
enactment. The distribution requirements are effective for 
taxable years beginning after the date of enactment. The 
prohibited transaction rules are effective for transactions 
occurring after the date of enactment. The excess business 
holdings requirements are effective for taxable years beginning 
after the date of enactment. The provision relating to 
distributions by nonoperating private foundations is effective 
for distributions and expenditures made after the date of 
enactment. The return requirements are effective for returns 
filed for taxable years ending after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                   TITLE IV--MISCELLANEOUS PROVISIONS

          A. Restructure New York Liberty Zone Tax Incentives

(Sec. 301 of the Senate amendment)

                              PRESENT LAW

In general
      Present law includes a number of incentives to invest in 
property located in the New York Liberty Zone (``NYLZ''), which 
is the area located on or south of Canal Street, East Broadway 
(east of its intersection with Canal Street), or Grand Street 
(east of its intersection with East Broadway) in the Borough of 
Manhattan in the City of New York, New York. These incentives 
were enacted following the terrorist attack in New York City on 
September 11, 2001.\323\
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    \323\ In addition to the NYLZ provisions described above, other 
NYLZ incentives are provided: (1) $8 billion of tax-exempt private 
activity bond financing for certain nonresidential real property, 
residential rental property and public utility property is authorized 
to be issued after March 9, 2002, and before January 1, 2010; and (2) 
$9 billion of additional tax-exempt advance refunding bonds is 
available after March 9, 2002, and before January 1, 2006, with respect 
to certain State or local bonds outstanding on September 11, 2001.
---------------------------------------------------------------------------
Special depreciation allowance for qualified New York Liberty Zone 
        property
      Section 1400L(b) allows an additional first-year 
depreciation deduction equal to 30 percent of the adjusted 
basis of qualified NYLZ property.\324\ In order to qualify, 
property generally must be placed in service on or before 
December 31, 2006 (December 31, 2009 in the case of 
nonresidential real property and residential rental property).
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    \324\ The amount of the additional first-year depreciation 
deduction is not affected by a short taxable year.
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      The additional first-year depreciation deduction is 
allowed for both regular tax and alternative minimum tax 
purposes for the taxable year in which the property is placed 
in service. A taxpayer is allowed to elect out of the 
additional first-year depreciation for any class of property 
for any taxable year.
      In order for property to qualify for the additional 
first-year depreciation deduction, it must meet all of the 
following requirements. First, the property must be property to 
which the general rules of the Modified Accelerated Cost 
Recovery System (``MACRS'') \325\ apply with (1) an applicable 
recovery period of 20 years or less, (2) water utility property 
(as defined in section 168(e)(5)), (3) certain nonresidential 
real property and residential rental property, or (4) computer 
software other than computer software covered by section 197. A 
special rule precludes the additional first-year depreciation 
under this provision for (1) qualified NYLZ leasehold 
improvement property \326\ and (2) property eligible for the 
additional first-year depreciation deduction under section 
168(k) (i.e., property is eligible for only one 30 percent 
additional first-year depreciation). Second, substantially all 
of the use of such property must be in the NYLZ. Third, the 
original use of the property in the NYLZ must commence with the 
taxpayer on or after September 11, 2001. Finally, the property 
must be acquired by purchase\327\ by the taxpayer after 
September 10, 2001 and placed in service on or before December 
31, 2006. For qualifying nonresidential real property and 
residential rental property the property must be placed in 
service on or before December 31, 2009 in lieu of December 31, 
2006. Property will not qualify if a binding written contract 
for the acquisition of such property was in effect before 
September 11, 2001.\328\
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    \325\ A special rule precludes the additional first-year 
depreciation deduction for property that is required to be depreciated 
under the alternative depreciation system of MACRS.
    \326\ Qualified NYLZ leasehold improvement property is defined in 
another provision. Leasehold improvements that do not satisfy the 
requirements to be treated as ``qualified NYLZ leasehold improvement 
property'' maybe eligible for the 30 percent additional first-year 
depreciation deduction (assuming all other conditions are met).
    \327\ For purposes of this provision, purchase is defined as under 
section 179(d).
    \328\ Property is not precluded from qualifying for the additional 
first-year depreciation merely because a binding written contract to 
acquire a component of the property is in effect prior to September 11, 
2001.
---------------------------------------------------------------------------
      Nonresidential real property and residential rental 
property is eligible for the additional first-year depreciation 
only to the extent such property rehabilitates real property 
damaged, or replaces real property destroyed or condemned as a 
result of the terrorist attacks of September 11, 2001.
      Property that is manufactured, constructed, or produced 
by the taxpayer for use by the taxpayer qualifies for the 
additional first-year depreciation deduction if the taxpayer 
begins the manufacture, construction, or production of the 
property after September 10, 2001, and the property is placed 
in service on or before December 31, 2006 \329\ (and all other 
requirements are met). Property that is manufactured, 
constructed, or produced for the taxpayer by another person 
under a contract that is entered into prior to the manufacture, 
construction, or production of the property is considered to be 
manufactured, constructed, or produced by the taxpayer.
---------------------------------------------------------------------------
    \329\ December 31, 2009 with respect to qualified nonresidential 
real property and residential rental property.
---------------------------------------------------------------------------
Depreciation of New York Liberty Zone 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.\330\ This rule applies regardless of 
whether the lessor or the lessee places the leasehold 
improvements in service.\331\ 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 is placed in service.\332\
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    \330\ Sec. 168(i)(8). The Tax Reform Act of 1986 modified the 
Accelerated Cost Recovery System (``ACRS'') to institute MACRS. Prior 
to the adoption of ACRS by the Economic Recovery Tax Act of 1981, 
taxpayers were allowed to depreciate the various components of a 
building as separate assets with separate useful lives. The use of 
component depreciation was repealed upon the adoption of ACRS. The Tax 
Reform Act of 1986 also denied the use of component depreciation under 
MACRS.
    \331\ Former sections 168(f)(6) and 178 provided that, in certain 
circumstances, a lessee could recover the cost of leasehold 
improvements made over the remaining term of the lease. The Tax Reform 
Act of 1986 repealed these provisions.
    \332\ Secs. 168(b)(3), (c), (d)(2), and (i)(6). If the improvement 
is characterized as tangible personal property, ACRS or MACRS 
depreciation is calculated using the shorter recovery periods, 
accelerated methods, and conventions applicable to such property. The 
determination of whether improvements are characterized as tangible 
personal property or as nonresidential real property often depends on 
whether or not the improvements constitute a ``structural component'' 
of a building (as defined by Treas. Reg. sec. 1.48-1(e)(1)). See, e.g., 
Metro National Corp v. Commissioner, 52 TCM (CCH) 1440 (1987); King 
Radio Corp Inc. v. U.S., 486 F.2d 1091 (10th Cir. 1973); Mallinckrodt, 
Inc. v. Commissioner, 778 F.2d 402 (8th Cir. 1985) (with respect to 
various leasehold improvements).
---------------------------------------------------------------------------
      A special rule exists for qualified NYLZ leasehold 
improvement property, which is recovered over five years using 
the straight-line method. The term qualified NYLZ leasehold 
improvement property means property defined in section 
168(e)(6) that is acquired and placed in service after 
September 10, 2001, and before January 1, 2007 (and not subject 
to a binding contract on September 10, 2001), in the NYLZ. For 
purposes of the alternative depreciation system, the property 
is assigned a nine-year recovery period. A taxpayer may elect 
out of the 5-year (and 9-year) recovery period for qualified 
NYLZ leasehold improvement property.
Increased section 179 expensing for qualified New York Liberty Zone 
        property
      In lieu of depreciation, a taxpayer with a sufficiently 
small amount of annual investment may elect to deduct the cost 
of qualifying property. For taxable years beginning in 2003 
through 2007, a taxpayer may deduct up to $100,000 of the cost 
of qualifying property placed in service for the taxable year. 
In general, qualifying property for this purpose is defined as 
depreciable tangible personal property (and certain computer 
software) that is purchased for use in the active conduct of a 
trade or business. The $100,000 amount is reduced (but not 
below zero) by the amount by which the cost of qualifying 
property placed in service during the taxable year exceeds 
$400,000. The $100,000 and $400,000 amounts are indexed for 
inflation.
      For taxable years beginning in 2008 and thereafter, a 
taxpayer with a sufficiently small amount of annual investment 
may elect to deduct up to $25,000 of the cost of qualifying 
property placed in service for the taxable year. The $25,000 
amount is reduced (but not below zero) by the amount by which 
the cost of qualifying property placed in service during the 
taxable year exceeds $200,000. In general, qualifying property 
for this purpose is defined as depreciable tangible personal 
property that is purchased for use in the active conduct of a 
trade or business.
      The amount eligible to be expensed for a taxable year may 
not exceed the taxable income for a taxable year that is 
derived from the active conduct of a trade or business 
(determined without regard to this provision). Any amount that 
is not allowed as a deduction because of the taxable income 
limitation may be carried forward to succeeding taxable years 
(subject to similar limitations). No general business credit 
under section 38 is allowed with respect to any amount for 
which a deduction is allowed under section 179.
      The amount a taxpayer can deduct under section 179 is 
increased for qualifying property used in the NYLZ. 
Specifically, the maximum dollar amount that may be deducted 
under section 179 is increased by the lesser of (1) $35,000 or 
(2) the cost of qualifying property placed in service during 
the taxable year. This amount is in addition to the amount 
otherwise deductible under section 179.
      Qualifying property for purposes of the NYLZ provision 
means section 179 property \333\ purchased and placed in 
service by the taxpayer after September 10, 2001 and before 
January 1, 2007, where (1) substantially all of the use of such 
property is in the NYLZ in the active conduct of a trade or 
business by the taxpayer in the NYLZ, and (2) the original use 
of which in the NYLZ commences with the taxpayer after 
September 10, 2001.\334\
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    \333\ As defined in sec. 179(d)(1).
    \334\ See Rev. Proc. 2002-33, 2002-20 I.R.B. 963 (May 20, 2002), 
for procedures on claiming the increased section 179 expensing 
deduction by taxpayers who filed their tax returns before June 1, 2002.
---------------------------------------------------------------------------
      The phase-out range for the section 179 deduction 
attributable to NYLZ property is applied by taking into account 
only 50 percent of the cost of NYLZ property that is section 
179 property. Also, no general business credit under section 38 
is allowed with respect to any amount for which a deduction is 
allowed under section 179.
      The provision is effective for property placed in service 
after September 10, 2001 and before January 1, 2007.
Extended replacement period for New York Liberty Zone involuntary 
        conversions
      A taxpayer may elect not to recognize gain with respect 
to property that is involuntarily converted if the taxpayer 
acquires within an applicable period (the ``replacement 
period'') property similar or related in service or use 
(section 1033). If the taxpayer does not replace the converted 
property with property similar or related in service or use, 
then gain generally is recognized. If the taxpayer elects to 
apply the rules of section 1033, gain on the converted property 
is recognized only to the extent that the amount realized on 
the conversion exceeds the cost of the replacement property. In 
general, the replacement period begins with the date of the 
disposition of the converted property and ends two years after 
the close of the first taxable year in which any part of the 
gain upon conversion is realized.\335\ The replacement period 
is extended to three years if the converted property is real 
property held for the productive use in a trade or business or 
for investment.\336\
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    \335\ Section 1033(a)(2)(B).
    \336\ Section 1033(g)(4).
---------------------------------------------------------------------------
      The replacement period is extended to five years with 
respect to property that was involuntarily converted within the 
NYLZ as a result of the terrorist attacks that occurred on 
September 11, 2001. However, the five-year period is available 
only if substantially all of the use of the replacement 
property is in New York City. In all other cases, the present-
law replacement period rules continue to apply.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Repeal of certain NYLZ incentives
      The provision repeals the four NYLZ incentives relating 
to the additional first-year depreciation allowance of 30 
percent, the five-year depreciation of leasehold improvements, 
the additional section 179 expensing, and the extended 
replacement period for involuntary conversions.\337\
---------------------------------------------------------------------------
    \337\ The provision does not change the present-law rules relating 
to certain NYLZ private activity bond financing and additional advance 
refunding bonds.
---------------------------------------------------------------------------
Creation of New York Liberty Zone tax credits
      The provision provides a credit against tax imposed 
(other than taxes of section 3111(a), 3403, or subtitle D) paid 
or incurred by any governmental unit of the State of New York 
and the City of New York equal to the lesser of (1) the total 
expenditures during such year by such governmental unit for 
qualifying projects, or (2) the amount allocated to such 
governmental unit for such calendar year.
      Qualifying projects means any transportation 
infrastructure project, including highways, mass transit 
systems, railroads, airports, ports, and waterways, in or 
connecting with the New York Liberty Zone, which is designated 
as a qualifying project jointly by the Governor of the State of 
New York and the Mayor of the City of New York.
      The Governor of the State of New York and the Mayor of 
the City of New York shall jointly allocate to a governmental 
unit the amount of expenditures which may be taken into account 
for purposes of the credit for any calendar year in the credit 
period with respect to a qualifying project. The aggregate 
limit that may be allocated for all calendar years in the 
credit period is two billion dollars. The annual limit for any 
calendar year in the credit period shall not exceed the sum of 
200 million dollars plus the aggregate amount authorized to be 
allocated for all preceding calendar years in the credit period 
which was not allocated. The credit period is the ten-year 
period beginning on January 1, 2006.
      If, at the close of the credit period, the aggregate 
amounts allocated are less than the 2 billion dollar aggregate 
limit, the Governor of the State of New York and the Mayor of 
the City of New York may jointly allocate, for any calendar 
year following the credit period, for expenditures with respect 
to qualifying projects, amounts that in sum for all years 
following the credit period would equal such shortfall.
      Under the provision, any expenditure for a qualifying 
project taken into account for purposes of the credit shall be 
considered State and local funds for the purpose of any Federal 
program.
Effective date
      The provision is effective on the date of enactment, with 
an exception for property subject to a written binding contract 
in effect on the date of enactment which is placed in service 
prior to the original sunset dates under present law. The 
extended replacement period for involuntarily converted 
property ends on the earlier of (1) the date of enactment or 
(2) the last day of the five-year period specified in the Jobs 
Creation and Worker Assistance Act of 2002 (``JCWAA'').\338\
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    \338\ Pub. L. No. 107-147, sec. 301 (2002).
---------------------------------------------------------------------------

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

    B. Modification of S Corporation Passive Investment Income Rules

(Sec. 302 of the Senate amendment and secs. 1362 and 1375 of the Code)

                              PRESENT LAW

      An S corporation is subject to corporate-level tax, at 
the highest corporate tax rate, on its excess net passive 
income if the corporation has (1) accumulated earnings and 
profits at the close of the taxable year and (2) gross receipts 
more than 25 percent of which are passive investment income.
      Excess net passive income is the net passive income for a 
taxable year multiplied by a fraction, the numerator of which 
is the amount of passive investment income in excess of 25 
percent of gross receipts and the denominator of which is the 
passive investment income for the year. Net passive income is 
defined as passive investment income reduced by the allowable 
deductions that are directly connected with the production of 
that income. Passive investment income generally means gross 
receipts derived from royalties, rents, dividends, interest, 
annuities, and sales or exchanges of stock or securities (to 
the extent of gains). Passive investment income generally does 
not include interest on accounts receivable, gross receipts 
that are derived directly from the active and regular conduct 
of a lending or finance business, gross receipts from certain 
liquidations, or gain or loss from any section 1256 contract 
(or related property) of an options or commodities dealer.
      In addition, an S corporation election is terminated 
whenever the S corporation has accumulated earnings and profits 
at the close of each of three consecutive taxable years and has 
gross receipts for each of those years more than 25 percent of 
which are passive investment income.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment increases the 25-percent threshold 
to 60 percent; eliminates gains from the sale or exchange of 
stock or securities from the definition of passive investment 
income; and eliminates the rule terminating an S election by 
reason of having excess passive investment income for three 
consecutive taxable years.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2006, and before October 1, 2009.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the Senate 
amendment provision.

   C. Capital Expenditure Limitation for Qualified Small Issue Bonds

(Sec. 303 of the Senate amendment and sec. 144 of the Code)

                              PRESENT LAW

      Qualified small-issue bonds are tax-exempt State and 
local government bonds used to finance private business 
manufacturing facilities (including certain directly related 
and ancillary facilities) or the acquisition of land and 
equipment by certain farmers. In both instances, these bonds 
are subject to limits on the amount of financing that may be 
provided, both for a single borrowing and in the aggregate. In 
general, no more than $1 million of small-issue bond financing 
may be outstanding at any time for property of a business 
(including related parties) located in the same municipality or 
county. Generally, this $1 million limit may be increased to 
$10 million if all other capital expenditures of the business 
in the same municipality or county are counted toward the limit 
over a six-year period that begins three years before the issue 
date of the bonds and ends three years after such date. 
Outstanding aggregate borrowing is limited to $40 million per 
borrower (including related parties) regardless of where the 
property is located.
      For bonds issued after September 30, 2009, the Code 
permits up to $10 million of capital expenditures to be 
disregarded, in effect increasing from $10 million to $20 
million the maximum allowable amount of total capital 
expenditures by an eligible business in the same municipality 
or county.\339\ However, no more than $10 million of bond 
financing may be outstanding at any time for property of an 
eligible business (including related parties) located in the 
same municipality or county. Other limits (e.g., the $40 
million per borrower limit) also continue to apply.
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    \339\ Sec. 144(a)(4)(G) as added by sec. 340(a) of the American 
Jobs Creation Act of 2004, Pub. L. No. 108-357 (2004).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision accelerates the application of the $20 
million capital expenditure limitation from bonds issued after 
September 30, 2009, to bonds issued after December 31, 2006.
      Effective date.--The provision is effective on the date 
of enactment for bonds issued after December 31, 2006.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment 
provision.

                   D. Premiums for Mortgage Insurance

(Sec. 304 of the Senate amendment and secs. 163(h) and 6050H of the 
        Code)

                              PRESENT LAW

      Present law provides that qualified residence interest is 
deductible notwithstanding the general rule that personal 
interest is nondeductible (sec. 163(h)).
      Qualified residence interest is interest on acquisition 
indebtedness and home equity indebtedness with respect to a 
principal and a second residence of the taxpayer. The maximum 
amount of home equity indebtedness is $100,000. The maximum 
amount of acquisition indebtedness is $1 million. Acquisition 
indebtedness means debt that is incurred in acquiring 
constructing, or substantially improving a qualified residence 
of the taxpayer, and that is secured by the residence. Home 
equity indebtedness is debt (other than acquisition 
indebtedness) that is secured by the taxpayer's principal or 
second residence, to the extent the aggregate amount of such 
debt does not exceed the difference between the total 
acquisition indebtedness with respect to the residence, and the 
fair market value of the residence.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provision provides that premiums 
paid or accrued for qualified mortgage insurance by a taxpayer 
during the taxable year in connection with acquisition 
indebtedness on a qualified residence of the taxpayer are 
treated as interest that is qualified residence interest and 
thus deductible. The amount allowable as a deduction under the 
provision is phased out ratably by 10 percent for each $1,000 
by which the taxpayer's adjusted gross income exceeds $100,000 
($500 and $50,000, respectively, in the case of a married 
individual filing a separate return). Thus, the deduction is 
not allowed if the taxpayer's adjusted gross income exceeds 
$110,000 ($55,000 in the case of married individual filing a 
separate return).
      For this purpose, qualified mortgage insurance means 
mortgage insurance provided by the Veterans Administration, the 
Federal Housing Administration, or the Rural Housing 
Administration, and private mortgage insurance (defined in 
section 2 of the Homeowners Protection Act of 1998 as in effect 
on the date of enactment of the Senate amendment provision).
      Amounts paid for qualified mortgage insurance that are 
properly allocable to periods after the close of the taxable 
year are treated as paid in the period to which they are 
allocated. No deduction is allowed for the unamortized balance 
if the mortgage is paid before its term (except in the case of 
qualified mortgage insurance provided by the Department of 
Veterans Affairs or Rural Housing Administration).
      Reporting rules apply under the provision.
      Effective date.--The Senate amendment provision is 
effective for amounts paid or accrued in taxable years 
beginning after December 31, 2006, and ending before January 1, 
2008, and properly allocable to that period, with respect to 
mortgage insurance contracts issued after December 31, 2006.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

    E. Sense of the Senate on Use of No-Bid Contracting by Federal 
                      Emergency Management Agency

(Sec. 305 of the Senate amendment)

                              PRESENT LAW

      Present law does not provide for the special rules 
contemplated in the Sense of the Senate provision described 
below.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate Amendment provision provides that it is the 
sense of the Senate that the Federal Emergency Management 
Agency should (1) rebid certain contracts entered into 
following Hurricane Katrina for which competing bids were not 
solicited; (2) implement its planned competitive contracting 
strategy and, in carrying out that strategy, prioritize local 
and small disadvantaged businesses in contracting and 
subcontracting; and (3) immediately after awarding any 
contract, make public the dollar amount of the contract and 
whether competing bids were solicited.
      Effective date.--The Senate amendment provision is 
effective upon enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

               F. Sense of Congress Regarding Doha Round

(Sec. 306 of the Senate amendment)

                              PRESENT LAW

      Present law does not provide a sense of Congress 
regarding the Doha Round of trade negotiations.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provision provides that it is the 
sense of Congress that the United States should not be a 
signatory to an agreement or protocol with respect to the Doha 
Development Round of the World Trade Organization (WTO) 
negotiations or any other bilateral or multilateral trade 
negotiations if the agreement or protocol (1) adopts any 
provision to lessen the effectiveness of domestic and 
international disciplines on unfair trade or safeguard 
provisions or (2) would lessen in any manner the ability of the 
United States to enforce rigorously its trade laws, including 
the antidumping, countervailing duty, and safeguard laws. The 
provision also provides that it is the sense of Congress that 
(1) the United States trade laws and international rules 
appropriately serve the public interest by offsetting injurious 
unfair trade, and that further balancing modifications or other 
similar provisions are unnecessary and would add to the 
complexity and difficulty of achieving relief against injurious 
unfair trade practices, and (2) the United States should ensure 
that any new agreement relating to international disciplines on 
unfair trade or safeguard provisions fully rectifies and 
corrects decisions by WTO dispute settlement panels or the 
Appellate Body that have unjustifiably and negatively impacted, 
or threaten to negatively impact, United States law or 
practice, including a law or practice with respect to foreign 
dumping or subsidization.
      Effective date.--The Senate amendment provision is 
effective upon enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

G. Treatment of Certain Stock Option Plans Under Nonqualified Deferred 
                           Compensation Rules

(Sec. 308 of the Senate amendment)

                              PRESENT LAW

      Amounts deferred under a nonqualified deferred 
compensation plan for all taxable years are currently 
includible in gross income to the extent not subject to a 
substantial risk of forfeiture and not previously included in 
gross income, unless certain requirements are satisfied.\340\ 
For example, distributions from a nonqualified deferred 
compensation plan may be allowed only upon certain times and 
events. Rules also apply for the timing of elections. If the 
requirements are not satisfied, in addition to current income 
inclusion, interest at the underpayment rate plus one 
percentage point is imposed on the underpayments that would 
have occurred had the compensation been includible in income 
when first deferred, or if later, when not subject to a 
substantial risk of forfeiture. The amount required to be 
included in income is also subject to a 20-percent additional 
tax.
---------------------------------------------------------------------------
    \340\ Section 409A.
---------------------------------------------------------------------------
      The rules governing the tax treatment of nonqualified 
deferred compensation generally apply to stock options granted 
to employees. However, exceptions apply to incentive stock 
options and options granted under employee stock purchase 
plans.\341\
---------------------------------------------------------------------------
    \341\ Sections 422 and 423, respectively.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the Senate amendment, the Secretary of the Treasury 
is directed to modify the regulations relating to nonqualified 
deferred compensation to extend to applicable foreign option 
plans the exceptions for incentive stock options and options 
granted under employee stock purchase plans. The exception for 
applicable foreign option plans is subject to such terms and 
conditions as may be prescribed in the regulations.
      An applicable foreign option plan means a plan that (1) 
provides for the issuance of employee stock options; (2) is 
established under the laws of a foreign jurisdiction; and (3) 
under such laws or the terms of the plan (or both), is subject 
to requirements substantially similar to the requirements 
applicable to incentive stock options and options granted under 
employee stock purchase plans.
      For this purpose, a foreign option plan is not treated as 
subject to requirements substantially similar to the 
requirements applicable to incentive stock options and options 
granted under employee stock purchase plans unless the foreign 
option plan: (1) is required to cover substantially all 
employees; (2) in the case of an option under an employee stock 
purchase plan, is required to provide an option price of not 
less than the lesser of not less than 80 percent of the fair 
market value of the stock at the time the option is granted or 
an amount which, under the terms of the option, cannot be less 
than 80 percent of the fair market value of the stock at the 
time the option is exercised; (3) is required to provide 
coverage of individuals who, but for the exception under the 
provision, would be subject to tax under the nonqualified 
deferred compensation rules with respect to the plan; and (4) 
meets such other requirements as prescribed in regulations 
issued under the provision.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

    H. Sense of the Senate Regarding the Dedication of Excess Funds

(Sec. 309 of the Senate amendment)

                              PRESENT LAW

      Present law does not provide a sense of the Senate 
regarding the dedication of Treasury revenues that exceed 
amounts specified in the reconciliation instructions for this 
bill.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that it is the sense of the 
Senate that any Federal revenue increases resulting from the 
Senate amendment and exceeding the amounts specified in 
applicable reconciliation instructions are to be dedicated to 
the Low-Income Home Energy Assistance Program. The amount so 
dedicated is not to exceed by more than $2.9 billion the 
funding level established for the program for fiscal year 2005.
      Effective date.--The Senate amendment provision is 
effective upon enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

  I. Modification of Treatment of Loans to Qualified Continuing Care 
                               Facilities

(Sec. 310 of the Senate amendment and sec. 7872(g) of the Code)

                              PRESENT LAW

      Present law provides generally that certain loans that 
bear interest at a below-market rate are treated as loans 
bearing interest at the market rate, accompanied by imputed 
payments characterized in accordance with the substance of the 
transaction (for example, as a gift, compensation, a dividend, 
or interest).\342\
---------------------------------------------------------------------------
    \342\ Sec. 7872.
---------------------------------------------------------------------------
      An exception to this imputation rule is provided for any 
calendar year for a below-market loan made by a lender to a 
qualified continuing care facility pursuant to a continuing 
care contract, if the lender or the lender's spouse attains age 
65 before the close of the calendar year.\343\
---------------------------------------------------------------------------
    \343\ Sec. 7872(g).
---------------------------------------------------------------------------
      The exception applies only to the extent the aggregate 
outstanding loans by the lender (and spouse) to any qualified 
continuing care facility do not exceed $163,300 (for 
2006).\344\
---------------------------------------------------------------------------
    \344\ Rev. Rul. 2005-75, 2005-49 I.R.B. 1073.
---------------------------------------------------------------------------
      For this purpose, a continuing care contract means a 
written contract between an individual and a qualified 
continuing care facility under which: (1) the individual or the 
individual's spouse may use a qualified continuing care 
facility for their life or lives; (2) the individual or the 
individual's spouse will first reside in a separate, 
independent living unit with additional facilities outside such 
unit for the providing of meals and other personal care and 
will not require long-term nursing care, and then will be 
provided long-term and skilled nursing care as the health of 
the individual or the individual's spouse requires; and (3) no 
additional substantial payment is required if the individual or 
the individual's spouse requires increased personal care 
services or long-term and skilled nursing care.
      For this purpose, a qualified continuing care facility 
means one or more facilities that are designed to provide 
services under continuing care contracts, and substantially all 
of the residents of which are covered by continuing care 
contracts. A facility is not treated as a qualified continuing 
care facility unless substantially all facilities that are used 
to provide services required to be provided under a continuing 
care contract are owned or operated by the borrower. For these 
purposes, a nursing home is not a qualified continuing care 
facility.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provision modifies the present-law 
exception under section 7872(g) relating to loans to continuing 
care facilities by eliminating the dollar cap on aggregate 
outstanding loans and making other modifications.
      The Senate amendment provision provides an exception to 
the imputation rule of section 7872 for any calendar year for 
any below-market loan owed by a facility which on the last day 
of the year is a qualified continuing care facility, if the 
loan was made pursuant to a continuing care contract and if the 
lender or the lender's spouse attains age 62 before the close 
of the year.
      For this purpose, a continuing care contract means a 
written contract between an individual and a qualified 
continuing care facility under which: (1) the individual or the 
individual's spouse may use a qualified continuing care 
facility for their life or lives; (2) the individual or the 
individual's spouse will be provided with housing in an 
independent living unit (which has additional available 
facilities outside such unit for the provision of meals and 
other personal care), an assisted living facility or nursing 
facility, as is available in the continuing care facility, as 
appropriate for the health of the individual or the 
individual's spouse; and (3) the individual or the individual's 
spouse will be provided assisted living or nursing care as the 
health of the individual or the individual's spouse requires, 
and as is available in the continuing care facility.
      For this purpose, a qualified continuing care facility 
means one or more facilities: (1) that are designed to provide 
services under continuing care contracts; (2) that include an 
independent living unit, plus an assisted living or nursing 
facility, or both; and (3) substantially all of the independent 
living unit residents of which are covered by continuing care 
contracts. For these purposes, a nursing home is not a 
qualified continuing care facility.
      Effective date.--The provision is effective for loans 
made after December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment 
provision, with modifications. The conference agreement 
provision provides that a continuing care contract is a written 
contract between an individual and a qualified continuing care 
facility under which: (1) the individual or the individual's 
spouse may use a qualified continuing care facility for their 
life or lives; (2) the individual or the individual's spouse 
will be provided with housing, as appropriate for the health of 
such individual or individual's spouse, (i) in an independent 
living unit (which has additional available facilities outside 
such unit for the provision of meals and other personal care), 
and (ii) in an assisted living facility or a nursing facility, 
as is available in the continuing care facility; and (3) the 
individual or the individual's spouse will be provided assisted 
living or nursing care as the health of the individual or the 
individual's spouse requires, and as is available in the 
continuing care facility. The Secretary is required to issue 
guidance that limits the term ``continuing care contract'' to 
contracts that provide only facilities, care, and services 
described in the preceding sentence.
      For purposes of defining the terms ``continuing care 
contract'' and ``qualified continuing care facility'' under the 
conference agreement provision, the term ``assisted living 
facility'' is intended to mean a facility at which assistance 
is provided (1) with activities of daily living (such as 
eating, toileting, transferring, bathing, dressing, and 
continence) or (2) in cases of cognitive impairment, to protect 
the health or safety of an individual. The term ``nursing 
facility'' is intended to mean a facility that offers care 
requiring the utilization of licensed nursing staff.
      Effective date.--The conference agreement provision is 
generally effective for calendar years beginning after December 
31, 2005, with respect to loans made before, on, or after such 
date. The conference agreement provision does not apply to any 
calendar year after 2010. Thus, the conference agreement 
provision does not apply with respect to interest imputed after 
December 31, 2010. After such date, the law as in effect prior 
to enactment applies.

 J. Exclusion of Gain on Sale of a Principal Residence by a Member of 
                       the Intelligence Community

(Sec. 311 of the Senate amendment and sec. 121 of the Code)

                              PRESENT LAW

      Under present law, an individual taxpayer may exclude up 
to $250,000 ($500,000 if married filing a joint return) of gain 
realized on the sale or exchange of a principal residence. To 
be eligible for the exclusion, the taxpayer must have owned and 
used the residence as a principal residence for at least two of 
the five years ending on the sale or exchange. A taxpayer who 
fails to meet these requirements by reason of a change of place 
of employment, health, or, to the extent provided under 
regulations, unforeseen circumstances is able to exclude an 
amount equal to the fraction of the $250,000 ($500,000 if 
married filing a joint return) that is equal to the fraction of 
the two years that the ownership and use requirements are met.
      Present law also contains special rules relating to 
members of the uniformed services or the Foreign Service of the 
United States. An individual may elect to suspend for a maximum 
of 10 years the five-year test period for ownership and use 
during certain absences due to service in the uniformed 
services or the Foreign Service of the United States. The 
uniformed services include: (1) the Armed Forces (the Army, 
Navy, Air Force, Marine Corps, and Coast Guard); (2) the 
commissioned corps of the National Oceanic and Atmospheric 
Administration; and (3) the commissioned corps of the Public 
Health Service. If the election is made, the five-year period 
ending on the date of the sale or exchange of a principal 
residence does not include any period up to five years during 
which the taxpayer or the taxpayer's spouse is on qualified 
official extended duty as a member of the uniformed services or 
in the Foreign Service of the United States. For these 
purposes, qualified official extended duty is any period of 
extended duty while serving at a place of duty at least 50 
miles away from the taxpayer's principal residence or under 
orders compelling residence in Government furnished quarters. 
Extended duty is defined as any period of duty pursuant to a 
call or order to such duty for a period in excess of 90 days or 
for an indefinite period. The election may be made with respect 
to only one property for a suspension period.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the provision, specified employees of the 
intelligence community may elect to suspend the running of the 
five-year test period during any period in which they are 
serving on extended duty. The term ``employee of the 
intelligence community'' means an employee of the Office of the 
Director of National Intelligence, the Central Intelligence 
Agency, the National Security Agency, the Defense Intelligence 
Agency, the National Geospatial-Intelligence Agency, or the 
National Reconnaissance Office. The term also includes 
employment with: (1) any other office within the Department of 
Defense for the collection of specialized national intelligence 
through reconnaissance programs; (2) any of the intelligence 
elements of the Army, the Navy, the Air Force, the Marine 
Corps, the Federal Bureau of Investigation, the Department of 
the Treasury, the Department of Energy, and the Coast Guard; 
(3) the Bureau of Intelligence and Research of the Department 
of State; and (4) the elements of the Department of Homeland 
Security concerned with the analyses of foreign intelligence 
information. To qualify, a specified employee must move from 
one duty station to another and at least one of such duty 
stations must be located outside of the Washington, D.C. and 
Baltimore metropolitan statistical areas, as defined by the 
Secretary of Commerce. As under present law, the five-year 
period may not be extended more than 10 years.
      Effective date.--The provision is effective for sales and 
exchanges after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

K. Sense of the Senate Regarding the Permanent Extension of EGTRRA and 
           JGTRRA Provisions Relating to the Child Tax Credit

(Sec. 312 of the Senate amendment)

                              PRESENT LAW

      Present law provides for the sunset of the child tax 
credit provisions under Economic Growth and Tax Relief 
Reconciliation Act of 2001 (``EGTRRA'') and Jobs and Growth Tax 
Relief Reconciliation Act of 2003 (``JGTRRA'').

