[Senate Report 109-82]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 127
109th Congress                                                   Report
                                 SENATE
 1st Session                                                     109-82

======================================================================
 
   HIGHWAY REAUTHORIZATION AND EXCISE TAX SIMPLIFICATION ACT OF 2005

                                _______
                                

                 June 14, 2005.--Ordered to be printed

                                _______
                                

  Mr. Grassley, from the Committee on Finance, submitted the following

                              R E P O R T

                         [To accompany S. 1230]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Finance, having considered an original 
bill, S. 1230, to amend the Internal Revenue Code of 1986 to 
provide for the extension of the Highway Trust Fund and the 
Aquatic Resources Trust Fund expenditure authority and related 
taxes and to provide for excise tax reform and simplification, 
and for other purposes, reports favorably thereon and 
recommends that the bill do pass.

                                CONTENTS

                                                                   Page
 I. Legislative Background............................................3
II. Explanation of the Bill...........................................3
    Title I--Trust Fund Reauthorization...............................3
        A. Extension of Highway Trust Fund and Aquatic Resources 
            Trust Fund Expenditure Authority and Related Taxes 
            (secs. 101 and 102 of the bill and secs. 4041, 4051, 
            4071, 4081, 4221, 4481, 4482, 4483, 6412, 9503, and 
            9504 of the Code)....................................     3
    Title II--Excise Tax Reform and Simplification....................8
        A. Modify Gas Guzzler Tax (sec. 201 of the bill and sec. 
            4064 of the Code)....................................     8
        B. Aquatic Excise Taxes..................................     9
          1. Eliminate Aquatic Resources Trust Fund and transform 
              Sport Fish Restoration Account (sec. 211 of the 
              bill and secs. 9503 and 9504 of the Code)..........     9
          2. Repeal of harbor maintenance tax on exports (sec. 
              212 of the bill and sec. 4461 of the Code).........    11
          3. Cap on excise tax on certain fishing equipment (sec. 
              213 of the bill and sec. 4161 of the Code).........    12
        C. Aerial Excise Taxes...................................    13
          1. Clarification of excise tax exemptions for 
              agricultural aerial applicators and exemption for 
              fixed-wing aircraft engaged in forestry operations 
              (sec. 221 of the bill and secs. 4261 and 6420 of 
              the Code)..........................................    13
          2. Modify the definition of rural airport (sec. 222 of 
              the bill and sec. 4261 of the Code)................    14
          3. Exempt from ticket taxes transportation provided by 
              seaplanes (sec. 223 of the bill and sec. 4261 of 
              the Code)..........................................    15
          4. Exempt certain sightseeing flights from taxes on air 
              transportation (sec. 224 of the bill and sec. 4281 
              of the Code).......................................    16
        D. Taxes Relating to Alcohol.............................    17
          1. Repeal special occupational taxes on producers and 
              marketers of alcoholic beverages (sec. 231 of the 
              bill and secs. 5081, 5091, 5111, 5112, 5113, 5117, 
              5121, 5122, 5123, 5125, 5131, 5132, 5141, 5147, 
              5148, and 5276 of the Code)........................    17
          2. Modify limitation on rate of rum excise tax cover 
              over to Puerto Rico and Virgin Islands (sec. 232 of 
              the bill and sec. 7652 of the Code)................    19
          3. Provide an income tax credit for cost of carrying 
              tax-paid distilled spirits in wholesale inventories 
              and in control State bailment warehouses (sec. 233 
              of the bill and new sec. 5011 of the Code).........    20
          4. Quarterly excise tax filing for small alcohol excise 
              taxpayers (sec. 234 of the bill and sec. 5061 of 
              the Code)..........................................    21
         E. Sport Excise Taxes...................................    23
          1. Custom gunsmiths (sec. 241 of the bill and sec. 4182 
              of the Code).......................................    23
    Title III--Miscellaneous Provisions..............................23
        A. Motor Fuel Tax Enforcement Advisory Commission (sec. 
            301 of the bill).....................................    23
        B. National Surface Transportation Infrastructure 
            Financing Commission (sec. 302 of the bill)..........    24
        C. Expand Highway Trust Fund Expenditure Purposes To 
            Include Funding for Studies of Supplemental or 
            Alternative Financing for the Highway Trust Fund 
            (sec. 303 of the bill)...............................    26
        D. Delta Regional Transportation Plan (sec. 304 of the 
            bill)................................................    28
        E. Establish Build America Corporation (sec. 305 of the 
            bill)................................................    29
        F. Increase in Dollar Limits for Qualified Transportation 
            Fringe Benefits (sec. 306 of the bill and sec. 132(f) 
            of the Code).........................................    30
    Title IV--Fuels-Related Technical Corrections....................31
        A. Fuels-Related Technical Corrections to American Jobs 
            Creation Act of 2004 (``AJCA'')......................    31
          1. Volumetric ethanol excise tax credit (sec. 401 of 
              the bill, sec. 301 of AJCA, and sec. 6427 of the 
              Code)..............................................    31
          2. Aviation fuel (sec. 401 of the bill, sec. 853 of 
              AJCA, and sec. 4081 of the Code)...................    31
        B. Fuels-Related Technical Corrections to Transportation 
            Equity Act for the 21st Century (``TEA 21'').........    31
          1. Coastal Wetlands sub-account (sec. 401 of the bill, 
              sec. 9005 of TEA 21, and sec. 9504 of the Code)....    31
    Title V--Revenue Offset Provisions...............................32
        A. Treatment of Contingent Payment Convertible Debt 
            Instruments (sec. 501 of the bill and sec. 1275 of 
            the Code)............................................    32
        B. Frivolous Tax Submissions (sec. 502 of the bill and 
            sec. 6702 of the Code)...............................    35
        C. Increase in Certain Criminal Penalties (sec. 503 of 
            the bill and secs. 7201, 7203, and 7206 of the Code).    36
        D. Doubling of Certain Penalties, Fines, and Interest on 
            Underpayments Related to Certain Offshore Financial 
            Arrangements (sec. 504 of the bill)..................    38
        E. Modification of Coordination Rules for Controlled 
            Foreign Corporation and Passive Foreign Investment 
            Company Regimes (sec. 505 of the bill and sec. 1297 
            of the Code).........................................    42
        F. Declaration by Chief Executive Officer Relating to 
            Federal Annual Corporate Income Tax Return (sec. 506 
            of the bill and sec. 6062 of the Code)...............    44
        G. Grant Treasury Regulatory Authority to Address Foreign 
            Tax Credit Transactions Involving Inappropriate 
            Separation of Foreign Taxes from Related Foreign 
            Income (sec. 507 of the bill and sec. 901 of the 
            Code)................................................    46
III.Budget Effects of the Bill.......................................47

IV. Votes of the Committee...........................................55
 V. Regulatory Impact and Other Matters..............................55
VI. Changes in Existing Law Made by the Bill, as Reported............57

                       I. LEGISLATIVE BACKGROUND

    The Senate Committee on Finance marked up an original bill, 
S. 1230 (the ``Highway Reauthorization and Excise Tax 
Simplification Act of 2005'') on April 19, 2005, and, with a 
majority and quorum present, ordered the bill favorably 
reported by a voice vote on that date.\1\
---------------------------------------------------------------------------
    \1\ Subsequent to committee action, on May 31, 2005, the President 
signed H.R. 2566. Section nine of the Act temporarily extends the 
authority to make expenditures (subject to appropriations) from the 
Highway Trust Fund through July 1, 2005. The Act also updates the 
Highway Trust Fund cross references to authorizing legislation to 
include expenditure purposes in this Act and prior authorizing 
legislation as in effect on the date of enactment. It also extends the 
heavy highway vehicle use tax through September 30, 2006.
---------------------------------------------------------------------------
    During the 108th Congress, on February 12, 2004, the Senate 
passed a bill, S. 1072 (the ``Safe, Accountable, Flexible, and 
Efficient Transportation Equity Act of 2004''), which contained 
provisions to address the same issues addressed by the current 
bill. Many of the provisions in the current bill are 
substantially the same as the related provisions contained in 
S. 1072. On April 2, 2004, the House passed H.R. 3550 (the 
``Transportation Equity Act: A Legacy for Users''). On May 19, 
2004, the Senate amended and passed H.R. 3550, inserting the 
provisions of S. 1072 in lieu of the body of H.R. 3550. A 
conference was convened. The House and Senate failed to reach 
agreement in conference before the adjournment of the 108th 
Congress.

                      II. EXPLANATION OF THE BILL


                  TITLE I--TRUST FUND REAUTHORIZATION


  A. Extension of Highway Trust Fund and Aquatic Resources Trust Fund 
                Expenditure Authority and Related Taxes


(Secs. 101 and 102 of the bill and secs. 4041, 4051, 4071, 4081, 4221, 
        4481, 4482, 4483, 6412, 9503, and 9504 of the Code)

              PRESENT-LAW HIGHWAY TRUST FUND EXCISE TAXES

In general

    Six separate excise taxes are imposed to finance the 
Federal Highway Trust Fund program. Three of these taxes are 
imposed on highway motor fuels. Historically, fuel taxes have 
accounted for 90 percent of Highway Trust Fund receipts. The 
remaining three are a retail sales tax on heavy highway 
vehicles, a manufacturers' excise tax on heavy vehicle tires, 
and an annual use tax on heavy vehicles. The six taxes are 
summarized below. Except for 4.3 cents per gallon of the 
Highway Trust Fund fuels tax rates, and a portion of the tax on 
certain special motor fuels, all of these taxes are scheduled 
to expire after September 30, 2005. The 4.3-cents-per-gallon 
portion of the fuels tax rates is permanent.\2\ The six taxes 
are summarized below.
---------------------------------------------------------------------------
    \2\ This portion of the tax rates was enacted as a deficit 
reduction measure in 1993. Receipts from it were retained in the 
General Fund until 1997 legislation provided for their transfer to the 
Highway Trust Fund.
---------------------------------------------------------------------------

Highway motor fuels taxes

    The Highway Trust Fund motor fuels tax rates \3\ are as 
follows:
---------------------------------------------------------------------------
    \3\ These fuels also are subject to an additional 0.1-cent-per-
gallon excise tax to fund the Leaking Underground Storage Tank 
(``LUST'') Trust Fund (secs. 4041(d) and 4081(a)(2)(B)).
    \4\ The statutory rate for certain special motor fuels is 
determined on an energy equivalent basis, as follows:

    Liquefied petroleum gas (propane)--13.6 cents per gallon (3.2 cents 
after September 30, 2005)
    Liquefied natural gas--11.9 cents per gallon (2.8 cents after 
September 30, 2005)
    Methanol derived from natural gas--9.15 cents per gallon (2.15 
cents after September 30, 2005)
    Compressed natural gas--48.54 cents per MCF.

    See secs. 4041(a)(2), 4041(a)(3) and 4041(m).
    The compressed natural gas tax rate is equivalent only to 4.3 cents 
per gallon of the rate imposed on gasoline and other special motor 
fuels rather than the full 18.3-cents-per-gallon rate. The tax rate for 
the other special motor fuels is equivalent to the full 18.3-cents-per-
gallon gasoline and special motor fuels tax rate.

Gasoline..................................  18.3 cents per gallon
Diesel fuel (including transmix) and        24.3 cents per gallon
 kerosene.
Special motor fuels.......................  18.3 cents per gallon
                                             generally \4\



            Exemptions
    Present law includes numerous exemptions (including partial 
exemptions) for specified uses of taxable fuels or for 
specified fuels. Because the gasoline and diesel fuel taxes 
generally are imposed before the end use of the fuel is known, 
many exemptions are realized through refunds to end users of 
tax paid by a taxpayer earlier in the distribution chain. 
Exempt uses and fuels include:
           use in State and local government and 
        nonprofit educational organization highway vehicles;
           use in buses engaged in transporting 
        students and employees of schools;
           use in local mass transit buses having a 
        seating capacity of at least 20 adults (not including 
        the driver) when the buses operate under contract with 
        (or are subsidized by) a State or local governmental 
        unit to furnish the transportation; and
           use in intercity buses serving the general 
        public along scheduled routes. (Such use is totally 
        exempt from the gasoline excise tax and is exempt from 
        17 cents per gallon of the diesel fuel tax.)
    In addition, fuels used in off-highway business use or on a 
farm for farming purposes generally are exempt from these motor 
fuels taxes.\5\ The Highway Trust Fund does not receive excise 
taxes imposed on fuel used in off-highway activities. Rather, 
when tax is imposed on off-highway use fuel consumption, it is 
used to finance other Trust Funds (e.g., motorboat gasoline and 
special motor fuel taxes from non-business off-highway use 
dedicated to the Aquatic Resources Trust Fund) or is retained 
in the General Fund (e.g., tax on diesel fuel used in trains).
---------------------------------------------------------------------------
    \5\ Diesel fuel is the same fuel (#2 fuel oil) as that commonly 
used as home heating oil. Fuel oil used as heating oil is not subject 
to the Federal excise tax.
---------------------------------------------------------------------------

Non-fuel Highway Trust Fund excise taxes

    In addition to the highway motor fuels excise tax revenues, 
the Highway Trust Fund receives revenues produced by three 
excise taxes imposed exclusively on heavy highway vehicles or 
tires. These taxes are:
           A 12-percent excise tax imposed on the first 
        retail sale of heavy highway vehicles, tractors, and 
        trailers (generally, trucks having a gross vehicle 
        weight in excess of 33,000 pounds and trailers having 
        such a weight in excess of 26,000 pounds) (sec. 4051);
           An excise tax imposed on highway tires with 
        a rated load capacity exceeding 3,500 pounds, generally 
        at a rate of 9.45 cents per 10 pounds of excess (sec. 
        4071(a)); and
           An annual use tax imposed on highway 
        vehicles having a taxable gross weight of 55,000 pounds 
        or more (sec. 4481). (The maximum rate for this tax is 
        $550 per year, imposed on vehicles having a taxable 
        gross weight over 75,000 pounds.)

         PRESENT-LAW HIGHWAY TRUST FUND EXPENDITURE PROVISIONS

In general

    Dedication of excise tax revenues to the Highway Trust Fund 
and expenditures from the Highway Trust Fund are governed by 
provisions of the Code.\6\ The Code authorizes expenditures 
(subject to appropriations) from the Fund through May 31, 2005, 
for the purposes provided in authorizing legislation, as in 
effect on the date of enactment of the Surface Transportation 
Extension Act of 2004, Part V.
---------------------------------------------------------------------------
    \6\ Sec. 9503. The Highway Trust Fund statutory provisions were 
placed in the Internal Revenue Code in 1982.
---------------------------------------------------------------------------
    Under present law, revenues from the highway excise taxes, 
as imposed through September 30, 2005, generally are dedicated 
to the Highway Trust Fund. However, under section 9503(c)(2), 
certain transfers are made from the Highway Trust Fund into the 
General Fund, relating to amounts paid in respect of gasoline 
used on farms, amounts paid in respect of gasoline used for 
certain nonhighway purposes or by local transit systems, 
amounts relating to fuels not used for taxable purposes, and 
income tax credits for certain uses of fuels.

