[House Report 110-431]
[From the U.S. Government Publishing Office]



110th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                    110-431

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



 
                    TEMPORARY TAX RELIEF ACT OF 2007

                                _______
                                

November 6, 2007.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

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

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                        [To accompany H.R. 3996]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Ways and Means, to whom was referred the 
bill (H.R. 3996) to amend the Internal Revenue Code of 1986 to 
extend certain expiring provisions, and for other purposes, 
having considered the same, report favorably thereon with an 
amendment and recommend that the bill as amended do pass.
  The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE, ETC.

  (a) Short Title.--This Act may be cited as the ``Temporary Tax Relief 
Act of 2007''.
  (b) Reference.--Except as otherwise expressly provided, whenever in 
this Act an amendment or repeal is expressed in terms of an amendment 
to, or repeal of, a section or other provision, the reference shall be 
considered to be made to a section or other provision of the Internal 
Revenue Code of 1986.
  (c) Table of Contents.--The table of contents for this Act is as 
follows:

Sec. 1. Short title, etc.

                          TITLE I--AMT RELIEF

Sec. 101. Extension of alternative minimum tax relief for nonrefundable 
personal credits.
Sec. 102. Extension of increased alternative minimum tax exemption 
amount.
Sec. 103. Increase of AMT refundable credit amount for individuals with 
long-term unused credits for prior year minimum tax liability, etc.

               TITLE II--ADDITIONAL INDIVIDUAL TAX RELIEF

Sec. 201. Refundable child credit.
Sec. 202. Additional standard deduction for real property taxes for 
nonitemizers.

                     TITLE III--ONE-YEAR EXTENDERS

         Subtitle A--Extenders Primarily Affecting Individuals

Sec. 301. Deduction for State and local sales taxes.
Sec. 302. Deduction of qualified tuition and related expenses.
Sec. 303. Treatment of certain dividends of regulated investment 
companies.
Sec. 304. Parity in the application of certain limits to mental health 
benefits.
Sec. 305. Qualified conservation contributions.
Sec. 306. Tax-free distributions from individual retirement plans for 
charitable purposes.
Sec. 307. Deduction for certain expenses of elementary and secondary 
school teachers.
Sec. 308. Election to include combat pay as earned income for purposes 
of earned income tax credit.
Sec. 309. Modification of mortgage revenue bonds for veterans.
Sec. 310. Distributions from retirement plans to individuals called to 
active duty.
Sec. 311. Stock in RIC for purposes of determining estates of 
nonresidents not citizens.
Sec. 312. Qualified investment entities.
Sec. 313. State legislators' travel expenses away from home.

          Subtitle B--Extenders Primarily Affecting Businesses

Sec. 321. Research credit.
Sec. 322. Indian employment credit.
Sec. 323. New markets tax credit.
Sec. 324. Railroad track maintenance.
Sec. 325. Fifteen-year straight-line cost recovery for qualified 
leasehold improvements and qualified restaurant property.
Sec. 326. Seven-year cost recovery period for motorsports racing track 
facility.
Sec. 327. Accelerated depreciation for business property on Indian 
reservation.
Sec. 328. Expensing of environmental remediation costs.
Sec. 329. Deduction allowable with respect to income attributable to 
domestic production activities in Puerto Rico.
Sec. 330. Modification of tax treatment of certain payments to 
controlling exempt organizations.
Sec. 331. Extension and modification of credit to holders of qualified 
zone academy bonds.
Sec. 332. Tax incentives for investment in the District of Columbia.
Sec. 333. Extension of economic development credit for American Samoa.
Sec. 334. Enhanced charitable deduction for contributions of food 
inventory.
Sec. 335. Enhanced charitable deduction for contributions of book 
inventory to public schools.
Sec. 336. Enhanced deduction for qualified computer contributions.
Sec. 337. Basis adjustment to stock of S corporations making charitable 
contributions of property.
Sec. 338. Extension of work opportunity tax credit for Hurricane 
Katrina employees.

                      Subtitle C--Other Extenders

Sec. 341. Disclosure for combined employment tax reporting.
Sec. 342. Disclosure of return information to apprise appropriate 
officials of terrorist activities.
Sec. 343. Disclosure upon request of information relating to terrorist 
activities.
Sec. 344. Disclosure of return information to carry out income 
contingent repayment of student loans.
Sec. 345. Authority for undercover operations.
Sec. 346. Increase in limit on cover over of rum excise tax to Puerto 
Rico and the Virgin Islands.
Sec. 347. Disclosure of return information for certain veterans 
programs.

               TITLE IV--MORTGAGE FORGIVENESS DEBT RELIEF

Sec. 401. Discharges of indebtedness on principal residence excluded 
from gross income.
Sec. 402. Long-term extension of deduction for mortgage insurance 
premiums.
Sec. 403. Alternative tests for qualifying as cooperative housing 
corporation.
Sec. 404. Gain from sale of principal residence allocated to 
nonqualified use not excluded from income.

                   TITLE V--ADMINISTRATIVE PROVISIONS

Sec. 501. Repeal of authority to enter into private debt collection 
contracts.
Sec. 502. Delay of application of withholding requirement on certain 
governmental payments for goods and services.
Sec. 503. Clarification of entitlement of Virgin Islands residents to 
protections of limitations on assessment and collection of tax.
Sec. 504. Revision of tax rules on expatriation.
Sec. 505. Repeal of suspension of certain penalties and interest.
Sec. 506. Unused merchandise drawback.

                      TITLE VI--REVENUE PROVISIONS

    Subtitle A--Nonqualified Deferred Compensation From Certain Tax 
                          Indifferent Parties

Sec. 601. Nonqualified deferred compensation from certain tax 
indifferent parties.

   Subtitle B--Provisions Related to Certain Investment Partnerships

Sec. 611. Income of partners for performing investment management 
services treated as ordinary income received for performance of 
services.
Sec. 612. Indebtedness incurred by a partnership in acquiring 
securities and commodities not treated as acquisition indebtedness for 
organizations which are partners with limited liability.
Sec. 613. Application to partnership interests and tax sharing 
agreements of rule treating certain gain on sales between related 
persons as ordinary income.

                      Subtitle C--Other Provisions

Sec. 621. Delay in application of worldwide allocation of interest.
Sec. 622. Broker reporting of customer's basis in securities 
transactions.
Sec. 623. Modification of penalty for failure to file partnership 
returns.
Sec. 624. Penalty for failure to file S corporation returns.
Sec. 625. Time for payment of corporate estimated taxes.

                          TITLE I--AMT RELIEF

SEC. 101. EXTENSION OF ALTERNATIVE MINIMUM TAX RELIEF FOR NONREFUNDABLE 
                    PERSONAL CREDITS.

  (a) In General.--Paragraph (2) of section 26(a) (relating to special 
rule for taxable years 2000 through 2006) is amended--
          (1) by striking ``or 2006'' and inserting ``2006, or 2007'', 
        and
          (2) by striking ``2006'' in the heading thereof and inserting 
        ``2007''.
  (b)  Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2006.

SEC. 102. EXTENSION OF INCREASED ALTERNATIVE MINIMUM TAX EXEMPTION 
                    AMOUNT.

  (a) In General.--Paragraph (1) of section 55(d) (relating to 
exemption amount) is amended--
          (1) by striking ``($62,550 in the case of taxable years 
        beginning in 2006)'' in subparagraph (A) and inserting 
        ``($66,250 in the case of taxable years beginning in 2007)'', 
        and
          (2) by striking ``($42,500 in the case of taxable years 
        beginning in 2006)'' in subparagraph (B) and inserting 
        ``($44,350 in the case of taxable years beginning in 2007)''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2006.

SEC. 103. INCREASE OF AMT REFUNDABLE CREDIT AMOUNT FOR INDIVIDUALS WITH 
                    LONG-TERM UNUSED CREDITS FOR PRIOR YEAR MINIMUM TAX 
                    LIABILITY, ETC.

  (a) In General.--Paragraph (2) of section 53(e) of the Internal 
Revenue Code of 1986 is amended to read as follows:
          ``(2) AMT refundable credit amount.--For purposes of 
        paragraph (1), the term `AMT refundable credit amount' means, 
        with respect to any taxable year, the amount (not in excess of 
        the long-term unused minimum tax credit for such taxable year) 
        equal to the greater of--
                  ``(A) 50 percent of the long-term unused minimum tax 
                credit for such taxable year, or
                  ``(B) the amount (if any) of the AMT refundable 
                credit amount determined under this paragraph for the 
                taxpayer's preceding taxable year.''.
  (b) Treatment of Certain Underpayments, Interest, and Penalties 
Attributable to the Treatment of Incentive Stock Options.--Section 53 
of such Code is amended by adding at the end the following new 
subsection:
  ``(f) Treatment of Certain Underpayments, Interest, and Penalties 
Attributable to the Treatment of Incentive Stock Options.--
          ``(1) Abatement.--Any underpayment of tax outstanding on the 
        date of the enactment of this subsection which is attributable 
        to the application of section 56(b)(3) for any taxable year 
        ending before January 1, 2007 (and any interest or penalty with 
        respect to such underpayment which is outstanding on such date 
        of enactment), is hereby abated. No credit shall be allowed 
        under this section with respect to any amount abated under this 
        paragraph.
          ``(2) Increase in credit for certain interest and penalties 
        already paid.--Any interest or penalty paid before the date of 
        the enactment of this subsection which would (but for such 
        payment) have been abated under paragraph (1) shall be treated 
        for purposes of this section as an amount of adjusted net 
        minimum tax imposed for the taxable year of the underpayment to 
        which such interest or penalty relates.''.
  (c) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendment made by this section shall apply to taxable years 
        beginning after December 31, 2006.
          (2) Abatement.--Section 53(f)(1) of the Internal Revenue Code 
        of 1986, as added by subsection (b), shall take effect on the 
        date of the enactment of this Act.

               TITLE II--ADDITIONAL INDIVIDUAL TAX RELIEF

SEC. 201. REFUNDABLE CHILD CREDIT.

  (a) Modification of Threshold Amount.--Clause (i) of section 
24(d)(1)(B) is amended by inserting ``($8,500 in the case of taxable 
years beginning in 2008)'' after ``$10,000''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to taxable years beginning after December 31, 2007.

SEC. 202. ADDITIONAL STANDARD DEDUCTION FOR REAL PROPERTY TAXES FOR 
                    NONITEMIZERS.

  (a) In General.--Section 63(c)(1) (defining standard deduction) is 
amended by striking ``and'' at the end of subparagraph (A), by striking 
the period at the end of subparagraph (B) and inserting ``, and'', and 
by adding at the end the following new subparagraph:
                  ``(C) in the case of any taxable year beginning in 
                2008, the real property tax deduction.''.
  (b) Definition.--Section 63(c) is amended by adding at the end the 
following new paragraph:
          ``(8) Real property tax deduction.--For purposes of paragraph 
        (1), the real property tax deduction is so much of the amount 
        of State and local real property taxes (within the meaning of 
        section 164) paid or accrued by the taxpayer during the taxable 
        year which do not exceed $350 ($700 in the case of a joint 
        return).''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2007.

                     TITLE III--ONE-YEAR EXTENDERS

         Subtitle A--Extenders Primarily Affecting Individuals

SEC. 301. DEDUCTION FOR STATE AND LOCAL SALES TAXES.

  (a) In General.--Subparagraph (I) of section 164(b)(5) is amended by 
striking ``January 1, 2008'' and inserting ``January 1, 2009''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2007.

SEC. 302. DEDUCTION OF QUALIFIED TUITION AND RELATED EXPENSES.

  (a) In General.--Subsection (e) of section 222 (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2007.

SEC. 303. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED INVESTMENT 
                    COMPANIES.

  (a) Interest-Related Dividends.--Subparagraph (C) of section 
871(k)(1) (defining interest-related dividend) is amended by striking 
``December 31, 2007'' and inserting ``December 31, 2008''.
  (b) Short-Term Capital Gain Dividends.--Subparagraph (C) of section 
871(k)(2) (defining short-term capital gain dividend) is amended by 
striking ``December 31, 2007'' and inserting ``December 31, 2008''.
  (c) Effective Date.--The amendments made by this section shall apply 
to dividends with respect to taxable years of regulated investment 
companies beginning after December 31, 2007.

SEC. 304. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MENTAL HEALTH 
                    BENEFITS.

  (a) In General.--Paragraph (3) of section 9812(f) (relating to 
application of section) is amended by striking ``December 31, 2007'' 
and inserting ``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to benefits for services furnished after December 31, 2007.

SEC. 305. QUALIFIED CONSERVATION CONTRIBUTIONS.

  (a) In General.--Clause (vi) of section 170(b)(1)(E) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to contributions made in taxable years beginning after December 31, 
2007.

SEC. 306. TAX-FREE DISTRIBUTIONS FROM INDIVIDUAL RETIREMENT PLANS FOR 
                    CHARITABLE PURPOSES.

  (a) In General.--Subparagraph (F) of section 408(d)(8) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to distributions made in taxable years beginning after December 31, 
2007.

SEC. 307. DEDUCTION FOR CERTAIN EXPENSES OF ELEMENTARY AND SECONDARY 
                    SCHOOL TEACHERS.

  (a) In General.--Subparagraph (D) of section 62(a)(2) (relating to 
certain expenses of elementary and secondary school teachers) is 
amended by striking ``or 2007'' and inserting ``2007, or 2008''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to taxable years beginning after December 31, 2007.

SEC. 308. ELECTION TO INCLUDE COMBAT PAY AS EARNED INCOME FOR PURPOSES 
                    OF EARNED INCOME TAX CREDIT.

  (a) In General.--Subclause (II) of section 32(c)(2)(B)(vi) (defining 
earned income) is amended by striking ``January 1, 2008'' and inserting 
``January 1, 2009''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years ending after December 31, 2007.

SEC. 309. MODIFICATION OF MORTGAGE REVENUE BONDS FOR VETERANS.

  (a) Qualified Mortgage Bonds Used To Finance Residences for Veterans 
Without Regard to First-Time Homebuyer Requirement.--Subparagraph (D) 
of section 143(d)(2) (relating to exceptions) is amended by striking 
``January 1, 2008'' and inserting ``January 1, 2009''.
  (b) Effective Date.--The amendment made by this section shall apply 
to bonds issued after December 31, 2007.

SEC. 310. DISTRIBUTIONS FROM RETIREMENT PLANS TO INDIVIDUALS CALLED TO 
                    ACTIVE DUTY.

  (a) In General.--Clause (iv) of section 72(t)(2)(G) is amended by 
striking ``December 31, 2007'' and inserting ``January 1, 2009''.
  (b) Effective Date.--The amendment made by this section shall apply 
to individuals ordered or called to active duty on or after December 
31, 2007.

SEC. 311. STOCK IN RIC FOR PURPOSES OF DETERMINING ESTATES OF 
                    NONRESIDENTS NOT CITIZENS.

  (a) In General.--Paragraph (3) of section 2105(d) (relating to stock 
in a RIC) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to decedents dying after December 31, 2007.

SEC. 312. QUALIFIED INVESTMENT ENTITIES.

  (a) In General.--Clause (ii) of section 897(h)(4)(A) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by subsection (a) shall take 
effect on January 1, 2008.

SEC. 313. STATE LEGISLATORS' TRAVEL EXPENSES AWAY FROM HOME.

  (a) In General.--Paragraph (2) of section 162(h) (relating to 
legislative days) is amended by adding at the end the following flush 
sentence: ``In the case of taxable years beginning in 2008, a 
legislature shall be treated for purposes of this paragraph as in 
session on any day in which it is formally called into session without 
regard to whether legislation was considered on such day.''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to taxable years beginning after December 31, 2007.

          Subtitle B--Extenders Primarily Affecting Businesses

SEC. 321. RESEARCH CREDIT.

  (a) In General.--Subparagraph (B) of section 41(h)(1) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Conforming Amendment.--Subparagraph (D) of section 45C(b)(1) 
(relating to qualified clinical testing expenses) is amended by 
striking ``December 31, 2007'' and inserting ``December 31, 2008''.
  (c) Effective Date.--The amendments made by this section shall apply 
to amounts paid or incurred after December 31, 2007.

SEC. 322. INDIAN EMPLOYMENT CREDIT.

  (a) In General.--Subsection (f) of section 45A (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2007.

SEC. 323. NEW MARKETS TAX CREDIT.

  Subparagraph (D) of section 45D(f)(1) (relating to national 
limitation on amount of investments designated) is amended by striking 
``and 2008'' and inserting ``2008, and 2009''.

SEC. 324. RAILROAD TRACK MAINTENANCE.

  (a) In General.--Subsection (f) of section 45G (relating to 
application of section) is amended by striking ``January 1, 2008'' and 
inserting ``January 1, 2009''.
  (b) Effective Date.--The amendment made by this section shall apply 
to expenditures paid or incurred during taxable years beginning after 
December 31, 2007.

SEC. 325. FIFTEEN-YEAR STRAIGHT-LINE COST RECOVERY FOR QUALIFIED 
                    LEASEHOLD IMPROVEMENTS AND QUALIFIED RESTAURANT 
                    PROPERTY.

  (a) In General.--Clauses (iv) and (v) of section 168(e)(3)(E) 
(relating to 15-year property) are each amended by striking ``January 
1, 2008'' and inserting ``January 1, 2009''.
  (b) Effective Date.--The amendments made by this section shall apply 
to property placed in service after December 31, 2007.

SEC. 326. SEVEN-YEAR COST RECOVERY PERIOD FOR MOTORSPORTS RACING TRACK 
                    FACILITY.

  (a) In General.--Subparagraph (D) of section 168(i)(15) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to property placed in service after December 31, 2007.

SEC. 327. ACCELERATED DEPRECIATION FOR BUSINESS PROPERTY ON INDIAN 
                    RESERVATION.

  (a) In General.--Paragraph (8) of section 168(j) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to property placed in service after December 31, 2007.

SEC. 328. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS.

  (a) In General.--Subsection (h) of section 198 (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to expenditures paid or incurred after December 31, 2007.

SEC. 329. DEDUCTION ALLOWABLE WITH RESPECT TO INCOME ATTRIBUTABLE TO 
                    DOMESTIC PRODUCTION ACTIVITIES IN PUERTO RICO.

  (a) In General.--Subparagraph (C) of section 199(d)(8) (relating to 
termination) is amended--
          (1) by striking ``first 2 taxable years'' and inserting 
        ``first 3 taxable years'', and
          (2) by striking ``January 1, 2008'' and inserting ``January 
        1, 2009''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2007.

SEC. 330. MODIFICATION OF TAX TREATMENT OF CERTAIN PAYMENTS TO 
                    CONTROLLING EXEMPT ORGANIZATIONS.

  (a) In General.--Clause (iv) of section 512(b)(13)(E) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to payments received or accrued after December 31, 2007.

SEC. 331. EXTENSION AND MODIFICATION OF CREDIT TO HOLDERS OF QUALIFIED 
                    ZONE ACADEMY BONDS.

  (a) In General.--Subsection (e) of section 1397E (relating to 
limitation on amount of bonds designated) is amended by striking 
``1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, and 2007'' and 
inserting ``each of calendar years 1998 through 2008''.
  (b) Modification of Arbitrage Rules.--
          (1) In general.--Subsection (g) of section 1397E (relating to 
        special rules relating to arbitrage) is amended to read as 
        follows:
  ``(g) Special Rules Relating to Arbitrage.--
          ``(1) In general.--An issue shall be treated as meeting the 
        requirements of this subsection if the issuer satisfies the 
        requirements of section 148 with respect to the proceeds of the 
        issue.
          ``(2) Special rule for investments during expenditure 
        period.--An issue shall not be treated as failing to meet the 
        requirements of paragraph (1) by reason of any investment of 
        available project proceeds during the 5-year period described 
        in subsection (f)(1)(A) (including any extension of such period 
        under subsection (f)(2)).
          ``(3) Special rule for reserve funds.--An issue shall not be 
        treated as failing to meet the requirements of paragraph (1) by 
        reason of any fund which is expected to be used to repay such 
        issue if--
                  ``(A) such fund is funded at a rate not more rapid 
                than equal annual installments,
                  ``(B) such fund is funded in a manner that such fund 
                will not exceed the amount necessary to repay the issue 
                if invested at the maximum rate permitted under 
                subparagraph (C), and
                  ``(C) the yield on such fund is not greater than the 
                discount rate determined under subsection (d)(3) with 
                respect to the issue.''.
          (2) Application of available project proceeds to other 
        requirements.--Subsections (d)(1)(A), (d)(2)(A), (f)(1)(A), 
        (f)(1)(B), (f)(1)(C), and (f)(3) of section 1397E are each 
        amended by striking ``proceeds'' and inserting ``available 
        project proceeds''
          (3) Available project proceeds defined.--Subsection (i) of 
        section 1397E (relating to definitions) is amended by adding at 
        the end the following new paragraph:
          ``(4) Available project proceeds.--The term `available 
        project proceeds'' means--
                  ``(A) the excess of--
                          ``(i) the proceeds from the sale of an issue, 
                        over
                          ``(ii) the issuance costs financed by the 
                        issue (to the extent that such costs do not 
                        exceed 2 percent of such proceeds), and
                  ``(B) the proceeds from any investment of the excess 
                described in subparagraph (A).''.
  (c) Effective Date.--
          (1) Extension.--The amendment made by subsection (a) shall 
        apply to obligations issued after December 31, 2007.
          (2) Modification of arbitrage rules.--The amendments made by 
        subsection (b) shall apply to obligations issued after the date 
        of the enactment of this Act.

SEC. 332. TAX INCENTIVES FOR INVESTMENT IN THE DISTRICT OF COLUMBIA.

  (a) Designation of Zone.--
          (1) In general.--Subsection (f) of section 1400 is amended by 
        striking ``2007'' both places it appears and inserting 
        ``2008''.
          (2) Effective date.--The amendments made by this subsection 
        shall apply to periods beginning after December 31, 2007.
  (b) Tax-Exempt Economic Development Bonds.--
          (1) In general.--Subsection (b) of section 1400A is amended 
        by striking ``2007'' and inserting ``2008''.
          (2) Effective date.--The amendment made by this subsection 
        shall apply to bonds issued after December 31, 2007.
  (c) Zero Percent Capital Gains Rate.--
          (1) In general.--Subsection (b) of section 1400B is amended 
        by striking ``2008'' each place it appears and inserting 
        ``2009''.
          (2) Conforming amendments.--
                  (A) Section 1400B(e)(2) is amended--
                          (i) by striking ``2012'' and inserting 
                        ``2013'', and
                          (ii) by striking ``2012'' in the heading 
                        thereof and inserting ``2013''.
                  (B) Section 1400B(g)(2) is amended by striking 
                ``2012'' and inserting ``2013''.
                  (C) Section 1400F(d) is amended by striking ``2012'' 
                and inserting ``2013''.
          (3) Effective dates.--
                  (A) Extension.--The amendments made by paragraph (1) 
                shall apply to acquisitions after December 31, 2007.
                  (B) Conforming amendments.--The amendments made by 
                paragraph (2) shall take effect on the date of the 
                enactment of this Act.
  (d) First-Time Homebuyer Credit.--
          (1) In general.--Subsection (i) of section 1400C is amended 
        by striking ``2008'' and inserting ``2009''.
          (2) Effective date.--The amendment made by this subsection 
        shall apply to property purchased after December 31, 2007.

SEC. 333. EXTENSION OF ECONOMIC DEVELOPMENT CREDIT FOR AMERICAN SAMOA.

  (a) In General.--Subsection (d) of section 119 of division A of the 
Tax Relief and Health Care Act of 2006 is amended--
          (1) by striking ``first two taxable years'' and inserting 
        ``first 3 taxable years'', and
          (2) by striking ``January 1, 2008'' and inserting ``January 
        1, 2009''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2007.

SEC. 334. ENHANCED CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF FOOD 
                    INVENTORY.

  (a) In General.--Clause (iv) of section 170(e)(3)(C) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to contributions made after December 31, 2007.

SEC. 335. ENHANCED CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF BOOK 
                    INVENTORY TO PUBLIC SCHOOLS.

  (a) In General.--Clause (iv) of section 170(e)(3)(D) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to contributions made after December 31, 2007.

SEC. 336. ENHANCED DEDUCTION FOR QUALIFIED COMPUTER CONTRIBUTIONS.

  (a) In General.--Subparagraph (G) of section 170(e)(6) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to contributions made during taxable years beginning after December 31, 
2007.

SEC. 337. BASIS ADJUSTMENT TO STOCK OF S CORPORATIONS MAKING CHARITABLE 
                    CONTRIBUTIONS OF PROPERTY.

  (a) In General.--The last sentence of section 1367(a)(2) (relating to 
decreases in basis) is amended by striking ``December 31, 2007'' and 
inserting ``December 31, 2008''.
  (b) Technical Amendment Related to Section 1203 of the Pension 
Protection Act of 2006.--Subsection (d) of section 1366 is amended by 
adding at the end the following new paragraph:
          ``(4) Application of limitation on charitable 
        contributions.--In the case of any charitable contribution of 
        property to which the second sentence of section 1367(a)(2) 
        applies, paragraph (1) shall not apply to the extent of the 
        excess (if any) of--
                  ``(A) the shareholder's pro rata share of such 
                contribution, over
                  ``(B) the shareholder's pro rata share of the 
                adjusted basis of such property.''.
  (c) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to contributions 
        made in taxable years beginning after December 31, 2007.
          (2) Technical amendment.--The amendment made by subsection 
        (b) shall take effect as if included in the provision of the 
        Pension Protection Act of 2006 to which it relates.

SEC. 338. EXTENSION OF WORK OPPORTUNITY TAX CREDIT FOR HURRICANE 
                    KATRINA EMPLOYEES.

  (a) In General.--Paragraph (1) of section 201(b) of the Katrina 
Emergency Tax Relief Act of 2005 is amended by striking ``2-year'' and 
inserting ``3-year''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to individuals hired after August 27, 2007.

                      Subtitle C--Other Extenders

SEC. 341. DISCLOSURE FOR COMBINED EMPLOYMENT TAX REPORTING.

  (a) In General.--Subparagraph (B) of section 6103(d)(5) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to disclosures after December 31, 2007.

SEC. 342. DISCLOSURE OF RETURN INFORMATION TO APPRISE APPROPRIATE 
                    OFFICIALS OF TERRORIST ACTIVITIES.

  (a) In General.--Clause (iv) of section 6103(i)(3)(C) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to disclosures after December 31, 2007.

SEC. 343. DISCLOSURE UPON REQUEST OF INFORMATION RELATING TO TERRORIST 
                    ACTIVITIES.

  (a) In General.--Subparagraph (E) of section 6103(i)(7) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to disclosures after December 31, 2007.

SEC. 344. DISCLOSURE OF RETURN INFORMATION TO CARRY OUT INCOME 
                    CONTINGENT REPAYMENT OF STUDENT LOANS.

  (a) In General.--Subparagraph (D) of section 6103(l)(13) (relating to 
termination) is amended by striking ``December 31, 2007'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by this section shall apply 
to requests made after December 31, 2007.

SEC. 345. AUTHORITY FOR UNDERCOVER OPERATIONS.

  (a) In General.--Paragraph (6) of section 7608(c) (relating to 
application of section) is amended by striking ``January 1, 2008'' each 
place it appears and inserting ``January 1, 2009''.
  (b) Effective Date.--The amendment made by this section shall take 
effect on January 1, 2008.

SEC. 346. INCREASE IN LIMIT ON COVER OVER OF RUM EXCISE TAX TO PUERTO 
                    RICO AND THE VIRGIN ISLANDS.

  (a) In General.--Paragraph (1) of section 7652(f) is amended by 
striking ``January 1, 2008'' and inserting ``January 1, 2009''.
  (b) Effective Date.--The amendment made by this section shall apply 
to distilled spirits brought into the United States after December 31, 
2007.

SEC. 347. DISCLOSURE OF RETURN INFORMATION FOR CERTAIN VETERANS 
                    PROGRAMS.

  (a) In General.--The last sentence of paragraph (7) of section 
6103(l) is amended by striking ``September 30, 2008'' and inserting 
``December 31, 2008''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to requests made after September 30, 2008.

               TITLE IV--MORTGAGE FORGIVENESS DEBT RELIEF

SEC. 401. DISCHARGES OF INDEBTEDNESS ON PRINCIPAL RESIDENCE EXCLUDED 
                    FROM GROSS INCOME.

  (a) In General.--Paragraph (1) of section 108(a) is amended by 
striking ``or'' at the end of subparagraph (C), by striking the period 
at the end of subparagraph (D) and inserting ``, or'', and by inserting 
after subparagraph (D) the following new subparagraph:
                  ``(E) the indebtedness discharged is qualified 
                principal residence indebtedness.''.
  (b) Special Rules Relating to Qualified Principal Residence 
Indebtedness.--Section 108 is amended by adding at the end the 
following new subsection:
  ``(h) Special Rules Relating to Qualified Principal Residence 
Indebtedness.--
          ``(1) Basis reduction.--The amount excluded from gross income 
        by reason of subsection (a)(1)(E) shall be applied to reduce 
        (but not below zero) the basis of the principal residence of 
        the taxpayer.
          ``(2) Qualified principal residence indebtedness.--For 
        purposes of this section, the term `qualified principal 
        residence indebtedness' means acquisition indebtedness (within 
        the meaning of section 163(h)(3)(B), applied by substituting 
        `$2,000,000 ($1,000,000' for `$1,000,000 ($500,000' in clause 
        (ii) thereof) with respect to the principal residence of the 
        taxpayer.
          ``(3) Exception for certain discharges not related to 
        taxpayer's financial condition.--Subsection (a)(1)(E) shall not 
        apply to the discharge of a loan if the discharge is on account 
        of services performed for the lender or any other factor not 
        directly related to a decline in the value of the residence or 
        to the financial condition of the taxpayer.
          ``(4) Ordering rule.--If any loan is discharged, in whole or 
        in part, and only a portion of such loan is qualified principal 
        residence indebtedness, subsection (a)(1)(E) shall apply only 
        to so much of the amount discharged as exceeds the amount of 
        the loan (as determined immediately before such discharge) 
        which is not qualified principal residence indebtedness.
          ``(5) Principal residence.--For purposes of this subsection, 
        the term `principal residence' has the same meaning as when 
        used in section 121.''.
  (c) Coordination.--
          (1) Subparagraph (A) of section 108(a)(2) is amended by 
        striking ``and (D)'' and inserting ``(D), and (E)''.
          (2) Paragraph (2) of section 108(a) is amended by adding at 
        the end the following new subparagraph:
                  ``(C) Principal residence exclusion takes precedence 
                over insolvency exclusion unless elected otherwise.--
                Paragraph (1)(B) shall not apply to a discharge to 
                which paragraph (1)(E) applies unless the taxpayer 
                elects to apply paragraph (1)(B) in lieu of paragraph 
                (1)(E).''.
  (d) Effective Date.--The amendments made by this section shall apply 
to discharges of indebtedness on or after January 1, 2007.

SEC. 402. LONG-TERM EXTENSION OF DEDUCTION FOR MORTGAGE INSURANCE 
                    PREMIUMS.

  (a) In General.--Subparagraph (E) of section 163(h)(3) (relating to 
mortgage insurance premiums treated as interest) is amended by striking 
clauses (iii) and (iv) and inserting the following new clause:
                          ``(iii) Application.--Clause (i) shall not 
                        apply with respect to any mortgage insurance 
                        contract issued before January 1, 2007, or 
                        after December 31, 2014.''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to contracts issued after December 31, 2006.

SEC. 403. ALTERNATIVE TESTS FOR QUALIFYING AS COOPERATIVE HOUSING 
                    CORPORATION.

  (a) In General.--Subparagraph (D) of section 216(b)(1) (defining 
cooperative housing corporation) is amended to read as follows:
                  ``(D) meeting 1 or more of the following requirements 
                for the taxable year in which the taxes and interest 
                described in subsection (a) are paid or incurred:
                          ``(i) 80 percent or more of the corporation's 
                        gross income for such taxable year is derived 
                        from tenant-stockholders.
                          ``(ii) At all times during such taxable year, 
                        80 percent or more of the total square footage 
                        of the corporation's property is used or 
                        available for use by the tenant-stockholders 
                        for residential purposes or purposes ancillary 
                        to such residential use.
                          ``(iii) 90 percent or more of the 
                        expenditures of the corporation paid or 
                        incurred during such taxable year are paid or 
                        incurred for the acquisition, construction, 
                        management, maintenance, or care of the 
                        corporation's property for the benefit of the 
                        tenant-stockholders.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years ending after the date of the enactment of this Act.

SEC. 404. GAIN FROM SALE OF PRINCIPAL RESIDENCE ALLOCATED TO 
                    NONQUALIFIED USE NOT EXCLUDED FROM INCOME.

  (a) In General.--Subsection (b) of section 121 (relating to 
limitations) is amended by adding at the end the following new 
paragraph:
          ``(4) Exclusion of gain allocated to nonqualified use.--
                  ``(A) In general.--Subsection (a) shall not apply to 
                so much of the gain from the sale or exchange of 
                property as is allocated to periods of nonqualified 
                use.
                  ``(B) Gain allocated to periods of nonqualified 
                use.--For purposes of subparagraph (A), gain shall be 
                allocated to periods of nonqualified use based on the 
                ratio which--
                          ``(i) the aggregate periods of nonqualified 
                        use during the period such property was owned 
                        by the taxpayer, bears to
                          ``(ii) the period such property was owned by 
                        the taxpayer.
                  ``(C) Period of nonqualified use.--For purposes of 
                this paragraph--
                          ``(i) In general.--The term `period of 
                        nonqualified use' means any period (other than 
                        the portion of any period preceding January 1, 
                        2008) during which the property is not used as 
                        the principal residence of the taxpayer or the 
                        taxpayer's spouse or former spouse.
                          ``(ii) Exceptions.--The term `period of 
                        nonqualified use' does not include--
                                  ``(I) any portion of the 5-year 
                                period described in subsection (a) 
                                which is after the last date that such 
                                property is used as the principal 
                                residence of the taxpayer or the 
                                taxpayer's spouse,
                                  ``(II) any period (not to exceed an 
                                aggregate period of 10 years) during 
                                which the taxpayer or the taxpayer's 
                                spouse is serving on qualified official 
                                extended duty (as defined in subsection 
                                (d)(9)(C)) described in clause (i), 
                                (ii), or (iii) of subsection (d)(9)(A), 
                                and
                                  ``(III) any other period of temporary 
                                absence (not to exceed an aggregate 
                                period of 2 years) due to change of 
                                employment, health conditions, or such 
                                other unforeseen circumstances as may 
                                be specified by the Secretary.
                  ``(D) Coordination with recognition of gain 
                attributable to depreciation.--For purposes of this 
                paragraph--
                          ``(i) subparagraph (A) shall be applied after 
                        the application of subsection (d)(6), and
                          ``(ii) subparagraph (B) shall be applied 
                        without regard to any gain to which subsection 
                        (d)(6) applies.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to sales and exchanges after December 31, 2007.

                   TITLE V--ADMINISTRATIVE PROVISIONS

SEC. 501. REPEAL OF AUTHORITY TO ENTER INTO PRIVATE DEBT COLLECTION 
                    CONTRACTS.

  (a) In General.--Subchapter A of chapter 64 is amended by striking 
section 6306.
  (b) Conforming Amendments.--
          (1) Subchapter B of chapter 76 is amended by striking section 
        7433A.
          (2) Section 7811 is amended by striking subsection (g).
          (3) Section 1203 of the Internal Revenue Service 
        Restructuring Act of 1998 is amended by striking subsection 
        (e).
          (4) The table of sections for subchapter A of chapter 64 is 
        amended by striking the item relating to section 6306.
          (5) The table of sections for subchapter B of chapter 76 is 
        amended by striking the item relating to section 7433A.
  (c) Effective Date.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall take 
        effect on the date of the enactment of this Act.
          (2) Exception for existing contracts, etc.--The amendments 
        made by this section shall not apply to any contract which was 
        entered into before July 18, 2007, and is not renewed or 
        extended on or after such date.
          (3) Unauthorized contracts and extensions treated as void.--
        Any qualified tax collection contract (as defined in section 
        6306 of the Internal Revenue Code of 1986, as in effect before 
        its repeal) which is entered into on or after July 18, 2007, 
        and any extension or renewal on or after such date of any 
        qualified tax collection contract (as so defined) shall be 
        void.

SEC. 502. DELAY OF APPLICATION OF WITHHOLDING REQUIREMENT ON CERTAIN 
                    GOVERNMENTAL PAYMENTS FOR GOODS AND SERVICES.

  (a) In General.--Subsection (b) of section 511 of the Tax Increase 
Prevention and Reconciliation Act of 2005 is amended by striking 
``December 31, 2010'' and inserting ``December 31, 2011''.
  (b) Report to Congress.--Not later than 6 months after the date of 
the enactment of this Act, the Secretary of the Treasury shall submit 
to the Committee on Ways and Means of the House of Representatives and 
the Committee on Finance of the Senate a report with respect to the 
withholding requirements of section 3402(t) of the Internal Revenue 
Code of 1986, including a detailed analysis of--
          (1) the problems, if any, which are anticipated in 
        administering and complying with such requirements,
          (2) the burdens, if any, that such requirements will place on 
        governments and businesses (taking into account such mechanisms 
        as may be necessary to administer such requirements), and
          (3) the application of such requirements to small 
        expenditures for services and goods by governments.

SEC. 503. CLARIFICATION OF ENTITLEMENT OF VIRGIN ISLANDS RESIDENTS TO 
                    PROTECTIONS OF LIMITATIONS ON ASSESSMENT AND 
                    COLLECTION OF TAX.