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment includes a provision stating that it 
is the sense of the Senate that the conferees for the Tax 
Relief Act of 2006 should strive to permanently extend the 
amendments to the child tax credit made by EGTRRA and JGTRRA.
      Effective date.--The Senate amendment provision is 
effective on the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

        L. Partial Expensing for Advanced Mine Safety Equipment

(Sec. 313 of the Senate amendment)

                              PRESENT LAW

      A taxpayer generally must capitalize the cost of property 
used in a trade or business and recover such cost over time 
through annual deductions for depreciation or amortization. 
Tangible property generally is depreciated under the Modified 
Accelerated Cost Recovery System (``MACRS''), which determines 
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of 
various types of depreciable property (sec. 168).
      Personal property is classified under MACRS based on the 
property's class life unless a different classification is 
specifically provided in section 168. The class life applicable 
for personal property is the asset guideline period (midpoint 
class life as of January 1, 1986). Based on the property's 
classification, a recovery period is prescribed under MACRS. In 
general, there are six classes of recovery periods to which 
personal property can be assigned. For example, personal 
property that has a class life of four years or less has a 
recovery period of three years, whereas personal property with 
a class life greater than four years but less than 10 years has 
a recovery period of five years. The class lives and recovery 
periods for most property are contained in Revenue Procedure 
87-56.\345\
---------------------------------------------------------------------------
    \345\ 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-
22, 1988-1 C.B. 785).
---------------------------------------------------------------------------
      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. In general, 
qualifying property is defined as depreciable tangible personal 
property that is purchased for use in the active conduct of a 
trade or business. The $100,000 amount is reduced (but not 
below zero) by the amount by which the cost of qualifying 
property placed in service during the taxable year exceeds 
$400,000.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that the taxpayer may elect 
to treat 50 percent of the cost of any qualified advanced mine 
safety equipment property as a deduction in the taxable year in 
which the equipment is placed in service.
      Advanced mine safety equipment property means any of the 
following: (1) emergency communication technology or devices 
used to allow a miner to maintain constant communication with 
an individual who is not in the mine; (2) electronic 
identification and location devices that allow individuals not 
in the mine to track at all times the movements and location of 
miners working in or at the mine; (3) emergency oxygen-
generating, self-rescue devices that provide oxygen for at 
least 90 minutes; (4) pre-positioned supplies of oxygen 
providing each miner on a shift the ability to survive for at 
least 48 hours; and (5) comprehensive atmospheric monitoring 
systems that monitor the levels of carbon monoxide, methane and 
oxygen that are present in all areas of the mine and that can 
detect smoke in the case of a fire in a mine.
      To be treated as qualified advanced mine safety equipment 
property under the provision, the original use of the property 
must have commenced with the taxpayer, and the taxpayer must 
have placed the property in service after the date of 
enactment.
      The portion of the cost of any property with respect to 
which an expensing election under section 179 is made may not 
be taken into account for purposes of the 50-percent deduction 
allowed under this provision. For Federal tax purposes, the 
basis of property is reduced by the portion of its cost that is 
taken into account for purposes of the 50-percent deduction 
allowed under the provision.
      The provision requires the taxpayer to report information 
required by the Treasury Secretary with respect to the 
operation of mines of the taxpayer, in order for the deduction 
to be allowed for the taxable year.
      The provision includes a termination rule providing that 
it does not apply to property placed in service after the date 
that is three years after the date of enactment.
      Effective date.--The provision applies to costs paid or 
incurred after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                  M. Mine Rescue Team Training Credit

(Sec. 314 of the Senate amendment and new sec. 45N of the Code)

                              PRESENT LAW

      There is no present law credit for expenditures incurred 
by a taxpayer to train mine rescue workers. In general, a 
deduction is allowed for all ordinary and necessary expenses 
that are paid or incurred by the taxpayer during the taxable 
year in carrying on any trade or business.\346\ A taxpayer that 
employs individuals as miners in underground mines will 
generally be permitted to deduct as ordinary and necessary 
expenses the educational expenditures such taxpayer incurs to 
train its employees in the principles, procedures, and 
techniques of mine rescue, as well as the wages paid by the 
taxpayer for the time its employees were engaged in such 
training.
---------------------------------------------------------------------------
    \346\ Sec. 162(a).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that a taxpayer which is an 
eligible employer may claim a credit equal to the lesser of (1) 
20 percent of the amount paid or incurred by the taxpayer 
during the taxable year with respect to the training program 
costs of each qualified mine rescue team employee (including 
wages of the employee), or (2) $10,000.\347\ An eligible 
employer is any taxpayer which employs individuals as miners in 
underground mines in the United States. No deduction is allowed 
for the amount of the expenses otherwise deductible which is 
equal to the amount of the credit.
---------------------------------------------------------------------------
    \347\ The credit is part of the general business credit (sec. 38).
---------------------------------------------------------------------------
      A qualified mine rescue team employee is any full-time 
employee of the taxpayer who is a miner eligible for more than 
six months of a taxable year to serve as a mine rescue team 
member by virtue of either having completed the initial 20-hour 
course of instruction prescribed by the Mine Safety and Health 
Administration's Office of Educational Policy and Development, 
or receiving at least 40 hours of refresher training in such 
instruction.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2005, and before January 1, 
2009.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

  N. Funding for Veterans Health Care and Disability Compensation and 
                  Hospital Infrastructure for Veterans

(Sec. 315 of the Senate amendment)

                              PRESENT LAW

      Within the U.S. Department of Veterans Affairs, the 
Veterans Health Administration provides a broad spectrum of 
medical, surgical, and rehabilitative care to veterans. The 
Veteran Benefits Administration provides services to veterans, 
including services related to compensation and pensions.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment authorizes the appropriation of 
funds for the Department of Veterans Affairs for the Veterans 
Health Administration for Medical Care as well as the Veterans 
Benefits Administration for Compensation and Pensions for 
fiscal years 2006 through 2010 in the amounts listed below. The 
amounts authorized are in addition to any other amounts 
authorized for these Administrations under any other provision 
of law.

------------------------------------------------------------------------
                                     Veterans health   Veterans benefits
            Fiscal year               administration     administration
------------------------------------------------------------------------
2006..............................       $900,000,000     $2,300,000,000
2007..............................      1,300,000,000      2,700,000,000
2008..............................      1,500,000,000      3,000,000,000
2009..............................      1,600,000,000      3,000,000,000
2010..............................      1,600,000,000      3,000,000,000
------------------------------------------------------------------------

      The Senate amendment also establishes the Veterans 
Hospital Improvement Fund, with an initial balance of 
$1,000,000,000, to be administered by the Secretary of Veterans 
Affairs. The funds are to be used for improvements of health 
facilities treating veterans.
      Effective date.--The Senate amendment is effective upon 
the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

O. Sense of the Senate Regarding Protecting Middle-Class Families From 
                      the Alternative Minimum Tax

(Sec. 316 of the Senate amendment)

                              PRESENT LAW

      Present law imposes an 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 an exemption amount. AMTI is the 
individual's taxable income adjusted to take account of 
specified preferences and adjustments.
      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, and dividends 
received by an individual from domestic corporations and 
qualified foreign corporations are taxed at the same rates that 
apply to capital gains. 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, and dividends 
received by an individual are taxed as ordinary income at rates 
of up to 35 percent.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that it is the sense of the 
Senate that protecting middle-class families from the 
alternative minimum tax should be a higher priority for 
Congress in 2006 than extending a tax cut that does not expire 
until the end of 2008.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                   TITLE V--REVENUE OFFSET PROVISIONS

             A. Provisions Designed to Curtail Tax Shelters

1. Understatement of taxpayer's liability by income tax return preparer 
        (Sec. 401 of the Senate amendment and sec. 6694 of the Code)

                              PRESENT LAW

      An income tax return preparer who prepares a return with 
respect to which there is an understatement of tax that is due 
to an undisclosed position for which there was not a realistic 
possibility of being sustained on its merits, or a frivolous 
position, is liable for a penalty of $250, provided the 
preparer knew or reasonably should have known of the position. 
An income tax return preparer who prepares a return and engages 
in specified willful or reckless conduct with respect to 
preparing such a return is liable for a penalty of $1,000.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision alters the standards of conduct that must 
be met to avoid imposition of the first penalty described above 
by replacing the realistic possibility standard with a 
requirement that there be a reasonable belief that the tax 
treatment of the position was more likely than not the proper 
treatment. The provision also replaces the not-frivolous 
standard with the requirement that there be a reasonable basis 
for the tax treatment of the position, increases the present-
law $250 penalty to $1,000, and increases the present-law 
$1,000 penalty to $5,000.
      Effective date.--The provision is effective for documents 
prepared after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Frivolous tax submissions (Sec. 402 of the Senate amendment and sec. 
        6702 of the Code)

                              PRESENT LAW

      The Code provides that an individual who files a 
frivolous income tax return is subject to a penalty of $500 
imposed by the IRS (sec. 6702). The Code also permits the Tax 
Court \348\ to impose a penalty of up to $25,000 if a taxpayer 
has instituted or maintained proceedings primarily for delay or 
if the taxpayer's position in the proceeding is frivolous or 
groundless (sec. 6673(a)).
---------------------------------------------------------------------------
    \348\ Because in general the Tax Court is the only pre-payment 
forum available to taxpayers, it deals with most of the frivolous, 
groundless, or dilatory arguments raised in tax cases.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment modifies the IRS-imposed penalty by 
increasing the amount of the penalty to up to $5,000 and by 
applying it to all taxpayers and to all types of Federal taxes.
      The Senate amendment also modifies present law with 
respect to certain submissions that raise frivolous arguments 
or that are intended to delay or impede tax administration. The 
submissions to which the Senate amendment applies are requests 
for a collection due process hearing, installment agreements, 
offers-in-compromise, and taxpayer assistance orders. First, 
the Senate amendment permits the IRS to disregard such 
requests. Second, the Senate amendment permits the IRS to 
impose a penalty of up to $5,000 for such requests, unless the 
taxpayer withdraws the request after being given an opportunity 
to do so.
      The Senate amendment requires the IRS to publish a list 
of positions, arguments, requests, and submissions determined 
to be frivolous for purposes of these provisions.
      Effective date.--The Senate amendment applies to 
submissions made and issues raised after the date on which the 
Secretary first prescribes the required list of frivolous 
positions.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
3. Penalty for promoting abusive tax shelters (sec. 403 of the Senate 
        amendment and sec. 6700 of the Code)

                              PRESENT LAW

      A penalty is imposed on any person who organizes, assists 
in the organization of, or participates in the sale of any 
interest in, a partnership or other entity, any investment plan 
or arrangement, or any other plan or arrangement, if in 
connection with such activity the person makes or furnishes a 
qualifying false or fraudulent statement or a gross valuation 
overstatement.\349\ A qualified false or fraudulent statement 
is any statement with respect to the allowability of any 
deduction or credit, the excludability of any income, or the 
securing of any other tax benefit by reason of holding an 
interest in the entity or participating in the plan or 
arrangement which the person knows or has reason to know is 
false or fraudulent as to any material matter. A ``gross 
valuation overstatement'' means any statement as to the value 
of any property or services if the stated value exceeds 200 
percent of the correct valuation, and the value is directly 
related to the amount of any allowable income tax deduction or 
credit.
---------------------------------------------------------------------------
    \349\ Sec. 6700.
---------------------------------------------------------------------------
      In the case of a gross valuation overstatement, the 
amount of the penalty is $1,000 (or, if the person establishes 
that it is less, 100 percent of the gross income derived or to 
be derived by the person from such activity). A penalty 
attributable to a gross valuation misstatement can be waived on 
a showing that there was a reasonable basis for the valuation 
and it was made in good faith. In the case of any activity that 
involves a qualified false or fraudulent statement, the penalty 
amount is equal to 50 percent of the gross income derived by 
the person from the activity.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment modifies the penalty rate imposed on 
any person who organizes, assists in the organization of, or 
participates in the sale of any interest in, a partnership or 
other entity, any investment plan or arrangement, or any other 
plan or arrangement, if in connection with such activity the 
person makes or furnishes a qualifying false or fraudulent 
statement or a gross valuation overstatement. The penalty is 
equal to 100 percent of the gross income derived (or to be 
derived) from the activity. The penalty amount is calculated 
with respect to each instance of an activity subject to the 
penalty, each instance in which income was derived by the 
person or persons subject to the penalty, and each person who 
participated in an activity subject to the penalty.
      Under the Senate amendment, if more than one person is 
liable for the penalty, all such persons are jointly and 
severally liable for the penalty. In addition, the Senate 
amendment provides that the penalty, as well as amounts paid to 
settle or avoid the imposition of the penalty, is not 
deductible for tax purposes.
      Effective date.--The provision is effective for 
activities occurring after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
4. Penalty for aiding and abetting the understatement of tax liability 
        (sec. 404 of the Senate amendment and sec. 6701 of the Code)

                              PRESENT LAW

      A penalty is imposed on a person who: (1) aids or assists 
in, procures, or advises with respect to a tax return or other 
document; (2) knows (or has reason to believe) that such 
document will be used in connection with a material tax matter; 
and (3) knows that this would result in an understatement of 
tax of another person. In general, the amount of the penalty is 
$1,000. If the document relates to the tax return of a 
corporation, the amount of the penalty is $10,000.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment expands the scope of the penalty in 
several ways. First, it applies the penalty to aiding or 
assisting with respect to tax liability reflected in a tax 
return. Second, it applies the penalty to each instance of 
aiding or abetting. Third, it increases the amount of the 
penalty to a maximum of 100 percent of the gross income derived 
(or to be derived) from the aiding or abetting. Fourth, if more 
than one person is liable for the penalty, all such persons are 
jointly and severally liable for the penalty. Fifth, the 
penalty, as well as amounts paid to settle or avoid the 
imposition of the penalty, is not deductible for tax purposes.
      Effective date.--The provision is effective for 
activities occurring after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                     B. Economic Substance Doctrine

1. Clarification of the economic substance doctrine (sec. 411 of the 
        Senate amendment)

                              PRESENT LAW

In general
      The Code provides specific rules regarding the 
computation of taxable income, including the amount, timing, 
source, and character of items of income, gain, loss and 
deduction. These rules are designed to provide for the 
computation of taxable income in a manner that provides for a 
degree of specificity to both taxpayers and the government. 
Taxpayers generally may plan their transactions in reliance on 
these rules to determine the federal income tax consequences 
arising from the transactions.
      In addition to the statutory provisions, courts have 
developed several doctrines that can be applied to deny the tax 
benefits of tax motivated transactions, notwithstanding that 
the transaction may satisfy the literal requirements of a 
specific tax provision. The common-law doctrines are not 
entirely distinguishable, and their application to a given set 
of facts is often blurred by the courts and the IRS. Although 
these doctrines serve an important role in the administration 
of the tax system, invocation of these doctrines can be seen as 
at odds with an objective, ``rule-based'' system of taxation. 
Nonetheless, courts have applied the doctrines to deny tax 
benefits arising from certain transactions.\350\
---------------------------------------------------------------------------
    \350\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d 231 (3d 
Cir. 1998), aff'g 73 T.C.M. (CCH) 2189 (1997), cert. denied 526 U.S. 
1017 (1999).
---------------------------------------------------------------------------
      A common-law doctrine applied with increasing frequency 
is the ``economic substance'' doctrine. In general, this 
doctrine denies tax benefits arising from transactions that do 
not result in a meaningful change to the taxpayer's economic 
position other than a purported reduction in federal income 
tax.\351\
---------------------------------------------------------------------------
    \351\ Closely related doctrines also applied by the courts 
(sometimes interchangeable with the economic substance doctrine) 
include the ``sham transaction doctrine'' and the ``business purpose 
doctrine''. See, e.g., Knetsch v. United States, 364 U.S. 361 (1960) 
(denying interest deductions on a ``sham transaction'' whose only 
purpose was to create the deductions).
---------------------------------------------------------------------------
            Economic substance doctrine
      Courts generally deny claimed tax benefits if the 
transaction that gives rise to those benefits lacks economic 
substance independent of tax considerations--notwithstanding 
that the purported activity actually occurred. The tax court 
has described the doctrine as follows:

            The tax law . . . requires that the intended 
        transactions have economic substance separate and 
        distinct from economic benefit achieved solely by tax 
        reduction. The doctrine of economic substance becomes 
        applicable, and a judicial remedy is warranted, where a 
        taxpayer seeks to claim tax benefits, unintended by 
        Congress, by means of transactions that serve no 
        economic purpose other than tax savings.\352\
---------------------------------------------------------------------------
    \352\ ACM Partnership v. Commissioner, 73 T.C.M. at 2215.
---------------------------------------------------------------------------
            Business purpose doctrine
      Another common law doctrine that overlays and is often 
considered together with (if not part and parcel of) the 
economic substance doctrine is the business purpose doctrine. 
The business purpose test is a subjective inquiry into the 
motives of the taxpayer--that is, whether the taxpayer intended 
the transaction to serve some useful non-tax purpose. In making 
this determination, some courts have bifurcated a transaction 
in which independent activities with non-tax objectives have 
been combined with an unrelated item having only tax-avoidance 
objectives in order to disallow the tax benefits of the overall 
transaction.\353\
---------------------------------------------------------------------------
    \353\ ACM Partnership v. Commissioner, 157 F.3d at 256 n.48.
---------------------------------------------------------------------------
Application by the courts
            Elements of the doctrine
      There is a lack of uniformity regarding the proper 
application of the economic substance doctrine.\354\ Some 
courts apply a conjunctive test that requires a taxpayer to 
establish the presence of both economic substance (i.e., the 
objective component) and business purpose (i.e., the subjective 
component) in order for the transaction to survive judicial 
scrutiny.\355\ A narrower approach used by some courts is to 
conclude that either a business purpose or economic substance 
is sufficient to respect the transaction).\356\ A third 
approach regards economic substance and business purpose as 
``simply more precise factors to consider'' in determining 
whether a transaction has any practical economic effects other 
than the creation of tax benefits.\357\
---------------------------------------------------------------------------
    \354\ ``The casebooks are glutted with [economic substance] tests. 
Many such tests proliferate because they give the comforting illusion 
of consistency and precision. They often obscure rather than clarify.'' 
Collins v. Commissioner, 857 F.2d 1383, 1386 (9th Cir. 1988).
    \355\ See, e.g., Pasternak v. Commissioner, 990 F.2d 893, 898 (6th 
Cir. 1993) (``The threshold question is whether the transaction has 
economic substance. If the answer is yes, the question becomes whether 
the taxpayer was motivated by profit to participate in the 
transaction.'').
    \356\ See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d 89, 
91-92 (4th Cir. 1985) (``To treat a transaction as a sham, the court 
must find that the taxpayer was motivated by no business purposes other 
than obtaining tax benefits in entering the transaction, and, second, 
that the transaction has no economic substance because no reasonable 
possibility of a profit exists.''); IES Industries v. United States, 
253 F.3d 350, 358 (8th Cir. 2001) (``In determining whether a 
transaction is a sham for tax purposes [under the Eighth Circuit test], 
a transaction will be characterized as a sham if it is not motivated by 
any economic purpose out of tax considerations (the business purpose 
test), and if it is without economic substance because no real 
potential for profit exists (the economic substance test).''). As noted 
earlier, the economic substance doctrine and the sham transaction 
doctrine are similar and sometimes are applied interchangeably. For a 
more detailed discussion of the sham transaction doctrine, see, e.g., 
Joint Committee on Taxation, Study of Present-Law Penalty and Interest 
Provisions as Required by Section 3801 of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (including Provisions Relating to 
Corporate Tax Shelters) (JCS-3-99) at 182.
    \357\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 247; 
James v. Commissioner, 899 F.2d 905, 908 (10th Cir. 1995); Sacks v. 
Commissioner, 69 F.3d 982, 985 (9th Cir. 1995) (``Instead, the 
consideration of business purpose and economic substance are simply 
more precise factors to consider . . . We have repeatedly and carefully 
noted that this formulation cannot be used as a `rigid two-step 
analysis'.'').
---------------------------------------------------------------------------
      Recently, the Court of Federal Claims questioned the 
continuing viability of the doctrine.\358\ The court also 
stated that ``the use of the `economic substance' doctrine to 
trump `mere compliance with the Code' would violate the 
separation of powers.'' \359\
---------------------------------------------------------------------------
    \358\ Coltec Industries, Inc. v. United States, 62 Fed. Cl. 716 
(2004) (slip opinion at 123-124). The court also found, however, that 
the doctrine was satisfied in that case. Id. at 128.
    \359\ Id. at 128.
---------------------------------------------------------------------------
            Nontax economic benefits
      There also is a lack of uniformity regarding the type of 
non-tax economic benefit a taxpayer must establish in order to 
satisfy economic substance. Several courts have denied tax 
benefits on the grounds that the subject transactions lacked 
profit potential.\360\ In addition, some courts have applied 
the economic substance doctrine to disallow tax benefits in 
transactions in which a taxpayer was exposed to risk and the 
transaction had a profit potential, but the court concluded 
that the economic risks and profit potential were insignificant 
when compared to the tax benefits.\361\ Under this analysis, 
the taxpayer's profit potential must be more than nominal. 
Conversely, other courts view the application of the economic 
substance doctrine as requiring an objective determination of 
whether a ``reasonable possibility of profit'' from the 
transaction existed apart from the tax benefits.\362\ In these 
cases, in assessing whether a reasonable possibility of profit 
exists, it is sufficient if there is a nominal amount of pre-
tax profit as measured against expected net tax benefits.
---------------------------------------------------------------------------
    \360\ See, e.g., Knetsch, 364 U.S. at 361; Goldstein v. 
Commissioner, 364 F.2d 734 (2d Cir. 1966) (holding that an 
unprofitable, leveraged acquisition of Treasury bills, and accompanying 
prepaid interest deduction, lacked economic substance).
    \361\ See, e.g., Goldstein v. Commissioner, 364 F.2d at 739-40 
(disallowing deduction even though taxpayer had a possibility of small 
gain or loss by owning Treasury bills); Sheldon v. Commissioner, 94 
T.C. 738, 768 (1990) (stating that ``potential for gain . . . is 
infinitesimally nominal and vastly insignificant when considered in 
comparison with the claimed deductions'').
    \362\ See, e.g., Rice's Toyota World v. Commissioner, 752 F.2d at 
94 (the economic substance inquiry requires an objective determination 
of whether a reasonable possibility of profit from the transaction 
existed apart from tax benefits); Compaq Computer Corp. v. 
Commissioner, 277 F.3d at 781 (applied the same test, citing Rice's 
Toyota World); IES Industries v. United States, 253 F.3d 350, 354 (8th 
Cir. 2001). s
---------------------------------------------------------------------------
            Financial accounting benefits
      In determining whether a taxpayer had a valid business 
purpose for entering into a transaction, at least one court has 
concluded that financial accounting benefits arising from tax 
savings do not qualify as a non-tax business purpose.\363\ 
However, based on court decisions that recognize the importance 
of financial accounting treatment, taxpayers have asserted that 
financial accounting benefits arising from tax savings can 
satisfy the business purpose test.\364\
---------------------------------------------------------------------------
    \363\ See, American Electric Power, Inc. v. U.S., 136 F. Supp. 2d 
762, 791-92 (S.D. Ohio 2001); aff'd 326 F.3d.737 (6th Cir. 2003).
    \364\ See, e.g., Joint Committee on Taxation, Report of 
Investigation of Enron Corporation and Related Entities Regarding 
Federal Tax and Compensation Issues, and Policy Recommendations (JSC-3-
03) February, 2003 (``Enron Report''), Volume III at C-93, 289. Enron 
Corporation relied on Frank Lyon Co. v. United States, 435 U.S. 561, 
577-78 (1978), and Newman v. Commissioner, 902 F.2d 159, 163 (2d Cir. 
1990) to argue that financial accounting benefits arising from tax 
savings constitutes a good business purpose.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provision clarifies and enhances the 
application of the economic substance doctrine. Under the 
provision, in a case in which a court determines that the 
economic substance doctrine is relevant to a transaction (or a 
series of transactions), such transaction (or series of 
transactions) has economic substance (and thus satisfies the 
economic substance doctrine) only if the taxpayer establishes 
that (1) the transaction changes in a meaningful way (apart 
from Federal income tax consequences) the taxpayer's economic 
position, and (2) the taxpayer has a substantial non-tax 
purpose for entering into such transaction and the transaction 
is a reasonable means of accomplishing such purpose.\365\
---------------------------------------------------------------------------
    \365\ If the tax benefits are clearly contemplated and expected by 
the language and purpose of the relevant authority, it is not intended 
that such tax benefits be disallowed if the only reason for such 
disallowance is that the transaction fails the economic substance 
doctrine as defined in this provision.
---------------------------------------------------------------------------
      The provision does not change current law standards used 
by courts in determining when to utilize an economic substance 
analysis.\366\ Also, the provision does not alter the court's 
ability to aggregate, disaggregate or otherwise recharacterize 
a transaction when applying the doctrine.\367\ The provision 
provides a uniform definition of economic substance, but does 
not alter the flexibility of the courts in other respects.
---------------------------------------------------------------------------
    \366\ See, e.g., Treas. Reg. sec. 1.269-2, stating that 
characteristic of circumstances in which a deduction otherwise allowed 
will be disallowed are those in which the effect of the deduction, 
credit, or other allowance would be to distort the liability of the 
particular taxpayer when the essential nature of the transaction or 
situation is examined in the light of the basic purpose or plan which 
the deduction, credit, or other allowance was designed by the Congress 
to effectuate.
    \367\ See, e.g., Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613 
(1938) (``A given result at the end of a straight path is not made a 
different result because reached by following a devious path.'').
---------------------------------------------------------------------------
Conjunctive analysis
      The provision clarifies that the economic substance 
doctrine involves a conjunctive analysis--there must be an 
objective inquiry regarding the effects of the transaction on 
the taxpayer's economic position, as well as a subjective 
inquiry regarding the taxpayer's motives for engaging in the 
transaction. Under the provision, a transaction must satisfy 
both tests--i.e., it must change in a meaningful way (apart 
from Federal income tax consequences) the taxpayer's economic 
position, and the taxpayer must have a substantial non-tax 
purpose for entering into such transaction (and the transaction 
is a reasonable means of accomplishing such purpose)--in order 
to satisfy the economic substance doctrine. This clarification 
eliminates the disparity that exists among the circuits 
regarding the application of the doctrine, and modifies its 
application in those circuits in which either a change in 
economic position or a non-tax business purpose (without having 
both) is sufficient to satisfy the economic substance doctrine.
Non-tax business purpose
      Under the provision, a taxpayer's non-tax purpose for 
entering into a transaction (the second prong in the analysis) 
must be ``substantial,'' and the transaction must be ``a 
reasonable means'' of accomplishing such purpose. Under this 
formulation, the non-tax purpose for the transaction must bear 
a reasonable relationship to the taxpayer's normal business 
operations or investment activities.\368\
---------------------------------------------------------------------------
    \368\ See, e.g., Treas. Reg. sec. 1.269-2(b) (stating that a 
distortion of tax liability indicating the principal purpose of tax 
evasion or avoidance might be evidenced by the fact that ``the 
transaction was not undertaken for reasons germane to the conduct of 
the business of the taxpayer''). Similarly, in ACM Partnership v. 
Commissioner, 73 T.C.M. (CCH) 2189 (1997), the court stated:
    ``Key to [the determination of whether a transaction has economic 
substance] is that the transaction must be rationally related to a 
useful nontax purpose that is plausible in light of the taxpayer's 
conduct and useful in light of the taxpayer's economic situation and 
intentions. Both the utility of the stated purpose and the rationality 
of the means chosen to effectuate it must be evaluated in accordance 
with commercial practices in the relevant industry. A rational 
relationship between purpose and means ordinarily will not be found 
unless there was a reasonable expectation that the nontax benefits 
would be at least commensurate with the transaction costs.'' [citations 
omitted]
    See also Martin McMahon Jr., Economic Substance, Purposive 
Activity, and Corporate Tax Shelters, 94 Tax Notes 1017, 1023 (Feb. 25, 
2002) (advocates ``confining the most rigorous application of business 
purpose, economic substance, and purposive activity tests to 
transactions outside the ordinary course of the taxpayer's business--
those transactions that do not appear to contribute to any business 
activity or objective that the taxpayer may have had apart from tax 
planning but are merely loss generators.''); Mark P. Gergen, The Common 
Knowledge of Tax Abuse, 54 SMU L. Rev. 131, 140 (Winter 2001) (``The 
message is that you can pick up tax gold if you find it in the street 
while going about your business, but you cannot go hunting for it.'').
---------------------------------------------------------------------------
      In determining whether a taxpayer has a substantial non-
tax business purpose, an objective of achieving a favorable 
accounting treatment for financial reporting purposes will not 
be treated as having a substantial non-tax purpose.\369\ 
Furthermore, a transaction that is expected to increase 
financial accounting income as a result of generating tax 
deductions or losses without a corresponding financial 
accounting charge (i.e., a permanent book-tax difference) \370\ 
should not be considered to have a substantial non-tax purpose 
unless a substantial non-tax purpose exists apart from the 
financial accounting benefits.\371\
---------------------------------------------------------------------------
    \369\ However, if the tax benefits are clearly contemplated and 
expected by the language and purpose of the relevant authority, such 
tax benefits should not be disallowed solely because the transaction 
results in a favorable accounting treatment. An example is the repealed 
foreign sales corporation rules.
    \370\ This includes tax deductions or losses that are anticipated 
to be recognized in a period subsequent to the period the financial 
accounting benefit is recognized. For example, FAS 109 in some cases 
permits the recognition of financial accounting benefits prior to the 
period in which the tax benefits are recognized for income tax 
purposes.
    \371\ Claiming that a financial accounting benefit constitutes a 
substantial non-tax purpose fails to consider the origin of the 
accounting benefit (i.e., reduction of taxes) and significantly 
diminishes the purpose for having a substantial non-tax purpose 
requirement. See, e.g., American Electric Power, Inc. v. U.S., 136 F. 
Supp. 2d 762, 791-92 (S.D. Ohio, 2001) (``AEP's intended use of the 
cash flows generated by the [corporate-owned life insurance] plan is 
irrelevant to the subjective prong of the economic substance analysis. 
If a legitimate business purpose for the use of the tax savings `were 
sufficient to breathe substance into a transaction whose only purpose 
was to reduce taxes, [then] every sham tax-shelter device might 
succeed,' '') (citing Winn-Dixie v. Commissioner, 113 T.C. 254, 287 
(1999)); aff'd 326 F3d 737 (6th Cir. 2003).
---------------------------------------------------------------------------
      By requiring that a transaction be a ``reasonable means'' 
of accomplishing its non-tax purpose, the provision reiterates 
the present-law ability of the courts to bifurcate a 
transaction in which independent activities with non-tax 
objectives are combined with an unrelated item having only tax-
avoidance objectives in order to disallow the tax benefits of 
the overall transaction.\372\
---------------------------------------------------------------------------
    \372\ See, e.g., ACM Partnership v. Commissioner, 157 F.3d at 256 
n.48.
---------------------------------------------------------------------------
Profit potential
      Under the provision, a taxpayer may rely on factors other 
than profit potential to demonstrate that a transaction results 
in a meaningful change in the taxpayer's economic position; the 
provision merely sets forth a minimum threshold of profit 
potential if that test is relied on to demonstrate a meaningful 
change in economic position. If a taxpayer relies on a profit 
potential, however, the present value of the reasonably 
expected pre-tax profit must be substantial in relation to the 
present value of the expected net tax benefits that would be 
allowed if the transaction were respected.\373\ Moreover, the 
profit potential must exceed a risk-free rate of return. In 
addition, in determining pre-tax profit, fees and other 
transaction expenses and foreign taxes are treated as expenses.
---------------------------------------------------------------------------
    \373\ Thus, a ``reasonable possibility of profit'' will not be 
sufficient to establish that a transaction has economic substance.
---------------------------------------------------------------------------
      In applying the profit potential test to a lessor of 
tangible property, depreciation, applicable tax credits (such 
as the rehabilitation tax credit and the low income housing tax 
credit), and any other deduction as provided in guidance by the 
Secretary are not taken into account in measuring tax benefits.
Transactions with tax-indifferent parties
      The provision also provides special rules for 
transactions with tax-indifferent parties. For this purpose, a 
tax-indifferent party means any person or entity not subject to 
Federal income tax, or any person to whom an item would have no 
substantial impact on its income tax liability. Under these 
rules, the form of a financing transaction will not be 
respected if the present value of the tax deductions to be 
claimed is substantially in excess of the present value of the 
anticipated economic returns to the lender. Also, the form of a 
transaction with a tax-indifferent party will not be respected 
if it results in an allocation of income or gain to the tax-
indifferent party in excess of the tax-indifferent party's 
economic gain or income or if the transaction results in the 
shifting of basis on account of overstating the income or gain 
of the tax-indifferent party.
Other rules
      The Secretary may prescribe regulations which provide (1) 
exemptions from the application of the provision, and (2) other 
rules as may be necessary or appropriate to carry out the 
purposes of the provision.
      No inference is intended as to the proper application of 
the economic substance doctrine under present law. In addition, 
except with respect to the economic substance doctrine, the 
provision shall not be construed as altering or supplanting any 
other common law doctrine (including the sham transaction 
doctrine), and the provision shall be construed as being 
additive to any such other doctrine.
      Effective date.--The provision applies to transactions 
entered into after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Penalty for understatements attributable to transactions lacking 
        economic substance, etc. (sec. 412 of the Senate amendment)