Highway Trust Fund expenditure purposes

    The Highway Trust Fund has a subaccount for Mass Transit. 
Both the Trust Fund and its sub-account are funding sources for 
specific programs. Neither the Highway Trust Fund nor its Mass 
Transit sub-account receive interest on unexpended balances. 
The Highway Fund's Mass Transit sub-account receives 2.86 cents 
per gallon of highway motor fuels excise taxes.
    Highway Trust Fund expenditure purposes have been revised 
with each authorization Act enacted since establishment of the 
Highway Trust Fund in 1956. In general, expenditures authorized 
under those Acts (as the Acts were in effect on the date of 
enactment of the most recent such authorizing Act) are approved 
by the Code as Highway Trust Fund expenditure purposes.\7\ 
Thus, no Highway Trust Fund monies may be spent for a purpose 
not approved by the tax-writing committees of Congress. The 
Code provides that authority to make expenditures from the 
Highway Trust Fund expires after May, 31, 2005. Thus, no 
Highway Trust Fund expenditures may occur after May 31, 2005.
---------------------------------------------------------------------------
    \7\ The authorizing Acts which currently are referenced in the 
Highway Trust Fund provisions of the Code are: the Highway Revenue Act 
of 1956, Titles I and II of the Surface Transportation Assistance Act 
of 1982, the Surface Transportation and Uniform Relocation Act of 1987, 
the Intermodal Surface Transportation Efficiency Act of 1991 and the 
Transportation Equity Act for the 21st Century, the Surface 
Transportation Extension Act of 2003, the Surface Transportation 
Extension Act of 2004; the Surface Transportation Extension Act of 
2004, Part II; the Surface Transportation Extension Act of 2004, Part 
III; the Surface Transportation Extension Act of 2004, Part IV; and the 
Surface Transportation Extension Act of 2004, Part V.
---------------------------------------------------------------------------

Anti-deficit provisions (the ``Harry Byrd rule'')

    Highway projects can take multiple years to complete. As a 
result, the Highway Trust Fund carries positive unexpended 
balances, a large portion of which are reserved to cover 
existing obligations.\8\ Highway Trust Fund spending is limited 
by anti-deficit provisions internal to the Highway Trust Fund, 
the so-called ``Harry Byrd rule''. Generally, the Harry Byrd 
rule prevents the further obligation of Federal highway funds 
if the current and expected balances of the Highway Trust Fund 
fall below a certain level. The rule requires the Treasury 
Department to determine, on a quarterly basis, the amount (if 
any) by which unfunded highway authorizations exceed projected 
net Highway Trust Fund tax receipts for the 24-month period 
beginning at the close of each fiscal year.\9\ Similar rules 
apply to unfunded Mass Transit Account authorizations. If 
unfunded authorizations exceed projected 24-month receipts, 
apportionments to the States for specified programs funded by 
the relevant Trust Fund Account are to be reduced 
proportionately. Because of the Harry Byrd rule, taxes 
dedicated to the Highway Trust Fund typically are scheduled to 
expire at least 24-months after current authorizing Acts.
---------------------------------------------------------------------------
    \8\ Congressional Research Service, RL 32226, Highway and Transit 
Program Reauthorization Legislation in the 2nd Session, 108th Congress 
(December 15, 2004) at CRS-12.
    \9\ Sec. 9503(d).
---------------------------------------------------------------------------
    The Surface Transportation Extension Act of 2003, created a 
temporary rule (through February 29, 2004) for purposes of the 
anti-deficit provisions of the Highway Trust Fund. For purposes 
of determining 24 months of projected revenues for the anti-
deficit provisions, the Secretary of the Treasury is instructed 
to treat each expiring provision relating to appropriations and 
transfers to the Highway Trust Fund to have been extended 
through the end of the 24-month period and to assume that the 
rate of tax during such 24-month period remains at the same 
rate in effect on the date of enactment of the provision. The 
temporary rule has been continuously extended since February 
29, 2004. The last extension, enacted as part of the Surface 
Transportation Extension Act of 2004, Part V, extended the rule 
through May 31, 2005.

Limitations on transfers to the Highway Trust Fund

    The Code also contains a special enforcement provision to 
prevent expenditure of Highway Trust Fund monies for purposes 
not authorized in section 9503.\10\ Should such unapproved 
expenditures occur, no further excise tax receipts will be 
transferred to the Highway Trust Fund. Rather, the taxes will 
continue to be imposed with receipts being retained in the 
General Fund. This enforcement provision provides specifically 
that it applies not only to unauthorized expenditures under the 
current Code provisions, but also to expenditures pursuant to 
future legislation that does not amend section 9503's 
expenditure authorization provisions or otherwise authorize the 
expenditure as part of a revenue Act.
---------------------------------------------------------------------------
    \10\ Sec. 9503(b)(5).
---------------------------------------------------------------------------

Interrelationship of the Highway Trust Fund and the Aquatic Resources 
        Trust Fund

    The Aquatic Resources Trust Fund is funded by a portion of 
the receipts from the excise taxes imposed on motorboat 
gasoline and special motor fuels and on gasoline used as a fuel 
in the nonbusiness use of small-engine outdoor power equipment. 
A portion of these taxes are transferred into the Highway Trust 
Fund and then retransferred into the Aquatic Resources Trust 
Fund. As a result, transfers to the Aquatic Resources Trust 
Fund are governed in part by Highway Trust Fund provisions.\11\
---------------------------------------------------------------------------
    \11\ Secs. 9503(c)(4) and 9503(c)(5).
---------------------------------------------------------------------------
    A total tax rate of 18.4 cents per gallon is imposed on 
gasoline and special motor fuels used in motorboats and on 
gasoline used as a fuel in the nonbusiness use of small-engine 
outdoor power equipment. Of this rate, 0.1 cent per gallon is 
dedicated to the Leaking Underground Storage Tank Trust Fund. 
Of the remaining 18.3 cents per gallon, 4.8 cents per gallon 
are retained in the General Fund. The balance of 13.5 cents per 
gallon is transferred to the Highway Trust Fund and then 
retransferred to the Aquatic Resources Trust Fund and the Land 
and Water Conservation Fund, as follows.
    The Aquatic Resources Trust Fund is comprised of two 
accounts, the Boat Safety Account and the Sport Fish 
Restoration Account. Motorboat fuel taxes, not exceeding $70 
million per year, are transferred to the Boat Safety Account. 
In addition, these transfers are subject to an overall annual 
limit equal to an amount that will not cause the Boat Safety 
Account to have an unobligated balance in excess of $70 
million. To the extent there are excess motorboat fuel taxes, 
the next $1 million per year of motorboat fuel taxes is 
transferred from the Highway Trust Fund to the Land and Water 
Conservation Fund provided for in Title I of the Land and Water 
Conservation Fund Act of 1965. The balance of the motorboat 
fuel taxes in the Highway Trust Fund is transferred to the 
Sport Fish Restoration Account.
    The Sport Fish Restoration Account also receives 13.5 cents 
per gallon of the small-engine fuel taxes from the Highway 
Trust Fund. This Account is also funded with receipts from an 
ad valorem manufacturers' excise tax on sport fishing 
equipment.
    The retention in the General Fund of 4.8 cents per gallon 
of taxes on fuel used in motorboats and in the nonbusiness use 
of small-engine outdoor power equipment expires with respect to 
taxes imposed after September 30, 2005.
    The expenditure authority for the Aquatic Resources Trust 
Fund expires after May 31, 2005.

                           REASONS FOR CHANGE

    The Committee believes that highway and transit spending 
sustains and creates jobs, providing valuable new opportunities 
in communities where the availability of jobs is declining. In 
addition, a long-term reauthorization provides stability for 
State transportation programs dependent on Federal funds. Thus, 
the Committee believes it is appropriate to reauthorize Highway 
Trust Fund expenditures through September 30, 2009 and to 
extend current Federal taxes payable to the Highway Trust Fund.
    The bill modifies the Harry Byrd rule to require that 
Highway Account and Mass Transit Account (each separately) 
unpaid authorizations at the end of a fiscal year be less than 
or equal to the cash balance of the account at the end of the 
year plus the projected receipts for the next 48 months, rather 
than 24 months. Most highway projects are capital projects on 
which money is spent over a number of years. Given that highway 
projects, and therefore contract payments, may extend longer 
than 24 months, the Committee believes it is appropriate to 
extend the testing period to 48 months to better reflect that 
some existing obligations will be satisfied by using future tax 
receipts.

                        EXPLANATION OF PROVISION

    The expenditure authority for the Highway Trust Fund and 
Aquatic Resources Trust Fund is extended through September 30, 
2009. The Code provisions governing the purposes for which 
monies in the Highway Trust Fund and Aquatic Resources Trust 
Fund may be spent is updated to include the reauthorization 
bill. The provision also extends the motor fuel taxes and all 
three non-fuel excises taxes at their current rates through 
September 30, 2011.
    The Harry Byrd rule is changed from a 24-month to a 48-
month receipt rule. Under the provision, the Harry Byrd rule is 
not triggered unless unfunded highway authorizations exceed 
projected net Highway Trust Fund tax receipts for the 48-month 
period beginning at the close of each fiscal year. This 
potentially allows a greater obligation of funds than permitted 
under present law. For purposes of the 48-month rule, taxes are 
assumed extended beyond their expiration date.
    The provision does not extend the retention in the General 
Fund of 4.8 cents per gallon of taxes on fuel used in 
motorboats and in the nonbusiness use of small-engine outdoor 
power equipment.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

             TITLE II--EXCISE TAX REFORM AND SIMPLIFICATION


                       A. Modify Gas Guzzler Tax


(Sec. 201 of the bill and sec. 4064 of the Code)

                              PRESENT LAW

    Under present law, the Code imposes a tax (``the gas 
guzzler tax'') on automobiles that are manufactured primarily 
for use on public streets, roads, and highways and that are 
rated at 6,000 pounds unloaded gross vehicle weight or 
less.\12\ The tax applies to limousines without regard to the 
weight requirement. The tax is imposed on the sale by the 
manufacturer of each automobile of a model type with a fuel 
economy of 22.5 miles per gallon or less. The tax range begins 
at $1,000 and increases to $7,700 for models with a fuel 
economy less than 12.5 miles per gallon.
---------------------------------------------------------------------------
    \12\ Sec. 4064.
---------------------------------------------------------------------------
    Emergency vehicles and non-passenger automobiles are exempt 
from the tax. The tax also does not apply to non-passenger 
automobiles. The Secretary of Transportation determines which 
vehicles are ``non-passenger'' automobiles, thereby exempting 
these vehicles from the gas guzzler tax based on regulations in 
effect on the date of enactment of the gas guzzler tax.\13\ 
Hence, vehicles defined in Title 49 C.F.R. sec. 523.5 (relating 
to light trucks) are exempt. These vehicles include those 
designed to transport property on an open bed (e.g., pick-up 
trucks) or provide greater cargo-carrying than passenger 
carrying volume including the expanded cargo-carrying space 
created through the removal of readily detachable seats (e.g., 
pick-up trucks, vans, and most minivans, sports utility 
vehicles and station wagons). Additional vehicles that meet the 
``non-passenger'' requirements are those with at least four of 
the following characteristics: (1) an angle of approach of not 
less than 28 degrees; (2) a breakover angle of not less than 14 
degrees; (3) a departure angle of not less than 20 degrees; (4) 
a running clearance of not less than 20 centimeters; and (5) 
front and rear axle clearances of not less than 18 centimeters 
each. These vehicles would include many sports utility 
vehicles.
---------------------------------------------------------------------------
    \13\ Sec. 4064(b)(1)(B).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee observes that limousines are the only class 
of vehicles weighing in excess of 6,000 pounds subject to the 
gas guzzler tax. The Committee believes that, as equipment 
essential to a commercial enterprise, the present-law 
application of the gas guzzler tax to such limousines is 
inappropriate.

                        EXPLANATION OF PROVISION

    The provision repeals the tax as it applies to limousines 
rated at greater than 6,000 pounds unloaded gross vehicle 
weight.

                             EFFECTIVE DATE

    The provision is effective on October 1, 2005.

                        B. Aquatic Excise Taxes


1. Eliminate Aquatic Resources Trust Fund and transform Sport Fish 
        Restoration Account (sec. 211 of the bill and secs. 9503 and 
        9504 of the Code)

                              PRESENT LAW

    A total tax rate of 18.4 cents per gallon is imposed on 
gasoline and special motor fuels used in motorboats, and on 
gasoline used as a fuel in the nonbusiness use of small-engine 
outdoor power equipment.\14\ Of this rate, 0.1 cent per gallon 
is dedicated to the Leaking Underground Storage Tank Trust 
Fund. Of the remaining 18.3 cents per gallon, tax collected in 
excess of 13.5 cents per gallon (i.e., 4.8 cents per gallon) is 
retained in the General Fund of the Treasury.\15\ The balance 
is transferred to the Highway Trust Fund, and retransferred 
(except with respect to amounts transferred to the fund for 
land and water conservation, as described below) to the Aquatic 
Resources Trust Fund.\16\ The taxes on gasoline and special 
motor fuels used in motorboats and the taxes on gasoline used 
as a fuel in the nonbusiness use of small-engine outdoor power 
equipment are collected under the same rules as apply to the 
Highway Trust Fund collections generally.
---------------------------------------------------------------------------
    \14\ Sec. 4081(a)(2).
    \15\ The retention in the General Fund of the 4.8 cents per gallon 
of motorboat fuel taxes and taxes on gasoline used as a fuel in the 
nonbusiness use of small-engine outdoor power equipment expires after 
September 30, 2005.
    \16\ See Sec. 9503(b)(4), (c)(4) and (5). The transfer from the 
Highway Trust Fund to the Aquatic Resources Trust Fund of amounts of 
taxes on gasoline used a fuel in the nonbusiness use of small-engine 
outdoor power equipment expires after September 30, 2005. Between 
October 1, 2001 and September 30, 2003, the amount transferred to the 
Aquatic Resources Trust Fund was 13 cents per gallon. Prior to October 
1, 2001, the amount transferred was 11.5 cents per gallon. Sec. 
9503(b)(4)(D).
---------------------------------------------------------------------------
    The Aquatic Resources Trust Fund is comprised of two 
accounts.\17\ First, the Boat Safety Account is funded by a 
portion of the receipts from the excise tax imposed on 
motorboat gasoline and special motor fuels. Transfers to the 
Boat Safety Account are limited to amounts not exceeding $70 
million per year. In addition, these transfers are subject to 
an overall annual limit equal to an amount that will not cause 
the Boat Safety Account to have an unobligated balance in 
excess of $70 million.\18\
---------------------------------------------------------------------------
    \17\ Sec. 9504(a).
    \18\ Sec. 9503(c)(4)(A). Funding of the Boat Safety Account is 
scheduled to terminate after September 30, 2005.
---------------------------------------------------------------------------
    Second, the Sport Fish Restoration Account receives the 
balance of the motorboat gasoline and special motor fuels 
receipts that are transferred to the Aquatic Resources Trust 
Fund.\19\ The Sport Fish Restoration Account is also funded 
with receipts from an excise tax on sport fishing equipment 
sold by the manufacturer, producer or importer. The excise tax 
rate on sport fishing equipment is 10 percent of the sales 
price; the rate is reduced to 3 percent for electric outboard 
motors and fishing tackle boxes.\20\ Examples of the items of 
sport fishing equipment subject to the 10-percent rate include 
fishing rods and poles, fishing reels, fly fishing lines and 
certain other fishing lines, fishing spears, spear guns, spear 
tips, items of terminal tackle, containers designed to hold 
fish, fishing vests, landing nets, and portable bait 
containers.\21\ In addition, import duties on certain fishing 
tackle, yachts and pleasure craft are transferred into the 
Sport Fish Restoration Account.
---------------------------------------------------------------------------
    \19\ After funding of the Boat Safety Account, remaining motorboat 
fuel taxes, not exceeding $1,000,000 during any fiscal year, are 
transferred from the Highway Trust Fund into the land and water 
conservation fund provided in title I of the Land and Water 
Conservation Fund Act of 1965. Sec. 9503(c)(4)(B). After the transfer 
to the land and water conservation fund, motorboat fuel taxes remaining 
in the Highway Trust Fund are transferred to the Sport Fish Restoration 
Account. See 9503(c)(4)(C).
    \20\ Sec. 4161(a)(2) and (3).
    \21\ Items of ``sport fishing equipment'' are enumerated in section 
4162(a).
---------------------------------------------------------------------------
    The amounts of taxes on gasoline used as a fuel in the 
nonbusiness use of small-engine outdoor power equipment that 
are transferred to the Highway Trust Fund and retransferred to 
the Aquatics Resources Trust Fund are directed to a separate 
sub-account of the Sport Fish Restoration Account, the Coastal 
Wetlands Sub-Account.
    Expenditures from the Boat Safety Account are subject to 
annual appropriations. Amounts transferred, paid, or credited 
to the Sport Fish Restoration Account (including the Coastal 
Wetlands Sub-Account) are authorized to be appropriated for the 
uses authorized in the expenditure provisions.\22\
---------------------------------------------------------------------------
    \22\ Act of August 9, 1950, 64 Stat. 430 (codified at 16 U.S.C. 
sec. 777 et seq.) (``An Act to provide that the United States shall aid 
the States in fish restoration and management projects, and for other 
purposes.'')
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the current Boat Safety Account 
is fully funded and that expenditures for boating safety 
relating to newly collected funds would be facilitated by 
treating these collections in the same manner as those 
currently required for the Sport Fish Restoration Account. The 
Committee further believes that combining the Boat Safety 
Account and Sport Fish Restoration Account will facilitate such 
uniform treatment in the future and better coordinate 
expenditures for sport fishing and boating safety.