  (a) In General.--Subsection (c) of section 932 (relating to treatment 
of Virgin Islands residents) is amended by adding at the end the 
following new paragraph:
          ``(5) Treatment of income tax return filed with virgin 
        islands.--An income tax return filed with the Virgin Islands by 
        an individual claiming to be described in paragraph (1) for the 
        taxable year shall be treated for purposes of subtitle F in the 
        same manner as if such return were an income tax return filed 
        with the United States for such taxable year. The preceding 
        sentence shall not apply where such return is false or 
        fraudulent with the intent to evade tax or otherwise is a 
        willful attempt in any manner to defeat or evade tax.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after 1986.

SEC. 504. REVISION OF TAX RULES ON EXPATRIATION.

  (a) In General.--Subpart A of part II of subchapter N of chapter 1 is 
amended by inserting after section 877 the following new section:

``SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.

  ``(a) General Rules.--For purposes of this subtitle--
          ``(1) Mark to market.--All property of a covered expatriate 
        shall be treated as sold on the day before the expatriation 
        date for its fair market value.
          ``(2) Recognition of gain or loss.--In the case of any sale 
        under paragraph (1)--
                  ``(A) notwithstanding any other provision of this 
                title, any gain arising from such sale shall be taken 
                into account for the taxable year of the sale, and
                  ``(B) any loss arising from such sale shall be taken 
                into account for the taxable year of the sale to the 
                extent otherwise provided by this title, except that 
                section 1091 shall not apply to any such loss.
        Proper adjustment shall be made in the amount of any gain or 
        loss subsequently realized for gain or loss taken into account 
        under the preceding sentence, determined without regard to 
        paragraph (3).
          ``(3) Exclusion for certain gain.--
                  ``(A) In general.--The amount which would (but for 
                this paragraph) be includible in the gross income of 
                any individual by reason of paragraph (1) shall be 
                reduced (but not below zero) by $600,000.
                  ``(B) Adjustment for inflation.--
                          ``(i) In general.--In the case of any taxable 
                        year beginning in a calendar year after 2008, 
                        the dollar amount in subparagraph (A) shall be 
                        increased by an amount equal to--
                                  ``(I) such dollar amount, multiplied 
                                by
                                  ``(II) the cost-of-living adjustment 
                                determined under section 1(f)(3) for 
                                the calendar year in which the taxable 
                                year begins, by substituting `calendar 
                                year 2007' for `calendar year 1992' in 
                                subparagraph (B) thereof.
                          ``(ii) Rounding.--If any amount as adjusted 
                        under clause (i) is not a multiple of $1,000, 
                        such amount shall be rounded to the nearest 
                        multiple of $1,000.
  ``(b) Election To Defer Tax.--
          ``(1) In general.--If the taxpayer elects the application of 
        this subsection with respect to any property treated as sold by 
        reason of subsection (a), the time for payment of the 
        additional tax attributable to such property shall be extended 
        until the due date of the return for the taxable year in which 
        such property is disposed of (or, in the case of property 
        disposed of in a transaction in which gain is not recognized in 
        whole or in part, until such other date as the Secretary may 
        prescribe).
          ``(2) Determination of tax with respect to property.--For 
        purposes of paragraph (1), the additional tax attributable to 
        any property is an amount which bears the same ratio to the 
        additional tax imposed by this chapter for the taxable year 
        solely by reason of subsection (a) as the gain taken into 
        account under subsection (a) with respect to such property 
        bears to the total gain taken into account under subsection (a) 
        with respect to all property to which subsection (a) applies.
          ``(3) Termination of extension.--The due date for payment of 
        tax may not be extended under this subsection later than the 
        due date for the return of tax imposed by this chapter for the 
        taxable year which includes the date of death of the expatriate 
        (or, if earlier, the time that the security provided with 
        respect to the property fails to meet the requirements of 
        paragraph (4), unless the taxpayer corrects such failure within 
        the time specified by the Secretary).
          ``(4) Security.--
                  ``(A) In general.--No election may be made under 
                paragraph (1) with respect to any property unless 
                adequate security is provided with respect to such 
                property.
                  ``(B) Adequate security.--For purposes of 
                subparagraph (A), security with respect to any property 
                shall be treated as adequate security if--
                          ``(i) it is a bond which is furnished to, and 
                        accepted by, the Secretary, which is 
                        conditioned on the payment of tax (and interest 
                        thereon), and which meets the requirements of 
                        section 6325, or
                          ``(ii) it is another form of security for 
                        such payment (including letters of credit) that 
                        meets such requirements as the Secretary may 
                        prescribe.
          ``(5) Waiver of certain rights.--No election may be made 
        under paragraph (1) unless the taxpayer makes an irrevocable 
        waiver of any right under any treaty of the United States which 
        would preclude assessment or collection of any tax imposed by 
        reason of this section.
          ``(6) Elections.--An election under paragraph (1) shall only 
        apply to property described in the election and, once made, is 
        irrevocable.
          ``(7) Interest.--For purposes of section 6601, the last date 
        for the payment of tax shall be determined without regard to 
        the election under this subsection.
  ``(c) Exception for Certain Property.--Subsection (a) shall not apply 
to--
          ``(1) any deferred compensation item (as defined in 
        subsection (d)(4)),
          ``(2) any specified tax deferred account (as defined in 
        subsection (e)(2)), and
          ``(3) any interest in a nongrantor trust (as defined in 
        subsection (f)(3)).
  ``(d) Treatment of Deferred Compensation Items.--
          ``(1) Withholding on eligible deferred compensation items.--
                  ``(A) In general.--In the case of any eligible 
                deferred compensation item, the payor shall deduct and 
                withhold from any taxable payment to a covered 
                expatriate with respect to such item a tax equal to 30 
                percent thereof.
                  ``(B) Taxable payment.--For purposes of subparagraph 
                (A), the term `taxable payment' means with respect to a 
                covered expatriate any payment to the extent it would 
                be includible in the gross income of the covered 
                expatriate if such expatriate continued to be subject 
                to tax as a citizen or resident of the United States. A 
                deferred compensation item shall be taken into account 
                as a payment under the preceding sentence when such 
                item would be so includible.
          ``(2) Other deferred compensation items.--In the case of any 
        deferred compensation item which is not an eligible deferred 
        compensation item--
                  ``(A)(i) with respect to any deferred compensation 
                item to which clause (ii) does not apply, an amount 
                equal to the present value of the covered expatriate's 
                accrued benefit shall be treated as having been 
                received by such individual on the day before the 
                expatriation date as a distribution under the plan, and
                  ``(ii) with respect to any deferred compensation item 
                referred to in paragraph (4)(D), the rights of the 
                covered expatriate to such item shall be treated as 
                becoming transferable and not subject to a substantial 
                risk of forfeiture on the day before the expatriation 
                date,
                  ``(B) no early distribution tax shall apply by reason 
                of such treatment, and
                  ``(C) appropriate adjustments shall be made to 
                subsequent distributions from the plan to reflect such 
                treatment.
          ``(3) Eligible deferred compensation items.--For purposes of 
        this subsection, the term `eligible deferred compensation item' 
        means any deferred compensation item with respect to which--
                  ``(A) the payor of such item is--
                          ``(i) a United States person, or
                          ``(ii) a person who is not a United States 
                        person but who elects to be treated as a United 
                        States person for purposes of paragraph (1) and 
                        meets such requirements as the Secretary may 
                        provide to ensure that the payor will meet the 
                        requirements of paragraph (1), and
                  ``(B) the covered expatriate--
                          ``(i) notifies the payor of his status as a 
                        covered expatriate, and
                          ``(ii) makes an irrevocable waiver of any 
                        right to claim any reduction under any treaty 
                        with the United States in withholding on such 
                        item.
          ``(4) Deferred compensation item.--For purposes of this 
        subsection, the term `deferred compensation item' means--
                  ``(A) any interest in a plan or arrangement described 
                in section 219(g)(5),
                  ``(B) any interest in a foreign pension plan or 
                similar retirement arrangement or program,
                  ``(C) any item of deferred compensation, and
                  ``(D) any property, or right to property, which the 
                individual is entitled to receive in connection with 
                the performance of services to the extent not 
                previously taken into account under section 83 or in 
                accordance with section 83.
          ``(5) Exception.--Paragraphs (1) and (2) shall not apply to 
        any deferred compensation item which is attributable to 
        services performed outside the United States while the covered 
        expatriate was not a citizen or resident of the United States.
          ``(6) Special rules.--
                  ``(A) Application of withholding rules.--Rules 
                similar to the rules of subchapter B of chapter 3 shall 
                apply for purposes of this subsection.
                  ``(B) Application of tax.--Any item subject to the 
                withholding tax imposed under paragraph (1) shall be 
                subject to tax under section 871.
                  ``(C) Coordination with other withholding 
                requirements.--Any item subject to withholding under 
                paragraph (1) shall not be subject to withholding under 
                section 1441 or chapter 24.
  ``(e) Treatment of Specified Tax Deferred Accounts.--
          ``(1) Account treated as distributed.--In the case of any 
        interest in a specified tax deferred account held by a covered 
        expatriate on the day before the expatriation date--
                  ``(A) the covered expatriate shall be treated as 
                receiving a distribution of his entire interest in such 
                account on the day before the expatriation date,
                  ``(B) no early distribution tax shall apply by reason 
                of such treatment, and
                  ``(C) appropriate adjustments shall be made to 
                subsequent distributions from the account to reflect 
                such treatment.
          ``(2) Specified tax deferred account.--For purposes of 
        paragraph (1), the term `specified tax deferred account' means 
        an individual retirement plan (as defined in section 
        7701(a)(37)) other than any arrangement described in subsection 
        (k) or (p) of section 408, a qualified tuition program (as 
        defined in section 529), a Coverdell education savings account 
        (as defined in section 530), a health savings account (as 
        defined in section 223), and an Archer MSA (as defined in 
        section 220).
  ``(f) Special Rules for Nongrantor Trusts.--
          ``(1) In general.--In the case of a distribution (directly or 
        indirectly) of any property from a nongrantor trust to a 
        covered expatriate--
                  ``(A) the trustee shall deduct and withhold from such 
                distribution an amount equal to 30 percent of the 
                taxable portion of the distribution, and
                  ``(B) if the fair market value of such property 
                exceeds its adjusted basis in the hands of the trust, 
                gain shall be recognized to the trust as if such 
                property were sold to the expatriate at its fair market 
                value.
          ``(2) Taxable portion.--For purposes of this subsection, the 
        term `taxable portion' means, with respect to any distribution, 
        that portion of the distribution which would be includible in 
        the gross income of the covered expatriate if such expatriate 
        continued to be subject to tax as a citizen or resident of the 
        United States.
          ``(3) Nongrantor trust.--For purposes of this subsection, the 
        term `nongrantor trust' means the portion of any trust that the 
        individual is not considered the owner of under subpart E of 
        part I of subchapter J. The determination under the preceding 
        sentence shall be made immediately before the expatriation 
        date.
          ``(4) Special rules relating to withholding.--For purposes of 
        this subsection--
                  ``(A) rules similar to the rules of subsection (d)(6) 
                shall apply, and
                  ``(B) the covered expatriate shall be treated as 
                having waived any right to claim any reduction under 
                any treaty with the United States in withholding on any 
                distribution to which paragraph (1)(A) applies.
          ``(5) Application.--This subsection shall apply to a 
        nongrantor trust only if the covered expatriate was a 
        beneficiary of the trust on the day before the expatriation 
        date.
  ``(g) Definitions and Special Rules Relating to Expatriation.--For 
purposes of this section--
          ``(1) Covered expatriate.--
                  ``(A) In general.--The term `covered expatriate' 
                means an expatriate who meets the requirements of 
                subparagraph (A), (B), or (C) of section 877(a)(2).
                  ``(B) Exceptions.--An individual shall not be treated 
                as meeting the requirements of subparagraph (A) or (B) 
                of section 877(a)(2) if--
                          ``(i) the individual--
                                  ``(I) became at birth a citizen of 
                                the United States and a citizen of 
                                another country and, as of the 
                                expatriation date, continues to be a 
                                citizen of, and is taxed as a resident 
                                of, such other country, and
                                  ``(II) has been a resident of the 
                                United States (as defined in section 
                                7701(b)(1)(A)(ii)) for not more than 10 
                                taxable years during the 15-taxable 
                                year period ending with the taxable 
                                year during which the expatriation date 
                                occurs, or
                          ``(ii)(I) the individual's relinquishment of 
                        United States citizenship occurs before such 
                        individual attains age 18\1/2\, and
                          ``(II) the individual has been a resident of 
                        the United States (as so defined) for not more 
                        than 10 taxable years before the date of 
                        relinquishment.
                  ``(C) Covered expatriates also subject to tax as 
                citizens or residents.--In the case of any covered 
                expatriate who is subject to tax as a citizen or 
                resident of the United States for any period beginning 
                after the expatriation date, such individual shall not 
                be treated as a covered expatriate during such period 
                for purposes of subsections (d)(1) and (f) and section 
                2801.
          ``(2) Expatriate.--The term `expatriate' means--
                  ``(A) any United States citizen who relinquishes his 
                citizenship, and
                  ``(B) any long-term resident of the United States who 
                ceases to be a lawful permanent resident of the United 
                States (within the meaning of section 7701(b)(6)).
          ``(3) Expatriation date.--The term `expatriation date' 
        means--
                  ``(A) the date an individual relinquishes United 
                States citizenship, or
                  ``(B) in the case of a long-term resident of the 
                United States, the date on which the individual ceases 
                to be a lawful permanent resident of the United States 
                (within the meaning of section 7701(b)(6)).
          ``(4) Relinquishment of citizenship.--A citizen shall be 
        treated as relinquishing his United States citizenship on the 
        earliest of--
                  ``(A) the date the individual renounces his United 
                States nationality before a diplomatic or consular 
                officer of the United States pursuant to paragraph (5) 
                of section 349(a) of the Immigration and Nationality 
                Act (8 U.S.C. 1481(a)(5)),
                  ``(B) the date the individual furnishes to the United 
                States Department of State a signed statement of 
                voluntary relinquishment of United States nationality 
                confirming the performance of an act of expatriation 
                specified in paragraph (1), (2), (3), or (4) of section 
                349(a) of the Immigration and Nationality Act (8 U.S.C. 
                1481(a)(1)-(4)),
                  ``(C) the date the United States Department of State 
                issues to the individual a certificate of loss of 
                nationality, or
                  ``(D) the date a court of the United States cancels a 
                naturalized citizen's certificate of naturalization.
        Subparagraph (A) or (B) shall not apply to any individual 
        unless the renunciation or voluntary relinquishment is 
        subsequently approved by the issuance to the individual of a 
        certificate of loss of nationality by the United States 
        Department of State.
          ``(5) Long-term resident.--The term `long-term resident' has 
        the meaning given to such term by section 877(e)(2).
          ``(6) Early distribution tax.--The term `early distribution 
        tax' means any increase in tax imposed under section 72(t), 
        220(e)(4), 223(f)(4), 409A(a)(1)(B), 529(c)(6), or 530(d)(4).
  ``(h) Other Rules.--
          ``(1) Termination of deferrals, etc.--In the case of any 
        covered expatriate, notwithstanding any other provision of this 
        title--
                  ``(A) any time period for acquiring property which 
                would result in the reduction in the amount of gain 
                recognized with respect to property disposed of by the 
                taxpayer shall terminate on the day before the 
                expatriation date, and
                  ``(B) any extension of time for payment of tax shall 
                cease to apply on the day before the expatriation date 
                and the unpaid portion of such tax shall be due and 
                payable at the time and in the manner prescribed by the 
                Secretary.
          ``(2) Step-up in basis.--Solely for purposes of determining 
        any tax imposed by reason of subsection (a), property which was 
        held by an individual on the date the individual first became a 
        resident of the United States (within the meaning of section 
        7701(b)) shall be treated as having a basis on such date of not 
        less than the fair market value of such property on such date. 
        The preceding sentence shall not apply if the individual elects 
        not to have such sentence apply. Such an election, once made, 
        shall be irrevocable.
          ``(3) Coordination with section 684.--If the expatriation of 
        any individual would result in the recognition of gain under 
        section 684, this section shall be applied after the 
        application of section 684.
  ``(i) Regulations.--The Secretary shall prescribe such regulations as 
may be necessary or appropriate to carry out the purposes of this 
section.''.
  (b) Tax on Gifts and Bequests Received by United States Citizens and 
Residents From Expatriates.--
          (1) In general.--Subtitle B (relating to estate and gift 
        taxes) is amended by inserting after chapter 14 the following 
        new chapter:

           ``CHAPTER 15--GIFTS AND BEQUESTS FROM EXPATRIATES

``Sec. 2801. Imposition of tax.

``SEC. 2801. IMPOSITION OF TAX.

  ``(a) In General.--If, during any calendar year, any United States 
citizen or resident receives any covered gift or bequest, there is 
hereby imposed a tax equal to the product of--
          ``(1) the highest rate of tax specified in the table 
        contained in section 2001(c) as in effect on the date of such 
        receipt (or, if greater, the highest rate of tax specified in 
        the table applicable under section 2502(a) as in effect on the 
        date), and
          ``(2) the value of such covered gift or bequest.
  ``(b) Tax To Be Paid by Recipient.--The tax imposed by subsection (a) 
on any covered gift or bequest shall be paid by the person receiving 
such gift or bequest.
  ``(c) Exception for Certain Gifts.--Subsection (a) shall apply only 
to the extent that the value of covered gifts and bequests received by 
any person during the calendar year exceeds $10,000.
  ``(d) Tax Reduced by Foreign Gift or Estate Tax.--The tax imposed by 
subsection (a) on any covered gift or bequest shall be reduced by the 
amount of any gift or estate tax paid to a foreign country with respect 
to such covered gift or bequest.
  ``(e) Covered Gift or Bequest.--
          ``(1) In general.--For purposes of this chapter, the term 
        `covered gift or bequest' means--
                  ``(A) any property acquired by gift directly or 
                indirectly from an individual who, at the time of such 
                acquisition, is a covered expatriate, and
                  ``(B) any property acquired directly or indirectly by 
                reason of the death of an individual who, immediately 
                before such death, was a covered expatriate.
          ``(2) Exceptions for transfers otherwise subject to estate or 
        gift tax.--Such term shall not include--
                  ``(A) any property shown on a timely filed return of 
                tax imposed by chapter 12 which is a taxable gift by 
                the covered expatriate, and
                  ``(B) any property included in the gross estate of 
                the covered expatriate for purposes of chapter 11 and 
                shown on a timely filed return of tax imposed by 
                chapter 11 of the estate of the covered expatriate.
          ``(3) Transfers in trust.--
                  ``(A) Domestic trusts.--In the case of a covered gift 
                or bequest made to a domestic trust--
                          ``(i) subsection (a) shall apply in the same 
                        manner as if such trust were a United States 
                        citizen, and
                          ``(ii) the tax imposed by subsection (a) on 
                        such gift or bequest shall be paid by such 
                        trust.
                  ``(B) Foreign trusts.--
                          ``(i) In general.--In the case of a covered 
                        gift or bequest made to a foreign trust, 
                        subsection (a) shall apply to any distribution 
                        attributable to such gift or bequest from such 
                        trust (whether from income or corpus) to a 
                        United States citizen or resident in the same 
                        manner as if such distribution were a covered 
                        gift or bequest.
                          ``(ii) Deduction for tax paid by recipient.--
                        There shall be allowed as a deduction under 
                        section 164 the amount of tax imposed by this 
                        section which is paid or accrued by a United 
                        States citizen or resident by reason of a 
                        distribution from a foreign trust, but only to 
                        the extent such tax is imposed on the portion 
                        of such distribution which is included in the 
                        gross income of such citizen or resident.
                          ``(iii) Election to be treated as domestic 
                        trust.--Solely for purposes of this section, a 
                        foreign trust may elect to be treated as a 
                        domestic trust. Such an election may be revoked 
                        with the consent of the Secretary.
  ``(f) Covered Expatriate.--For purposes of this section, the term 
`covered expatriate' has the meaning given to such term by section 
877A(g)(1).''.
          (2) Clerical amendment.--The table of chapters for subtitle B 
        is amended by inserting after the item relating to chapter 14 
        the following new item:

         ``Chapter 15. Gifts and Bequests From Expatriates.''.

  (c) Definition of Termination of United States Citizenship.--
          (1) In general.--Section 7701(a) is amended by adding at the 
        end the following new paragraph:
          ``(50) Termination of united states citizenship.--
                  ``(A) In general.--An individual shall not cease to 
                be treated as a United States citizen before the date 
                on which the individual's citizenship is treated as 
                relinquished under section 877A(g)(4).
                  ``(B) Dual citizens.--Under regulations prescribed by 
                the Secretary, subparagraph (A) shall not apply to an 
                individual who became at birth a citizen of the United 
                States and a citizen of another country.''.
          (2) Conforming amendments.--
                  (A) Paragraph (1) of section 877(e) is amended to 
                read as follows:
          ``(1) In general.--Any long-term resident of the United 
        States who ceases to be a lawful permanent resident of the 
        United States (within the meaning of section 7701(b)(6)) shall 
        be treated for purposes of this section and sections 2107, 
        2501, and 6039G in the same manner as if such resident were a 
        citizen of the United States who lost United States citizenship 
        on the date of such cessation or commencement.''.
                  (B) Paragraph (6) of section 7701(b) is amended by 
                adding at the end the following flush sentence:
        ``An individual shall cease to be treated as a lawful permanent 
        resident of the United States if such individual commences to 
        be treated as a resident of a foreign country under the 
        provisions of a tax treaty between the United States and the 
        foreign country, does not waive the benefits of such treaty 
        applicable to residents of the foreign country, and notifies 
        the Secretary of the commencement of such treatment.''.
                  (C) Section 7701 is amended by striking subsection 
                (n) and by redesignating subsections (o) and (p) as 
                subsections (n) and (o), respectively.
  (d) Information Returns.--Section 6039G is amended--
          (1) by inserting ``or 877A'' after ``section 877(b)'' in 
        subsection (a), and
          (2) by inserting ``or 877A'' after ``section 877(a)'' in 
        subsection (d).
  (e) Clerical Amendment.--The table of sections for subpart A of part 
II of subchapter N of chapter 1 is amended by inserting after the item 
relating to section 877 the following new item:

``Sec. 877A. Tax responsibilities of expatriation.''.

  (f) Effective Date.--
          (1) In general.--Except as provided in this subsection, the 
        amendments made by this section shall apply to expatriates (as 
        defined in section 877A(g) of the Internal Revenue Code of 
        1986, as added by this section) whose expatriation date (as so 
        defined) is on or after the date of the enactment of this Act.
          (2) Gifts and bequests.--Chapter 15 of the Internal Revenue 
        Code of 1986 (as added by subsection (b)) shall apply to 
        covered gifts and bequests (as defined in section 2801 of such 
        Code, as so added) received on or after the date of the 
        enactment of this Act, regardless of when the transferor 
        expatriated.

SEC. 505. REPEAL OF SUSPENSION OF CERTAIN PENALTIES AND INTEREST.

  (a) In General.--Section 6404 is amended by striking subsection (g) 
and by redesignating subsection (h) as subsection (g).
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
to notices provided by the Secretary of the Treasury, or his delegate, 
after the date which is 6 months after the date of the enactment of the 
Small Business and Work Opportunity Tax Act of 2007.

SEC. 506. UNUSED MERCHANDISE DRAWBACK.

  (a) In General.--Section 313(j)(2) of the Tariff Act of 1930 (19 
U.S.C. 1313(j)(2)) is amended by adding at the end the following: ``For 
purposes of subparagraph (A) of this paragraph, wine of the same color 
having a price variation not to exceed 50 percent between the imported 
wine and the exported wine shall be deemed to be commercially 
interchangeable.''.
  (b) Effective Date.--The amendment made by subsection (a) shall apply 
with respect to claims filed for drawback under section 313(j)(2) of 
the Tariff Act of 1930 on or after the date of the enactment of this 
Act.

                      TITLE VI--REVENUE PROVISIONS

    Subtitle A--Nonqualified Deferred Compensation From Certain Tax 
                          Indifferent Parties

SEC. 601. NONQUALIFIED DEFERRED COMPENSATION FROM CERTAIN TAX 
                    INDIFFERENT PARTIES.

  (a) In General.--Subpart B of part II of subchapter E of chapter 1 
(relating to taxable year for which items of gross income included) is 
amended by inserting after section 457 the following new section:

``SEC. 457A. NONQUALIFIED DEFERRED COMPENSATION FROM CERTAIN TAX 
                    INDIFFERENT PARTIES.

  ``(a) In General.--Any compensation which is deferred under a 
nonqualified deferred compensation plan of a nonqualified entity shall 
be taken into account for purposes of this chapter when there is no 
substantial risk of forfeiture of the rights to such compensation.
  ``(b) Nonqualified Entity.--For purposes of this section, the term 
`nonqualified entity' means--
          ``(1) any foreign corporation unless substantially all of 
        such income is--
                  ``(A) effectively connected with the conduct of a 
                trade or business in the United States, or
                  ``(B) subject to a comprehensive foreign income tax, 
                and
          ``(2) any partnership unless substantially all of such income 
        is allocated to persons other than--
                  ``(A) foreign persons with respect to whom such 
                income is not subject to a comprehensive foreign income 
                tax, and
                  ``(B) organizations which are exempt from tax under 
                this title.
  ``(c) Ascertainability of Amounts of Compensation.--
          ``(1) In general.--If the amount of any compensation is not 
        ascertainable at the time that such compensation is otherwise 
        to be taken into account under subsection (a)--
                  ``(A) such amount shall be so taken into account when 
                ascertainable, and
                  ``(B) the tax imposed under this chapter for the 
                taxable year in which such compensation is taken into 
                account under subparagraph (A) shall be increased by 
                the sum of--
                          ``(i) the amount of interest determined under 
                        paragraph (2), and
                          ``(ii) an amount equal to 20 percent of the 
                        amount of such compensation.
          ``(2) Interest.--For purposes of paragraph (1)(B)(i), the 
        interest determined under this paragraph for any taxable year 
        is the amount of interest at the underpayment rate under 
        section 6621 plus 1 percentage point on the underpayments that 
        would have occurred had the deferred compensation been 
        includible in gross income for the taxable year in which first 
        deferred or, if later, the first taxable year in which such 
        deferred compensation is not subject to a substantial risk of 
        forfeiture.
  ``(d) Other Definitions and Special Rules.--For purposes of this 
section--
          ``(1) Substantial risk of forfeiture.--The rights of a person 
        to compensation shall be treated as subject to a substantial 
        risk of forfeiture only if such person's rights to such 
        compensation are conditioned upon the future performance of 
        substantial services by any individual.
          ``(2) Comprehensive foreign income tax.--The term 
        `comprehensive foreign income tax' means, with respect to any 
        foreign person, the income tax of a foreign country if--
                  ``(A) such person is eligible for the benefits of a 
                comprehensive income tax treaty between such foreign 
                country and the United States, or
                  ``(B) such person demonstrates to the satisfaction of 
                the Secretary that such foreign country has a 
                comprehensive income tax.
        Such term shall not include any tax unless such tax includes 
        rules for the deductibility of deferred compensation which are 
        similar to the rules of this title.
          ``(3) Nonqualified deferred compensation plan.--The term 
        `nonqualified deferred compensation plan' has the meaning given 
        such term under section 409A(d), except that such term shall 
        include any plan that provides a right to compensation based on 
        the appreciation in value of a specified number of equity units 
        of the service recipient.
          ``(4) Application of rules.--Rules similar to the rules of 
        paragraphs (5) and (6) of section 409A(d) shall apply.
  ``(e) Regulations.--The Secretary shall prescribe such regulations as 
may be necessary or appropriate to carry out the purposes of this 
section, including regulations disregarding a substantial risk of 
forfeiture in cases where necessary to carry out the purposes of this 
section.''.
  (b) Conforming Amendment.--Section 26(b)(2) is amended by striking 
``and'' at the end of subparagraph (S), by striking the period at the 
end of subparagraph (T) and inserting ``, and'', and by adding at the 
end the following new subparagraph:
                  ``(U) section 457A(c)(1)(B) (relating to 
                ascertainability of amounts of compensation).''.
  (c) Clerical Amendment.--The table of sections of subpart B of part 
II of subchapter E of chapter 1 is amended by inserting after the item 
relating to section 457 the following new item:

``Sec. 457A. Nonqualified deferred compensation from certain tax 
indifferent parties.''.

  (d) Effective Date.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        amounts deferred which are attributable to services performed 
        after December 31, 2007.
          (2) Application to existing deferrals.--In the case of any 
        amount deferred to which the amendments made by this section do 
        not apply solely by reason of the fact that the amount is 
        attributable to services performed before January 1, 2008, to 
        the extent such amount is not includible in gross income in a 
        taxable year beginning before 2017, such amounts shall be 
        includible in gross income in the later of--
                  (A) the last taxable year beginning before 2017, or
                  (B) the taxable year in which there is no substantial 
                risk of forfeiture of the rights to such compensation 
                (determined in the same manner as determined for 
                purposes of section 457A of the Internal Revenue Code 
                of 1986, as added by this section).
          (3) Accelerated payments.--No later than 60 days after the 
        date of the enactment of this Act, the Secretary shall issue 
        guidance providing a limited period of time during which a 
        nonqualified deferred compensation arrangement attributable to 
        services performed on or before December 31, 2007, may, without 
        violating the requirements of section 409A(a) of the Internal 
        Revenue Code of 1986, be amended to conform the date of 
        distribution to the date the amounts are required to be 
        included in income.

   Subtitle B--Provisions Related to Certain Investment Partnerships

SEC. 611. INCOME OF PARTNERS FOR PERFORMING INVESTMENT MANAGEMENT 
                    SERVICES TREATED AS ORDINARY INCOME RECEIVED FOR 
                    PERFORMANCE OF SERVICES.

  (a) In General.--Part I of subchapter K of chapter 1 is amended by 
adding at the end the following new section:

``SEC. 710. SPECIAL RULES FOR PARTNERS PROVIDING INVESTMENT MANAGEMENT 
                    SERVICES TO PARTNERSHIP.

  ``(a) Treatment of Distributive Share of Partnership Items.--For 
purposes of this title, in the case of an investment services 
partnership interest--
          ``(1) In general.--Notwithstanding section 702(b)--
                  ``(A) any net income with respect to such interest 
                for any partnership taxable year shall be treated as 
                ordinary income for the performance of services, and
                  ``(B) any net loss with respect to such interest for 
                such year, to the extent not disallowed under paragraph 
                (2) for such year, shall be treated as an ordinary 
                loss.
          ``(2) Treatment of losses.--
                  ``(A) Limitation.--Any net loss with respect to such 
                interest shall be allowed for any partnership taxable 
                year only to the extent that such loss does not exceed 
                the excess (if any) of--
                          ``(i) the aggregate net income with respect 
                        to such interest for all prior partnership 
                        taxable years, over
                          ``(ii) the aggregate net loss with respect to 
                        such interest not disallowed under this 
                        subparagraph for all prior partnership taxable 
                        years.
                  ``(B) Carryforward.--Any net loss for any partnership 
                taxable year which is not allowed by reason of 
                subparagraph (A) shall be treated as an item of loss 
                with respect to such partnership interest for the 
                succeeding partnership taxable year.
                  ``(C) Basis adjustment.--No adjustment to the basis 
                of a partnership interest shall be made on account of 
                any net loss which is not allowed by reason of 
                subparagraph (A).
                  ``(D) Exception for basis attributable to purchase of 
                a partnership interest.--In the case of an investment 
                services partnership interest acquired by purchase, 
                paragraph (1)(B) shall not apply to so much of any net 
                loss with respect to such interest for any taxable year 
                as does not exceed the excess of--
                          ``(i) the basis of such interest immediately 
                        after such purchase, over
                          ``(ii) the aggregate net loss with respect to 
                        such interest to which paragraph (1)(B) did not 
                        apply by reason of this subparagraph for all 
                        prior taxable years.
                Any net loss to which paragraph (1)(B) does not apply 
                by reason of this subparagraph shall not be taken into 
                account under subparagraph (A).
                  ``(E) Prior partnership years.--Any reference in this 
                paragraph to prior partnership taxable years shall only 
                include prior partnership taxable years to which this 
                section applies.
          ``(3) Net income and loss.--For purposes of this section--
                  ``(A) Net income.--The term `net income' means, with 
                respect to any investment services partnership 
                interest, for any partnership taxable year, the excess 
                (if any) of--
                          ``(i) all items of income and gain taken into 
                        account by the holder of such interest under 
                        section 702 with respect to such interest for 
                        such year, over
                          ``(ii) all items of deduction and loss so 
                        taken into account.
                  ``(B) Net loss.--The term `net loss'' means with 
                respect to such interest for such year, the excess (if 
                any) of the amount described in subparagraph (A)(ii) 
                over the amount described in subparagraph (A)(i).
  ``(b) Dispositions of Partnership Interests.--
          ``(1) Gain.--Any gain on the disposition of an investment 
        services partnership interest shall be treated as ordinary 
        income for the performance of services.
          ``(2) Loss.--Any loss on the disposition of an investment 
        services partnership interest shall be treated as an ordinary 
        loss to the extent of the excess (if any) of--
                  ``(A) the aggregate net income with respect to such 
                interest for all partnership taxable years, over
                  ``(B) the aggregate net loss with respect to such 
                interest allowed under subsection (a)(2) for all 
                partnership taxable years.
          ``(3) Disposition of portion of interest.--In the case of any 
        disposition of an investment services partnership interest, the 
        amount of net loss which otherwise would have (but for 
        subsection (a)(2)(C)) applied to reduce the basis of such 
        interest shall be disregarded for purposes of this section for 
        all succeeding partnership taxable years.
          ``(4) Distributions of partnership property.--In the case of 
        any distribution of appreciated property by a partnership with 
        respect to any investment services partnership interest, gain 
        shall be recognized by the partnership in the same manner as if 
        the partnership sold such property at fair market value at the 
        time of the distribution. For purposes of this paragraph, the 
        term `appreciated property' means any property with respect to 
        which gain would be determined if sold as described in the 
        preceding sentence.
          ``(5) Application of section 751.--In applying section 
        751(a), an investment services partnership interest shall be 
        treated as an inventory item.
  ``(c) Investment Services Partnership Interest.--For purposes of this 
section--
          ``(1) In general.--The term `investment services partnership 
        interest' means any interest in a partnership which is held by 
        any person if such person provides (directly or indirectly) a 
        substantial quantity of any of the following services with 
        respect to the assets of the partnership in the conduct of the 
        trade or business of providing such services:
                  ``(A) Advising as to the advisability of investing 
                in, purchasing, or selling any specified asset.
                  ``(B) Managing, acquiring, or disposing of any 
                specified asset.
                  ``(C) Arranging financing with respect to acquiring 
                specified assets.
                  ``(D) Any activity in support of any service 
                described in subparagraphs (A) through (C).
        For purposes of this paragraph, the term `specified asset' 
        means securities (as defined in section 475(c)(2) without 
        regard to the last sentence thereof), real estate, commodities 
        (as defined in section 475(e)(2))), or options or derivative 
        contracts with respect to securities (as so defined), real 
        estate, or commodities (as so defined).
          ``(2) Exception for certain capital interests.--
                  ``(A) In general.--If--
                          ``(i) a portion of an investment services 
                        partnership interest is acquired on account of 
                        a contribution of invested capital, and
                          ``(ii) the partnership makes a reasonable 
                        allocation of partnership items between the 
                        portion of the distributive share that is with 
                        respect to invested capital and the portion of 
                        such distributive share that is not with 
                        respect to invested capital,
                then subsection (a) shall not apply to the portion of 
                the distributive share that is with respect to invested 
                capital. An allocation will not be treated as 
                reasonable for purposes of this subparagraph if such 
                allocation would result in the partnership allocating a 
                greater portion of income to invested capital than any 
                other partner not providing services would have been 
                allocated with respect to the same amount of invested 
                capital.
                  ``(B) Special rule for dispositions.--In any case to 
                which subparagraph (A) applies, subsection (b) shall 
                not apply to any gain or loss allocable to invested 
                capital. The portion of any gain or loss attributable 
                to invested capital is the proportion of such gain or 
                loss which is based on the distributive share of gain 
                or loss that would have been allocable to invested 
                capital under subparagraph (A) if the partnership sold 
                all of its assets immediately before the disposition.
                  ``(C) Invested capital.--For purposes of this 
                paragraph, the term `invested capital' means, the fair 
                market value at the time of contribution of any money 
                or other property contributed to the partnership.
                  ``(D) Treatment of certain loans.--
                          ``(i) Proceeds of partnership loans not 
                        treated as invested capital of service 
                        providing partners.--For purposes of this 
                        paragraph, an investment services partnership 
                        interest shall not be treated as acquired on 
                        account of a contribution of invested capital 
                        to the extent that such capital is attributable 
                        to the proceeds of any loan or other advance 
                        made or guaranteed, directly or indirectly, by 
                        any partner or the partnership.
                          ``(ii) Loans from nonservice providing 
                        partners to the partnership treated as invested 
                        capital.--For purposes of this paragraph, any 
                        loan or other advance to the partnership made 
                        or guaranteed, directly or indirectly, by a 
                        partner not providing services to the 
                        partnership shall be treated as invested 
                        capital of such partner and amounts of income 
                        and loss treated as allocable to invested 
                        capital shall be adjusted accordingly.
  ``(d) Other Income and Gain in Connection With Investment Management 
Services.--
          ``(1) In general.--If--
                  ``(A) a person performs (directly or indirectly) 
                investment management services for any entity,
                  ``(B) such person holds a disqualified interest with 
                respect to such entity, and
                  ``(C) the value of such interest (or payments 
                thereunder) is substantially related to the amount of 
                income or gain (whether or not realized) from the 
                assets with respect to which the investment management 
                services are performed,
        any income or gain with respect to such interest shall be 
        treated as ordinary income for the performance of services. 
        Rules similar to the rules of subsection (c)(2) shall apply 
        where such interest was acquired on account of invested capital 
        in such entity.
          ``(2) Definitions.--For purposes of this subsection--
                  ``(A) Disqualified interest.--The term `disqualified 
                interest' means, with respect to any entity--
                          ``(i) any interest in such entity other than 
                        indebtedness,
                          ``(ii) convertible or contingent debt of such 
                        entity,
                          ``(iii) any option or other right to acquire 
                        property described in clause (i) or (ii), and
                          ``(iv) any derivative instrument entered into 
                        (directly or indirectly) with such entity or 
                        any investor in such entity.
                Such term shall not include a partnership interest and 
                shall not include stock in a taxable corporation.
                  ``(B) Taxable corporation.--The term `taxable 
                corporation' means--
                          ``(i) a domestic C corporation, or
                          ``(ii) a foreign corporation subject to a 
                        comprehensive foreign income tax (as defined in 
                        section 457A(d)(4)).
                  ``(C) Investment management services.--The term 
                `investment management services' means a substantial 
                quantity of any of the services described in subsection 
                (c)(1) which are provided in the conduct of the trade 
                or business of providing such services.
  ``(e) Regulations.--The Secretary shall prescribe such regulations as 
are necessary or appropriate to carry out the purposes of this section, 
including regulations to--
          ``(1) prevent the avoidance of the purposes of this section, 
        and
          ``(2) coordinate this section with the other provisions of 
        this subchapter.
  ``(f) Cross Reference.--For 40 percent no fault penalty on certain 
underpayments due to the avoidance of this section, see section 
6662.''.
  (b) Application to Real Estate Investment Trusts.--Subsection (c) of 
section 856 is amended by adding at the end the following new 
paragraph:
          ``(8) Exception from recharacterization of income from 
        investment services partnership interests.--
                  ``(A) In general.--Paragraphs (2), (3), and (4) shall 
                be applied without regard to section 710 (relating to 
                special rules for partners providing investment 
                management services to partnership).
                  ``(B) Special rule for partnerships owned by reits.--
                Section 7704 shall be applied without regard to section 
                710 in the case of a partnership which meets each of 
                the following requirements:
                          ``(i) Such partnership is treated as publicly 
                        traded under section 7704 solely by reason of 
                        interests in such partnership being convertible 
                        into interests in a real estate investment 
                        trust which is publicly traded.
                          ``(ii) 50 percent or more of the capital and 
                        profits interests of such partnership are 
                        owned, directly or indirectly, at all times 
                        during the taxable year by such real estate 
                        investment trust (determined with the 
                        application of section 267(c)).
                          ``(iii) Such partnership meets the 
                        requirements of paragraphs (2), (3), and (4) 
                        (applied without regard to section 710).''.
  (c) Imposition of Penalty on Underpayments.--
          (1) In general.--Subsection (b) of section 6662 is amended by 
        inserting after paragraph (5) the following new paragraph:
          ``(6) The application of subsection (d) of section 710 or the 
        regulations prescribed under section 710(e) to prevent the 
        avoidance of the purposes of section 710.''.
          (2) Amount of penalty.--
                  (A) In general.--Section 6662 is amended by adding at 
                the end the following new subsection:
  ``(i) Increase in Penalty in Case of Property Transferred for 
Investment Management Services.--In the case of any portion of an 
underpayment to which this section applies by reason of subsection 
(b)(6), subsection (a) shall be applied with respect to such portion by 
substituting `40 percent' for `20 percent'.''.
                  (B) Conforming amendments.--Subparagraph (B) of 
                section 6662A(e)(2) is amended--
                          (i) by striking ``section 6662(h)'' and 
                        inserting ``subsection (h) or (i) of section 
                        6662'', and
                          (ii) by striking ``gross valuation 
                        misstatement penalty'' in the heading and 
                        inserting ``certain increased underpayment 
                        penalties''.
          (3) Reasonable cause exception not applicable.--Subsection 
        (c) of section 6664 is amended--
                  (A) by redesignating paragraphs (2) and (3) as 
                paragraphs (3) and (4), respectively,
                  (B) by striking ``paragraph (2)'' in paragraph (4), 
                as so redesignated, and inserting ``paragraph (3)'', 
                and
                  (C) by inserting after paragraph (1) the following 
                new paragraph:
          ``(2) Exception.--Paragraph (1) shall not apply to any 
        portion of an underpayment to which this section applies by 
        reason of subsection (b)(6).''.
  (d) Conforming Amendments.--
          (1) Subsection (d) of section 731 is amended by inserting 
        ``section 710(b)(4) (relating to distributions of partnership 
        property),'' before ``section 736''.
          (2) Section 741 is amended by inserting ``or section 710 
        (relating to special rules for partners providing investment 
        management services to partnership)'' before the period at the 
        end.
          (3) Paragraph (13) of section 1402(a) is amended--
                  (A) by striking ``other than guaranteed'' and 
                inserting ``other than--
                  ``(A) guaranteed'',
                  (B) by striking the semi-colon at the end and 
                inserting ``, and'', and
                  (C) by adding at the end the following new 
                subparagraph:
                  ``(B) any income treated as ordinary income under 
                section 710 received by an individual who provides 
                investment management services (as defined in section 
                710(d)(2));''.
          (4) Paragraph (12) of section 211(a) of the Social Security 
        Act is amended--
                  (A) by striking ``other than guaranteed'' and 
                inserting ``other than--
                  ``(A) guaranteed'',
                  (B) by striking the semi-colon at the end and 
                inserting ``, and'', and
                  (C) by adding at the end the following new 
                subparagraph:
                  ``(B) any income treated as ordinary income under 
                section 710 of the Internal Revenue Code of 1986 
                received by an individual who provides investment 
                management services (as defined in section 710(d)(2) of 
                such Code);''.
          (5) The table of sections for part I of subchapter K of 
        chapter 1 is amended by adding at the end the following new 
        item:

``Sec. 710. Special rules for partners providing investment management 
services to partnership.''.

  (e) Effective Date.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years ending after November 1, 2007.
          (2) Partnership taxable years which include effective date.--
        In applying section 710(a) of the Internal Revenue Code of 1986 
        (as added by this section) in the case of any partnership 
        taxable year which includes November 1, 2007, the amount of the 
        net income referred to in such section shall be treated as 
        being the lesser of the net income for the entire partnership 
        taxable year or the net income determined by only taking into 
        account items attributable to the portion of the partnership 
        taxable year which is after such date.
          (3) Dispositions of partnership interests.--Section 710(b) of 
        the Internal Revenue Code of 1986 (as added by this section) 
        shall apply to dispositions and distributions after November 1, 
        2007.
          (4) Other income and gain in connection with investment 
        management services.--Section 710(d) of such Code (as added by 
        this section) shall take effect on November 1, 2007.
          (5) Publicly traded partnerships.--For purposes of applying 
        section 7704, the amendments made by this section shall apply 
        to taxable years beginning after December 31, 2009.

SEC. 612. INDEBTEDNESS INCURRED BY A PARTNERSHIP IN ACQUIRING 
                    SECURITIES AND COMMODITIES NOT TREATED AS 
                    ACQUISITION INDEBTEDNESS FOR ORGANIZATIONS WHICH 
                    ARE PARTNERS WITH LIMITED LIABILITY.

  (a) In General.--Subsection (c) of section 514 (relating to 
acquisition indebtedness) is amended by adding at the end the following 
new paragraph:
          ``(10) Securities and commodities acquired by partnerships in 
        which an organization is a partner with limited liability.--
                  ``(A) In general.--In the case of any organization 
                which is a partner with limited liability in a 
                partnership, the term `acquisition indebtedness' does 
                not, for purposes of this section, include indebtedness 
                incurred or continued by such partnership in purchasing 
                or carrying any qualified security or commodity.
                  ``(B) Qualified security or commodity.--For purposes 
                of this paragraph, the term `qualified security or 
                commodity' means any security (as defined in section 
                475(c)(2) without regard to the last sentence thereof), 
                any commodity (as defined in section 475(e)(2)), or any 
                option or derivative contract with respect to such a 
                security or commodity.
                  ``(C) Application to tiered partnerships and other 
                pass-thru entities.--Rules similar to the rules of 
                subparagraph (A) shall apply in the case of tiered 
                partnerships and other pass-thru entities.
                  ``(D) Regulations.--The Secretary may prescribe such 
                regulations as may be necessary or appropriate to carry 
                out the purposes of this paragraph, including 
                regulations to prevent the abuse of this paragraph.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.

SEC. 613. APPLICATION TO PARTNERSHIP INTERESTS AND TAX SHARING 
                    AGREEMENTS OF RULE TREATING CERTAIN GAIN ON SALES 
                    BETWEEN RELATED PERSONS AS ORDINARY INCOME.

  (a) Partnership Interests.--Subsection (a) of section 1239 is amended 
to read as follows:
  ``(a) Treatment of Gain as Ordinary Income.--In the case of a sale or 
exchange of property, directly or indirectly, between related persons, 
any gain recognized to the transferor shall be treated as ordinary 
income if--
          ``(1) such property is, in the hands of the transferee, of a 
        character which is subject to the allowance for depreciation 
        provided in section 167, or
          ``(2) such property is an interest in a partnership, but only 
        to the extent of gain attributable to unrealized appreciation 
        in property which is of a character subject to the allowance 
        for depreciation provided in section 167.''.
  (b) Tax Sharing Agreements.--Section 1239 (relating to gain from sale 
of depreciable property between certain related taxpayers) is amended 
by adding at the end the following new subsection:
  ``(f) Application to Tax Sharing Agreements.--
          ``(1) In general.--If there is a tax sharing agreement with 
        respect to any sale or exchange, the transferee and the 
        transferor shall be treated as related persons for purposes of 
        this section.
          ``(2) Tax sharing agreement.--For purposes of this 
        subsection, the term `tax sharing agreement' means any 
        agreement which provides for the payment to the transferor of 
        any amount which is determined by reference to any portion of 
        the tax benefit realized by the transferee with respect to the 
        depreciation (or amortization) of the property transferred.''.
  (c) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to sales and 
        exchanges after the date of the enactment of this Act.
          (2) Exception for binding contracts.--The amendment made by 
        subsection (b) shall not apply to any sale or exchange pursuant 
        to a written binding contract which includes a tax sharing 
        agreement and which is in effect on November 1, 2007, and not 
        modified thereafter in any material respect.

                      Subtitle C--Other Provisions

SEC. 621. DELAY IN APPLICATION OF WORLDWIDE ALLOCATION OF INTEREST.

  (a) In General.--Paragraphs (5)(D) and (6) of section 864(f) are each 
amended by striking ``December 31, 2008'' and inserting ``December 31, 
2017''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2008.

SEC. 622. BROKER REPORTING OF CUSTOMER'S BASIS IN SECURITIES 
                    TRANSACTIONS.

  (a) In General.--
          (1) Broker reporting for securities transactions.--Section 
        6045 (relating to returns of brokers) is amended by adding at 
        the end the following new subsection:
  ``(g) Additional Information Required in the Case of Securities 
Transactions.--
          ``(1) In general.--If a broker is otherwise required to make 
        a return under subsection (a) with respect to the gross 
        proceeds of the sale of a covered security, the broker shall 
        include in such return the information described in paragraph 
        (2).
          ``(2) Additional information required.--
                  ``(A) In general.--The information required under 
                paragraph (1) to be shown on a return with respect to a 
                covered security of a customer shall include the 
                customer's adjusted basis in such security and whether 
                any gain or loss with respect to such security is long-
                term or short-term (within the meaning of section 
                1222).
                  ``(B) Determination of adjusted basis.--For purposes 
                of subparagraph (A)--
                          ``(i) In general.--The customer's adjusted 
                        basis shall be determined--
                                  ``(I) in the case of any stock (other 
                                than any stock in an open-end fund), in 
                                accordance with the first-in first-out 
                                method unless the customer notifies the 
                                broker by means of making an adequate 
                                identification of the stock sold or 
                                transferred,
                                  ``(II) in the case of any stock in an 
                                open-end fund acquired before January 
                                1, 2011, in accordance with any 
                                acceptable method under section 1012 
                                with respect to the account in which 
                                such interest is held,
                                  ``(III) in the case of any stock in 
                                an open-end fund acquired after 
                                December 31, 2010, in accordance with 
                                the broker's default method unless the 
                                customer notifies the broker that he 
                                elects another acceptable method under 
                                section 1012 with respect to the 
                                account in which such interest is held, 
                                and
                                  ``(IV) in any other case, under the 
                                method for making such determination 
                                under section 1012.
                          ``(ii) Exception for wash sales.--Except as 
                        otherwise provided by the Secretary, the 
                        customer's adjusted basis shall be determined 
                        without regard to section 1091 (relating to 
                        loss from wash sales of stock or securities) 
                        unless the transactions occur in the same 
                        account with respect to identical securities.
          ``(3) Covered security.--For purposes of this subsection--
                  ``(A) In general.--The term `covered security' means 
                any specified security acquired on or after the 
                applicable date if such security--
                          ``(i) was acquired through a transaction in 
                        the account in which such security is held, or
                          ``(ii) was transferred to such account from 
                        an account in which such security was a covered 
                        security, but only if the broker received a 
                        statement under section 6045A with respect to 
                        the transfer.
                  ``(B) Specified security.--The term `specified 
                security' means--
                          ``(i) any share of stock in a corporation,
                          ``(ii) any note, bond, debenture, or other 
                        evidence of indebtedness,
                          ``(iii) any commodity, or contract or 
                        derivative with respect to such commodity, if 
                        the Secretary determines that adjusted basis 
                        reporting is appropriate for purposes of this 
                        subsection, and
                          ``(iv) any other financial instrument with 
                        respect to which the Secretary determines that 
                        adjusted basis reporting is appropriate for 
                        purposes of this subsection.
                  ``(C) Applicable date.--The term `applicable date' 
                means--
                          ``(i) January 1, 2009, in the case of any 
                        specified security which is stock in a 
                        corporation, and
                          ``(ii) January 1, 2011, or such later date 
                        determined by the Secretary in the case of any 
                        other specified security.
          ``(4) Open-end fund.--For purposes of this subsection, the 
        term `open-end fund' means a regulated investment company (as 
        defined in section 851) which is offering for sale or has 
        outstanding any redeemable security of which it is the issuer 
        and the shares of which are not traded on an established 
        securities exchange.''.
          (2) Broker information required with respect to options.--
        Section 6045, as amended by subsection (a), is amended by 
        adding at the end the following new subsection:
  ``(h) Application to Options on Covered Securities.--
          ``(1) Exercise of option.--For purposes of this section, in 
        the case of any exercise of an option on a covered security 
        where the taxpayer is the grantor of the option and the option 
        was acquired in the same account as the covered security, the 
        amount received for the grant of an option on a covered 
        security shall be treated as an adjustment to gross proceeds or 
        as an adjustment to basis, as the case may be. A similar rule 
        shall apply in the case of the exercise of an option where the 
        taxpayer is not the grantor of the option.
          ``(2) Lapse or closing transaction.--For purposes of this 
        section, in the case of the lapse (or closing transaction (as 
        defined in section 1234(b)(2)(A))) of an option on a covered 
        security where the taxpayer is the grantor of the option, this 
        section shall apply as if the premium received for such option 
        were gross proceeds received on the date of the lapse or 
        closing transaction, and the cost (if any) of the closing 
        transaction shall be taken into account as adjusted basis. A 
        similar rule shall apply in the case of a lapse or closing 
        transaction where the taxpayer is not the grantor of the 
        option.
          ``(3) Prospective application.--Paragraphs (1) and (2) shall 
        not apply to any option which is granted or acquired before 
        January 1, 2011.
          ``(4) Covered security.--For purposes of this subsection, the 
        term `covered security' shall have the meaning given such term 
        in subsection (g)(3).''.
          (3) Extension of period for statements sent to customers.--
                  (A) In general.--Subsection (b) of section 6045 is 
                amended by striking ``January 31'' and inserting 
                ``February 15''.
                  (B) Statements related to substitute payments.--
                Subsection (d) of section 6045 is amended--
                          (i) by striking ``at such time and'', and
                          (ii) by inserting after ``other item.'' the 
                        following new sentence: ``The written statement 
                        required under the preceding sentence shall be 
                        furnished on or before February 15 of the year 
                        following the calendar year during which such 
                        payment was made.''.
                  (C) Other statements.--Subsection (b) of section 6045 
                is amended by adding at the end the following: ``In the 
                case of a consolidated reporting statement (as defined 
                in regulations) with respect to any account which 
                includes the statement required by this subsection, any 
                statement which would otherwise be required to be 
                furnished on or before January 31 under section 
                6042(c), 6049(c)(2)(A), or 6050N(b) with respect to any 
                item in such account shall instead be required to be 
                furnished on or before February 15 if furnished as part 
                of such consolidated reporting statement.''.
  (b) Determination of Basis of Certain Securities on Account by 
Account Method.--Section 1012 (relating to basis of property-cost) is 
amended--
          (1) by striking ``The basis of property'' and inserting the 
        following:
  ``(a) In General.--The basis of property'',
          (2) by striking ``The cost of real property'' and inserting 
        the following:
  ``(b) Special Rule for Apportioned Real Estate Taxes.--The cost of 
real property'', and
          (3) by adding at the end the following new subsection:
  ``(c) Determinations by Account.--
          ``(1) In general.--In the case of the sale, exchange, or 
        other disposition of a specified security on or after the 
        applicable date, the conventions prescribed by regulations 
        under this section shall be applied on an account by account 
        basis.
          ``(2) Application to open-end funds.--
                  ``(A) In general.--Except as provided in subparagraph 
                (B), any stock in an open-end fund acquired before 
                January 1, 2009, shall be treated as a separate account 
                from any such stock acquired on or after such date.
                  ``(B) Election by open-end fund for treatment as 
                single account.--If an open-end fund elects (at such 
                time and in such form and manner as the Secretary may 
                prescribe) to have this subparagraph apply with respect 
                to one or more of its stockholders--
                          ``(i) subparagraph (A) shall not apply with 
                        respect to any stock in such fund held by such 
                        stockholders, and
                          ``(ii) all stock in such fund which is held 
                        by such stockholders shall be treated as 
                        covered securities described in section 
                        6045(g)(3) without regard to the date of the 
                        acquisition of such stock.
          ``(3) Definitions.--For purposes of this section, the terms 
        `specified security', `applicable date', and `open-end fund' 
        shall have the meaning given such terms in section 6045(g).''.
  (c) Information by Transferors to Aid Brokers.--
          (1) In general.--Subpart B of part III of subchapter A of 
        chapter 61 is amended by inserting after section 6045 the 
        following new section:

``SEC. 6045A. INFORMATION REQUIRED IN CONNECTION WITH TRANSFERS OF 
                    COVERED SECURITIES TO BROKERS.

  ``(a) Furnishing of Information.--Every applicable person which 
transfers to a broker (as defined in section 6045(c)(1)) a security 
which is a covered security (as defined in section 6045(g)(3)) in the 
hands of such applicable person shall furnish to such broker a written 
statement in such manner and setting forth such information as the 
Secretary may by regulations prescribe for purposes of enabling such 
broker to meet the requirements of section 6045(g).
  ``(b) Applicable Person.--For purposes of subsection (a), the term 
`applicable person' means--
          ``(1) any broker (as defined in section 6045(c)(1)), and
          ``(2) any other person as provided by the Secretary in 
        regulations.
  ``(c) Time for Furnishing Statement.--Any statement required by 
subsection (a) shall be furnished not later than the earlier of--
          ``(1) 45 days after the date of the transfer described in 
        subsection (a), or
          ``(2) January 15 of the year following the calendar year 
        during which such transfer occurred.''.
          (2) Assessable penalties.--Paragraph (2) of section 6724(d) 
        (defining payee statement) is amended by redesignating 
        subparagraphs (I) through (CC) as subparagraphs (J) through 
        (DD), respectively, and by inserting after subparagraph (H) the 
        following new subparagraph:
                  ``(I) section 6045A (relating to information required 
                in connection with transfers of covered securities to 
                brokers).''.
          (3) Clerical amendment.--The table of sections for subpart B 
        of part III of subchapter A of chapter 61 is amended by 
        inserting after the item relating to section 6045 the following 
        new item:

``Sec. 6045A. Information required in connection with transfers of 
covered securities to brokers.''.

  (d) Additional Issuer Information To Aid Brokers.--
          (1) In general.--Subpart B of part III of subchapter A of 
        chapter 61 of the Internal Revenue Code of 1986, as amended by 
        subsection (b), is amended by inserting after section 6045A the 
        following new section:

``SEC. 6045B. RETURNS RELATING TO ACTIONS AFFECTING BASIS OF SPECIFIED 
                    SECURITIES.

  ``(a) In General.--According to the forms or regulations prescribed 
by the Secretary, any issuer of a specified security shall make a 
return setting forth--
          ``(1) a description of any organizational action which 
        affects the basis of such specified security of such issuer,
          ``(2) the quantitative effect on the basis of such specified 
        security resulting from such action, and
          ``(3) such other information as the Secretary may prescribe.
  ``(b) Time for Filing Return.--Any return required by subsection (a) 
shall be filed not later than the earlier of--
          ``(1) 45 days after the date of the action described in 
        subsection (a), or
          ``(2) January 31 of the year following the calendar year 
        during which such action occurred.
  ``(c) Statements To Be Furnished to Holders of Specified Securities 
or Their Nominees.--According to the forms or regulations prescribed by 
the Secretary, every person required to make a return under subsection 
(a) with respect to a specified security shall furnish to the nominee 
with respect to the specified security (or certificate holder if there 
is no nominee) a written statement showing--
          ``(1) the name, address, and phone number of the information 
        contact of the person required to make such return,
          ``(2) the information required to be shown on such return 
        with respect to such security, and
          ``(3) such other information as the Secretary may prescribe.
The written statement required under the preceding sentence shall be 
furnished to the holder on or before January 31 of the year following 
the calendar year during which the action described in subsection (a) 
occurred.
  ``(d) Specified Security.--For purposes of this section, the term 
`specified security' has the meaning given such term by section 
6045(g)(3)(B). No return shall be required under this section with 
respect to actions described in subsection (a) with respect to a 
specified security which occur before the applicable date (as defined 
in section 6045(g)(3)(C) with respect to such security.
  ``(e) Public Reporting in Lieu of Return.--The Secretary may waive 
the requirements under subsections (a) and (c) with respect to a 
specified security, if the person required to make the return under 
subsection (a) makes publicly available, in such form and manner as the 
Secretary determines necessary to carry out the purposes of this 
section--
          ``(1) the name, address, phone number, and email address of 
        the information contact of such person, and
          ``(2) the information described in paragraphs (1), (2), and 
        (3) of subsection (a).''.
          (2) Assessable penalties.--
                  (A) Subparagraph (B) of section 6724(d)(1) of such 
                Code (defining information return) is amended by 
                redesignating clauses (iv) through (xix) as clauses (v) 
                through (xx), respectively, and by inserting after 
                clause (iii) the following new clause:
                          ``(iv) section 6045B(a) (relating to returns 
                        relating to actions affecting basis of 
                        specified securities),''.
                  (B) Paragraph (2) of section 6724(d) of such Code 
                (defining payee statement), as amended by subsection 
                (c)(2), is amended by redesignating subparagraphs (J) 
                through (DD) as subparagraphs (K) through (EE), 
                respectively, and by inserting after subparagraph (I) 
                the following new subparagraph:
                  ``(J) subsections (c) and (e) of section 6045B 
                (relating to returns relating to actions affecting 
                basis of specified securities).''.
          (3) Clerical amendment.--The table of sections for subpart B 
        of part III of subchapter A of chapter 61 of such Code, as 
        amended by subsection (b)(3), is amended by inserting after the 
        item relating to section 6045A the following new item:

``Sec. 6045B. Returns relating to actions affecting basis of specified 
securities.''.

  (e) Effective Date.--The amendments made by this section shall take 
effect on January 1, 2009.

SEC. 623. MODIFICATION OF PENALTY FOR FAILURE TO FILE PARTNERSHIP 
                    RETURNS.

  Section 6698 is amended by adding at the end the following new 
subsection:
  ``(e) Modifications.--In the case of any return required to be filed 
after the date of the enactment of this subsection--
          ``(1) the dollar amount in effect under subsection (b)(1) 
        shall be increased by $25, and
          ``(2) the limitation on the number of months taken into 
        account under subsection (a) shall not be less than 12 
        months.''.

SEC. 624. PENALTY FOR FAILURE TO FILE S CORPORATION RETURNS.

  (a) In General.--Part I of subchapter B of chapter 68 (relating to 
assessable penalties) is amended by adding at the end the following new 
section:

``SEC. 6699A. FAILURE TO FILE S CORPORATION RETURN.

  ``(a) General Rule.--In addition to the penalty imposed by section 
7203 (relating to willful failure to file return, supply information, 
or pay tax), if any S corporation required to file a return under 
section 6037 for any taxable year--
          ``(1) fails to file such return at the time prescribed 
        therefor (determined with regard to any extension of time for 
        filing), or
          ``(2) files a return which fails to show the information 
        required under section 6037,
such S corporation shall be liable for a penalty determined under 
subsection (b) for each month (or fraction thereof) during which such 
failure continues (but not to exceed 12 months), unless it is shown 
that such failure is due to reasonable cause.
  ``(b) Amount Per Month.--For purposes of subsection (a), the amount 
determined under this subsection for any month is the product of--
          ``(1) $25, multiplied by
          ``(2) the number of persons who were shareholders in the S 
        corporation during any part of the taxable year.
  ``(c) Assessment of Penalty.--The penalty imposed by subsection (a) 
shall be assessed against the S corporation.
  ``(d) Deficiency Procedures Not to Apply.--Subchapter B of chapter 63 
(relating to deficiency procedures for income, estate, gift, and 
certain excise taxes) shall not apply in respect of the assessment or 
collection of any penalty imposed by subsection (a).''.
  (b) Clerical Amendment.--The table of sections for part I of 
subchapter B of chapter 68 is amended by adding at the end the 
following new item:

``Sec. 6699A. Failure to file S corporation return.''.

  (c) Effective Date.--The amendments made by this section shall apply 
to returns required to be filed after the date of the enactment of this 
Act.

SEC. 625. TIME FOR PAYMENT OF CORPORATE ESTIMATED TAXES.

   Subparagraph (B) of section 401(1) of the Tax Increase Prevention 
and Reconciliation Act of 2005 is amended by striking ``115 percent'' 
and inserting ``181 percent''.

                       I. SUMMARY AND BACKGROUND


                         A. Purpose and Summary

    The bill, H.R. 3996, as amended, (1) provides a one-year 
increase in the individual AMT exemption amount for taxable 
years beginning in 2007 and makes certain related changes, (2) 
extends certain expiring provisions through 2008, and (3) makes 
other modifications to the tax laws.

Individual AMT Relief

    The bill provides that the individual AMT exemption amount 
for taxable years beginning in 2007 is (1) $66,250, in the case 
of married individuals filing a joint return and surviving 
spouses; (2) $44,350 in the case of other unmarried 
individuals; and (3) $33,125 in the case of married individuals 
filing separate returns.
    For taxable years beginning in 2007, the bill allows an 
individual to offset the entire regular tax liability and 
alternative minimum tax liability by the nonrefundable personal 
credits.
    The bill also removes certain income limitations on the AMT 
refundable credit for long-term unused minimum tax credits.

Extension of certain expiring provisions through 2008

    The bill extends for one year, through December 31, 2008, 
the following provisions:
           deduction for State and local sales taxes
           deduction for qualified tuition and related 
        expenses
           treatment of certain dividends of regulated 
        investment companies
           excise tax provisions relating to mental 
        health parity rules
           encourage contributions of property 
        interests made for conservation purposes
           tax-free distributions from IRAs to certain 
        public charities
           deduction for teacher classroom expenses
           election to include combat pay in earned 
        income for purposes of the earned income tax credit
           use of qualified mortgage bonds to finance 
        residences for veterans without regard to first-time 
        homebuyer requirement
           penalty-free withdrawals from retirement 
        plans for individuals called to active duty
           estate tax look-through for certain RIC 
        stock held by nonresidents
           treatment of certain RIC stock under FIRPTA
           treatment of State legislators' travel 
        expenses away from home
           the research and experimentation credit
           tax incentives for business activities on 
        Indian reservations
           the new markets tax credit
           tax credit for certain expenditures for 
        maintaining railroad tracks
           fifteen-year cost recovery for leasehold 
        improvements
           fifteen-year cost recovery for restaurant 
        improvements
           seven-year recovery period for certain 
        motorsports racetrack property
           expensing of ``brownfield'' environmental 
        clean up costs
           application of domestic production activity 
        deduction to Puerto Rico
           modification of tax treatment of certain 
        payments to controlling exempt organizations
           authority to issue qualified zone academy 
        bonds
           tax incentives for the District of Columbia 
        Enterprise Zone
           possession tax credit with respect to 
        American Samoa
           the enhanced deduction for corporate 
        donations of food inventory, of book inventories to 
        public schools, and of computer technology and 
        equipment
           basis of adjustment to stock of S 
        corporations making charitable contributions of 
        property
           extension of work opportunity tax credit to 
        Hurricane Katrina employees
           certain provisions relating to disclosure of 
        confidential taxpayer information
           authority for undercover operations
           increase in limit on cover over of rum 
        excise tax revenues

Other provisions

    The bill contains other provisions, as follows:
           Modifies the threshold amount for the 
        refundable child credit
           Additional standard deduction for real 
        property taxes paid by non-itemizers
           Certain provisions for housing-related tax 
        relief
           Repeal of the authority of the Internal 
        Revenue Service (``IRS'') to use private debt 
        collection companies, delay of implementation of 
        withholding taxes on government payments, revision of 
        rules on expatriation, and certain related changes
           Changes to the treatment of certain offshore 
        nonqualified deferred compensation arrangements
           Changes to the treatment of income of 
        partners performing investment management services as 
        ordinary income received for the performance of 
        services
           Changes to the treatment of indebtedness 
        incurred by a partnership in acquiring securities and 
        commodities to tax-exempt limited partners
           Application section 1239 to certain sales of 
        partnership interests and sales between parties to a 
        tax-sharing agreement
           Delay of the implementation of the worldwide 
        interest allocation rules
           Broker reporting of customer's basis in 
        securities transactions
           Increase in the penalty for the failure to 
        file partnership returns
           Imposition of a penalty for the failure to 
        file S corporation returns
           Modifications to corporate estimated tax 
        payments

                 B. Background and Need for Legislation

    The provisions approved by the Committee reflect the need 
to avoid tax increases on families and businesses as a result 
of provisions that would otherwise expire, as well as other 
purposes.

                         C. Legislative History

    The Committee on Ways and Means marked up the Temporary Tax 
Relief Act of 2007 on November 1, 2007, and ordered the bill, 
as amended, favorably reported.

                      II. EXPLANATION OF THE BILL


     TITLE I--EXTEND ALTERNATIVE MINIMUM TAX RELIEF FOR INDIVIDUALS


1. Extension of alternative minimum relief for nonrefundable personal 
        credits and extension of increased alternative minimum tax 
        exemption amounts (secs. 101 and 102 of the bill and secs. 26 
        and 55 of the Code)

                              PRESENT LAW

    Present law imposes an alternative minimum tax on 
individuals. The alternative minimum tax is the amount by which 
the tentative minimum tax exceeds the regular income tax. An 
individual's tentative minimum tax is the sum of (1) 26 percent 
of so much of the taxable excess as does not exceed $175,000 
($87,500 in the case of a married individual filing a separate 
return) and (2) 28 percent of the remaining taxable excess. The 
taxable excess is so much of the alternative minimum taxable 
income (``AMTI'') as exceeds the exemption amount. The maximum 
tax rates on net capital gain and dividends used in computing 
the regular tax are used in computing the tentative minimum 
tax. AMTI is the individual's taxable income adjusted to take 
account of specified preferences and adjustments.
    The present exemption amount is: (1) $62,550 ($45,000 in 
taxable years beginning after 2006) in the case of married 
individuals filing a joint return and surviving spouses; (2) 
$42,500 ($33,750 in taxable years beginning after 2006) in the 
case of other unmarried individuals; (3) $31,275 ($22,500 in 
taxable years beginning after 2006) in the case of married 
individuals filing separate returns; and (4) $22,500 in the 
case of an estate or trust. The exemption amount is phased out 
by an amount equal to 25 percent of the amount by which the 
individual's AMTI exceeds (1) $150,000 in the case of married 
individuals filing a joint return and surviving spouses, (2) 
$112,500 in the case of other unmarried individuals, and (3) 
$75,000 in the case of married individuals filing separate 
returns or an estate or a trust. These amounts are not indexed 
for inflation.
    Present law provides for certain nonrefundable personal tax 
credits (i.e., the dependent care credit, the credit for the 
elderly and disabled, the adoption credit, the child tax 
credit, the credit for interest on certain home mortgages, the 
HOPE Scholarship and Lifetime Learning credits, the credit for 
savers, the credit for certain nonbusiness energy property, the 
credit for residential energy efficient property, and the D.C. 
first-time homebuyer credit).
    For taxable years beginning before 2007, the nonrefundable 
personal credits are allowed to the extent of the full amount 
of the individual's regular tax and alternative minimum tax.
    For taxable years beginning after 2006, the nonrefundable 
personal credits (other than the adoption credit, child credit 
and saver's credit) are allowed only to the extent that the 
individual's regular income tax liability exceeds the 
individual's tentative minimum tax, determined without regard 
to the minimum tax foreign tax credit. The adoption credit, 
child credit, and saver's credit are allowed to the full extent 
of the individual's regular tax and alternative minimum tax.\1\
---------------------------------------------------------------------------
    \1\The rule applicable to the adoption credit and child credit is 
subject to the EGTRRA sunset.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is concerned about the projected increase in 
the number of individuals who will be affected by the 
individual alternative minimum tax for 2007. The provision will 
reduce the number of individuals who would otherwise be 
affected be the minimum tax.

                        EXPLANATION OF PROVISION

    The bill provides that the individual AMT exemption amount 
for taxable years beginning in 2007 is (1) $66,250, in the case 
of married individuals filing a joint return and surviving 
spouses; (2) $44,350 in the case of other unmarried 
individuals; and (3) $33,125 in the case of married individuals 
filing separate returns.
    For taxable years beginning in 2007, the bill allows an 
individual to offset the entire regular tax liability and 
alternative minimum tax liability by the nonrefundable personal 
credits.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning in 
2007.

2. Alternative minimum tax credit relief for individuals (sec. 103 of 
        the bill and sec. 53 of the Code)

                              PRESENT LAW

In general

    Present law imposes an alternative minimum tax (``AMT'') on 
an individual taxpayer to the extent the taxpayer's tentative 
minimum tax liability exceeds his or her regular income tax 
liability. An individual's tentative minimum tax is the sum of 
(1) 26 percent of so much of the taxable excess as does not 
exceed $175,000 ($87,500 in the case of a married individual 
filing a separate return) and (2) 28 percent of the remaining 
taxable excess. The taxable excess is the amount by which the 
alternative minimum taxable income (``AMTI'') exceeds an 
exemption amount.
    An individual's AMTI is the taxpayer's taxable income 
increased by certain preference items and adjusted by 
determining the tax treatment of certain items in a manner that 
negates the deferral of income resulting from the regular tax 
treatment of those items.
    The individual AMT attributable to deferral adjustments 
generates a minimum tax credit that is allowable to the extent 
the regular tax (reduced by other nonrefundable credits) 
exceeds the tentative minimum tax in a future taxable year. 
Unused minimum tax credits are carried forward indefinitely.

AMT treatment of incentive stock options

    One of the adjustments in computing AMTI is the tax 
treatment of the exercise of an incentive stock option. An 
incentive stock option is an option granted by a corporation in 
connection with an individual's employment, so long as the 
option meets certain specified requirements.\2\ Under the 
regular tax, the exercise of an incentive stock option is tax-
free if the stock is not disposed of within one year of 
exercise of the option or within two years of the grant of the 
option.\3\ The individual then computes the long-term capital 
gain or loss on the sale of the stock using the amount paid for 
the stock as the cost basis. If the holding period requirements 
are not satisfied, the individual generally takes into account 
at the exercise of the option an amount of ordinary income 
equal to the excess of the fair market value of the stock on 
the date of exercise over the amount paid for the stock. The 
cost basis of the stock is increased by the amount taken into 
account.\4\
---------------------------------------------------------------------------
    \2\Sec. 422.
    \3\Sec. 421.
    \4\If the stock is sold at a loss before the required holding 
periods are met, the amount taken into account may not exceed the 
amount realized on the sale over the adjusted basis of the stock. If 
the stock is sold after the taxable year in which the option was 
exercised but before the required holding periods are met, the required 
inclusion is made in the year the stock is sold.
---------------------------------------------------------------------------
    Under the individual alternative minimum tax, the exercise 
of an incentive stock option is treated as the exercise of an 
option other than an incentive stock option. Under this 
treatment, generally the individual takes into account as 
ordinary income for purposes of computing AMTI the excess of 
the fair market value of the stock at the date of exercise over 
the amount paid for the stock.\5\ When the stock is later sold, 
for purposes of computing capital gain or loss for purposes of 
AMTI, the adjusted basis of the stock includes the amount taken 
into account as AMTI.
---------------------------------------------------------------------------
    \5\If the stock is sold in the same taxable year the option is 
exercised, no adjustment in computing AMTI is required.
---------------------------------------------------------------------------
    The adjustment relating to incentive stock options is a 
deferral adjustment and therefore generates an AMT credit in 
the year the stock is sold.\6\
---------------------------------------------------------------------------
    \6\If the stock is sold for less than the amount paid for the 
stock, the loss may not be allowed in full in computing AMTI by reason 
of the $3,000 limit on the deductibility of net capital losses. Thus, 
the excess of the regular tax over the tentative minimum tax may not 
reflect the full amount of the loss.
---------------------------------------------------------------------------

Allowance of long-term unused credits

    Under present law, an individual's minimum tax credit 
allowable for any taxable year beginning after December 31, 
2006, and beginning before January 1, 2013, is not less than 
the ``AMT refundable credit amount.'' The ``AMT refundable 
credit amount'' is the greater of (1) the lesser of $5,000 or 
the long-term unused minimum tax credit, or (2) 20 percent of 
the long-term unused minimum tax credit. The long-term unused 
minimum tax credit for any taxable year means the portion of 
the minimum tax credit attributable to the adjusted net minimum 
tax for taxable years before the 3rd taxable year immediately 
preceding the taxable year (assuming the credits are used on a 
first-in, first-out basis). In the case of an individual whose 
adjusted gross income for a taxable year exceeds the threshold 
amount (within the meaning of section 151(d)(3)(C)), the AMT 
refundable credit amount is reduced by the applicable 
percentage (within the meaning of section 151(d)(3)(B)). The 
additional credit allowable by reason of this provision is 
refundable.