                              PRESENT LAW

General accuracy-related penalty
      An accuracy-related penalty under section 6662 applies to 
the portion of any underpayment that is attributable to (1) 
negligence, (2) any substantial understatement of income tax, 
(3) any substantial valuation misstatement, (4) any substantial 
overstatement of pension liabilities, or (5) any substantial 
estate or gift tax valuation understatement. If the correct 
income tax liability exceeds that reported by the taxpayer by 
the greater of 10 percent of the correct tax or $5,000 (or, in 
the case of corporations, by the lesser of (a) 10 percent of 
the correct tax (or $10,000 if greater) or (b) $10 million), 
then a substantial understatement exists and a penalty may be 
imposed equal to 20 percent of the underpayment of tax 
attributable to the understatement.\374\ Except in the case of 
tax shelters,\375\ the amount of any understatement is reduced 
by any portion attributable to an item if (1) the treatment of 
the item is supported by substantial authority, or (2) facts 
relevant to the tax treatment of the item were adequately 
disclosed and there was a reasonable basis for its tax 
treatment. The Treasury Secretary may prescribe a list of 
positions which the Secretary believes do not meet the 
requirements for substantial authority under this provision.
---------------------------------------------------------------------------
    \374\ Sec. 6662.
    \375\ A tax shelter is defined for this purpose as a partnership or 
other entity, an investment plan or arrangement, or any other plan or 
arrangement if a significant purpose of such partnership, other entity, 
plan, or arrangement is the avoidance or evasion of Federal income tax. 
Sec. 6662(d)(2)(C).
---------------------------------------------------------------------------
      The section 6662 penalty generally is abated (even with 
respect to tax shelters) in cases in which the taxpayer can 
demonstrate that there was ``reasonable cause'' for the 
underpayment and that the taxpayer acted in good faith.\376\ 
The relevant regulations provide that reasonable cause exists 
where the taxpayer ``reasonably relies in good faith on an 
opinion based on a professional tax advisor's analysis of the 
pertinent facts and authorities [that] . . . unambiguously 
concludes that there is a greater than 50-percent likelihood 
that the tax treatment of the item will be upheld if 
challenged'' by the IRS.\377\
---------------------------------------------------------------------------
    \376\ Sec. 6664(c).
    \377\ Treas. Reg. sec. 1.6662-4(g)(4)(i)(B); Treas. Reg. sec. 
1.6664-4(c).
---------------------------------------------------------------------------
Listed transactions and reportable avoidance transactions
            In general
      A separate accuracy-related penalty under section 6662A 
applies to ``listed transactions'' and to other ``reportable 
transactions'' with a significant tax avoidance purpose 
(hereinafter referred to as a ``reportable avoidance 
transaction''). The penalty rate and defenses available to 
avoid the penalty vary depending on whether the transaction was 
adequately disclosed.
      Both listed transactions and reportable transactions are 
allowed to be described by the Treasury Department under 
section 6707A(c), which imposes a penalty for failure 
adequately to report such transactions under section 6011. A 
reportable transaction is defined as one that the Treasury 
Secretary determines is required to be disclosed because it is 
determined to have a potential for tax avoidance or 
evasion.\378\ A listed transaction is defined as a reportable 
transaction which is the same as, or substantially similar to, 
a transaction specifically identified by the Secretary as a tax 
avoidance transaction for purposes of the reporting disclosure 
requirements.\379\
---------------------------------------------------------------------------
    \378\ Sec. 6707A(c)(1).
    \379\ Sec. 6707A(c)(2).
---------------------------------------------------------------------------
            Disclosed transactions
      In general, a 20-percent accuracy-related penalty is 
imposed on any understatement attributable to an adequately 
disclosed listed transaction or reportable avoidance 
transaction.\380\ The only exception to the penalty is if the 
taxpayer satisfies a more stringent reasonable cause and good 
faith exception (hereinafter referred to as the ``strengthened 
reasonable cause exception''), which is described below. The 
strengthened reasonable cause exception is available only if 
the relevant facts affecting the tax treatment are adequately 
disclosed, there is or was substantial authority for the 
claimed tax treatment, and the taxpayer reasonably believed 
that the claimed tax treatment was more likely than not the 
proper treatment.
---------------------------------------------------------------------------
    \380\ Sec. 6662A(a).
---------------------------------------------------------------------------
            Undisclosed transactions
      If the taxpayer does not adequately disclose the 
transaction, the strengthened reasonable cause exception is not 
available (i.e., a strict-liability penalty generally applies), 
and the taxpayer is subject to an increased penalty equal to 30 
percent of the understatement.\381\ However, a taxpayer will be 
treated as having adequately disclosed a transaction for this 
purpose if the IRS Commissioner has separately rescinded the 
separate penalty under section 6707A for failure to disclose a 
reportable transaction.\382\ The IRS Commissioner is authorized 
to do this only if the failure does not relate to a listed 
transaction and only if rescinding the penalty would promote 
compliance and effective tax administration.\383\
---------------------------------------------------------------------------
    \381\ Sec. 6662A(c).
    \382\ Sec. 6664(d).
    \383\ Sec. 6707A(d).
---------------------------------------------------------------------------
      A public entity that is required to pay a penalty for an 
undisclosed listed or reportable transaction must disclose the 
imposition of the penalty in reports to the SEC for such 
periods as the Secretary shall specify. The disclosure to the 
SEC applies without regard to whether the taxpayer determines 
the amount of the penalty to be material to the reports in 
which the penalty must appear; and any failure to disclose such 
penalty in the reports is treated as a failure to disclose a 
listed transaction. A taxpayer must disclose a penalty in 
reports to the SEC once the taxpayer has exhausted its 
administrative and judicial remedies with respect to the 
penalty (or if earlier, when paid).\384\
---------------------------------------------------------------------------
    \384\ Sec. 6707A(e).
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            Determination of the understatement amount
      The penalty is applied to the amount of any 
understatement attributable to the listed or reportable 
avoidance transaction without regard to other items on the tax 
return. For purposes of this provision, the amount of the 
understatement is determined as the sum of: (1) the product of 
the highest corporate or individual tax rate (as appropriate) 
and the increase in taxable income resulting from the 
difference between the taxpayer's treatment of the item and the 
proper treatment of the item (without regard to other items on 
the tax return); \385\ and (2) the amount of any decrease in 
the aggregate amount of credits which results from a difference 
between the taxpayer's treatment of an item and the proper tax 
treatment of such item.
---------------------------------------------------------------------------
    \385\ For this purpose, any reduction in the excess of deductions 
allowed for the taxable year over gross income for such year, and any 
reduction in the amount of capital losses which would (without regard 
to section 1211) be allowed for such year, shall be treated as an 
increase in taxable income. Sec. 6662A(b).
---------------------------------------------------------------------------
      Except as provided in regulations, a taxpayer's treatment 
of an item shall not take into account any amendment or 
supplement to a return if the amendment or supplement is filed 
after the earlier of when the taxpayer is first contacted 
regarding an examination of the return or such other date as 
specified by the Secretary.\386\
---------------------------------------------------------------------------
    \386\ Sec. 6662A(e)(3).
---------------------------------------------------------------------------
            Strengthened reasonable cause exception
      A penalty is not imposed under the provision with respect 
to any portion of an understatement if it is shown that there 
was reasonable cause for such portion and the taxpayer acted in 
good faith. Such a showing requires: (1) adequate disclosure of 
the facts affecting the transaction in accordance with the 
regulations under section 6011; \387\ (2) that there is or was 
substantial authority for such treatment; and (3) that the 
taxpayer reasonably believed that such treatment was more 
likely than not the proper treatment. For this purpose, a 
taxpayer will be treated as having a reasonable belief with 
respect to the tax treatment of an item only if such belief: 
(1) is based on the facts and law that exist at the time the 
tax return (that includes the item) is filed; and (2) relates 
solely to the taxpayer's chances of success on the merits and 
does not take into account the possibility that (a) a return 
will not be audited, (b) the treatment will not be raised on 
audit, or (c) the treatment will be resolved through settlement 
if raised.\388\
---------------------------------------------------------------------------
    \387\ See the previous discussion regarding the penalty for failing 
to disclose a reportable transaction.
    \388\ Sec. 6664(d).
---------------------------------------------------------------------------
      A taxpayer may (but is not required to) rely on an 
opinion of a tax advisor in establishing its reasonable belief 
with respect to the tax treatment of the item. However, a 
taxpayer may not rely on an opinion of a tax advisor for this 
purpose if the opinion (1) is provided by a ``disqualified tax 
advisor'' or (2) is a ``disqualified opinion.''
            Disqualified tax advisor
      A disqualified tax advisor is any advisor who: (1) is a 
material advisor \389\ and who participates in the 
organization, management, promotion or sale of the transaction 
or is related (within the meaning of section 267(b) or 
707(b)(1)) to any person who so participates; (2) is 
compensated directly or indirectly \390\ by a material advisor 
with respect to the transaction; (3) has a fee arrangement with 
respect to the transaction that is contingent on all or part of 
the intended tax benefits from the transaction being sustained; 
or (4) as determined under regulations prescribed by the 
Secretary, has a disqualifying financial interest with respect 
to the transaction.
---------------------------------------------------------------------------
    \389\ The term ``material advisor'' means any person who provides 
any material aid, assistance, or advice with respect to organizing, 
managing, promoting, selling, implementing, or carrying out any 
reportable transaction, and who derives gross income in excess of 
$50,000 in the case of a reportable transaction substantially all of 
the tax benefits from which are provided to natural persons ($250,000 
in any other case). Sec. 6111(b)(1).
    \390\ This situation could arise, for example, when an advisor has 
an arrangement or understanding (oral or written) with an organizer, 
manager, or promoter of a reportable transaction that such party will 
recommend or refer potential participants to the advisor for an opinion 
regarding the tax treatment of the transaction.
---------------------------------------------------------------------------
      A material advisor is considered as participating in the 
``organization'' of a transaction if the advisor performs acts 
relating to the development of the transaction. This may 
include, for example, preparing documents: (1) establishing a 
structure used in connection with the transaction (such as a 
partnership agreement); (2) describing the transaction (such as 
an offering memorandum or other statement describing the 
transaction); or (3) relating to the registration of the 
transaction with any federal, state or local government 
body.\391\ Participation in the ``management'' of a transaction 
means involvement in the decision-making process regarding any 
business activity with respect to the transaction. 
Participation in the ``promotion or sale'' of a transaction 
means involvement in the marketing or solicitation of the 
transaction to others. Thus, an advisor who provides 
information about the transaction to a potential participant is 
involved in the promotion or sale of a transaction, as is any 
advisor who recommends the transaction to a potential 
participant.
---------------------------------------------------------------------------
    \391\ An advisor should not be treated as participating in the 
organization of a transaction if the advisor's only involvement with 
respect to the organization of the transaction is the rendering of an 
opinion regarding the tax consequences of such transaction. However, 
such an advisor may be a ``disqualified tax advisor'' with respect to 
the transaction if the advisor participates in the management, 
promotion or sale of the transaction (or if the advisor is compensated 
by a material advisor, has a fee arrangement that is contingent on the 
tax benefits of the transaction, or as determined by the Secretary, has 
a continuing financial interest with respect to the transaction).
---------------------------------------------------------------------------
            Disqualified opinion
      An opinion may not be relied upon if the opinion: (1) is 
based on unreasonable factual or legal assumptions (including 
assumptions as to future events); (2) unreasonably relies upon 
representations, statements, findings or agreements of the 
taxpayer or any other person; (3) does not identify and 
consider all relevant facts; or (4) fails to meet any other 
requirement prescribed by the Secretary.
            Coordination with other penalties
      To the extent a penalty on an understatement is imposed 
under section 6662A, that same amount of understatement is not 
also subject to the accuracy-related penalty under section 
6662(a) or to the valuation misstatement penalties under 
section 6662(e) or 6662(h). However, such amount of 
understatement is included for purposes of determining whether 
any understatement (as defined in sec. 6662(d)(2)) is a 
substantial understatement as defined under section 6662(d)(1) 
and for purposes of identifying an underpayment under the 
section 6663 fraud penalty.
      The penalty imposed under section 6662A does not apply to 
any portion of an understatement to which a fraud penalty is 
applied under section 6663.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provision imposes a new, stronger 
penalty for an understatement attributable to any transaction 
that lacks economic substance (referred to in the statute as a 
``non-economic substance transaction understatement'').\392\ 
The penalty rate is 40 percent (reduced to 20 percent if the 
taxpayer adequately discloses the relevant facts in accordance 
with regulations prescribed under section 6011). No exceptions 
(including the reasonable cause or rescission rules) to the 
penalty are available (i.e., the penalty is a strict-liability 
penalty).
---------------------------------------------------------------------------
    \392\ Thus, unlike the present-law accuracy-related penalty under 
section 6662A (which applies only to listed and reportable avoidance 
transactions), the new penalty under the provision applies to any 
transaction that lacks economic substance.
---------------------------------------------------------------------------
      A ``non-economic substance transaction'' means any 
transaction if (1) the transaction lacks economic substance (as 
defined in the Senate amendment provision regarding the 
clarification of the economic substance doctrine),\393\ (2) the 
transaction was not respected under the rules relating to 
transactions with tax-indifferent parties (as described in the 
Senate amendment provision regarding the clarification of the 
economic substance doctrine),\394\ or (3) any similar rule of 
law. For this purpose, a similar rule of law would include, for 
example, an understatement attributable to a transaction that 
is determined to be a sham transaction.
---------------------------------------------------------------------------
    \393\ That Senate amendment provision generally provides that in 
any case in which a court determines that the economic substance 
doctrine is relevant, a transaction has economic substance only if: (1) 
the transaction changes in a meaningful way (apart from Federal income 
tax effects) the taxpayer's economic position, and (2) the taxpayer has 
a substantial non-tax purpose for entering into such transaction and 
the transaction is a reasonable means of accomplishing such purpose. 
Specific other rules also apply. See ``Explanation of Provision'' for 
the immediately preceding Senate amendment provision, ``Clarification 
of the economic substance doctrine.''
    \394\ That Senate amendment provision provides that the form of a 
transaction that involves a tax-indifferent party will not be respected 
in certain circumstances. See ``Explanation of Provision'' for the 
immediately preceding Senate amendment provision, ``Clarification of 
the economic substance doctrine.''
---------------------------------------------------------------------------
      For purposes of the bill, the calculation of an 
``understatement'' is made in the same manner as in the present 
law provision relating to accuracy-related penalties for listed 
and reportable avoidance transactions (sec. 6662A). Thus, the 
amount of the understatement under the provision would be 
determined as the sum of (1) the product of the highest 
corporate or individual tax rate (as appropriate) and the 
increase in taxable income resulting from the difference 
between the taxpayer's treatment of the item and the proper 
treatment of the item (without regard to other items on the tax 
return),\395\ and (2) the amount of any decrease in the 
aggregate amount of credits which results from a difference 
between the taxpayer's treatment of an item and the proper tax 
treatment of such item. In essence, the penalty will apply to 
the amount of any understatement attributable solely to a non-
economic substance transaction.
---------------------------------------------------------------------------
    \395\ For this purpose, any reduction in the excess of deductions 
allowed for the taxable year over gross income for such year, and any 
reduction in the amount of capital losses that would (without regard to 
section 1211) be allowed for such year, would be treated as an increase 
in taxable income.
---------------------------------------------------------------------------
      As in the case of the understatement penalty for 
reportable and listed transactions under present law section 
6662A(e)(3), except as provided in regulations, the taxpayer's 
treatment of an item will not take into account any amendment 
or supplement to a return if the amendment or supplement is 
filed after the earlier of the date the taxpayer is first 
contacted regarding an examination of such return or such other 
date as specified by the Secretary.
      As in the case of the understatement penalty for 
undisclosed reportable transactions under present law section 
6707A, a public entity that is required to pay a penalty under 
the provision (but in this case, regardless of whether the 
transaction was disclosed) must disclose the imposition of the 
penalty in reports to the SEC for such periods as the Secretary 
shall specify. The disclosure to the SEC applies without regard 
to whether the taxpayer determines the amount of the penalty to 
be material to the reports in which the penalty must appear, 
and any failure to disclose such penalty in the reports is 
treated as a failure to disclose a listed transaction. A 
taxpayer must disclose a penalty in reports to the SEC once the 
taxpayer has exhausted its administrative and judicial remedies 
with respect to the penalty (or if earlier, when paid).
      Regardless of whether the transaction was disclosed, once 
a penalty under the provision has been included in the first 
letter of proposed deficiency which allows the taxpayer an 
opportunity for administrative review in the IRS Office of 
Appeals, the penalty cannot be compromised for purposes of a 
settlement without approval of the Commissioner personally. 
Furthermore, the IRS is required to keep records summarizing 
the application of this penalty and providing a description of 
each penalty compromised under the provision and the reasons 
for the compromise.
      Any understatement on which a penalty is imposed under 
the provision will not be subject to the accuracy-related 
penalty under section 6662 or under 6662A (accuracy-related 
penalties for listed and reportable avoidance transactions). 
However, an understatement under the provision is taken into 
account for purposes of determining whether any understatement 
(as defined in sec. 6662(d)(2)) is a substantial understatement 
as defined under section 6662(d)(1). The penalty imposed under 
the provision will not apply to any portion of an 
understatement to which a fraud penalty is applied under 
section 6663.
      Effective date.--The provision applies to transactions 
entered into after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the Senate 
amendment provision.
3. Denial of deduction for interest on underpayments attributable to 
        noneconomic substance transactions (sec. 413 of the Senate 
        amendment and sec. 163(m) of the Code)

                              PRESENT LAW

      No deduction for interest is allowed for interest paid or 
accrued on any underpayment of tax which is attributable to the 
portion of any reportable transaction understatement with 
respect to which the relevant facts were not adequately 
disclosed.\396\ The Secretary of the Treasury is authorized to 
define reportable transactions for this purpose.\397\
---------------------------------------------------------------------------
    \396\ Sec. 163(m). Under section 6664(d)(2)(A), in such a case of 
nondisclosure, the taxpayer also is not entitled to the ``reasonable 
cause and good faith'' exception to the section 6662A penalty for a 
reportable transaction understatement.
    \397\ See the description of present law with respect to the 
immediately preceding Senate amendment provision, ``Penalty for 
understatements attributable to transactions lacking economic 
substance, etc.''
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provision extends the disallowance 
of interest deductions to interest paid or accrued on any 
underpayment of tax which is attributable to any noneconomic 
substance underpayment (whether or not disclosed).
      Effective date.--The provision applies to transactions 
after the date of enactment in taxable years ending after such 
date.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

   C. Improvements in Efficiency and Safeguards in Internal Revenue 
                          Service Collections

1. Waiver of user fee for installment agreements using automated 
        withdrawals (sec. 421 of the Senate amendment and sec. 6159 of 
        the Code)

                              PRESENT LAW

      The Code authorizes the IRS to enter into written 
agreements with any taxpayer under which the taxpayer is 
allowed to pay taxes owed, as well as interest and penalties, 
in installment payments if the IRS determines that doing so 
will facilitate collection of the amounts owed.\398\ An 
installment agreement does not reduce the amount of taxes, 
interest, or penalties owed. Generally, during the period 
installment payments are being made, other IRS enforcement 
actions (such as levies or seizures) with respect to the taxes 
included in that agreement are held in abeyance.
---------------------------------------------------------------------------
    \398\ Sec. 6159.
---------------------------------------------------------------------------
      The IRS charges a user fee if a request for an 
installment agreement is approved.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment waives the user fee for installment 
agreements in which the parties agree to the use of automated 
installment payments (such as automated debits from a bank 
account).
      Effective date.--The provision is effective with respect 
to agreements entered into on or after the date which is 180 
days after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Termination of installment agreements (sec. 422 of the Senate 
        amendment and sec. 6159 of the Code)

                              PRESENT LAW

      The Code authorizes the IRS to enter into written 
agreements with any taxpayer under which the taxpayer is 
allowed to pay taxes owed, as well as interest and penalties, 
in installment payments, if the IRS determines that doing so 
will facilitate collection of the amounts owed.\399\ An 
installment agreement does not reduce the amount of taxes, 
interest, or penalties owed. Generally, during the period 
installment payments are being made, other IRS enforcement 
actions (such as levies or seizures) with respect to the taxes 
included in that agreement are held in abeyance.
---------------------------------------------------------------------------
    \399\ Sec. 6159.
---------------------------------------------------------------------------
      Under present law, the IRS is permitted to terminate an 
installment agreement only if: (1) the taxpayer fails to pay an 
installment at the time the payment is due; (2) the taxpayer 
fails to pay any other tax liability at the time when such 
liability is due; (3) the taxpayer fails to provide a financial 
condition update as required by the IRS; (4) the taxpayer 
provides inadequate or incomplete information when applying for 
an installment agreement; (5) there has been a significant 
change in the financial condition of the taxpayer; or (6) the 
collection of the tax is in jeopardy.\400\
---------------------------------------------------------------------------
    \400\ Sec. 6159(b)(2), (3), and (4).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment grants the IRS authority to 
terminate installment agreement when a taxpayer fails to timely 
make a required Federal tax deposit or fails to timely file a 
tax return (including extensions). Under the provision, the IRS 
may terminate an installment agreement even if the taxpayer 
remained current with payments under the installment agreement.
      Effective date.--The provision is effective for failures 
occurring on or after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
3. Partial payments required with submissions of offers-in-compromise 
        (sec. 423 of the Senate amendment and sec. 7122 of the Code)

                              PRESENT LAW

      The IRS has the authority to compromise any civil or 
criminal case arising under the internal revenue laws.\401\ In 
general, taxpayers initiate this process by making an offer-in-
compromise, which is an offer by the taxpayer to settle an 
outstanding tax liability for less than the total amount due. 
The IRS currently imposes a user fee of $150 on most offers, 
payable upon submission of the offer to the IRS. Taxpayers may 
justify their offers on the basis of doubt as to collectibility 
or liability or on the basis of effective tax administration. 
In general, enforcement action is suspended during the period 
that the IRS evaluates an offer. In some instances, it may take 
the IRS 12 to 18 months to evaluate an offer.\402\ Taxpayers 
are permitted (but not required) to make a deposit with their 
offer; if the offer is rejected, the deposit is generally 
returned to the taxpayer. There are two general categories 
\403\ of offers-in-compromise, lump-sum offers and periodic 
payment offers. Taxpayers making lump-sum offers propose to 
make one lump-sum payment of a specified dollar amount in 
settlement of their outstanding liability. Taxpayers making 
periodic payment offers propose to make a series of payments 
over time (either short-term or long-term) in settlement of 
their outstanding liability.
---------------------------------------------------------------------------
    \401\ Sec. 7122.
    \402\ Olsen v. United States, 326 F. Supp. 2d 184 (D. Mass. 2004).
    \403\ The IRS categorizes payment plans with more specificity, 
which is generally not significant for purposes of the provision. See 
Form 656, Offer in Compromise, page 6 of instruction booklet (revised 
July 2004).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision requires a taxpayer to make partial 
payments to the IRS while the taxpayer's offer is being 
considered by the IRS. For lump-sum offers, taxpayers must make 
a down payment of 20 percent of the amount of the offer with 
any application. For purposes of this provision, a lump-sum 
offer includes single payments as well as payments made in five 
or fewer installments. For periodic payment offers, the 
provision requires the taxpayer to comply with the taxpayer's 
own proposed payment schedule while the offer is being 
considered. Offers submitted to the IRS that do not comport 
with these payment requirements are returned to the taxpayer as 
unprocessable and immediate enforcement action is permitted. 
The provision eliminates the user fee requirement for offers 
submitted with the appropriate partial payment.
      The provision also provides that an offer is deemed 
accepted if the IRS does not make a decision with respect to 
the offer within two years from the date the offer was 
submitted.
      The Senate amendment authorizes the Secretary to issue 
regulations providing exceptions to the partial payment 
requirements in the case of offers from certain low-income 
taxpayers and offers based on doubt as to liability.
      Effective date.--The provision is effective for offers-
in-compromise submitted on and after the date which is 60 days 
after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment 
provision, with the following modifications. Under the 
conference agreement, any user fee imposed by the IRS for 
participation in the offer-in-compromise program must be 
submitted with the appropriate partial payment. The user fee is 
applied to the taxpayer's outstanding tax liability. In 
addition, under the conference agreement, offers submitted to 
the IRS that do not comport with the payment requirements may 
be returned to the taxpayer as unprocessable.

                         D. Penalties and Fines

1. Increase in criminal monetary penalty limitation for the 
        underpayment or overpayment of tax due to fraud (sec. 431 of 
        the Senate amendment and secs. 7201, 7203, and 7206 of the 
        Code)

                              PRESENT LAW

Attempt to evade or defeat tax
      In general, section 7201 imposes a criminal penalty on 
persons who willfully attempt to evade or defeat any tax 
imposed by the Code. Upon conviction, the Code provides that 
the penalty is up to $100,000 or imprisonment of not more than 
five years (or both). In the case of a corporation, the Code 
increases the monetary penalty to a maximum of $500,000.
Willful failure to file return, supply information, or pay tax
      In general, section 7203 imposes a criminal penalty on 
persons required to make estimated tax payments, pay taxes, 
keep records, or supply information under the Code who 
willfully fails to do so. Upon conviction, the Code provides 
that the penalty is up to $25,000 or imprisonment of not more 
than one year (or both). In the case of a corporation, the Code 
increases the monetary penalty to a maximum of $100,000.
Fraud and false statements
      In general, section 7206 imposes a criminal penalty on 
persons who make fraudulent or false statements under the Code. 
Upon conviction, the Code provides that the penalty is up to 
$100,000 or imprisonment of not more than three years (or 
both). In the case of a corporation, the Code increases the 
monetary penalty to a maximum of $500,000.
Uniform sentencing guidelines
      Under the uniform sentencing guidelines established by 18 
U.S.C. 3571, a defendant found guilty of a criminal offense is 
subject to a maximum fine that is the greatest of: (a) the 
amount specified in the underlying provision, (b) for a felony 
\404\ $250,000 for an individual or $500,000 for an 
organization, or (c) twice the gross gain if a person derives 
pecuniary gain from the offense. This Title 18 provision 
applies to all criminal provisions in the United States Code, 
including those in the Internal Revenue Code. For example, for 
an individual, the maximum fine under present law upon 
conviction of violating section 7206 is $250,000 or, if 
greater, twice the amount of gross gain from the offense.
---------------------------------------------------------------------------
    \404\ Section 7206 states that making fraudulent or false 
statements under the Code is a felony. In addition, this offense is a 
felony pursuant to the classification guidelines of 18 U.S.C. 
3559(a)(5).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

Attempt to evade or defeat tax
      The provision increases the criminal penalty under 
section 7201 of the Code for individuals to $500,000 and for 
corporations to $1,000,000. The provision increases the maximum 
prison sentence to ten years.
Willful failure to file return, supply information, or pay tax
      The provision increases the criminal penalty under 
section 7203 of the Code for individuals from $25,000 to 
$50,000 and, in the case of an ``aggravated failure to file'' 
(defined as a failure to file a return for a period of three or 
more consecutive taxable years if the aggregated tax liability 
for such period is at least $100,000), changes the crime from a 
misdemeanor to a felony and increases the maximum prison 
sentence to ten years.
Fraud and false statements
      The provision increases the criminal penalty for making 
fraudulent or false statements to $500,000 for individuals and 
$1,000,000 for corporations. The provision increases the 
maximum prison sentence for making fraudulent or false 
statements to five years. The provision provides that in no 
event shall the amount of the monetary penalty under the 
provision be less than the amount of the underpayment or 
overpayment attributable to fraud.
Effective date
      The provision is effective for actions and failures to 
act occurring after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Doubling of certain penalties, fines, and interest on underpayments 
        related to certain offshore financial arrangements (sec. 432 of 
        the Senate amendment)

                              PRESENT LAW

In general
      The Code contains numerous civil penalties, such as the 
delinquency, accuracy-related, fraud, and assessable penalties. 
These civil penalties are in addition to any interest that may 
be due as a result of an underpayment of tax. If all or any 
part of a tax is not paid when due, the Code imposes interest 
on the underpayment, which is assessed and collected in the 
same manner as the underlying tax and is subject to the 
respective statutes of limitations for assessment and 
collection.
Delinquency penalties
      Failure to file.--Under present law, a taxpayer who fails 
to file a tax return on a timely basis is generally subject to 
a penalty equal to 5 percent of the net amount of tax due for 
each month that the return is not filed, up to a maximum of 
five months or 25 percent. An exception from the penalty 
applies if the failure is due to reasonable cause. In the case 
of fraudulent failure to file, the penalty is increased to 15 
percent of the net amount of tax due for each month that the 
return is not filed, up to a maximum of five months or 75 
percent. The net amount of tax due is the excess of the amount 
of the tax required to be shown on the return over the amount 
of any tax paid on or before the due date prescribed for the 
payment of tax.
      Failure to pay.--Taxpayers who fail to pay their taxes 
are subject to a penalty of 0.5 percent per month on the unpaid 
amount, up to a maximum of 25 percent. If a penalty for failure 
to file and a penalty for failure to pay tax shown on a return 
both apply for the same month, the amount of the penalty for 
failure to file for such month is reduced by the amount of the 
penalty for failure to pay tax shown on a return. If an income 
tax return is filed more than 60 days after its due date, then 
the penalty for failure to pay tax shown on a return may not 
reduce the penalty for failure to file below the lesser of $100 
or 100 percent of the amount required to be shown on the 
return. For any month in which an installment payment agreement 
with the IRS is in effect, the rate of the penalty is half the 
usual rate (0.25 percent instead of 0.5 percent), provided that 
the taxpayer filed the tax return in a timely manner (including 
extensions).
      Failure to make timely deposits of tax.--The penalty for 
the failure to make timely deposits of tax consists of a four-
tiered structure in which the amount of the penalty varies with 
the length of time within which the taxpayer corrects the 
failure. A depositor is subject to a penalty equal to 2 percent 
of the amount of the underpayment if the failure is corrected 
on or before the date that is five days after the prescribed 
due date. A depositor is subject to a penalty equal to 5 
percent of the amount of the underpayment if the failure is 
corrected after the date that is five days after the prescribed 
due date but on or before the date that is 15 days after the 
prescribed due date. A depositor is subject to a penalty equal 
to 10 percent of the amount of the underpayment if the failure 
is corrected after the date that is 15 days after the due date 
but on or before the date that is 10 days after the date of the 
first delinquency notice to the taxpayer (under sec. 6303). 
Finally, a depositor is subject to a penalty equal to 15 
percent of the amount of the underpayment if the failure is not 
corrected on or before earlier of 10 days after the date of the 
first delinquency notice to the taxpayer and 10 days after the 
date on which notice and demand for immediate payment of tax is 
given in cases of jeopardy.
      An exception from the penalty applies if the failure is 
due to reasonable cause. In addition, the Secretary may waive 
the penalty for an inadvertent failure to deposit any tax by 
specified first-time depositors.
Accuracy-related penalties
      In general.--The accuracy-related penalties are imposed 
at a rate of 20 percent of the portion of any underpayment that 
is attributable, in relevant part, to (1) negligence, (2) any 
substantial understatement of income tax, (3) any substantial 
valuation misstatement, and (4) any reportable transaction 
understatement. The penalty for a substantial valuation 
misstatement is doubled for certain gross valuation 
misstatements. In the case of a reportable transaction 
understatement for which the transaction is not disclosed, the 
penalty rate is 30 percent. These penalties are coordinated 
with the fraud penalty. This statutory structure operates to 
eliminate any stacking of the penalties.
      No penalty is to be imposed if it is shown that there was 
reasonable cause for an underpayment and the taxpayer acted in 
good faith, and in the case of a reportable transaction 
understatement the relevant facts of the transaction have been 
disclosed, there is or was substantial authority for the 
taxpayer's treatment of such transaction, and the taxpayer 
reasonably believed that such treatment was more likely than 
not the proper treatment.
      Negligence or disregard for the rules or regulations.--If 
an underpayment of tax is attributable to negligence, the 
negligence penalty applies only to the portion of the 
underpayment that is attributable to negligence. Negligence 
means any failure to make a reasonable attempt to comply with 
the provisions of the Code. Disregard includes any careless, 
reckless, or intentional disregard of the rules or regulations.
      Substantial understatement of income tax.--Generally, an 
understatement is substantial if the understatement exceeds the 
greater of (1) 10 percent of the tax required to be shown on 
the return for the tax year, or (2) $5,000. In determining 
whether a substantial understatement exists, the amount of the 
understatement is reduced by any portion attributable to an 
item if (1) the treatment of the item on the return is or was 
supported by substantial authority, or (2) facts relevant to 
the tax treatment of the item were adequately disclosed on the 
return or on a statement attached to the return.
      Substantial valuation misstatement.--A penalty applies to 
the portion of an underpayment that is attributable to a 
substantial valuation misstatement. Generally, a substantial 
valuation misstatement exists if the value or adjusted basis of 
any property claimed on a return is 200 percent or more of the 
correct value or adjusted basis. The amount of the penalty for 
a substantial valuation misstatement is 20 percent of the 
amount of the underpayment if the value or adjusted basis 
claimed is 200 percent or more but less than 400 percent of the 
correct value or adjusted basis. If the value or adjusted basis 
claimed is 400 percent or more of the correct value or adjusted 
basis, then the overvaluation is a gross valuation 
misstatement.
      Reportable transaction understatement.--A penalty applies 
to any item that is attributable to any listed transaction, or 
to any reportable transaction (other than a listed transaction) 
if a significant purpose of such reportable transaction is tax 
avoidance or evasion.
Fraud penalty
      The fraud penalty is imposed at a rate of 75 percent of 
the portion of any underpayment that is attributable to fraud. 
The accuracy-related penalty does not apply to any portion of 
an underpayment on which the fraud penalty is imposed.
Assessable penalties
      In addition to the penalties described above, the Code 
imposes a number of additional penalties, including, for 
example, penalties for failure to file (or untimely filing of) 
information returns with respect to foreign trusts, and 
penalties for failure to disclose any required information with 
respect to a reportable transaction.
Interest provisions
      Taxpayers are required to pay interest to the IRS 
whenever there is an underpayment of tax. An underpayment of 
tax exists whenever the correct amount of tax is not paid by 
the last date prescribed for the payment of the tax. The last 
date prescribed for the payment of the income tax is the 
original due date of the return.
      Different interest rates are provided for the payment of 
interest depending upon the type of taxpayer, whether the 
interest relates to an underpayment or overpayment, and the 
size of the underpayment or overpayment. Interest on 
underpayments is compounded daily.
Offshore Voluntary Compliance Initiative
      In January 2003, Treasury announced the Offshore 
Voluntary Compliance Initiative (``OVCI'') to encourage the 
voluntary disclosure of previously unreported income placed by 
taxpayers in offshore accounts and accessed through credit card 
or other financial arrangements. A taxpayer had to comply with 
various requirements in order to participate in the OVCI, 
including sending a written request to participate in the 
program by April 15, 2003. This request had to include 
information about the taxpayer, the taxpayer's introduction to 
the credit card or other financial arrangements and the names 
of parties that promoted the transaction. A taxpayer entering 
into a closing agreement under the OVCI is not liable for the 
civil fraud penalty, the fraudulent failure to file penalty, or 
the civil information return penalties. Such a taxpayer is 
responsible for back taxes, interest, and certain accuracy-
related and delinquency penalties.\405\
---------------------------------------------------------------------------
    \405\ Rev. Proc. 2003-11, 2003-4 C.B. 311.
---------------------------------------------------------------------------
Voluntary disclosure policy
      A taxpayer's timely, voluntary disclosure of a 
substantial unreported tax liability has long been an important 
factor in deciding whether the taxpayer's case should 
ultimately be referred for criminal prosecution. The voluntary 
disclosure must be truthful, timely, and complete. The taxpayer 
must show a willingness to cooperate (as well as actual 
cooperation) with the IRS in determining the correct tax 
liability. The taxpayer must make good-faith arrangements with 
the IRS to pay in full the tax, interest, and any penalties 
determined by the IRS to be applicable. A voluntary disclosure 
does not guarantee immunity from prosecution. It creates no 
substantive or procedural rights for taxpayers.\406\ The IRS 
treats participation in the OVCI as a voluntary 
disclosure.\407\
---------------------------------------------------------------------------
    \406\ Internal Revenue News Release 2002-135, IR-2002-135 (December 
11, 2002).
    \407\ Rev. Proc. 2003-11, 2003-4 C.B. 311.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment doubles the amounts of civil 
penalties, interest, and fines related to taxpayers' 
underpayments of U.S. income tax liability through the direct 
or indirect use of certain offshore financial arrangements. The 
provision applies to taxpayers who did not (or do not) 
voluntarily disclose such arrangements through the OVCI or 
otherwise. Under the Senate amendment, the determination of 
whether any civil penalty is to be applied to such underpayment 
is made without regard to whether a return has been filed, 
whether there was reasonable cause for such underpayment, and 
whether the taxpayer acted in good faith.
      The proscribed financial arrangements include, but are 
not limited to, the use of certain foreign leasing corporations 
for providing domestic employee services,\408\ certain 
arrangements whereby the taxpayer may hold securities trading 
accounts through offshore banks or other financial 
intermediaries, certain arrangements whereby the taxpayer may 
access funds through the use of offshore credit, debit, or 
charge cards, and offshore annuities or trusts.
---------------------------------------------------------------------------
    \408\ These arrangements were described and classified as listed 
transactions in Notice 2003-22, 2003-1 C.B. 851.
---------------------------------------------------------------------------
      The Secretary of the Treasury is granted the authority to 
waive the application of the provision if the use of the 
offshore financial arrangements is incidental to the 
transaction and, in the case of a trade or business, such use 
is conducted in the ordinary course of the type of trade or 
business in which the taxpayer is engaged.
      Effective date.--The provision generally is effective 
with respect to a taxpayer's open tax years on or after the 
date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
3. Denial of deduction for certain fines, penalties, and other amounts 
        (sec. 433 of the Senate Amendment and sec. 162 of the Code)