                        EXPLANATION OF PROVISION

    The proposal eliminates the Aquatics Resources Trust Fund 
and future transfers to the Boat Safety Account and transforms 
the Sport Fish Restoration Account into the Sport Fish 
Restoration and Boating Trust Fund. After funding of the land 
and water conservation fund as under present law, the balance 
of the taxes on motorboat fuels is transferred from the Highway 
Trust Fund into the Sport Fish Restoration and Boating Trust 
Fund. In addition, the transfers from the Highway Trust Fund to 
the Sport Fish Restoration and Boating Trust Fund of amounts of 
taxes on gasoline used as a fuel in the nonbusiness use of 
small-engine outdoor power equipment are extended through 
September 30, 2011.
    Existing amounts in the Boat Safety Account, plus interest 
accrued on interest-bearing obligations of such account, are 
made available as provided under expenditure provisions.\23\ 
The expenditure provisions also authorize the appropriation of 
amounts in the Sport Fish Restoration and Boating Trust Fund, 
including for boating safety, for the uses authorized in the 
expenditure provisions.
---------------------------------------------------------------------------
    \23\ The expenditure provisions are codified at 16 U.S.C. sec. 777 
et seq., as may be amended by the Sportfishing and Recreational Boating 
Safety Act of 2005.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The proposal is effective October 1, 2005.

2. Repeal of harbor maintenance tax on exports (sec. 212 of the bill 
        and sec. 4461 of the Code)

                              PRESENT LAW

    The Code contains provisions imposing a 0.125-percent 
excise tax on the value of most commercial cargo loaded or 
unloaded at U.S. ports (other than ports included in the Inland 
Waterway Trust Fund system). The tax also applies to amounts 
paid for passenger transportation using these U.S. ports. 
Exemptions are provided for (1) cargo donated for overseas use, 
(2) cargo shipped between the U.S. mainland and Alaska (except 
for crude oil), Hawaii, and/or U.S. possessions and (3) cargo 
shipped between Alaska, Hawaii, and/or U.S. possessions. 
Receipts from this tax are deposited in the Harbor Maintenance 
Trust Fund.
    The U.S. Supreme Court has held that the harbor maintenance 
excise tax is unconstitutional as applied to exported cargo 
because it violates the ``Export Clause'' of the U.S. 
Constitution.\24\ The tax remains in effect for imported cargo. 
Imposition of the tax on passenger transportation with respect 
to passengers on cruises that originate, stop, or terminate, at 
U.S. ports has been upheld.
---------------------------------------------------------------------------
    \24\ United States Shoe Corp. v. United States, 523 U.S. 360, 118 
S. Ct. 1290, 140 L. Ed. 2d 453 (1998).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes the Internal Revenue Code should 
conform to the law of the land as interpreted by the Supreme 
Court and, thus, believes the harbor maintenance excise tax as 
applied to exported cargo should be repealed as deadwood.

                        EXPLANATION OF PROVISION

    The provision conforms the Code to the Supreme Court 
decision and exempts exported commercial cargo from the harbor 
maintenance tax.

                             EFFECTIVE DATE

    The provision is effective before, on, and after the date 
of enactment.

3. Cap on excise tax on certain fishing equipment (sec. 213 of the bill 
        and sec. 4161 of the Code)

                              PRESENT LAW

    In general, the Code imposes a 10-percent tax on the sale 
by the manufacturer, producer, or importer of specified sport 
fishing equipment.\25\ A three percent rate, however, applies 
to the sale of electric outboard motors and fishing tackle 
boxes.\26\ Sport fishing equipment subject to the 10-percent 
tax includes fishing rods and poles, fishing reels, fly fishing 
lines, and other fishing lines not over 130 pounds test, 
fishing spears, spear guns, and spear tips, and tackle items 
including leaders, artificial lures, artificial baits, 
artificial flies, fishing hooks, bobbers, sinkers, snaps, 
drayles, and swivels. In addition the following fishing 
supplies and accessories are subject to the 10-percent tax: 
fish stringers; creels; bags, baskets, and other containers 
designed to hold fish; portable bait containers; fishing vests; 
landing nets; gaff hooks; fishing hook disgorgers; dressing for 
fishing lines and artificial flies; fishing tip-ups and tilts; 
fishing rod belts, fishing rodholders; fishing harnesses; fish 
fighting chairs; and fishing outriggers and downriggers.
---------------------------------------------------------------------------
    \25\ Sec. 4161(a)(1).
    \26\ Sec. 4161(a)(2) and (a)(3).
---------------------------------------------------------------------------
    Revenues from the excise tax on sport fishing equipment are 
deposited in the Sport Fishing Account of the Aquatic Resources 
Trust Fund. Monies in the fund are spent, subject to an 
existing permanent appropriation, to support Federal-State 
sport fish enhancement and safety programs.

                           REASONS FOR CHANGE

    The Committee understands that as a tax on the 
manufacturer, the 10-percent ad valorem tax rate generally is 
imposed at the time a rod is sold to a wholesaler or retailer 
and thus the tax as a percentage of the ultimate retail price 
paid by the consumer is less than 10 percent. However, the 
Committee understands that most rods priced in excess of $100 
are custom rods produced by businesses that are both the 
``manufacturer'' and the retailer. In this circumstance the 10-
percent tax rate would apply to the retail price. The Committee 
therefore believes that present-law tax does not provide for 
neutral taxation of different segments of the fishing rod 
market. The Committee concludes that the tax on rods and poles 
the manufacturer's price of which exceeds $100 should be 
limited to $10.00.

                        EXPLANATION OF PROVISION

    The provision provides that the tax applicable to a fishing 
rod or fishing pole is the lesser of 10 percent or $10.00.

                             EFFECTIVE DATE

    The provision is effective for articles sold by the 
manufacturer, producer, or importer after September 30, 2005.

                         C. Aerial Excise Taxes


1. Clarification of excise tax exemptions for agricultural aerial 
        applicators and exemption for fixed-wing aircraft engaged in 
        forestry operations (sec. 221 of the bill and secs. 4261 and 
        6420 of the Code)

                              PRESENT LAW

    Excise taxes are imposed on aviation gasoline (19.4 cents 
per gallon) and jet fuel (21.9 cents per gallon).\27\ All but 
0.1 cent per gallon of the revenues from these taxes are 
dedicated to the Airport and Airway Trust Fund. The remaining 
0.1 cent per gallon rate is imposed for the Leaking Underground 
Storage Tank Trust Fund.
---------------------------------------------------------------------------
    \27\ Sec. 4081.
---------------------------------------------------------------------------
    Fuel used on a farm for farming purposes is a nontaxable 
use. Aerial applicators (crop dusters) are allowed to claim a 
refund instead of farm owners and operators in the case of 
aviation gasoline if the owners or operators give written 
consent to the aerial applicators.\28\ This provision applies 
only to fuel consumed in the airplane while operating over the 
farm, i.e., fuel consumed traveling to and from the farm is not 
exempt.
---------------------------------------------------------------------------
    \28\ Sec. 6420(c)(4).
---------------------------------------------------------------------------
    Air passenger transportation is subject to an excise tax 
equal to 7.5 percent of the amount paid plus $3.20 per domestic 
flight segment.\29\ The tax on transportation by air does not 
apply to air transportation by helicopter if the helicopter is 
used for (1) the exploration, or the development or removal of 
oil, gas, or hard minerals exploration, or (2) certain timber 
operations (planting, cultivating, cutting, transporting, or 
caring for trees, including logging operations).\30\ The 
exemption applies only when the helicopters are not using the 
Federally funded airport and airway services. Helicopters and 
fixed-wing aircraft providing emergency medical services also 
are exempt from the air passenger tax regardless of the type of 
airport and airway services used.\31\
---------------------------------------------------------------------------
    \29\ Sec. 4261(a) and (b).
    \30\ Sec. 4261(f)
    \31\ Sec. 4261(g).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes significant simplification and 
reduction of administrative burden will be achieved by 
eliminating the requirements that aerial applicators obtain 
written consent from the farm owner for exempt fuel use and by 
allowing exempt fuel use to extend to fuel consumed when flying 
between the farms where chemicals are applied and the airport 
where the airplane takes off and lands. In addition, the 
Committee notes that the purpose of the aviation excise taxes 
is to generate revenue for the Airport Improvement program, 
which builds new and retrofits and expands existing public 
airports. The Committee believes it is appropriate to extend 
the current exemption for helicopters engaged in timber 
operations to fixed wing aircraft when such aircraft are not 
using the Federally funded airport and airway services.

                        EXPLANATION OF PROVISION

    With regard to the exemption for aerial applicators, 
written consent from the farm owner or operator is no longer 
needed for the aerial applicator to claim exemption for 
aviation gasoline. The exemption also is expanded to include 
fuels consumed when flying between the farms where chemicals 
are applied and the airport where the airplane takes off and 
lands. The present exemption for helicopters engaged in timber 
operations is expanded to include fixed-wing aircraft if such 
aircraft are not using the Federally funded airport and airway 
services.

                             EFFECTIVE DATE

    The provision is effective for fuel use or air 
transportation after September 30, 2005.

2. Modify the definition of rural airport (sec. 222 of the bill and 
        sec. 4261 of the Code)

                              PRESENT LAW

    Air passenger transportation is subject to an excise tax 
equal to 7.5 percent of the amount paid plus $3.20 per domestic 
flight segment.\32\ The $3.20 tax on flight segments does not 
apply to a domestic segment beginning or ending at a rural 
airport.
---------------------------------------------------------------------------
    \32\ Sec. 4261(a) and (b).
---------------------------------------------------------------------------
    With respect to any calendar year, a rural airport is an 
airport that had fewer than 100,000 passengers departing by air 
during the second preceding calendar year for such airport and 
such airport either (1) is not located within 75 miles of a 
larger airport (one that had at least 100,000 passengers 
departing in the second preceding calendar year), or (2) was 
receiving essential air service subsidy payments as of August 
5, 1997.

                           REASONS FOR CHANGE

    The Committee notes that the present-law definition of 
``rural airports'' generally encompasses those airports that do 
not offer potential customers a viable alternative to a larger 
airport from which a ticket would subject the purchaser to the 
flight segment tax in addition to the ad valorem tax. The 
Committee observes that airports located on islands with no 
direct access by road from the mainland also would not offer 
potential customers a viable alternative to a larger airport, 
even if the island airport is within 75 miles of the larger 
airport.

                        EXPLANATION OF PROVISION

    The provision expands the definition of qualified rural 
airport to include an airport that (1) is not connected by 
paved roads to another airport and (2) had fewer than 100,000 
commercial passengers departing by air on flight segments of at 
least 100 miles during the second preceding calendar year.

                             EFFECTIVE DATE

    The provision is effective on October 1, 2005.

3. Exempt from ticket taxes transportation provided by seaplanes (sec. 
        223 of the bill and sec. 4261 of the Code)

                              PRESENT LAW

    Air passenger transportation is subject to an excise tax 
equal to 7.5 percent of the amount paid plus $3.20 per domestic 
flight segment (``air passenger tax'').\33\ A 6.25-percent tax 
is imposed on amounts paid for transportation of property by 
air (``air cargo tax'').\34\ The air cargo tax applies only to 
amounts paid to persons engaged in the business of transporting 
property by air for hire. The air passenger tax and air cargo 
tax does not apply to amounts paid for the transportation if 
furnished on an aircraft having a maximum certificated takeoff 
weight of 6,000 pounds or less unless the aircraft is operated 
on an established line.\35\
---------------------------------------------------------------------------
    \33\ Sec. 4261(a) and (b).
    \34\ Sec. 4271.
    \35\ Sec. 4281.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee observes that seaplanes do not make as full 
utilization of Federal Aviation Administration services as do 
planes that offer passenger service out of traditional 
airports. The Committee, therefore, believes it is appropriate 
to exempt such service from the air transportation excise taxes 
and instead impose only the fuels excise taxes.

                        EXPLANATION OF PROVISION

    The provision provides that the air passenger tax and the 
air cargo tax do not apply to transportation by a seaplane with 
respect to any segment consisting of a takeoff from, and a 
landing on, water, but only if the places at which such takeoff 
and landing occur have not received and are not receiving 
financial assistance from the Airport and Airway Trust Fund.

                             EFFECTIVE DATE

    The provision is effective for transportation after 
September 30, 2005.

4. Exempt certain sightseeing flights from taxes on air transportation 
        (sec. 224 of the bill and sec. 4281 of the Code)

                              PRESENT LAW

    Under present law, taxable aviation transportation is 
subject to a 7.5-percent excise tax on the price of an airline 
ticket and a $3.20 segment tax. An exception to these taxes is 
provided for transportation by an aircraft having a maximum 
certificated takeoff weight of 6,000 pounds or less except when 
the aircraft is operated on an established line. Under the 
Treasury regulations to be ``operated on an established line'' 
means to be operated with ``some degree of regularity between 
definite points. The term implies that the air carrier 
maintains control over the direction, routes, time, number of 
passengers carried, etc.'' Treasury regulations provide that 
transportation need not be between two definite points to be 
taxable: a payment for continuous transportation beginning and 
ending at the same point is subject to the tax.\36\ The IRS 
position is that the words ``between definite points'' do not 
require two separate points for purposes of determining whether 
an aircraft is operated on an established line. At least one 
court has agreed.\37\
---------------------------------------------------------------------------
    \36\ Treas. Reg. sec. 494261-1(c).
    \37\ Lake Mead Air Inc. v. United States, 991 F. Supp. 1209 (D. 
Nev. 1997).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to exempt certain 
sightseeing flights from the taxes on air transportation. 
Examples of sightseeing flights include flights of short 
duration that overlook a glacier, volcano, the Grand Canyon, or 
other similar attraction and for which the air tour begins and 
ends at the same point. By short duration, the Committee 
intends that the tour occur within a calendar day, irrespective 
of intermittent stops to view the attraction. In addition, all 
passengers from the initial point of departure must return with 
the aircraft at the conclusion of the tour. The Committee 
believes that such flights are primarily for entertainment 
rather than for transportation from one place to another and so 
should be treated as noncommercial aviation.

                        EXPLANATION OF PROVISION

    For purposes of the proposal exemption for small aircraft 
operated on nonestablished lines, an aircraft operated on a 
flight, the sole purpose of which is sightseeing, will not be 
considered as operated on an established line.

                             EFFECTIVE DATE

    The provision is effective with respect to transportation 
beginning after September 30, 2005, but does not apply to any 
amount paid before such date for such transportation.