                           REASONS FOR CHANGE

    The individual alternative minimum tax is intended to 
accelerate the tax on certain items of income that are deferred 
under the regular tax by initially imposing a tax and later 
allowing a minimum tax credit when the deferral ends. One of 
these items relates to the exercise of incentive stock options. 
However, because of technical problems, the credit may not be 
properly allowable where the value of the stock acquired on the 
exercise of an incentive stock option has declined in value 
when the stock is sold. In 2006, Congress provided certain 
relief in these situations. The Committee believes that 
additional relief should be provided to correct this problem so 
that taxpayers are not paying tax on ``phantom'' income 
attributable to incentive stock options.

                        EXPLANATION OF PROVISION

    The bill generally allows the long-term unused minimum tax 
credit over two years and eliminates the AGI phase-out. Thus, 
if an individual has a long-term unused minimum tax credit of 
$1 million for 2007, the AMT refundable credit amount for 2007 
is $500,000 (50 percent of the $1 million long-term unused 
credit amount for 2007) and the AMT refundable credit amount 
for 2008 is also $500,000 (the $500,000 amount of the AMT 
refundable credit amount for 2007 but not in excess of the 
$500,000 long-term unused minimum tax credit for 2008).
    The bill provides that any underpayment of tax outstanding 
on the date of enactment which is attributable to the 
application of the minimum tax adjustment for incentive stock 
options (including any interest or penalty relating thereto) is 
abated. No credit is allowed with respect to any amount abated.
    The bill provides that any interest and penalty paid before 
the date of enactment with respect to the application of the 
minimum adjustment for incentive stock options is treated as an 
amount of adjusted net minimum tax for the taxable year of the 
underpayment to which the interest or penalty relates for 
purposes of the minimum tax credit.

                             EFFECTIVE DATE

    The provision generally applies to taxable years beginning 
after December 31, 2006.
    The provision relating to the abatement of interest and 
penalties takes effect on date of enactment.

               TITLE II--ADDITIONAL INDIVIDUAL TAX RELIEF


1. Refundable child credit (sec. 201 of the bill and sec. 24(d) of the 
        Code)

                              PRESENT LAW

    An individual may claim a tax credit for each qualifying 
child under the age of 17. The amount of the credit per child 
is $1,000 through 2010, and $500 thereafter. A child who is not 
a citizen, national, or resident of the United States cannot be 
a qualifying child.
    The credit is phased out for individuals with income over 
certain threshold amounts. Specifically, the otherwise 
allowable child tax credit is reduced by $50 for each $1,000 
(or fraction thereof) of modified adjusted gross income over 
$75,000 for single individuals or heads of households, $110,000 
for married individuals filing joint returns, and $55,000 for 
married individuals filing separate returns. For purposes of 
this limitation, modified adjusted gross income includes 
certain otherwise excludable income earned by U.S. citizens or 
residents living abroad or in certain U.S. territories.
    The credit is allowable against the regular tax and the 
alternative minimum tax. To the extent the child credit exceeds 
the taxpayer's tax liability, the taxpayer is eligible for a 
refundable credit (the additional child tax credit) equal to 15 
percent of earned income in excess of a threshold dollar amount 
(the ``earned income'' formula). The threshold dollar amount is 
$11,750 (2007), and is indexed for inflation.
    Families with three or more children may determine the 
additional child tax credit using the ``alternative formula,'' 
if this results in a larger credit than determined under the 
earned income formula. Under the alternative formula, the 
additional child tax credit equals the amount by which the 
taxpayer's social security taxes exceed the taxpayer's earned 
income credit (``EIC'').
    Earned income is defined as the sum of wages, salaries, 
tips, and other taxable employee compensation plus net self-
employment earnings. Unlike the EIC, which also includes the 
preceding items in its definition of earned income, the 
additional child tax credit is based only on earned income to 
the extent it is included in computing taxable income. For 
example, some ministers' parsonage allowances are considered 
self-employment income, and thus are considered earned income 
for purposes of computing the EIC, but the allowances are 
excluded from gross income for individual income tax purposes, 
and thus are not considered earned income for purposes of the 
additional child tax credit since the income is not included in 
taxable income.

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to lower the 
threshold earnings level for the refundable child credit in 
order to increase the amount of available child credit for 
lower income households.

                        EXPLANATION OF PROVISION

    The provision modifies the earned income formula for the 
determination of the refundable child credit to apply to 15 
percent of earned income in excess of $8,500 for taxable years 
beginning in 2008.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning in 
2008.

2. Additional standard deduction for real property taxes for non-
        itemizers (sec. 202 of the bill and sec. 63 of the Code)

                              PRESENT LAW

    For purposes of determining regular tax liability, an 
itemized deduction is permitted for certain State and local 
taxes paid, including individual income taxes, real property 
taxes, and personal property taxes. The itemized deduction is 
not permitted for purposes of determining a taxpayer's 
alternative minimum taxable income.

                           REASONS FOR CHANGE

    The Committee believes an additional standard deduction for 
real property taxes is appropriate in order to help lessen the 
impact of rising State and local property tax bills on those 
with insufficient total deductions to warrant itemizing such 
deductions.

                        EXPLANATION OF PROVISION

    The provision allows taxpayers an additional standard 
deduction for State and local real property taxes for taxpayers 
who claim the regular standard deduction. The additional 
standard deduction applies only for 2008, and is limited to 
$350 ($700 in the case of a married individual filing jointly).

                             EFFECTIVE DATE

    The provision applies to taxable years beginning in 2008.

                     TITLE III--ONE YEAR EXTENDERS


              A. Extenders Primarily Affecting Individuals


1. Deduction of State and local general sales taxes (sec. 301 of the 
        bill and sec. 164 of the Code)

                              PRESENT LAW

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

                           REASONS FOR CHANGE

    The Committee believes an extension of the option to deduct 
State and local sales taxes in lieu of deducting State and 
local income taxes is appropriate to continue to provide 
similar Federal tax treatment to residents of States that rely 
on sales taxes, rather than income taxes, to fund State and 
local governmental functions.

                        EXPLANATION OF PROVISION

    The present-law provision allowing taxpayers to elect to 
deduct State and local sales taxes in lieu of State and local 
income taxes is extended for one year (through December 31, 
2008).

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2007.

2. Above-the-line deduction for higher education expenses (sec. 302 of 
        the bill and sec. 222 of the Code)

                              PRESENT LAW

    An individual is allowed an above-the-line deduction for 
qualified tuition and related expenses for higher education 
paid by the individual during the taxable year.\7\ Qualified 
tuition and related expenses are defined in the same manner as 
for the Hope and Lifetime Learning credits, and includes 
tuition and fees required for the enrollment or attendance of 
the taxpayer, the taxpayer's spouse, or any dependent of the 
taxpayer with respect to whom the taxpayer may claim a personal 
exemption, at an eligible institution of higher education for 
courses of instruction of such individual at such 
institution.\8\ The expenses must be in connection with 
enrollment at an institution of higher education during the 
taxable year, or with an academic period beginning during the 
taxable year or during the first three months of the next 
taxable year. The deduction is not available for tuition and 
related expenses paid for elementary or secondary education.
---------------------------------------------------------------------------
    \7\Sec. 222.
    \8\The deduction generally is not available for expenses with 
respect to a course or education involving sports, games, or hobbies, 
and is not available for student activity fees, athletic fees, 
insurance expenses, or other expenses unrelated to an individual's 
academic course of instruction.
---------------------------------------------------------------------------
    The maximum deduction is $4,000 for an individual whose 
adjusted gross income for the taxable year does not exceed 
$65,000 ($130,000 in the case of a joint return), or $2,000 for 
other individuals whose adjusted gross income does not exceed 
$80,000 ($160,000 in the case of a joint return). No deduction 
is allowed for an individual whose adjusted gross income 
exceeds the relevant adjusted gross income limitations, for a 
married individual who does not file a joint return, or for an 
individual with respect to whom a personal exemption deduction 
may be claimed by another taxpayer for the taxable year. The 
deduction is not available for taxable years beginning after 
December 31, 2007.
    The amount of qualified tuition and related expenses must 
be reduced by certain scholarships, educational assistance 
allowances, and other amounts paid for the benefit of such 
individual,\9\ and by the amount of such expenses taken into 
account for purposes of determining any exclusion from gross 
income of: (1) income from certain U.S. Savings Bonds used to 
pay higher education tuition and fees; and (2) income from a 
Coverdell education savings account.\10\ Additionally, such 
expenses must be reduced by the earnings portion (but not the 
return of principal) of distributions from a qualified tuition 
program if an exclusion under section 529 is claimed with 
respect to expenses eligible for the qualified tuition 
deduction. No deduction is allowed for any expense for which a 
deduction is otherwise allowed or with respect to an individual 
for whom a Hope credit or Lifetime Learning credit is elected 
for such taxable year.
---------------------------------------------------------------------------
    \9\Secs. 222(d)(1) and 25A(g)(2).
    \10\Sec. 222(c). These reductions are the same as those that apply 
to the Hope and Lifetime Learning credits.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee observes that the cost of a college education 
continues to rise, and thus believes that the extension of the 
qualified tuition deduction is appropriate to mitigate the 
impact of rising tuition costs on students and their families. 
The Committee further believes that the tuition deduction 
provides an important financial incentive for individuals to 
pursue higher education.

                        EXPLANATION OF PROVISION

    The provision extends the qualified tuition deduction for 
one year.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2007, and prior to January 1, 2009.

3. Extension of special withholding tax rule for interest-related 
        dividends paid by regulated investment companies (sec. 303 of 
        the bill and sec. 871(k) of the Code)

                              PRESENT LAW

In general

    Under present law, a regulated investment company (``RIC'') 
that earns certain interest income that would not be subject to 
U.S. tax if earned by a foreign person directly may, to the 
extent of such income, designate a dividend it pays as derived 
from such interest income. A foreign person who is a 
shareholder in the RIC generally would treat such a dividend as 
exempt from gross-basis U.S. tax, as if the foreign person had 
earned the interest directly.

                       INTEREST-RELATED DIVIDENDS

    Under present law, a RIC may, under certain circumstances, 
designate all or a portion of a dividend as an ``interest-
related dividend,'' by written notice mailed to its 
shareholders not later than 60 days after the close of its 
taxable year. In addition, an interest-related dividend 
received by a foreign person generally is exempt from U.S. 
gross-basis tax under sections 871(a), 881, 1441 and 1442.
    However, this exemption does not apply to a dividend on 
shares of RIC stock if the withholding agent does not receive a 
statement, similar to that required under the portfolio 
interest rules, that the beneficial owner of the shares is not 
a U.S. person. The exemption does not apply to a dividend paid 
to any person within a foreign country (or dividends addressed 
to, or for the account of, persons within such foreign country) 
with respect to which the Treasury Secretary has determined, 
under the portfolio interest rules, that exchange of 
information is inadequate to prevent evasion of U.S. income tax 
by U.S. persons.
    In addition, the exemption generally does not apply to 
dividends paid to a controlled foreign corporation to the 
extent such dividends are attributable to income received by 
the RIC on a debt obligation of a person with respect to which 
the recipient of the dividend (i.e., the controlled foreign 
corporation) is a related person. Nor does the exemption 
generally apply to dividends to the extent such dividends are 
attributable to income (other than short-term original issue 
discount or bank deposit interest) received by the RIC on 
indebtedness issued by the RIC-dividend recipient or by any 
corporation or partnership with respect to which the recipient 
of the RIC dividend is a 10-percent shareholder. However, in 
these two circumstances the RIC remains exempt from its 
withholding obligation unless the RIC knows that the dividend 
recipient is such a controlled foreign corporation or 10-
percent shareholder. To the extent that an interest-related 
dividend received by a controlled foreign corporation is 
attributable to interest income of the RIC that would be 
portfolio interest if received by a foreign corporation, the 
dividend is treated as portfolio interest for purposes of the 
de minimis rules, the high-tax exception, and the same country 
exceptions of subpart F (see sec. 881(c)(5)(A)).
    The aggregate amount designated as interest-related 
dividends for the RIC's taxable year (including dividends so 
designated that are paid after the close of the taxable year 
but treated as paid during that year as described in section 
855) generally is limited to the qualified net interest income 
of the RIC for the taxable year. The qualified net interest 
income of the RIC equals the excess of: (1) the amount of 
qualified interest income of the RIC; over (2) the amount of 
expenses of the RIC properly allocable to such interest income.
    Qualified interest income of the RIC is equal to the sum of 
its U.S.-source income with respect to: (1) bank deposit 
interest; (2) short term original issue discount that is 
currently exempt from the gross-basis tax under section 871; 
(3) any interest (including amounts recognized as ordinary 
income in respect of original issue discount, market discount, 
or acquisition discount under the provisions of sections 1271-
1288, and such other amounts as regulations may provide) on an 
obligation which is in registered form, unless it is earned on 
an obligation issued by a corporation or partnership in which 
the RIC is a 10-percent shareholder or is contingent interest 
not treated as portfolio interest under section 871(h)(4); and 
(4) any interest-related dividend from another RIC.
    If the amount designated as an interest-related dividend is 
greater than the qualified net interest income described above, 
the portion of the distribution so designated which constitutes 
an interest-related dividend will be only that proportion of 
the amount so designated as the amount of the qualified net 
interest income bears to the amount so designated.
    This withholding tax rule for interest-related dividends 
received from a RIC does not apply to any taxable year of a RIC 
beginning after December 31, 2007.

                           REASONS FOR CHANGE

    The committee believes that, to the extent a RIC 
distributes to a foreign person a dividend attributable to 
amounts that would have been exempt from U.S. withholding tax 
had the foreign person received it directly (such as portfolio 
interest and capital gains, including short-term capital 
gains), such dividend similarly should be exempt from the U.S. 
gross-basis withholding tax. Therefore, the committee believes 
that it is desirable to extend the present law provision for an 
additional year.

                        EXPLANATION OF PROVISION

    The provision extends the exemption from withholding tax of 
interest-related dividends received from a RIC to taxable years 
of a RIC beginning before January 1, 2009.

                             EFFECTIVE DATE

    The provision applies to estates of decedents dying after 
December 31, 2007.

4. Extension of parity in the application of certain limits to mental 
        health benefits (sec. 304 of the bill and sec. 9812(f) of the 
        Code)

                              PRESENT LAW

    The Code, the Employee Retirement Income Security Act of 
1974 (``ERISA'') and the Public Health Service Act (``PHSA'') 
contain provisions under which group health plans that provide 
both medical and surgical benefits and mental health benefits 
cannot impose aggregate lifetime or annual dollar limits on 
mental health benefits that are not imposed on substantially 
all medical and surgical benefits (``mental health parity 
requirements''). In the case of a group health plan which 
provides benefits for mental health, the mental health parity 
requirements do not affect the terms and conditions (including 
cost sharing, limits on numbers of visits or days of coverage, 
and requirements relating to medical necessity) relating to the 
amount, duration, or scope of mental health benefits under the 
plan, except as specifically provided in regard to parity in 
the imposition of aggregate lifetime limits and annual limits.
    The Code imposes an excise tax on group health plans which 
fail to meet the mental health parity requirements. The excise 
tax is equal to $100 per day during the period of noncompliance 
and is generally imposed on the employer sponsoring the plan if 
the plan fails to meet the requirements. The maximum tax that 
can be imposed during a taxable year cannot exceed the lesser 
of 10 percent of the employer's group health plan expenses for 
the prior year or $500,000. No tax is imposed if the Secretary 
determines that the employer did not know, and in exercising 
reasonable diligence would not have known, that the failure 
existed.
    The mental health parity requirements do not apply to group 
health plans of small employers nor do they apply if their 
application results in an increase in the cost under a group 
health plan of at least one percent. Further, the mental health 
parity requirements do not require group health plans to 
provide mental health benefits.
    The Code, ERISA and PHSA mental health parity requirements 
are scheduled to expire with respect to benefits for services 
furnished after December 31, 2007.

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

    The provision extends the present-law Code excise tax for 
failure to comply with the mental health parity requirements 
through December 31, 2008.

                             EFFECTIVE DATE

    The provision is effective for benefits for services 
furnished after December 31, 2007.

5. Extend the special rule encouraging contributions of capital gain 
        real property for conservation purposes (sec. 305 of the bill 
        and sec. 170 of the Code)

                              PRESENT LAW

Charitable contributions generally

    In general, a deduction is permitted for charitable 
contributions, subject to certain limitations that depend on 
the type of taxpayer, the property contributed, and the donee 
organization. The amount of deduction generally equals the fair 
market value of the contributed property on the date of the 
contribution. Charitable deductions are provided for income, 
estate, and gift tax purposes.\11\
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    \11\Secs. 170, 2055, and 2522, respectively. Unless otherwise 
provided, all section references are to the Internal Revenue Code of 
1986, as amended (the ``Code'').
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    In general, in any taxable year, charitable contributions 
by a corporation are not deductible to the extent the aggregate 
contributions exceed 10 percent of the corporation's taxable 
income computed without regard to net operating or capital loss 
carrybacks. For individuals, the amount deductible is a 
percentage of the taxpayer's contribution base, which is the 
taxpayer's adjusted gross income computed without regard to any 
net operating loss carryback. The applicable percentage of the 
contribution base varies depending on the type of donee 
organization and property contributed. Cash contributions of an 
individual taxpayer to public charities, private operating 
foundations, and certain types of private nonoperating 
foundations may not exceed 50 percent of the taxpayer's 
contribution base. Cash contributions to private foundations 
and certain other organizations generally may be deducted up to 
30 percent of the taxpayer's contribution base.
    In general, a charitable deduction is not allowed for 
income, estate, or gift tax purposes if the donor transfers an 
interest in property to a charity while also either retaining 
an interest in that property or transferring an interest in 
that property to a noncharity for less than full and adequate 
consideration. Exceptions to this general rule are provided 
for, among other interests, remainder interests in charitable 
remainder annuity trusts, charitable remainder unitrusts, and 
pooled income funds, present interests in the form of a 
guaranteed annuity or a fixed percentage of the annual value of 
the property, and qualified conservation contributions.

Capital gain property

    Capital gain property means any capital asset or property 
used in the taxpayer's trade or business the sale of which at 
its fair market value, at the time of contribution, would have 
resulted in gain that would have been long-term capital gain. 
Contributions of capital gain property to a qualified charity 
are deductible at fair market value within certain limitations. 
Contributions of capital gain property to charitable 
organizations described in section 170(b)(1)(A) (e.g., public 
charities, private foundations other than private non-operating 
foundations, and certain governmental units) generally are 
deductible up to 30 percent of the taxpayer's contribution 
base. An individual may elect, however, to bring all these 
contributions of capital gain property for a taxable year 
within the 50-percent limitation category by reducing the 
amount of the contribution deduction by the amount of the 
appreciation in the capital gain property. Contributions of 
capital gain property to charitable organizations described in 
section 170(b)(1)(B) (e.g., private non-operating foundations) 
are deductible up to 20 percent of the taxpayer's contribution 
base.
    For purposes of determining whether a taxpayer's aggregate 
charitable contributions in a taxable year exceed the 
applicable percentage limitation, contributions of capital gain 
property are taken into account after other charitable 
contributions. Contributions of capital gain property that 
exceed the percentage limitation may be carried forward for 
five years.

Qualified conservation contributions

    Qualified conservation contributions are not subject to the 
``partial interest'' rule, which generally bars deductions for 
charitable contributions of partial interests in property. A 
qualified conservation contribution is a contribution of a 
qualified real property interest to a qualified organization 
exclusively for conservation purposes. A qualified real 
property interest is defined as: (1) the entire interest of the 
donor other than a qualified mineral interest; (2) a remainder 
interest; or (3) a restriction (granted in perpetuity) on the 
use that may be made of the real property. Qualified 
organizations include certain governmental units, public 
charities that meet certain public support tests, and certain 
supporting organizations. Conservation purposes include: (1) 
the preservation of land areas for outdoor recreation by, or 
for the education of, the general public; (2) the protection of 
a relatively natural habitat of fish, wildlife, or plants, or 
similar ecosystem; (3) the preservation of open space 
(including farmland and forest land) where such preservation 
will yield a significant public benefit and is either for the 
scenic enjoyment of the general public or pursuant to a clearly 
delineated Federal, State, or local governmental conservation 
policy; and (4) the preservation of an historically important 
land area or a certified historic structure.
    Qualified conservation contributions of capital gain 
property are subject to the same limitations and carryover 
rules of other charitable contributions of capital gain 
property.

Special rule regarding contributions of capital gain real property for 
        conservation purposes

            In general
    Under a temporary provision that is effective for 
contributions made in taxable years beginning after December 
31, 2005,\12\ the 30-percent contribution base limitation on 
contributions of capital gain property by individuals does not 
apply to qualified conservation contributions (as defined under 
present law). Instead, individuals may deduct the fair market 
value of any qualified conservation contribution to an 
organization described in section 170(b)(1)(A) to the extent of 
the excess of 50 percent of the contribution base over the 
amount of all other allowable charitable contributions. These 
contributions are not taken into account in determining the 
amount of other allowable charitable contributions.
---------------------------------------------------------------------------
    \12\Sec. 170(b)(1)(E).
---------------------------------------------------------------------------
    Individuals are allowed to carryover any qualified 
conservation contributions that exceed the 50-percent 
limitation for up to 15 years.
    For example, assume an individual with a contribution base 
of $100 makes a qualified conservation contribution of property 
with a fair market value of $80 and makes other charitable 
contributions subject to the 50-percent limitation of $60. The 
individual is allowed a deduction of $50 in the current taxable 
year for the non-conservation contributions (50 percent of the 
$100 contribution base) and is allowed to carryover the excess 
$10 for up to 5 years. No current deduction is allowed for the 
qualified conservation contribution, but the entire $80 
qualified conservation contribution may be carried forward for 
up to 15 years.
            Farmers and ranchers
    In the case of an individual who is a qualified farmer or 
rancher for the taxable year in which the contribution is made, 
a qualified conservation contribution is allowable up to 100 
percent of the excess of the taxpayer's contribution base over 
the amount of all other allowable charitable contributions.
    In the above example, if the individual is a qualified 
farmer or rancher, in addition to the $50 deduction for non-
conservation contributions, an additional $50 for the qualified 
conservation contribution is allowed and $30 may be carried 
forward for up to 15 years as a contribution subject to the 
100-percent limitation.
    In the case of a corporation (other than a publicly traded 
corporation) that is a qualified farmer or rancher for the 
taxable year in which the contribution is made, any qualified 
conservation contribution is allowable up to 100 percent of the 
excess of the corporation's taxable income (as computed under 
section 170(b)(2)) over the amount of all other allowable 
charitable contributions. Any excess may be carried forward for 
up to 15 years as a contribution subject to the 100-percent 
limitation.\13\
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    \13\Sec. 170(b)(2)(B).
---------------------------------------------------------------------------
    As an additional condition of eligibility for the 100 
percent limitation, with respect to any contribution of 
property in agriculture or livestock production, or that is 
available for such production, by a qualified farmer or 
rancher, the qualified real property interest must include a 
restriction that the property remain generally available for 
such production. (There is no requirement as to any specific 
use in agriculture or farming, or necessarily that the property 
be used for such purposes, merely that the property remain 
available for such purposes.) Such additional condition does 
not apply to contributions made on or before August 17, 2006.
    A qualified farmer or rancher means a taxpayer whose gross 
income from the trade or business of farming (within the 
meaning of section 2032A(e)(5)) is greater than 50 percent of 
the taxpayer's gross income for the taxable year.
            Termination
    The special rule regarding contributions of capital gain 
real property for conservation purposes does not apply to 
contributions made in taxable years beginning after December 
31, 2007.

                           REASONS FOR CHANGE

    The Committee believes that the special rule that provides 
an increased incentive to make charitable contributions of 
partial interests in real property for conservation purposes is 
an important way of encouraging conservation and preservation, 
and should be extended for an additional year.

                        EXPLANATION OF PROVISION

    The provision extends the special rule regarding 
contributions of capital gain real property for conservation 
purposes for contributions made in taxable years beginning 
before January 1, 2009.

                             EFFECTIVE DATE

    The provision is effective for contributions made in 
taxable years beginning after December 31, 2007.

6. Tax-free distributions from individual retirement plans for 
        charitable purposes (sec. 306 of the bill and sec. 408 of the 
        Code)

                              PRESENT LAW

In general

    If an amount withdrawn from a traditional individual 
retirement arrangement (``IRA'') or a Roth IRA is donated to a 
charitable organization, the rules relating to the tax 
treatment of withdrawals from IRAs apply to the amount 
withdrawn and the charitable contribution is subject to the 
normally applicable limitations on deductibility of such 
contributions. An exception applies in the case of a qualified 
charitable distribution.

Charitable contributions

    In computing taxable income, an individual taxpayer who 
itemizes deductions generally is allowed to deduct the amount 
of cash and up to the fair market value of property contributed 
to a charity described in section 501(c)(3), to certain 
veterans' organizations, fraternal societies, and cemetery 
companies,\14\ or to a Federal, State, or local governmental 
entity for exclusively public purposes.\15\ The deduction also 
is allowed for purposes of calculating alternative minimum 
taxable income.
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    \14\Secs. 170(c)(3)-(5).
    \15\Sec. 170(c)(1).
---------------------------------------------------------------------------
    The amount of the deduction allowable for a taxable year 
with respect to a charitable contribution of property may be 
reduced depending on the type of property contributed, the type 
of charitable organization to which the property is 
contributed, and the income of the taxpayer.\16\
---------------------------------------------------------------------------
    \16\Secs. 170(b) and (e).
---------------------------------------------------------------------------
    A taxpayer who takes the standard deduction (i.e., who does 
not itemize deductions) may not take a separate deduction for 
charitable contributions.\17\
---------------------------------------------------------------------------
    \17\Sec. 6115.
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    A payment to a charity (regardless of whether it is termed 
a ``contribution'') in exchange for which the donor receives an 
economic benefit is not deductible, except to the extent that 
the donor can demonstrate, among other things, that the payment 
exceeds the fair market value of the benefit received from the 
charity. To facilitate distinguishing charitable contributions 
from purchases of goods or services from charities, present law 
provides that no charitable contribution deduction is allowed 
for a separate contribution of $250 or more unless the donor 
obtains a contemporaneous written acknowledgement of the 
contribution from the charity indicating whether the charity 
provided any good or service (and an estimate of the value of 
any such good or service) to the taxpayer in consideration for 
the contribution.\18\ In addition, present law requires that 
any charity that receives a contribution exceeding $75 made 
partly as a gift and partly as consideration for goods or 
services furnished by the charity (a ``quid pro quo'' 
contribution) is required to inform the contributor in writing 
of an estimate of the value of the goods or services furnished 
by the charity and that only the portion exceeding the value of 
the goods or services may be deductible as a charitable 
contribution.\19\
---------------------------------------------------------------------------
    \18\Sec. 170(f)(8).
    \19\Sec. 6115.
---------------------------------------------------------------------------
    Under present law, total deductible contributions of an 
individual taxpayer to public charities, private operating 
foundations, and certain types of private nonoperating 
foundations may not exceed 50 percent of the taxpayer's 
contribution base, which is the taxpayer's adjusted gross 
income for a taxable year (disregarding any net operating loss 
carryback). To the extent a taxpayer has not exceeded the 50-
percent limitation, (1) contributions of capital gain property 
to public charities generally may be deducted up to 30 percent 
of the taxpayer's contribution base, (2) contributions of cash 
to private foundations and certain other charitable 
organizations generally may be deducted up to 30 percent of the 
taxpayer's contribution base, and (3) contributions of capital 
gain property to private foundations and certain other 
charitable organizations generally may be deducted up to 20 
percent of the taxpayer's contribution base.
    Contributions by individuals in excess of the 50-percent, 
30-percent, and 20-percent limits may be carried over and 
deducted over the next five taxable years, subject to the 
relevant percentage limitations on the deduction in each of 
those years.
    In addition to the percentage limitations imposed 
specifically on charitable contributions, present law imposes a 
reduction on most itemized deductions, including charitable 
contribution deductions, for taxpayers with adjusted gross 
income in excess of a threshold amount, which is indexed 
annually for inflation. The threshold amount for 2007 is 
$156,400 ($78,200 for married individuals filing separate 
returns). For those deductions that are subject to the limit, 
the total amount of itemized deductions is reduced by three 
percent of adjusted gross income over the threshold amount, but 
not by more than 80 percent of itemized deductions subject to 
the limit. Beginning in 2006, the overall limitation on 
itemized deductions phases-out for all taxpayers. The overall 
limitation on itemized deductions is reduced by one-third in 
taxable years beginning in 2006 and 2007, and by two-thirds in 
taxable years beginning in 2008 and 2009. The overall 
limitation on itemized deductions is eliminated for taxable 
years beginning after December 31, 2009; however, this 
elimination of the limitation sunsets on December 31, 2010.
    In general, a charitable deduction is not allowed for 
income, estate, or gift tax purposes if the donor transfers an 
interest in property to a charity (e.g., a remainder) while 
also either retaining an interest in that property (e.g., an 
income interest) or transferring an interest in that property 
to a noncharity for less than full and adequate 
consideration.\20\ Exceptions to this general rule are provided 
for, among other interests, remainder interests in charitable 
remainder annuity trusts, charitable remainder unitrusts, and 
pooled income funds, and present interests in the form of a 
guaranteed annuity or a fixed percentage of the annual value of 
the property.\21\ For such interests, a charitable deduction is 
allowed to the extent of the present value of the interest 
designated for a charitable organization.
---------------------------------------------------------------------------
    \20\Secs. 170(f), 2055(e)(2), and 2522(c)(2).
    \21\Sec. 170(f)(2).
---------------------------------------------------------------------------

IRA rules

    Within limits, individuals may make deductible and 
nondeductible contributions to a traditional IRA. Amounts in a 
traditional IRA are includible in income when withdrawn (except 
to the extent the withdrawal represents a return of 
nondeductible contributions). Individuals also may make 
nondeductible contributions to a Roth IRA. Qualified 
withdrawals from a Roth IRA are excludable from gross income. 
Withdrawals from a Roth IRA that are not qualified withdrawals 
are includible in gross income to the extent attributable to 
earnings. Includible amounts withdrawn from a traditional IRA 
or a Roth IRA before attainment of age 59\1/2\ are subject to 
an additional 10-percent early withdrawal tax, unless an 
exception applies. Under present law, minimum distributions are 
required to be made from tax-favored retirement arrangements, 
including IRAs. Minimum required distributions from a 
traditional IRA must generally begin by the April 1 of the 
calendar year following the year in which the IRA owner attains 
age 70\1/2\.\22\
---------------------------------------------------------------------------
    \22\Minimum distribution rules also apply in the case of 
distributions after the death of a traditional or Roth IRA owner.
---------------------------------------------------------------------------
    If an individual has made nondeductible contributions to a 
traditional IRA, a portion of each distribution from an IRA is 
nontaxable until the total amount of nondeductible 
contributions has been received. In general, the amount of a 
distribution that is nontaxable is determined by multiplying 
the amount of the distribution by the ratio of the remaining 
nondeductible contributions to the account balance. In making 
the calculation, all traditional IRAs of an individual are 
treated as a single IRA, all distributions during any taxable 
year are treated as a single distribution, and the value of the 
contract, income on the contract, and investment in the 
contract are computed as of the close of the calendar year.
    In the case of a distribution from a Roth IRA that is not a 
qualified distribution, in determining the portion of the 
distribution attributable to earnings, contributions and 
distributions are deemed to be distributed in the following 
order: (1) regular Roth IRA contributions; (2) taxable 
conversion contributions;\23\ (3) nontaxable conversion 
contributions; and (4) earnings. In determining the amount of 
taxable distributions from a Roth IRA, all Roth IRA 
distributions in the same taxable year are treated as a single 
distribution, all regular Roth IRA contributions for a year are 
treated as a single contribution, and all conversion 
contributions during the year are treated as a single 
contribution.
---------------------------------------------------------------------------
    \23\Conversion contributions refer to conversions of amounts in a 
traditional IRA to a Roth IRA.
---------------------------------------------------------------------------
    Distributions from an IRA (other than a Roth IRA) are 
generally subject to withholding unless the individual elects 
not to have withholding apply.\24\ Elections not to have 
withholding apply are to be made in the time and manner 
prescribed by the Secretary.
---------------------------------------------------------------------------
    \24\Sec. 3405.
---------------------------------------------------------------------------

Qualified charitable distributions

    Present law provides an exclusion from gross income for 
otherwise taxable IRA distributions from a traditional or a 
Roth IRA in the case of qualified charitable distributions.\25\ 
The exclusion may not exceed $100,000 per taxpayer per taxable 
year. Special rules apply in determining the amount of an IRA 
distribution that is otherwise taxable. The otherwise 
applicable rules regarding taxation of IRA distributions and 
the deduction of charitable contributions continue to apply to 
distributions from an IRA that are not qualified charitable 
distributions. Qualified charitable distributions are taken 
into account for purposes of the minimum distribution rules 
applicable to traditional IRAs to the same extent the 
distribution would have been taken into account under such 
rules had the distribution not been directly distributed under 
the qualified charitable distribution provision. An IRA does 
not fail to qualify as an IRA merely because qualified 
charitable distributions have been made from the IRA.
---------------------------------------------------------------------------
    \25\The exclusion does not apply to distributions from employer-
sponsored retirements plans, including SIMPLE IRAs and simplified 
employee pensions (``SEPs'').
---------------------------------------------------------------------------
    A qualified charitable distribution is any distribution 
from an IRA directly by the IRA trustee to an organization 
described in section 170(b)(1)(A) (other than an organization 
described in section 509(a)(3) or a donor advised fund (as 
defined in section 4966(d)(2)). Distributions are eligible for 
the exclusion only if made on or after the date the IRA owner 
attains age 70\1/2\.
    The exclusion applies only if a charitable contribution 
deduction for the entire distribution otherwise would be 
allowable (under present law), determined without regard to the 
generally applicable percentage limitations. Thus, for example, 
if the deductible amount is reduced because of a benefit 
received in exchange, or if a deduction is not allowable 
because the donor did not obtain sufficient substantiation, the 
exclusion is not available with respect to any part of the IRA 
distribution.
    If the IRA owner has any IRA that includes nondeductible 
contributions, a special rule applies in determining the 
portion of a distribution that is includible in gross income 
(but for the qualified charitable distribution provision) and 
thus is eligible for qualified charitable distribution 
treatment. Under the special rule, the distribution is treated 
as consisting of income first, up to the aggregate amount that 
would be includible in gross income (but for the qualified 
charitable distribution provision) if the aggregate balance of 
all IRAs having the same owner were distributed during the same 
year. In determining the amount of subsequent IRA distributions 
includible in income, proper adjustments are to be made to 
reflect the amount treated as a qualified charitable 
distribution under the special rule.
    Distributions that are excluded from gross income by reason 
of the qualified charitable distribution provision are not 
taken into account in determining the deduction for charitable 
contributions under section 170.
    The exclusion for qualified charitable distributions 
applies to distributions made in taxable years beginning after 
December 31, 2005. Under present law, the exclusion does not 
apply to distributions made in taxable years beginning after 
December 31, 2007.

                           REASONS FOR CHANGE

    The Committee believes that facilitating charitable 
contributions from IRAs will help increase giving to charitable 
organizations. Therefore, the Committee believes that the 
present-law exclusion for qualified charitable distributions 
should be extended for one year.

                        EXPLANATION OF PROVISION

    The provision extends the exclusion for qualified 
charitable distributions to distributions made in taxable years 
beginning after December 31, 2007, and before January 1, 2009.

                             EFFECTIVE DATE

    The provision is effective for distributions made in 
taxable years beginning after December 31, 2007.