                              PRESENT LAW

      Under present law, no deduction is allowed as a trade or 
business expense under section 162(a) for the payment of a fine 
or similar penalty to a government for the violation of any law 
(sec. 162(f)). The enactment of section 162(f) in 1969 codified 
existing case law that denied the deductibility of fines as 
ordinary and necessary business expenses on the grounds that 
``allowance of the deduction would frustrate sharply defined 
national or State policies proscribing the particular types of 
conduct evidenced by some governmental declaration thereof.'' 
\409\
---------------------------------------------------------------------------
    \409\ S. Rep. No. 91-552, 91st Cong, 1st Sess., 273-74 (1969), 
referring to Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30 
(1958).
---------------------------------------------------------------------------
      Treasury regulation section 1.162-21(b)(1) provides that 
a fine or similar penalty includes an amount: (1) paid pursuant 
to conviction or a plea of guilty or nolo contendere for a 
crime (felony or misdemeanor) in a criminal proceeding; (2) 
paid as a civil penalty imposed by Federal, State, or local 
law, including additions to tax and additional amounts and 
assessable penalties imposed by chapter 68 of the Code; (3) 
paid in settlement of the taxpayer's actual or potential 
liability for a fine or penalty (civil or criminal); or (4) 
forfeited as collateral posted in connection with a proceeding 
which could result in imposition of such a fine or penalty. 
Treasury regulation section 1.162-21(b)(2) provides, among 
other things, that compensatory damages (including damages 
under section 4A of the Clayton Act (15 U.S.C. 15a), as 
amended) paid to a government do not constitute a fine or 
penalty.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provision modifies the rules 
regarding the determination whether payments are nondeductible 
payments of fines or penalties under section 162(f). In 
particular, the provision generally provides that amounts paid 
or incurred (whether by suit, agreement, or otherwise) to, or 
at the direction of, a government in relation to the violation 
of any law or the investigation or inquiry into the potential 
violation of any law \410\ are nondeductible under any 
provision of the income tax provisions.\411\ The provision 
applies to deny a deduction for any such payments, including 
those where there is no admission of guilt or liability and 
those made for the purpose of avoiding further investigation or 
litigation. An exception applies to payments that the taxpayer 
establishes are either restitution (including remediation of 
property), or amounts required to come into compliance with any 
law that was violated or involved in the investigation or 
inquiry, and that are identified in the court order or 
settlement as restitution, remediation, or required to come 
into compliance.\412\ The IRS remains free to challenge the 
characterization of an amount so identified; however, no 
deduction is allowed unless the identification is made.\413\
---------------------------------------------------------------------------
    \410\ The provision does not affect amounts paid or incurred in 
performing routine audits or reviews such as annual audits that are 
required of all organizations or individuals in a similar business 
sector, or profession, as a requirement for being allowed to conduct 
business. However, if the government or regulator raised an issue of 
compliance and a payment is required in settlement of such issue, the 
provision would affect that payment.
    \411\ The provision provides that such amounts are nondeductible 
under chapter 1 of the Internal Revenue Code.
    \412\ The provision does not affect the treatment of antitrust 
payments made under section 4 of the Clayton Act, which continue to be 
governed by the provisions of section 162(g).
    \413\ If a settlement agreement does not specify a specific amount 
to be paid for the purpose of coming into compliance but instead simply 
requires the taxpayer to come into compliance, it is sufficient 
identification to so state. Amounts expended by the taxpayer for that 
purpose would then be considered identified. However, if an agreement 
specifies a specific dollar amount that must be paid or incurred, the 
amount would not be eligible to be deducted without a specification 
that it is for restitution (including remediation of property), or 
coming into compliance.
---------------------------------------------------------------------------
      An exception also applies to any amount paid or incurred 
as taxes due.\414\
---------------------------------------------------------------------------
    \414\ Thus, amounts paid or incurred as taxes due are not affected 
by the provision (e.g., State taxes that are otherwise deductible). The 
reference to taxes due is also intended to include interest with 
respect to such taxes (but not interest, if any, with respect to any 
penalties imposed with respect to such taxes).
---------------------------------------------------------------------------
      The provision is intended to apply only where a 
government (or other entity treated in a manner similar to a 
government under the amendment) is a complainant or 
investigator with respect to the violation or potential 
violation of any law.\415\
---------------------------------------------------------------------------
    \415\ Thus, for example, the provision would not apply to payments 
made by one private party to another in a lawsuit between private 
parties, merely because a judge or jury acting in the capacity as a 
court directs the payment to be made. The mere fact that a court enters 
a judgment or directs a result in a private dispute does not cause a 
payment to be made ``at the direction of a government'' for purposes of 
the provision.
---------------------------------------------------------------------------
      It is intended that a payment will be treated as 
restitution (including remediation of property) only if 
substantially all of the payment is required to be paid to the 
specific persons, or in relation to the specific property, 
actually harmed by the conduct of the taxpayer that resulted in 
the payment. Thus, a payment to or with respect to a class 
substantially broader than the specific persons or property 
that were actually harmed (e.g., to a class including similarly 
situated persons or property) does not qualify as restitution 
or included remediation of property.\416\ Restitution and 
included remediation of property is limited to the amount that 
bears a substantial quantitative relationship to the harm 
caused by the past conduct or actions of the taxpayer that 
resulted in the payment in question. If the party harmed is a 
government or other entity, then restitution and included 
remediation of property includes payment to such harmed 
government or entity, provided the payment bears a substantial 
quantitative relationship to the harm. However, restitution or 
included remediation of property does not include reimbursement 
of government investigative or litigation costs, or payments to 
whistleblowers.
---------------------------------------------------------------------------
    \416\ Similarly, a payment to a charitable organization benefiting 
a broader class than the persons or property actually harmed, or to be 
paid out without a substantial quantitative relationship to the harm 
caused, would not qualify as restitution. Under the provision, such a 
payment not deductible under section 162 would also not be deductible 
under section 170.
---------------------------------------------------------------------------
      It is intended that a payment will be treated as an 
amount required to come into compliance only if it directly 
corrects a violation with respect to a particular requirement 
of law that was under investigation. For example, if the law 
requires a particular emission standard to be met or particular 
machinery to be used, amounts required to be paid under a 
settlement agreement to meet the required standard or install 
the machinery are deductible to the extent otherwise allowed. 
Similarly, if the law requires certain practices and procedures 
to be followed and a settlement agreement requires the taxpayer 
to pay to establish such practices or procedures, such amounts 
would be deductible. However, amounts paid for other purposes 
not directly correcting a violation of law are not deductible. 
For example, amounts paid to bring other machinery that is 
already in compliance up to a standard higher than required by 
the law, or to create other benefits (such as a park or other 
action not previously required by law), are not deductible if 
required under a settlement agreement. Similarly, amounts paid 
to educate consumers or customers about the risks of doing 
business with the taxpayer or about the field in which the 
taxpayer does business generally, which education efforts are 
not specifically required under the law, are not deductible if 
required under a settlement agreement.
      The provision requires government agencies to report to 
the IRS and to the taxpayer the amount of each settlement 
agreement or order entered where the aggregate amount required 
to be paid or incurred to or at the direction of the government 
under such settlement agreements and orders with respect to the 
violation, investigation, or inquiry is least $600 (or such 
other amount as may be specified by the Secretary of the 
Treasury as necessary to ensure the efficient administration of 
the Internal Revenue laws). The reports must be made within 30 
days of the date the court order is issued or the settlement 
agreement is entered into, or such other time as may be 
required by Secretary. The report must separately identify any 
amounts that are restitution or remediation of property, or 
correction of noncompliance.\417\
---------------------------------------------------------------------------
    \417\ As in the case of the identification requirement, if the 
agreement does not specify a specific amount to be expended to come 
into compliance but simply requires that to occur, it is expected that 
the report may state simply that the taxpayer is required to come into 
compliance but no specific dollar amount has been specified for that 
purpose in the settlement agreement.
---------------------------------------------------------------------------
      The IRS is encouraged to require taxpayers to identify 
separately on their tax returns the amounts of any such 
settlements with respect to which reporting is required under 
the provision, including separate identification of the 
nondeductible amount and of any amount deductible as 
restitution, remediation, or required to correct 
noncompliance.\418\
---------------------------------------------------------------------------
    \418\ For example, the IRS might require such reporting as part of 
the schedule M-3, whether or not the particular amounts create a book-
tax difference.
---------------------------------------------------------------------------
      Amounts paid or incurred (whether by suit, agreement, or 
otherwise) to, or at the direction of, any self-regulatory 
entity that regulates a financial market or other market that 
is a qualified board or exchange under section 1256(g)(7), and 
that is authorized to impose sanctions (e.g., the National 
Association of Securities Dealers) are likewise subject to the 
provision if paid in relation to a violation, or investigation 
or inquiry into a potential violation, of any law (or any rule 
or other requirement of such entity). To the extent provided in 
regulations, amounts paid or incurred to, or at the direction 
of, any other nongovernmental entity that exercises self-
regulatory powers as part of performing an essential 
governmental function are similarly subject to the provision. 
The exception for payments that the taxpayer establishes are 
paid or incurred for restitution, remediation of property, or 
coming into compliance and that are identified as such in the 
order or settlement agreement likewise applies in these cases. 
The requirement of reporting to the IRS and the taxpayer also 
applies in these cases.
      No inference is intended as to the treatment of payments 
as nondeductible fines or penalties under present law. In 
particular, the provision is not intended to limit the scope of 
present-law section 162(f) or the regulations thereunder.
      Effective date.--The provision is effective for amounts 
paid or incurred on or after the date of enactment; however the 
provision does not apply to amounts paid or incurred under any 
binding order or agreement entered into before such date. Any 
order or agreement requiring court approval is not a binding 
order or agreement for this purpose unless such approval was 
obtained before the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not contain the Senate 
amendment provision.
4. Denial of deduction for punitive damages (sec. 434 of the Senate 
        amendment and sec. 162 of the Code)

                              PRESENT LAW

      In general, a deduction is allowed for all ordinary and 
necessary expenses that are paid or incurred by the taxpayer 
during the taxable year in carrying on any trade or 
business.\419\ However, no deduction is allowed for any payment 
that is made to an official of any governmental agency if the 
payment constitutes an illegal bribe or kickback or if the 
payment is to an official or employee of a foreign government 
and is illegal under Federal law.\420\ In addition, no 
deduction is allowed under present law for any fine or similar 
payment made to a government for violation of any law.\421\ 
Furthermore, no deduction is permitted for two-thirds of any 
damage payments made by a taxpayer who is convicted of a 
violation of the Clayton antitrust law or any related antitrust 
law.\422\
---------------------------------------------------------------------------
    \419\ Sec. 162(a).
    \420\ Sec. 162(c).
    \421\ Sec. 162(f).
    \422\ Sec. 162(g).
---------------------------------------------------------------------------
      In general, gross income does not include amounts 
received on account of personal physical injuries and physical 
sickness.\423\ However, this exclusion does not apply to 
punitive damages.\424\
---------------------------------------------------------------------------
    \423\ Sec. 104(a).
    \424\ Sec. 104(a)(2).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision denies any deduction for punitive damages 
that are paid or incurred by the taxpayer as a result of a 
judgment or in settlement of a claim. If the liability for 
punitive damages is covered by insurance, any such punitive 
damages paid by the insurer are included in gross income of the 
insured person and the insurer is required to report such 
amounts to both the insured person and the IRS.
      Effective date.--The provision is effective for punitive 
damages that are paid or incurred on or after the date of 
enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
5. Increase in penalty for bad checks and money orders (sec. 435 of the 
        Senate amendment and sec. 6657 of the Code)

                              PRESENT LAW

      The Code \425\ imposes a penalty for bad checks and money 
orders on the person who tendered it. The penalty is two 
percent of the amount of the bad check or money order. For 
checks that are less than $750, the minimum penalty is $15 (or, 
if less, the amount of the check).
---------------------------------------------------------------------------
    \425\ Sec. 6657.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision increases the minimum penalty to $25 (or, 
if less, the amount of the check), applicable to checks that 
are less than $1,250.
      Effective date.--The provision is effective with respect 
to checks or money orders received after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                E. Provisions to Discourage Expatriation

1. Tax treatment of inverted corporate entities (sec. 441 of the Senate 
        amendment and sec. 7874 of the Code)

                              PRESENT LAW

Determination of corporate residence
      The U.S. tax treatment of a multinational corporate group 
depends significantly on whether the parent corporation of the 
group is domestic or foreign. For purposes of U.S. tax law, a 
corporation is treated as domestic if it is incorporated under 
the law of the United States or of any State. Other 
corporations (i.e., those incorporated under the laws of 
foreign countries or U.S. possessions) generally are treated as 
foreign.
U.S. taxation of domestic corporations
      The United States employs a ``worldwide'' tax system, 
under which domestic corporations generally are taxed on all 
income, whether derived in the United States or abroad. In 
order to mitigate the double taxation that may arise from 
taxing the foreign-source income of a domestic corporation, a 
foreign tax credit for income taxes paid to foreign countries 
is provided to reduce or eliminate the U.S. tax owed on such 
income, subject to certain limitations.
      Income earned by a domestic parent corporation from 
foreign operations conducted by foreign corporate subsidiaries 
generally is subject to U.S. tax when the income is distributed 
as a dividend to the domestic corporation. Until such 
repatriation, the U.S. tax on such income generally is 
deferred, and U.S. tax is imposed on such income when 
repatriated. However, certain anti-deferral regimes may cause 
the domestic parent corporation to be taxed on a current basis 
in the United States with respect to certain categories of 
passive or highly mobile income earned by its foreign 
subsidiaries, regardless of whether the income has been 
distributed as a dividend to the domestic parent corporation. 
The main anti-deferral regimes in this context are the 
controlled foreign corporation rules of subpart F (secs. 951-
964) and the passive foreign investment company rules (secs. 
1291-1298). A foreign tax credit is generally available to 
offset, in whole or in part, the U.S. tax owed on this foreign-
source income, whether such income is repatriated as an actual 
dividend or included under one of the anti-deferral regimes.
U.S. taxation of foreign corporations
      The United States taxes foreign corporations only on 
income that has a sufficient nexus to the United States. Thus, 
a foreign corporation is generally subject to U.S. tax only on 
income that is ``effectively connected'' with the conduct of a 
trade or business in the United States. Such ``effectively 
connected income'' generally is taxed in the same manner and at 
the same rates as the income of a U.S. corporation. An 
applicable tax treaty may limit the imposition of U.S. tax on 
business operations of a foreign corporation to cases in which 
the business is conducted through a ``permanent establishment'' 
in the United States.
      In addition, foreign corporations generally are subject 
to a gross-basis U.S. tax at a flat 30-percent rate on the 
receipt of interest, dividends, rents, royalties, and certain 
similar types of income derived from U.S. sources, subject to 
certain exceptions. The tax generally is collected by means of 
withholding by the person making the payment. This tax may be 
reduced or eliminated under an applicable tax treaty.
U.S. tax treatment of inversion transactions prior to the American Jobs 
        Creation Act of 2004
      Prior to the American Jobs Creation Act of 2004 
(``AJCA''), a U.S. corporation could reincorporate in a foreign 
jurisdiction and thereby replace the U.S. parent corporation of 
a multinational corporate group with a foreign parent 
corporation. These transactions were commonly referred to as 
inversion transactions. Inversion transactions could take many 
different forms, including stock inversions, asset inversions, 
and various combinations of and variations on the two. Most of 
the known transactions were stock inversions. In one example of 
a stock inversion, a U.S. corporation forms a foreign 
corporation, which in turn forms a domestic merger subsidiary. 
The domestic merger subsidiary then merges into the U.S. 
corporation, with the U.S. corporation surviving, now as a 
subsidiary of the new foreign corporation. The U.S. 
corporation's shareholders receive shares of the foreign 
corporation and are treated as having exchanged their U.S. 
corporation shares for the foreign corporation shares. An asset 
inversion could be used to reach a similar result, but through 
a direct merger of the top-tier U.S. corporation into a new 
foreign corporation, among other possible forms. An inversion 
transaction could be accompanied or followed by further 
restructuring of the corporate group. For example, in the case 
of a stock inversion, in order to remove income from foreign 
operations from the U.S. taxing jurisdiction, the U.S. 
corporation could transfer some or all of its foreign 
subsidiaries directly to the new foreign parent corporation or 
other related foreign corporations.
      In addition to removing foreign operations from U.S. 
taxing jurisdiction, the corporate group could seek to derive 
further advantage from the inverted structure by reducing U.S. 
tax on U.S.-source income through various earnings stripping or 
other transactions. This could include earnings stripping 
through payment by a U.S. corporation of deductible amounts 
such as interest, royalties, rents, or management service fees 
to the new foreign parent or other foreign affiliates. In this 
respect, the post-inversion structure could enable the group to 
employ the same tax-reduction strategies that are available to 
other multinational corporate groups with foreign parents and 
U.S. subsidiaries, subject to the same limitations (e.g., secs. 
163(j) and 482).
      Inversion transactions could give rise to immediate U.S. 
tax consequences at the shareholder and/or the corporate level, 
depending on the type of inversion. In stock inversions, the 
U.S. shareholders generally recognized gain (but not loss) 
under section 367(a), based on the difference between the fair 
market value of the foreign corporation shares received and the 
adjusted basis of the domestic corporation stock exchanged. To 
the extent that a corporation's share value had declined, and/
or it had many foreign or tax-exempt shareholders, the impact 
of this section 367(a) ``toll charge'' was reduced. The 
transfer of foreign subsidiaries or other assets to the foreign 
parent corporation also could give rise to U.S. tax 
consequences at the corporate level (e.g., gain recognition and 
earnings and profits inclusions under secs. 1001, 311(b), 304, 
367, 1248 or other provisions). The tax on any income 
recognized as a result of these restructurings could be reduced 
or eliminated through the use of net operating losses, foreign 
tax credits, and other tax attributes.
      In asset inversions, the U.S. corporation generally 
recognized gain (but not loss) under section 367(a) as though 
it had sold all of its assets, but the shareholders generally 
did not recognize gain or loss, assuming the transaction met 
the requirements of a reorganization under section 368.
U.S. tax treatment of inversion transactions under AJCA
            In general
      AJCA added new section 7874 to the Code, which defines 
two different types of corporate inversion transactions and 
establishes a different set of consequences for each type. 
Certain partnership transactions also are covered.
            Transactions involving at least 80 percent identity of 
                    stock ownership
      The first type of inversion is a transaction in which, 
pursuant to a plan \426\ or a series of related transactions: 
(1) a U.S. corporation becomes a subsidiary of a foreign-
incorporated entity or otherwise transfers substantially all of 
its properties to such an entity in a transaction completed 
after March 4, 2003; (2) the former shareholders of the U.S. 
corporation hold (by reason of holding stock in the U.S. 
corporation) 80 percent or more (by vote or value) of the stock 
of the foreign-incorporated entity after the transaction; and 
(3) the foreign-incorporated entity, considered together with 
all companies connected to it by a chain of greater than 50 
percent ownership (i.e., the ``expanded affiliated group''), 
does not have substantial business activities in the entity's 
country of incorporation, compared to the total worldwide 
business activities of the expanded affiliated group. The 
provision denies the intended tax benefits of this type of 
inversion by deeming the top-tier foreign corporation to be a 
domestic corporation for all purposes of the Code.\427\
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    \426\ Acquisitions with respect to a domestic corporation or 
partnership are deemed to be ``pursuant to a plan'' if they occur 
within the four-year period beginning on the date which is two years 
before the ownership threshold under the provision is met with respect 
to such corporation or partnership.
    \427\ Since the top-tier foreign corporation is treated for all 
purposes of the Code as domestic, the shareholder-level ``toll charge'' 
of sec. 367(a) does not apply to these inversion transactions.
---------------------------------------------------------------------------
      In determining whether a transaction meets the definition 
of an inversion under the provision, stock held by members of 
the expanded affiliated group that includes the foreign 
incorporated entity is disregarded. For example, if the former 
top-tier U.S. corporation receives stock of the foreign 
incorporated entity (e.g., so-called ``hook'' stock), the stock 
would not be considered in determining whether the transaction 
meets the definition. Similarly, if a U.S. parent corporation 
converts an existing wholly owned U.S. subsidiary into a new 
wholly owned controlled foreign corporation, the stock of the 
new foreign corporation would be disregarded, with the result 
that the transaction would not meet the definition of an 
inversion under the provision. Stock sold in a public offering 
related to the transaction also is disregarded for these 
purposes.
      Transfers of properties or liabilities as part of a plan 
a principal purpose of which is to avoid the purposes of the 
provision are disregarded. In addition, the Treasury Secretary 
is to provide regulations to carry out the provision, including 
regulations to prevent the avoidance of the purposes of the 
provision, including avoidance through the use of related 
persons, pass-through or other noncorporate entities, or other 
intermediaries, and through transactions designed to qualify or 
disqualify a person as a related person or a member of an 
expanded affiliated group. Similarly, the Treasury Secretary 
has the authority to treat certain non-stock instruments as 
stock, and certain stock as not stock, where necessary to carry 
out the purposes of the provision.
            Transactions involving at least 60 percent but less than 80 
                    percent identity of stock ownership
      The second type of inversion is a transaction that would 
meet the definition of an inversion transaction described 
above, except that the 80-percent ownership threshold is not 
met. In such a case, if at least a 60-percent ownership 
threshold is met, then a second set of rules applies to the 
inversion. Under these rules, the inversion transaction is 
respected (i.e., the foreign corporation is treated as 
foreign), but any applicable corporate-level ``toll charges'' 
for establishing the inverted structure are not offset by tax 
attributes such as net operating losses or foreign tax credits. 
Specifically, any applicable corporate-level income or gain 
required to be recognized under sections 304, 311(b), 367, 
1001, 1248, or any other provision with respect to the transfer 
of controlled foreign corporation stock or the transfer or 
license of other assets by a U.S. corporation as part of the 
inversion transaction or after such transaction to a related 
foreign person is taxable, without offset by any tax attributes 
(e.g., net operating losses or foreign tax credits). This rule 
does not apply to certain transfers of inventory and similar 
property. These measures generally apply for a 10-year period 
following the inversion transaction.
            Other rules
      Under section 7874, inversion transactions include 
certain partnership transactions. Specifically, the provision 
applies to transactions in which a foreign-incorporated entity 
acquires substantially all of the properties constituting a 
trade or business of a domestic partnership, if after the 
acquisition at least 60 percent (or 80 percent, as the case may 
be) of the stock of the entity is held by former partners of 
the partnership (by reason of holding their partnership 
interests), provided that the other terms of the basic 
definition are met. For purposes of applying this test, all 
partnerships that are under common control within the meaning 
of section 482 are treated as one partnership, except as 
provided otherwise in regulations. In addition, the modified 
``toll charge'' rules apply at the partner level.
      A transaction otherwise meeting the definition of an 
inversion transaction is not treated as an inversion 
transaction if, on or before March 4, 2003, the foreign-
incorporated entity had acquired directly or indirectly more 
than half of the properties held directly or indirectly by the 
domestic corporation, or more than half of the properties 
constituting the partnership trade or business, as the case may 
be.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment makes several changes to the 
inversions regime of section 7874. First, the provision applies 
the rules of section 7874 to transactions completed after March 
20, 2002 (as opposed to March 4, 2003 under present law). A 
transaction otherwise meeting the definition of an inversion 
transaction under the provision is not treated as an inversion 
transaction if, on or before March 20, 2002, the foreign-
incorporated entity had acquired directly or indirectly more 
than half the properties held directly or indirectly by the 
domestic corporation, or more than half the properties 
constituting the partnership trade or business, as the case may 
be.
      The Senate amendment also lowers the present-law 60-
percent ownership threshold for the second category of 
inversion transactions to greater-than-50-percent, and 
increases the accuracy-related penalties and tightens the 
earnings stripping rules of section 163(j) with respect to 
companies involved in this type of transaction. Specifically, 
the 20-percent penalty for negligence or disregard of rules or 
regulations, substantial understatement of income tax, and 
substantial valuation misstatement is increased to 30 percent 
with respect to the inverting entity and taxpayers related to 
the inverting entity, and the 40-percent penalty for gross 
valuation misstatement is increased to 50 percent with respect 
to such taxpayers. In applying section 163(j) to taxpayers 
related to the inverted entity, the generally applicable debt-
equity threshold is eliminated, and the 50-percent thresholds 
for ``excess interest expense'' and ``excess limitation'' are 
lowered to 25 percent.
      The Senate amendment also excludes from the inversions 
regime the acquisition of a U.S. corporation in cases in which 
none of the stock of the U.S. corporation was readily tradable 
on an established securities market at any time during the 
four-year period ending on the date of the acquisition, except 
as provided in regulations.
      Effective date.--The provision in the Senate amendment is 
effective for taxable years ending after March 20, 2002.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Revision of tax rules on expatriation of individuals (sec. 442 of 
        the Senate amendment and secs. 102, 877, 2107, 2501, 7701, and 
        6039G of the Code)

                              PRESENT LAW

In general
      U.S. citizens and residents generally are subject to U.S. 
income taxation on their worldwide income. The U.S. tax may be 
reduced or offset by a credit allowed for foreign income taxes 
paid with respect to foreign source income. Nonresident aliens 
are taxed at a flat rate of 30 percent (or a lower treaty rate) 
on certain types of passive income derived from U.S. sources, 
and at regular graduated rates on net profits derived from a 
U.S. trade or business. The estates of nonresident aliens 
generally are subject to estate tax on U.S.-situated property 
(e.g., real estate and tangible property located within the 
United States and stock in a U.S. corporation). Nonresident 
aliens generally are subject to gift tax on transfers by gift 
of U.S.-situated property (e.g., real estate and tangible 
property located within the United States), but excluding 
intangibles, such as stock, regardless of where they are 
located.
Income tax rules with respect to expatriates
      For the 10 taxable years after an individual relinquishes 
his or her U.S. citizenship or terminates his or her U.S. long-
term residency, unless certain conditions are met, the 
individual is subject to an alternative method of income 
taxation than that generally applicable to nonresident aliens 
(the ``alternative tax regime''). Generally, the individual is 
subject to income tax for the 10-year period at the rates 
applicable to U.S. citizens, but only on U.S.-source 
income.\428\
---------------------------------------------------------------------------
    \428\ For this purpose, however, U.S.-source income has a broader 
scope than it does typically in the Code.
---------------------------------------------------------------------------
      A ``long-term resident'' is a noncitizen who is a lawful 
permanent resident of the United States for at least eight 
taxable years during the period of 15 taxable years ending with 
the taxable year during which the individual either ceases to 
be a lawful permanent resident of the United States or 
commences to be treated as a resident of a foreign country 
under a tax treaty between such foreign country and the United 
States (and does not waive such benefits).
      A former citizen or former long-term resident is subject 
to the alternative tax regime for a 10-year period following 
citizenship relinquishment or residency termination, unless the 
former citizen or former long-term resident: (1) establishes 
that his or her average annual net income tax liability for the 
five preceding years does not exceed $124,000 (adjusted for 
inflation after 2004) and his or her net worth is less than $2 
million, or alternatively satisfies limited, objective 
exceptions for certain dual citizens and minors who have had no 
substantial contacts with the United States; and (2) certifies 
under penalties of perjury that he or she has complied with all 
U.S. Federal tax obligations for the preceding five years and 
provides such evidence of compliance as the Secretary of the 
Treasury may require.
      Anti-abuse rules are provided to prevent the 
circumvention of the alternative tax regime.
Estate tax rules with respect to expatriates
      Special estate tax rules apply to individuals who die 
during a taxable year in which he or she is subject to the 
alternative tax regime. Under these special rules, certain 
closely-held foreign stock owned by the former citizen or 
former long-term resident is includible in his or her gross 
estate to the extent that the foreign corporation owns U.S.-
situated assets. The special rules apply if, at the time of 
death: (1) the former citizen or former long-term resident 
directly or indirectly owns 10 percent or more of the total 
combined voting power of all classes of stock entitled to vote 
of the foreign corporation; and (2) directly or indirectly, is 
considered to own more than 50 percent of (a) the total 
combined voting power of all classes of stock entitled to vote 
in the foreign corporation, or (b) the total value of the stock 
of such corporation. If this stock ownership test is met, then 
the gross estate of the former citizen or former long-term 
resident includes that proportion of the fair market value of 
the foreign stock owned by the individual at the time of death, 
which the fair market value of any assets owned by such foreign 
corporation and situated in the United States (at the time of 
death) bears to the total fair market value of all assets owned 
by such foreign corporation (at the time of death).
Gift tax rules with respect to expatriates
      Special gift tax rules apply to individuals who make 
gifts during a taxable year in which he or she is subject to 
the alternative tax regime. The individual is subject to gift 
tax on gifts of U.S.-situated intangibles made during the 10 
years following citizenship relinquishment or residency 
termination. In addition, gifts of stock of certain closely-
held foreign corporations by a former citizen or former long-
term resident are subject to gift tax, if the gift is made 
during the time that such person is subject to the alternative 
tax regime. The operative rules with respect to these gifts of 
closely-held foreign stock are the same as described above 
relating to the estate tax, except that the relevant testing 
and valuation date is the date of gift rather than the date of 
death.
Termination of U.S. citizenship or long-term resident status for U.S. 
        Federal income tax purposes
      An individual continues to be treated as a U.S. citizen 
or long-term resident for U.S. Federal tax purposes, including 
for purposes of section 7701(b)(10), until the individual: (1) 
gives notice of an expatriating act or termination of residency 
(with the requisite intent to relinquish citizenship or 
terminate residency) to the Secretary of State or the Secretary 
of Homeland Security, respectively; and (2) provides a 
statement to the Secretary of the Treasury in accordance with 
section 6039G.
Sanction for individuals subject to the individual tax regime who 
        return to the United States for extended periods
      The alternative tax regime does not apply to any 
individual for any taxable year during the 10-year period 
following citizenship relinquishment or residency termination 
if such individual is present in the United States for more 
than 30 days in the calendar year ending in such taxable year. 
Such individual is treated as a U.S. citizen or resident for 
such taxable year and, therefore, is taxed on his or her 
worldwide income.
      Similarly, if an individual subject to the alternative 
tax regime is present in the United States for more than 30 
days in any calendar year ending during the 10-year period 
following citizenship relinquishment or residency termination, 
and the individual dies during that year, he or she is treated 
as a U.S. resident, and the individual's worldwide estate is 
subject to U.S. estate tax. Likewise, if an individual subject 
to the alternative tax regime is present in the United States 
for more than 30 days in any year during the 10-year period 
following citizenship relinquishment or residency termination, 
the individual is subject to U.S. gift tax on any transfer of 
his or her worldwide assets by gift during that taxable year.
      For purposes of these rules, an individual is treated as 
present in the United States on any day if such individual is 
physically present in the United States at any time during that 
day. The present-law exceptions from being treated as present 
in the United States for residency purposes \429\ generally do 
not apply for this purpose. However, for individuals with 
certain ties to countries other than the United States \430\ 
and individuals with minimal prior physical presence in the 
United States,\431\ a day of physical presence in the United 
States is disregarded if the individual is performing services 
in the United States on such day for an unrelated employer 
(within the meaning of sections 267 and 707(b)), who meets the 
requirements the Secretary of the Treasury may prescribe in 
regulations. No more than 30 days may be disregarded during any 
calendar year under this rule.
---------------------------------------------------------------------------
    \429\ Secs. 7701(b)(3)(D), 7701(b)(5) and 7701(b)(7)(B)-(D).
    \430\ An individual has such a relationship to a foreign country if 
(1) the individual becomes a citizen or resident of the country in 
which the individual was born, such individual's spouse was born, or 
either of the individual's parents was born, and (2) the individual 
becomes fully liable for income tax in such country.
    \431\ An individual has a minimal prior physical presence in the 
United States if the individual was physically present for no more than 
30 days during each year in the ten-year period ending on the date of 
loss of United States citizenship or termination of residency. However, 
for purposes of this test, an individual is not treated as being 
present in the United States on a day if the individual remained in the 
United States because of a medical condition that arose while the 
individual was in the United States. Sec. 7701(b)(3)(D)(ii).
---------------------------------------------------------------------------
Annual return
      Former citizens and former long-term residents are 
required to file an annual return for each year following 
citizenship relinquishment or residency termination in which 
they are subject to the alternative tax regime. The annual 
return is required even if no U.S. Federal income tax is due. 
The annual return requires certain information, including 
information on the permanent home of the individual, the 
individual's country of residence, the number of days the 
individual was present in the United States for the year, and 
detailed information about the individual's income and assets 
that are subject to the alternative tax regime. This 
requirement includes information relating to foreign stock 
potentially subject to the special estate and gift tax rules.
      If the individual fails to file the statement in a timely 
manner or fails correctly to include all the required 
information, the individual is required to pay a penalty of 
$10,000. The $10,000 penalty does not apply if it is shown that 
the failure is due to reasonable cause and not to willful 
neglect.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