                      D. Taxes Relating to Alcohol


1. Repeal special occupational taxes on producers and marketers of 
        alcoholic beverages (sec. 231 of the bill and secs. 5081, 5091, 
        5111, 5112, 5113, 5117, 5121, 5122, 5123, 5125, 5131, 5132, 
        5141, 5147, 5148, and 5276 of the Code)

                              PRESENT LAW

    Under the law in effect prior to July 1, 2005, special 
occupational taxes are imposed on producers and others engaged 
in the marketing of distilled spirits, wine, and beer. These 
excise taxes are imposed as part of a broader Federal tax and 
regulatory structure governing the production and marketing of 
alcoholic beverages. The special occupational taxes are payable 
annually, on July 1 of each year. The tax rates in effect prior 
to July 1, 2005 are as follows:
          Producers 38 Distilled spirits and wines 
        (sec. 5081),39 $1,000 per year, per permise; 
        Brewers (sec. 5091), 1,000 per year, per premise
---------------------------------------------------------------------------
    \38\ A reduced rate of tax in the amount of $500.00 is imposed on 
small proprietors (as defined in the Code) (secs. 5081(b) and 5091(b)).
    \39\ Proprietors of plants producing distilled spirits exclusively 
for fuel use, with annual production not exceeding 10,000 proof 
gallons, are exempt. Secs. 5081(c), 5181(c)(4).
---------------------------------------------------------------------------
          Wholesale dealers (sec. 5111): Liquors, wines, or 
        beer, $500 per year
          Retail dealers (sec. 5121): Liquors, wines, or beer, 
        $250 per year
          Nonbeverage use of distilled spirits (sec. 5131): 
        $500 per year
          Industrial use of distilled spirits (sec. 5276) $250 
        per year
    Section 246(a) of the American Jobs Creation Act of 2004 
40 suspends the special occupational tax for the 
period beginning July 1, 2005 and ending June 30, 
2008.41
---------------------------------------------------------------------------
    \40\ Pub. L. No. 108-357.
    \41\ See sec. 5148.
---------------------------------------------------------------------------
    Every person engaged in a trade or business on which a 
special occupational tax is imposed is required to register 
with the Secretary.42 In addition, every dealer in 
liquors, wine or beer is required to keep records of their 
transactions.43 A dealer is any person who sells, or 
offers for sale, distilled spirits, wine, or beer.44 
A delegate of the Secretary of the Treasury is authorized to 
inspect the records of any dealer during business 
hours.45 There are penalties for failing to comply 
with the recordkeeping requirements.46 There are 
also registration and regulation requirements for the 
nonbeverage use of distilled spirits, and permit and 
recordkeeping requirements for the industrial use of distilled 
spirits.47
---------------------------------------------------------------------------
    \42\ Secs. 5141 and 7011. The registration is of such person's name 
or style, place of residence, trade or business, and the place where 
such trade or business is to be carried on.
    \43\ Secs. 5114 and 5124.
    \44\ Sec. 5112(a). Such definition includes producers and, in 
general, proprietors of warehouses.
    \45\ Sec. 5146.
    \46\ Sec. 5603.
    \47\ Secs. 5132 and 5275.
---------------------------------------------------------------------------
    The Code limits the persons from whom dealers may purchase 
their liquor stock intended for resale. A dealer may only 
purchase from:
          1. a wholesale dealer in liquors who has paid the 
        special occupational tax as such dealer to cover the 
        place where such purchase is made; or
          2. a wholesale dealer in liquors who is exempt, at 
        the place where such purchase is made, from payment of 
        such tax under any provision chapter 51 of the Code; or
          3. a person who is not required to pay special 
        occupational tax as a wholesale dealer in 
        liquors.48
---------------------------------------------------------------------------
    \48\ Sec. 5117. For example, purchases from a proprietor of a 
distilled spirits plant at his principal business office would be 
covered under item (2) since such a proprietor is not subject to the 
special occupational tax on account of sales at his principal business 
office (sec. 5113(a)). Purchases from a liquor store operated by a 
State or by a political subdivision of a State would be covered under 
item (3) (sec. 5113(b)).
---------------------------------------------------------------------------
    Violation of this restriction in punishable by $1,000 fine, 
imprisonment of one year, or both.49 A violation 
also makes the alcohol subject to seizure and 
forfeiture.50
---------------------------------------------------------------------------
    \49\ Sec. 5687.
    \50\ Sec. 7302.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The special occupational tax is not a tax on alcoholic 
products but rather operates as a license fee on businesses. 
The Committee believes that this tax places an unfair burden on 
business owners. However, the Committee recognizes that the 
registration and recordkeeping requirements applicable to 
wholesalers and retailers engaged in such businesses are 
necessary enforcement tools to ensure the protection of the 
revenue arising from the excise taxes on these products. Thus, 
the Committee believes it appropriate to repeal the tax, while 
retaining present-law recordkeeping requirements.

                        EXPLANATION OF PROVISION

    The provision repeals the special occupational taxes on 
producers and marketers of alcoholic beverages and on the 
nonbeverage or industrial use of distilled spirits. The 
registration, recordkeeping and inspection rules applicable to 
wholesale and retail dealers are retained.51 For 
purposes of the recordkeeping requirements for wholesale and 
retail liquor dealers, the provision provides a rebuttable 
presumption that a person who sells, or offers for sale, 
distilled spirits, wine, or beer, in quantities of 20 wine 
gallons or more to the same person at the same time is engaged 
in the business of a wholesale dealer in liquors or a wholesale 
dealer in beer. In addition, the provision retains the present-
law rules that make it unlawful for any liquor dealer to 
purchase distilled spirits for resale from any person other 
than a wholesale liquor dealer subject to the recordkeeping 
requirements, or a proprietor of a distilled spirits plant 
subject to recordkeeping requirements.52 Existing 
general criminal penalties relating to records and reports 
apply to wholesalers and retailers who fail to comply with 
these requirements.
---------------------------------------------------------------------------
    \51\ The provision also retains the present-law registration and 
regulation requirements for the nonebeverage use of distilled spirits, 
and the permit and recordkeeping requirements for the industrial use of 
distilled spirits.
    \52\ Proprietors of distilled spirits plants remain subject to 
present law recordkeeping requirements under section 5207. Under 
present law, a limited retail dealer in liquors (such as a charitable 
organization selling liquor at a picnic) may lawfully purchase 
distilled spirits for resale from a retail dealer in distilled spirits. 
The provision retains this rule.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective on July 1, 2008. The provision 
does not affect liability for taxes imposed with respect to 
periods before July 1, 2008.

2. Modify limitation on rate of rum excise tax cover over to Puerto 
        Rico and Virgin Islands (sec. 232 of the bill and sec. 7652 of 
        the Code)

                              PRESENT LAW

    A $13.50 per proof gallon 53 excise tax is 
imposed on distilled spirits produced in or imported (or 
brought) into the United States.54 The excise tax 
does not apply to distilled spirits that are exported from the 
United States, including exports to U.S. possessions (e.g., 
Puerto Rico and the Virgin Islands).55
---------------------------------------------------------------------------
    \53\ A proof gallon is a liquid gallon consisting of 50 percent 
alcohol. See sec. 5002(a)(10) and (11).
    \54\ Sec. 5001(a)(1).
    \55\ Secs. 5062(b), 7653(b) and (c).
---------------------------------------------------------------------------
    The Code provides for cover over (payment) to Puerto Rico 
and the Virgin Islands of the excise tax imposed on rum 
imported (or brought) into the United States, without regard to 
the country of origin.56 The amount of the cover 
over is limited under Code section 7652(f) to $10.50 per proof 
gallon ($13.25 per proof gallon during the period July 1, 1999 
through December 31, 2005).
---------------------------------------------------------------------------
    \56\ Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the 
amount of excise tax collected from imports into the United States of 
articles produced in the Virgin Islands is retained by the United 
States under section 7652(b)(3).
---------------------------------------------------------------------------
    Tax amounts attributable to shipments to the United States 
of rum produced in Puerto Rico are covered over to Puerto Rico. 
Tax amounts attributable to shipments to the United States of 
rum produced in the Virgin Islands are covered over to the 
Virgin Islands. Tax amounts attributable to shipments to the 
United States of rum produced in neither Puerto Rico nor the 
Virgin Islands are divided and covered over to the two 
possessions under a formula.57 Amounts covered over 
to Puerto Rico and the Virgin Islands are deposited into the 
treasuries of the two possessions for use as those possessions 
determine.58 All of the amounts covered over are 
subject to the limitation.
---------------------------------------------------------------------------
    \57\ Sec. 7652(e)(2).
    \58\ Secs. 7652(a)(3), (b)(3), and (e)(1).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the fiscal needs of Puerto Rico 
and Virgin Islands justify the extension and the increase to 
full cover over for calendar year 2006. The Committee further 
believes that dedicating a small portion of the amount covered 
over to Puerto Rico to the Puerto Rico Conservation Trust Fund 
will help to ensure the continued viability of such fund.

                        EXPLANATION OF PROVISION

    Under the provision, the cover over amount of $13.25 per 
proof gallon is modified to $13.50 for rum brought into the 
United States after December 31, 2005 and before January 1, 
2007. After December 31, 2006, the cover over amount reverts to 
$10.50 per proof gallon.
    The provision additionally requires that Puerto Rico 
transfers a portion of the amount covered over to Puerto Rico 
to the Puerto Rico Conservation Trust Fund (the 
``Fund'').59 The treasury of Puerto Rico is required 
to make a transfer to the Fund in an amount equal to 50 cents 
per proof gallon of the taxes covered over to Puerto Rico, and 
attributable to rum imported into the United States that was 
produced neither in Puerto Rico nor the Virgin Islands. The 
transfer is required to be made within 30 days of each such 
cover over payment to Puerto Rico. Each transfer payment is to 
be treated as principal for an endowment, the income from which 
is to be used by the Fund for the purposes for which the Fund 
was established. If Puerto Rico fails to make a timely payment 
to the Trust Fund, the Secretary of the Treasury shall deduct 
and withhold such unpaid amount from the next cover over 
payment, plus interest, and shall transfer such amounts 
directly to the Fund. Such deduction, withholding, and direct 
payment will not be made if the Secretary of the Interior, 
after consultation with the Governor of Puerto Rico, finds that 
the failure of the treasury of Puerto Rico to make the transfer 
payment was for good cause. The transfer requirement expires 
after December 31, 2006.
---------------------------------------------------------------------------
    \59\ The Puerto Rico Conservation Trust Fund was established 
pursuant to a Memorandum of Understanding, dated December 24, 1968, 
between the United States Department of the Interior and the 
Commonwealth of Puerto Rico.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The changes in the cover over rate are effective for 
articles brought into the United States after December 31, 
2005. The provision regarding the Puerto Rico Conservation 
Trust Fund is effective January 1, 2006.

3. Provide an income tax credit for cost of carrying tax-paid distilled 
        spirits in wholesale inventories and in control State bailment 
        warehouses (sec. 233 of the bill and new sec. 5011 of the Code)

                              PRESENT LAW

    As is true of most major Federal excise taxes, the excise 
tax on distilled spirits is imposed at a point in the chain of 
distribution before the product reaches the retail (consumer) 
level. The excise tax on distilled spirits produced in the 
United States is imposed when the distilled spirits are removed 
from the distilled spirits plant where they are produced. 
Distilled spirits that are bottled before importation into the 
United States are taxed on removal from the first U.S. custom 
bonded warehouse to which they are landed (including a 
warehouse located in a foreign trade zone). Distilled spirits 
imported in bulk containers from bottling in the United States 
may be transferred to a domestic distilled spirits plant 
without payment of tax; subsequently, these distilled spirits 
are taxed in the same way as domestically produced distilled 
spirits.
    No tax credits are allowed under present law for business 
costs associated with having tax-paid products in inventory. 
Rather, excise tax that is included in the purchase price of a 
product is treated the same as the other components of the 
product cost, i.e., deductible as a cost of goods sold.

                           REASONS FOR CHANGE

    Under current law, wholesale importers of distilled spirits 
are not required to pay the Federal excise tax on imported 
spirits until after the product is removed from a bonded 
warehouse for sale to a retailer. In contrast, the tax on 
domestically produced spirits is included as part of the 
purchase price and passed on from the supplier to wholesaler. 
It is the Committee's understanding that in some instances, 
wholesalers can carry this tax-paid inventory for an average of 
60 days before selling it to a retailer. The Committee believes 
it is appropriate to provide an income tax credit to 
approximate the interest charge--more commonly referred to as 
float--that results from carrying tax-paid distilled spirits in 
inventory.

                        EXPLANATION OF PROVISION

    The provision creates a new income tax credit for eligible 
wholesalers, distillers, and importers, of distilled spirits. 
The credit is calculated by multiplying the number of cases of 
bottled distilled spirits by the average tax-financing cost per 
case for the most recent calendar year ending before the 
beginning of such taxable year. A case is 12 80-proof 750-
milliliter bottles. The average tax-financing cost per case is 
the amount of interest that would accrue at corporate 
overpayment rates during an assumed 60-day holding period on an 
assumed tax rate of $25.68 per case of 12 80-proof 750-
milliliter bottles.
    The wholesaler credit only applies to domestically bottled 
distilled spirits \60\ purchased directly from the bottler of 
such spirits. An eligible wholesaler is any person that holds a 
permit under the Federal Alcohol Administration Act as a 
wholesaler of distilled spirits that is not a State, or agency 
or political subdivision thereof.
---------------------------------------------------------------------------
    \60\ Distilled spirits that are imported in bulk and then bottled 
domestically qualify as domestically bottled distilled spirits.
---------------------------------------------------------------------------
    For distillers and importers that are not eligible 
wholesalers, the credit is limited to bottled inventory in a 
warehouse owned and operated by, or on behalf of, a State when 
title to such inventory has not passed unconditionally. The 
credit for distillers and importers applies to distilled 
spirits bottled both domestically and abroad.
    The credit is in addition to present-law rules allowing tax 
included in inventory costs to be deducted as a cost of goods 
sold.
    The credit is treated as part of the general business 
credits.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after September 30, 2005.

4. Quarterly excise tax filing for small alcohol excise taxpayers (sec. 
        234 of the bill and sec. 5061 of the Code)

                              PRESENT LAW

    Excise taxes on distilled spirits, wines, and beers are 
collected on the basis of returns filed in accordance with 
rules prescribed by the Secretary of the Treasury.\61\ Domestic 
producers of distilled spirits, beer, and wine are generally 
required to pay alcohol excise taxes within 14 days after the 
last day of the semi-monthly period during which the article is 
withdrawn under a deferred payment bond.\62\ Treasury 
regulations also permit certain very small wine producers to 
file and pay on an annual basis.\63\ In the case of distilled 
spirits, wines, and beer which are imported into the United 
States (other than in bulk containers), the importer is 
generally required to pay alcohol excise taxes within 14 days 
after the last day of the semi-monthly period during which the 
article is entered into the customs territory of the United 
States.\64\ In the case of imported articles entered for 
warehousing, the taxes are generally due within 14 days after 
the last day of the semi-monthly period during which the 
article is removed from the first such warehouse.\65\
---------------------------------------------------------------------------
    \61\ Sec. 5061(a).
    \62\ Sec. 5061(d)(1).
    \63\ Annual filing and payment is permitted to a wine producer who 
has not given a deferred payment bond, and who either paid wine excise 
taxes in an amount less than $1,000 during the previous calendar year 
or is a proprietor of a new bonded wine premise and expects to pay less 
than $1,000 in wine excise taxes before the end of the calendar year. 
27 CFR sec. 24.273(a).
    \64\ Sec. 5061(d)(2)(A).
    \65\ Sec. 5061(d)(2)(B).
---------------------------------------------------------------------------
    Special rules apply to accelerate payments made with 
respect to taxes allocable to the second half of the month of 
September.\66\
---------------------------------------------------------------------------
    \66\ Sec. 5061(d)(4).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the payment of alcohol excise 
taxes and filing of the related tax returns on a semi-monthly 
basis are a heavy burden for small businesses engaged in the 
production and importation of distilled spirits, wines and 
beers. The Committee wishes to lighten the paperwork load on 
these taxpayers by permitting filing and payment on a quarterly 
basis.