7. Deduction for certain expenses of elementary and secondary (sec. 307 
        of the bill and sec. 62(a)(2) of the Code)

                              PRESENT LAW

    In general, ordinary and necessary business expenses are 
deductible. However, unreimbursed employee business expenses 
generally are deductible only as an itemized deduction and only 
to the extent that the individual's total miscellaneous 
deductions (including employee business expenses) exceed two 
percent of adjusted gross income. An individual's otherwise 
allowable itemized deductions may be further limited by the 
overall limitation on itemized deductions, which reduces 
itemized deductions for taxpayers with adjusted gross income in 
excess of $156,400 (for 2007).\26\ In addition, miscellaneous 
itemized deductions are not allowable under the alternative 
minimum tax.
---------------------------------------------------------------------------
    \26\The adjusted gross income threshold is $78,200 in the case of a 
married individual filing a separate return (for 2007).
---------------------------------------------------------------------------
    Eligible educators are allowed an above-the-line deduction 
for certain expenses.\27\ Specifically, for taxable years 
beginning after December 31, 2001, and prior to January 1, 
2008, an above-the-line deduction is allowed for up to $250 
annually of expenses paid or incurred by an eligible educator 
for books, supplies (other than nonathletic supplies for 
courses of instruction in health or physical education), 
computer equipment (including related software and services) 
and other equipment, and supplementary materials used by the 
eligible educator in the classroom. To be eligible for this 
deduction, the expenses must be otherwise deductible under 
section 162 as a trade or business expense. A deduction is 
allowed only to the extent the amount of expenses exceeds the 
amount excludable from income under section 135 (relating to 
education savings bonds), 529(c)(1) (relating to qualified 
tuition programs), and section 530(d)(2) (relating to Coverdell 
education savings accounts).
---------------------------------------------------------------------------
    \27\Sec. 62(a)(2)(D).
---------------------------------------------------------------------------
    An eligible educator is a kindergarten through grade 12 
teacher, instructor, counselor, principal, or aide in a school 
for at least 900 hours during a school year. A school means any 
school that provides elementary education or secondary 
education, as determined under State law.
    The above-the-line deduction for eligible educators is not 
allowed for taxable years beginning after December 31, 2007.

                           REASONS FOR CHANGE

    The Committee recognizes that many elementary and secondary 
school teachers provide substantial classroom resources at 
their own expense, and believe that it is appropriate to extend 
the present law deduction for such expenses in order to 
continue to partially offset the substantial costs such 
educators incur for the benefit of their students.

                        EXPLANATION OF PROVISION

    The provision extends the deduction for eligible educator 
expenses for one year.

                             EFFECTIVE DATE

    The provision is effective for expenses paid or incurred in 
taxable years beginning after December 31, 2007, and prior to 
January 1, 2009.

8. One year extension of the election to treat combat pay as earned 
        income for purposes of the earned income credit (sec. 308 of 
        the bill and sec. 32(c)(2) of the Code)

                              PRESENT LAW

In general

    Subject to certain limitations, military compensation 
earned by members of the Armed Forces while serving in a combat 
zone may be excluded from gross income. In addition, for up to 
two years following service in a combat zone, military 
personnel may also exclude compensation earned while 
hospitalized from wounds, disease, or injuries incurred while 
serving in the combat zone.

Child credit

    Combat pay that is otherwise excluded from gross income 
under section 112 is treated as earned income which is taken 
into account in computing taxable income for purposes of 
calculating the refundable portion of the child credit.\28\
---------------------------------------------------------------------------
    \28\Unless otherwise provided, all section references are to the 
Internal Revenue Code of 1986, as amended (the ``Code'').
---------------------------------------------------------------------------

Earned income credit

    Any taxpayer may elect to treat combat pay that is 
otherwise excluded from gross income under section 112 as 
earned income for purposes of the earned income credit. This 
election is available with respect to any taxable year ending 
after the date of enactment and before January 1, 2008.

                           REASONS FOR CHANGE

    The Committee believes that members of the armed forces 
serving in combat should have full availability of the earned 
income credit, notwithstanding the exclusion of combat pay from 
gross income for purposes of determining federal tax liability. 
The Committee believes an extension of the election to treat 
combat pay as earnings for purposes of the earned income credit 
is necessary to achieve this result.

                        EXPLANATION OF PROVISION

    The provision extends for one year the availability of the 
election to treat combat pay that is otherwise excluded from 
gross income under section 112 as earned income for purposes of 
the earned income credit.

                             EFFECTIVE DATE

    The provision is effective in taxable years beginning after 
December 31, 2007 and before January 1, 2009.

9. Extension of qualified mortgage bond program rules for veterans 
        (sec. 309 of the bill and sec. 143 of the Code)

                              PRESENT LAW

    Private activity bonds are bonds that nominally are issued 
by States or local governments, but the proceeds of which are 
used (directly or indirectly) by a private person and payment 
of which is derived from funds of such private person. The 
exclusion from income for State and local bonds does not apply 
to private activity bonds, unless the bonds are issued for 
certain permitted purposes (``qualified private activity 
bonds''). The definition of a qualified private activity bond 
includes both qualified mortgage bonds and qualified veterans' 
mortgage bonds.
    Qualified mortgage bonds are issued to make mortgage loans 
to qualified mortgagors for owner-occupied residences. The Code 
imposes several limitations on qualified mortgage bonds, 
including income limitations for homebuyers and purchase price 
limitations for the home financed with bond proceeds. In 
addition, qualified mortgage bonds generally cannot be used to 
finance a mortgage for a homebuyer who had an ownership 
interest in a principal residence in the three years preceding 
the execution of the mortgage (the ``first-time homebuyer'' 
requirement).
    Under a special rule, qualified mortgage bonds may be 
issued to finance mortgages for veterans who served in the 
active military without regard to the first-time homebuyer 
requirement. Present-law income and purchase price limitations 
apply to loans to veterans financed with the proceeds of 
qualified mortgage bonds. Veterans are eligible for the 
exception from the first-time homebuyer requirement without 
regard to the date they last served on active duty or the date 
they applied for a loan after leaving active duty. However, 
veterans may only use the exception one time. This provision 
applies to bonds issued before January 1, 2008.

                           REASONS FOR CHANGE

    The Committee believes that the mortgage bond program 
provides an effective tool for providing the benefits of 
homeownership to military veterans. The present-law exception 
to the first-time homebuyer rule allows a broader class of 
veterans to benefit from the program and the Committee believes 
it is appropriate to extend the exception for an additional 
year.

                        EXPLANATION OF PROVISION

    The provision extends for one year the first-time homebuyer 
exception for veterans under the qualified mortgage bond 
program.

                             EFFECTIVE DATE

    The provision applies to bonds issued after December 31, 
2007 and before January 1, 2009.

10. Treatment of distributions to individuals called to active duty for 
        at least 180 days (sec. 310 of the bill and sec. 72(t) of the 
        Code)

                              PRESENT LAW

    Under present law, a taxpayer who receives a distribution 
from a qualified retirement plan prior to age 59\1/2\, death, 
or disability generally is subject to a 10-percent early 
withdrawal tax on the amount includable in income, unless an 
exception to the tax applies. Among other exceptions, the early 
distribution tax does not apply to distributions made to an 
employee who separates from service after age 55, or to 
distributions that are part of a series of substantially equal 
periodic payments made for the life (or life expectancy) of the 
employee or the joint lives (or life expectancies) of the 
employee and his or her beneficiary.
    Certain amounts held in a qualified cash or deferred 
arrangement (a ``section 401(k) plan'') or in a tax-sheltered 
annuity (a ``section 403(b) annuity'') may not be distributed 
before severance from employment, age 59\1/2\, death, 
disability, or financial hardship of the employee.
    Pursuant to amendments to section 72(t) made by the Pension 
Protection Act of 2006,\29\ the 10-percent early withdrawal tax 
does not apply to a qualified reservist distribution. A 
qualified reservist distribution is a distribution (1) from an 
IRA or attributable to elective deferrals under a section 
401(k) plan, section 403(b) annuity, or certain similar 
arrangements, (2) made to an individual who (by reason of being 
a member of a reserve component as defined in section 101 of 
title 37 of the U.S. Code) was ordered or called to active duty 
for a period in excess of 179 days or for an indefinite period, 
and (3) that is made during the period beginning on the date of 
such order or call to duty and ending at the close of the 
active duty period. A section 401(k) plan or section 403(b) 
annuity does not violate the distribution restrictions 
applicable to such plans by reason of making a qualified 
reservist distribution.
---------------------------------------------------------------------------
    \29\Pub. L. No. 109-280.
---------------------------------------------------------------------------
    An individual who receives a qualified reservist 
distribution may, at any time during the two-year period 
beginning on the day after the end of the active duty period, 
make one or more contributions to an IRA of such individual in 
an aggregate amount not to exceed the amount of such 
distribution. The dollar limitations otherwise applicable to 
contributions to IRAs do not apply to any contribution made 
pursuant to this special repayment rule. No deduction is 
allowed for any contribution made under the special repayment 
rule.
    The special rules applicable to a qualified reservist 
distribution apply to individuals ordered or called to active 
duty after September 11, 2001, and before December 31, 2007.

                           REASONS FOR CHANGE

    The Committee believes that the exception to the 10-percent 
early withdrawal tax is an important tax relief provision for 
reservists called to active duty. Reservists called to active 
duty may need access to amounts that they have contributed to 
tax-favored retirement savings programs in order to meet their 
personal financial obligations while serving our country. Given 
the continuing need for activation of reservists, the Committee 
believes that this tax relief provision should be extended so 
that it applies to reservists called to active duty on or after 
December 31, 2007.

                        EXPLANATION OF PROVISION

    The provision extends the rules applicable to qualified 
reservist distributions to individuals ordered or called to 
active duty before January 1, 2009.

                             EFFECTIVE DATE

    The provision is effective upon enactment.

11. Extension of special rule for regulated investment company stock 
        held in the estate of a nonresident non-citizen (sec. 311 of 
        the bill and sec. 2105(d) of the Code)

                              PRESENT LAW

    The gross estate of a decedent who was a U.S. citizen or 
resident generally includes all property--real, personal, 
tangible, and intangible--wherever situated.\30\ The gross 
estate of a nonresident non-citizen decedent, by contrast, 
generally includes only property that at the time of the 
decedent's death is situated within the United States.\31\ 
Property within the United States generally includes debt 
obligations of U.S. persons, including the Federal government 
and State and local governments, but does not include either 
bank deposits or portfolio obligations the interest on which 
would be exempt from U.S. income tax under section 871.\32\ 
Stock owned and held by a nonresident non-citizen generally is 
treated as property within the United States if the stock was 
issued by a domestic corporation.\33\
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    \30\Sec. 2031. The Economic Growth and Tax Relief Reconciliation 
Act of 2001 (``EGTRRA'') repealed the estate tax for estates of 
decedents dying after December 31, 2009. EGTRRA, however, included a 
termination provision under which EGTRRA's rules, including estate tax 
repeal, do not apply to estates of decedents dying after December 31, 
2010.
    \31\Sec. 2103.
    \32\Secs. 2104(c), 2105(b).
    \33\Sec. 2104(a); Treas. Reg. sec. 20.2104-1(a)(5).
---------------------------------------------------------------------------
    Treaties may reduce U.S. taxation of transfers of the 
estates of nonresident non-citizens. Under recent treaties, for 
example, U.S. tax generally may be eliminated except insofar as 
the property transferred includes U.S. real property or 
business property of a U.S. permanent establishment.
    Although stock issued by a domestic corporation generally 
is treated as property within the United States, stock of a 
regulated investment company (``RIC'') that was owned by a 
nonresident non-citizen is not deemed property within the 
United States in the proportion that, at the end of the quarter 
of the RIC's taxable year immediately before a decedent's date 
of death, the assets held by the RIC are debt obligations, 
deposits, or other property that would be treated as situated 
outside the United States if held directly by the estate (the 
``estate tax look-through rule for RIC stock'').\34\ This 
estate tax look-through rule for RIC stock does not apply to 
estates of decedents dying after December 31, 2007.
---------------------------------------------------------------------------
    \34\Sec. 2105(d).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    If a RIC satisfies certain income, asset, and distribution 
requirements, only one level of income tax generally is imposed 
on the income and gains of a RIC, and this tax is imposed on 
the RIC stockholders. By extension, the Committee believes it 
is appropriate to treat a RIC as a conduit under the rules for 
determining the extent to which the transfer of the estate of a 
nonresident non-citizen is subject to U.S. Federal estate tax. 
To the extent the assets of a RIC would not be subject to U.S. 
estate tax if held directly by an estate, the Committee 
believes there should be no estate tax when the assets are 
owned indirectly by ownership of stock in a RIC.

                        EXPLANATION OF PROVISION

    The provision permits the estate tax look-through rule for 
RIC stock to apply to estates of decedents dying before January 
1, 2009.

                             EFFECTIVE DATE

    The provision applies to estates of decedents dying after 
December 31, 2007.

12. Extend RIC ``qualified investment entity'' treatment under FIRPTA 
        (sec. 312 of the bill and sec. 897(h) of the Code).

                              PRESENT LAW

    Special U.S. tax rules apply to capital gains of foreign 
persons that are attributable to dispositions of interests in 
U.S. real property. In general, a foreign person (a foreign 
corporation or a nonresident alien individual) is not generally 
taxed on U.S. source capital gains unless certain personal 
presence or effectively connected business requirements are 
met. However, under the Foreign Investment in Real Property Tax 
Act (``FIRPTA'') provisions codified in section 897 of the 
Code, a foreign person who sells a U.S. real property interest 
(USRPI) is treated as if the gain from such a sale is 
effectively connected with a U.S. business, and is subject to 
tax at the same rates as a U.S. person. Withholding tax is also 
imposed under section 1445.
    A USPRI, the sale of which is subject to FIRPTA tax, 
includes stock or a beneficial interest in any U.S. real 
property holding corporation (as defined), unless the stock is 
regularly traded on an established securities market and the 
selling foreign corporation or nonresident alien individual 
held no more than 5 percent of that stock within the 5-year 
period ending on date of disposition (or, if shorter, during 
the period in which the entity was in existence). There is an 
exception, however, for stock of a domestically controlled 
``qualified investment entity.'' However, if stock of a 
domestically controlled qualified investment entity is disposed 
of within the 30 days preceding a dividend distribution in an 
``applicable wash sale transaction,'' in which an amount that 
would have been a taxable distribution (as described below) is 
instead treated as nontaxable sales proceeds, but substantially 
similar stock is reacquired (or an option to obtain it is 
acquired) within a 61 day period, then the amount that would 
have been a taxable distribution continues to be taxed.
    A distribution from a ``qualified investment entity'' that 
is attributable to the sale of a USRPI is subject to tax under 
FIRPTA unless the distribution is with respect to an interest 
that is regularly traded on an established securities market 
located in the United States and the recipient foreign 
corporation or nonresident alien individual held no more than 5 
percent of that class of stock or beneficial interest within 
the 1-year period ending on the date of distribution. Special 
rules apply to situations involving tiers of qualified 
investment entities.
    The term ``qualified investment entity'' includes a 
regulated investment company (``RIC'') that meets certain 
requirements, although the inclusion of a RIC in that 
definition is scheduled to expire, for certain purposes, on 
December 31, 2007.\35\ The definition does not expire for 
purposes of taxing distributions from the RIC that are 
attributable directly or indirectly to a distribution to the 
entity from a real estate investment trust, nor for purposes of 
the applicable wash sale rules.
---------------------------------------------------------------------------
    \35\Section 897(h)
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The committee believes it is desirable to extend the 
present law provision for an additional year.

                        EXPLANATION OF PROVISION

    The proposal would extend the inclusion of a regulated 
investment company (RIC) within the definition of a ``qualified 
investment entity'' under section 897 of the Code through 
December 31, 2008, for those situations in which that that 
inclusion would otherwise expire at the end of 2007.

                             EFFECTIVE DATE

    The proposal would take effect on January 1, 2008.

13. State legislators' travel expenses away from home (sec. 313 of the 
        bill and sec. 162 of the Code)

                              PRESENT LAW

    In general, for Federal income tax purposes, any individual 
who is a State legislator, at any time during the year, may 
elect to deduct deemed living expenses while away from home as 
a miscellaneous itemized deduction.\36\ If such election is 
made, the State legislator's place of residence within the 
legislative district is considered his home. A State legislator 
is deemed to incur for living expenses an amount equal to the 
product of the State legislator's legislative days and the per 
diem amount.
---------------------------------------------------------------------------
    \36\Sec. 162(h).
---------------------------------------------------------------------------
    The State legislator's legislative days is the number of 
days the legislature was in session (including any day not in 
session for a period of four consecutive days or less),\37\ 
plus any day the physical presence of the individual was 
recorded at a committee meeting.\38\
---------------------------------------------------------------------------
    \37\Sec. 162(h)(2)(A).
    \38\Sec. 162(h)(2)(B).
---------------------------------------------------------------------------
    The per diem amount is the greater of: (1) the per diem 
amount allowable to employees of the State, for which he or she 
is a legislator, while away from home, not to exceed 110 
percent of the Federal government amount,\39\ or (2) the amount 
allowable to executive branch employees of the Federal 
government for per diem while away from home.\40\
---------------------------------------------------------------------------
    \39\Sec. 162(h)(1)(B)(i).
    \40\Sec. 162(h)(1)(B)(ii).
---------------------------------------------------------------------------
    The election is not available if the legislator's place of 
residence within the legislative district is within 50 miles of 
the State Capitol.\41\
---------------------------------------------------------------------------
    \41\Sec. 162(h)(4).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the definition of what 
constitutes a legislative day should be clarified. The 
Committee is aware that the IRS and Treasury are working on 
authoritative guidance on the issue. However, in the absence of 
such guidance, the Committee believes that a temporary 
statutory rule is necessary so that taxpayers are provided 
certainty in their positions.
    It is intended that the Committee will revisit the 
appropriateness of the provision after a thorough study of the 
issue.

                        EXPLANATION OF PROVISION

    The provision clarifies the definition of legislative days 
to include any day in which the legislature is formally called 
into session without regard to whether legislation was 
considered on such day. The provision applies in the case of 
the taxpayer's taxable year beginning in 2008.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2007.

              B. Extenders Primarily Affecting Businesses


1. Extend the research and experimentation tax credit (sec. 321 of the 
        bill and sec. 41 of the Code)

                              PRESENT LAW

General rule

    A taxpayer may claim a research credit equal to 20 percent 
of the amount by which the taxpayer's qualified research 
expenses for a taxable year exceed its base amount for that 
year.\42\ Thus, the research credit is generally available with 
respect to incremental increases in qualified research.
---------------------------------------------------------------------------
    \42\Sec. 41.
---------------------------------------------------------------------------
    A 20-percent research tax credit is also available with 
respect to the excess of (1) 100 percent of corporate cash 
expenses (including grants or contributions) paid for basic 
research conducted by universities (and certain nonprofit 
scientific research organizations) over (2) the sum of (a) the 
greater of two minimum basic research floors plus (b) an amount 
reflecting any decrease in nonresearch giving to universities 
by the corporation as compared to such giving during a fixed-
base period, as adjusted for inflation. This separate credit 
computation is commonly referred to as the university basic 
research credit.\43\
---------------------------------------------------------------------------
    \43\Sec. 41(e).
---------------------------------------------------------------------------
    Finally, a research credit is available for a taxpayer's 
expenditures on research undertaken by an energy research 
consortium. This separate credit computation is commonly 
referred to as the energy research credit. Unlike the other 
research credits, the energy research credit applies to all 
qualified expenditures, not just those in excess of a base 
amount.
    The research credit, including the university basic 
research credit and the energy research credit, is scheduled to 
expire and generally will not apply to amounts paid or incurred 
after December 31, 2007.\44\
---------------------------------------------------------------------------
    \44\The research tax credit was initially enacted in the Economic 
Recovery Tax Act of 1981. It has been subsequently extended and 
modified numerous times. Most recently, the Tax Relief and Health Care 
Act of 2006 extended the research credit through December 31, 2007, 
modified the alternative incremental research credit, and added an 
election to claim an alternative simplified credit.
---------------------------------------------------------------------------

Computation of allowable credit

    Except for energy research payments and certain university 
basic research payments made by corporations, the research tax 
credit applies only to the extent that the taxpayer's qualified 
research expenses for the current taxable year exceed its base 
amount. The base amount for the current year generally is 
computed by multiplying the taxpayer's fixed-base percentage by 
the average amount of the taxpayer's gross receipts for the 
four preceding years. If a taxpayer both incurred qualified 
research expenses and had gross receipts during each of at 
least three years from 1984 through 1988, then its fixed-base 
percentage is the ratio that its total qualified research 
expenses for the 1984-1988 period bears to its total gross 
receipts for that period (subject to a maximum fixed-base 
percentage of 16 percent). All other taxpayers (so-called 
start-up firms) are assigned a fixed-base percentage of three 
percent.\45\
---------------------------------------------------------------------------
    \45\The Small Business Job Protection Act of 1996 expanded the 
definition of start-up firms under section 41(c)(3)(B)(i) to include 
any firm if the first taxable year in which such firm had both gross 
receipts and qualified research expenses began after 1983. A special 
rule (enacted in 1993) is designed to gradually recompute a start-up 
firm's fixed-base percentage based on its actual research experience. 
Under this special rule, a start-up firm is assigned a fixed-base 
percentage of three percent for each of its first five taxable years 
after 1993 in which it incurs qualified research expenses. A start-up 
firm's fixed-base percentage for its sixth through tenth taxable years 
after 1993 in which it incurs qualified research expenses is a phased-
in ratio based on the firm's actual research experience. For all 
subsequent taxable years, the taxpayer's fixed-base percentage is its 
actual ratio of qualified research expenses to gross receipts for any 
five years selected by the taxpayer from its fifth through tenth 
taxable years after 1993. Sec. 41(c)(3)(B).
---------------------------------------------------------------------------
    In computing the credit, a taxpayer's base amount can not 
be less than 50 percent of its current-year qualified research 
expenses.
    To prevent artificial increases in research expenditures by 
shifting expenditures among commonly controlled or otherwise 
related entities, a special aggregation rule provides that all 
members of the same controlled group of corporations are 
treated as a single taxpayer.\46\ Under regulations prescribed 
by the Secretary, special rules apply for computing the credit 
when a major portion of a trade or business (or unit thereof) 
changes hands, under which qualified research expenses and 
gross receipts for periods prior to the change of ownership of 
a trade or business are treated as transferred with the trade 
or business that gave rise to those expenses and receipts for 
purposes of recomputing a taxpayer's fixed-base percentage.\47\
---------------------------------------------------------------------------
    \46\Sec. 41(f)(1).
    \47\Sec. 41(f)(3).
---------------------------------------------------------------------------

Alternative incremental research credit regime

    Taxpayers are allowed to elect an alternative incremental 
research credit regime.\48\ If a taxpayer elects to be subject 
to this alternative regime, the taxpayer is assigned a three-
tiered fixed-base percentage (that is lower than the fixed-base 
percentage otherwise applicable under present law) and the 
credit rate likewise is reduced.
---------------------------------------------------------------------------
    \48\Sec. 41(c)(4).
---------------------------------------------------------------------------
    Generally, for amounts paid or incurred prior to 2007, 
under the alternative incremental credit regime, a credit rate 
of 2.65 percent applies to the extent that a taxpayer's 
current-year research expenses exceed a base amount computed by 
using a fixed-base percentage of one percent (i.e., the base 
amount equals one percent of the taxpayer's average gross 
receipts for the four preceding years) but do not exceed a base 
amount computed by using a fixed-base percentage of 1.5 
percent. A credit rate of 3.2 percent applies to the extent 
that a taxpayer's current-year research expenses exceed a base 
amount computed by using a fixed-base percentage of 1.5 percent 
but do not exceed a base amount computed by using a fixed-base 
percentage of two percent. A credit rate of 3.75 percent 
applies to the extent that a taxpayer's current-year research 
expenses exceed a base amount computed by using a fixed-base 
percentage of two percent. Generally, for amounts paid or 
incurred after 2006, the credit rates listed above are 
increased to three percent, four percent, and five percent, 
respectively.\49\
---------------------------------------------------------------------------
    \49\A special transition rule applies for fiscal year 2006-2007 
taxpayers.
---------------------------------------------------------------------------
    An election to be subject to this alternative incremental 
credit regime can be made for any taxable year beginning after 
June 30, 1996, and such an election applies to that taxable 
year and all subsequent years unless revoked with the consent 
of the Secretary of the Treasury.

Alternative simplified credit

    Generally, for amounts paid or incurred after 2006, 
taxpayers may elect to claim an alternative simplified credit 
for qualified research expenses.\50\ The alternative simplified 
research credit is equal to 12 percent of qualified research 
expenses that exceed 50 percent of the average qualified 
research expenses for the three preceding taxable years. The 
rate is reduced to six percent if a taxpayer has no qualified 
research expenses in any one of the three preceding taxable 
years.
---------------------------------------------------------------------------
    \50\A special transition rule applies for fiscal year 2006-2007 
taxpayers.
---------------------------------------------------------------------------
    An election to use the alternative simplified credit 
applies to all succeeding taxable years unless revoked with the 
consent of the Secretary. An election to use the alternative 
simplified credit may not be made for any taxable year for 
which an election to use the alternative incremental credit is 
in effect. A transition rule applies which permits a taxpayer 
to elect to use the alternative simplified credit in lieu of 
the alternative incremental credit if such election is made 
during the taxable year which includes January 1, 2007. The 
transition rule applies only to the taxable year which includes 
that date.

Eligible expenses

    Qualified research expenses eligible for the research tax 
credit consist of: (1) in-house expenses of the taxpayer for 
wages and supplies attributable to qualified research; (2) 
certain time-sharing costs for computer use in qualified 
research; and (3) 65 percent of amounts paid or incurred by the 
taxpayer to certain other persons for qualified research 
conducted on the taxpayer's behalf (so-called contract research 
expenses).\51\ Notwithstanding the limitation for contract 
research expenses, qualified research expenses include 100 
percent of amounts paid or incurred by the taxpayer to an 
eligible small business, university, or Federal laboratory for 
qualified energy research.
---------------------------------------------------------------------------
    \51\Under a special rule, 75 percent of amounts paid to a research 
consortium for qualified research are treated as qualified research 
expenses eligible for the research credit (rather than 65 percent under 
the general rule under section 41(b)(3) governing contract research 
expenses) if (1) such research consortium is a tax-exempt organization 
that is described in section 501(c)(3) (other than a private 
foundation) or section 501(c)(6) and is organized and operated 
primarily to conduct scientific research, and (2) such qualified 
research is conducted by the consortium on behalf of the taxpayer and 
one or more persons not related to the taxpayer. Sec. 41(b)(3)(C).
---------------------------------------------------------------------------
    To be eligible for the credit, the research does not only 
have to satisfy the requirements of present-law section 174 
(described below) but also must be undertaken for the purpose 
of discovering information that is technological in nature, the 
application of which is intended to be useful in the 
development of a new or improved business component of the 
taxpayer, and substantially all of the activities of which 
constitute elements of a process of experimentation for 
functional aspects, performance, reliability, or quality of a 
business component. Research does not qualify for the credit if 
substantially all of the activities relate to style, taste, 
cosmetic, or seasonal design factors.\52\ In addition, research 
does not qualify for the credit: (1) if conducted after the 
beginning of commercial production of the business component; 
(2) if related to the adaptation of an existing business 
component to a particular customer's requirements; (3) if 
related to the duplication of an existing business component 
from a physical examination of the component itself or certain 
other information; or (4) if related to certain efficiency 
surveys, management function or technique, market research, 
market testing, or market development, routine data collection 
or routine quality control.\53\ Research does not qualify for 
the credit if it is conducted outside the United States, Puerto 
Rico, or any U.S. possession.
---------------------------------------------------------------------------
    \52\Sec. 41(d)(3).
    \53\Sec. 41(d)(4).
---------------------------------------------------------------------------

Relation to deduction

    Under section 174, taxpayers may elect to deduct currently 
the amount of certain research or experimental expenditures 
paid or incurred in connection with a trade or business, 
notwithstanding the general rule that business expenses to 
develop or create an asset that has a useful life extending 
beyond the current year must be capitalized.\54\ However, 
deductions allowed to a taxpayer under section 174 (or any 
other section) are reduced by an amount equal to 100 percent of 
the taxpayer's research tax credit determined for the taxable 
year.\55\ Taxpayers may alternatively elect to claim a reduced 
research tax credit amount under section 41 in lieu of reducing 
deductions otherwise allowed.\56\
---------------------------------------------------------------------------
    \54\Taxpayers may elect 10-year amortization of certain research 
expenditures allowable as a deduction under section 174(a). Secs. 
174(f)(2) and 59(e).
    \55\Sec. 280C(c).
    \56\Sec. 280C(c)(3).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee acknowledges that research is important to 
the economy. Research is the basis of new products, new 
services, new industries, and new jobs for the domestic 
economy. Therefore the Committee believes it is appropriate to 
extend the present-law research credit.

                        EXPLANATION OF PROVISION

    The provision extends the research credit for one year.

                             EFFECTIVE DATE

    The provision is effective for amounts paid or incurred 
after December 31, 2007.

2. Indian employment tax credit (sec. 322 of the bill and sec. 45A of 
        the Code)

                              PRESENT LAW

    In general, a credit against income tax liability is 
allowed to employers for the first $20,000 of qualified wages 
and qualified employee health insurance costs paid or incurred 
by the employer with respect to certain employees (sec. 45A). 
The credit is equal to 20 percent of the excess of eligible 
employee qualified wages and health insurance costs during the 
current year over the amount of such wages and costs incurred 
by the employer during 1993. The credit is an incremental 
credit, such that an employer's current-year qualified wages 
and qualified employee health insurance costs (up to $20,000 
per employee) are eligible for the credit only to the extent 
that the sum of such costs exceeds the sum of comparable costs 
paid during 1993. No deduction is allowed for the portion of 
the wages equal to the amount of the credit.
    Qualified wages means wages paid or incurred by an employer 
for services performed by a qualified employee. A qualified 
employee means any employee who is an enrolled member of an 
Indian tribe or the spouse of an enrolled member of an Indian 
tribe, who performs substantially all of the services within an 
Indian reservation, and whose principal place of abode while 
performing such services is on or near the reservation in which 
the services are performed. An ``Indian reservation'' is a 
reservation as defined in section 3(d) of the Indian Financing 
Act of 1974 or section 4(1) of the Indian Child Welfare Act of 
1978. For purposes of the preceding sentence, section 3(d) is 
applied by treating ``former Indian reservations in Oklahoma'' 
as including only lands that are (1) within the jurisdictional 
area of an Oklahoma Indian tribe as determined by the Secretary 
of the Interior, and (2) recognized by such Secretary as an 
area eligible for trust land status under 25 CFR Part 151 (as 
in effect on August 5, 1997).
    An employee is not treated as a qualified employee for any 
taxable year of the employer if the total amount of wages paid 
or incurred by the employer with respect to such employee 
during the taxable year exceeds an amount determined at an 
annual rate of $30,000 (which after adjustment for inflation is 
currently $40,000).\57\ In addition, an employee will not be 
treated as a qualified employee under certain specific 
circumstances, such as where the employee is related to the 
employer (in the case of an individual employer) or to one of 
the employer's shareholders, partners, or grantors. Similarly, 
an employee will not be treated as a qualified employee where 
the employee has more than a 5 percent ownership interest in 
the employer. Finally, an employee will not be considered a 
qualified employee to the extent the employee's services relate 
to gaming activities or are performed in a building housing 
such activities.
---------------------------------------------------------------------------
    \57\See Form 8845, Indian Employment Credit (Rev. December 2006).
---------------------------------------------------------------------------
    The wage credit is available for wages paid or incurred on 
or after January 1, 1994, in taxable years that begin before 
January 1, 2007.

                           REASONS FOR CHANGE

    To further encourage employment on Indian reservations, the 
Committee believes it is appropriate to extend the Indian 
employment credit an additional year.

                        EXPLANATION OF PROVISION

    The provision extends for one year the present-law 
employment credit provision (through taxable years beginning on 
or before December 31, 2008).

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2007.

3. Extend the new markets tax credit (sec. 323 of the bill and sec. 45D 
        of the Code)

                              PRESENT LAW

    Section 45D provides a new markets tax credit for qualified 
equity investments made to acquire stock in a corporation, or a 
capital interest in a partnership, that is a qualified 
community development entity (``CDE'').\58\ The amount of the 
credit allowable to the investor (either the original purchaser 
or a subsequent holder) is (1) a five-percent credit for the 
year in which the equity interest is purchased from the CDE and 
for each of the following two years, and (2) a six-percent 
credit for each of the following four years. The credit is 
determined by applying the applicable percentage (five or six 
percent) to the amount paid to the CDE for the investment at 
its original issue, and is available for a taxable year to the 
taxpayer who holds the qualified equity investment on the date 
of the initial investment or on the respective anniversary date 
that occurs during the taxable year. The credit is recaptured 
if at any time during the seven-year period that begins on the 
date of the original issue of the investment the entity ceases 
to be a qualified CDE, the proceeds of the investment cease to 
be used as required, or the equity investment is redeemed.
---------------------------------------------------------------------------
    \58\Section 45D was added by section 121(a) of the Community 
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554 (December 21, 
2000).
---------------------------------------------------------------------------
    A qualified CDE is any domestic corporation or partnership: 
(1) whose primary mission is serving or providing investment 
capital for low-income communities or low-income persons; (2) 
that maintains accountability to residents of low-income 
communities by their representation on any governing board of 
or any advisory board to the CDE; and (3) that is certified by 
the Secretary as being a qualified CDE. A qualified equity 
investment means stock (other than nonqualified preferred 
stock) in a corporation or a capital interest in a partnership 
that is acquired directly from a CDE for cash, and includes an 
investment of a subsequent purchaser if such investment was a 
qualified equity investment in the hands of the prior holder. 
Substantially all of the investment proceeds must be used by 
the CDE to make qualified low-income community investments. For 
this purpose, qualified low-income community investments 
include: (1) capital or equity investments in, or loans to, 
qualified active low-income community businesses; (2) certain 
financial counseling and other services to businesses and 
residents in low-income communities; (3) the purchase from 
another CDE of any loan made by such entity that is a qualified 
low-income community investment; or (4) an equity investment 
in, or loan to, another CDE.
    A ``low-income community'' is a population census tract 
with either (1) a poverty rate of at least 20 percent or (2) 
median family income which does not exceed 80 percent of the 
greater of metropolitan area median family income or statewide 
median family income (for a non-metropolitan census tract, does 
not exceed 80 percent of statewide median family income). In 
the case of a population census tract located within a high 
migration rural county, low-income is defined by reference to 
85 percent (rather than 80 percent) of statewide median family 
income. For this purpose, a high migration rural county is any 
county that, during the 20-year period ending with the year in 
which the most recent census was conducted, has a net out-
migration of inhabitants from the county of at least 10 percent 
of the population of the county at the beginning of such 
period.
    The Secretary has the authority to designate ``targeted 
populations'' as low-income communities for purposes of the new 
markets tax credit. For this purpose, a ``targeted population'' 
is defined by reference to section 103(20) of the Riegle 
Community Development and Regulatory Improvement Act of 1994 
(12 U.S.C. 4702(20)) to mean individuals, or an identifiable 
group of individuals, including an Indian tribe, who (A) are 
low-income persons; or (B) otherwise lack adequate access to 
loans or equity investments. Under such Act, ``low-income'' 
means (1) for a targeted population within a metropolitan area, 
less than 80 percent of the area median family income; and (2) 
for a targeted population within a non-metropolitan area, less 
than the greater of 80 percent of the area median family income 
or 80 percent of the statewide non-metropolitan area median 
family income.\59\ Under such Act, a targeted population is not 
required to be within any census tract. In addition, a 
population census tract with a population of less than 2,000 is 
treated as a low-income community for purposes of the credit if 
such tract is within an empowerment zone, the designation of 
which is in effect under section 1391, and is contiguous to one 
or more low-income communities.
---------------------------------------------------------------------------
    \59\12 U.S.C. 4702(17) (defines ``low-income'' for purposes of 12 
U.S.C. 4702(20)).
---------------------------------------------------------------------------
    A qualified active low-income community business is defined 
as a business that satisfies, with respect to a taxable year, 
the following requirements: (1) at least 50 percent of the 
total gross income of the business is derived from the active 
conduct of trade or business activities in any low-income 
community; (2) a substantial portion of the tangible property 
of such business is used in a low-income community; (3) a 
substantial portion of the services performed for such business 
by its employees is performed in a low-income community; and 
(4) less than five percent of the average of the aggregate 
unadjusted bases of the property of such business is 
attributable to certain financial property or to certain 
collectibles.
    The maximum annual amount of qualified equity investments 
is capped at $2.0 billion per year for calendar years 2004 and 
2005, and at $3.5 billion per year for calendar years 2006, 
2007, and 2008.

                           REASONS FOR CHANGE

    The Committee believes that the new markets tax credit has 
proved to be an effective means of providing equity and other 
investments to benefit businesses in low income communities, 
and that it is appropriate to provide for the allocation of 
additional investments for another calendar year.