In general
      The Senate amendment creates new section 877A, that 
generally subjects certain U.S. citizens who relinquish their 
U.S. citizenship and certain long-term U.S. residents who 
terminate their U.S. residence to tax on the net unrealized 
gain in their property as if such property were sold for fair 
market value on the day before the expatriation or residency 
termination (``mark-to-market tax''). Gain from the deemed sale 
is taken into account at that time without regard to other Code 
provisions. Any loss from the deemed sale generally is taken 
into account to the extent otherwise provided in the Code, 
except that the wash sale rules of section 1091 do not apply. 
Any net gain on the deemed sale, is recognized to the extent it 
exceeds $600,000 ($1.2 million in the case of married 
individuals filing a joint return, both of whom relinquish 
citizenship or terminate residency). The $600,000 amount is 
increased by a cost of living adjustment factor for calendar 
years after 2005.
Individuals covered
      Under the Senate amendment, the mark-to-market tax 
applies to U.S. citizens who relinquish citizenship and long-
term residents who terminate U.S. residency (collectively, 
``covered expatriates''). The definition of ``long-term 
resident'' under the provision is the same as that under 
present law. As under present law, an individual is considered 
to terminate long-term residency when the individual either 
ceases to be a lawful permanent resident (i.e., loses his or 
her green card status), or is treated as a resident of another 
country under a tax treaty and does not waive the benefits of 
the treaty.
      Exceptions to an individual's classification as a covered 
expatriate are provided in two situations. The first exception 
applies to an individual who was born with citizenship both in 
the United States and in another country; provided that (1) as 
of the expatriation date the individual continues to be a 
citizen of, and is taxed as a resident of, such other country, 
and (2) the individual was not a resident of the United States 
for the five taxable years ending with the year of 
expatriation. The second exception applies to a U.S. citizen 
who relinquishes U.S. citizenship before reaching age 18\1/2\, 
provided that the individual was a resident of the United 
States for no more than five taxable years before such 
relinquishment.
      For purposes of the mark-to-market tax, an individual is 
treated as having relinquished U.S. citizenship on the earliest 
of four possible dates: (1) the date that the individual 
renounces U.S. nationality before a diplomatic or consular 
officer of the United States (provided that the voluntary 
relinquishment is later confirmed by the issuance of a 
certificate of loss of nationality); (2) the date that the 
individual furnishes to the State Department a signed statement 
of voluntary relinquishment of U.S. nationality confirming the 
performance of an expatriating act (again, provided that the 
voluntary relinquishment is later confirmed by the issuance of 
a certificate of loss of nationality); (3) the date that the 
State Department issues a certificate of loss of nationality; 
or (4) the date that a U.S. court cancels a naturalized 
citizen's certificate of naturalization.
      In addition, the provision provides that, for all tax 
purposes (i.e., not limited to the mark-to-market tax), a U.S. 
citizen continues to be treated as a U.S. citizen for tax 
purposes until that individual's citizenship is treated as 
relinquished under the rules of the immediately preceding 
paragraph. However, under Treasury regulations, relinquishment 
may occur earlier with respect to an individual who became at 
birth a citizen of the United Sates and of another country.
Election to be treated as a U.S. citizen
      Under the provision, a covered expatriate is permitted to 
make an irrevocable election to continue to be taxed as a U.S. 
citizen with respect to all property that otherwise is covered 
by the expatriation tax. This election is an ``all or nothing'' 
election; an individual is not permitted to elect this 
treatment for some property but not for other property. The 
election, if made, applies to all property that would be 
subject to the expatriation tax and to any property the basis 
of which is determined by reference to such property. Under 
this election, following expatriation the individual continues 
to pay U.S. income taxes at the rates applicable to U.S. 
citizens on any income generated by the property and on any 
gain realized on the disposition of the property. In addition, 
the property continues to be subject to U.S. gift, estate, and 
generation-skipping transfer taxes. In order to make this 
election, the taxpayer is required to waive any treaty rights 
that would preclude the collection of the tax.
      The individual is also required to provide security to 
ensure payment of the tax under this election in such form, 
manner, and amount as the Secretary of the Treasury requires. 
The amount of mark-to-market tax that would have been owed but 
for this election (including any interest, penalties, and 
certain other items) becomes a lien in favor of the United 
States on all U.S.-situated property owned by the individual. 
This lien arises on the expatriation date and continues until 
the tax liability is satisfied, the tax liability has become 
unenforceable by reason of lapse of time, or the Secretary of 
the Treasury is satisfied that no further tax liability may 
arise by reason of this provision. The rules of section 
6324A(d)(1), (3), and (4) (relating to liens arising in 
connection with the deferral of estate tax under section 6166) 
apply to liens arising under this provision.
Deemed sale of property upon expatriation or residency termination and 
        tentative tax
      The deemed sale rule of the provision generally applies 
to all property interests held by the individual on the date of 
relinquishment of citizenship or termination of residency. 
Special rules apply in the case of trust interests, as 
described below. U.S. real property interests (which remain 
subject to U.S. tax in the hands of nonresident noncitizens), 
with the exception of stock of certain former U.S. real 
property holding corporations, are exempted from the provision. 
Regulatory authority is granted to the Treasury to exempt other 
types of property from the provision.
      Under the provision, an individual who is subject to the 
mark-to-market tax is required to pay a tentative tax equal to 
the amount of tax that would be due for a hypothetical short 
tax year ending on the date the individual relinquishes 
citizenship or terminates residency. Thus, the tentative tax is 
based on all income, gains, deductions, losses, and credits of 
the individual for the year through such date, including 
amounts realized from the deemed sale of property. Moreover, 
notwithstanding any other provision of the Code, any period 
during which recognition of income or gain had been deferred 
terminates on the day before relinquishment of citizenship or 
termination of residency (and, therefore, such income or gain 
recognition becomes part of the tax base of the tentative tax). 
The tentative tax is due on the 90th day after the date of 
relinquishment of citizenship or termination of residency, 
subject to the election, described below, to defer payments of 
the mark-to-market tax. In addition, notwithstanding any other 
provision of the Code, any extension of time for payment of tax 
ceases to apply on the day before relinquishment of citizenship 
or termination of residency, and the unpaid portion of such tax 
becomes due and payable at the time and in the manner 
prescribed by the Secretary of the Treasury.
Deferral of payment of mark-to-market tax
      Under the provision, an individual is permitted to elect 
to defer payment of the mark-to-market tax imposed on the 
deemed sale of property. Interest is charged for the period the 
tax is deferred at a rate two percentage points higher than the 
rate normally applicable to individual underpayments. The 
election is irrevocable and is made on a property-by-property 
basis. Under the election, the deferred tax attributable to a 
particular property is due when the property is disposed of 
(or, if the property is disposed of in a transaction in which 
gain is not recognized in whole or in part, at such other time 
as the Secretary of the Treasury may prescribe). The deferred 
tax attributable to a particular property is an amount that 
bears the same ratio to the total mark-to-market tax as the 
gain taken into account with respect to such property bears to 
the total gain taken into account under these rules. The 
deferral of the mark-to-market tax may not be extended beyond 
the due date of the return for the taxable year which includes 
the individual's death.
      In order to elect deferral of the mark-to-market tax, the 
individual is required to provide a bond in the amount of the 
deferred tax to the Secretary of the Treasury. Other security 
mechanisms are permitted provided that the individual 
establishes to the satisfaction of the Secretary of the 
Treasury that the security is adequate. In the event that the 
security provided with respect to a particular property 
subsequently becomes inadequate and the individual fails to 
correct the situation, the deferred tax and the interest with 
respect to such property will become due. As a further 
condition to making the election, the individual is required to 
consent to the waiver of any treaty rights that would preclude 
the collection of the tax.
      The deferred tax amount (including any interest, 
penalties, and certain other items) becomes a lien in favor of 
the United States on all U.S.-situated property owned by the 
individual. This lien arises on the expatriation date and 
continues until the tax liability is satisfied, the tax 
liability has become unenforceable by reason of lapse of time, 
or the Secretary is satisfied that no further tax liability may 
arise by reason of this provision. The rules of section 
6324A(d)(1), (3), and (4) (relating to liens arising in 
connection with the deferral of estate tax under section 6166) 
apply to such liens.
Retirement plans and similar arrangements
      Subject to certain exceptions, the provision applies to 
all property interests held by covered expatriates at the time 
of relinquishment of citizenship or termination of residency. 
Accordingly, such property includes an interest in an employer-
sponsored qualified plan or deferred compensation arrangement 
as well as an interest in an individual retirement account or 
annuity (i.e., an IRA).\432\ However, the provision contains a 
special rule for an interest in a ``retirement plan.'' For 
purposes of the provision, a ``retirement plan'' includes an 
employer-sponsored qualified plan (sec. 401(a)), a qualified 
annuity (sec. 403(a)), a tax-sheltered annuity (sec. 403(b)), 
an eligible deferred compensation plan of a governmental 
employer (sec. 457(b)), an individual retirement account (sec. 
408(a)), and an individual retirement annuity (sec. 408(b)). 
The special retirement plan rule also applies, to the extent 
provided in regulations, to any foreign plan or similar 
retirement arrangement or program. An interest in a trust that 
is part of a retirement plan is subject to the special 
retirement plan rules and not to the rules for interests in 
trusts (discussed below).
---------------------------------------------------------------------------
    \432\ Application of the provision is not limited to an interest 
that meets the definition of property under section 83 (relating to 
property transferred in connection with the performance of services).
---------------------------------------------------------------------------
      Under the special retirement plan rules, in lieu of the 
deemed sale rule, an amount equal to the present value of the 
individual's vested, accrued benefit under a retirement plan is 
treated as having been received by the individual as a 
distribution under the retirement plan on the day before the 
individual's relinquishment of citizenship or termination of 
residency. In the case of any later distribution to the 
individual from the retirement plan, the amount otherwise 
includible in the individual's income as a result of the 
distribution is reduced to reflect the amount previously 
included in income under the special retirement plan rule. The 
amount of the reduction applied to a distribution is the excess 
of: (1) the amount included in income under the special 
retirement plan rule, over (2) the total reductions applied to 
any prior distributions. It is not intended that the retirement 
plan would be deemed to have made a distribution at the time of 
expatriation for purposes of the tax-favored status of the 
retirement plan, such as whether a plan may permit 
distributions before a participant has severed employment. 
However, the retirement plan, and any person acting on the 
plan's behalf, will treat any later distribution in the same 
manner as the distribution would be treated without regard to 
the special retirement plan rule.
      It is expected that the Treasury Department will provide 
guidance for determining the present value of an individual's 
vested, accrued benefit under a retirement plan, such as the 
individual's account balance in the case of a defined 
contribution plan or an IRA, or present value determined under 
the qualified joint and survivor annuity rules applicable to a 
defined benefit plan (sec. 417(e)).
Interests in trusts
      Detailed rules apply under the provision to trust 
interests held by an individual at the time of relinquishment 
of citizenship or termination of residency. The treatment of 
trust interests depends on whether the trust is a ``qualified 
trust.'' A trust is a qualified trust if a court within the 
United States is able to exercise primary supervision over the 
administration of the trust and one or more U.S. persons have 
the authority to control all substantial decisions of the 
trust.
      Constructive ownership rules apply to a trust beneficiary 
that is a corporation, partnership, trust, or estate. In such 
cases, the shareholders, partners, or beneficiaries of the 
entity are deemed to be the direct beneficiaries of the trust. 
In addition, an individual who holds (or who is treated as 
holding) a trust instrument at the time of relinquishment of 
citizenship or termination of residency is required to disclose 
on his or her tax return the methodology used to determine his 
or her interest in the trust, and whether such individual knows 
(or has reason to know) that any other beneficiary of the trust 
uses a different method.
      Nonqualified trusts.--If an individual holds an interest 
in a trust that is not a qualified trust, a special rule 
applies for purposes of determining the amount of the mark-to-
market tax due with respect to such trust interest. The 
individual's interest in the trust is treated as a separate 
trust consisting of the trust assets allocable to such 
interest. Such separate trust is treated as having sold its net 
assets for their fair market value on the day before the date 
of relinquishment of citizenship or termination of residency 
and having distributed the assets to the individual, who then 
is treated as having recontributed the assets to the trust. Any 
income, gain, or loss of the individual arising from the deemed 
distribution from the trust is taken into account as if it had 
arisen under the deemed sale rules.
      The election to defer payment is available for the mark-
to-market tax attributable to a nonqualified trust interest. A 
beneficiary's interest in a nonqualified trust is determined 
under all the facts and circumstances, including the trust 
instrument, letters of wishes, historical patterns of trust 
distributions, and the existence of, and function performed by, 
a trust protector or any similar advisor.
      Qualified trusts.--If an individual has an interest in a 
qualified trust, the amount of mark-to-market tax on unrealized 
gain allocable to the individual's trust interest (``allocable 
expatriation gain'') is calculated at the time of expatriation 
or residency termination, but is collected as the individual 
receives distributions from the qualified trust. The allocable 
expatriation gain is the amount of gain which would be 
allocable to the individual's trust interest if the individual 
directly held all the assets allocable to such interest.\433\ 
If any individual's interest in a trust is vested as of the day 
before the expatriation date (e.g., if the individual's 
interest in the trust is non-contingent and non-discretionary), 
the gain allocable to the individual's trust interest is 
determined based on the trust assets allocable to his or her 
trust interest. If the individual's interest in the trust is 
not vested as of the expatriation date (e.g., if the 
individual's trust interest is a contingent or discretionary 
interest), the gain allocable to his or her trust interest is 
determined based on all of the trust assets that could be 
allocable to his or her trust interest, determined by resolving 
all contingencies and discretionary powers in the individual's 
favor (i.e., the individual is allocated the maximum amount 
that he or she could receive).
---------------------------------------------------------------------------
    \433\ Allocable expatriation gain is subject to the $600,000 
exemption (adjusted for cost of living increases).
---------------------------------------------------------------------------
      Taxes are imposed on each distribution from a qualified 
trust. These distributions also may be subject to other U.S. 
income taxes. If a distribution from a qualified trust is made 
after the individual relinquishes citizenship or terminates 
residency, the mark-to-market tax is imposed in an amount equal 
to the amount of the distribution multiplied by the highest tax 
rate generally applicable to trusts and estates for the taxable 
year which includes the date of expatriation, but in no event 
will the tax imposed exceed the balance in the ``deferred tax 
account'' with respect to the trust interest. For this purpose, 
the balance in the deferred tax account is equal to (1) the 
hypothetical tax calculated under the ``regular'' deemed sale 
rules with respect to the allocable expatriation gain, (2) 
increased by interest charged on the balance in the deferred 
tax account at a rate two percentage points higher than the 
rate normally applicable to individual underpayments, for 
periods beginning after the 90th day after the expatriation 
date and calculated up to 30 days prior to the date of the 
distribution, (3) reduced by any mark-to-market tax imposed on 
prior trust distributions to the individual, and (4) to the 
extent provided in Treasury regulations, in the case of a 
covered expatriate holding a nonvested interest, reduced by 
mark-to-market taxes imposed on trust distributions to other 
persons holding nonvested interests.
      The tax that is imposed on distributions from a qualified 
trust generally is to be deducted and withheld by the trustees. 
If the individual does not agree to waive treaty rights that 
would preclude collection of the tax, the tax with respect to 
such distributions is imposed on the trust, the trustee is 
personally liable for the tax, and any other beneficiary has a 
right of contribution against such individual with respect to 
the tax.
      Mark-to-market taxes become due immediately if the trust 
ceases to be a qualified trust, the individual disposes of his 
or her qualified trust interest, or the individual dies. In 
such cases, the amount of mark-to-market tax equals the lesser 
of (1) the tax calculated under the rules for nonqualified 
trust interests as of the date of the triggering event, or (2) 
the balance in the deferred tax account with respect to the 
trust interest immediately before that date. Such tax is 
imposed on the trust, the trustee is personally liable for the 
tax, and any other beneficiary has a right of contribution 
against such individual (or his or her estate) with respect to 
such tax.
Regulatory authority
      The provision authorizes the Secretary of the Treasury to 
prescribe such regulations as may be necessary or appropriate 
to carry out the purposes of section 877A. In addition, the 
Secretary of the Treasury may provide for adjustments to the 
bases of assets in a trust or a deferred tax account, and the 
timing of such adjustments, to ensure that gain is taxed only 
once.
Income tax treatment of gifts and inheritances from a former citizen or 
        former long-term resident
      Under the provision, the exclusion from income provided 
in section 102 (relating to exclusions from income for the 
value of property acquired by gift or inheritance) does not 
apply to the value of any property received by gift or 
inheritance from a covered expatriate. Accordingly, a U.S. 
taxpayer who receives a gift or inheritance from such an 
individual is required to include the value of such gift or 
inheritance in gross income and is subject to U.S. tax on such 
amount. Having included the value of the property in income, 
the recipient takes a basis in the property equal to that 
value. The tax does not apply to property that is shown on a 
timely filed gift tax return and that is a taxable gift by the 
former citizen or former long-term resident, or property that 
is shown on a timely filed estate tax return and included in 
the gross U.S. estate of the former citizen or former long-term 
resident (regardless of whether the tax liability shown on such 
a return is reduced by credits, deductions, or exclusions 
available under the estate and gift tax rules). In addition, 
the tax does not apply to property in cases in which no estate 
or gift tax return was filed, but no such return would have 
been required to be filed if the former citizen or former long-
term resident had not relinquished citizenship or terminated 
residency, as the case may be.
Coordination with present-law alternative tax regime
      The provision provides a coordination rule with the 
present-law alternative tax regime. Under the provision, the 
expatriation income tax rules under section 877, and the 
special present-law expatriation estate and gift tax rules 
under sections 2107 and 2501(a)(3) (generally described above), 
do not apply to a covered expatriate whose expatriation or 
residency termination occurs on or after the date of enactment.
Information reporting
      Certain information reporting requirements under the law 
presently applicable to former citizens and former long-term 
residents (sec. 6039G) also apply for purposes of the 
provision.
Immigration rules
      The provision denies former citizens reentry into the 
United States if the individual is determined not to be in 
compliance with his or her tax obligations under the 
provision's expatriation tax rules (regardless of the 
subjective motive for expatriating). For this purpose, the 
provision permits the IRS to disclose certain items of return 
information of an individual, upon written request of the 
Attorney General or his delegate, as is necessary for making a 
determination under section 212(a)(10)(E) of the Immigration 
and Nationality Act. Specifically, the provision permits the 
IRS to disclose to the agency administering section 
212(a)(10)(E) whether such taxpayer is in compliance with 
section 877A, and to identify the items of any noncompliance. 
Recordkeeping requirements, safeguards, and civil and criminal 
penalties for unauthorized disclosure or inspection apply to 
return information disclosed under this provision.
Effective date
      The provision generally is effective for U.S. citizens 
who relinquish citizenship or long-term residents who terminate 
their residency on or after the date of enactment. The due date 
for tentative tax, however, may not occur before the 90th day 
after the date of enactment. The provision relating to income 
taxes on gifts and inheritances is effective for gifts and 
inheritances received from former citizens or former long-term 
residents (or their estates) on or after the date of enactment, 
whose relinquishment of citizenship or residency termination 
occurs after such date. The immigration and disclosure 
provisions relating to former citizens are effective with 
respect to individuals who relinquish citizenship on or after 
the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

                      F. Miscellaneous Provisions

1. Treatment of contingent payment convertible debt instruments (sec. 
        451 of the Senate amendment and sec. 1275 of the Code)

                              PRESENT LAW

      Under present law, a taxpayer generally deducts the 
amount of interest paid or accrued within the taxable year on 
indebtedness issued by the taxpayer. In the case of original 
issue discount (``OID''), the issuer of a debt instrument 
generally accrues and deducts, as interest, the OID over the 
life of the obligation, even though the amount of the OID may 
not be paid until the maturity of the instrument.
      The amount of OID with respect to a debt instrument is 
equal to the excess of the stated redemption price at maturity 
over the issue price of the debt instrument. The stated 
redemption price at maturity includes all amounts that are 
payable on the debt instrument by maturity. The amount of OID 
with respect to a debt instrument is allocated over the life of 
the instrument through a series of adjustments to the issue 
price for each accrual period. The adjustment to the issue 
price is determined by multiplying the adjusted issue price 
(i.e., the issue price increased or decreased by adjustments 
prior to the accrual period) by the instrument's yield to 
maturity, and then subtracting any payments on the debt 
instrument (other than non-OID stated interest) during the 
accrual period. Thus, in order to compute the amount of OID and 
the portion of OID allocable to a particular period, the stated 
redemption price at maturity and the time of maturity must be 
known. Issuers of debt instruments with OID accrue and deduct 
the amount of OID as interest expense in the same manner as the 
holders of such instruments accrue and include in gross income 
the amount of OID as interest income.
      Treasury regulations provide special rules for 
determining the amount of OID allocated to a period with 
respect to certain debt instruments that provide for one or 
more contingent payments of principal or interest.\434\ The 
regulations provide that a debt instrument does not provide for 
contingent payments merely because it provides for an option to 
convert the debt instrument into the stock of the issuer, into 
the stock or debt of a related party, or into cash or other 
property in an amount equal to the approximate value of such 
stock or debt.\435\ The regulations also provide that a payment 
is not a contingent payment merely because of a contingency 
that, as of the issue date of the debt instrument, is either 
remote or incidental.\436\
---------------------------------------------------------------------------
    \434\ Treas. Reg. sec. 1.1275-4.
    \435\ Treas. Reg. sec. 1.1275-4(a)(4).
    \436\ Treas. Reg. sec. 1.1275-4(a)(5).
---------------------------------------------------------------------------
      In the case of contingent payment debt instruments that 
are issued for money or publicly traded property,\437\ the 
regulations provide that interest on a debt instrument must be 
taken into account (as OID) whether or not the amount of any 
payment is fixed or determinable in the taxable year. The 
amount of OID that is taken into account for each accrual 
period is determined by constructing a comparable yield and a 
projected payment schedule for the debt instrument, and then 
accruing the OID on the basis of the comparable yield and 
projected payment schedule by applying rules similar to those 
for accruing OID on a noncontingent debt instrument (the 
``noncontingent bond method''). If the actual amount of a 
contingent payment is not equal to the projected amount, 
appropriate adjustments are made to reflect the difference. The 
comparable yield for a debt instrument is the yield at which 
the issuer would be able to issue a fixed-rate noncontingent 
debt instrument with terms and conditions similar to those of 
the contingent payment debt instrument (i.e., the comparable 
fixed-rate debt instrument), including the level of 
subordination, term, timing of payments, and general market 
conditions.\438\
---------------------------------------------------------------------------
    \437\ Treas. Reg. sec. 1.1275-4(b).
    \438\ Treas. Reg. sec. 1.1275-4(b)(4)(i)(A).
---------------------------------------------------------------------------
      With respect to certain debt instruments that are 
convertible into the common stock of the issuer and that also 
provide for contingent payments (other than the conversion 
feature)--often referred to as ``contingent convertible'' debt 
instruments--the IRS has stated that the noncontingent bond 
method applies in computing the accrual of OID on the debt 
instrument.\439\ In applying the noncontingent bond method, the 
IRS has stated that the comparable yield for a contingent 
convertible debt instrument is determined by reference to a 
comparable fixed-rate nonconvertible debt instrument, and the 
projected payment schedule is determined by treating the issuer 
stock received upon a conversion of the debt instrument as a 
contingent payment.
---------------------------------------------------------------------------
    \439\ Rev. Rul. 2002-31, 2002-1 C.B. 1023.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that, in the case of a 
contingent convertible debt instrument,\440\ any Treasury 
regulations which require OID to be determined by reference to 
the comparable yield of a noncontingent fixed-rate debt 
instrument shall be applied as requiring that such comparable 
yield be determined by reference to a noncontingent fixed-rate 
debt instrument which is convertible into stock. For purposes 
of applying the provision, the comparable yield shall be 
determined without taking into account the yield resulting from 
the conversion of a debt instrument into stock. Thus, the 
noncontingent bond method in the Treasury regulations shall be 
applied in a manner such that the comparable yield for 
contingent convertible debt instruments shall be determined by 
reference to comparable noncontingent fixed-rate convertible 
(rather than nonconvertible) debt instruments.
---------------------------------------------------------------------------
    \440\ Under the provision, a contingent convertible debt instrument 
is defined as a debt instrument that: (1) is convertible into stock of 
the issuing corporation, or a corporation in control of, or controlled 
by, the issuing corporation; and (2) provides for contingent payments.
---------------------------------------------------------------------------
      Effective date.--The provision is effective for debt 
instruments issued on or after date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
2. Grant Treasury regulatory authority to address foreign tax credit 
        transactions involving inappropriate separation of foreign 
        taxes from related foreign income (sec. 452 of the Senate 
        amendment and sec. 901 of the Code)

                              PRESENT LAW

      The United States employs a ``worldwide'' tax system, 
under which residents generally are taxed on all income, 
whether derived in the United States or abroad. In order to 
mitigate the possibility of double taxation arising from 
overlapping claims of the United States and a source country to 
tax the same item of income, the United States provides a 
credit for foreign income taxes paid or accrued, subject to 
several conditions and limitations.
      For purposes of the foreign tax credit, regulations 
provide that a foreign tax is treated as being paid by ``the 
person on whom foreign law imposes legal liability for such 
tax.'' \441\ Thus, for example, if a U.S. corporation owns an 
interest in a foreign partnership, the U.S. corporation can 
claim foreign tax credits for the tax that is imposed on it as 
a partner in the foreign entity. This would be true under the 
regulations even if the U.S. corporation elected to treat the 
foreign entity as a corporation for U.S. tax purposes. In such 
a case, if the foreign entity does not meet the definition of a 
controlled foreign corporation or does not generate income that 
is subject to current inclusion under the rules of subpart F, 
the income generated by the foreign entity might never be 
reported on a U.S. return, and yet the U.S. corporation might 
take the position that it can claim credits for taxes imposed 
on that income. This is one example of how a taxpayer might 
attempt to separate foreign taxes from the related foreign 
income, and thereby attempt to claim a foreign tax credit under 
circumstances in which there is no threat of double taxation.
---------------------------------------------------------------------------
    \441\ Treas. Reg. sec. 1.901-2(f)(1).
---------------------------------------------------------------------------
      The Treasury Department currently has the authority to 
promulgate regulations under section 901 and other provisions 
of the Code to address transactions and structures that produce 
inappropriate foreign tax credit results.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment enhances the regulatory authority of 
the Treasury Department to address transactions that involve 
the inappropriate separation of foreign taxes from the related 
foreign income or in which foreign taxes are imposed on any 
person in respect of income of another person. This grant of 
regulatory authority supplements existing Treasury Department 
authority and thereby provide greater flexibility in addressing 
a wide range of transactions and structures. Regulations issued 
pursuant to this authority could, for example, provide for the 
disallowance of a credit for all or a portion of the foreign 
taxes, or for the allocation of the foreign taxes among the 
participants in the transaction in a manner more consistent 
with the economics of the transaction.
      Effective date.--The provision generally is effective for 
transactions entered into after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision. No inference is intended as to the scope 
of the Treasury Department's existing regulatory authority to 
address transactions that involve the inappropriate separation 
of foreign taxes from the related foreign income.
3. Modifications of effective dates of leasing provisions of the 
        American Jobs Creation Act of 2004 (sec. 453 of the Senate 
        amendment and sec. 470 of the Code)

                              PRESENT LAW

      Present law provides for the deferral of losses 
attributable to certain tax exempt use property, generally 
effective for leases entered into after March 12, 2004. 
However, the deferral provision does not apply to property 
located in the United States that is subject to a lease with 
respect to which a formal application: (1) was submitted for 
approval to the Federal Transit Administration (an agency of 
the Department of Transportation) after June 30, 2003, and 
before March 13, 2004; (2) is approved by the Federal Transit 
Administration before January 1, 2006; and (3) includes a 
description and the fair market value of such property (the 
``qualified transportation property exception'').

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment makes two changes to the effective 
date of the loss deferral rules. First, the Senate amendment 
repeals the qualified transportation property exception. 
Second, the Senate amendment applies the loss deferral rules to 
leases entered into on or before March 12, 2004, if the lessee 
is a foreign person or entity. With respect to such leases, 
losses are deferred starting in taxable years beginning after 
December 31, 2005.
      Effective date.--The Senate amendment is effective as if 
included in the provisions of the American Jobs Creation Act of 
2004, Pub. L. No. 108-357 (2004), to which it relates.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
4. Application of earnings stripping rules to partners which are 
        corporations (sec. 454 of the Senate amendment and sec. 163 of 
        the Code)

                              PRESENT LAW

      Present law provides rules to limit the ability of U.S. 
corporations to reduce the U.S. tax on their U.S.-source income 
through earnings stripping transactions. Section 163(j) 
specifically addresses earnings stripping involving interest 
payments, by limiting the deductibility of interest paid to 
certain related parties (``disqualified interest''),\442\ if 
the payor's debt-equity ratio exceeds 1.5 to 1 and the payor's 
net interest expense exceeds 50 percent of its ``adjusted 
taxable income'' (generally taxable income computed without 
regard to deductions for net interest expense, net operating 
losses, and depreciation, amortization, and depletion). 
Disallowed interest amounts can be carried forward 
indefinitely. In addition, excess limitation (i.e., any excess 
of the 50-percent limit over a company's net interest expense 
for a given year) can be carried forward three years.
---------------------------------------------------------------------------
    \442\ This interest also may include interest paid to unrelated 
parties in certain cases in which a related party guarantees the debt.
---------------------------------------------------------------------------
      Proposed Treasury regulations provide that a partner's 
proportionate share of partnership liabilities is treated as 
liabilities incurred directly by the partner, for purposes of 
applying the earnings stripping limitation to interest payments 
by a corporate partner of a partnership.\443\ The proposed 
Treasury regulations provide that interest paid or accrued to a 
partnership is treated as paid or accrued to the partners of 
the partnership in proportion to each partner's distributive 
share of the partnership's interest income for the taxable 
year.\444\ In addition, the proposed Treasury regulations 
provide that interest expense paid or accrued by a partnership 
is treated as paid or accrued by the partners of the 
partnership in proportion to each partner's distributive share 
of the partnership's interest expense.\445\
---------------------------------------------------------------------------
    \443\ Prop. Treas. Reg. sec. 1.163(j)-3(b)(3).
    \444\ Prop. Treas. Reg. sec. 1.163(j)-2(e)(4).
    \445\ Prop. Treas. reg. sec. 1.163(j)-2(e)(5).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provision codifies the approach of 
the proposed Treasury regulations by providing that, except to 
the extent provided by regulations, in the case of a 
corporation that owns, directly or indirectly, an interest in a 
partnership, the corporation's share of partnership liabilities 
is treated as liabilities of the corporation for purposes of 
applying the earnings stripping rules to the corporation. The 
provision provides that the corporation's distributive share of 
interest income of the partnership, and of interest expense of 
the partnership, is treated as interest income or interest 
expense of the corporation.
      The provision provides Treasury regulatory authority to 
reallocate shares of partnership debt, or distributive shares 
of the partnership's interest income or interest expense, as 
may be appropriate to carry out the purposes of the provision. 
For example, it is not intended that the application of the 
earnings stripping rules to corporations with direct or 
indirect interests in partnerships be circumvented through the 
use of allocations of partnership interest income or expense 
(or partnership liabilities) to or away from partners.
      Effective date.--The provision is effective for taxable 
years beginning on or after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment 
provision.
5. Limitation on employer deduction for certain entertainment expenses 
        (sec. 455 of the Senate amendment and sec. 274(e) of the Code)

                              PRESENT LAW

In general
      Under present law, no deduction is allowed with respect 
to (1) an activity generally considered to be entertainment, 
amusement or recreation, unless the taxpayer establishes that 
the item was directly related to (or, in certain cases, 
associated with) the active conduct of the taxpayer's trade or 
business, or (2) a facility (e.g., an airplane) used in 
connection with such activity.\446\ The Code includes a number 
of exceptions to the general rule disallowing deductions of 
entertainment expenses. Under one exception, the deduction 
disallowance rule does not apply to expenses for goods, 
services, and facilities to the extent that the expenses are 
reported by the taxpayer as compensation and wages to an 
employee.\447\ The deduction disallowance rule also does not 
apply to expenses paid or incurred by the taxpayer for goods, 
services, and facilities to the extent that the expenses are 
includible in the gross income of a recipient who is not an 
employee (e.g., a nonemployee director) as compensation for 
services rendered or as a prize or award.\448\ The exceptions 
apply only to the extent that amounts are properly reported by 
the company as compensation and wages or otherwise includible 
in income. In no event can the amount of the deduction exceed 
the amount of the actual cost, even if a greater amount is 
includible in income.
---------------------------------------------------------------------------
    \446\ Sec. 274(a).
    \447\ Sec. 274(e)(2). As discussed below, a special rule applies in 
the case of specified individuals.
    \448\ Sec. 274(e)(9).
---------------------------------------------------------------------------
      Except as otherwise provided, gross income includes 
compensation for services, including fees, commissions, fringe 
benefits, and similar items. In general, an employee or other 
service provider must include in gross income the amount by 
which the fair value of a fringe benefit exceeds the amount 
paid by the individual. Treasury regulations provide rules 
regarding the valuation of fringe benefits, including flights 
on an employer-provided aircraft.\449\ In general, the value of 
a non-commercial flight is determined under the base aircraft 
valuation formula, also known as the Standard Industry Fare 
Level formula or ``SIFL''.\450\ If the SIFL valuation rules do 
not apply, the value of a flight on a company-provided aircraft 
is generally equal to the amount that an individual would have 
to pay in an arm's-length transaction to charter the same or a 
comparable aircraft for that period for the same or a 
comparable flight.\451\
---------------------------------------------------------------------------
    \449\ Treas. Reg. sec. 1.61-21.
    \450\ Treas. Reg. sec. 1.61-21(g).
    \451\ Treas. Reg. sec. 1.61-21(b)(6).
---------------------------------------------------------------------------
      In the context of an employer providing an aircraft to 
employees for nonbusiness (e.g., vacation) flights, the 
exception for expenses treated as compensation was interpreted 
in Sutherland Lumber-Southwest, Inc. v. Commissioner 
(``Sutherland Lumber'') as not limiting the company's deduction 
for operation of the aircraft to the amount of compensation 
reportable to its employees,\452\ which can result in a 
deduction many times larger than the amount required to be 
included in income. In many cases, the individual including 
amounts attributable to personal travel in income directly 
benefits from the enhanced deduction, resulting in a net 
deduction for the personal use of the company aircraft.
---------------------------------------------------------------------------
    \452\ Sutherland Lumber-Southwest, Inc. v. Comm., 114 T.C. 197 
(2000), aff'd, 255 F.3d 495 (8th Cir. 2001), acq., AOD 2002-02 (Feb. 
11, 2002).
---------------------------------------------------------------------------
Specified individuals
      In the case of specified individuals, the exceptions to 
the general entertainment expense disallowance rule for 
expenses treated as compensation or includible in income apply 
only to the extent of the amount of expenses treated as 
compensation or includible in income of the specified 
individual. For example, a company's deduction attributable to 
aircraft operating costs and other expenses for a specified 
individual's vacation use of a company aircraft is limited to 
the amount reported as compensation to the specified 
individual. Sutherland Lumber is thus overturned with respect 
to specified individuals.
      Specified individuals are individuals who, with respect 
to an employer or other service recipient (or a related party), 
are subject to the requirements of section 16(a) of the 
Securities and Exchange Act of 1934, or would be subject to 
such requirements if the employer or service recipient (or the 
related party) were an issuer of equity securities referred to 
in section 16(a).\453\ Such individuals generally include 
officers (as defined by section 16(a)),\454\ directors, and 10-
percent-or-greater owners of private and publicly-held 
companies.
---------------------------------------------------------------------------
    \453\ For purposes of this definition, a person is a related party 
with respect to another person if such person bears a relationship to 
such other person described in section 267(b) or 707(b).
    \454\ An officer is defined as the president, principal financial 
officer, principal accounting officer (or, if there is no such 
accounting officer, the controller), any vice-president in charge of a 
principal business unit, division or function (such as sales, 
administration or finance), any other officer who performs a policy-
making function, or any other person who performs similar policy-making 
functions.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the Senate amendment, in the case of all 
individuals, the exceptions to the general entertainment 
expense disallowance rule for expenses treated as compensation 
or includible in income apply only to the extent of the amount 
of expenses treated as compensation or includible in income. 
Thus, under those exceptions, no deduction is allowed with 
respect to expenses for (1) a nonbusiness activity generally 
considered to be entertainment, amusement or recreation, or (2) 
a facility (e.g., an airplane) used in connection with such 
activity to the extent that such expenses exceed the amount 
treated as compensation or includible in income. The provision 
is intended to overturn Sutherland Lumber for all individuals. 
As under present law, the exceptions apply only if amounts are 
properly reported by the company as compensation and wages or 
otherwise includible in income.
      Effective date.--The provision is effective for expenses 
incurred after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
6. Increase in age of minor children whose unearned income is taxed as 
        if parent's income (sec. 456 of the Senate amendment and sec. 
        1(g) of the Code)