                        EXPLANATION OF PROVISION

    Under the provision, domestic producers and importers of 
distilled spirits, wines, and beers with annual excise tax 
liability of $50,000 or less attributable to alcohol may file 
returns and pay taxes within 14 days after the end of the 
calendar quarter instead of on a semi-monthly basis. In order 
to qualify, the taxpayer's tax liability for such taxes during 
the immediately preceding year must have been $50,000 or less, 
and, as of the beginning of the current calendar year, the 
taxpayer must reasonably expect to pay less than $50,000 in 
such taxes for that year. The provision does not apply to a 
taxpayer for any portion of the calendar year following the 
first date on which the aggregate amount of tax due for that 
year exceeds the $50,000 threshold.
    The special rules accelerating payments for taxes allocable 
to the second half of September do not apply to quarterly 
filers under the proposal.
    Very small wine producers may still file and pay on an 
annual basis as under present law.

                             EFFECTIVE DATE

    The provision is effective for quarterly periods beginning 
January 1, 2006.

                         E. Sport Excise Taxes


1. Custom gunsmiths (sec. 241 of the bill and sec. 4182 of the Code)

                              PRESENT LAW

    The Code imposes an excise tax upon the sale by the 
manufacturer, producer or importer of certain firearms and 
ammunition.\67\ Pistols and revolvers are taxable at 10 
percent. Firearms (other than pistols and revolvers), shells, 
and cartridges are taxable at 11 percent. The excise tax for 
firearms imposed on manufacturers, producers, and importers 
does not apply to machine guns and short barreled firearms. 
Sales to the Defense Department of firearms, pistols, 
revolvers, shells and cartridges also are exempt from the tax.
---------------------------------------------------------------------------
    \67\ Sec. 4181.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Many custom gunsmiths do not actually make new guns, rather 
they remodel or refurbish existing firearms. The provision 
establishes an exemption from the excise tax for manufacturers 
of fewer than 50 firearms per year. The Committee believes two 
objectives are accomplished under the provisions. First, this 
provision eliminates the imposition of the excise tax on custom 
gunmakers, and second, it eliminates an administrative burden 
placed on small businesses.

                        EXPLANATION OF PROVISION

    The provision exempts from the firearms excise tax 
firearms, pistols, and revolvers manufactured, produced, or 
imported by a person who manufactures, produces, and imports 
less than 50 of such articles during the calendar year. 
Controlled groups are treated as a single person for 
determining the 50-article limit.

                             EFFECTIVE DATE

    The provision is effective for articles sold by the 
manufacturer, producer, or importer after September 30, 2005. 
No inference is intended from the prospective effective date of 
this provision as to the proper treatment of pre-effective date 
sales.

                  TITLE III--MISCELLANEOUS PROVISIONS


           A. Motor Fuel Tax Enforcement Advisory Commission


(sec. 301 of the bill)

                              Present Law

    Present law does not require that there be an advisory 
commission on motor tax fuel enforcement.

                           REASONS FOR CHANGE

    The Committee believes that motor fuel tax administration 
can be improved through the cooperation and shared experiences 
of the various stakeholders in motor fuel tax enforcement. 
Therefore, the Committee believes it appropriate to create an 
advisory commission for motor fuel tax enforcement consisting 
of both Government and private sector members.

                        EXPLANATION OF PROVISION

    The provision establishes a ``Motor Fuel Tax Enforcement 
Advisory Commission'' (the ``Commission''). The purpose of the 
Commission is to (1) review motor fuel revenue collections, 
historical and current, (2) review the progress of 
investigations (3) develop and review legislative proposals 
with respect to motor fuel taxes, (4) monitor the progress of 
administrative regulation projects relating to fuel taxes, (5) 
review the results Federal and State agency cooperative efforts 
regarding motor fuel taxes, and (6) review the results of 
Federal interagency cooperative efforts regarding motor fuel 
taxes. The Commission also is to evaluate and make 
recommendations regarding (1) the effectiveness of existing 
Federal enforcement programs regarding motor fuel taxes, (2) 
enforcement personnel allocation, and (3) proposals for 
regulatory projects, legislation, and funding.
    The Commission is to be composed of the following:
          1. At least one representative from each of the 
        following Federal entities: the Department of Homeland 
        Security, the Department of Transportation--Office of 
        Inspector General, the Federal Highway Administration, 
        the Department of Defense, and the Department of 
        Justice.
          2. At least one representative from the Federation of 
        State Tax Administrators,
          3. At least one representative from any State 
        Department of Transportation,
          4. Two representatives from the highway construction 
        industry,
          5. Six representatives from industries relating to 
        fuel distribution: refiners (2 representatives), 
        distributors (1 representative), pipelines (1 
        representative), terminal operators (2 
        representatives),
          6. One representative from the retail fuel industry, 
        and
          7. Two representatives each from the staff of the 
        Senate Committee on Finance and the House Committee on 
        Ways and Means.
    Members of the Commission are to be appointed by the Senate 
Committee on Finance and the House Committee on Ways and Means. 
Representatives from the Department of Treasury and the IRS 
shall be available to consult with the Commission upon request. 
The Commission is to terminate after September 30, 2009.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

 B. National Surface Transportation Infrastructure Financing Commission


(Sec. 302 of the bill)

                              PRESENT LAW

    Present law does not provide for any advisory commissions 
related Federal highway or mass transit funding.

                           REASONS FOR CHANGE

    The Committee observes that, as the fuel economy of the 
nation's vehicular fleet improves, receipts flowing to the 
Highway Trust Fund will not grow commensurately with highway 
use. At the same time, the Committee recognizes that the 
nation's need for transportation infrastructure improvements 
are great. The Committee believes now is the time to engage in 
a review of the nation's long-term transportation 
infrastructure needs and a thoughtful reassessment of how to 
finance those needs.

                        EXPLANATION OF PROVISION

    The provision establishes a ``National Surface 
Transportation Infrastructure Financing Commission'' (the 
``Financing Commission''). The Financing Commission is to be 
composed of 15 members drawn from among individuals 
knowledgeable in the fields of public transportation finance or 
highway and transit programs, policy, and needs. Financing 
Commission members may include representatives of State and 
local governments or other public transportation agencies, 
representatives of the transportation construction industry, 
providers of transportation, persons knowledgeable in finance, 
and users of highway and transit systems. The 15 members will 
be appointed as follows:
          1. The Secretary of Transportation, in consultation 
        with the Secretary of the Treasury, will appoint seven 
        members;
          2. The chairman of the House Committee on Ways and 
        Means will appoint two members;
          3. The ranking minority member of the House Committee 
        on Ways and Means will appoint two members;
          4. The chairman of the Senate Committee on Finance 
        will appoint two members; and
          5. The ranking minority member of the Senate 
        Committee on Finance will appoint two members.
    The Financing Commission will make an investigation and 
study of revenues flowing into the Highway Trust Fund under 
present law, including the individual components of the flow of 
such revenues. The Financing Commission will consider whether 
the amount of such revenues is likely to increase, decline or 
remain unchanged absent changes in the law, particularly by 
taking into account the impact of possible changes in 
consumers' vehicle choice, fuel use or travel alternatives that 
could be expected to reduce or increase revenues in to the 
Highway Trust Fund. The Financing Commission will consider 
alternative approaches to generating revenues for the Highway 
Trust Fund, and the level of revenues that such alternatives 
would yield. The Financing Commission will consider highway and 
transit needs and whether additional revenues into the Highway 
Trust Fund, or other Federal revenues dedicated to highway and 
transit infrastructure, would be required in order to meet such 
needs. The Financing Commission's study should address the 
period between the present and through the year 2015.
    Based on such investigation and study, the Financing 
Commission will develop a final report, with recommendations 
and the bases for those recommendations, indicating policies 
that the Congress may consider to achieve various levels of 
annual revenue for the Highway Trust Fund and to enable the 
Highway Trust Fund to receive revenues sufficient to meet 
highway and transit needs. The Financing Commission's 
recommendations will address: (1) what levels of revenue are 
required by the Highway Trust Fund in order for it to meet 
needs to maintain and improve the condition and performance of 
the nation's highway and transit systems; (2) what levels of 
revenue are required by the Highway Trust Fund in order to 
ensure that Federal levels of investment in highways and 
transit do not decline in real terms; and (3) the extent, if 
any, to which the Highway Trust Fund should be augmented by 
other mechanisms or funds as a Federal means of financing 
highway and transit infrastructure investments.
    The Financing Commission will submit its report and 
recommendations within two years of the date of its first 
meeting to the Secretary of Transportation, the Secretary of 
the Treasury, the House Committee on Ways and Means, Senate 
Committee on Finance, the House Committee on Transportation and 
Infrastructure, the Senate Committee on Environment and Public 
Works, and Senate Committee on Banking, Housing, and Urban 
Affairs. The Financing Commission will hold its first meeting 
within 90 days of the appointment of the eighth individual to 
the Financing Commission and the Financing Commission will 
terminate on the 180th day following the transmittal of its 
report and recommendations.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

 C. Expand Highway Trust Fund Expenditure Purposes To Include Funding 
 for Studies of Supplemental or Alternative Financing for the Highway 
                               Trust Fund


(Sec. 303 of the bill)

                              PRESENT LAW

In general

    Dedication of excise tax revenues to the Highway Trust Fund 
and expenditures from the Highway Trust Fund are governed by 
provisions of the Code (sec. 9503).\68\ The Code authorizes 
expenditures (subject to appropriations) from the Fund through 
May 31, 2005, for the purposes provided in authorizing 
legislation, as in effect on the date of enactment of the 
Surface Transportation Extension Act of 2004, Part V.
---------------------------------------------------------------------------
    \68\ The Highway Trust Fund statutory provisions were placed in the 
Internal Revenue Code in 1982.
---------------------------------------------------------------------------
    The Highway Trust Fund has a subaccount for Mass Transit. 
Both the Trust Fund and its subaccount are funding sources for 
specific programs.
    Highway Trust Fund expenditure purposes have been revised 
with each authorization Act enacted since establishment of the 
Highway Trust Fund in 1956. In general, expenditures authorized 
under those Acts (as the Acts were in effect on the date of 
enactment of the most recent such authorizing Act) are approved 
by the Code as Highway Trust Fund expenditure purposes.\69\
---------------------------------------------------------------------------
    \69\ The authorizing Acts which currently are referenced in the 
Highway Trust Fund provisions of the Code are: the Highway Revenue Act 
of 1956, Titles I and II of the Surface Transportation Assistance Act 
of 1982, the Surface Transportation and Uniform Relocation Act of 1987, 
the Intermodal Surface Transportation Efficiency Act of 1991 and the 
Transportation Equity Act for the 21st Century, the Surface 
Transportation Extension Act of 2003, the Surface Transportation 
Extension Act of 2004; the Surface Transportation Extension Act of 
2004, Part II; the Surface Transportation Extension Act of 2004, Part 
III; the Surface Transportation Extension Act of 2004, Part IV; and the 
Surface Transportation Extension Act of 2004, Part V.
---------------------------------------------------------------------------

Highway Trust Fund expenditure purposes

    The Highway Trust Fund receives revenues from all non-fuel 
highway transportation excise taxes and revenues from all but 
2.86 cents per gallon of the highway motor fuels excise taxes 
transferred to the Highway Trust Fund. Programs financed from 
the Highway Trust Fund (excluding the Mass Transit account) 
include:
          1. Interstate maintenance program;
          2. National Highway System;
          3. The bridge program (bridge replacement and 
        repair);
          4. Surface transportation programs;
          5. Congestion mitigation and air quality improvement 
        program;
          6. Highway safety programs and research and 
        development, including a share of the cost of National 
        Highway Traffic Safety Administration (``NHTSA'') 
        programs and university research centers;
          7. Appalachian development highway system program;
          8. Recreational trails program;
          9. Federal lands highways program;
          10. National corridor planning and development and 
        coordinated border infrastructure programs;
          11. Construction of ferry boats and ferry terminal 
        facilities;
          12. National scenic byways program;
          13. Value pricing pilot program;
          14. High priority projects program;
          15. Highway use tax evasion projects;
          16. Commonwealth of Puerto Rico highway program.
    Certain administrative costs of the Federal Highway 
Administration and NHTSA are also funded from the Highway Trust 
Fund.
            Mass Transit Account expenditure purposes
    The Highway Fund's Mass Transit Account receives revenues 
equivalent to 2.86 cents per gallon of the highway motor fuels 
excise taxes. Mass Transit Account monies are available through 
May 31, 2005, for capital and capital-related expenditures 
under sections 5338(a)(1) and (b)(1) of Title 49, United States 
Code, the Intermodal Surface Transportation Efficiency Act of 
1991, the Transportation Equity Act for the 21st Century, the 
Surface Transportation Extension Act of 2003, the Surface 
Transportation Extension Act of 2004; the Surface 
Transportation Extension Act of 2004, Part II; the Surface 
Transportation Extension Act of 2004, Part III; the Surface 
Transportation Extension Act of 2004, Part IV; and the Surface 
Transportation Extension Act of 2004, Part V; as those 
provisions were in effect on the date of enactment of the 
Surface Transportation Extension Act of 2004, Part V.

                           REASONS FOR CHANGE

    The Committee notes that the United States has relied 
primarily on motor fuels taxes as the basis of funding Federal 
highway programs for more than 50 years. The Committee 
understands that it has been at least two decades since the 
Department of Transportation has attempted an extensive study 
of an allocation of costs of the Federal highway system. The 
Committee believes it is important to examine alternative 
methods of funding highway construction.

                        EXPLANATION OF PROVISION

    The provision expands the expenditure authority and 
authorizes the expenditure of monies from the Highway Trust 
Fund to fund two comprehensive studies of supplemental or 
alternative funding sources for the Highway Trust Fund. One 
study, to receive $1 million in funding, will review funding 
mechanisms of other industrialized nations and examine the 
viability of proposals such as congestion pricing, greater 
reliance on tolls, privatization of facilities, and other 
funding proposals. This study would be due no later than 
December 31, 2006. The other study, to receive $16.5 million in 
funding, would report on a long-term field test of a new 
approach to assessing highway use taxes by use of an on-board 
computer that links to satellites to calculate road mileage 
traversed and compute the appropriate highway use tax for each 
of the Federal, State, and local government as the vehicle 
makes use of the roads. The vehicle owner would periodically 
download the data from the on-board computer to a collection 
center and the collection center would assess highway use taxes 
due in each jurisdiction traversed. The results of this study 
would be due no later than December 31, 2011. Each study would 
be delivered to the Secretary of the Treasury and the Secretary 
of Transportation.

                             EFFECTIVE DATE

    The provision is effective upon date of enactment.

                 D. Delta Regional Transportation Plan


(Sec. 304 of the bill)

                              PRESENT LAW

    The Delta Regional Authority is a Federal-State 
partnership, serving a 240-county/parish area in an eight-State 
region.\70\ No State is required to participate with the 
authority. The duties of the authority are to: (1) produce a 
regional development plan; (2) set priorities for approval of 
grants in the region; (3) assess the region's needs and assets; 
(4) inform participating States about interstate cooperation; 
(5) work with States and local agencies to develop model 
legislation; (6) enhance the capacity of and support Local 
Development Districts, as well as the creation of Local 
Development Districts where none currently exist; (7) encourage 
private investment in economic development projects in the 
region; and (8) assist State governments with the States' 
economic development program.
---------------------------------------------------------------------------
    \70\ The covered States and counties are: Alabama--20 counties; 
Arkansas--42 counties; Illinois, 16 counties; Kentucky--21 counties; 
Louisiana--46 parishes; Mississippi--45 counties; Missouri--29 
counties; and Tennessee--21 counties. Delta Regional Authority, 
Legislative Matters and Overview, (February 1, 200).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that integrated transportation 
planning for the States comprising the Delta region is an 
important objective. The Committee believes it is appropriate 
to charge the Delta Regional Authority with studying the 
transportation needs of the region and preparing a plan to 
address those needs.