                        EXPLANATION OF PROVISION

    The provision extends the new markets tax credit for one 
year, through 2009, permitting up to $3.5 billion in qualified 
equity investments for that calendar year. The Committee is 
concerned that the Treasury Department has not exercised its 
authority under section 45D(e)(2) to prescribe regulations with 
regard to the definition of ``targeted populations.'' The 
Committee urges the Treasury Department to do so in a timely 
manner. Should the Treasury Department continue to delay 
prescription of such regulations, the Committee may take 
legislative action with regard to that definition.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

4. Extend railroad track maintenance credit (sec. 324 of the bill and 
        sec. 45G of the Code)

                              PRESENT LAW

    Present law provides a 50-percent business tax credit for 
qualified railroad track maintenance expenditures paid or 
incurred by an eligible taxpayer during the taxable year.\60\ 
The credit is limited to the product of $3,500 times the number 
of miles of railroad track (1) owned or leased by an eligible 
taxpayer as of the close of its taxable year, and (2) assigned 
to the eligible taxpayer by a Class II or Class III railroad 
that owns or leases such track at the close of the taxable 
year.\61\ Each mile of railroad track may be taken into account 
only once, either by the owner of such mile or by the owner's 
assignee, in computing the per-mile limitation. Under the 
provision, the credit is limited in respect of the total number 
of miles of track (1) owned or leased by the Class II or Class 
III railroad and (2) assigned to the Class II or Class III 
railroad for purposes of the credit.
---------------------------------------------------------------------------
    \60\Sec. 45G(a).
    \61\Sec. 45G(b)(1).
---------------------------------------------------------------------------
    Qualified railroad track maintenance expenditures are 
defined as gross expenditures (whether or not otherwise 
chargeable to capital account) for maintaining railroad track 
(including roadbed, bridges, and related track structures) 
owned or leased as of January 1, 2005, by a Class II or Class 
III railroad (determined without regard to any consideration 
for such expenditure given by the Class II or Class III 
railroad which made the assignment of such track).\62\
---------------------------------------------------------------------------
    \62\Sec. 45G(d).
---------------------------------------------------------------------------
    An eligible taxpayer means any Class II or Class III 
railroad, and any person who transports property using the rail 
facilities of a Class II or Class III railroad or who furnishes 
railroad-related property or services to a Class II or Class 
III railroad, but only with respect to miles of railroad track 
assigned to such person by such railroad under the 
provision.\63\
---------------------------------------------------------------------------
    \63\Sec. 45G(c).
---------------------------------------------------------------------------
    The terms Class II or Class III railroad have the meanings 
given by the Surface Transportation Board.\64\
---------------------------------------------------------------------------
    \64\Sec. 45G(e)(1).
---------------------------------------------------------------------------
    The provision applies to qualified railroad track 
maintenance expenditures paid or incurred during taxable years 
beginning after December 31, 2004, and before January 1, 2008.

                           REASONS FOR CHANGE

    The Committee believes that Class II and Class III 
railroads are an important part of the nation's railway system. 
Therefore, the Committee believes that this incentive for 
railroad track maintenance expenditures should be extended.

                        EXPLANATION OF PROVISION

    The provision extends the present law provision for one 
year, for qualified railroad track maintenance expenditures 
paid or incurred before January 1, 2009.

                             EFFECTIVE DATE

    The provision is effective for expenditures paid or 
incurred after December 31, 2007.

5. Fifteen-year straight-line cost recovery for qualified leasehold 
        improvements and qualified restaurant improvements (sec. 325 of 
        the bill and sec. 168 of the Code)

                              PRESENT LAW

In general

    A taxpayer generally must capitalize the cost of property 
used in a trade or business and recover such cost over time 
through annual deductions for depreciation or amortization. 
Tangible property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation by applying specific recovery periods, placed-in-
service conventions, and depreciation methods to the cost of 
various types of depreciable property.\65\ The cost of 
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years. 
Nonresidential real property is subject to the mid-month 
placed-in-service convention. Under the mid-month convention, 
the depreciation allowance for the first year property is 
placed in service is based on the number of months the property 
was in service, and property placed in service at any time 
during a month is treated as having been placed in service in 
the middle of the month.
---------------------------------------------------------------------------
    \65\Sec. 168.
---------------------------------------------------------------------------

Depreciation of leasehold improvements

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

Qualified leasehold improvement property

    Section 168(e)(3)(E)(iv) provides a statutory 15-year 
recovery period for qualified leasehold improvement property 
placed in service before January 1, 2008. Qualified leasehold 
improvement property is recovered using the straight-line 
method. Leasehold improvements placed in service in 2008 and 
later will be subject to the general rules described above.
    Qualified leasehold improvement property is any improvement 
to an interior portion of a building that is nonresidential 
real property, provided certain requirements are met. The 
improvement must be made under or pursuant to a lease either by 
the lessee (or sublessee), or by the lessor, of that portion of 
the building to be occupied exclusively by the lessee (or 
sublessee). The improvement must be placed in service more than 
three years after the date the building was first placed in 
service. Qualified leasehold improvement property does not 
include any improvement for which the expenditure is 
attributable to the enlargement of the building, any elevator 
or escalator, any structural component benefiting a common 
area, or the internal structural framework of the building.
    If a lessor makes an improvement that qualifies as 
qualified leasehold improvement property, such improvement does 
not qualify as qualified leasehold improvement property to any 
subsequent owner of such improvement. An exception to the rule 
applies in the case of death and certain transfers of property 
that qualify for non-recognition treatment.

Qualified restaurant property

    Section 168(e)(3)(E)(v) provides a statutory 15-year 
recovery period for qualified restaurant property placed in 
service before January 1, 2008. For purposes of the provision, 
qualified restaurant property means any improvement to a 
building if such improvement is placed in service more than 
three years after the date such building was first placed in 
service and more than 50 percent of the building's square 
footage is devoted to the preparation of, and seating for on-
premises consumption of, prepared meals. Qualified restaurant 
property is recovered using the straight-line method.

                           REASONS FOR CHANGE

    The Committee believes that it is appropriate to extend the 
15-year recovery period for qualified leasehold improvements 
and qualified restaurant property.

                        EXPLANATION OF PROVISION

    The present-law provisions for qualified leasehold 
improvement property and qualified restaurant property are 
extended for one year (through December 31, 2008).

                             EFFECTIVE DATE

    The provision applies to property placed in service after 
December 31, 2007.

6. 7-year recovery period for motorsports racetrack property (sec. 326 
        of the bill and sec. 168 of the Code)

                              PRESENT LAW

    A taxpayer generally must capitalize the cost of property 
used in a trade or business and recover such cost over time 
through annual deductions for depreciation or amortization. 
Tangible property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation by applying specific recovery periods, placed-
inservice conventions, and depreciation methods to the cost of 
various types of depreciable property.\66\ The cost of 
nonresidential real property is recovered using the straight-
line method of depreciation and a recovery period of 39 years. 
Nonresidential real property is subject to the mid-month 
placed-in-service convention. Under the mid-month convention, 
the depreciation allowance for the first year property is 
placed in service is based on the number of months the property 
was in service, and property placed in service at any time 
during a month is treated as having been placed in service in 
the middle of the month. Land improvements (such as roads and 
fences) are recovered over 15 years. An exception exists for 
the theme and amusement park industry, whose assets are 
assigned a recovery period of seven years. Additionally, a 
motorsports entertainment complex placed in service before 
December 31, 2007 is assigned a recovery period of seven 
years.\67\ For these purposes, a motorsports entertainment 
complex means a racing track facility which is permanently 
situated on land that during the 36 month period following its 
placed in service date it hosts a racing event.\68\ The term 
motorsports entertainment complex also includes ancillary 
facilities, land improvements (e.g., parking lots, sidewalks, 
fences), support facilities (e.g., food and beverage retailing, 
souvenir vending), and appurtenances associated with such 
facilities (e.g., ticket booths, grandstands).
---------------------------------------------------------------------------
    \66\Sec. 168.
    \67\Sec. 168(e)(3)(C)(ii).
    \68\Sec. 168(i)(15).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that extending the depreciation 
incentive will encourage economic development. Therefore, the 
provision extends the 7-year recovery period for motorsports 
entertainment complex property.

                        EXPLANATION OF PROVISION

    The provision extends the present law seven year recovery 
period for one year (through December 31, 2008).

                             EFFECTIVE DATE

    The provision is effective for property placed in service 
after December 31, 2007.

7. Accelerated depreciation for business property on Indian 
        reservations (Sec. 327 of the bill and Sec. 168 of the Code)

                              PRESENT LAW

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

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

    ``Qualified Indian reservation property'' eligible for 
accelerated depreciation includes property described in the 
table above which is: (1) used by the taxpayer predominantly in 
the active conduct of a trade or business within an Indian 
reservation; (2) not used or located outside the reservation on 
a regular basis; (3) not acquired (directly or indirectly) by 
the taxpayer from a person who is related to the taxpayer;\69\ 
and (4) is not property placed in service for purposes of 
conducting gaming activities.\70\ Certain ``qualified 
infrastructure property'' may be eligible for the accelerated 
depreciation even if located outside an Indian reservation, 
provided that the purpose of such property is to connect with 
qualified infrastructure property located within the 
reservation (e.g., roads, power lines, water systems, railroad 
spurs, and communications facilities).\71\
---------------------------------------------------------------------------
    \69\For these purposes, related persons is defined in Sec. 
465(b)(3)(C).
    \70\Sec. 168(j)(4)(A).
    \71\Sec. 168(j)(4)(C).
---------------------------------------------------------------------------
    An ``Indian reservation'' means a reservation as defined in 
section 3(d) of the Indian Financing Act of 1974 or section 
4(10) of the Indian Child Welfare Act of 1978. For purposes of 
the preceding sentence, section 3(d) is applied by treating 
``former Indian reservations in Oklahoma'' as including only 
lands that are (1) within the jurisdictional area of an 
Oklahoma Indian tribe as determined by the Secretary of the 
Interior, and (2) recognized by such Secretary as an area 
eligible for trust land status under 25 CFR part 151 (as in 
effect on August 5, 1997).
    The depreciation deduction allowed for regular tax purposes 
is also allowed for purposes of the alternative minimum tax. 
The accelerated depreciation for Indian reservations is 
available with respect to property placed in service on or 
after January 1, 1994, and before January 1, 2008.

                           REASONS FOR CHANGE

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

                        EXPLANATION OF PROVISION

    The provision extends for one year the present-law 
incentive relating to depreciation of qualified Indian 
reservation property (to apply to property placed in service 
through December 31, 2008).

                             EFFECTIVE DATE

    The provision applies to property placed in service after 
December 31, 2007.

8. Extend expensing of brownfields remediation costs (sec. 328 of the 
        bill and sec. 198 of the Code)

                              PRESENT LAW

    Present law allows a deduction for ordinary and necessary 
expenses paid or incurred in carrying on any trade or 
business.\72\ Treasury regulations provide that the cost of 
incidental repairs that neither materially add to the value of 
property nor appreciably prolong its life, but keep it in an 
ordinarily efficient operating condition, may be deducted 
currently as a business expense. Section 263(a)(1) limits the 
scope of section 162 by prohibiting a current deduction for 
certain capital expenditures. Treasury regulations define 
``capital expenditures'' as amounts paid or incurred to 
materially add to the value, or substantially prolong the 
useful life, of property owned by the taxpayer, or to adapt 
property to a new or different use. Amounts paid for repairs 
and maintenance do not constitute capital expenditures. The 
determination of whether an expense is deductible or 
capitalizable is based on the facts and circumstances of each 
case.
---------------------------------------------------------------------------
    \72\Sec. 162.
---------------------------------------------------------------------------
    Taxpayers may elect to treat certain environmental 
remediation expenditures that would otherwise be chargeable to 
capital account as deductible in the year paid or incurred.\73\ 
The deduction applies for both regular and alternative minimum 
tax purposes. The expenditure must be incurred in connection 
with the abatement or control of hazardous substances at a 
qualified contaminated site. In general, any expenditure for 
the acquisition of depreciable property used in connection with 
the abatement or control of hazardous substances at a qualified 
contaminated site does not constitute a qualified environmental 
remediation expenditure. However, depreciation deductions 
allowable for such property, which would otherwise be allocated 
to the site under the principles set forth in Commissioner v. 
Idaho Power Co.\74\ and section 263A, are treated as qualified 
environmental remediation expenditures.
---------------------------------------------------------------------------
    \73\Sec. 198.
    \74\418 U.S. 1 (1974).
---------------------------------------------------------------------------
    A ``qualified contaminated site'' (a so-called 
``brownfield'') generally is any property that is held for use 
in a trade or business, for the production of income, or as 
inventory and is certified by the appropriate State 
environmental agency to be an area at or on which there has 
been a release (or threat of release) or disposal of a 
hazardous substance. Both urban and rural property may qualify. 
However, sites that are identified on the national priorities 
list under the Comprehensive Environmental Response, 
Compensation, and Liability Act of 1980 (``CERCLA'')\75\ cannot 
qualify as targeted areas. Hazardous substances generally are 
defined by reference to sections 101(14) and 102 of CERCLA, 
subject to additional limitations applicable to asbestos and 
similar substances within buildings, certain naturally 
occurring substances such as radon, and certain other 
substances released into drinking water supplies due to 
deterioration through ordinary use, as well as petroleum 
products defined in section 4612(a)(3) of the Code.
---------------------------------------------------------------------------
    \75\Pub. L. No. 96-510 (1980).
---------------------------------------------------------------------------
    In the case of property to which a qualified environmental 
remediation expenditure otherwise would have been capitalized, 
any deduction allowed under section 198 is treated as a 
depreciation deduction and the property is treated as section 
1245 property. Thus, deductions for qualified environmental 
remediation expenditures are subject to recapture as ordinary 
income upon a sale or other disposition of the property. In 
addition, sections 280B (demolition of structures) and 468 
(special rules for mining and solid waste reclamation and 
closing costs) do not apply to amounts that are treated as 
expenses under this provision.
    Eligible expenditures are those paid or incurred before 
January 1, 2008.
    The Gulf Opportunity Zone Act of 2005\76\ added section 
1400N(g) to the Code, which extended for two years (through 
December 31, 2007) the expensing of environmental remediation 
expenditures paid or incurred to abate contamination at 
qualified contaminated sites located in the Gulf Opportunity 
Zone. As a result of the extension of section 198 contained in 
the Tax Relief and Health Care Act of 2006,\77\ eligible 
expenditures covered under both section 1400N(g) and section 
198 must be paid or incurred prior to January 1, 2008.
---------------------------------------------------------------------------
    \76\Pub. L. No. 109-135 (2005).
    \77\Pub. L. No. 109-432 (2006).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the expensing of brownfields 
remediation costs promotes the goal of environmental 
remediation and promotes new investment and employment 
opportunities by lowering the net capital cost of a development 
project. Therefore, the Committee believes it is appropriate to 
extend the present-law provision permitting the expensing of 
these environmental remediation costs.

                        EXPLANATION OF PROVISION

    The provision extends the present law expensing provision 
under section 198 for one year through December 31, 2008.

                             EFFECTIVE DATE

    The provision is effective for expenditures paid or 
incurred after December 31, 2007.

9. Extension of deduction for income attributable to domestic 
        production activities in Puerto Rico (sec. 329 of the bill and 
        sec. 199 of the Code)

                              PRESENT LAW

In general

    Present law provides a deduction from taxable income (or, 
in the case of an individual, adjusted gross income) that is 
equal to a portion of the taxpayer's qualified production 
activities income. For taxable years beginning after 2009, the 
deduction is nine percent of that income. For taxable years 
beginning in 2005 and 2006, the deduction is three percent of 
qualified production activities income and for taxable years 
beginning in 2007, 2008, and 2009, the deduction is six percent 
of qualified production activities income. For taxpayers 
subject to the 35-percent corporate income tax rate, the nine-
percent deduction effectively reduces the corporate income tax 
rate to just under 32 percent on qualified production 
activities income.

Qualified production activities income

    In general, qualified production activities income is equal 
to domestic production gross receipts (defined by section 
199(c)(4)), reduced by the sum of: (1) the costs of goods sold 
that are allocable to those receipts and (2) other expenses, 
losses, or deductions which are properly allocable to those 
receipts.

Domestic production gross receipts

    Domestic production gross receipts generally are gross 
receipts of a taxpayer that are derived from (1) any sale, 
exchange, or other disposition, or any lease, rental, or 
license, of qualifying production property\78\ that was 
manufactured, produced, grown or extracted by the taxpayer in 
whole or in significant part within the United States; (2) any 
sale, exchange, or other disposition, or any lease, rental, or 
license, of qualified film\79\ produced by the taxpayer; (3) 
any lease, rental, license, sale, exchange, or other 
disposition of electricity, natural gas, or potable water 
produced by the taxpayer in the United States; (4) construction 
of real property performed in the United States by a taxpayer 
in the ordinary course of a construction trade or business; or 
(5) engineering or architectural services performed in the 
United States for the construction of real property located in 
the United States.
---------------------------------------------------------------------------
    \78\Qualifying production property generally includes any tangible 
personal property, computer software, and sound recordings.
    \79\Qualified film includes any motion picture film or videotape 
(including live or delayed television programming, but not including 
certain sexually explicit productions) if 50 percent or more of the 
total compensation relating to the production of the film (including 
compensation in the form of residuals and participations) constitutes 
compensation for services performed in the United States by actors, 
production personnel, directors, and producers.
---------------------------------------------------------------------------

Wage limitation

    For taxable years beginning after May 17, 2006, the amount 
of the deduction for a taxable year is limited to 50 percent of 
the wages paid by the taxpayer, and properly allocable to 
domestic production gross receipts, during the calendar year 
that ends in such taxable year.\80\ Wages paid to bona fide 
residents of Puerto Rico generally are not included in the wage 
limitation amount.\81\
---------------------------------------------------------------------------
    \80\For purposes of the provision, ``wages'' include the sum of the 
amounts of wages as defined in section 3401(a) and elective deferrals 
that the taxpayer properly reports to the Social Security 
Administration with respect to the employment of employees of the 
taxpayer during the calendar year ending during the taxpayer's taxable 
year. For taxable years beginning before May 18, 2006, the limitation 
is based upon all wages paid by the taxpayer, rather than only wages 
properly allocable to domestic production gross receipts.
    \81\Sec. 3401(a)(8)(C).
---------------------------------------------------------------------------

Rules for Puerto Rico

    When used in the Code in a geographical sense, the term 
``United States'' generally includes only the States and the 
District of Columbia.\82\ A special rule for determining 
domestic production gross receipts, however, provides that in 
the case of any taxpayer with gross receipts from sources 
within the Commonwealth of Puerto Rico, the term ``United 
States'' includes the Commonwealth of Puerto Rico, but only if 
all of the taxpayer's gross receipts are taxable under the 
Federal income tax for individuals or corporations.\83\ In 
computing the 50-percent wage limitation, that taxpayer is 
permitted to take into account wages paid to bona fide 
residents of Puerto Rico for services performed in Puerto 
Rico.\84\
---------------------------------------------------------------------------
    \82\Sec. 7701(a)(9).
    \83\Sec. 199(d)(8)(A).
    \84\Sec. 199(d)(8)(B).
---------------------------------------------------------------------------
    The special rules for Puerto Rico apply only with respect 
to the first two taxable years of a taxpayer beginning after 
December 31, 2005 and before January 1, 2008.

                           REASONS FOR CHANGE

    The Committee believes that given the expiration of the 
Puerto Rico economic activity credit after 2005, it is 
appropriate to use other means to encourage investment in 
Puerto Rico. In particular, the Committee believes it is 
appropriate to treat a U.S. taxpayer's manufacturing activities 
in Puerto Rico in a manner similar to the treatment of 
manufacturing activities in the United States.

                        EXPLANATION OF PROVISION

    The provision allows the special domestic production 
activities rules for Puerto Rico to apply for one additional 
taxable year of a taxpayer.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2007.

10. Modify tax treatment of certain payments to controlling exempt 
        organizations (sec. 330 of the bill and sec. 512 of the Code)

                              PRESENT LAW

    In general, organizations exempt from Federal income tax 
are subject to the unrelated business income tax on income 
derived from a trade or business regularly carried on by the 
organization that is not substantially related to the 
performance of the organization's tax-exempt functions.\85\ In 
general, interest, rents, royalties, and annuities are excluded 
from the unrelated business income of tax-exempt 
organizations.\86\
---------------------------------------------------------------------------
    \85\Sec. 511.
    \86\Sec. 512(b).
---------------------------------------------------------------------------
    Section 512(b)(13) provides special rules regarding income 
derived by an exempt organization from a controlled subsidiary. 
In general, section 512(b)(13) treats otherwise excluded rent, 
royalty, annuity, and interest income as unrelated business 
income if such income is received from a taxable or tax-exempt 
subsidiary that is 50-percent controlled by the parent tax-
exempt organization to the extent the payment reduces the net 
unrelated income (or increases any net unrelated loss) of the 
controlled entity (determined as if the entity were tax 
exempt). However, a special rule enacted as part of the Pension 
Protection Act of 2006 provides that, for payments made 
pursuant to a binding written contract in effect on August 17, 
2006 (or renewal of such a contract on substantially similar 
terms), the general rule of section 512(b)(13) applies only to 
the portion of payments received or accrued (before January 1, 
2008) in a taxable year that exceeds the amount of the payment 
that would have been paid or accrued if the amount of such 
payment had been determined under the principles of section 482 
(i.e., at arm's length).\87\ In addition, the special rule 
imposes a 20-percent penalty on the larger of such excess 
determined without regard to any amendment or supplement to a 
return of tax, or such excess determined with regard to all 
such amendments and supplements.
---------------------------------------------------------------------------
    \87\Sec. 512(b)(13)(E).
---------------------------------------------------------------------------
    In the case of a stock subsidiary, ``control'' means 
ownership by vote or value of more than 50 percent of the 
stock. In the case of a partnership or other entity, 
``control'' means ownership of more than 50 percent of the 
profits, capital, or beneficial interests. In addition, present 
law applies the constructive ownership rules of section 318 for 
purposes of section 512(b)(13). Thus, a parent exempt 
organization is deemed to control any subsidiary in which it 
holds more than 50 percent of the voting power or value, 
directly (as in the case of a first-tier subsidiary) or 
indirectly (as in the case of a second-tier subsidiary).

                           REASONS FOR CHANGE

    In enacting the special rule described above, the Pension 
Protection Act also required that, not later than January 1, 
2009, the Secretary shall submit a report to the Committee on 
Finance of the Senate and the Committee on Ways and Means of 
the House of Representatives a report on the effectiveness of 
the Internal Revenue Service in administering the special rule 
and on the extent to which payments by controlled entities to 
the controlling exempt organization meet the requirements of 
section 482 of the Code. Such report is required to include the 
results of any audit of any controlling organization or 
controlled entity and recommendations relating to the tax 
treatment of payments from controlled entities to controlling 
organizations. Considering that the report is not due until 
January 1, 2009, the Committee believes it is appropriate to 
extend the special rule for one year.

                        EXPLANATION OF PROVISION

    The provision extends the special rule of the Pension 
Protection Act to payments received or accrued before January 
1, 2009. Accordingly, under the provision, payments of rent, 
royalties, annuities, or interest income by a controlled 
organization to a controlling organization pursuant to a 
binding written contract in effect on August 17, 2006 (or 
renewal of such a contract on substantially similar terms), may 
be includible in the unrelated business taxable income of the 
controlling organization only to the extent the payment exceeds 
the amount of the payment determined under the principles of 
section 482 (i.e., at arm's length). Any such excess is subject 
to a 20-percent penalty on the larger of such excess determined 
without regard to any amendment or supplement to a return of 
tax, or such excess determined with regard to all such 
amendments and supplements.

                             EFFECTIVE DATE

    The provision is effective for payments received or accrued 
after December 31, 2007.

11. Extend and modify qualified zone academy bonds (sec. 331 of the 
        bill and sec. 1397E of the Code)

                              PRESENT LAW

Tax-exempt bonds

    Interest on State and local governmental bonds generally is 
excluded from gross income for Federal income tax purposes if 
the proceeds of the bonds are used to finance direct activities 
of these governmental units or if the bonds are repaid with 
revenues of the governmental units. Activities that can be 
financed with these tax-exempt bonds include the financing of 
public schools.\88\ An issuer must file with the IRS certain 
information about the bonds issued by them in order for that 
bond issue to be tax-exempt.\89\ Generally, this information 
return is required to be filed no later than the 15th day of 
the second month after the close of the calendar quarter in 
which the bonds were issued.
---------------------------------------------------------------------------
    \88\Sec. 103.
    \89\Sec. 149(e).
---------------------------------------------------------------------------
    The tax exemption for State and local bonds does not apply 
to any arbitrage bond.\90\ An arbitrage bond is defined as any 
bond that is part of an issue if any proceeds of the issue are 
reasonably expected to be used (or intentionally are used) to 
acquire higher yielding investments or to replace funds that 
are used to acquire higher yielding investments.\91\ In 
general, arbitrage profits may be earned only during specified 
periods (e.g., defined ``temporary periods'') before funds are 
needed for the purpose of the borrowing or on specified types 
of investments (e.g., ``reasonably required reserve or 
replacement funds''). Subject to limited exceptions, investment 
profits that are earned during these periods or on such 
investments must be rebated to the Federal Government.
---------------------------------------------------------------------------
    \90\Sec. 103(a) and (b)(2).
    \91\Sec. 148.
---------------------------------------------------------------------------

Qualified zone academy bonds

    As an alternative to traditional tax-exempt bonds, State 
and local governments were given the authority to issue 
``qualified zone academy bonds.''\92\ A total of $400 million 
of qualified zone academy bonds is authorized to be issued 
annually in calendar years 1998 through 2007. The $400 million 
aggregate bond cap is allocated each year to the States 
according to their respective populations of individuals below 
the poverty line. Each State, in turn, allocates the credit 
authority to qualified zone academies within such State.
---------------------------------------------------------------------------
    \92\Sec. 1397E.
---------------------------------------------------------------------------
    Financial institutions that hold qualified zone academy 
bonds are entitled to a nonrefundable tax credit in an amount 
equal to a credit rate multiplied by the face amount of the 
bond. A taxpayer holding a qualified zone academy bond on the 
credit allowance date is entitled to a credit. The credit is 
includable in gross income (as if it were a taxable interest 
payment on the bond), and may be claimed against regular income 
tax and alternative minimum tax liability.
    The Treasury Department sets the credit rate at a rate 
estimated to allow issuance of qualified zone academy bonds 
without discount and without interest cost to the issuer. The 
maximum term of the bond is determined by the Treasury 
Department, so that the present value of the obligation to 
repay the bond was 50 percent of the face value of the bond.
    ``Qualified zone academy bonds'' are defined as any bond 
issued by a State or local government, provided that (1) at 
least 95 percent of the proceeds are used for the purpose of 
renovating, providing equipment to, developing course materials 
for use at, or training teachers and other school personnel in 
a ``qualified zone academy'' and (2) private entities have 
promised to contribute to the qualified zone academy certain 
equipment, technical assistance or training, employee services, 
or other property or services with a value equal to at least 10 
percent of the bond proceeds.
    A school is a ``qualified zone academy'' if (1) the school 
is a public school that provides education and training below 
the college level, (2) the school operates a special academic 
program in cooperation with businesses to enhance the academic 
curriculum and increase graduation and employment rates, and 
(3) either (a) the school is located in an empowerment zone or 
enterprise community designated under the Code, or (b) it is 
reasonably expected that at least 35 percent of the students at 
the school will be eligible for free or reduced-cost lunches 
under the school lunch program established under the National 
School Lunch Act.
    The Tax Relief and Health Care Act of 2006 (``TRHCA'')\93\ 
imposed the arbitrage requirements that generally apply to 
interest-bearing tax-exempt bonds to qualified zone academy 
bonds. In addition, an issuer of qualified zone academy bonds 
must reasonably expect to and actually spend 95 percent or more 
of the proceeds of such bonds on qualified zone academy 
property within the five-year period that begins on the date of 
issuance. To the extent less than 95 percent of the proceeds 
are used to finance qualified zone academy property during the 
five-year spending period, bonds will continue to qualify as 
qualified zone academy bonds if unspent proceeds are used 
within 90 days from the end of such five-year period to redeem 
any nonqualified bonds. The five-year spending period may be 
extended by the Secretary if the issuer establishes that the 
failure to meet the spending requirement is due to reasonable 
cause and the related purposes for issuing the bonds will 
continue to proceed with due diligence. Issuers of qualified 
zone academy bonds are required to report issuance to the IRS 
in a manner similar to the information returns required for 
tax-exempt bonds.
---------------------------------------------------------------------------
    \93\Pub. L. 109-432.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that tax-credit bonds provide an 
effective means of subsidizing rehabilitation and repairs to 
public school facilities. Thus, the Committee believes that the 
extension of authority to issue qualified zone academy bonds is 
appropriate in light of the educational needs that exist today. 
However, the Committee also recognizes that modifications to 
the present law qualified zone academy bond program may be 
necessary to increase the marketability of such bonds. These 
modifications also will promote additional investment in the 
beneficiary public schools.

                        EXPLANATION OF PROVISION

    The provision authorizes issuance of up to $400 million of 
qualified zone academy bonds annually through 2008.
    The provision also modifies the spending and arbitrage 
rules that apply to qualified zone academy bonds. The provision 
modifies the spending rule by requiring 95 percent of available 
project proceeds to be spent on qualified zone academy 
property. In addition, the provision modifies the arbitrage 
rules by providing that available project proceeds invested 
during the five-year period beginning on the date of issue are 
not subject to the arbitrage restrictions (i.e., yield 
restriction and rebate requirements). The provision defines 
``available project proceeds'' as proceeds from the sale of an 
issue of qualified zone academy bonds, less issuance costs (not 
to exceed two percent) and any investment earnings on such 
proceeds. Thus, available project proceeds invested during the 
five-year spending period may be invested at unrestricted 
yields, but the earnings on such investments must be spent on 
qualified zone academy property.
    The provision also provides that amounts invested in a 
reserve fund are not subject to the arbitrage restrictions to 
the extent: (1) such fund is funded at a rate not more rapid 
than equal annual installments; (2) such fund is funded in a 
manner such that the fund will not exceed the amount necessary 
to repay the issue if invested at the average annual interest 
rate of tax-exempt obligations having a term of 10 years or 
more that are issued during the month the qualified zone 
academy bonds are issued; and (3) the yield on such fund is not 
greater than the average annual interest rate of tax-exempt 
obligations having a term of 10 years or more that are issued 
during the month the qualified zone academy bonds are issued.

                             EFFECTIVE DATE

    The provision to extend authority to issue qualified zone 
academy bonds through 2008 applies to bonds issued after 
December 31, 2007. The provision to modify the spending and 
arbitrage rules applies to bonds issued after the date of 
enactment.

12. Tax incentives for investment in the District of Columbia (sec. 332 
        of the bill and secs. 1400, 1400A, 1400B, and 1400C of the 
        Code)

                              PRESENT LAW

In general

    The Taxpayer Relief Act of 1997 designated certain 
economically depressed census tracts within the District of 
Columbia as the District of Columbia Enterprise Zone (the 
``D.C. Zone''), within which businesses and individual 
residents are eligible for special tax incentives. The census 
tracts that compose the D.C. Zone are (1) all census tracts 
that presently are part of the D.C. enterprise community 
designated under section 1391 (i.e., portions of Anacostia, Mt. 
Pleasant, Chinatown, and the easternmost part of the District), 
and (2) all additional census tracts within the District of 
Columbia where the poverty rate is not less than 20 percent. 
The D.C. Zone designation remains in effect for the period from 
January 1, 1998, through December 31, 2007. In general, the tax 
incentives available in connection with the D.C. Zone are a 20-
percent wage credit, an additional $35,000 of section 179 
expensing for qualified zone property, expanded tax-exempt 
financing for certain zone facilities, and a zero-percent 
capital gains rate from the sale of certain qualified D.C. zone 
assets.

Wage credit

    A 20-percent wage credit is available to employers for the 
first $15,000 of qualified wages paid to each employee (i.e., a 
maximum credit of $3,000 with respect to each qualified 
employee) who (1) is a resident of the D.C. Zone, and (2) 
performs substantially all employment services within the D.C. 
Zone in a trade or business of the employer.
    Wages paid to a qualified employee who earns more than 
$15,000 are eligible for the wage credit (although only the 
first $15,000 of wages is eligible for the credit). The wage 
credit is available with respect to a qualified full-time or 
part-time employee (employed for at least 90 days), regardless 
of the number of other employees who work for the employer. In 
general, any taxable business carrying out activities in the 
D.C. Zone may claim the wage credit, regardless of whether the 
employer meets the definition of a ``D.C. Zone business.''\94\
---------------------------------------------------------------------------
    \94\However, the wage credit is not available for wages paid in 
connection with certain business activities described in section 
144(c)(6)(B) or certain farming activities. In addition, wages are not 
eligible for the wage credit if paid to (1) a person who owns more than 
five percent of the stock (or capital or profits interests) of the 
employer, (2) certain relatives of the employer, or (3) if the employer 
is a corporation or partnership, certain relatives of a person who owns 
more than 50 percent of the business.
---------------------------------------------------------------------------
    An employer's deduction otherwise allowed for wages paid is 
reduced by the amount of wage credit claimed for that taxable 
year.\95\ Wages are not to be taken into account for purposes 
of the wage credit if taken into account in determining the 
employer's work opportunity tax credit under section 51 or the 
welfare-to-work credit under section 51A.\96\ In addition, the 
$15,000 cap is reduced by any wages taken into account in 
computing the work opportunity tax credit or the welfare-to-
work credit.\97\ The wage credit may be used to offset up to 25 
percent of alternative minimum tax liability.\98\
---------------------------------------------------------------------------
    \95\Sec. 280C(a).
    \96\Secs. 1400H(a), 1396(c)(3)(A) and 51A(d)(2).
    \97\Secs. 1400H(a), 1396(c)(3)(B) and 51A(d)(2).
    \98\Sec. 38(c)(2).
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Section 179 expensing

    In general, a D.C. Zone business is allowed an additional 
$35,000 of section 179 expensing for qualifying property placed 
in service by a D.C. Zone business.\99\ The section 179 
expensing allowed to a taxpayer is phased out by the amount by 
which 50 percent of the cost of qualified zone property placed 
in service during the year by the taxpayer exceeds $200,000 
($500,000 for taxable years beginning after 2006 and before 
2011). The term ``qualified zone property'' is defined as 
depreciable tangible property (including buildings), provided 
that (1) the property is acquired by the taxpayer (from an 
unrelated party) after the designation took effect, (2) the 
original use of the property in the D.C. Zone commences with 
the taxpayer, and (3) substantially all of the use of the 
property is in the D.C. Zone in the active conduct of a trade 
or business by the taxpayer.\100\ Special rules are provided in 
the case of property that is substantially renovated by the 
taxpayer.
---------------------------------------------------------------------------
    \99\Sec. 1397A.
    \100\Sec. 1397D.
---------------------------------------------------------------------------

Tax-exempt financing

    A qualified D.C. Zone business is permitted to borrow 
proceeds from tax-exempt qualified enterprise zone facility 
bonds (as defined in section 1394) issued by the District of 
Columbia.\101\ Such bonds are subject to the District of 
Columbia's annual private activity bond volume limitation. 
Generally, qualified enterprise zone facility bonds for the 
District of Columbia are bonds 95 percent or more of the net 
proceeds of which are used to finance certain facilities within 
the D.C. Zone. The aggregate face amount of all outstanding 
qualified enterprise zone facility bonds per qualified D.C. 
Zone business may not exceed $15 million and may be issued only 
while the D.C. Zone designation is in effect.
---------------------------------------------------------------------------
    \101\Sec. 1400A.
---------------------------------------------------------------------------

Zero-percent capital gains

    A zero-percent capital gains rate applies to capital gains 
from the sale of certain qualified D.C. Zone assets held for 
more than five years.\102\ In general, a qualified ``D.C. Zone 
asset'' means stock or partnership interests held in, or 
tangible property held by, a D.C. Zone business. For purposes 
of the zero-percent capital gains rate, the D.C. Enterprise 
Zone is defined to include all census tracts within the 
District of Columbia where the poverty rate is not less than 10 
percent.
---------------------------------------------------------------------------
    \102\Sec. 1400B.
---------------------------------------------------------------------------
    In general, gain eligible for the zero-percent tax rate 
means gain from the sale or exchange of a qualified D.C. Zone 
asset that is (1) a capital asset or property used in the trade 
or business as defined in section 1231(b), and (2) acquired 
before January 1, 2008. Gain that is attributable to real 
property, or to intangible assets, qualifies for the zero-
percent rate, provided that such real property or intangible 
asset is an integral part of a qualified D.C. Zone 
business.\103\ However, no gain attributable to periods before 
January 1, 1998, and after December 31, 2012, is qualified 
capital gain.
---------------------------------------------------------------------------
    \103\However, sole proprietorships and other taxpayers selling 
assets directly cannot claim the zero-percent rate on capital gain from 
the sale of any intangible property (i.e., the integrally related test 
does not apply).
---------------------------------------------------------------------------

District of Columbia homebuyer tax credit

    First-time homebuyers of a principal residence in the 
District of Columbia are eligible for a nonrefundable tax 
credit of up to $5,000 of the amount of the purchase price. The 
$5,000 maximum credit applies both to individuals and married 
couples. Married individuals filing separately can claim a 
maximum credit of $2,500 each. The credit phases out for 
individual taxpayers with adjusted gross income between $70,000 
and $90,000 ($110,000-$130,000 for joint filers). For purposes 
of eligibility, ``first-time homebuyer'' means any individual 
if such individual did not have a present ownership interest in 
a principal residence in the District of Columbia in the one-
year period ending on the date of the purchase of the residence 
to which the credit applies. The credit expires for purchases 
after December 31, 2007.\104\
---------------------------------------------------------------------------
    \104\Sec. 1400C(i).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that it continues to be important to 
provide tax incentives to individuals and businesses in the 
D.C. Zone and that it is appropriate to extend such incentives 
for an additional year.

                        EXPLANATION OF PROVISION

    The provision extends the designation of the D.C. Zone for 
one year (through December 31, 2008), thus extending the wage 
credit and section 179 expensing for one year.
    The provision extends the tax-exempt financing authority 
for one year, applying to bonds issued during the period 
beginning on January 1, 1998, and ending on December 31, 2008.
    The provision extends the zero-percent capital gains rate 
applicable to capital gains from the sale of certain qualified 
D.C. Zone assets for one year.
    The provision extends the first-time homebuyer credit for 
one year, through December 31, 2008.