                              PRESENT LAW

Filing requirements for children
      A single unmarried individual eligible to be claimed as a 
dependent on another taxpayer's return generally must file an 
individual income tax return if he or she has: (1) earned 
income only over $5,150 (for 2006); (2) unearned income only 
over the minimum standard deduction amount for dependents ($850 
in 2006); or (3) both earned income and unearned income 
totaling more than the smaller of (a) $5,150 (for 2006) or (b) 
the larger of (i) $850 (for 2006), or (ii) earned income plus 
$300.\455\ Thus, if a dependent child has less than $850 in 
gross income, the child does not have to file an individual 
income tax return for 2006.\456\
---------------------------------------------------------------------------
    \455\ Sec. 6012(a)(1)(C). Other filing requirements apply to 
dependents who are married, elderly, or blind. See, Internal Revenue 
Service, Publication 929, Tax Rules for Children and Dependents, at 2, 
Table 1 (2005).
    \456\ A taxpayer generally need not file a return if he or she has 
gross income in an amount less than the standard deduction (and, if 
allowable to the taxpayer, the personal exemption amount). An 
individual who may be claimed as a dependent of another taxpayer is not 
eligible to claim the dependency exemption relating to that individual. 
Sec. 151(d)(2). For taxable years beginning in 2006, the standard 
deduction amount for an individual who may be claimed as a dependent by 
another taxpayer may not exceed the greater of $850 or the sum of $300 
and the individual's earned income.
---------------------------------------------------------------------------
      A child who cannot be claimed as a dependent on another 
person's tax return is subject to the generally applicable 
filing requirements. Such a child generally must file a return 
if the individual's gross income exceeds the sum of the 
standard deduction and the personal exemption amount ($3,300 
for 2006).
Taxation of unearned income under section 1(g)
      Special rules (generally referred to as the ``kiddie 
tax'') apply to the unearned income of a child who is under age 
14.\457\ The kiddie tax applies if: (1) the child has not 
reached the age of 14 by the close of the taxable year; (2) the 
child's unearned income was more than $1,700 (for 2006); and 
(3) the child is required to file a return for the year. The 
kiddie tax applies regardless of whether the child may be 
claimed as a dependent on the parent's return.
---------------------------------------------------------------------------
    \457\ Sec. 1(g).
---------------------------------------------------------------------------
      For these purposes, unearned income is income other than 
wages, salaries, professional fees, or other amounts received 
as compensation for personal services actually rendered.\458\ 
For children under age 14, net unearned income (for 2006, 
generally unearned income over $1,700) is taxed at the parent's 
rate if the parent's rate is higher than the child's rate. The 
remainder of a child's taxable income (i.e., earned income, 
plus unearned income up to $1,700 (for 2006), less the child's 
standard deduction) is taxed at the child's rates, regardless 
of whether the kiddie tax applies to the child. In general, a 
child is eligible to use the preferential tax rates for 
qualified dividends and capital gains.\459\
---------------------------------------------------------------------------
    \458\ Sec. 1(g)(4) and sec. 911(d)(2).
    \459\ Sec. 1(h).
---------------------------------------------------------------------------
      The kiddie tax is calculated by computing the ``allocable 
parental tax.'' This involves adding the net unearned income of 
the child to the parent's income and then applying the parent's 
tax rate. A child's ``net unearned income'' is the child's 
unearned income less the sum of (1) the minimum standard 
deduction allowed to dependents ($850 for 2006), and (2) the 
greater of (a) such minimum standard deduction amount or (b) 
the amount of allowable itemized deductions that are directly 
connected with the production of the unearned income.\460\ A 
child's net unearned income cannot exceed the child's taxable 
income.
---------------------------------------------------------------------------
    \460\ Sec. 1(g)(4).
---------------------------------------------------------------------------
      The allocable parental tax equals the hypothetical 
increase in tax to the parent that results from adding the 
child's net unearned income to the parent's taxable income. If 
the child has net capital gains or qualified dividends, these 
items are allocated to the parent's hypothetical taxable income 
according to the ratio of net unearned income to the child's 
total unearned income. If a parent has more than one child 
subject to the kiddie tax, the net unearned income of all 
children is combined, and a single kiddie tax is calculated. 
Each child is then allocated a proportionate share of the 
hypothetical increase, based upon the child's net unearned 
income relative to the aggregate net unearned income of all of 
the parent's children subject to the tax.
      Special rules apply to determine which parent's tax 
return and rate is used to calculate the kiddie tax. If the 
parents file a joint return, the allocable parental tax is 
calculated using the income reported on the joint return. In 
the case of parents who are married but file separate returns, 
the allocable parental tax is calculated using the income of 
the parent with the greater amount of taxable income. In the 
case of unmarried parents, the child's custodial parent is the 
parent whose taxable income is taken into account in 
determining the child's liability. If the custodial parent has 
remarried, the stepparent is treated as the child's other 
parent. Thus, if the custodial parent and stepparent file a 
joint return, the kiddie tax is calculated using that joint 
return. If the custodial parent and stepparent file separate 
returns, the return of the one with the greater taxable income 
is used. If the parents are unmarried but lived together all 
year, the return of the parent with the greater taxable income 
is used.\461\
---------------------------------------------------------------------------
    \461\ Sec. 1(g)(5); Internal Revenue Service, Publication 929, Tax 
Rules for Children and Dependents, at 6 (2005).
---------------------------------------------------------------------------
      Unless the parent elects to include the child's income on 
the parent's return (as described below) the child files a 
separate return to report the child's income.\462\ In this 
case, items on the parent's return are not affected by the 
child's income. The total tax due from a child is the greater 
of:
---------------------------------------------------------------------------
    \462\ The child must attach to the return Form 8615, Tax for 
Children Under Age 14 With Investment Income of More Than $1,700 
(2006).
---------------------------------------------------------------------------
      1. the sum of (a) the tax payable by the child on the 
child's earned income and unearned income up to $1,700 (for 
2006), plus (b) the allocable parental tax on the child's 
unearned income, or
      2. the tax on the child's income without regard to the 
kiddie tax provisions.
Parental election to include child's dividends and interest on parent's 
        return
      Under certain circumstances, a parent may elect to report 
a child's dividends and interest on the parent's return. If the 
election is made, the child is treated as having no income for 
the year and the child does not have to file a return. The 
parent makes the election on Form 8814, Parents' Election to 
Report Child's Interest and Dividends. The requirements for the 
parent's election are that:
      1. the child has gross income only from interest and 
dividends (including capital gains distributions and Alaska 
Permanent Fund Dividends); \463\
---------------------------------------------------------------------------
    \463\ Internal Revenue Service, Publication 929, Tax Rules for 
Children and Dependents, at 6 (2005).
---------------------------------------------------------------------------
      2. such income is more than the minimum standard 
deduction amount for dependents ($850 in 2006) and less than 10 
times that amount ($8500 in 2006);
      3. no estimated tax payments for the year were made in 
the child's name and taxpayer identification number;
      4. no backup withholding occurred; and
      5. the child is required to file a return if the parent 
does not make the election.
      Only the parent whose return must be used when 
calculating the kiddie tax may make the election. The parent 
includes in income the child's gross income in excess of twice 
the minimum standard deduction amount for dependents (i.e., the 
child's gross income in excess of $1,700 for 2007). This amount 
is taxed at the parent's rate. The parent also must report an 
additional tax liability equal to the lesser of: (1) $85 (in 
2006), or (2) 10 percent of the child's gross income exceeding 
the child's standard deduction ($850 in 2006).
      Including the child's income on the parent's return can 
affect the parent's deductions and credits that are based on 
adjusted gross income, as well as income-based phaseouts, 
limitations, and floors.\464\ In addition, certain deductions 
that the child would have been entitled to take on his or her 
own return are lost.\465\ Further, if the child received tax-
exempt interest from a private activity bond, that item is 
considered a tax preference of the parent for alternative 
minimum tax purposes.\466\
---------------------------------------------------------------------------
    \464\ Internal Revenue Service, Publication 929, Tax Rules for 
Children and Dependents, at 7 (2005).
    \465\ Internal Revenue Service, Publication 929, Tax Rules for 
Children and Dependents, at 7 (2005).
    \466\ Sec. 1(g)(7)(B).
---------------------------------------------------------------------------
Taxation of compensation for services under section 1(g)
      Compensation for a child's services is considered the 
gross income of the child, not the parent, even if the 
compensation is not received or retained by the child (e.g. is 
the parent's income under local law).\467\ If the child's 
income tax is not paid, however, an assessment against the 
child will be considered as also made against the parent to the 
extent the assessment is attributable to amounts received for 
the child's services.\468\
---------------------------------------------------------------------------
    \467\ Sec. 73(a).
    \468\ Sec. 6201(c).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision increases the age to which the kiddie tax 
provisions apply from under 14 to under 18 years of age. The 
provision also creates an exception to the kiddie tax for 
distributions from certain qualified disability trusts, defined 
by cross-reference to sections 1917 and 1614(a)(3) of the 
Social Security Act.
      Effective date.--The provision applies to taxable years 
beginning after December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment 
provision with one modification. This modification provides 
that the kiddie tax does not apply to a child who is married 
and files a joint return for the taxable year.
7. Impose loan and redemption requirements on pooled financing bonds 
        (sec. 457 of the Senate amendment and sec. 149 of the Code)

                              PRESENT LAW

In general
      Interest on bonds issued by State and local governments 
generally is excluded from gross income for Federal income tax 
purposes if the proceeds of such bonds are used to finance 
direct activities of governmental units or if such bonds are 
repaid with revenues of governmental units. These bonds are 
called ``governmental bonds.'' Interest on State or local 
government bonds issued to finance activities of private 
persons is taxable unless a specific exception applies. These 
bonds are called ``private activity bonds.'' The exclusion from 
income for State and local bonds does not apply to private 
activity bonds, unless the bonds are issued for certain 
permitted purposes. In addition, the Code imposes qualification 
requirements that apply to all State and local bonds. Arbitrage 
restrictions, for example, limit the ability of issuers to 
profit from investment of tax-exempt bond proceeds. The Code 
also imposes requirements that only apply to specific types of 
bond issues. For instance, pooled financing bonds (defined 
below) are not tax-exempt unless the issuer meets certain 
requirements regarding the expected use of proceeds.
Pooled financing bond restrictions
      State or local governments also issue bonds to provide 
financing for the benefit of a third party (a ``conduit 
borrower''). Pooled financing bonds are bond issues that are 
used to make or finance loans to two or more conduit borrowers, 
unless the conduit loans are to be used to finance a single 
project.\469\ The Code imposes several requirements on pooled 
financing bonds if more than $5 million of proceeds are 
expected to be used to make loans to conduit borrowers. For 
purposes of these rules, a pooled financing bond does not 
include certain private activity bonds.\470\
---------------------------------------------------------------------------
    \469\ Treas. Reg. sec. 1.150-1(b).
    \470\ Sec. 149(f)(4)(B).
---------------------------------------------------------------------------
      A pooled financing bond is not tax-exempt unless the 
issuer reasonably expects that at least 95 percent of the net 
proceeds will be lent to ultimate borrowers by the end of the 
third year after the date of issue. The term ``net proceeds'' 
is defined to mean the proceeds of the issue less the following 
amounts: 1) proceeds used to finance issuance costs; 2) 
proceeds necessary to pay interest on the bonds during a three-
year period; and 3) amounts in reasonably required 
reserves.\471\
---------------------------------------------------------------------------
    \471\ Sec. 149(f)(2)(C).
---------------------------------------------------------------------------
      An issuer's past experience regarding loan origination is 
a criterion upon which the reasonableness of the issuer's 
expectations can be based. As an additional requirement for tax 
exemption, all legal and underwriting costs associated with the 
issuance of pooled financing bonds may not be contingent and 
must be substantially paid within 180 days of the date of 
issuance.
Arbitrage restrictions on tax-exempt bonds
      To prevent the issuance of more Federally subsidized tax-
exempt bonds than necessary; the tax exemption for State and 
local bonds does not apply to any arbitrage bond.\472\ An 
arbitrage bond is defined as any bond that is part of an issue 
if any proceeds of the issue are reasonably expected to be used 
(or intentionally are used) to acquire higher yielding 
investments or to replace funds that are used to acquire higher 
yielding investments. In general, arbitrage profits may be 
earned only during specified periods (e.g., defined ``temporary 
periods'') before funds are needed for the purpose of the 
borrowing or on specified types of investments (e.g., 
``reasonably required reserve or replacement funds''). Subject 
to limited exceptions, investment profits that are earned 
during these periods or on such investments must be rebated to 
the Federal Government (``arbitrage rebate'').
---------------------------------------------------------------------------
    \472\ Secs. 103(a) and (b)(2).
---------------------------------------------------------------------------
      The Code contains several exceptions to the arbitrage 
rebate requirement, including an exception for bonds issued by 
small governments (the ``small issuer exception''). For this 
purpose, small governments are defined as general purpose 
governmental units that issue no more than $5 million of tax-
exempt governmental bonds in a calendar year.\473\
---------------------------------------------------------------------------
    \473\ The $5 million limit is increased to $15 million if at least 
$10 million of the bonds are used to finance public schools.
---------------------------------------------------------------------------
      Pooled financing bonds are subject to the arbitrage 
restrictions that apply to all tax-exempt bonds, including 
arbitrage rebate. Under certain circumstances, however, small 
governments may issue pooled financing bonds without those 
bonds counting towards the determination of whether the issuer 
qualifies for the small issuer exception to arbitrage rebate. 
In the case of a pooled financing bond where the ultimate 
borrowers are governmental units with general taxing powers not 
subordinate to the issuer of the pooled bond, the pooled bond 
does not count against the issuer's $5 million limitation, 
provided the issuer is not a borrower from the pooled 
bond.\474\ However, the issuer of the pooled financing bond 
remains subject to the arbitrage rebate requirement for 
unloaned proceeds.\475\
---------------------------------------------------------------------------
    \474\ Sec. 148(f)(4)(D)(ii)(II).
    \475\ Treas. Reg. sec. 1.148-8(d)(1).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

In general
      The provision imposes new requirements on pooled 
financing bonds as a condition of tax-exemption. First, the 
provision imposes a written loan commitment requirement to 
restrict the issuance of pooled bonds where potential borrowers 
have not been identified (``blind pools''). Second, in addition 
to the current three-year expectations requirement, the issuer 
must reasonably expect that at least 50 percent of the net 
proceeds of the pooled bond will be lent to borrowers one year 
after the date of issue. Third, the provision requires the 
redemption of outstanding bonds with proceeds that are not 
loaned to borrowers within the expected loan origination 
periods. Finally, the provision eliminates the rule allowing an 
issuer of pooled financing bonds to disregard the pooled bonds 
for purposes of determining whether the issuer qualifies for 
the small issuer exception to rebate.
Borrower identification
      Under the provision, interest on a pooled financing bond 
is tax exempt only if the issuer obtains written commitments 
with ultimate borrowers for loans equal to at least 50 percent 
of the net proceeds of the pooled bond prior to issuance. The 
loan commitment requirement does not apply to bonds issued by 
States (or an integral part of a State) to provide loans to 
subordinate governmental units or State entities created to 
provide financing for water-infrastructure projects through the 
federally-sponsored State revolving fund program.
Loan origination expectations
      The provision imposes new reasonable expectations 
requirements for loan originations. The issuer must expect that 
at least 50 percent of the net proceeds of a pooled financing 
bond will be lent to ultimate borrowers one year after the date 
of issue. This is in addition to the present-law requirement 
that at least 95 percent of the net proceeds will be lent to 
ultimate borrowers by the end of the third year after the date 
of issue.
Redemption requirement
      Under the provision, if bond proceeds are not loaned to 
borrowers within prescribed periods, outstanding bonds equal to 
the amount of proceeds that were not loaned within the required 
period must be redeemed with 90 days. The bond redemption 
requirement applies with respect to proceeds that are unloaned 
as of expiration of the one-year and three-year loan 
origination periods. For example, if an amount equal to 45 
percent of the net proceeds of an issue are used to make loans 
to ultimate borrowers as of one year after the bonds are 
issued, an amount equal to five percent of the net proceeds of 
the issue is no longer available for lending and must be used 
to redeem bonds within the following six-month period. 
Similarly, if only 85 percent of the net proceeds of the issue 
are used to make qualifying loans (or to redeem bonds) as of 
three years after the bonds are issued, 10 percent of the 
remaining net proceeds is no longer available for lending and 
must be used to redeem bonds within the following six months.
Small issuer exception
      The provision eliminates the rule disregarding pooled 
financing bonds from the issuer's $5,000,000 annual limitation 
for purposes of the small issuer exception to arbitrage rebate.
      Effective date.--The provision is effective for bonds 
issued after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment 
provision, with the following modifications.
      Under the conference agreement, issuers of pooled 
financing bonds must reasonably expect that at least 30 percent 
of the net proceeds of such bonds will be loaned to ultimate 
borrowers one year after the date of issue. The present-law 
requirement that issuers must reasonably expect to loan at 
least 95 percent of the net proceeds of a pooled financing bond 
to ultimate borrowers three years after the date of issue is 
unchanged. Bond proceeds that are not loaned to borrowers as 
required under the one- and three-year rules must be used to 
redeem outstanding bonds within 90 days of the expiration of 
such one- and three-year periods.
      The conference agreement requires issuers of pooled 
financing bonds to obtain, prior to issuance, written 
commitments from borrowers equal to at least 30 percent of the 
net proceeds of the pooled financing bond. The conference 
agreement includes the Senate amendment's exception to the 
written loan commitment requirement. Thus, the loan commitment 
requirement does not apply to pooled financing bonds issued by 
States (or an integral part of a State) to provide loans to 
subordinate governmental units or State entities created to 
provide financing for water-infrastructure projects through the 
federally-sponsored State revolving fund program.
8. Amend information reporting requirements to include interest on tax-
        exempt bonds (sec. 458 of the Senate amendment and sec. 6049 of 
        the Code)

                              PRESENT LAW

Tax-exempt bonds
      Generally, gross income does not include interest on 
State or local bonds.\476\ State and local bonds are classified 
generally as either governmental bonds or private activity 
bonds. Governmental bonds are bonds the proceeds of which are 
primarily used to finance governmental facilities or the debt 
is repaid with governmental funds. Private activity bonds are 
bonds in which the State or local government serves as a 
conduit providing financing to nongovernmental persons (e.g., 
private businesses or individuals). The exclusion from income 
for State and local bonds does not apply to private activity 
bonds, unless the bonds are issued for certain purposes 
(``qualified private activity bonds'') permitted by the 
Code.\477\
---------------------------------------------------------------------------
    \476\ Sec. 103.
    \477\ Secs. 103(b)(1) and 141.
---------------------------------------------------------------------------
Tax-exempt interest reporting by taxpayers
      The Code provides that every person required to file a 
return must report the amount of tax-exempt interest received 
or accrued during any taxable year.\478\ There are a number of 
reasons why the amount of tax-exempt interest received is 
relevant to determining tax liability despite the general 
exclusion from income. For example, the interest income from 
qualified private activity bonds (other than qualified 
501(c)(3) bonds) issued after August 7, 1986, is a preference 
item for purposes of calculating the alternative minimum tax 
(``AMT'').\479\ Tax-exempt interest also is relevant for 
determining eligibility for the earned income credit (the 
``EIC'') \480\ and the amount of Social Security benefits 
includable in gross income.\481\ Moreover, determining 
includable Social Security benefits is necessary for 
calculating either adjusted or modified adjusted gross income 
under several Code sections.\482\
---------------------------------------------------------------------------
    \478\ Sec. 6012(d).
    \479\ Sec. 57(a)(5). Special rules apply to exclude refundings of 
bonds issued before August 8, 1986, and certain bonds issued before 
September 1, 1986.
    \480\ Sec. 32(i).
    \481\ Sec. 86.
    \482\ See Secs. 135, 219, and 221.
---------------------------------------------------------------------------
Information reporting by payors
      The Code generally requires every person who makes 
payments of interest aggregating $10 or more or receives 
payments of interest as a nominee and who makes payments 
aggregating $10 or more to file an information return setting 
forth the amount of interest payments for the calendar year and 
the name, address, and TIN \483\ of the person to whom interest 
is paid.\484\ Treasury regulations prescribe the form and 
manner for filing interest payment information returns. 
Penalties are imposed for failures to file interest payment 
information returns or payee statements.\485\ Treasury 
Regulations also impose recordkeeping requirements on any 
person required to file information returns.\486\ The Code 
excludes interest paid on tax-exempt bonds from interest 
reporting requirements.\487\
---------------------------------------------------------------------------
    \483\ The taxpayer's identification number, generally, for 
individuals is the taxpayer's social security number. Sec. 7701(a)(41).
    \484\ Sec. 6049.
    \485\ Secs. 6721 and 6722.
    \486\ Treas. Reg. sec. 1.6001-1(a).
    \487\ Sec. 6049.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision eliminates the exception from information 
reporting requirements for interest paid on tax-exempt bonds.
      Effective date.--The provision is effective for interest 
paid on tax-exempt bonds after December 31, 2005.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment 
provision.
9. Modification of credit for fuel from a non-conventional source (sec. 
        459 of the Senate amendment and sec. 45K of the Code)

                              PRESENT LAW

      Certain fuels produced from ``non-conventional sources'' 
and sold to unrelated parties are eligible for an income tax 
credit equal to $3 (generally adjusted for inflation) \488\ per 
barrel or Btu oil barrel equivalent (``non- conventional source 
fuel credit'').\489\ Qualified fuels must be produced within 
the United States.
---------------------------------------------------------------------------
    \488\ The inflation adjustment is generally calculated using 1979 
as the base year. Generally, the value of the credit for fuel produced 
in 2005 was $6.79 per barrel-of-oil equivalent produced, which is 
approximately $1.20 per thousand cubic feet of natural gas. The credit 
for coke or coke gas is indexed for inflation using 2004 as the base 
year instead of 1979.
    \489\ Sec. 29 (for tax years ending before 2006); sec. 45K (for tax 
years ending after 2005).
---------------------------------------------------------------------------
            Qualified fuels include:
            --oil produced from shale and tar sands;
            --gas produced from geopressured brine, Devonian 
        shale, coal seams, tight formations, or biomass; and
            --liquid, gaseous, or solid synthetic fuels 
        produced from coal (including lignite).
      Generally, the non-conventional source fuel credit has 
expired, except for certain biomass gas and synthetic fuels 
sold before January 1, 2008, and produced at facilities placed 
in service after December 31, 1992, and before July 1, 1998. 
The non-conventional source fuel credit provision also includes 
a credit for producing coke or coke gas at qualified facilities 
placed in service before 1993 or after June 30, 1998, and 
before 2010. The coke production credit is available for coke 
or coke gas produced over the four-year period beginning on 
January 1, 2006, or the date the facility was placed in 
service, if later. The amount of credit-eligible coke produced 
at any one facility may not exceed an average barrel-of-oil 
equivalent of 4,000 barrels per day.
      The non-conventional source fuel credit is reduced (but 
not below zero) over a $6 (inflation-adjusted) phase-out period 
as the reference price for oil exceeds $23.50 per barrel (also 
adjusted for inflation). The reference price is the Secretary's 
estimate of the annual average wellhead price per barrel for 
all domestic crude oil. The credit did not phase-out for 2004 
because the reference price for that year of $50.26 did not 
exceed the inflation adjusted threshold of $51.35.
      Beginning with taxable years ending after December 31, 
2005, the non-conventional source fuel credit is part of the 
general business credit (sec. 38).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision modifies the manner in which the phase-out 
of the non-conventional source fuel credit is calculated. 
Specifically, in calculating the phase-out of the credit rather 
than relying upon the reference price for the calendar year in 
which the sale of qualified non-conventional fuel occurs, the 
provision uses the reference price for the calendar year 
preceding the calendar year in which the sale occurs. Thus, 
under the provision, whether the credit is phased out in 2005 
is determined by reference to 2004 wellhead prices, whether the 
credit is phased out in 2006 is determined by reference to 2005 
wellhead prices, and so on. In addition, the provision repeals 
the phase-out limitation entirely for coke and coke gas 
produced under section 45K(g).
      The provision eliminates the inflation adjustment for all 
fuels other than coke and coke gas for 2005, 2006, and 2007. 
Thus, the current credit amount of $6.79 per barrel of oil 
equivalent would be retroactively reduced to $6.56 per barrel 
of oil equivalent, and that reduced amount would remain in 
effect through the December 31, 2007. Under the provision, the 
credit amount of $3 per barrel of oil equivalent for coke and 
coke gas produced under section 45K(g) would continue to be 
adjusted for inflation using 2004 as the base year.
      Finally, the provision clarifies that qualifying 
facilities producing coke and coke gas under section 45K(g) do 
not include facilities that produce petroleum-based coke or 
coke gas.
      Effective date.--The provision applies to fuel sold after 
December 31, 2004.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
10. Modification of individual estimated tax safe harbor (sec. 460 of 
        the Senate Amendment and sec. 6654 of the Code)

                              PRESENT LAW

      An individual taxpayer generally is subject to an 
addition to tax for any underpayment of estimated tax. An 
individual generally does not have an underpayment of estimated 
tax if he or she makes timely estimated tax payments equal to 
the lesser of: (1) 90 percent of the tax shown on the current 
year's return or (2) 100 percent of the prior year's tax. For 
individuals with a prior year's AGI above $150,000, however, 
the rule that allows payment of 100 percent of prior year's tax 
is modified. Individuals with prior-year AGI above $150,000 
generally must make estimated payments equal to the lesser of 
(1) 90 percent of the tax shown on the current year's return or 
(2) 110 percent of the tax shown on the prior year's return.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that individuals with prior 
year's AGI above $150,000 who make estimated tax payments based 
on prior year's tax must do so based on 120 percent of the tax 
shown on the prior year's return, for estimated tax payments 
for taxable years beginning in 2006. That percentage will 
revert back to 110 percent for taxable years beginning after 
2006.
      Effective date.--The provision is effective for estimated 
tax payments for taxable years beginning after December 31, 
2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
11. Revaluation of LIFO inventories of large integrated oil companies 
        (sec. 461 of the Senate amendment)

                              PRESENT LAW

      A taxpayer is generally permitted to use a last-in, 
first-out (LIFO) method to inventory goods, on the condition 
that the taxpayer also uses the LIFO method in reporting to 
shareholders, partners, other proprietors, and beneficiaries, 
and for credit purposes.\490\ Under the LIFO method, a taxpayer 
(i) treats goods on hand at the close of the taxable year as 
being: first, those goods included in the opening inventory of 
the taxable year (in the order of acquisition) to the extent 
thereof; and second, those acquired in the taxable year; (ii) 
inventories the goods at cost; and (iii) treats those goods 
included in the opening inventory of the taxable year in which 
the LIFO method was first used as having been acquired at the 
same time, and determines their cost by the average cost 
method.\491\
---------------------------------------------------------------------------
    \490\ Sec. 472(c).
    \491\ Sec. 472.
---------------------------------------------------------------------------
      In periods during which a taxpayer produces or purchases 
more goods than the taxpayer sells (such excess, an ``inventory 
increment''), a LIFO method taxpayer generally records the 
inventory cost of such excess (and separately tracks such 
amount as the ``LIFO layer'' for such period), adds it to the 
cost of inventory at the start of the period, and carries such 
total inventory cost forward to the beginning inventory of the 
following year.
      In periods during which the taxpayer sells more goods 
than the taxpayer produces or purchases (such decrease, an 
``inventory decrement''), a LIFO method taxpayer generally 
determines the cost of goods sold of the amount of the 
decrement by treating such sales as occurring out of the most 
recent LIFO layer (or the most recent LIFO layers, if the 
amount of the decrement exceeds the amount of inventory in the 
most recent LIFO layer) in reverse chronological order.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision disallows a portion of the benefit of the 
LIFO method to integrated oil companies \492\ which have an 
average daily production of crude oil of at least 500,000 
barrels of oil and which have in excess of $1 billion for the 
last taxable year ending during 2005.
---------------------------------------------------------------------------
    \492\ The provision defines an ``integrated oil company'' by cross-
reference to section 291(b)(4), which generally includes retailers and 
large refiners of oil or natural gas or any product derived from oil or 
natural gas.
---------------------------------------------------------------------------
      Specifically, the provision requires such taxpayers to 
revalue each historic LIFO layer of crude oil inventories by 
adding to each layer an amount equal to $18.75 multiplied by 
the number of barrels of crude oil represented by such LIFO 
layer; the taxpayer must reduce its cost of sales for such 
taxable year by a like amount.
      For example, suppose a taxpayer, which is an integrated 
oil company with average daily production of at least 500,000 
barrels of oil and revenues in excess of $1 billion, has a 2005 
starting inventory of 200x barrels, comprised of a 1955 LIFO 
layer with 50x barrels valued at $5 per barrel (with a total 
cost of $250x); a 1985 LIFO layer with 100x barrels valued at 
$18 per barrel (with a total cost $1800x); a 2000 LIFO layer 
with 30x barrels valued at $25 per barrel (with a total cost of 
$750x), and a 2004 LIFO layer with 20x barrels valued at $35 
per barrel (with a total cost $700x), for a total inventory 
value of $3500x. Suppose further that the taxpayer's ending 
inventory is 200x barrels, i.e., the same as the starting 
inventory, so the taxpayer has neither an inventory increment 
nor an inventory decrement for the taxable year.
      Under the provision, the taxpayer will revalue each layer 
upwards by $18.75/barrel. Thus, the taxpayer will increase its 
1955 LIFO layer by $937.50x; its 1985 LIFO layer by $1875x; its 
2000 LIFO layer by $562.50x; and its 2004 LIFO layer by $375x. 
The taxpayer will offset this $3750x increase in inventory by 
reducing by $3750x the taxpayer's cost of goods sold for the 
last taxable year ending in 2005. In the event the taxpayer's 
cost of goods sold for such taxable year prior to such 
reduction is less than $3750x, the taxpayer will reduce its 
cost of goods sold to zero and increase its gross income for 
such taxable year by such difference.
      Effective date.--The provision is effective for the last 
taxable year of a taxpayer ending in 2005.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
12. Amortization of geological and geophysical expenditures (sec. 462 
        of the Senate amendment and sec. 167(h) of the Code)

                              PRESENT LAW

      Geological and geophysical expenditures (``G&G costs'') 
are costs incurred by a taxpayer for the purpose of obtaining 
and accumulating data that will serve as the basis for the 
acquisition and retention of mineral properties by taxpayers 
exploring for minerals. G&G costs incurred in connection with 
oil and gas exploration in the United States may be amortized 
over two years.\493\ In the case of abandoned property, 
remaining basis may not be recovered in the year of abandonment 
of a property as all basis is recovered over the two-year 
amortization period.
---------------------------------------------------------------------------
    \493\ Sec. 167(h).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The provision repeals the two-year amortization period 
with respect to G&G costs paid or incurred by certain large 
integrated oil companies, defined to include integrated oil 
companies (as defined in section 291(b)(4) of the Code) that 
have an average daily worldwide production of crude oil of at 
least 500,000 barrels. Thus, affected oil companies are 
required to capitalize their G&G costs associated with 
successful exploration projects that result in the acquisition 
of property. Such companies can recover any G&G costs 
associated with abandoned property in the year of abandonment.
      Effective date.--The provision is effective for G&G costs 
paid or incurred in taxable years beginning after August 8, 
2005.

                          CONFERENCE AGREEMENT

      The conference agreement extends the two-year 
amortization period for G&G costs to five years for certain 
major integrated oil companies. Under the conference agreement, 
the five-year amortization rule for G&G costs applies only to 
integrated oil companies that have an average daily worldwide 
production of crude oil of at least 500,000 barrels for the 
taxable year, gross receipts in excess of $1 billion in the 
last taxable year ending during calendar year 2005, and an 
ownership interest in a crude oil refiner of 15 percent or 
more.
      Effective date.--The provision applies to amounts paid or 
incurred after the date of enactment.
13. Valuation of employee personal use of noncommercial aircraft (sec. 
        463 of the Senate amendment)

                              PRESENT LAW

      Unless an exception applies, gross income includes 
compensation for services, including fees, commissions, fringe 
benefits, and similar items. In general, an employee or other 
service provider must include in gross income the amount by 
which the fair value of a fringe benefit exceeds the amount 
paid by the individual. Treasury regulations provide rules 
regarding the valuation of fringe benefits, including flights 
on an employer-provided aircraft.\494\ In general, the value of 
a non-commercial flight is determined under the base aircraft 
valuation formula, also known as the Standard Industry Fare 
Level formula or ``SIFL''.\495\ If the SIFL valuation rules do 
not apply, the value of a flight on a company-provided aircraft 
is generally equal to the amount that an individual would have 
to pay in an arm's-length transaction to charter the same or a 
comparable aircraft for that period for the same or a 
comparable flight.\496\
---------------------------------------------------------------------------
    \494\ Treas. Reg. sec. 1.61-21.
    \495\ Treas. Reg. sec. 1.61-21(g).
    \496\ Treas. Reg. sec. 1.61-21(b)(6).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      Under the Senate amendment, for purposes of income 
inclusion, the value of any employee personal use of 
noncommercial aircraft is equal to the excess of (1) the 
greater of the fair market value of such use or actual cost of 
such use (including all fixed and variable costs), over (2) the 
amount paid by or on behalf of the employee for such use. Thus, 
the SIFL valuation rules may no longer be used to determine the 
value of such use.
      Effective date.--The provision applies to use after the 
date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
14. Application of Foreign Investment in Real Property Tax Act 
        (``FIRPTA'') to Regulated Investment Companies (``RICs'') (sec. 
        464 of the Senate amendment and sec. 897(h)(4) of the Code)
In general
      A nonresident alien individual or foreign corporation is 
taxable on its taxable income which is effectively connected 
with the conduct of a trade or business within the United 
States, at the income tax rates applicable to U.S. persons. A 
nonresident alien individual is taxed (at a 30-percent rate) on 
gains, derived from sources within the United States, from the 
sale or exchange of capital assets if the individual is present 
in the United States for 183 days or more during the taxable 
year.
      In addition, the Foreign Investment in Real Property Tax 
Act (FIRPTA) \497\ generally treats a nonresident alien 
individual or foreign corporation's gain or loss from the 
disposition of a U.S. real property interest (USRPI) as income 
that is effectively connected with a U.S. trade or business, 
and thus taxable at the income tax rates applicable to U.S. 
persons, including the rates for net capital gain. A foreign 
investor subject to tax on this income is required to file a 
U.S. income tax return under the normal rules relating to 
receipt of income effectively connected with a U.S. trade or 
business.
---------------------------------------------------------------------------
    \497\ FIRPTA is codified in section 897 of the Code.
---------------------------------------------------------------------------
      The payor of FIRPTA effectively connected income to a 
foreign person is generally required to withhold U.S. tax from 
the payment. Withholding is generally 10 percent of the sales 
price in the case of a direct sale by the foreign person of a 
USRPI, and 35 percent of the amount of a distribution to a 
foreign person of proceeds attributable to such sales from an 
entity such as a partnership.\498\ The foreign person can 
request a refund with its U.S. tax return, if appropriate based 
on that person's total U.S. effectively connected income and 
deductions (if any) for the taxable year.
---------------------------------------------------------------------------
    \498\ Sec. 1445 and Treasury regulations thereunder. The Treasury 
department is authorized to issue regulations that would reduce the 35 
percent withholding on distributions to 15 percent during the time that 
the maximum income tax rate on dividends and capital gains of U.S. 
persons is 15 percent.
    Section 1445 statutorily requires the 10 percent withholding by the 
purchaser of a USRPI and the 35 percent withholding (or less if 
directed by Treasury) on certain distributions by partnerships, trusts, 
and estates, among other situations. Treasury regulations prescribe the 
35 percent withholding requirement for distributions by REITs to 
foreign shareholders. Treas. Reg. sec. 1.1445-8. No regulations have 
been issued relating specifically to RIC distributions, which first 
became subject to FIRPTA in 2005.
---------------------------------------------------------------------------
      USRPIs include interests in real property located in the 
United States or the U.S. Virgin Islands, and stock of a 
domestic U.S. real property holding company (USRPHC), generally 
defined as any corporation, unless the taxpayer established 
that the fair market value of its U.S. real property interests 
is less than 50 percent of the combined fair market value of 
all its real property interests (U.S. and worldwide) and of all 
its assets used or held for use in a trade or business.\499\ 
However, any class of stock that is regularly traded on an 
established securities market located in the U.S. is treated as 
a U.S. real property interest only if the seller held more than 
5 percent of the stock at any time during the 5-year period 
ending on the date of disposition of the stock.\500\
---------------------------------------------------------------------------
    \499\ Sec. 897(c)(2).
    \500\ Sec. 897(c)(3).
---------------------------------------------------------------------------
Special rules for certain investment entities
      Real estate investment trusts and regulated investment 
companies are generally passive investment entities. They are 
organized as U.S. domestic entities and are taxed as U.S. 
domestic corporations. However, because of their special 
status, they are entitled to deduct amounts distributed to 
shareholders and, in some cases, to allow the shareholders to 
characterize these amounts based on the type of income the REIT 
or RIC received. Among numerous other requirements for 
qualification as a REIT or RIC, the entity is required to 
distribute to shareholders at least 90 percent of its income 
(excluding net capital gain) annually.\501\ A REIT or RIC may 
designate a capital gain dividend to its shareholders, who then 
treat the amount designated as capital gain.\502\ A REIT or RIC 
is taxed at regular corporate rates on undistributed income; 
but the combination of the requirement to distribute income 
other than net capital gain, plus the ability to declare a 
capital gain dividend and avoid corporate level tax on such 
income, can result in little, if any, corporate level tax paid 
by a REIT or RIC. Instead, the shareholder-level tax on 
distributions is the principal tax paid with respect to income 
of these entities. The requirements for REIT eligibility 
include primary investment in real estate assets (which assets 
can include mortgages). The requirements for RIC eligibility 
include primary investment in stocks and securities (which can 
include stock of REITs or of other RICs).
---------------------------------------------------------------------------
    \501\ Secs. 852(a)(1) and 852(b)(2)(A); 857(a)(1).
    \502\ Secs. 852(b)(3); 857(b)(3).
---------------------------------------------------------------------------
      FIRPTA contains special rules for real estate investment 
trusts (REITs) and regulated investment companies (RICs).\503\
---------------------------------------------------------------------------
    \503\ Sec. 897(h).
---------------------------------------------------------------------------
      Stock of a ``domestically controlled'' REIT is not a 
USRPI. The term ``domestically controlled'' is defined to mean 
that less than 50 percent in value of the REIT has been owned 
by non-U.S. shareholders during the 5-year period ending on the 
date of disposition.\504\ For 2005, 2006, and 2007, a similar 
exception applies to RIC stock. Thus, stock of a domestically 
controlled REIT or RIC can be sold without FIRPTA consequences. 
This exception applies regardless of whether the sale of stock 
is made directly by a foreign person, or by a REIT or RIC whose 
distributions to foreign persons of gain attributable to the 
sale of USRPI's would be subject to FIRPTA as described below.
---------------------------------------------------------------------------
    \504\ Sec. 897(h)(2) and (h)(4)(B).
---------------------------------------------------------------------------
      A distribution by a REIT to a foreign shareholder, to the 
extent attributable to gain from the REIT's sale or exchange of 
USRPIs, is generally treated as FIRPTA gain to the shareholder. 
An exception enacted in 2004 applies if the distribution is 
made on a class of REIT stock that is regularly traded on an 
established securities market located in the United States and 
the foreign shareholder has not held more than 5 percent of the 
class of stock at any time during the one-year period ending on 
the date of the distribution.\505\ Where the exception applies, 
the distribution to the foreign shareholder is treated as the 
distribution of an ordinary dividend (rather than as a capital 
gain dividend), subject to 30-percent (or lower treaty rate) 
withholding.\506\
---------------------------------------------------------------------------
    \505\ This exception, effective beginning in 2005, was added by 
section 418 of the American Jobs Creation Act of 2004 (``AJCA''), Pub. 
L. No. 108-357, and modified by section 403(p) of the Tax Technical 
Corrections Act of 2005.
    \506\ Sec. 857(b)(3)(F).
---------------------------------------------------------------------------
      Prior to 2005, distributions by RICs to foreign 
shareholders, to the extent attributable to the RIC's sale or 
exchange of USRPIs, were not treated as FIRPTA gain. If 
distributions were attributable to long-term capital gains, the 
RIC could designate the distributions as long-term capital gain 
dividends that would not be subject to any tax to the foreign 
shareholder, rather than as a regular dividends subject to 30-
percent (or lower treaty rate) withholding.\507\ For 2005, 
2006, and 2007, RICs are subject to the rule that had applied 
to REITs prior to 2005, i.e., any distribution to a foreign 
shareholder attributable to gain from the RIC's sale of a USRPI 
is characterized as FIRPTA gain, without any exceptions.\508\
---------------------------------------------------------------------------
    \507\ Sec. 852(b)(3)(C); Treas. Reg. sec. 1.1441-3(c)(2)(D).
    \508\ This requirement for RICs was added by section 411 of the 
American Jobs Creation Act of 2004 (``AJCA''), in connection with the 
enactment of other rules that allow RICs to identify certain types of 
distributions to foreign shareholders, attributable to the RIC's 
receipt of short-term capital gains or interest income, as 
distributions to such shareholders of such short-term gains or interest 
income and thus not taxed to the foreign shareholders, rather than as 
regular dividends that would be subject to withholding. See Secs. 
871(k), 881(e), 1441(c)(12) and 1442(a). All these rules are scheduled 
to expire at the end of 2007, as is the rule subjecting to FIRPTA all 
distributions of RIC gain attributable to sales of U.S. real property 
interests and the rule excepting from FIRPTA a foreign person's sale of 
stock of a ``domestically controlled'' RIC.
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provision provides that 
distributions by a RIC to foreign shareholders of amounts 
attributable to the sale of USRPIs are not treated as FIRPTA 
income unless the RIC itself is a U.S. real property holding 
corporation (i.e. 50 percent or more of its value is 
represented by its U.S. real property interests, including 
investments in U.S. real property holding corporations). In 
determining whether a RIC is a real property holding company 
for this purpose, a special rule applies that requires the RIC 
to include as U.S. real property interests its holdings of RIC 
or REIT stock if such RIC or REIT is a U.S. real property 
holding corporation, even if such stock is regularly traded on 
an established securities market and even if the RIC owns less 
than 5 percent of such stock. Another special rule requires the 
RIC to include as U.S. real property interests its interests in 
any domestically controlled RIC or REIT that is a U.S. real 
property holding corporation.
      Effective date.--The provision applies to distributions 
with respect to taxable years beginning after December 31, 
2004.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment 
provision with a clarification to the effective date. Under the 
clarification, the provision takes effect as if included in the 
provisions of section 411 of the American Jobs Creation Act of 
2004 to which it relates.
15. Treatment of REIT and RIC distributions attributable to FIRPTA 
        gains (secs. 465 and 466 of the Senate amendment and secs. 897, 
        852, and 871 of the Code)