                        EXPLANATION OF PROVISION

    The provision directs the Delta Regional Authority to 
conduct a comprehensive study of transportation assets and 
needs in the eight states comprising the Delta region (Alabama, 
Arkansas, Illinois, Kentucky, Louisiana, Mississippi, Missouri, 
and Tennessee). Upon completion of the study, the Delta 
Regional Authority is to create a regional strategic plan to 
achieve efficient transportation systems in the Delta region.
    The study and plan is to include but is not limited to the 
following transportation modes and systems: transit, rail, 
highway, interstate, bridges, air, airports, waterways and 
ports. The Delta Regional Authority is to work with local 
planning and development districts, local and regional 
governments, metropolitan planning organizations, State 
transportation entities, and Federal transportation agencies to 
develop a regional strategic transportation plan.
    The provision authorizes the Delta Regional Authority to 
receive $500,000 in fiscal year 2005, and $500,000 in fiscal 
year 2006 to conduct a comprehensive study and plan. These 
funds are to remain available until spent.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                 E. Establish Build America Corporation


(Sec. 305 of the bill)

                              PRESENT LAW

    There is no provision in Federal law establishing a 
nonprofit corporation dedicated to providing financing or other 
financial support for transportation infrastructure projects.

                           REASONS FOR CHANGE

    The Committee believes that the establishment, maintenance, 
and improvement of the national transportation network are a 
national priority. Investing in transportation infrastructure 
creates long-term capital assets for the nation that will help 
address its enormous infrastructure needs and improves its 
economic productivity. The Committee believes that financing 
for long-term infrastructure capital investments are not 
currently being met by existing investment programs. Thus, the 
Committee believes it is important to establish a corporation 
dedicated to providing financial support to transportation and 
infrastructure projects.

                        EXPLANATION OF PROVISION

    The provision establishes a nonprofit corporation, to be 
known as the ``Build America Corporation.'' The Build America 
Corporation is not an agency or establishment of the United 
States Government. The Build America Corporation generally 
shall be subject to the laws of the State of Delaware 
applicable to corporations not for profit.
    The purpose of the corporation is to provide financial 
support for qualified projects. Under the provision a 
``qualified project'' generally is defined as any 
transportation infrastructure project of any governmental unit 
or other person that is proposed by a State, including a 
highway project, a transit system project, a railroad project, 
an airport project, a port project, and an inland waterways 
project. The provision imposes additional requirements if a 
qualified project is financed by debt issued by the Build 
America Corporation.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

   F. Increase in Dollar Limits for Qualified Transportation Fringe 
                                Benefits


(Sec. 306 of the bill and sec. 132(f) of the Code)

                              PRESENT LAW

    Under present law, qualified transportation benefits are 
excludable from gross income and wages for employment tax 
purposes. Qualified transportation benefits are: (1) 
transportation in a commuter highway vehicle if such 
transportation is in connection with travel between the 
employee's residence and place of employment (``van pooling''); 
(2) transit passes; and (3) qualified parking. For purposes of 
the exclusion for van pooling benefits, a commuter highway 
vehicle is any highway vehicle: (1) the seating capacity of 
which is at least six adults (excluding the driver); and (2) at 
least 80 percent of the mileage use of which can reasonably be 
expected to be (a) for purposes of transporting employees in 
connection with travel between their residences and their place 
of employment and (b) on trips during which the number of 
employees transported for such purposes is at least one-half of 
the adult seating capacity of such vehicle (not including the 
driver).
    The maximum amount of qualified parking that is excludable 
from income and wages is $200 per month (for 2005). The maximum 
amount of transit passes and van pooling benefits that are 
excludable from income and wages per month is $105 (for 2005). 
These dollar amounts are indexed for inflation.

                           REASONS FOR CHANGE

    The Committee believes that the use of van pooling and mass 
transit should be encouraged. Thus, the Committee believes that 
the maximum amount of excludable van pooling and transit pass 
benefits should be increased. The Committee also believes that 
it is appropriate to use consistent inflation adjustments in 
the determination of the amount of qualified transportation 
fringe benefits.

                        EXPLANATION OF PROVISION

    Under the provision, the maximum dollar amount of 
excludable van pooling and transit pass benefits is increased 
to $155 per month. The maximum amount of excludable qualified 
parking is $200 per month. The dollar amounts are indexed for 
inflation after 2008 (with 2007 as a base year).

                             EFFECTIVE DATE

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

             TITLE IV--FUELS-RELATED TECHNICAL CORRECTIONS


A. Fuels-Related Technical Corrections to American Jobs Creation Act of 
                            2004 (``AJCA'')

    The provision includes two technical corrections to AJCA, 
described below. Such technical corrections take effect as if 
included in the section of AJCA to which the correction 
relates.

1. Volumetric ethanol excise tax credit (sec. 401 of the bill, sec. 301 
        of AJCA, and sec. 6427 of the Code)

    AJCA repealed the reduced tax rates for alcohol fuels and 
taxable fuels to be blended with alcohol. The technical 
correction makes a conforming amendment to eliminate the refund 
provisions based on those reduced rates (secs. 6427(f) and 
6427(o)).

2. Aviation fuel (sec. 401 of the bill, sec. 853 of AJCA, and sec. 4081 
        of the Code)

    Section 853 of the AJCA moved the taxation of jet fuel 
(aviation-grade kerosene) from section 4091 to section 4081 of 
the Code and repealed section 4091. The termination date for 
the 21.8 cent per gallon rate for noncommercial aviation jet 
fuel was inadvertently omitted from the Act. The technical 
correction clarifies that after September 30, 2007, the rate 
for jet fuel used in noncommercial aviation will be 4.3 cents 
per gallon (sec. 4081(d)(2)).
    An additional technical correction clarifies that users of 
aviation fuel in commercial aviation are required to be 
registered with the IRS in order for the 4.3-cents-per-gallon 
rate to apply (including for purposes of the self-assessment of 
tax by commercial aircraft operators) (sec. 4081(a)(2)(C)).

B. Fuels-Related Technical Corrections to Transportation Equity Act for 
                     the 21st Century (``TEA 21'')

    The provision includes a technical correction to TEA 21, 
described below. The technical correction takes effect as if 
included in the section of TEA 21 to which it relates.

1. Coastal Wetlands sub-account (sec. 401 of the bill, sec. 9005 of TEA 
        21, and sec. 9504 of the Code)

    Section 9005(b)(3) of TEA 21 redesignated Code section 
9504(b)(2)(B), referring to the purposes of the Coastal 
Wetlands Planning, Protection and Restoration Act, as 
9504(b)(2)(C), but did not cross reference the limitation for 
such purposes of taxes on gasoline used in the nonbusiness use 
of small-engine outdoor power equipment. The technical 
correction makes a conforming cross-reference amendment (sec. 
9504(b)(2)).

                   TITLE V--REVENUE OFFSET PROVISIONS


    A. Treatment of Contingent Payment Convertible Debt Instruments


(Sec. 501 of the bill 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.\71\ 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.\72\ 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.\73\
---------------------------------------------------------------------------
    \71\ Treas. Reg. sec. 1.1275-4.
    \72\ Treas. Reg. sec. 1.1275-4(a)(4).
    \73\ 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,\74\ 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.\75\
---------------------------------------------------------------------------
    \74\ Treas. Reg. sec. 1.1275-4(b).
    \75\ 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.\76\ 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.
---------------------------------------------------------------------------
    \76\ Rev. Rul. 2002-31, 2002-1 C.B. 1023.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is aware that, in recent years, several 
corporate taxpayers have issued convertible debt instruments 
that also include a separate contingent feature, usually 
consisting of an interest rate reset provision. The Committee 
understands that the primary intent of these corporations is 
simply to issue straight convertible debt instruments, and that 
the contingency is unlikely to have any meaningful impact on 
either the stated interest rate or overall economic yield of 
the debt instrument. Rather, the contingency is incorporated 
into the financing for the purpose of subjecting the debt 
instrument to the contingent payment OID regulations, which 
would not otherwise apply solely on the basis of the conversion 
feature. As with straight convertible debt instruments, the 
stated interest rate on contingent payment convertible debt 
instruments typically is substantially less than the stated 
interest rate would be on a nonconvertible debt instrument, 
usually less than 400 basis points.
    The Committee is aware that, in determining the comparable 
yield on contingent payment convertible debt instruments under 
the contingent payment OID regulations, borrowers and their 
advisors take the position that the regulations call for using 
a comparable noncontingent debt instrument that is also 
nonconvertible. The net effect of applying the contingent 
payment OID regulations in this manner (i.e., determining the 
comparable yield on the basis of a noncontingent, 
nonconvertible--rather than noncontingent, convertible--debt 
instrument), is to significantly and artificially enhance the 
interest deductions generated by what is essentially a straight 
convertible debt instrument. Because the corresponding interest 
income inclusions to holders of these debt instruments likewise 
is significantly and artificially enhanced, the Committee 
understands that the debt instruments almost exclusively are 
sold to and purchased by tax indifferent holders.
    Notwithstanding the endorsement of the taxpayer position by 
the IRS in Rev. Rul. 2002-31, the Committee believes that 
applying the contingent payment OID regulations in this manner 
is inappropriate, from an economic standpoint and based upon a 
reasonable interpretation of the plain meaning of the 
regulations. Furthermore, applying the regulations in this 
manner creates disparate tax treatment between contingent 
payment convertible debt instruments and straight convertible 
debt instruments that differ only on the basis of an 
economically meaningless contingency.
    The Committee believes that the methodology mandated by 
this provision would require the comparable yield on a 
contingent payment convertible debt instrument to be based upon 
a truly comparable noncontingent debt instrument (i.e., one 
that is convertible, like the actual debt instrument issued by 
the taxpayer). This methodology would provide parity between 
straight convertible debt instruments and contingent payment 
convertible debt instruments, and eliminate the unwarranted tax 
benefits that are currently attained merely by incorporating an 
essentially meaningless contingency into an otherwise ordinary 
convertible debt instrument.
    In its ruling, the IRS indicated that determining the 
comparable yield on contingent payment convertible debt 
instruments based upon a contingent nonconvertible debt 
instrument is more consistent with the overall economic 
rationale of the contingent payment OID regulations. However, 
the Committee believes that this view incorrectly assumes that 
the economic rationale of these regulations deviates from the 
rest of the OID rules--and, for that matter, general tax 
principles--in giving tax significance to a conversion feature 
in a debt instrument. The Committee recognizes that contingent 
payment convertible debt instruments highlight a potential flaw 
in the current tax system whereby both the Code and general tax 
principles typically disregard the economic yield provided by 
convertibility features in debt instruments. However, the 
Committee believes that this issue should be addressed 
legislatively through comprehensive reform of the tax treatment 
of financial products, rather than through administrative 
acquiescence in taxpayer self-help that is achieved using a 
particular financial product designed specifically to obtain a 
favorable tax result, particularly if that result is in 
conflict with the current operation of the Code and general tax 
principles.

                        EXPLANATION OF PROVISION

    The provision provides that, in the case of a contingent 
convertible debt instrument,\77\ 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.
---------------------------------------------------------------------------
    \77\ 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.

                      B. Frivolous Tax Submissions


(Sec. 502 of the bill 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.\78\ The Code also permits the Tax Court \79\ 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.\80\
---------------------------------------------------------------------------
    \78\ Sec. 6702.
    \79\ Because the Tax Court generally is the only pre-payment forum 
available to taxpayers, it hears most of the frivolous, groundless, or 
dilatory arguments raised in tax cases.
    \80\ Sec. 6673(a).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Effective tax administration is hindered by the significant 
number of tax returns and other submissions the IRS routinely 
receives that are based on frivolous arguments. Despite 
constant efforts by the IRS to provide public notice and 
guidance debunking frivolous arguments, these arguments have 
become tax lore--such as arguments that the income tax is 
unconstitutional, that taxes may be withheld as a protest 
against government programs, and that taxpayers may obtain a 
refund of all Social Security taxes paid by waiving their right 
to Social Security benefits. Injecting frivolous arguments into 
existing procedures for collection due process hearings, 
offers-in-compromise, installment agreements, and taxpayer 
assistance is a common means to impede and delay tax 
administration. IRS administrative procedures are intended to 
provide assistance to taxpayers genuinely seeking to resolve 
legitimate disputes with the IRS, and the abuse of these 
procedures as described diverts scarce IRS resources away from 
resolving genuine disputes.
    The Committee believes the IRS needs a more significant 
penalty to deter the routine assertion of frivolous tax filings 
and other submissions. The Committee believes that frivolous 
returns and submissions consume resources at the IRS and in the 
courts that can better be utilized in resolving legitimate 
disputes with taxpayers. Expanding the scope of the penalty to 
cover all taxpayers and tax returns promotes fairness in the 
tax system. The Committee believes that this provision will 
improve effective tax administration.

                        EXPLANATION OF PROVISION

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

                             EFFECTIVE DATE

    The provision is effective with respect to submissions made 
and issues raised after the date on which the Secretary first 
prescribes the required list of frivolous positions.

               C. Increase in Certain Criminal Penalties


(Sec. 503 of the bill 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 any 
person 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 
\81\ $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.
---------------------------------------------------------------------------
    \81\ 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).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Criminal tax penalties for the three basic tax crimes have 
not been updated since 1982. Since then, tax evasion, fraud, 
and other abusive schemes have steadily increased in magnitude 
and sophistication. Additionally, non-filing has consistently 
remained a major component of the tax gap. The Committee 
believes it is important to strengthen the criminal tax 
penalties as a means to maintain an appropriate deterrent to 
these crimes, punish more harshly the most egregious tax 
violators, and contribute towards closing the tax gap. The 
Committee also believes the creation of an enhanced penalty for 
aggravated failures to file is appropriate to address egregious 
instances of noncompliant behavior.

                        EXPLANATION OF PROVISION

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 from a misdemeanor to a felony for aggravated 
failures to file. Under the provision, an aggravated failure to 
file is any case in which the taxpayer fails to file returns 
for three or more consecutive years and the aggregated tax 
liability during such years is $100,000 or greater. The 
provision imposes a penalty for an aggravated failure to file 
up to $500,000 for individuals and up to $1,000,000 for 
corporations. The provision also imposes a maximum prison 
sentence of ten years.
    In misdemeanor cases, the provision increases the criminal 
penalty under section 7203 of the Code for individuals to 
$50,000.

Fraud and false statements

    The provision increases the criminal penalty under section 
7206 of the Code for individuals to $500,000 and for 
corporations to $1,000,000. The provision increases the maximum 
prison sentence to five years. The provision also provides that 
in no event shall the amount of the monetary penalty under this 
provision be less than the amount of the underpayment or 
overpayment attributable to fraud.

                             EFFECTIVE DATE

    The provision is effective for actions and failures to act 
occurring after the date of enactment.