                             EFFECTIVE DATE

    The provision is effective for periods beginning after, 
bonds issued after, acquisitions after, and property purchased 
after December 31, 2007.

13. Extension of economic development credit for American Samoa (sec. 
        333 of the bill and sec. 119 of Pub. L. No. 109-432)

                         PRESENT AND PRIOR LAW

In general

    For taxable years beginning before January 1, 2006, certain 
domestic corporations with business operations in the U.S. 
possessions were eligible for the possession tax credit.\105\ 
This credit offset the U.S. tax imposed on certain income 
related to operations in the U.S. possessions.\106\ For 
purposes of the credit, possessions included, among other 
places, American Samoa. Subject to certain limitations 
described below, the amount of the possession tax credit 
allowed to any domestic corporation equaled the portion of that 
corporation's U.S. tax that was attributable to the 
corporation's non-U.S. source taxable income from (1) the 
active conduct of a trade or business within a U.S. possession, 
(2) the sale or exchange of substantially all of the assets 
that were used in such a trade or business, or (3) certain 
possessions investment.\107\ No deduction or foreign tax credit 
was allowed for any possessions or foreign tax paid or accrued 
with respect to taxable income that was taken into account in 
computing the credit under section 936.\108\ The section 936 
credit generally expired for taxable years beginning after 
December 31, 2005, but a special credit, described below, was 
allowed with respect to American Samoa.
---------------------------------------------------------------------------
    \105\Secs. 27(b), 936.
    \106\Domestic corporations with activities in Puerto Rico are 
eligible for the section 30A economic activity credit. That credit is 
calculated under the rules set forth in section 936.
    \107\Under phase-out rules described below, investment only in 
Guam, American Samoa, and the Northern Mariana Islands (and not in 
other possessions) now may give rise to income eligible for the section 
936 credit.
    \108\Sec. 936(c).
---------------------------------------------------------------------------
    To qualify for the possession tax credit for a taxable 
year, a domestic corporation was required to satisfy two 
conditions. First, the corporation was required to derive at 
least 80 percent of its gross income for the three-year period 
immediately preceding the close of the taxable year from 
sources within a possession. Second, the corporation was 
required to derive at least 75 percent of its gross income for 
that same period from the active conduct of a possession 
business.
    The possession tax credit was available only to a 
corporation that qualified as an existing credit claimant. The 
determination of whether a corporation was an existing credit 
claimant was made separately for each possession. The 
possession tax credit was computed separately for each 
possession with respect to which the corporation was an 
existing credit claimant, and the credit was subject to either 
an economic activity-based limitation or an income-based 
limitation.

Qualification as existing credit claimant

    A corporation was an existing credit claimant with respect 
to a possession if (1) the corporation was engaged in the 
active conduct of a trade or business within the possession on 
October 13, 1995, and (2) the corporation elected the benefits 
of the possession tax credit in an election in effect for its 
taxable year that included October 13, 1995.\109\ A corporation 
that added a substantial new line of business (other than in a 
qualifying acquisition of all the assets of a trade or business 
of an existing credit claimant) ceased to be an existing credit 
claimant as of the close of the taxable year ending before the 
date on which that new line of business was added.
---------------------------------------------------------------------------
    \109\A corporation will qualify as an existing credit claimant if 
it acquired all the assets of a trade or business of a corporation that 
(1) actively conducted that trade or business in a possession on 
October 13, 1995, and (2) had elected the benefits of the possession 
tax credit in an election in effect for the taxable year that included 
October 13, 1995.
---------------------------------------------------------------------------

Economic activity-based limit

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

Income-based limit

    As an alternative to the economic activity-based limit, a 
taxpayer was permitted to elect to apply a limit equal to the 
applicable percentage of the credit that otherwise would have 
been allowable with respect to possession business income; in 
taxable years beginning in 1998 and subsequent years, the 
applicable percentage was 40 percent.

Repeal and phase out

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

American Samoa economic development credit

    A domestic corporation that was an existing credit claimant 
with respect to American Samoa and that elected the application 
of section 936 for its last taxable year beginning before 
January 1, 2006 is allowed a credit based on the economic 
activity-based limitation rules described above. The credit is 
not part of the Code but is computed based on the rules secs. 
30A and 936. The credit is allowed for the first two taxable 
years of a corporation that first two taxable years of a 
corporation that begin after December 31, 2005, and before 
January 1, 2008.
    The amount of the credit allowed to a qualifying domestic 
corporation under the provision is equal to the sum of the 
amounts used in computing the corporation's economic activity-
based limitation (described previously) with respect to 
American Samoa, except that no credit is allowed for the amount 
of any American Samoa income taxes. Thus, for any qualifying 
corporation the amount of the credit equals the sum of (1) 60 
percent of the corporation's qualified American Samoa wages and 
allocable employee fringe benefit expenses and (2) 15 percent 
of the corporation's depreciation allowances with respect to 
short-life qualified American Samoa tangible property, plus 40 
percent of the corporation's depreciation allowances with 
respect to medium-life qualified American Samoa tangible 
property, plus 65 percent of the corporation's depreciation 
allowances with respect to long-life qualified American Samoa 
tangible property.
    The section 936(c) rule denying a credit or deduction for 
any possessions or foreign tax paid with respect to taxable 
income taken into account in computing the credit under section 
936 does not apply with respect to the credit allowed by the 
provision.
    The credit is not available for taxable years beginning 
after December 31, 2007.

                           REASONS FOR CHANGE

    The Committee believes that it is important to encourage 
investment in American Samoa. With the expiration of the 
possession tax credit, the American Samoa economic development 
credit is an appropriate temporary provision while Congress 
considers long-term tax policy toward the U.S. possessions.

                        EXPLANATION OF PROVISION

    The provision allows the American Samoa economic 
development credit for one additional taxable year of a 
taxpayer.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2007.

14. Extend the enhanced charitable deduction for contributions of food 
        inventory (sec. 334 of the bill and sec. 170 of the Code)

                              PRESENT LAW

General rules regarding contributions of food inventory

    Under present law, a taxpayer's deduction for charitable 
contributions of inventory generally is limited to the 
taxpayer's basis (typically, cost) in the inventory, or if less 
the fair market value of the inventory.
    For certain contributions of inventory, C corporations may 
claim an enhanced deduction equal to the lesser of (1) basis 
plus one-half of the item's appreciation (i.e., basis plus one-
half of fair market value in excess of basis) or (2) two times 
basis.\110\ In general, a C corporation's charitable 
contribution deductions for a year may not exceed 10 percent of 
the corporation's taxable income.\111\ To be eligible for the 
enhanced deduction, the contributed property generally must be 
inventory of the taxpayer, contributed to a charitable 
organization described in section 501(c)(3) (except for private 
nonoperating foundations), and the donee must (1) use the 
property consistent with the donee's exempt purpose solely for 
the care of the ill, the needy, or infants, (2) not transfer 
the property in exchange for money, other property, or 
services, and (3) provide the taxpayer a written statement that 
the donee's use of the property will be consistent with such 
requirements. In the case of contributed property subject to 
the Federal Food, Drug, and Cosmetic Act, the property must 
satisfy the applicable requirements of such Act on the date of 
transfer and for 180 days prior to the transfer.
---------------------------------------------------------------------------
    \110\Sec. 170(e)(3).
    \111\Sec. 170(b)(2).
---------------------------------------------------------------------------
    A donor making a charitable contribution of inventory must 
make a corresponding adjustment to the cost of goods sold by 
decreasing the cost of goods sold by the lesser of the fair 
market value of the property or the donor's basis with respect 
to the inventory.\112\ Accordingly, if the allowable charitable 
deduction for inventory is the fair market value of the 
inventory, the donor reduces its cost of goods sold by such 
value, with the result that the difference between the fair 
market value and the donor's basis may still be recovered by 
the donor other than as a charitable contribution.
---------------------------------------------------------------------------
    \112\Treas. Reg. sec. 1.170A-4A(c)(3).
---------------------------------------------------------------------------
    To use the enhanced deduction, the taxpayer must establish 
that the fair market value of the donated item exceeds basis. 
The valuation of food inventory has been the subject of 
disputes between taxpayers and the IRS.\113\
---------------------------------------------------------------------------
    \113\Lucky Stores Inc. v. Commissioner, 105 T.C. 420 (1995) 
(holding that the value of surplus bread inventory donated to charity 
was the full retail price of the bread rather than half the retail 
price, as the IRS asserted).
---------------------------------------------------------------------------

Temporary rule expanding and modifying the enhanced deduction for 
        contributions of food inventory

    Under a temporary provision enacted as part of the Katrina 
Emergency Tax Relief Act of 2005 and extended by the Pension 
Protection Act of 2006, any taxpayer, whether or not a C 
corporation, engaged in a trade or business is eligible to 
claim the enhanced deduction for donations of food 
inventory.\114\ For taxpayers other than C corporations, the 
total deduction for donations of food inventory in a taxable 
year generally may not exceed 10 percent of the taxpayer's net 
income for such taxable year from all sole proprietorships, S 
corporations, or partnerships (or other non C corporation) from 
which contributions of apparently wholesome food are made. For 
example, if a taxpayer is a sole proprietor, a shareholder in 
an S corporation, and a partner in a partnership, and each 
business makes charitable contributions of food inventory, the 
taxpayer's deduction for donations of food inventory is limited 
to 10 percent of the taxpayer's net income from the sole 
proprietorship and the taxpayer's interests in the S 
corporation and partnership. However, if only the sole 
proprietorship and the S corporation made charitable 
contributions of food inventory, the taxpayer's deduction would 
be limited to 10 percent of the net income from the trade or 
business of the sole proprietorship and the taxpayer's interest 
in the S corporation, but not the taxpayer's interest in the 
partnership.\115\
---------------------------------------------------------------------------
    \114\Sec. 170(e)(3)(C).
    \115\The 10 percent limitation does not affect the application of 
the generally applicable percentage limitations. For example, if 10 
percent of a sole proprietor's net income from the proprietor's trade 
or business was greater than 50 percent of the proprietor's 
contribution base, the available deduction for the taxable year (with 
respect to contributions to public charities) would be 50 percent of 
the proprietor's contribution base. Consistent with present law, such 
contributions may be carried forward because they exceed the 50 percent 
limitation. Contributions of food inventory by a taxpayer that is not a 
C corporation that exceed the 10 percent limitation but not the 50 
percent limitation could not be carried forward.
---------------------------------------------------------------------------
    Under the temporary provision, the enhanced deduction for 
food is available only for food that qualifies as ``apparently 
wholesome food.'' ``Apparently wholesome food'' is defined as 
food intended for human consumption that meets all quality and 
labeling standards imposed by Federal, State, and local laws 
and regulations even though the food may not be readily 
marketable due to appearance, age, freshness, grade, size, 
surplus, or other conditions.
    The temporary provision does not apply to contributions 
made after December 31, 2007.

                           REASONS FOR CHANGE

    The Committee believes that charitable organizations 
benefit from charitable contributions of food by non C 
corporations and that the enhanced deduction is a useful 
incentive for the making of such contributions. Accordingly, 
the Committee believes it is appropriate to extend the special 
rule for charitable contributions of food inventory for one 
year.

                        EXPLANATION OF PROVISION

    The provision extends the expansion of, and modifications 
to, the enhanced deduction for charitable contributions of food 
inventory to contributions made before January 1, 2009.

                             EFFECTIVE DATE

    The provision is effective for contributions made after 
December 31, 2007.

15. Extend the enhanced deduction for charitable contributions of book 
        inventory (sec. 335 of the bill and sec. 170 of the Code)

                              PRESENT LAW

    Under present law, a taxpayer's deduction for charitable 
contributions of inventory generally is limited to the 
taxpayer's basis (typically, cost) in the inventory, or, if 
less, the fair market value of the inventory.
    In general, for certain contributions of inventory, C 
corporations may claim an enhanced deduction equal to the 
lesser of (1) basis plus one-half of the item's appreciation 
(i.e., basis plus one-half of fair market value in excess of 
basis) or (2) two times basis.\116\ In general, a C 
corporation's charitable contribution deductions for a year may 
not exceed 10 percent of the corporation's taxable income.\117\ 
To be eligible for the enhanced deduction, the contributed 
property generally must be inventory of the taxpayer 
contributed to a charitable organization described in section 
501(c)(3) (except for private nonoperating foundations), and 
the donee must (1) use the property consistent with the donee's 
exempt purpose solely for the care of the ill, the needy, or 
infants, (2) not transfer the property in exchange for money, 
other property, or services, and (3) provide the taxpayer a 
written statement that the donee's use of the property will be 
consistent with such requirements. In the case of contributed 
property subject to the Federal Food, Drug, and Cosmetic Act, 
the property must satisfy the applicable requirements of such 
Act on the date of transfer and for 180 days prior to the 
transfer.
---------------------------------------------------------------------------
    \116\Sec. 170(e)(3).
    \117\Sec. 170(b)(2).
---------------------------------------------------------------------------
    A donor making a charitable contribution of inventory must 
make a corresponding adjustment to the cost of goods sold by 
decreasing the cost of goods sold by the lesser of the fair 
market value of the property or the donor's basis with respect 
to the inventory.\118\ Accordingly, if the allowable charitable 
deduction for inventory is the fair market value of the 
inventory, the donor reduces its cost of goods sold by such 
value, with the result that the difference between the fair 
market value and the donor's basis may still be recovered by 
the donor other than as a charitable contribution.
---------------------------------------------------------------------------
    \118\Treas. Reg. sec. 1.170A-4A(c)(3).
---------------------------------------------------------------------------
    To use the enhanced deduction, the taxpayer must establish 
that the fair market value of the donated item exceeds basis.
    The Katrina Emergency Tax Relief Act of 2005 expanded the 
generally applicable enhanced deduction for C corporations to 
certain qualified book contributions made after August 28, 
2005, and before January 1, 2006. The Pension Protection Act of 
2006 extended such deduction for qualified book contributions 
to contributions made before January 1, 2008. A qualified book 
contribution means a charitable contribution of books to a 
public school that provides elementary education or secondary 
education (kindergarten through grade 12) and that is an 
educational organization that normally maintains a regular 
faculty and curriculum and normally has a regularly enrolled 
body of pupils or students in attendance at the place where its 
educational activities are regularly carried on. The enhanced 
deduction for qualified book contributions is not allowed 
unless the donee organization certifies in writing that the 
contributed books are suitable, in terms of currency, content, 
and quantity, for use in the donee's educational programs and 
that the donee will use the books in such educational programs. 
The donee also must make the certifications required for the 
generally applicable enhanced deduction, i.e., the donee will 
(1) use the property consistent with the donee's exempt purpose 
solely for the care of the ill, the needy, or infants, (2) not 
transfer the property in exchange for money, other property, or 
services, and (3) provide the taxpayer a written statement that 
the donee's use of the property will be consistent with such 
requirements.

                           REASONS FOR CHANGE

    The Committee believes that public schools benefit from 
charitable contributions of book inventory and that the 
enhanced deduction is a useful incentive for the making of such 
contributions. Accordingly, the Committee believes it is 
appropriate to extend the enhanced deduction for charitable 
contributions of book inventory to public schools for one year.

                        EXPLANATION OF PROVISION

    The provision extends the enhanced deduction for 
contributions of book inventory to contributions made before 
January 1, 2009.

                             EFFECTIVE DATE

    The provision is effective for contributions made after 
December 31, 2007.

16. Extend the enhanced charitable deduction for computer technology 
        and equipment (sec. 336 of the bill and sec. 170 of the Code)

                              PRESENT LAW

    In the case of a charitable contribution of inventory or 
other ordinary-income or short-term capital gain property, the 
amount of the charitable deduction generally is limited to the 
taxpayer's basis in the property. In the case of a charitable 
contribution of tangible personal property, the deduction is 
limited to the taxpayer's basis in such property if the use by 
the recipient charitable organization is unrelated to the 
organization's tax-exempt purpose. In cases involving 
contributions to a private foundation (other than certain 
private operating foundations), the amount of the deduction is 
limited to the taxpayer's basis in the property.\119\
---------------------------------------------------------------------------
    \119\Sec. 170(e)(1).
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    Under present law, a taxpayer's deduction for charitable 
contributions of computer technology and equipment generally is 
limited to the taxpayer's basis (typically, cost) in the 
property. However, certain corporations may claim a deduction 
in excess of basis for a ``qualified computer 
contribution.''\120\ This enhanced deduction is equal to the 
lesser of (1) basis plus one-half of the item's appreciation 
(i.e., basis plus one half of fair market value in excess of 
basis) or (2) two times basis. The enhanced deduction for 
qualified computer contributions expires for any contribution 
made during any taxable year beginning after December 31, 2007.
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    \120\Secs. 170(e)(4) and 170(e)(6).
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    A qualified computer contribution means a charitable 
contribution of any computer technology or equipment, which 
meets standards of functionality and suitability as established 
by the Secretary of the Treasury. The contribution must be to 
certain educational organizations or public libraries and made 
not later than three years after the taxpayer acquired the 
property or, if the taxpayer constructed or assembled the 
property, not later than the date construction or assembly of 
the property is substantially completed.\121\ The original use 
of the property must be by the donor or the donee,\122\ and in 
the case of the donee, must be used substantially for 
educational purposes related to the function or purpose of the 
donee. The property must fit productively into the donee's 
education plan. The donee may not transfer the property in 
exchange for money, other property, or services, except for 
shipping, installation, and transfer costs. To determine 
whether property is constructed or assembled by the taxpayer, 
the rules applicable to qualified research contributions apply. 
Contributions may be made to private foundations under certain 
conditions.\123\
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    \121\If the taxpayer constructed the property and reacquired such 
property, the contribution must be within three years of the date the 
original construction was substantially completed. Sec. 
170(e)(6)(D)(i).
    \122\This requirement does not apply if the property was reacquired 
by the manufacturer and contributed. Sec. 170(e)(6)(D)(ii).
    \123\Sec. 170(e)(6)(C).
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                           REASONS FOR CHANGE

    The Committee believes that public libraries and 
educational organizations continue to benefit from corporate 
contributions of computer technology and equipment and that it 
is appropriate to extend the enhanced deduction for such 
contributions for one year.

                        EXPLANATION OF PROVISION

    The provision extends the enhanced deduction for computer 
technology and equipment for one year to apply to contributions 
made during any taxable year beginning after December 31, 2007, 
and before January 1, 2009.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2007.

17. Basis adjustment to stock of S corporation contributing property 
        (sec. 337 of the bill and secs. 1366 and 1367 of the Code)

                              PRESENT LAW

    Under present law, if an S corporation contributes money or 
other property to a charity, each shareholder takes into 
account the shareholder's pro rata share of the contribution in 
determining its own income tax liability.\124\ A shareholder of 
an S corporation reduces the basis in the stock of the S 
corporation by the amount of the charitable contribution that 
flows through to the shareholder.\125\
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    \124\Sec. 1366(a)(1)(A).
    \125\Sec. 1367(a)(2)(B).
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    In the case of contributions made in taxable years 
beginning after December 31, 2005, and before January 1, 2008, 
the amount of a shareholder's basis reduction in the stock of 
an S corporation by reason of a charitable contribution made by 
the corporation is equal to the shareholder's pro rata share of 
the adjusted basis of the contributed property. For 
contributions made in taxable years beginning after December 
31, 2008, the reduction in basis is the fair market value of 
the contributed property.

                           REASONS FOR CHANGE

    The Committee believes that the present-law treatment of 
contributions of property by S corporations is appropriate and 
should be extended.

                        EXPLANATION OF PROVISION

    The bill extends the rule relating to the basis reduction 
on account of charitable contributions of property for one year 
to contributions made in taxable years beginning before January 
1, 2009.
    The bill also makes a technical correction to the present-
law rule limiting the amount of losses and deductions which a 
shareholder of an S corporation may take into account in any 
taxable year to the shareholder's adjusted basis in his stock 
and indebtedness of the corporation. The technical correction 
provides that this limitation does not apply to a contribution 
of appreciated property to the extent the shareholder's pro 
rata share of the contribution exceeds the shareholder's pro 
rata share of the adjusted basis of the property.

                             EFFECTIVE DATE

    The provision extending the basis reduction rule applies to 
contributions made in taxable years beginning after December 
31, 2007.
    The technical correction is effective as if included in the 
legislation enacting the basis reduction rule which is being 
extended by the bill.

18. Extension of the Hurricane Katrina work opportunity tax credit 
        (sec. 338 of the bill and sec. 51 of the Code)

                              PRESENT LAW

Work opportunity tax credit

            In general
    The work opportunity tax credit is available on an elective 
basis for employers hiring individuals from one or more of nine 
targeted groups. The amount of the credit available to an 
employer is determined by the amount of qualified wages paid by 
the employer. Generally, qualified wages consist of wages 
attributable to service rendered by a member of a targeted 
group during the one-year period beginning with the day the 
individual begins work for the employer (two years in the case 
of an individual in the long-term family assistance recipient 
category).
            Targeted groups eligible for the credit
    Generally an employer is eligible for the credit only for 
qualified wages paid to members of a targeted group. There are 
nine targeted groups: (1) families receiving Temporary 
Assistance for Needy Families Program (``TANF''); (2) qualified 
veterans; (3) qualified ex-felons; (4) designated community 
residents; (5) vocational rehabilitation referrals; (6) 
qualified summer youth employees; (7) qualified food stamp 
recipients; (8) qualified supplemental security income 
(``SSI'') benefit recipients; and (9) qualified long-term 
family assistance recipients.
            Qualified wages
    Generally, qualified wages are defined as cash wages paid 
by the employer to a member of a targeted group. The employer's 
deduction for wages is reduced by the amount of the credit.
    For purposes of the credit, generally, wages are defined by 
reference to the FUTA definition of wages contained in sec. 
3306(b) (without regard to the dollar limitation therein 
contained). Special rules apply in the case of certain 
agricultural labor and certain railroad labor.
            Calculation of the credit
    The credit available to an employer for qualified wages 
paid to members of all targeted groups except for long-term 
family assistance recipients equals 40 percent (25 percent for 
employment of 400 hours or less) of qualified first-year wages. 
Generally, qualified first-year wages are qualified wages (not 
in excess of $6,000) attributable to service rendered by a 
member of a targeted group during the one-year period beginning 
with the day the individual began work for the employer. 
Therefore, the maximum credit per employee is $2,400 (40 
percent of the first $6,000 of qualified first-year wages). 
There are two exceptions to this general rule. First, with 
respect to qualified summer youth employees, the maximum credit 
is $1,200 (40 percent of the first $3,000 of qualified first-
year wages). Second, with respect to qualified veterans who are 
entitled to compensation for a service-connected disability, 
the maximum credit is $4,800 because qualified first-year wages 
are $12,000 rather than $6,000 for such individuals.\126\ 
Except for long-term family assistance recipients, no credit is 
allowed for second-year wages.
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    \126\The expanded definition of qualified first-year wages does not 
apply to the veterans qualified with reference to a food stamp program, 
as defined under present law.
---------------------------------------------------------------------------
    In the case of long-term family assistance recipients, the 
credit equals 40 percent (25 percent for employment of 400 
hours or less) of $10,000 for qualified first-year wages and 50 
percent of the first $10,000 of qualified second-year wages. 
Generally, qualified second-year wages are qualified wages (not 
in excess of $10,000) attributable to service rendered by a 
member of the long-term family assistance category during the 
one-year period beginning on the day after the one-year period 
beginning with the day the individual began work for the 
employer. Therefore, the maximum credit per employee is $9,000 
(40 percent of the first $10,000 of qualified first-year wages 
plus 50 percent of the first $10,000 of qualified second-year 
wages).
            Certification rules
    An individual is not treated as a member of a targeted 
group unless: (1) on or before the day on which an individual 
begins work for an employer, the employer has received a 
certification from a designated local agency that such 
individual is a member of a targeted group; or (2) on or before 
the day an individual is offered employment with the employer, 
a prescreening notice is completed by the employer with respect 
to such individual, and not later than the 28th day after the 
individual begins work for the employer, the employer submits 
such notice, signed by the employer and the individual under 
penalties of perjury, to the designated local agency as part of 
a written request for certification. For these purposes, a pre-
screening notice is a document (in such form as the Secretary 
may prescribe) which contains information provided by the 
individual on the basis of which the employer believes that the 
individual is a member of a targeted group.
            Minimum employment period
    No credit is allowed for qualified wages paid to employees 
who work less than 120 hours in the first year of employment.
            Other rules
    The work opportunity tax credit is not allowed for wages 
paid to a relative or dependent of the taxpayer. No credit is 
allowed for wages paid to an individual who is a more than 
fifty-percent owner of the entity. Similarly, wages paid to 
replacement workers during a strike or lockout are not eligible 
for the work opportunity tax credit. Wages paid to any employee 
during any period for which the employer received on-the-job 
training program payments with respect to that employee are not 
eligible for the work opportunity tax credit. The work 
opportunity tax credit generally is not allowed for wages paid 
to individuals who had previously been employed by the 
employer. In addition, many other technical rules apply.
            Expiration
    The work opportunity tax credit is not available for 
individuals who begin work for an employer after August 31, 
2011.

Work Opportunity Tax Credit for Hurricane Katrina Employees

            In general
    The Katrina Emergency Tax Relief Act of 2005 provided that 
a Hurricane Katrina employee is treated as a member of a 
targeted group for purposes of the work opportunity tax credit. 
A Hurricane Katrina employee was: (1) an individual who on 
August 28, 2005, had a principal place of abode in the core 
disaster area and was hired during the two-year period 
beginning on such date for a position, the principal place of 
employment of which was located in the core disaster area; and 
(2) an individual who on August 28, 2005, had a principal place 
of abode in the core disaster area, who was displaced from such 
abode by reason of Hurricane Katrina and was hired during the 
period beginning on such date and ending on December 31, 2005 
without regard to whether the new principal place of employment 
is in the core disaster area.
    The present-law WOTC certification requirement was waived 
for such individuals. In lieu of the certification requirement, 
an individual may have provided to the employer reasonable 
evidence that the individual is a Hurricane Katrina employee.
    The present-law rule that denies the credit with respect to 
wages of employees who had been previously employed by the 
employer was waived for the first hire of such employee as a 
Hurricane Katrina employee unless such employee was an employee 
of the employer on August 28, 2005.
            Definitions
    The term ``Hurricane Katrina disaster area'' means an area 
with respect to which a major disaster has been declared by the 
President before September 14, 2005 under section 401 of the 
Robert T. Stafford Disaster Relief and Emergency Assistance 
Act.
    The term ``core disaster area'' means that portion of the 
Hurricane Katrina disaster area determined by the President to 
warrant individual or individual and public assistance from the 
Federal Government under the Robert T. Stafford Disaster Relief 
and Emergency Assistance Act.

                           REASONS FOR CHANGE

    In light of the economic deprivation that continues to be 
suffered as a result of Hurricane Katrina, the Committee 
believes that the work opportunity tax credit should continue 
to be available as an incentive to provide employment 
opportunities in the core disaster area of Hurricane Katrina.

                        EXPLANATION OF PROVISION

    The provision extends through August 28, 2008, the work 
opportunity tax credit for certain Hurricane Katrina employees 
employed within the core disaster area. For this purpose, a 
Hurricane Katrina employee employed within the core disaster 
area is an individual who on August 28, 2005, had a principal 
place of abode in the core disaster area and is hired on or 
after August 28, 2005 and before August 29, 2008 for a 
position, the principal place of employment of which was 
located in the core disaster area.\127\ The other special rules 
(e.g., certification and previous employment) for Hurricane 
Katrina employees apply.
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    \127\The prior-law work opportunity tax credit for Katrina 
employees hired to a new place of employment outside of the core 
disaster area is not extended by this provision.
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                             EFFECTIVE DATE

    The provision is effective for individuals hired after 
August 28, 2007, and before August 29, 2008.

                           C. Other Extenders


1. Disclosure of tax information to facilitate combined employment tax 
        reporting (sec. 341 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    Traditionally, Federal tax forms are filed with the Federal 
government and State tax forms are filed with individual 
States. This necessitates duplication of items common to both 
returns. The Code permits the IRS to disclose taxpayer identity 
information and signatures to any agency, body, or commission 
of any State for the purpose of carrying out with such agency, 
body or commission a combined Federal and State employment tax 
reporting program approved by the Secretary. The Federal 
disclosure restrictions, safeguard requirements, and criminal 
penalties for unauthorized disclosure and unauthorized 
inspection do not apply with respect to disclosures or 
inspections made pursuant to this authority.
    The authority for this program expires December 31, 2007.
    Under section 6103(c), the IRS may disclose a taxpayer's 
return or return information to such person or persons as the 
taxpayer may designate in a request for or consent to such 
disclosure. Pursuant to Treasury regulations, a taxpayer's 
participation in a combined return filing program between the 
IRS and a State agency, body or commission constitutes a 
consent to the disclosure by the IRS to the State agency of 
taxpayer identity information, signature and items of common 
data contained on the return. No disclosures may be made under 
this authority unless there are provisions of State law 
protecting the confidentiality of such items of common data.

                           REASONS FOR CHANGE

    Combined filing of Federal and State tax forms simplifies 
the filing obligations for taxpayers. As a result, the 
Committee believes it is appropriate to further extend the 
disclosure authority to facilitate combined employment tax 
reporting programs.

                        EXPLANATION OF PROVISION

    The provision extends for one year (through December 31, 
2008) the authority for the combined employment tax reporting 
program.

                             EFFECTIVE DATE

    The provision applies to disclosures after December 31, 
2007.

2. Disclosure of tax return information relating to terrorist activity 
        (secs. 342 and 343 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

In general

    Section 6103 provides that returns and return information 
may not be disclosed by the IRS, other Federal employees, State 
employees, and certain others having access to the information 
except as provided in the Internal Revenue Code. Section 6103 
contains a number of exceptions to this general rule of 
nondisclosure that authorize disclosure in specifically 
identified circumstances (including nontax criminal 
investigations) when certain conditions are satisfied.
            Disclosure provisions relating to emergency circumstances
    The IRS is authorized to disclose return information to 
apprise Federal law enforcement agencies of danger of death or 
physical injury to an individual or to apprise Federal law 
enforcement agencies of imminent flight of an individual from 
Federal prosecution.\128\ This authority has been used in 
connection with the investigation of terrorist activity.\129\
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    \128\Sec. 6103(i)(3)(B).
    \129\See, Joint Committee on Taxation, Disclosure Report for Public 
Inspection Pursuant to Internal Revenue Code Section 6103(p)(3)(C) for 
Calendar Year 2002 (JCX 29-04) April 6, 2004.
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            Disclosure provisions relating specifically to terrorist 
                    activity
    Also among the disclosures permitted under the Code is 
disclosure of returns and return information for purposes of 
investigating terrorist incidents, threats, or activities, and 
for analyzing intelligence concerning terrorist incidents, 
threats, or activities. The term ``terrorist incident, threat, 
or activity'' is statutorily defined to mean an incident, 
threat, or activity involving an act of domestic terrorism or 
international terrorism.\130\
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    \130\Sec. 6103(b)(11). For this purpose, ``domestic terrorism'' is 
defined in 18 U.S.C. sec. 2331(5) and ``international terrorism'' is 
defined in 18 U.S.C. sec. 2331(1).
---------------------------------------------------------------------------
    The term ``international terrorism'' means activities that 
involve violent acts or acts dangerous to human life that are a 
violation of the criminal laws of the United States or of any 
State, or that would be a criminal violation if committed 
within the jurisdiction of the United States or of any State; 
appear to be intended to intimidate or coerce a civilian 
population, to influence the policy of a government by 
intimidation or coercion, or to affect the conduct of a 
government by mass destruction, assassination, or kidnapping; 
and occur primarily outside the territorial jurisdiction of the 
United States, or transcend national boundaries in terms of the 
means by which they are accomplished, the persons they appear 
intended to intimidate or coerce, or the locale in which their 
perpetrators operate or seek asylum. The term ``domestic 
terrorism'' means activities that involve acts dangerous to 
human life that are a violation of the criminal laws of the 
United States or of any State; appear to be intended to 
intimidate or coerce a civilian population, to influence the 
policy of a government by intimidation or coercion or to affect 
the conduct of a government by mass destruction, assassination, 
or kidnapping; and occur primarily within the territorial 
jurisdiction of the United States.
    In general, returns and taxpayer return information must be 
obtained pursuant to an ex parte court order. Return 
information, other than taxpayer return information, generally 
is available upon a written request meeting specific 
requirements. The IRS also is permitted to make limited 
disclosures of such information on its own initiative to the 
appropriate Federal law enforcement agency.
    No disclosures may be made under these provisions after 
December 31, 2007. The procedures applicable to these 
provisions are described in detail below.

Disclosure of returns and return information--by ex parte court order

            Ex parte court orders sought by Federal law enforcement and 
                    Federal intelligence agencies
    The Code permits, pursuant to an ex parte court order, the 
disclosure of returns and return information (including 
taxpayer return information) to certain officers and employees 
of a Federal law enforcement agency or Federal intelligence 
agency. These officers and employees are required to be 
personally and directly engaged in any investigation of, 
response to, or analysis of intelligence and 
counterintelligence information concerning any terrorist 
incident, threat, or activity. These officers and employees are 
permitted to use this information solely for their use in the 
investigation, response, or analysis, and in any judicial, 
administrative, or grand jury proceeding, pertaining to any 
such terrorist incident, threat, or activity.
    The Attorney General, Deputy Attorney General, Associate 
Attorney General, an Assistant Attorney General, or a United 
States attorney, may authorize the application for the ex parte 
court order to be submitted to a Federal district court judge 
or magistrate. The Federal district court judge or magistrate 
would grant the order if based on the facts submitted he or she 
determines that: (1) there is reasonable cause to believe, 
based upon information believed to be reliable, that the return 
or return information may be relevant to a matter relating to 
such terrorist incident, threat, or activity; and (2) the 
return or return information is sought exclusively for the use 
in a Federal investigation, analysis, or proceeding concerning 
any terrorist incident, threat, or activity.
            Special rule for ex parte court ordered disclosure 
                    initiated by the IRS
    If the Secretary of the Treasury (or his delegate) 
possesses returns or return information that may be related to 
a terrorist incident, threat, or activity, the Secretary may, 
on his own initiative, authorize an application for an ex parte 
court order to permit disclosure to Federal law enforcement. In 
order to grant the order, the Federal district court judge or 
magistrate must determine that there is reasonable cause to 
believe, based upon information believed to be reliable, that 
the return or return information may be relevant to a matter 
relating to such terrorist incident, threat, or activity. The 
information may be disclosed only to the extent necessary to 
apprise the appropriate Federal law enforcement agency 
responsible for investigating or responding to a terrorist 
incident, threat, or activity and for officers and employees of 
that agency to investigate or respond to such terrorist 
incident, threat, or activity. Further, use of the information 
is limited to use in a Federal investigation, analysis, or 
proceeding concerning a terrorist incident, threat, or 
activity. Because the Department of Justice represents the 
Secretary in Federal district court, the Secretary is permitted 
to disclose returns and return information to the Department of 
Justice as necessary and solely for the purpose of obtaining 
the special IRS ex parte court order.

Disclosure of return information other than by ex parte court order

            Disclosure by the IRS without a request
    The Code permits the IRS to disclose return information, 
other than taxpayer return information, related to a terrorist 
incident, threat, or activity to the extent necessary to 
apprise the head of the appropriate Federal law enforcement 
agency responsible for investigating or responding to such 
terrorist incident, threat, or activity. The IRS on its own 
initiative and without a written request may make this 
disclosure. The head of the Federal law enforcement agency may 
disclose information to officers and employees of such agency 
to the extent necessary to investigate or respond to such 
terrorist incident, threat, or activity. A taxpayer's identity 
is not treated as return information supplied by the taxpayer 
or his or her representative.
            Disclosure upon written request of a Federal law 
                    enforcement agency
    The Code permits the IRS to disclose return information, 
other than taxpayer return information, to officers and 
employees of Federal law enforcement upon a written request 
satisfying certain requirements. The request must: (1) be made 
by the head of the Federal law enforcement agency (or his 
delegate) involved in the response to or investigation of 
terrorist incidents, threats, or activities, and (2) set forth 
the specific reason or reasons why such disclosure may be 
relevant to a terrorist incident, threat, or activity. The 
information is to be disclosed to officers and employees of the 
Federal law enforcement agency who would be personally and 
directly involved in the response to or investigation of 
terrorist incidents, threats, or activities. The information is 
to be used by such officers and employees solely for such 
response or investigation.
    The Code permits the redisclosure by a Federal law 
enforcement agency to officers and employees of State and local 
law enforcement personally and directly engaged in the response 
to or investigation of the terrorist incident, threat, or 
activity. The State or local law enforcement agency must be 
part of an investigative or response team with the Federal law 
enforcement agency for these disclosures to be made.
            Disclosure upon request from the Departments of Justice or 
                    the Treasury for intelligence analysis of terrorist 
                    activity
    Upon written request satisfying certain requirements 
discussed below, the IRS is to disclose return information 
(other than taxpayer return information) to officers and 
employees of the Department of Justice, Department of the 
Treasury, and other Federal intelligence agencies, who are 
personally and directly engaged in the collection or analysis 
of intelligence and counterintelligence or investigation 
concerning terrorist incidents, threats, or activities. Use of 
the information is limited to use by such officers and 
employees in such investigation, collection, or analysis.
    The written request is to set forth the specific reasons 
why the information to be disclosed is relevant to a terrorist 
incident, threat, or activity. The request is to be made by an 
individual who is: (1) an officer or employee of the Department 
of Justice or the Department of the Treasury, (2) appointed by 
the President with the advice and consent of the Senate, and 
(3) responsible for the collection, and analysis of 
intelligence and counterintelligence information concerning 
terrorist incidents, threats, or activities. The Director of 
the United States Secret Service also is an authorized 
requester.