                              PRESENT LAW

General treatment of U.S.-source income of foreign investors
            Fixed and determinable annual and periodical income
      The United States generally imposes a flat 30-percent 
tax, collected by withholding, on the gross amount of U.S.-
source investment income payments, such as interest, dividends, 
rents, royalties and similar types of fixed and determinable 
annual and periodical income, to nonresident alien individuals 
and foreign corporations (``foreign persons'').\509\ Under 
treaties, the United States may reduce or eliminate such taxes.
---------------------------------------------------------------------------
    \509\ Secs. 871(a), 881, 1441, and 1442.
---------------------------------------------------------------------------
            Dividends
      Even taking into account U.S. treaties, the tax on a 
dividend generally is not entirely eliminated. Instead, U.S.-
source portfolio investment dividends received by foreign 
persons generally are subject to U.S. withholding tax at a rate 
of at least 15 percent.
            Interest
      Although payments of U.S.-source interest that is not 
effectively connected with a U.S. trade or business generally 
are subject to the 30-percent withholding tax, there are 
exceptions to that rule. For example, interest from certain 
deposits with banks and other financial institutions is exempt 
from tax.\510\ Original issue discount on obligations maturing 
in 183 days or less from the date of original issue (without 
regard to the period held by the taxpayer) is also exempt from 
tax.\511\ An additional exception is provided for certain 
interest paid on portfolio obligations.\512\ Such ``portfolio 
interest'' generally is defined as any U.S.-source interest 
(including original issue discount), not effectively connected 
with the conduct of a U.S. trade or business, (i) on an 
obligation that satisfies certain registration requirements or 
specified exceptions thereto (i.e., the obligation is ``foreign 
targeted''), and (ii) that is not received by a 10-percent 
shareholder.\513\ With respect to a registered obligation, a 
statement that the beneficial owner is not a U.S. person is 
required.\514\ This exception is not available for any interest 
received either by a bank on a loan extended in the ordinary 
course of its business (except in the case of interest paid on 
an obligation of the United States), or by a controlled foreign 
corporation from a related person.\515\ Moreover, this 
exception is not available for certain contingent interest 
payments.\516\ For 2005, 2006 and 2007, a regulated investment 
company (``RIC'') may designate certain distributions to 
foreign shareholders that are attributable to the RIC's 
qualified interest income as non-taxable interest distributions 
to such foreign persons.\517\
---------------------------------------------------------------------------
    \510\ Secs. 871(i)(2)(A) and 881(d).
    \511\ Sec. 871(g).
    \512\ Secs. 871(h) and 881(c).
    \513\ Secs. 871(h)(3) and 881(c)(3).
    \514\ Secs. 871(h)(2), (5) and 881(c)(2).
    \515\ Sec. 881(c)(3).
    \516\ Secs. 871(h)(4) and 881(c)(4).
    \517\ This interest distribution rule was added by section 411 of 
the American Jobs Creation Act of 2004 (``AJCA''), Pub. L. No. 108-357.
---------------------------------------------------------------------------
            Capital gains
      A foreign person generally is not subject to U.S. tax on 
capital gain, including gain realized on the disposition of 
stock or securities issued by a U.S. person, unless the gain is 
effectively connected with the conduct of a trade or business 
in the United States or such person is an individual present in 
the United States for a period or periods aggregating 183 days 
or more during the taxable year.\518\ A regulated investment 
company (RIC) can generally designate dividends to foreign 
persons that are attributable to the RIC's long term capital 
gain as a long-term gain dividends that are not subject to 
withholding.\519\ For 2005, 2006 and 2007, RICs may also 
designate short-term capital gain dividends.\520\
---------------------------------------------------------------------------
    \518\ Secs. 871(a)(2) and 881.
    \519\ Treas. Reg. sec. 1.1441-3(c)(2)(D).
    \520\ This short-term gain distribution rule was added by section 
411 of AJCA.
---------------------------------------------------------------------------
      For the years 2005, 2006 and 2007, RIC capital gain 
dividends that are attributable to the sale of U.S. real 
property interests (which can include stock of companies that 
are U.S. real property holding companies) are subject to 
special rules described below.
      Real estate investment trusts (REITs) can also designate 
long-term capital gain dividends to shareholders; but when made 
to a foreign person such distributions attributable to the sale 
of U.S. real property interests are also subject to the special 
rules described below.
Foreign Investment in Real Property Tax Act (``FIRPTA'')
      Unlike most other U.S. source capital gains, which are 
generally not taxed to a foreign investor, the Foreign 
Investment in Real Property Tax Act of 1980 (FIRPTA) subjects 
gain or loss of a foreign person from the disposition of a U.S. 
real property interest (USRPI) to tax as if the taxpayer were 
engaged in a trade or business within the United States and the 
gain or loss were effectively connected with such trade or 
business.\521\ In addition to an interest in real property 
located in the United States or the Virgin Islands, USRPIs 
include (among other things) any interest in a domestic 
corporation unless the taxpayer establishes that the 
corporation was not, during a five-year period ending on the 
date of the disposition of the interest, a U.S. real property 
holding corporation (which is defined generally to mean any 
corporation the fair market value of whose U.S. real property 
interests equals or exceeds 50 percent of the sum of the fair 
market values of its real property interests and any other of 
its assets used or held for use in a trade or business).
---------------------------------------------------------------------------
    \521\ Sec. 897.
---------------------------------------------------------------------------
      Distributions by a REIT to its foreign shareholders 
attributable to the sale of USRPI's are generally treated as 
income from the sale of USRPIs.\522\ Treasury regulations 
require the REIT to withhold at 35 percent on such a 
distribution.\523\ However, there is an exception for 
distributions by a REIT with respect to stock of the REIT that 
is regularly traded on an established securities market located 
in the U.S., to a foreign shareholder that has not held more 
than 5 percent of the stock of the REIT for the one year period 
ending with the date of the distribution.\524\ In such cases, 
the REIT and the shareholder treat the distribution to a 
foreign shareholder as the distribution of an ordinary 
dividend,\525\ subject to the 30-percent (or lower treaty rate) 
withholding applicable to dividends.
---------------------------------------------------------------------------
    \522\ Sec. 897(h)(1).
    \523\ Treas. Reg. sec. 1.1445-8.
    \524\ Sec. 897(h)(1)(second sentence).
    \525\ Sec. 857(b)(3)(F).
---------------------------------------------------------------------------
      For 2005, 2006, and 2007, any RIC distribution to a 
foreign shareholder attributable to the sale of USRPIs is 
treated as FIRPTA income, without any exceptions.\526\ However, 
no Treasury regulations have been issued addressing withholding 
obligations with respect to such distributions.
---------------------------------------------------------------------------
    \526\ Sec. 897(h)(1)
---------------------------------------------------------------------------
      A more complete description of the provisions of FIRPTA 
and the special rules under FIRPTA that apply to RICs and REITs 
is contained under ``Present Law'' for the provision 
``Application of Foreign Investors in Real Property Tax Act 
(FIRPTA) to Regulated Investment Companies (RICS).
      Although the law thus provides rules for taxing foreign 
persons under FIRPTA on distributions of gain from the sale of 
USRPIs by RICs or REITs, some taxpayers may be taking the 
position that if a foreign person invests in a RIC or REIT 
that, in turn, invests in a lower-tier RIC or REIT that is the 
entity that disposes of USRPIs and distributes the proceeds, 
then the proceeds from such disposition by the lower-tier RIC 
or REIT cease to be FIRPTA income when distributed to the 
upper-tier RIC or REIT (which is not itself a foreign person), 
and can thereafter be distributed by that latter entity to its 
foreign shareholders as non- FIRPTA income of such RIC or REIT, 
rather than continuing to be categorized as FIRPTA income. 
Furthermore, RICs may take the position that in the absence of 
regulations or a specific statutory rule addressing the 
withholding rules for FIRPTA capital gain that is treated as 
effectively connected with a U.S. trade or business, such gain 
should be considered capital gain for which no withholding is 
required.
      In addition, some foreign persons may be attempting to 
avoid FIRPTA tax on a distribution from a RIC or a REIT, by 
selling the RIC or REIT stock shortly before the distribution 
and buying back the stock shortly after the distribution. If 
the stock is not a U.S. real property interest in the hands of 
the foreign seller, that person would take the position that 
the gain on the sale of the stock is capital gain not subject 
to U.S. tax. Stock of a RIC or REIT that is ``domestically 
controlled'' is not a U.S. real property interest.\527\
---------------------------------------------------------------------------
    \527\ Sec. 897(g)(3). A RIC or REIT is ``domestically controlled'' 
if less than 50 percent in value of the entity's stock is held by 
foreign persons. RIC stock ceases to be eligible for this exception as 
of the end of 2007. Distributions by a domestically controlled RIC or 
REIT, if attributable to the sale of U.S. real property interests, are 
not exempt from FIRPTA by reason of such domestic control. A foreign 
person that would be subject to FIRPTA on receipt of a distribution 
from such an entity might sell its stock before the distribution and 
repurchase stock after the distribution in an attempt to avoid FIRPTA 
consequences.
    Under a different exception from FIRPTA, applicable to stock of all 
entities, neither RIC nor REIT stock is a U.S. real property interest 
if the RIC or REIT stock is regularly traded on an established 
securities market located in the United States and if the stock sale is 
made by a foreign shareholder that has not owned more than five percent 
of the stock during the five years ending with the date of the sale. 
Sec. 897(c)(3). Distributions by a REIT to a foreign person, 
attributable to the sale of U.S. real property interests, are also not 
subject to FIRPTA if made with respect to stock that is regularly 
traded on an established securities market located in the United States 
and made to a foreign person that has not held more than five percent 
of the REIT stock for the one-year period ending on the date of 
distribution. (Sec. 897(h)(1), second sentence.) Thus, any foreign 
shareholder of such a regularly traded REIT that would be exempt from 
FIRPTA on a sale of the REIT stock immediately before a distribution 
would also generally be exempt from FIRPTA on a distribution from the 
REIT if such shareholder held the stock through the date of the 
distribution, due to the holding period requirements. Distributions 
that are not subject to FIRPTA under this five percent exception are 
recharacterized as ordinary dividends and thus would normally be 
subject to ordinary dividend withholding rules. Secs. 857(b)(3)(F) and 
1441.
---------------------------------------------------------------------------
      If the stock is a USRPI in the hands of the foreign 
person, the transferee generally is required to withhold 10 
percent of the gross sales price under general FIRPTA 
withholding rules.\528\
---------------------------------------------------------------------------
    \528\ Secs. 1445(a) and 1445(e).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The first part of the Senate amendment provision requires 
any distribution that is made by a RIC or a REIT that would 
otherwise be subject to FIRPTA because the distribution is 
attributable to the disposition of a U.S. real property 
interest (USRPI) to retain its character as FIRPTA income when 
distributed to any other RIC or REIT, and to be treated as if 
it were from the disposition of a USRPI by that other RIC or 
REIT. Under the provision, a RIC continues to be subject to 
FIRPTA, even after December 31, 2007, in any case in which a 
REIT makes a distribution to the RIC that is attributable to 
gain from the sale of U.S. real property interests.
      The second part of the Senate amendment provision 
provides that a distribution by a RIC to a foreign shareholder, 
or to a RIC or REIT shareholder, attributable to sales of 
USRPIs is not treated as gain from the sale of a USRPI by that 
shareholder if the distribution is made with respect to a class 
of RIC stock that is regularly traded on an established 
securities market \529\ located in the U.S. and if such 
shareholder did not hold more than 5 percent of such stock 
within the one year period ending on the date of the 
distribution. Such distributions instead are treated as 
dividend distributions.\530\
---------------------------------------------------------------------------
    \529\ It is intended that the rules generally applicable for this 
purpose under section 897 also apply under the provision in determining 
whether a class of interests is regularly traded on an established 
securities market located in the United States. For example, at the 
present time the rules currently in force for this purpose include 
Temp. Reg. sec. 1.897-9T(d)(2).
    \530\ The provision treats such distributions as ordinary dividend 
distributions rather than as distributions of long term capital gain. 
This rule is the same as the present law rule for publicly traded REITs 
making a distribution to a foreign shareholder. In addition, under the 
immediately preceding provision (sec. 464) of the Senate amendment, for 
the years 2005, 2006 and 2007 that RICs are subject to FIRPTA, a RIC 
can make distributions from sales of USRPIs to shareholders who do not 
meet this rule, and such distributions will be treated not as dividends 
but as non-taxable long- or short-term capital gain, if so designated 
by the RIC, as long as the RIC itself is not a USRPHC after applying 
the special rules for counting the RIC's ownership of REIT or other RIC 
stock.
---------------------------------------------------------------------------
      The third part of the Senate amendment provision requires 
a foreign person that disposes of stock of a RIC or REIT during 
the 30-day period preceding a distribution on that stock that 
would have been treated as a distribution from the disposition 
of a USRPI, that acquires an identical stock interest during 
the 60 day period beginning the first day of such 30-day period 
preceding the distribution, and that does not in fact receive 
the distribution in a manner that subjects the person to tax 
under FIRPTA, to pay FIRPTA tax on an amount equal to the 
amount of the distribution that was not taxed under FIRPTA as a 
result of the disposition. A foreign person is treated as 
having acquired any interest acquired by any person treated as 
related to that foreign first person under section 
465(b)(3)(C).\531\
---------------------------------------------------------------------------
    \531\ These relationships generally include persons that are 
engaged in trades or businesses under common control (generally, a more 
than 50 percent relationship) and also include persons that have a more 
than 10 percent relationship, such as (for example) a corporation and 
an individual owning more than 10 percent of the corporation; or a 
corporation and a partnership if the same persons own more than 10 
percent of the interests in each.
---------------------------------------------------------------------------
      This third part of the Senate amendment provision applies 
only in the case of a shareholder that would have been treated 
as receiving FIRPTA income on the distribution if that 
shareholder had in fact received the distribution, but that 
would not have been treated as receiving FIRPTA income if the 
form of the disposition transaction were respected. This 
category of persons consists of persons that are shareholders 
in a domestically controlled RIC or REIT (since sales of shares 
of such an entity are not subject to FIRPTA tax), but does not 
include a person who sells stock that is regularly traded on an 
established securities market located in the U.S. and who did 
not own more than five percent of such stock during the one 
year period ending on the date of the distribution (since such 
a person would not have been subject to FIRPTA tax under 
present law for REITs and under the second part of the Senate 
amendment provision for RICs, supra., if that person had 
received the dividend instead of disposing of the stock).
      Notwithstanding the recharacterization of the disposition 
as involving a FIRPTA distribution to the foreign person, no 
withholding on disposition proceeds to the foreign person on 
the disposition of such stock would be required. No inference 
is intended as to what situations under present law would or 
would not be respected as dispositions.
      Effective dates.--The first part of the Senate amendment 
provision is effective for distributions with respect to 
taxable years of a RIC or REIT beginning after the date of 
enactment.
      The second part of the Senate amendment provision applies 
to dividends with respect to taxable years of regulated 
investment companies beginning after December 31, 2004.
      The third part of the Senate amendment provision is 
effective for dispositions after December 31, 2005, in taxable 
years ending after that date.

                          CONFERENCE AGREEMENT

      The conference agreement includes the Senate amendment 
provision with modifications and clarifications.
      The conference agreement provides that the second part of 
the Senate amendment provision, treating certain distributions 
attributable to sales of U.S. real property interests as 
dividends subject to dividend withholding, applies when the 
distribution is made to a foreign shareholder of a RIC or REIT, 
but does not apply when the distribution is made to another RIC 
or a REIT. In such cases, the character of the distribution as 
FIRPTA gain is retained and must be tracked by the recipient 
RIC or REIT, but the distribution itself does not become 
dividend income in the hands of such RIC or REIT. Therefore, 
such recipient RIC or REIT can in turn distribute amounts 
attributable to that distribution (attributable to the sale of 
USRPIs) to its U.S shareholders as capital gain. However, if 
any recipient RIC or REIT in turn distributes to a foreign 
shareholder amounts that are attributable to a sale by a lower 
tier RIC or REIT of USRPIs, such amounts distributed to a 
foreign shareholder shall be treated as FIRPTA gain or as 
dividend income, according to whether or not such distribution 
to such foreign shareholder qualifies for dividend treatment.
      The conference agreement amends section 1445 so that it 
explicitly requires withholding on RIC and REIT distributions 
to foreign persons, attributable to the sale of USRPIs, at 35 
percent, or, to the extent provided by regulations, at 15 
percent.\532\
---------------------------------------------------------------------------
    \532\ This provision is similar to present law section 1445(c)(1). 
The regulatory authority to reduce the withholding to 15 percent 
sunsets in accordance with the same sunset that applies to section 
1445(c)(1), at the time that the present law maximum 15 percent rate on 
dividends is scheduled to sunset.
    Treasury regulations under section 1445 already impose FIRPTA 
withholding on REITs under present law. Treasury has not yet written 
regulations applicable to RICs. No inference is intended regarding the 
existing Treasury regulations in force under section 1445 with respect 
to REITs.
---------------------------------------------------------------------------
      The conference agreement clarifies that the treatment of 
a RIC as a qualified investment entity continues after December 
2007 with respect to a RIC that receives a distribution from a 
REIT, not only for purposes of the distribution rules, 
including withholding on distributions to foreign shareholders, 
but also for purposes of the new ``wash sale'' rules of the 
provision.
      The conference agreement modifies the new ``wash sale'' 
rule. The period within which the basic ``wash-sale'' rule 
applies is changed from 60 days to 61 days.\533\ The definition 
of ``applicable wash sales transaction'' is expanded to cover 
not only situations in which the taxpayer acquires a 
substantially identical interest, but also situations in which 
the taxpayer enters into a contract or option to acquire such 
an interest. The related party rule is also modified to apply 
the 50-percent relationship test under section 267(b) and 
707(b)(1) rather than a 10-percent test.
---------------------------------------------------------------------------
    \533\ Thus the period includes the 30 days before and the 30 days 
after the ex-dividend date, in addition to the ex-dividend date itself.
---------------------------------------------------------------------------
      In addition, treatment of a foreign shareholder of a RIC 
or REIT as if it had received a FIRPTA distribution that is 
treated as U.S. effectively connected income is extended to 
transactions that meet the definition of ``substitute dividend 
payments'' provided for purposes of section 861 and that would 
be properly treated by the foreign taxpayer as receipt of a 
distribution of FIRPTA gain if the distribution from the RIC or 
REIT had itself been received by the taxpayer, but that, by 
virtue of the substitute dividend payment, is not so treated 
but for the provision,\534\ as well as to other similar 
arrangements to which Treasury may extend the rules.
---------------------------------------------------------------------------
    \534\ The conference agreement adopts the definition of 
``substitute dividend payment'' used for purposes of section 861, which 
definition applies to determine substitute dividend payments under the 
conference agreement provision, even though the recipient may not be an 
individual and even though the underlying payment would not have been 
treated as a dividend to the recipient but as a distribution of FIRPTA 
gain. Treasury regulations section 1.861-3(a)(6) defines a ``substitute 
dividend payment'' as a payment, made to the transferor of a security 
in a securities lending transaction or a sale-repurchase transaction, 
of an amount equivalent to a dividend distribution which the owner of 
the transferred security is entitled to receive during the term of the 
transaction. The regulation applies to amounts received or accrued by 
the taxpayer. The regulation defines a securities lending transaction 
as a transfer of one or more securities that is described in section 
1058(a) or a substantially similar transaction. The regulation defines 
a sale-repurchase transaction as an agreement under which a person 
transfers a security in exchange for cash and simultaneously agrees to 
receive substantially identical securities from the transferee in the 
future in exchange for cash. Under the regulation, a ``substitute 
dividend payment'' is generally sourced and in many instances 
characterized in the same manner as the underlying distribution with 
respect to the transferred security.
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      Effective date.--The first part of the conference 
agreement provision, relating to distributions generally, 
applies to distributions with respect to taxable years of RICs 
and REITs beginning after December 31, 2005, except that no 
withholding is required under sections 1441, 1442, or 1445 with 
respect to any distribution before the date of enactment if 
such amount was not otherwise required to be withheld under any 
such section as in affect before the amendments made by the 
conference agreement.
      The second part of the conference agreement, relating to 
the ``wash sale'' and substitute dividend payment transactions, 
is applicable to distributions and substitute dividend payments 
occurring on or after the 30th day following the date of 
enactment.
      No inference is intended regarding the treatment under 
present law of any transactions addressed by the conference 
agreement.
16. Credit to holders of rural renaissance bonds (sec. 469 of the 
        Senate amendment)

                              PRESENT LAW

In general
      Interest on bonds issued by State and local governments 
generally is excluded from gross income for Federal income tax 
purposes if the proceeds of such bonds are used to finance 
direct activities of governmental units or if such bonds are 
repaid with revenues of governmental units. These bonds are 
called ``governmental bonds.'' Interest on State or local 
government bonds issued to finance activities of private 
persons is taxable unless a specific exception applies. These 
bonds are called ``private activity bonds.'' The term ``private 
person'' generally includes the Federal Government and all 
other individuals and entities other than States or local 
governments.
      Private activity bonds are eligible for tax-exemption if 
issued for certain purposes permitted by the Code (``qualified 
private activity bonds''). Generally, qualified private 
activity bonds are subject to restrictions on the use of 
proceeds for the acquisition of land and existing property, use 
of proceeds to finance certain specified facilities (e.g., 
airplanes, skyboxes, other luxury boxes, health club 
facilities, gambling facilities, and liquor stores), and use of 
proceeds to pay costs of issuance (e.g., bond counsel and 
underwriter fees). Small issue and redevelopment also are 
subject to additional restrictions on the use of proceeds for 
certain facilities (e.g., golf courses and massage parlors). 
Moreover, the term of qualified private activity bonds 
generally may not exceed 120 percent of the economic life of 
the property being financed and certain public approval 
requirements (similar to requirements that typically apply 
under State law to issuance of governmental debt) apply under 
Federal law to issuance of private activity bonds.
Tax-credit bonds
      As an alternative to traditional tax-exempt bonds, States 
and local governments may issue tax-credit bonds for certain 
purposes. Rather than receiving interest payments, a taxpayer 
holding a tax-credit bond on an allowance date is entitled to a 
credit. Generally, the credit amount is includible in gross 
income (as if it were a taxable interest payment on the bond), 
and the credit may be claimed against regular income tax and 
alternative minimum tax liability. The following types of tax-
credit bonds may be issued under present law: ``qualified zone 
academy bonds,'' which are bonds issued for the purpose of 
renovating, providing equipment to, developing course materials 
for use at, or training teachers and other personnel at certain 
school facilities; ``clean renewable energy bonds,'' which are 
bonds issued to finance for facilities that would qualify for 
the tax credit under section 45 without regard to the placed in 
service date requirements of that section; and ``gulf tax 
credit bonds,'' which are bonds issued by the States of 
Louisiana, Mississippi, and Alabama to pay principal, interest, 
or premium on certain prior bonds.
Arbitrage restrictions on tax-exempt bonds
      To prevent States and local governments from issuing more 
tax-exempt bonds than is necessary for the activity being 
financed or from issuing such bonds earlier than needed for the 
purpose of the borrowing, the Code includes arbitrage 
restrictions limiting the ability to profit from investment of 
tax-exempt bond proceeds. In general, arbitrage profits may be 
earned only during specified periods (e.g., defined ``temporary 
periods'' before funds are needed for the purpose of the 
borrowing) or on specified types of investments (e.g., 
``reasonably required reserve or replacement funds''). Subject 
to limited exceptions, profits that are earned during these 
periods or on such investments must be rebated to the Federal 
Government. Governmental bonds are subject to less restrictive 
arbitrage rules than most private activity bonds.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment creates a new category of tax-credit 
bonds to finance certain projects located in rural areas 
(``Rural Renaissance Bonds''). As with present law tax-credit 
bonds, the taxpayer holding Rural Renaissance Bonds on the 
allowance date would be entitled to a tax credit. The amount of 
the credit would be determined by multiplying the bond's credit 
rate by the face amount on the holder's bond. The credit would 
be includible in gross income (as if it were an interest 
payment on the bond) and could be claimed against regular 
income tax liability and alternative minimum tax liability.
      Under the Senate amendment, Rural Renaissance Bonds are 
defined as any bonds issued by a qualified issuer if, in 
addition to the requirements discussed below, 95 percent or 
more of the proceeds of such bonds are used to finance capital 
expenditures incurred for one or more qualified projects. 
``Qualified projects'' include any of the following projects 
located in a rural area: (i) a water or waste treatment 
project, (ii) an affordable housing project, (iii) a community 
facility project, including hospitals, fire and police 
stations, and nursing and assisted-living facilities, (iv) a 
value-added agriculture or renewable energy facility project 
for agricultural producers or farmer-owned entities, including 
any project to promote the production, processing, or retail 
sale of ethanol (including fuel at least 85 percent of the 
volume of which consists of ethanol), bio-diesel, animal waste, 
biomass, raw commodities, or wind as a fuel, (v) a distance 
learning or telemedicine project, (vi) a rural utility 
infrastructure project, including any electric or telephone 
system, (vii) a project to expand broadband technology, (viii) 
a rural teleworks project, and (ix) any of the previously 
described projects if carried out by the Delta Regional 
Authority. A ``rural area'' means any area other than a city or 
town which has a population of greater than 50,000 inhabitants 
or the urbanized area contiguous and adjacent to such a city or 
town.
      For purposes of the provision, the term ``qualified 
issuer'' means any not-for-profit cooperative lender which, as 
of the date of enactment of this provision, has received a 
guarantee under the Rural Electrification Act. A qualified 
issuer must also meet a user fee requirement during the period 
any Rural Renaissance Bond issued by such qualified issuer is 
outstanding. The user fee requirement is met if the qualified 
issuer makes semi-annual grants for qualified projects equal to 
the outstanding principal of Rural Renaissance Bond issued by 
such issuer multiplied by one-half the rate on United States 
Treasury securities of the same maturity.
      The Senate amendment imposes a maximum maturity 
limitation on Rural Renaissance Bonds. The maximum maturity is 
the term which the Secretary estimates will result in the 
present value of the obligation to repay the principal on any 
bonds being equal to 50 percent of the face amount of such 
bond. The provision also requires level amortization of Rural 
Renaissance Bonds during the period such bonds are outstanding.
      To qualify as Rural Renaissance Bonds, the qualified 
issuer of such bonds must reasonably expect to and actually 
spend 95 percent or more of the proceeds of such bonds on 
qualified projects within the five-year period that begins on 
the date of issuance. To the extent less than 95 percent of the 
proceeds are used to finance qualified projects during the 
five-year spending period, bonds will continue to qualify as 
Rural Renaissance Bonds if unspent proceeds are used within 90 
days from the end of such five-year period to redeem any 
``nonqualified bonds.'' For these purposes, the amount of 
nonqualified bonds is to be determined in the same manner as 
Treasury regulations under section 142. In addition, the 
provision provides that the five-year spending period may be 
extended by the Secretary upon the qualified issuer's request.
      Under the provision, Rural Renaissance Bonds are subject 
to the arbitrage requirements of section 148 that apply to 
traditional tax-exempt bonds. Principles under section 148 and 
the regulations thereunder shall apply for purposes of 
determining the yield restriction and arbitrage rebate 
requirements applicable to Rural Renaissance Bonds. For 
example, for arbitrage purposes, the yield on an issue of Rural 
Renaissance Bonds is computed by taking into account all 
payments of interest, if any, on such bonds, i.e., whether the 
bonds are issued at par, premium, or discount. However, for 
purposes of determining yield, the amount of the credit allowed 
to a taxpayer holding Rural Renaissance Bonds is not treated as 
interest, although such credit amount is treated as interest 
income to the taxpayer.
      Rural Renaissance Bonds must be designated as such by the 
qualified issuer and must be issued in registered form. The 
provision also requires issuers of Rural Renaissance Bonds to 
report issuance to the IRS in a manner similar to that required 
for tax-exempt bonds. There is a national limitation of $200 
million of Rural Renaissance Bonds that the Secretary may 
allocate, in the aggregate, to qualified projects. The 
authority to issue Rural Renaissance Bonds expires December 31, 
2009.
      Effective date.--The provision is effective for bonds 
issued after the date of enactment and before January 1, 2010.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
17. Modify foreign tax credit rules for large integrated oil companies 
        which are dual capacity taxpayers (sec. 470 of the Senate 
        amendment and sec. 901 of the Code)

                              PRESENT LAW

      U.S. persons are subject to U.S. income tax on their 
worldwide income. A credit against U.S. tax on foreign source 
income is allowed for foreign taxes that are paid or 
accrued.\535\ In addition, a domestic corporation which owns 10 
percent or more of the voting stock of a foreign corporation 
from which it receives dividends or with respect to which it is 
taxed under the rules of subpart F is deemed to have paid a 
portion of the foreign taxes of such foreign corporation.\536\ 
The foreign tax credit is available only for foreign income, 
war profits, and excess profits taxes, and for certain taxes 
that qualify under section 903 as imposed ``in lieu'' of such 
taxes. Other foreign levies generally are treated as deductible 
expenses only.
---------------------------------------------------------------------------
    \535\ Sec. 901. Foreign taxes include taxes imposed by possessions.
    \536\ Secs. 902 and 960. Foreign corporations include corporations 
created or organized in possessions.
---------------------------------------------------------------------------
      The amount of foreign tax credits that a taxpayer may 
claim in a year is subject to a limitation that prevents 
taxpayers from using foreign tax credits to offset U.S. tax on 
U.S. source income. The foreign tax credit limitation is 
calculated separately for specific categories of income. The 
amount of creditable taxes paid or accrued (or deemed paid) in 
any taxable year which exceeds the foreign tax credit 
limitation is permitted to be carried back one year and carried 
forward 10 years.
      Treasury regulations provide detailed rules for 
determining whether a foreign levy is a creditable income tax. 
A levy generally is a tax if it is a compulsory payment under 
the authority of a foreign country to levy taxes and is not 
compensation for a specific economic benefit provided by a 
foreign country. A taxpayer that is subject to a foreign levy 
and also receives a specific economic benefit from such country 
is considered a ``dual capacity taxpayer.'' \537\ Treasury 
regulations provide that the portion of a foreign levy paid by 
a dual capacity taxpayer that is considered a tax is determined 
based on all the facts and circumstances.\538\ Alternatively, 
under a safe harbor provided in the regulations, the portion of 
a foreign levy paid by a dual capacity taxpayer that is 
creditable is determined based on the foreign country's 
generally imposed income tax or, if the foreign country has no 
generally imposed income tax, the U.S. tax.\539\
---------------------------------------------------------------------------
    \537\ Treas. Reg. sec. 1.901-2(a)(2)(ii)(A).
    \538\ Treas. Reg. sec. 1.901-2A(c)(2)(i).
    \539\ Treas. Reg. sec. 1.901-2A(e).
---------------------------------------------------------------------------

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment denies the foreign tax credit with 
respect to all amounts paid or accrued (or deemed paid) to any 
foreign country or possession by a large integrated oil company 
which is a dual capacity taxpayer if the country or possession 
does not impose a generally applicable income tax. The 
provision modifies the safe harbor rule currently provided by 
Treasury Regulations. Under the provision, as under present 
law, a dual capacity taxpayer is a person who is subject to a 
levy in a foreign country or possession and also directly or 
indirectly receives (or will receive) a specific economic 
benefit (as determined in accordance with regulations) from 
such foreign country or possession. A generally applicable 
income tax is an income tax that is generally imposed on income 
derived from a trade or business conducted within that foreign 
country or possession (which may include taxes qualifying under 
section 903 as imposed in lieu of income taxes), provided that 
the tax has substantial application (by its terms and in 
practice) to persons who are not dual capacity taxpayers and to 
persons who are citizens or residents of the foreign country or 
possession.
      If the country does impose a generally applicable income 
tax, the foreign tax credit is denied to the extent that such 
amounts exceed the amount (as determined under regulations) 
which is paid by the dual capacity taxpayer pursuant to such 
generally applicable income tax, or which would have been paid 
if such generally applicable income tax were applicable to the 
dual capacity taxpayer. Amounts not in excess of the amount 
calculated under the generally applicable income tax are 
subject to all other rules pertaining to foreign tax credits. 
Amounts for which the foreign tax credit is denied under the 
provision are not subject to carryback or carryforward, but 
could constitute deductible expenses if such amounts qualify 
under the relevant deduction provisions. The provision does not 
apply to the extent contrary to any treaty obligation of the 
United States.
      The provision applies only to ``large integrated oil 
companies.'' These are persons that meet all of the following 
requirements for a particular taxable year: (1) the person is a 
producer of crude oil; (2) the person has gross receipts in 
excess of one billion dollars; (3) the person or persons 
related to such person has an average daily worldwide 
production of crude oil of at least 500,000 barrels; and (4) 
either (a) the person or persons related to such person sells 
at retail oil or natural gas (excluding bulk sales of such 
items to commercial or industrial users), or any product 
derived from oil or natural gas (excluding bulk sales of 
aviation fuels to the Department of Defense), in an aggregate 
amount of five million dollars or greater, or (b) the person or 
persons related to such person engage in the refining of crude 
oil, if the aggregate average daily refinery runs for that 
taxable year exceeds 75,000 barrels. For purposes of 
requirement (4), a person is a related person with respect to 
another person if either one owns a five percent or greater 
interest in the other, or if a third person owns such an 
interest in both.
      Effective date.--The provision applies to taxes paid or 
accrued in taxable years beginning after the date of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.
18. Disability preference program for tax collection contracts (sec. 
        471 of the Senate amendment)

                              PRESENT LAW

      Under present law, the IRS may use private debt 
collection companies to locate and contact taxpayers owing 
outstanding tax liabilities of any type and to arrange payment 
of those taxes by the taxpayers.
      There are several procedural conditions applicable to the 
use of private debt collection contracts. First, provisions of 
the Fair Debt Collection Practices Act apply to the private 
debt collection company. Second, taxpayer protections that are 
statutorily applicable to the IRS are also made statutorily 
applicable to the private sector debt collection companies. In 
addition, taxpayer protections that are statutorily applicable 
to IRS employees also are made statutorily applicable to 
employees of private sector debt collection companies. Third, 
subcontractors are prohibited from having contact with 
taxpayers, providing quality assurance services, and composing 
debt collection notices; any other service provided by a 
subcontractor must receive prior approval from the IRS.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that the IRS may not enter 
a contract with a private debt collection company after April 
1, 2006, until the Secretary implements a qualified disability 
preference program. A qualified disability preference program 
is a program that requires qualified employers to receive not 
less than 10 percent of taxpayer accounts (based on dollar 
value) awarded to private debt collection companies. A 
qualified employer is an employer who, as of the date the 
private debt collection contract is awarded, employs not less 
than 50 severely disabled individuals or not less than 30 
percent of such employer's employees are severely disabled. In 
addition, a qualified employer must agree that not more than 90 
days after being awarded a private debt collection contract not 
less than 35 percent of the employees providing services under 
the private debt collection contract shall be severely disabled 
individuals and hired after the date the contract is awarded.
      For purposes of the provision, a severely disabled 
individual means (i) a veteran of the United States armed 
forces with a disability of 50 percent or greater determined by 
law or the Secretary of Veterans Affairs to be service-
connected or (ii) any individual who is a disabled beneficiary 
as defined by the Social Security Act or would be considered to 
such a disabled beneficiary but for having income or resources 
in excess of limits established by the Social Security Act.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

         TITLE VI--SUNSET OF CERTAIN PROVISIONS AND AMENDMENTS

(Sec. 501 of the Senate amendment)

                              PRESENT LAW

      Reconciliation is a procedure under the Congressional 
Budget Act of 1974 (the ``Budget Act'') by which Congress 
implements spending and tax policies contained in a budget 
resolution. The Budget Act contains numerous rules enforcing 
the scope of items permitted to be considered under the budget 
reconciliation process. One such rule, the so-called ``Byrd 
rule,'' was incorporated into the Budget Act in 1990. The Byrd 
rule, named after its principal sponsor, Senator Robert C. 
Byrd, is contained in section 313 of the Budget Act. The Byrd 
rule generally permits members to raise a point of order 
against extraneous provisions (those which are unrelated to the 
goals of the reconciliation process) from either a 
reconciliation bill or a conference report on such bill.
      Under the Byrd rule, a provision is considered to be 
extraneous if it falls under one or more of the following six 
definitions:
      1. It does not produce a change in outlays or revenues;
      2. It produces an outlay increase or revenue decrease 
when the instructed committee is not in compliance with its 
instructions;
      3. It is outside of the jurisdiction of the committee 
that submitted the title or provision for inclusion in the 
reconciliation measure;
      4. It produces a change in outlays or revenues which is 
merely incidental to the nonbudgetary components of the 
provision;
      5. It would increase the deficit for a fiscal year beyond 
those covered by the reconciliation measure; and
      6. It recommends changes in Social Security.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      To ensure compliance with the Budget Act, the Senate 
amendment provides that the provisions of, and amendments made 
by, title I, subtitle A of title II, and title III of the 
Senate amendment shall not apply to taxable years beginning 
after September 30, 2010, and that the Code shall be applied 
and administered to such years as if those provisions and 
amendments had never been enacted.
      Effective date.--The provision is effective on the date 
of enactment.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

               TITLE VII--FUNDING FOR MILITARY OPERATIONS

(Secs. 601 and 602 of the Senate amendment)

                              PRESENT LAW

      Present law does not include the Senate amendment 
provision.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      The Senate amendment provides that there is to be 
appropriated, out of any money in the Treasury that is not 
otherwise appropriated, for the fiscal years 2006 through 2010, 
the following amounts, to be used for resetting and 
recapitalizing equipment being used in theaters of operations: 
(1) $16,900,000,000 for operations and maintenance of the Army; 
(2) $1,800,000,000 for aircraft for the Army; (3) 
$6,300,000,000 for other Army procurement; (4) $10,000,000,000 
for wheeled and tracked combat vehicles for the Army; (5) 
$467,000,000 for the Army working capital fund; (6) $6,000,000 
for missiles for the Department of Defense; (7) $100,000,000 
for defense wide procurement for the Department of Defense; (8) 
$4,500,000,000 for Marine Corps procurement; (9) $4,500,000,000 
for operations and maintenance of the Marine Corps; and (10) 
$2,700,000,000 for Navy aircraft procurement.