D. Doubling of Certain Penalties, Fines, and Interest on Underpayments 
           Related to Certain Offshore Financial Arrangements


(Sec. 504 of the bill)

                              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. 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 a 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 the date that is 10 days after the date 
of the day 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 to 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. Taxpayers entering into a closing 
agreement under the OVCI will not be liable for civil fraud, 
the fraudulent failure to file penalty or the civil information 
return penalties. The taxpayer will pay back taxes, interest 
and certain accuracy-related and delinquency penalties.\82\
---------------------------------------------------------------------------
    \82\ 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.\83\
---------------------------------------------------------------------------
    \83\ Internal Revenue News Release 2002-135, IR-2002-135 (December 
11, 2002).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is aware that individuals and corporations, 
through sophisticated transactions, are placing unreported 
income in offshore financial accounts accessed through credit 
or debit cards or other financial arrangements in order to 
avoid or evade Federal income tax. Such a phenomenon poses a 
serious threat to the efficacy of the tax system because of 
both the potential loss of revenue and the potential threat to 
the integrity of the self-assessment system. The IRS estimates 
there may be several hundred thousand taxpayers using offshore 
financial arrangements to conceal taxable income from the IRS, 
costing the government billions of dollars in lost revenue. 
However, only 1,235 applications to participate in the OVCI 
initiative were received. From these cases, the IRS expects to 
identify millions of dollars of uncollected tax. At the start 
of the program, the clear message to taxpayers was that those 
who failed to come forward would be pursued by the IRS and 
would be subject to more significant penalties and possible 
criminal sanctions. The Committee believes that doubling the 
civil penalties, fines and interest applicable to taxpayers who 
entered into these arrangements and did not take advantage of 
OVCI will provide the IRS with the significant sanctions needed 
to stem the promotion of, and participation in, these abusive 
schemes.

                        EXPLANATION OF PROVISION

    The provision increases by a factor of two the total amount 
of civil penalties, interest, and fines applicable to taxpayers 
who were eligible to participate in, but did not participate 
in, the OVCI and did not otherwise voluntarily disclose their 
underpayment of U.S. income tax liability through the use of 
certain offshore financial arrangements. Under the provision, 
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.

                             EFFECTIVE DATE

    The provision generally is effective with respect to a 
taxpayer's open tax years on or after date of enactment.

     E. Modification of Coordination Rules for Controlled Foreign 
       Corporation and Passive Foreign Investment Company Regimes


(Sec. 505 of the bill and sec. 1297 of the Code)

                              PRESENT LAW

    The United States employs a ``worldwide'' tax system, under 
which domestic corporations generally are taxed on all income, 
whether derived in the United States or abroad. Income earned 
by a domestic parent corporation from foreign operations 
conducted by foreign corporate subsidiaries generally is 
subject to U.S. tax when the income is distributed as a 
dividend to the domestic corporation. Until such repatriation, 
the U.S. tax on such income generally is deferred. However, 
certain anti-deferral regimes may cause the domestic parent 
corporation to be taxed on a current basis in the United States 
with respect to certain categories of passive or highly mobile 
income earned by its foreign subsidiaries, regardless of 
whether the income has been distributed as a dividend to the 
domestic parent corporation. The main anti-deferral regimes in 
this context are the controlled foreign corporation rules of 
subpart F \84\ and the passive foreign investment company 
rules.\85\ Deferral of U.S. tax is considered appropriate, on 
the other hand, with respect to most types of active business 
income earned abroad. A foreign tax credit generally is 
available to offset, in whole or in part, the U.S. tax owed on 
foreign-source income, whether earned directly by the domestic 
corporation, repatriated as an actual dividend, or included 
under one of the anti-deferral regimes.\86\
---------------------------------------------------------------------------
    \84\ Secs. 951-964.
    \85\ Secs. 1291-1298.
    \86\ Secs. 901, 902, 960, 1291(g).
---------------------------------------------------------------------------
    Subpart F,\87\ applicable to controlled foreign 
corporations and their shareholders, is the main anti-deferral 
regime of relevance to a U.S.-based multinational corporate 
group. A controlled foreign corporation generally is defined as 
any foreign corporation if U.S. persons own (directly, 
indirectly, or constructively) more than 50 percent of the 
corporation's stock (measured by vote or value), taking into 
account only those U.S. persons that own at least 10 percent of 
the stock (measured by vote only).\88\ Under the subpart F 
rules, the United States generally taxes the U.S. 10-percent 
shareholders of a controlled foreign corporation on their pro 
rata shares of certain income of the controlled foreign 
corporation (referred to as ``subpart F income''), without 
regard to whether the income is distributed to the 
shareholders.\89\
---------------------------------------------------------------------------
    \87\ Secs. 951-964.
    \88\ Secs. 951(b), 957, 958.
    \89\ Sec. 951(a).
---------------------------------------------------------------------------
    Subpart F income generally includes passive income and 
other income that is readily movable from one taxing 
jurisdiction to another. Subpart F income consists of foreign 
base company income,\90\ insurance income,\91\ and certain 
income relating to international boycotts and other violations 
of public policy.\92\ Foreign base company income consists of 
foreign personal holding company income, which includes passive 
income (e.g., dividends, interest, rents, and royalties), as 
well as a number of categories of non-passive income, including 
foreign base company sales income and foreign base company 
services income.\93\
---------------------------------------------------------------------------
    \90\ Sec. 954.
    \91\ Sec. 953.
    \92\ Sec. 952(a)(3)-(5).
    \93\ Sec. 954.
---------------------------------------------------------------------------
    In effect, the United States treats the U.S. 10-percent 
shareholders of a controlled foreign corporation as having 
received a current distribution out of the corporation's 
subpart F income. In addition, the U.S. 10-percent shareholders 
of a controlled foreign corporation are required to include 
currently in income for U.S. tax purposes their pro rata shares 
of the corporation's earnings invested in U.S. property.\94\
---------------------------------------------------------------------------
    \94\ Secs. 951(a)(1)(B), 956.
---------------------------------------------------------------------------
    The Tax Reform Act of 1986 established an additional anti-
deferral regime, for passive foreign investment companies. A 
passive foreign investment company generally is defined as any 
foreign corporation if 75 percent or more of its gross income 
for the taxable year consists of passive income, or 50 percent 
or more of its assets consists of assets that produce, or are 
held for the production of, passive income.\95\ Alternative 
sets of income inclusion rules apply to U.S. persons that are 
shareholders in a passive foreign investment company, 
regardless of their percentage ownership in the company. One 
set of rules applies to passive foreign investment companies 
that are ``qualified electing funds,'' under which electing 
U.S. shareholders currently include in gross income their 
respective shares of the company's earnings, with a separate 
election to defer payment of tax, subject to an interest 
charge, on income not currently received.\96\ A second set of 
rules applies to passive foreign investment companies that are 
not qualified electing funds, under which U.S. shareholders pay 
tax on certain income or gain realized through the company, 
plus an interest charge that is attributable to the value of 
deferral.\97\ A third set of rules applies to passive foreign 
investment company stock that is marketable, under which 
electing U.S. shareholders currently take into account as 
income (or loss) the difference between the fair market value 
of the stock as of the close of the taxable year and their 
adjusted basis in such stock (subject to certain limitations), 
often referred to as ``marking to market.'' \98\
---------------------------------------------------------------------------
    \95\ Sec. 1297.
    \96\ Sec. 1293-1295.
    \97\ Sec. 1291.
    \98\ Sec. 1296.
---------------------------------------------------------------------------
    Under section 1297(e), which was enacted in 1997 to address 
the overlap of the passive foreign investment company rules and 
subpart F, a controlled foreign corporation generally is not 
also treated as a passive foreign investment company with 
respect to a U.S. shareholder of the corporation. This 
exception applies regardless of the likelihood that the U.S. 
shareholder would actually be taxed under subpart F in the 
event that the controlled foreign corporation earns subpart F 
income. Thus, even in a case in which a controlled foreign 
corporation's subpart F income would be allocated to a 
different shareholder under the subpart F allocation rules, a 
U.S. shareholder would still qualify for the exception from the 
passive foreign investment company rules under section 1297(e).

                           REASONS FOR CHANGE

    The Committee is aware that section 1297(e) may enable a 
U.S. shareholder (like Enron in the ``Project Apache'' 
transaction) \99\ to claim exemption from the passive foreign 
investment company rules with respect to ownership of 
controlled foreign corporation stock on the basis of mere 
status as a U.S. shareholder, despite the fact that the U.S. 
shareholder may have implemented a structure intended to render 
it impossible for such shareholder to recognize any income 
under subpart F in connection with the stock. The Committee 
believes that the passive foreign investment company rules 
should be available to serve as a backstop to subpart F in such 
circumstances, and thus believes that the exception to the 
passive foreign investment company rules for U.S. shareholders 
of controlled foreign corporations should be geared more 
closely to the U.S. shareholder's potential taxability under 
subpart F, as opposed to mere status as a U.S. shareholder 
under subpart F.
---------------------------------------------------------------------------
    \99\ See Joint Committee on Taxation, Report of Investigation of 
Enron Corporation and Related Entities Regarding Federal Tax and 
Compensation Issues, and Policy Recommendations (JCS-3-03), February 
2003, vol. I at 255, 258-59.
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    The provision adds an exception to section 1297(e) for U.S. 
shareholders that face only a remote likelihood of incurring a 
subpart F inclusion in the event that a controlled foreign 
corporation earns subpart F income, thus preserving the 
potential application of the passive foreign investment company 
rules in such cases.

                             EFFECTIVE DATE

    The provision is effective for taxable years of controlled 
foreign corporations beginning after March 2, 2005, and for 
taxable years of U.S. shareholders in which or with which such 
taxable years of controlled foreign corporations end.

 F. Declaration by Chief Executive Officer Relating to Federal Annual 
                      Corporate Income Tax Return


(Sec. 506 of the bill and sec. 6062 of the Code)

                              PRESENT LAW

    The Code requires \100\ that the income tax return of a 
corporation must be signed by either the president, the vice-
president, the treasurer, the assistant treasurer, the chief 
accounting officer, or any other officer of the corporation 
authorized by the corporation to sign the return.
---------------------------------------------------------------------------
    \100\ Sec. 6062.
---------------------------------------------------------------------------
    The Code also imposes \101\ a criminal penalty on any 
person who willfully signs any tax return under penalties of 
perjury that that person does not believe to be true and 
correct with respect to every material matter at the time of 
filing. If convicted, the person is guilty of a felony; the 
Code imposes a fine of not more than $100,000 \102\ ($500,000 
in the case of a corporation) or imprisonment of not more than 
three years, or both, together with the costs of prosecution.
---------------------------------------------------------------------------
    \101\ Sec. 7206.
    \102\ Pursuant to 18 U.S.C. 3571, the maximum fine for an 
individual convicted of a felony is $250,000.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Recent incidents of corporate and accounting malfeasance 
resulting in criminal charges and convictions demonstrate that 
Chief Executive Officers (CEO) are not immune from noncompliant 
behavior. The Committee believes that requiring the CEO of a 
corporation to personally certify that he or she has received 
reasonable assurance that the material aspects of the 
corporation's tax return are accurate and that processes and 
procedures are in place to assure compliance with tax laws will 
reduce the likelihood that abusive transactions and unintended 
application of the tax laws will appear on a tax return. The 
Committee believes that CEO certification will effectively 
eliminate the opportunity to claim ignorance or lack of 
involvement in material issues involving the company's 
financial activities.
    A CEO is responsible for the company he or she runs. The 
CEO influences who sits on the Board of Directors, who the 
company auditors will be, and the business strategy of the 
company. Similarly, the CEO should have accountability for the 
corporate tax return. This concept has already been codified in 
the Sarbanes-Oxley Act of 2002, in which CEO and Chief 
Financial Officer certification requirements regarding the 
appropriateness of financial statements and disclosures, and 
the fair presentation of the operations and financial condition 
of the issuer, were established. The Committee believes this 
provision complements the requirements of Sarbanes-Oxley and 
should not impose significant additional burden on a CEO.

                        EXPLANATION OF PROVISION

    The provision requires that a corporation's Federal annual 
income tax return include a declaration signed under penalties 
of perjury by the chief executive officer of the corporation 
that the corporation has in place processes and procedures to 
ensure that the return complies with the Internal Revenue Code 
and that the CEO was provided reasonable assurance of the 
accuracy of all material aspects of the return. This 
declaration is part of the income tax return. The provision is 
in addition to the requirement of present law as to the signing 
of the income tax return itself. Because a CEO's duties 
generally do not require a detailed or technical understanding 
of the corporation's tax return, it is anticipated that this 
declaration of the CEO will be more limited in scope than the 
declaration of the officer required to sign the return itself.
    The provision provides that the Secretary of the Treasury 
shall prescribe the matters to which the declaration of the CEO 
applies. It is intended that the declaration help insure that 
the preparation and completion of the corporation's tax return 
be given an appropriate level of care. For example, it is 
anticipated that the CEO would declare that processes and 
procedures have been implemented to ensure that the return 
complies with the Internal Revenue Code and all regulations and 
rules promulgated thereunder. Although appropriate processes 
and procedures can vary for each taxpayer depending on the size 
and nature of the taxpayer's business, in every case the CEO 
should be briefed on all material aspects of the corporation's 
tax return by the corporation's chief financial officer (or 
another person authorized to sign the return under present 
law).
    If the corporation does not have a chief executive officer, 
the IRS may designate another officer of the corporation; 
otherwise, no other person is permitted to sign the 
declaration. It is intended that the IRS issue general 
guidance, such as a revenue procedure, to: (1) address 
situations when a corporation does not have a chief executive 
officer; and (2) define who the chief executive officer is, in 
situations (for example) when the primary official bears a 
different title, when a corporation has multiple chief 
executive officers, or when the corporation is a foreign 
corporation and the CEO is not a U.S. resident.\103\ It is 
intended that, in every instance, the highest ranking corporate 
officer (regardless of title) sign this declaration.
---------------------------------------------------------------------------
    \103\ With respect to foreign corporations, it is intended that the 
rules for signing this declaration generally parallel the present-law 
rules for signing the return. See Treas. Reg. sec. 1.6062-1(a)(3).
---------------------------------------------------------------------------
    The provision does not apply to the income tax returns of 
mutual funds; \104\ they are required to be signed as under 
present law.
---------------------------------------------------------------------------
    \104\ The proposal does, however, apply to the income tax returns 
of mutual fund management companies and advisors.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision applies to Federal annual tax returns for 
taxable years ending after the date of enactment.

 G. Grant Treasury Regulatory Authority to Address Foreign Tax Credit 
 Transactions Involving Inappropriate Separation of Foreign Taxes from 
                         Related Foreign Income


(Sec. 507 of the bill 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.'' \105\ 
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.
---------------------------------------------------------------------------
    \105\ Treas. Reg. sec. 1.901-2(f)(1).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the foreign tax credit is a 
mechanism to relieve double taxation and that appropriate 
measures should be taken to ensure such mechanism is not being 
abused. The Committee therefore believes that it is necessary 
to expand existing regulatory authority to provide the Treasury 
Department additional mechanisms to address abusive foreign tax 
credit schemes that involve the inappropriate separation of 
foreign taxes from the related foreign income.

                        EXPLANATION OF PROVISION

    The provision provides regulatory authority for the 
Treasury Department to address transactions that involve the 
inappropriate separation of foreign taxes from the related 
foreign income in cases in which taxes are imposed on any 
person in respect of income of an entity. Regulations issued 
pursuant to this authority could 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 proposal generally is effective for transactions 
entered into after the date of enactment.

                    III. BUDGET EFFECTS OF THE BILL


                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the revenue 
provisions of the ``Highway Reauthorization and Excise Tax 
Simplification Act of 2005'' as reported.


                B. Budget Authority and Tax Expenditures


Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that the provisions of section 304 of the bill 
as reported involves new or increased budget authority with 
respect to the funding of a study and plan by the Delta 
Regional Authority.

Tax expenditures

    In compliance with section 308(a)(2) of the Budget Act, the 
Committee states that the revenue-reducing provisions of the 
bill involve increased tax expenditures (see revenue table in 
Part A., above). The revenue-increasing provisions of the bill 
involve reduced tax expenditures (see revenue table in part A, 
above).