                          CONFERENCE AGREEMENT

      The conference agreement does not include the Senate 
amendment provision.

              TITLE VIII--OTHER REVENUE OFFSET PROVISIONS

  A. Imposition of Withholding on Certain Payments Made by Government 
                                Entities

(Sec. 3402 of the Code)

                              PRESENT LAW

Withholding requirements
      Employers are required to withhold income tax on wages 
paid to employees, including wages and salaries of employees or 
elected officials of Federal, State, and local government 
units. Withholding rates vary depending on the amount of wages 
paid, the length of the payroll period, and the number of 
withholding allowances claimed by the employee.
      Certain non-wage payments also are subject to mandatory 
or voluntary withholding. For example:
       Employers are required to withhold FICA and 
Railroad Retirement taxes from wages paid to their employees. 
Withholding rates are generally uniform.
       Payors of pensions are required to withhold from 
payments made to payees, unless the payee elects no 
withholding.\540\ Withholding from periodic payments is at 
variable rates, parallel to income tax withholding from wages, 
whereas withholding from nonperiodic payments is at a flat 10-
percent rate.
---------------------------------------------------------------------------
    \540\ Withholding at a rate of 20 percent is required in the case 
of an eligible rollover distribution that is not directly rolled over.
---------------------------------------------------------------------------
       A variety of payments (such as interest and 
dividends) are subject to backup withholding if the payee has 
not provided a valid taxpayer identification number (TIN). 
Withholding is at a flat rate based on the fourth lowest rate 
of tax applicable to single taxpayers.
       Certain gambling proceeds are subject to 
withholding. Withholding is at a flat rate based on the third 
lowest rate of tax applicable to single taxpayers.
       Voluntary withholding applies to certain Federal 
payments, such as Social Security payments. Withholding is at 
rates specified by Treasury regulations.
       Voluntary withholding applies to unemployment 
compensation benefits. Withholding is at a flat 10-percent 
rate.
       Foreign taxpayers are generally subject to 
withholding on certain U.S.-source income which is not 
effectively connected with the conduct of a U.S. trade or 
business. Withholding is at a flat 30-percent rate (14-percent 
for certain items of income).
      Many payments, including payments made by government 
entities, are not subject to withholding under present law. For 
example, no tax is generally withheld from payments made to 
workers who are not classified as employees (i.e., independent 
contractors).
Information reporting
      Present law imposes numerous information reporting 
requirements that enable the Internal Revenue Service (``IRS'') 
to verify the correctness of taxpayers' returns. For example, 
every person engaged in a trade or business generally is 
required to file information returns for each calendar year for 
payments of $600 or more made in the course of the payor's 
trade or business. Special information reporting requirements 
exist for employers required to deduct and withhold tax from 
employees' income. In addition, any service recipient engaged 
in a trade or business and paying for services is required to 
make a return according to regulations when the aggregate of 
payments is $600 or more. Government entities are specifically 
required to make an information return, reporting certain 
payments to corporations as well as individuals. Moreover, the 
head of every Federal executive agency that enters into certain 
contracts must file an information return reporting the 
contractor's name, address, TIN, date of contract action, 
amount to be paid to the contractor, and any other information 
required by Forms 8596 (Information Return for Federal 
Contracts) and 8596A (Quarterly Transmittal of Information 
Returns for Federal Contracts).

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement requires withholding on certain 
payments to persons providing property or services made by the 
Government of the United States, every State, every political 
subdivision thereof, and every instrumentality of the foregoing 
(including multi-State agencies). The withholding requirement 
applies regardless of whether the government entity making such 
payment is the recipient of the property or services. Political 
subdivisions of States (or any instrumentality thereof) with 
less than $100 million of annual expenditures for property or 
services that would otherwise be subject to withholding under 
this provision are exempt from the withholding requirement.
      The rate of withholding is three percent on all payments 
regardless of whether the payments are for property or 
services. Payments subject to withholding under the provision 
include any payment made in connection with a government 
voucher or certificate program which functions as a payment for 
property or services. For example, payments to a commodity 
producer under a government commodity support program are 
subject to the withholding requirement. The provision imposes 
information reporting requirements on the payments that are 
subject to withholding under the provision.
      The provision does not apply to any payments made through 
a Federal, State, or local government public assistance or 
public welfare program for which eligibility is determined by a 
needs or income test. For example, payments under government 
programs providing food vouchers or medical assistance to low-
income individuals are not subject to withholding under the 
provision. However, payments under government programs to 
provide health care or other services that are not based on the 
needs or income of the recipients are subject to withholding, 
including programs where eligibility is based on the age of the 
beneficiary.
      The provision does not apply to payments of wages or to 
any other payment with respect to which mandatory (e.g., U.S.-
source income of foreign taxpayers) or voluntary (e.g., 
unemployment benefits) withholding applies under present law. 
The provision does not exclude payments that are potentially 
subject to backup withholding under section 3406. If, however, 
payments are actually being withheld under backup withholding, 
withholding under the provision does not apply.
      The provision also does not apply to the following: 
payments of interest; payments for real property; payments to 
tax-exempt entities or foreign governments; intra-governmental 
payments; payments made pursuant to a classified or 
confidential contract (as defined in section 6050M(e)(3)); and 
payments to government employees that are not otherwise 
excludable from the new withholding provision with respect to 
the employees' services as an employees.
      Effective date.--The provision applies to payments made 
after December 31, 2010.

        B. Eliminate Income Limitations on Roth IRA Conversions

(Sec. 408A of the Code)

                              PRESENT LAW

      There are two general types of individual retirement 
arrangements (``IRAs''): traditional IRAs and Roth IRAs. The 
total amount that an individual may contribute to one or more 
IRAs for a year is generally limited to the lesser of: (1) a 
dollar amount ($4,000 for 2006); and (2) the amount of the 
individual's compensation that is includible in gross income 
for the year. In the case of an individual who has attained age 
50 before the end of the year, the dollar amount is increased 
by an additional amount ($1,000 for 2006). In the case of a 
married couple, contributions can be made up to the dollar 
limit for each spouse if the combined compensation of the 
spouses that is includible in gross income is at least equal to 
the contributed amount. IRA contributions in excess of the 
applicable limit are generally subject to an excise tax of six 
percent per year until withdrawn.
      Contributions to a traditional IRA may or may not be 
deductible. The extent to which contributions to a traditional 
IRA are deductible depends on whether or not the individual (or 
the individual's spouse) is an active participant in an 
employer-sponsored retirement plan and the taxpayer's AGI. An 
individual may deduct his or her contributions to a traditional 
IRA if neither the individual nor the individual's spouse is an 
active participant in an employer-sponsored retirement plan. If 
an individual or the individual's spouse is an active 
participant in an employer-sponsored retirement plan, the 
deduction is phased out for taxpayers with AGI over certain 
levels. To the extent an individual does not or cannot make 
deductible contributions, the individual may make nondeductible 
contributions to a traditional IRA, subject to the maximum 
contribution limit. Distributions from a traditional IRA are 
includible in gross income to the extent not attributable to a 
return of nondeductible contributions.
      Individuals with adjusted gross income (``AGI'') below 
certain levels may make contributions to a Roth IRA (up to the 
maximum IRA contribution limit). The maximum Roth IRA 
contribution is phased out between $150,000 to $160,000 of AGI 
in the case of married taxpayers filing a joint return and 
between $95,000 to $105,000 in the case of all other returns 
(except a separate return of a married individual).\541\ 
Contributions to a Roth IRA are not deductible. Qualified 
distributions from a Roth IRA are excludable from gross income. 
Distributions from a Roth IRA that are not qualified 
distributions are includible in gross income to the extent 
attributable to earnings. In general, a qualified distribution 
is a distribution that is made on or after the individual 
attains age 59\1/2\, death, or disability or which is a 
qualified special purpose distribution. A distribution is not a 
qualified distribution if it is made within the five-taxable 
year period beginning with the taxable year for which an 
individual first made a contribution to a Roth IRA.
---------------------------------------------------------------------------
    \541\ In the case of a married taxpayer filing a separate return, 
the phaseout range is $0 to $10,000 of AGI.
---------------------------------------------------------------------------
      A taxpayer with AGI of $100,000 or less may convert all 
or a portion of a traditional IRA to a Roth IRA.\542\ The 
amount converted is treated as a distribution from the 
traditional IRA for income tax purposes, except that the 10-
percent additional tax on early withdrawals does not apply.
---------------------------------------------------------------------------
    \542\ Married taxpayers filing a separate return may not convert 
amounts in a traditional IRA into a Roth IRA.
---------------------------------------------------------------------------
      In the case of a distribution from a Roth IRA that is not 
a qualified distribution, certain ordering rules apply in 
determining the amount of the distribution that is includible 
in income. For this purpose, a distribution that is not a 
qualified distribution is treated as made in the following 
order: (1) regular Roth IRA contributions; (2) conversion 
contributions (on a first in, first out basis); and (3) 
earnings. To the extent a distribution is treated as made from 
a conversion contribution, it is treated as made first from the 
portion, if any, of the conversion contribution that was 
required to be included in income as a result of the 
conversion.
      Includible amounts withdrawn from a traditional IRA or a 
Roth IRA before attainment of age 59\1/2\, death, or disability 
are subject to an additional 10-percent early withdrawal tax, 
unless an exception applies.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement eliminates the income limits on 
conversions of traditional IRAs to Roth IRAs.\543\ Thus, 
taxpayers may make such conversions without regard to their 
AGI.
---------------------------------------------------------------------------
    \543\ Under the conference agreement, married taxpayers filing a 
separate return may convert amounts in a traditional IRA into a Roth 
IRA.
---------------------------------------------------------------------------
      For conversions occurring in 2010, unless a taxpayer 
elects otherwise, the amount includible in gross income as a 
result of the conversion is included ratably in 2011 and 2012. 
That is, unless a taxpayer elects otherwise, none of the amount 
includible in gross income as a result of a conversion 
occurring in 2010 is included in income in 2010, and half of 
the income resulting from the conversion is includible in gross 
income in 2011 and half in 2012. However, income inclusion is 
accelerated if converted amounts are distributed before 
2012.\544\ In that case, the amount included in income in the 
year of the distribution is increased by the amount 
distributed, and the amount included in income in 2012 (or 2011 
and 2012 in the case of a distribution in 2010) is the lesser 
of: (1) half of the amount includible in income as a result of 
the conversion; and (2) the remaining portion of such amount 
not already included in income. The following example 
illustrates the application of the accelerated inclusion rule.
---------------------------------------------------------------------------
    \544\ Whether a distribution consists of converted amounts is 
determined under the present-law ordering rules.
---------------------------------------------------------------------------
      Example.--Taxpayer A has a traditional IRA with a value 
of $100, consisting of deductible contributions and earnings. A 
does not have a Roth IRA. A converts the traditional IRA to a 
Roth IRA in 2010, and, as a result of the conversion, $100 is 
includible in gross income. Unless A elects otherwise, $50 of 
the income resulting from the conversion is included in income 
in 2011 and $50 in 2012. Later in 2010, A takes a $20 
distribution, which is not a qualified distribution and all of 
which, under the ordering rules, is attributable to amounts 
includible in gross income as a result of the conversion. Under 
the accelerated inclusion rule, $20 is included in income in 
2010. The amount included in income in 2011 is the lesser of 
(1) $50 (half of the income resulting from the conversion) or 
(2) $70 (the remaining income from the conversion), or $50. The 
amount included in income in 2012 is the lesser of (1) $50 
(half of the income resulting from the conversion) or (2) $30 
(the remaining income from the conversion, i.e., $100--$70 ($20 
included in income in 2010 and $50 included in income in 
2011)), or $30.
      Effective date.--The provision is effective for taxable 
years beginning after December 31, 2009.

              C. Repeal of FSC/ETI Binding Contract Relief

                         PRIOR AND PRESENT LAW

      For most of the last two decades, the United States 
provided export-related tax benefits under the foreign sales 
corporation (``FSC'') regime. In 2000, the World Trade 
Organization (``WTO'') held that the FSC regime constituted a 
prohibited export subsidy under the relevant trade agreements. 
In response to this WTO finding, the United States repealed the 
FSC rules and enacted a new regime, under the FSC Repeal and 
Extraterritorial Income (``ETI'') Exclusion Act of 2000. 
Transition rules delayed the repeal of the FSC rules and the 
effective date of ETI for transactions in the ordinary course 
of a trade or business occurring before January 1, 2002, or 
after December 31, 2001 pursuant to a binding contract between 
the taxpayer and an unrelated person which was in effect on 
September 30, 2000 and at all times thereafter (the ``FSC 
binding contract relief'').\545\ In 2002, the WTO held that the 
ETI regime also constituted a prohibited export subsidy.
---------------------------------------------------------------------------
    \545\ An election was provided, however, under which taxpayers 
could adopt ETI at an earlier date for transactions after September 30, 
2000. This election allowed the ETI rules to apply to transactions 
after September 30, 2000, including transactions occurring pursuant to 
pre-existing binding contracts.
---------------------------------------------------------------------------
      In general, under the ETI regime, an exclusion from gross 
income applied with respect to ``extraterritorial income,'' 
which was a taxpayer's gross income attributable to ``foreign 
trading gross receipts.'' This income was eligible for the 
exclusion to the extent that it was ``qualifying foreign trade 
income.'' Qualifying foreign trade income was the amount of 
gross income that, if excluded, would result in a reduction of 
taxable income by the greatest of: (1) 1.2 percent of the 
foreign trading gross receipts derived by the taxpayer from the 
transaction; (2) 15 percent of the ``foreign trade income'' 
derived by the taxpayer from the transaction; \546\ or (3) 30 
percent of the ``foreign sale and leasing income'' derived by 
the taxpayer from the transaction.\547\
---------------------------------------------------------------------------
    \546\ ``Foreign trade income'' was the taxable income of the 
taxpayer (determined without regard to the exclusion of qualifying 
foreign trade income) attributable to foreign trading gross receipts.
    \547\ ``Foreign sale and leasing income'' was the amount of the 
taxpayer's foreign trade income (with respect to a transaction) that 
was properly allocable to activities constituting foreign economic 
processes. Foreign sale and leasing income also included foreign trade 
income derived by the taxpayer in connection with the lease or rental 
of qualifying foreign trade property for use by the lessee outside the 
United States.
---------------------------------------------------------------------------
      Foreign trading gross receipts were gross receipts 
derived from certain activities in connection with ``qualifying 
foreign trade property'' with respect to which certain economic 
processes had taken place outside of the United States. 
Specifically, the gross receipts must have been: (1) from the 
sale, exchange, or other disposition of qualifying foreign 
trade property; (2) from the lease or rental of qualifying 
foreign trade property for use by the lessee outside the United 
States; (3) for services which were related and subsidiary to 
the sale, exchange, disposition, lease, or rental of qualifying 
foreign trade property (as described above); (4) for 
engineering or architectural services for construction projects 
located outside the United States; or (5) for the performance 
of certain managerial services for unrelated persons. A 
taxpayer could elect to treat gross receipts from a transaction 
as not being foreign trading gross receipts. As a result of 
such an election, a taxpayer could use any related foreign tax 
credits in lieu of the exclusion.
      Qualifying foreign trade property generally was property 
manufactured, produced, grown, or extracted within or outside 
the United States that was held primarily for sale, lease, or 
rental in the ordinary course of a trade or business for direct 
use, consumption, or disposition outside the United States. No 
more than 50 percent of the fair market value of such property 
could be attributable to the sum of: (1) the fair market value 
of articles manufactured outside the United States; and (2) the 
direct costs of labor performed outside the United States. With 
respect to property that was manufactured outside the United 
States, certain rules were provided to ensure consistent U.S. 
tax treatment with respect to manufacturers.
      The American Jobs Creation Act of 2004 (``AJCA'') 
repealed the ETI exclusion,\548\ generally effective for 
transactions after December 31, 2004. AJCA provides a general 
transition rule under which taxpayers retain 100 percent of 
their ETI benefits for transactions prior to 2005, 80 percent 
of their otherwise-applicable ETI benefits for transactions 
during 2005, and 60 percent of their otherwise-applicable ETI 
benefits for transactions during 2006.
---------------------------------------------------------------------------
    \548\ Pub. L. No. 108-357, sec. 101. In addition, foreign 
corporations that elected to be treated for all Federal tax purposes as 
domestic corporations in order to facilitate the claiming of ETI 
benefits were allowed to revoke such elections within one year of the 
date of enactment of the repeal without recognition of gain or loss, 
subject to anti-abuse rules.
---------------------------------------------------------------------------
      In addition to the general transition rule, AJCA provides 
that the ETI exclusion provisions remain in effect for 
transactions in the ordinary course of a trade or business if 
such transactions are pursuant to a binding contract \549\ 
between the taxpayer and an unrelated person and such contract 
is in effect on September 17, 2003, and at all times thereafter 
(the ``ETI binding contract relief'').
---------------------------------------------------------------------------
    \549\ This rule also applies to a purchase option, renewal option, 
or replacement option that is included in such contract. For this 
purpose, a replacement option is considered enforceable against a 
lessor notwithstanding the fact that a lessor retained approval of the 
replacement lessee.
---------------------------------------------------------------------------
      In early 2006, the WTO Appellate Body held that the ETI 
general transition rule and the FSC and ETI binding contract 
relief measures are prohibited export subsidies.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      The conference agreement repeals both the FSC binding 
contract relief and the ETI binding contract relief. The 
general transition rule remains in effect.
      Effective date.--The provision is effective for taxable 
years beginning after date of enactment.

   D. Modification of Wage Limit for Purposes of Domestic Production 
                          Activities Deduction

(Sec. 199 of the Code)

                              PRESENT LAW

In general
      Present law provides a deduction from taxable income (or, 
in the case of an individual, adjusted gross income) that is 
equal to a portion of the taxpayer's qualified production 
activities income. For taxable years beginning after 2009, the 
deduction is nine percent of such income. For taxable years 
beginning in 2005 and 2006, the deduction is three percent of 
income and, for taxable years beginning in 2007, 2008 and 2009, 
the deduction is six percent of income. However, the deduction 
for a taxable year is limited to 50 percent of the wages paid 
by the taxpayer during the calendar year that ends in such 
taxable year.\550\
---------------------------------------------------------------------------
    \550\ For purposes of the provision, ``wages'' include the sum of 
the amounts of wages as defined in section 3401(a) and elective 
deferrals that the taxpayer properly reports to the Social Security 
Administration with respect to the employment of employees of the 
taxpayer during the calendar year ending during the taxpayer's taxable 
year. Elective deferrals include elective deferrals as defined in 
section 402(g)(3), amounts deferred under section 457, and, for taxable 
years beginning after December 31, 2005, designated Roth contributions 
(as defined in section 402A).
---------------------------------------------------------------------------
Qualified production activities income
      In general, ``qualified production activities income'' is 
equal to domestic production gross receipts (defined by section 
199(c)(4)), reduced by the sum of: (1) the costs of goods sold 
that are allocable to such receipts; and (2) other expenses, 
losses, or deductions which are properly allocable to such 
receipts.
Application of wage limitation to passthrough entities
      For purposes of applying the wage limitation, a 
shareholder, partner, or similar person who is allocated 
components of qualified production activities income from a 
passthrough entity also is treated as having been allocated 
wages from such entity in an amount that is equal to the lesser 
of: (1) such person's allocable share of wages, as determined 
under regulations prescribed by the Secretary; or (2) twice the 
qualified production activities income that actually is 
allocated to such person for the taxable year.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      Under the conference agreement, the wage limitation is 
modified such that taxpayers may only include amounts which are 
properly allocable to domestic production gross receipts.\551\ 
Thus, the wage limitation is 50 percent of those wages which 
are deducted in arriving at qualified production activities 
income.
---------------------------------------------------------------------------
    \551\ As under present law, the Secretary shall provide rules for 
the proper allocation of items (including wages) in determining 
qualified production activities income. Section 199(c)(2).
---------------------------------------------------------------------------
      In addition, the conference agreement repeals the special 
limitation on wages treated as allocated to partners or 
shareholders of passthrough entities. Accordingly, for purposes 
of the wage limitation, a shareholder, partner, or similar 
person who is allocated components of qualified production 
activities income from a passthrough entity is treated as 
having been allocated wages from such entity in an amount that 
is equal to such person's allocable share of wages as 
determined under regulations prescribed by the Secretary, even 
if such amount is more than twice the qualified production 
activities income that actually is allocated to such person for 
the taxable year. The shareholder, partner, or similar person 
will then include in its wage limitation only those wages which 
are deducted in arriving at qualified production activities 
income.
      Effective date.--The conference agreement is effective 
with respect to taxable years beginning after the date of 
enactment.

        E. Modification of Exclusion for Citizens Living Abroad

(Sec. 911 of the Code)

                              PRESENT LAW

In general
      U.S. citizens generally are subject to U.S. income tax on 
all their income, whether derived in the United States or 
elsewhere. A U.S. citizen who earns income in a foreign country 
also may be taxed on that income by the foreign country. The 
United States generally cedes the primary right to tax a U.S. 
citizen's non-U.S. source income to the foreign country in 
which the income is derived. This concession is effected by the 
allowance of a credit against the U.S. income tax imposed on 
foreign-source income for foreign taxes paid on that income. 
The amount of the credit for foreign income tax paid on 
foreign-source income generally is limited to the amount of 
U.S. tax otherwise owed on that income. Accordingly, if the 
amount of foreign tax paid on foreign-source income is less 
than the amount of U.S. tax owed on that income, a foreign tax 
credit generally is allowed in an amount not exceeding the 
amount of the foreign tax, and a residual U.S. tax liability 
remains.
      A U.S. citizen or resident living abroad may be eligible 
to exclude from U.S. taxable income certain foreign earned 
income and foreign housing costs.\552\ This exclusion applies 
regardless of whether any foreign tax is paid on the foreign 
earned income or housing costs. To qualify for these 
exclusions, an individual (a ``qualified individual'') must 
have his or her tax home in a foreign country and must be 
either (1) a U.S. citizen \553\ who is a bona fide resident of 
a foreign country or countries for an uninterrupted period that 
includes an entire taxable year, or (2) a U.S. citizen or 
resident present in a foreign country or countries for at least 
330 full days in any 12-consecutive-month period.
---------------------------------------------------------------------------
    \552\ Sec. 911.
    \553\ Generally, only U.S. citizens may qualify under the bona fide 
residence test. A U.S. resident alien who is a citizen of a country 
with which the United States has a tax treaty may, however, qualify for 
the section 911 exclusions under the bona fide residence test by 
application of a nondiscrimination provision of the treaty.
---------------------------------------------------------------------------
Exclusion for compensation
      The foreign earned income exclusion generally is 
available for a qualified individual's non-U.S. source earned 
income attributable to personal services performed by that 
individual during the period of foreign residence or presence 
described above. The maximum exclusion amount for any calendar 
year is $80,000 in 2002 through 2007 and is indexed for 
inflation after 2007.
Exclusion for housing costs
      A qualified individual is allowed an exclusion from gross 
income (or, as described below, a deduction) for certain 
foreign housing costs paid or incurred by or on behalf of the 
individual. The amount of this housing cost exclusion is equal 
to the excess of a taxpayer's ``housing expenses'' over a base 
housing amount. The term ``housing expenses'' means the 
reasonable expenses paid or incurred during the taxable year 
for a taxpayer's housing (and, if they live with the taxpayer, 
for the housing of the taxpayer's spouse and dependents) in a 
foreign country. The term includes expenses attributable to 
housing such as utilities and insurance, but it does not 
include separately deductible interest and taxes. If the 
taxpayer maintains a second household outside the United States 
for a spouse or dependents who do not reside with the taxpayer 
because of dangerous, unhealthful, or otherwise adverse living 
conditions, the housing expenses of the second household also 
are eligible for exclusion. The base housing amount above which 
costs are eligible for exclusion in a taxable year is 16 
percent of the annual salary (computed on a daily basis) of a 
grade GS-14, step 1, U.S. government employee, multiplied by 
the number of days of foreign residence or presence (as 
described above) in the taxable year. For 2006 this salary is 
$77,793; the current base housing amount therefore is $12,447 
(assuming the taxpayer is a bona fide resident of or is present 
in a foreign country every day during the year).
      To the extent otherwise excludable housing costs are not 
paid or reimbursed by a taxpayer's employer, these costs 
generally are allowed as a deduction in computing adjusted 
gross income.
Exclusion limitation amounts
      The combined foreign earned income exclusion and housing 
cost exclusion (including the amount of any deductible housing 
costs) may not exceed the taxpayer's total foreign earned 
income for the taxable year. The taxpayer's foreign tax credit 
is reduced by the amount of the credit that is attributable to 
excluded income.
Tax brackets
      A taxpayer with excludable income under section 911 is 
subject to tax on the taxpayer's other income, after 
deductions, starting in the lowest tax rate bracket.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

Exclusion for compensation
      The conference agreement provision adjusts for inflation 
the maximum amount of the foreign earned income exclusion in 
taxable years beginning in calendar years after 2005 (rather 
than, as under present law, after 2007). The limitation in 2006 
therefore is $82,400.\554\
---------------------------------------------------------------------------
    \554\ This $82,400 amount is calculated under section 
911(b)(2)(D)(ii), as amended by the conference agreement provision, 
using current U.S. Bureau of Labor Statistics (``BLS'') Consumer Price 
Index data.
---------------------------------------------------------------------------
Exclusion for housing costs
      Under the conference agreement, the base housing amount 
used in calculating the foreign housing cost exclusion in a 
taxable year is 16 percent of the amount (computed on a daily 
basis) of the foreign earned income exclusion limitation 
(instead of the present law 16 percent of the grade GS-14, step 
1 amount), multiplied by the number of days of foreign 
residence or presence (as previously described) in that year.
      Reasonable foreign housing expenses in excess of the base 
housing amount remain excluded from gross income (or, if paid 
by the taxpayer, are deductible) under the conference 
agreement, but the amount of the exclusion is limited to 30 
percent of the maximum amount of a taxpayer's foreign earned 
income exclusion.\555\ The Secretary is given authority to 
issue regulations or other guidance providing for the 
adjustment of this 30-percent housing cost limitation based on 
geographic differences in housing costs relative to housing 
costs in the United States. The conferees intend that the 
Secretary be permitted to use publicly available data, such as 
the Quarterly Report Indexes published by the U.S. Department 
of State or any other information deemed reliable by the 
Secretary, in making adjustments. The conferees also intend 
that the Secretary may adjust the 30-percent amount upward or 
downward. The conferees intend that the Secretary make 
adjustments annually.
---------------------------------------------------------------------------
    \555\ In certain programs including grant-making to subsidize 
rents, the U.S. Department of Housing and Urban Development considers 
maximum affordable housing costs to be 30 percent of a household's 
income. See, e.g., United States Housing Act of 1937, 42 U.S.C. sec. 
1437a (a)(1)(A), as amended.
---------------------------------------------------------------------------
      Under the 30-percent rule described above, the maximum 
amount of the foreign housing cost exclusion in 2006 is 
(assuming foreign residence or presence on all days in the 
year) $11,536 (= ($82,400  30 percent)-($82,400 
 16 percent)).\556\
---------------------------------------------------------------------------
    \556\ The $11,536 amount is based on a calculation under section 
911(b)(2)(D)(ii), as amended by the conference agreement, using the BLS 
data described above.
---------------------------------------------------------------------------
Tax brackets
      Under the conference agreement, if an individual excludes 
an amount from income under section 911, any income in excess 
of the exclusion amount determined under section 911 is taxed 
(under the regular tax and alternative minimum tax) by applying 
to that income the tax rates that would have been applicable 
had the individual not elected the section 911 exclusion. For 
example, an individual with $80,000 of foreign earned income 
that is excluded under section 911 and with $20,000 in other 
taxable income (after deductions) would be subject to tax on 
that $20,000 at the rate or rates applicable to taxable income 
in the range of $80,000 to $100,000.
Effective date
      The conference agreement provision is effective for 
taxable years beginning after December 31, 2005.

              TITLE IX--CORPORATE ESTIMATED TAX PROVISIONS

                              PRESENT LAW

      In general, corporations are required to make quarterly 
estimated tax payments of their income tax liability. For a 
corporation whose taxable year is a calendar year, these 
estimated tax payments must be made by April 15, June 15, 
September 15, and December 15.

                               HOUSE BILL

      No provision.

                            SENATE AMENDMENT

      No provision.

                          CONFERENCE AGREEMENT

      In case of a corporation with assets of at least $1 
billion, payments due in July, August, and September, 2006, 
shall be increased to 105 percent of the payment otherwise due 
and the next required payment shall be reduced accordingly.
      In case of a corporation with assets of at least $1 
billion, the payments due in July, August, and September, 2012, 
shall be increased to 106.25 percent of the payment otherwise 
due and the next required payment shall be reduced accordingly.
      In case of a corporation with assets of at least $1 
billion, the payments due in July, August, and September, 2013, 
shall be increased to 100.75 percent of the payment otherwise 
due and the next required payment shall be reduced accordingly.
      With respect to corporate estimated tax payments due on 
September 15, 2010, 20.5 percent shall not be due until October 
1, 2010.
      With respect to corporate estimated tax payments due on 
September 15, 2011, 27.5 percent shall not be due until October 
1, 2011.
      Effective date.--The provision is effective on the date 
of enactment.

                      TITLE X--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. 102 of the conference 
        agreement)
            Summary description of provision
      The conference agreement 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.
Increase in the AMT exemption amount (sec. 301 of the conference 
        agreement)
            Summary description of the provision
      The alternative minimum tax exemption amounts for 2006 
are increased.
            Number of affected taxpayers
      It is estimated that the provisions will affect 
approximately 19 million individual tax returns.
            Discussion
      Many individuals will not have to compute their 
alternative minimum tax and file the IRS forms relating to that 
tax.

                      TITLE XI--UNFUNDED MANDATES

      The staff of the Joint Committee on Taxation has reviewed 
the tax provisions in the conference agreement for H.R. 4297, 
the ``Tax Relief Extension Reconciliation Act of 2005'' as 
agreed to by the conferees. This information is provided in 
accordance with the requirements of Public Law 104-04, the 
Unfunded Mandates Reform Act of 1995, which provides that if a 
conference agreement contains (1) a mandate that was not 
previously considered by either the House or the Senate, or (2) 
an increase in the direct cost of a previously considered 
mandate, then the committee of conference is to ensure, to the 
greatest extent practicable, that a mandates statement is 
prepared.
      We have determined that the tax provisions of the 
conference agreement contain two unfunded private sector 
mandates that were not previously considered by either the 
House or the Senate: (1) repeal of FSC-ETI grandfather rule, 
and (2) amend section 911 housing exclusion. In addition, the 
provision relating to withholding on certain government 
payments imposes an intergovernmental mandate not previously 
considered by either the House or the Senate.
      The costs required to comply with each Federal private 
sector mandate and Federal intergovernmental mandate generally 
are no greater than the aggregate estimated budget effects of 
the provision as indicated on the enclosed revenue table. 
Benefits from the provisions include improved administration of 
the tax laws and a more accurate measurement of income for 
Federal income tax purposes.


                                   Wm. Thomas,
                                   Jim McCrery,
                                   Dave Camp,
                                 Managers on the Part of the House.

                                   Chuck Grassley,
                                   Jon Kyl,
                                Managers on the Part of the Senate.

                                  