            C. Consultation With Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office 
submitted the following statement on this bill:

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, April 26, 2005.
Hon. Charles E. Grassley,
Chairman, Committee on Finance,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for the Highway 
Reauthorization and Excise Tax Simplification Act of 2005.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Annabelle 
Bartsch.
            Sincerely,
                                      Elizabeth M. Robinson
                               (For Douglas Holtz-Eakin, Director).
    Enclosure.

Highway Reauthorization and Excise Tax Simplification Act of 2005

    Summary: The Highway Reauthorization and Excise Tax 
Simplification Act of 2005 would make numerous changes to the 
Internal Revenue Code, most of which would modify various 
excise taxes. The affected excise taxes include several 
dedicated to the Highway Trust Fund (HTF) and the Aquatic 
Resources Trust Fund (ARTF). In addition, the bill would raise 
revenues mainly by changing the rules for deductibility of 
interest for certain debt instruments and by increasing certain 
penalties. Enacting the legislation would increase direct 
spending by allocating additional amounts to the ARTF (which 
would be renamed the Sport Fishing Restoration and Boating 
Trust Fund).
    On net, CBO and Joint Committee on Taxation (JCT) estimate 
that enacting provisions of the bill would increase federal 
revenues by $9 million in 2005, $36 million over the 2006-2010 
period, and $71 million over the 2006-2015 period. JCT is in 
the process of revising its portion of the estimate downward, 
however. JCT indicates that the change in estimated revenues 
may be large enough to result in an estimated net revenue loss 
under the bill as ordered reported by the Senate Committee on 
Finance. CBO estimates that the provisions affecting spending 
would increase direct spending by $103 million in 2006, by $506 
million over the 2006-2010 period, and by $1.2 billion over the 
2006-2015 period.
    JCT has reviewed the tax provisions of the bill and 
determined that they contain no intergovernmental mandates as 
defined in the Unfunded Mandates Reform Act (UMRA).
    CBO has reviewed the non-tax provisions of the bill and 
determined that they contain no intergovernmental mandates and 
would impose no costs on state, local, or tribal governments.
    JCT has determined that the tax provisions contain private-
sector mandates as defined in UMRA. CBO has reviewed the non-
tax provision and determined that the declaration required by 
the chief executive officer, or other designated officer, 
relating to tax returns would be a new private-sector mandate 
as defined in UMRA. CBO estimates that the direct cost of the 
mandate would be minimal. In aggregate, the costs of all the 
mandates contained in the bill would fall below the annual 
threshold established by UMRA for private-sector mandates ($123 
million in 2005, adjusted annually for inflation).
    Estimated cost to the Federal Government: The budgetary 
impact of the bill over the 2005-2015 period is shown in the 
following table.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    By fiscal year, in millions of dollars--
                                                      --------------------------------------------------------------------------------------------------
                                                         2005     2006     2007     2008     2009     2010     2011     2012     2013     2014     2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   CHANGES IN REVENUES

Trust Fund Reauthorization...........................        0        0        0        0        0        0        0        0        0        0        0
Excise Tax Provisions................................        0      -36      -40      -94     -104     -106     -106     -106     -109     -110     -111
Miscellaneous Provisions.............................        0       -6       -6       -8       -5       -7      -11      -13      -14      -19      -23
Revenue-raising Provisions \1\.......................        9       41       75      105      111      116      120      126      131      137      143
                                                      --------------------------------------------------------------------------------------------------
    Estimated Revenues...............................        9       -1       29        3        2        3        3        7        8        8        9
        On-budget....................................        9        1       31        6        4        5        7       12       13       15       17
        Off-budget \2\...............................        0       -2       -2       -3       -2       -2       -4       -5       -5       -7       -8

                                                               CHANGES IN DIRECT SPENDING

Changes in Spending and Deposits From Sport and
 Conservation Funds:
    Estimated Budget Authority.......................        0       92      120      128      134      140      145      147      151      154      157
    Estimated Outlays................................        0       28       57       90      111      125      133      138      142      145      150
Cover Over (Payment) of Tax on Distilled Spirits:
    Estimated Budget Authority:......................        0       75       20        0        0        0        0        0        0        0        0
    Estimated Outlays................................        0       75       20        0        0        0        0        0        0        0        0
      Total Changes:
        Estimated Budget Authority...................        0      167      140      128      134      140      145      147      151      154      157
        Estimated Outlays............................        0      103       77       90      111      125      133      138      142      145      150

                                                      CHANGES IN SPENDING SUBJECT TO APPROPRIATION

Alternative Financing Studies:                               0       18        0        0        0        0        0        0        0        0        0
    Estimated Authorization Level....................        0        2        2        3        3        4        4        0        0        0        0
Regional Transportation Plan:
    Estimated Authorization Level....................        0        1        0        0        0        0        0        0        0        0        0
    Estimated Outlays................................        0        1        0        0        0        0        0        0        0        0        0
      Total Changes:
        Estimated Authorization Level................        0       19        0        0        0        0        0        0        0        0        0
        Estimated Outlays............................        0        3        2        3        3        4        4        0        0        0        0
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The Joint Committee on Taxation is revising the estimate downward for the provision that changes the rules for deductibility of interest for certain
  debt instruments.
\2\ Increasing the maximum amount of tax-free, employer-provided commuting benefits contains both on- and off-budget revenue effects.
Souces: Joint Committee on Taxation and Congressional Budget Office.

Basis of estimate

            Revenues
    Most of the estimated revenue effects of the bill were 
provided by JCT. CBO estimated the impact of two provisions 
affecting revenues: repealing the harbor maintenance tax on 
exports and capping the excise tax on certain fishing 
equipment. Pending an anticipated revision in JCT's estimates, 
CBO and JCT estimate that enacting provisions of the bill would 
increase federal revenues by $9 million in 2005, $36 million 
over the 2006-2010 period, and $71 million over the 2006-2015 
period. However, JCT is likely to revise its portion of that 
estimate, which could result in the bill having an estimated 
net loss of revenue.
    Trust Fund Reauthorization. The bill would extend the 
authority to collect all excise taxes that are deposited into 
the Highway Trust Fund and the Aquatic Resources Trust Fund. 
Under current law, excise taxes are imposed on motor fuels, 
certain vehicles, and tires. Most of those taxes are set to 
expire on September 30, 2005. Among these levies is a tax of 
18.3 cents per gallon that is imposed on gasoline and special 
motor fuels used in motorboats and certain small engines. The 
bill would distribute all revenues collected from the tax on 
those fuels to the Aquatic Resources Trust Fund (ARTF). Under 
current law, only 13.5 cents per gallon is deposited in the 
ARTF; the balance of 4.8 cents per gallon remains in the 
general fund. JCT estimates that extending the expiring tax 
provisions would have no effect on federal revenues because the 
baseline already includes those revenues. Under section 257 of 
the Balanced Budget and Emergency Deficit Control Act, excise 
taxes dedicated to trust funds, if set to expire, are assumed 
to be extended in CBO' s baseline at the current rates in place 
just before scheduled expiration.
    Excise Tax Reform and Simplification. In total, JCT and CBO 
estimate that enacting title II would reduce federal revenues 
by $376 million over the 2006-2010 period and $918 million over 
the 2006-2015 period. Half of the decrease in receipts--$459 
million over the 2006-2015 period--would result from repealing 
special occupational taxes on producers and marketers of 
alcoholic beverages. The remaining provisions modify various 
excise taxes and other taxes related to alcohol and would 
reduce receipts by $459 million over the 2006-2015 period.
    Miscellaneous Provisions. JCT estimates that the remaining 
revenue-reducing provisions of the bill would decrease receipts 
by $33 million over the 2006-2010 period and $113 million over 
the 2006-2015 period. All of this change would result from 
increasing the maximum amount of tax-free, employer-provided 
commuting benefits. (Of this reduction, $41 million would apply 
to off-budget receipts.)
    Revenue-Raising Provisions. In total, JCT estimates that 
the revenue provisions in title V would increase revenues by $9 
million in 2005, about $450 million over the 2006-2010 period, 
and by about $1.1 billion over the 2006-2015 period. Most of 
that increase ($945 million over the 2005-2015 period) would 
result from changing the rules for deductibility of interest 
for certain debt instruments. (JCT is in the process of 
revising the estimate for that provision; the new estimate is 
likely to indicate a substantially smaller revenue gain.) 
Additional revenue increases would come from increasing certain 
penalties, including fines for frivolous tax submissions.

                            DIRECT SPENDING

    Changes in Spending and Deposits From the Aquatic Resources 
Trust Fund. Changes made to the ARTF by this legislation would 
increase direct spending by $28 million in 2006 and about $1.1 
billion over the 2006-2015 period.
    Enacting this legislation would increase direct spending 
from the ARTF by allocating to that fund the entire tax of 18.3 
cents per gallon of fuels used in motorboats and small engines 
rather than the 13.5 cents per gallon portion of the tax it 
currently receives. Because all revenues deposited to the trust 
fund are available to be spent in the following year without 
further appropriation, raising such deposits by 4.8 cents per 
gallon of fuel used in motorboats and small engines would 
increase direct spending by an estimated $29 million in 2007 
and by $1.1 billion through 2015. The additional deposits would 
be used for sport fish and coastal wetlands conservation 
activities and for boating safety grants.
    Enacting the legislation also would increase direct 
spending by making available without further appropriation the 
existing balance of the boating safety account of the ARTF 
(about $92 million) and any interest earned on the balance 
until it is expended (an estimated $5 million). CBO estimates 
that the provision would increase direct spending by $28 
million in 2006, by $96 over the 2006-2010 period, and by $97 
million over the 2006-2015 period.
    Finally, CBO estimates that capping the excise tax on 
certain fishing equipment would reduce direct spending for 
sport fish and wildlife conservation grants. The modifications 
would reduce the amount of excise taxes deposited to the ARTF 
and to the Federal Aid-Wildlife Fund beginning in 2006. Because 
amounts deposited to those funds are available without 
appropriation (in the following year), cutting such deposits 
would reduce direct spending by an estimated $1 million in 2007 
and by about $40 million over the 2007-2015 period.
    Cover Over (Payment) of Tax on Distilled Spirits. Under 
current law, an excise tax of $13.50 per proof gallon is 
assessed on distilled spirits produced or brought into the 
United States. Until December 31, 2005, the treasuries of 
Puerto Rico and the Virgin Islands will receive $13.25 per 
proof gallon of the excise tax on rum imported into the U.S. 
from any country or those possessions (that amount is known as 
the tax cover over). Section 232 would increase the cover over 
to $13.50 per proof gallon for assessments made between January 
1, 2006, and December 31, 2006. Those payments to Puerto Rico 
and the Virgin Islands are recorded in the budget as outlays. 
Based on recent tax and payment data, CBO estimates that this 
provision would increase direct spending by $95 million over 
the 2006-2007 period (with an additional $4 million in outlays 
after 2010).

                   SPENDING SUBJECT TO APPROPRIATION

    Alternative Financing Studies. Section 303 would authorize 
the appropriation of $1 million to Montana State University and 
$17 million to the University of Iowa for studies to be 
completed in fiscal year 2006 and fiscal year 2012 on 
supplemental or alternative funding sources for the Highway 
Trust Fund. Assuming the appropriation of the specified 
amounts, CBO estimates that implementing this provision would 
cost $14 million over the 2006-2010 period.
    Regional Transportation Plan. Section 304 would authorize 
the appropriation of $1 million in fiscal year 2005 and 2006 
for the Delta Regional Commission to study transportation needs 
in eight states in the Mississippi delta. Assuming the 
appropriation of the specified amount, CBO estimates that 
implementing this provision would cost $1 million over the 
2006-2007 period.
    Impact on state, local, and tribal governments: JCT has 
determined that the tax provisions of this legislation contain 
no intergovernmental mandates as defined in UMRA and would 
impose no costs on state, local, or tribal governments.
    CBO has determined that the non-tax provisions contain no 
intergovernmental mandates as defined in UMRA and would impose 
no costs on state, local, or tribal governments.
    Impact on the private sector: JCT has determined that the 
tax provisions contain private-sector mandates as defined in 
UMRA.
    CBO has reviewed the non-tax provisions of the bill and 
determined that section 506 would impose a new private-sector 
mandate on the chief executive officer (CEO), or other 
designated officer, of certain companies. The provision would 
require a CEO or other officer to include a signed declaration 
with the federal annual income tax return of certain companies. 
The declaration would state that the company has processes and 
procedures in place to ensure compliance with the Internal 
Revenue Code and that the CEO was provided reasonable assurance 
of the accuracy of all material aspects of such return. CBO 
expects that the cost to comply with the mandate would be 
minimal.
    In aggregate, the direct costs of all the mandates in the 
bill would fall below the annual threshold established by UMRA 
for private-sector mandates ($123 million in 2005, adjusted 
annually for inflation.)
    Estimate prepared by: Federal Revenues: Annabell and Laura 
Hanlon. Federal Costs: Matthew Pickford and Deborah Reis. 
Private Sector Impact: Paige Piper/Bach. Impact on State, 
Local, and Tribal Governments: Teri Gullo.
    Estimate Appoved By: G. Thomas Woodward, Assistant Director 
for Tax Analysis; Peter H. Fontaine Deputy Assistant Director 
for Budget Analysis.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
standing rules of the Senate, the Committee states that, with a 
majority and quorum present, the ``Highway Reauthorization and 
Excise Tax Simplification Act of 2005'' was ordered favorably 
reported by a voice vote on April 19, 2005.

                 V. REGULATORY IMPACT AND OTHER MATTERS


                          A. Regulatory Impact

    Pursuant to paragraph 11(b) of rule XXVI of the Standing 
Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact that might be 
incurred in carrying out the provisions of the bill.

Impact on individuals and businesses, paperwork and personal privacy

    The bill modifies several miscellaneous excise tax 
provisions. These provisions generally do not impose increased 
regulatory burdens on individuals or businesses. Taxpayers who 
elect to take advantage of certain provisions of the bill will 
need to keep records in order to demonstrate that they qualify 
for the tax treatment provided by the bill. For example, the 
bill contains a provision limiting the tax on a fishing rod or 
fishing pole to the lesser of 10 percent or $10. The present-
law tax is 10 percent. Affected taxpayers will be required to 
calculate tax separately for each such item, rather than in 
aggregate, and to keep records supporting such calculations.
    The bill contains provisions to curtail tax shelters, 
including provisions arising from the investigative report by 
the staff of the Joint Committee on Taxation relating to Enron 
Corporation undertaken at the request of the Committee,\106\ 
and other corporate governance provisions. In general, these 
provisions will have an impact on taxpayers that engage in 
certain tax avoidance transactions. Taxpayers that have not 
undertaken or planned to undertake such transactions generally 
are not affected by these provisions of the bill.
---------------------------------------------------------------------------
    \106\ See Joint Committee on Taxation, Report of Investigation of 
Enron Corporation and Related Entities Regarding Federal Tax and 
Compensation Issues, and Policy Recommendations (JCS-3-03), February 
2003.
---------------------------------------------------------------------------
    The provisions of the bill do not impact personal privacy.

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (P.L. 104-4).
    The Committee has determined that the tax provisions of the 
reported bill contain no Federal private sector mandates within 
the meaning of Public Law 104-4, the Unfunded Mandates Reform 
Act of 1995, and do not impose a Federal intergovernmental 
mandate on State, local, or tribal governments.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service and the Department of the Treasury) to provide 
a tax complexity analysis. The complexity analysis is required 
for all legislation reported by the 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.
    The staff of the Joint Committee on Taxation has determined 
that a complexity analysis is not required under section 
4022(b) of the IRS Reform Act because the bill contains no 
provisions that have ``widespread applicability'' to 
individuals or small businesses.

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

    In the opinion of the Committee, it is necessary in order 
to expedite the business of the Senate, to dispense with the 
requirements of paragraph 12 of rule XXVI of the Standing Rules 
of the Senate (relating to the showing of changes in existing 
law made by the bill as reported by the Committee).

                                  