                           REASONS FOR CHANGE

    It is important for the IRS to be able to share information 
with other law enforcement and intelligence agencies in the 
effort to combat terrorism. As a result, the Committee believes 
it is appropriate to extend the disclosure authority relating 
to terrorist activities for another year.

                        EXPLANATION OF PROVISION

    The provision extends for one year (through December 31, 
2008) the disclosure authority relating to terrorist 
activities.

                             EFFECTIVE DATE

    The provision is effective for disclosures after December 
31, 2007.

3. Disclosure of return information to carry out income contingent 
        repayment of student loans (sec. 344 of the bill and sec. 6103 
        of the Code)

                              PRESENT LAW

    Present law prohibits the disclosure of returns and return 
information, except to the extent specifically authorized by 
the Code. An exception is provided for disclosure to the 
Department of Education (but not to contractors thereof) of a 
taxpayer's filing status, adjusted gross income and identity 
information (i.e., name, mailing address, taxpayer identifying 
number) to establish an appropriate repayment amount for an 
applicable student loan. The disclosure authority for the 
income-contingent loan repayment program is scheduled to expire 
after December 31, 2007.
    The Department of Education utilizes contractors for the 
income-contingent loan verification program. The specific 
disclosure exception for the program does not permit disclosure 
of return information to contractors. As a result, the 
Department of Education obtains return information from the 
Internal Revenue Service by taxpayer consent (under section 
6103(c)), rather than under the specific exception for the 
income-contingent loan verification program (sec. 6103(l)(13)).

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to extend for an 
additional year the disclosure authority relating to income 
contingent student loans.

                        EXPLANATION OF PROVISION

    The provision extends for one year (through December 31, 
2008) the present law authority to disclose return information 
for purposes of the income-contingent loan repayment program.

                             EFFECTIVE DATE

    The provision applies to requests made after December 31, 
2007.

4. Extension of IRS authority to fund undercover operations (sec. 345 
        of the bill and sec. 7608 of the Code)

                              PRESENT LAW

    IRS undercover operations are statutorily\131\ exempt from 
the generally applicable restrictions controlling the use of 
Government funds (which generally provide that all receipts 
must be deposited in the general fund of the Treasury and all 
expenses be paid out of appropriated funds). In general, the 
Code permits the IRS to use proceeds from an undercover 
operation to pay additional expenses incurred in the undercover 
operation, through 2007. The IRS is required to conduct a 
detailed financial audit of large undercover operations in 
which the IRS is churning funds and to provide an annual audit 
report to the Congress on all such large undercover operations.
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    \131\Sec. 7608(c).
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                           REASONS FOR CHANGE

    The Committee believes it is appropriate to extend the 
IRS's authority to use proceeds from undercover operations to 
pay additional enforcement expenses. This authority provides 
the IRS with an important enforcement tool and it is similar to 
that provided to other law enforcement agencies.

                        EXPLANATION OF PROVISION

    The provision extends through 2008 the IRS's authority to 
use proceeds from an undercover operation to pay additional 
expenses incurred in the undercover operation.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

5. Suspend limitation on rate of rum excise tax cover over to Puerto 
        Rico and Virgin Islands (sec. 346 of the bill and sec. 7652(f) 
        of the Code)

                              PRESENT LAW

    A $13.50 per proof gallon\132\ excise tax is imposed on 
distilled spirits produced in or imported (or brought) into the 
United States.\133\ 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).\134\
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    \132\A proof gallon is a liquid gallon consisting of 50 percent 
alcohol. See sec. 5002(a)(10) and (11).
    \133\Sec. 5001(a)(1).
    \134\Secs. 5062(b), 7653(b) and (c).
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    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.\135\ 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, 2007).
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    \135\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.\136\ 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.\137\ All of the amounts covered over are subject to 
the limitation.
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    \136\Sec. 7652(e)(2).
    \137\Secs. 7652(a)(3), (b)(3), and (e)(1).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that, given the current fiscal needs 
of Puerto Rico and the U.S. Virgin Islands, it is appropriate 
to extend the increase in the amount of the rum excise tax 
covered over to these possessions.

                        EXPLANATION OF PROVISION

    The provision suspends for one year the $10.50 per proof 
gallon limitation on the amount of excise taxes on rum covered 
over to Puerto Rico and the Virgin Islands. Under the 
provision, the cover over amount of $13.25 per proof gallon is 
extended for rum brought into the United States after December 
31, 2007 and before January 1, 2009. After December 31, 2008, 
the cover over amount reverts to $10.50 per proof gallon.

                             EFFECTIVE DATE

    The change in the cover over rate is effective for articles 
brought into the United States after December 31, 2007.

6. Extension of disclosure authority to the Department of Veterans 
        Affairs (sec. 347 of the bill and sec. 6103 of the Code)

                              PRESENT LAW

    The Code prohibits disclosure of returns and return 
information, except to the extent specifically authorized by 
the Code (sec. 6103). Unauthorized disclosure is a felony 
punishable by a fine not exceeding $5,000 or imprisonment of 
not more than five years, or both (sec. 7213). An action for 
civil damages also may be brought for unauthorized disclosure 
(sec. 7431). No tax information may be furnished by the 
Internal Revenue Service (``IRS'') to another agency unless the 
other agency establishes procedures satisfactory to the IRS for 
safeguarding the tax information it receives (sec. 6103(p)).
    Among the disclosures permitted under the Code is 
disclosure of certain tax information to the Department of 
Veterans Affairs. Disclosure is permitted to assist the 
Department of Veterans Affairs in determining eligibility for, 
and establishing correct benefit amounts under, certain of its 
needs-based pension, health care, and other programs (sec. 
6103(l)(7)(D)(viii)). The Department of Veterans Affairs 
disclosure provision was scheduled to expire after September 
30, 2008.

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to further extend 
this authority to ensure the correct payment of government 
benefits.

                        EXPLANATION OF PROVISION

    The provision extends for three months (through December 
31, 2008) the disclosure authority to the Department of 
Veteran's Affairs.

                             EFFECTIVE DATE

    The provision is effective for requests made after 
September 30, 2008.

               TITLE IV--MORTGAGE FORGIVENESS DEBT RELIEF


    A. Exclude Discharges of Acquisition Indebtedness on Principal 
                      Residences From Gross Income


(Sec. 401 of the bill and sec. 108 of the Code)

                              PRESENT LAW

    Gross income includes income that is realized by a debtor 
from the discharge of indebtedness, subject to certain 
exceptions for debtors in Title 11 bankruptcy cases, insolvent 
debtors, certain student loans, certain farm indebtedness, and 
certain real property business indebtedness (secs. 61(a)(12) 
and 108).\138\ In cases involving discharges of indebtedness 
that are excluded from gross income under the exceptions to the 
general rule, taxpayers generally reduce certain tax 
attributes, including basis in property, by the amount of the 
discharge of indebtedness.
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    \138\A debt cancellation which constitutes a gift or bequest is not 
treated as income to the donee debtor (sec. 102).
---------------------------------------------------------------------------
    The amount of discharge of indebtedness excluded from 
income by an insolvent debtor not in a Title 11 bankruptcy case 
cannot exceed the amount by which the debtor is insolvent. In 
the case of a discharge in bankruptcy or where the debtor is 
insolvent, any reduction in basis may not exceed the excess of 
the aggregate bases of properties held by the taxpayer 
immediately after the discharge over the aggregate of the 
liabilities immediately after the discharge (sec. 1017).
    For all taxpayers, the amount of discharge of indebtedness 
generally is equal to the difference between the adjusted issue 
price of the debt being cancelled and the amount used to 
satisfy the debt. These rules generally apply to the exchange 
of an old obligation for a new obligation, including a 
modification of indebtedness that is treated as an exchange (a 
debt-for-debt exchange).
    For example, assume a taxpayer who is not in bankruptcy and 
is not insolvent owns a principal residence subject to a 
$200,000 mortgage debt for which the taxpayer has personal 
liability. If the creditor forecloses and the home is sold for 
$180,000 in satisfaction of the debt, the debtor has $20,000 
income from the discharge of indebtedness which is includible 
in gross income. Likewise, if the creditor restructures the 
loan and reduces the principal amount to $180,000, the debtor 
has $20,000 includible in gross income.

                           REASONS FOR CHANGE

    The Committee believes that where taxpayers restructure 
their acquisition debt on a principal residence or lose their 
principal residence in a foreclosure, that it is inappropriate 
to treat discharges of acquisition indebtedness as income.

                        EXPLANATION OF PROVISION

    The bill excludes from the gross income of a taxpayer any 
discharge of indebtedness income by reason of a discharge (in 
whole or in part) of qualified principal residence 
indebtedness. Qualified principal residence indebtedness means 
acquisition indebtedness (within the meaning of section 
163(h)(3)(B) except that the dollar limit is $2 million ($1 
million in the case of a separate return) with respect to the 
taxpayer's principal residence. Acquisition indebtedness with 
respect to a principal residence generally means indebtedness 
which is incurred in the acquisition, construction, or 
substantial improvement of the principal residence of the 
individual and is secured by the residence. It also includes 
refinancing of such indebtedness to the extent the amount of 
the refinancing does not exceed the amount of the refinanced 
indebtedness. For these purposes the term ``principal 
residence'' has the same meaning as under section 121 of the 
Code.
    If, immediately before the discharge, only a portion of a 
discharged indebtedness is qualified principal residence 
indebtedness, the exclusion applies only to so much of the 
amount discharged as exceeds the portion of the debt which is 
not qualified principal residence indebtedness. Thus, assume 
that a principal residence is secured by a recourse 
indebtedness of $1 million, of which $800,000 is qualified 
principal residence indebtedness. If the residence is sold for 
$700,000 and $300,000 debt is discharged, then only $100,000 of 
the amount discharged may be excluded from gross income under 
this provision.
    The basis of the individual's principal residence is 
reduced by the amount excluded from income under the bill.
    Under the bill, the exclusion does not apply to a taxpayer 
in a Title 11 case; instead the present-law exclusion applies. 
In the case of an insolvent taxpayer not in a Title 11 case, 
the exclusion under the bill applies unless the taxpayer elects 
to have the present-law exclusion apply instead.
    Under the bill, the exclusion does not apply to the 
discharge of a loan if the discharge is on account of services 
performed for the lender.

                             EFFECTIVE DATE

    The provision is effective for discharges of indebtedness 
on or after January 1, 2007.

         B. Extend the Deduction for Private Mortgage Insurance


(Sec. 402 of the bill and sec. 163 of the Code)

                              PRESENT LAW

In general

    Present law provides that qualified residence interest is 
deductible notwithstanding the general rule that personal 
interest is nondeductible (sec. 163(h)).

Acquisition indebtedness and home equity indebtedness

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

Private mortgage insurance

    Certain premiums paid or accrued for qualified mortgage 
insurance by a taxpayer during the taxable year in connection 
with acquisition indebtedness on a qualified residence of the 
taxpayer are treated as interest that is qualified residence 
interest and thus deductible. The amount allowable as a 
deduction is phased out ratably by 10 percent for each $1,000 
by which the taxpayer's adjusted gross income exceeds $100,000 
($500 and $50,000, respectively, in the case of a married 
individual filing a separate return). Thus, the deduction is 
not allowed if the taxpayer's adjusted gross income exceeds 
$110,000 ($55,000 in the case of married individual filing a 
separate return).
    For this purpose, qualified mortgage insurance means 
mortgage insurance provided by the Veterans Administration, the 
Federal Housing Administration, or the Rural Housing 
Administration, and private mortgage insurance (defined in 
section 2 of the Homeowners Protection Act of 1998 as in effect 
on the date of enactment of the provision).
    Amounts paid for qualified mortgage insurance that are 
properly allocable to periods after the close of the taxable 
year are treated as paid in the period to which they are 
allocated. No deduction is allowed for the unamortized balance 
if the mortgage is paid before its term (except in the case of 
qualified mortgage insurance provided by the Department of 
Veterans Affairs or Rural Housing Administration).
    The provision does not apply with respect to any mortgage 
insurance contract issued before January 1, 2007. The provision 
terminates for any amount paid or accrued after December 31, 
2007, or properly allocable to any period after that date.
    Reporting rules apply under the provision.

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to extend the 
present-law temporary provision. The Committee understands that 
the purpose of the provisions permitting deduction of home 
mortgage interest is to encourage home ownership while limiting 
significant disincentives to saving. The Committee believes 
that it would be consistent with the purpose of the provisions 
permitting deduction of home mortgage interest to permit the 
deduction of mortgage insurance premiums. While these premiums 
are not in the nature of interest, the Committee notes that 
purchase of such insurance is often demanded by lenders in 
order for home buyers to obtain financing (depending on the 
size of the buyer's down payment). The Committee believes that 
permitting deductibility of premiums for this type of insurance 
connected with home purchases will foster home ownership. In 
the case of higher income taxpayers who may not purchase 
mortgage insurance, however, the Committee believes the 
incentive of deductibility becomes unnecessary, and a phase-out 
is appropriate. It is not intended that prepayments be 
currently deductible, but rather, that they be deductible only 
in the period to which they relate. Reporting of payments is 
generally necessary to administer the provision.

                        EXPLANATION OF PROVISION

    The provision extends the deduction for private mortgage 
insurance to amounts paid or accrued after December 31, 2007, 
but only with respect to contracts entered into after December 
31, 2006, and prior to January 1, 2015.

                             EFFECTIVE DATE

    The provision applies to contracts entered into after 
December 31, 2006, and before January 1, 2015, with respect to 
amounts paid or accrued after December 31, 2007.

 C. Alternative Tests for Qualifying as Cooperative Housing Corporation


(Sec. 403 of the bill and sec. 216 of the Code)

                              PRESENT LAW

    A tenant-stockholder in a cooperative housing corporation 
is entitled to deduct amounts paid or accrued to the 
cooperative to the extent those amounts represent the tenant-
stockholder's proportionate share of (1) real estate taxes 
allowable as a deduction to the cooperative which are paid or 
incurred by the cooperative on the cooperative's land or 
buildings and (2) interest allowable as a deduction to the 
cooperative that is paid or incurred by the cooperative on its 
indebtedness contracted in the acquisition of the cooperative's 
land or in the acquisition, construction, alteration, 
rehabilitation, or maintenance of the cooperative's buildings.
    A cooperative housing corporation generally is a 
corporation (1) that has one class of stock, (2) each of the 
stockholders of which is entitled, solely by reason of 
ownership of stock in the corporation, to occupy a dwelling 
owned or leased by the cooperative, (3) no stockholder of which 
is entitled to receive any distribution not out of earnings and 
profits of the cooperative, except on complete or partial 
liquidation of the cooperative, and (4) 80 percent or more of 
the gross income of which for the taxable year in which the 
taxes and interest are paid or incurred is derived from tenant-
stockholders.

                           REASONS FOR CHANGE

    Under present law, tenant-stockholders of a cooperative 
housing corporation are allowed to deduct their proportionate 
shares of the cooperative's deductible real estate taxes and 
mortgage interest only if the cooperative's nonmember income is 
no more than 20 percent of its total gross income. To satisfy 
this rule, some cooperative housing corporations have made 
rentals to commercial tenants at below-market rates. The 
Committee believes that the tax rules should not create an 
incentive to charge below-market-rate rents. Accordingly, the 
Committee's bill provides two non-income-based alternatives to 
the 80-percent requirement of present law.

                        EXPLANATION OF PROVISION

    The provision amends the fourth requirement listed above to 
provide that the requirement is satisfied if, for the taxable 
year in which the taxes and interest are paid or incurred, the 
corporation meets one of the following three requirements: (1) 
80 percent or more of the corporation's gross income for that 
taxable year is derived from tenant-stockholders (the present 
law requirement); (2) at all times during that table year 80 
percent or more of the total square footage of the 
corporation's property is used or available for use by the 
tenant-stockholders for residential purposes or purposes 
ancillary to such residential use; or (3) 90 percent or more of 
the expenditures of the corporation paid or incurred during 
that taxable year are paid or incurred for the acquisition, 
construction, management, maintenance, or care of the 
corporation's property for the benefit of tenant-stockholders.

                             EFFECTIVE DATE

    The provision is effective for taxable years ending after 
the date of enactment.

 D. Exclusion of Gain on Sale of a Principal Residence Not to Apply to 
                            Nonqualified Use


(Sec. 404 of the bill and sec. 121 of the Code)

                              PRESENT LAW

In general

    Under present law, an individual taxpayer may exclude up to 
$250,000 ($500,000 if married filing a joint return) of gain 
realized on the sale or exchange of a principal residence. To 
be eligible for the exclusion, the taxpayer must have owned and 
used the residence as a principal residence for at least two of 
the five years ending on the sale or exchange. A taxpayer who 
fails to meet these requirements by reason of a change of place 
of employment, health, or, to the extent provided under 
regulations, unforeseen circumstances is able to exclude an 
amount equal to the fraction of the $250,000 ($500,000 if 
married filing a joint return) that is equal to the fraction of 
the two years that the ownership and use requirements are met.
    Present law also contains an election relating to members 
of the uniformed services, the Foreign Service, and certain 
employees of the intelligence community.\139\ If the election 
is made, the five-year period ending on the date of the sale or 
exchange of a principal residence does not include any period 
up to 10 years during which the taxpayer or the taxpayer's 
spouse is on qualified official extended duty. For these 
purposes, qualified official extended duty is any period of 
extended duty while serving at a place of duty at least 50 
miles away from the taxpayer's principal residence or under 
orders compelling residence in government furnished quarters. 
The election may be made with respect to only one property for 
a suspension period.
---------------------------------------------------------------------------
    \139\The provision relating to employees of the intelligence 
community is effective for sales and exchanges before January 1, 2011.
---------------------------------------------------------------------------
    The exclusion does not apply to gain to the extent the gain 
is attributable to depreciation allowable with respect to the 
rental or business use of a principal residence for periods 
after May 6, 1997.

                           REASONS FOR CHANGE

    The present-law exclusion of gain on principal residences 
has many beneficial effects by encouraging home ownership. The 
Committee believes that the application of present-law to 
exclude gain attributable to periods of use prior to a home's 
use as a principal residence is not consistent with the purpose 
of the present-law exclusion and inappropriate. The Committee 
believes that the provision limits the application of the 
exclusion to use as a principal residence without imposing 
undue computational and record-keeping burdens on the taxpayer 
or the Internal Revenue Service.

                        EXPLANATION OF PROVISION

    Under the bill, gain from the sale or exchange of a 
principal residence allocated to periods of nonqualified use is 
not excluded from gross income. The amount of gain allocated to 
periods of nonqualified use is the amount of gain multiplied by 
a fraction the numerator of which is the aggregate periods of 
nonqualified use during the period the property was owned by 
the taxpayer and the denominator of which is the period the 
taxpayer owned the property.
    A period of nonqualified use means any period (not 
including any period before January 1, 2008) during which the 
property is not used by the taxpayer or the taxpayer's spouse 
or former spouse as a principal residence. For purposes of 
determining periods of nonqualified use, (i) any period after 
the last date the property is used as the principal residence 
of the taxpayer or spouse (regardless of use during that 
period), and (ii) any period (not to exceed two years) that the 
taxpayer is temporarily absent by reason of a change in place 
of employment, health, or, to the extent provided in 
regulations, unforeseen circumstances, are not taken into 
account. The present-law election for the uniformed services, 
Foreign Service and employees of the intelligence community is 
unchanged.
    If any gain is attributable to post-May 6, 1997, 
depreciation, the exclusion does not apply to that amount of 
gain, as under present law, and that gain is not taken into 
account in determining the amount of gain allocated to 
nonqualified use.
    These provisions may be illustrated by the following 
examples:
    Example 1.--Assume that an individual buys a property on 
January 1, 2008, for $400,000, and uses it as rental property 
for two years claiming $20,000 of depreciation deductions. On 
January 1, 2010, the taxpayer converts the property to his 
principal residence. On January 1, 2012, the taxpayer moves 
out, and the taxpayer sells the property for $700,000 on 
January 1, 2013. As under present law, $20,000 gain 
attributable to the depreciation deductions is included in 
income. Of the remaining $300,000 gain, 40% of the gain (2 
years divided by 5 years), or $120,000, is allocated to 
nonqualified use and is not eligible for the exclusion. Since 
the remaining gain of $180,000 is less than the maximum gain of 
$250,000 that may be excluded, gain of $180,000 is excluded 
from gross income.
    Example 2.--Assume that an individual buys a principal 
residence on January 1, 2008, for $400,000, moves out on 
January 1, 2018, and on December 1, 2020 (more than two years 
after it was last used as the principal residence) sells the 
property for $600,000. The entire $200,000 gain is excluded 
from gross income, as under present law.

                             EFFECTIVE DATE

    The provision is effective for sales and exchanges after 
December 31, 2007.

                   TITLE V--ADMINISTRATIVE PROVISIONS


             A. Repeal of Private Tax Collection Contracts


(Sec. 501 of the bill and sec. 6306 of the Code)

                              PRESENT LAW

    The Secretary has general authority to administer and 
enforce the tax laws. Present law also provides specific 
authority for the collection of taxes. Under present law, the 
IRS may use private debt collection companies to locate and 
contact taxpayers owing outstanding tax liabilities of any type 
and to arrange payment of those taxes by the taxpayers.
    Present law provides for payments to private debt 
collection companies to be made from the amount collected 
pursuant to a private debt collection contract, but not in 
excess of 25 percent of the amount collected. Present law also 
permits the IRS to retain an amount not in excess of 25 percent 
from the amount collected pursuant to a private debt collection 
contract for additional enforcement activities.

                           REASONS FOR CHANGE

    Over 130 years ago, this Committee stated that ``any system 
of farming the collection of any portion of the revenue of the 
Government is fundamentally wrong * * * No necessity for such 
laws exist * * * the Secretary of the Treasury and the head of 
the Internal Revenue Bureau are empowered by law to make all 
collections of taxes * * *. The Internal Revenue Bureau is 
possessed of full knowledge of the laws relating to the 
collection of the revenue * * * and has all the machinery 
necessary for their full and complete enforcement.''\140\ The 
Committee believes these words remain true today.
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    \140\H.R. Rep. No. 43-559, 1st Sess. (1874).
---------------------------------------------------------------------------
    The Committee believes that the collection of federal 
income taxes is an inherently governmental function that should 
be restricted to IRS employees. The Committee believes that the 
use of private contractors to collect Federal tax debt violates 
the special and confidential relationship between taxpayers and 
the Federal government. The Committee believes that the use of 
private contractors jeopardizes the privacy of taxpayers and 
undermines long-term taxpayer compliance.
    The IRS Commissioner has stated on numerous times before 
the Committee that IRS employees can collect Federal taxes more 
efficiently than private debt collection companies. IRS 
employees have access to a taxpayer's complete file and 
history, including the most recent information relating to tax 
filings and compliance data. Access to the taxpayer's complete 
file allows IRS employees to collect outstanding tax debt more 
efficiently and in a manner that ensures long-term compliance 
with the tax laws. The Committee believes that only IRS 
employees should be allowed to perform tax collection 
activities. It is the Committee's view that the IRS take 
immediate and appropriate action to ensure that IRS employees 
being laid off at IRS processing centers be provided training 
and employment opportunities at IRS Automated Collection System 
(ACS) sites, including out-bound call collection activities, 
and that the IRS expand ACS activities as appropriate to ensure 
proper levels of collection activities.

                        EXPLANATION OF PROVISION

    The provision repeals the authority for the IRS to enter 
into, renew, or extend any private debt collection contract.

                             EFFECTIVE DATE

    The provision generally is effective on the date of 
enactment, except for any contract which was entered into 
before July 18, 2007, and is not renewed or extended after such 
date. The provision also provides that any private debt 
collection contract which is entered into on or after July 18, 
2007, and any extension or renewal on or after such date of any 
private debt collection contract shall be void.

          B. Delayed Implementation of Government Withholding


(Sec. 502 of the bill and sec. 3402(t) of the Code)

                              PRESENT LAW

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

                           REASONS FOR CHANGE

    The Committee understands that the three-percent 
withholding requirement presents a number of challenges for the 
government entities and taxpayers subject to the requirement. 
The Committee believes the Treasury should conduct a study of 
the issues confronting both businesses and governments in 
complying with the three-percent requirement, as well as the 
issues confronting Treasury and the IRS in administering such 
requirement. Thus, the Committee believes it is appropriate to 
delay the effective date of the three-percent withholding 
requirement by one year to allow the Secretary further time to 
study issues associated with the requirement and to provide 
Congress with time to review and respond to the results of such 
study.

                        EXPLANATION OF PROVISION

    The provision delays the effective date for the three-
percent withholding requirement. Under the provision, the 
requirement applies to payments made after December 31, 2011.
    The provision directs the Secretary to study issues 
associated with the three-percent withholding requirement, 
including (1) the problems, if any, which are anticipated in 
administering and complying with such requirement, (2) the 
burdens, if any, that such requirements will place on small 
businesses (taking into account such mechanisms as may be 
necessary to administer such requirements), and (3) the 
application of such requirements to small expenditures for 
services and goods by governments.
    The Secretary is to submit his report to the House 
Committee on Ways and Means and the Senate Committee on Finance 
no later than six months after the date of enactment.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

C. Application of Statute of Limitations Rules to Persons Claiming U.S. 
                        Virgin Islands Residency


(Sec. 503 of the bill and sec. 932 of the Code)

                              PRESENT LAW

Return filing rules for Virgin Islands residents

    An individual who is a bona fide resident of the U.S. 
Virgin Islands (``USVI'') or who files a joint return with a 
person who is a bona fide USVI resident must file an income tax 
return with the USVI.\141\ For any taxable year ending after 
October 22, 2004 the bona fide residence requirement for 
application of this return filing rule must be satisfied for 
the entire taxable year.\142\ For taxable years ending on or 
before October 22, 2004, section 932(c)(1)(A) provided that 
bona fide residence was tested at the close of the taxable 
year.
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    \141\Sec. 932(c)(1), (2).
    \142\Sec. 932(c)(1)(A).
---------------------------------------------------------------------------
    For an individual (1) who is a bona fide resident of the 
USVI, (2) who, on the income tax return filed with the USVI, 
reports income from all sources and identifies the source of 
each item shown on the return, and (3) who fully pays the tax 
liability resulting from the income shown on the return, for 
purposes of calculating income tax liability to the United 
States, gross income does not include any amount included in 
gross income on the USVI return, and allocable deductions and 
credits are not taken into account.\143\ Accordingly, an 
individual who is a bona fide USVI resident generally may 
satisfy the individual's U.S. return-filing and income tax 
payment obligations by filing an income tax return with the 
USVI and paying income tax to the USVI.
---------------------------------------------------------------------------
    \143\Sec. 932(c)(4).
---------------------------------------------------------------------------

Statute of limitations

    The IRS generally must assess tax within three years after 
the due date for the return to which the assessment 
relates.\144\
---------------------------------------------------------------------------
    \144\Sec. 6501(a), (b)(1).
---------------------------------------------------------------------------
    In certain circumstances, the three-year statute of 
limitations does not apply, and the IRS may assess tax at any 
time. These circumstances include the filing of a false or 
fraudulent return with the intent to evade tax; a willful 
attempt to defeat or evade tax; and the failure to file a 
return.

Statute of limitations for USVI residents

    In guidance published in 1999, the IRS concluded that when 
a U.S. citizen who was a bona fide resident of the USVI timely 
filed a USVI income tax return but failed to report on that 
return a U.S.-source dividend, the three-year statute of 
limitations period began to run with the filing of the USVI 
return and the IRS was precluded from assessing tax after 
expiration of the three-year period.\145\ In 2006 guidance, the 
IRS concluded that when a U.S. citizen who timely files a USVI 
income tax return fails to satisfy a requirement of section 
932(c)(4) (because, for example, the individual is not a bona 
fide USVI resident or does not report all income on the USVI 
return), the three-year statute of limitations period does not 
begin to run until the individual also files a return with the 
IRS.\146\
---------------------------------------------------------------------------
    \145\Field Service Advice Memorandum 199906031 (Feb. 12, 1999).
    \146\Chief Counsel Advice Memorandum 200624002 (June 16, 2006).
---------------------------------------------------------------------------
    In 2007 guidance, the IRS provided rules for the 
application of the three-year statute of limitations period and 
the section 932(c) return filing requirements to a U.S. citizen 
or resident who claims status as a bona fide USVI 
resident.\147\ As a result of this guidance, for taxable years 
ending on or after December 31, 2006, the three-year statute of 
limitations period for every U.S. citizen or resident claiming 
to be a bona fide USVI resident generally begins when the 
individual files an income tax return with the USVI.
---------------------------------------------------------------------------
    \147\Notice 2007-19, 2007-11 I.R.B. 689 (Mar. 12, 2007); Notice 
2007-31, 2007-16 I.R.B. 971 (Apr. 16, 2007).
---------------------------------------------------------------------------
    The rules in the 2007 guidance for an individual who claims 
bona fide USVI residence for a taxable year ending before 
December 31, 2006 differ based on whether the individual is a 
``covered person'' or a non-covered person. A covered person is 
a U.S. citizen or resident alien who takes the position that he 
or she is a bona fide USVI resident, files a USVI income tax 
return, and has less than $75,000 gross income for the taxable 
year. A covered person generally may claim application of the 
three-year statute of limitations period for a taxable year 
ending before December 31, 2006 based on that person's filing 
of a USVI income tax return for that year. A non-covered person 
may start the running of the three-year limitations period for 
a taxable year ending before December 31, 2006 by filing an 
income tax return for that year with the IRS and reporting on 
that return no gross income and no taxable income. The three-
year limitations period starts with the filing of the return 
with the IRS.

                           REASONS FOR CHANGE

    The Committee believes it is unfair to apply different 
statute of limitations rules to U.S. citizens who claim to be 
bona fide USVI residents and who file USVI income tax returns 
than to other U.S. citizens who file income tax returns with 
the IRS. The 1986 Tax Reform Act provided that residents of the 
USVI are required to file income tax returns only with the 
USVI. The Committee believes that the guidance issued by the 
IRS in 2006 and 2007 represents a misapplication of present 
law. In particular, the Committee objects to the retroactive 
denial of statute of limitations protections caused by the 2006 
IRS guidance. The IRS notices issued in 2007 ameliorate but do 
not eliminate this retroactive effect because, for taxable 
years ending before December 31, 2006, the notices 
differentiate among taxpayers based on income.

                        EXPLANATION OF PROVISION

    The provision provides generally that an income tax return 
filed with the USVI by an individual claiming to be a bona fide 
USVI resident will be treated for purposes of subtitle F of the 
Code (Procedure and Administration) in the same manner as if 
the return were an income tax return filed with the United 
States for that year. Consequently, under the provision the 
filing of a USVI income tax return by any individual claiming 
status as a bona fide USVI resident generally starts the three-
year limitations period. This rule does not, however, apply if 
the return filed with the USVI is false or fraudulent with the 
intent to evade tax or otherwise is a willful attempt in any 
manner to defeat or evade tax.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
1986.

        D. Revision of Tax Rules on Expatriation of Individuals


(Sec. 504 of the bill and new secs. 877A and 2801 of the Code)

                              PRESENT LAW

In general

            Income tax
    U.S. citizens and residents generally are subject to U.S. 
income taxation on their worldwide income. The U.S. tax may be 
reduced or offset by a credit allowed for foreign income taxes 
paid with respect to foreign source income. Nonresident aliens 
are taxed at a flat rate of 30 percent (or a lower treaty rate) 
on certain types of passive income derived from U.S. sources, 
and at regular graduated rates on net profits derived from a 
U.S. trade or business.
    Certain special rules (sections 671-679) apply to certain 
trust interests deemed to be owned by the grantor or other 
person (a ``grantor trust''). In that case, the deemed owner 
must include in income the items of income and deduction (and 
credits against tax) of the portion of such trust deemed to be 
owned by such person.
    Except to the extent a trust is a grantor trust, a transfer 
of property by a U.S. person to a foreign estate or trust is 
treated (under section 684) by the transferor as if the 
property had been sold to such estate or trust. The same rule 
applies if a domestic trust becomes a foreign trust.
            Estate tax
    The estates of U.S. citizens and residents are subject to 
estate tax on all property, wherever located. The estates of 
nonresident aliens generally are subject to estate tax on U.S.-
situated property (e.g., real estate and tangible property 
located within the United States and stock in a U.S. 
corporation).
            Gift tax
    U.S. citizens and residents generally are subject to gift 
tax on transfers by gift of any property, wherever situated. 
Nonresident aliens generally are subject to gift tax on 
transfers by gift of U.S.-situated property (e.g., real estate 
and tangible property located within the United States), but 
excluding intangibles, such as stock, regardless of where they 
are located.

Income tax rules with respect to expatriates

    For the 10 taxable years after an individual relinquishes 
his or her U.S. citizenship or terminates his or her U.S. long-
term residency, unless certain conditions are met, the 
individual is subject to an alternative method of income 
taxation than that generally applicable to nonresident aliens 
(the ``alternative tax regime''). Generally, the individual is 
subject to income tax for the 10-year period at the rates 
applicable to U.S. citizens, but only on U.S.-source 
income.\148\
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    \148\For this purpose, however, U.S.-source income has a broader 
scope than it does typically in the Code.
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    A ``long-term resident'' is a noncitizen who is a lawful 
permanent resident of the United States for at least eight 
taxable years during the period of 15 taxable years ending with 
the taxable year during which the individual either ceases to 
be a lawful permanent resident of the United States or 
commences to be treated as a resident of a foreign country 
under a tax treaty between such foreign country and the United 
States (and does not waive such benefits).
    A former citizen or former long-term resident is subject to 
the alternative tax regime for a 10-year period following 
citizenship relinquishment or residency termination, unless the 
former citizen or former long-term resident: (1) establishes 
that his or her average annual net income tax liability for the 
five preceding years does not exceed $124,000 (adjusted for 
inflation after 2004) and his or her net worth is less than $2 
million, or alternatively satisfies limited, objective 
exceptions for certain dual citizens and minors who have had no 
substantial contacts with the United States; and (2) certifies 
under penalties of perjury that he or she has complied with all 
U.S. Federal tax obligations for the preceding five years and 
provides such evidence of compliance as the Secretary may 
require.
    Anti-abuse rules are provided to prevent the circumvention 
of the alternative tax regime.

Estate tax rules with respect to expatriates

    Special estate tax rules apply to individuals who die 
during a taxable year in which they are subject to the 
alternative tax regime. Under these special rules, certain 
closely-held foreign stock owned by the former citizen or 
former long-term resident is includible in his or her gross 
estate to the extent that the foreign corporation owns U.S.-
situated assets. The special rules apply if, at the time of 
death, the former citizen or former long-term resident: (1) 
owns, directly or indirectly, 10 percent or more of the total 
combined voting power of all classes of stock of the foreign 
corporation entitled to vote; and (2) is considered to own, 
directly or indirectly, more than 50 percent of (a) the total 
combined voting power of all classes of stock of the foreign 
corporation entitled to vote, or (b) the total value of the 
stock of such corporation. If this stock ownership test is met, 
then the gross estate of the former citizen or former long-term 
resident includes that proportion of the fair market value of 
the foreign stock owned by the individual at the time of death, 
which the fair market value of any assets owned by such foreign 
corporation and situated in the United States (at the time of 
death) bears to the total fair market value of all assets owned 
by such foreign corporation (at the time of death).

Gift tax rules with respect to expatriates

    Special gift tax rules apply to individuals who make gifts 
during a taxable year in which they are subject to the 
alternative tax regime. The individual is subject to gift tax 
on gifts of U.S.-situated intangibles made during the 10 years 
following citizenship relinquishment or residency termination. 
In addition, gifts of stock of certain closely-held foreign 
corporations by a former citizen or former long-term resident 
are subject to gift tax, if the gift is made during the time 
that such person is subject to the alternative tax regime. The 
operative rules with respect to these gifts of closely-held 
foreign stock are the same as described above relating to the 
estate tax, except that the relevant testing and valuation date 
is the date of gift rather than the date of death.

Termination of U.S. citizenship or long-term resident status for U.S. 
        Federal income tax purposes

    An individual continues to be treated as a U.S. citizen or 
long-term resident for U.S. Federal tax purposes, including for 
purposes of section 7701(b)(10), until the individual: (1) 
gives notice of an expatriating act or termination of residency 
(with the requisite intent to relinquish citizenship or 
terminate residency) to the Secretary of State or the Secretary 
of Homeland Security, respectively; and (2) provides a 
statement to the Secretary of the Treasury in accordance with 
section 6039G.

Sanction for individuals subject to the individual tax regime who 
        return to the United States for extended periods

    The alternative tax regime does not apply to any individual 
for any taxable year during the 10-year period following 
citizenship relinquishment or residency termination if such 
individual is present in the United States for more than 30 
days in the calendar year ending in such taxable year. Such 
individual is treated as a U.S. citizen or resident for such 
taxable year and, therefore, is taxed on his or her worldwide 
income.
    Similarly, if an individual subject to the alternative tax 
regime is present in the United States for more than 30 days in 
any calendar year ending during the 10-year period following 
citizenship relinquishment or residency termination, and the 
individual dies during that year, he or she is treated as a 
U.S. resident, and the individual's worldwide estate is subject 
to U.S. estate tax. Likewise, if an individual subject to the 
alternative tax regime is present in the United States for more 
than 30 days in any year during the 10-year period following 
citizenship relinquishment or residency termination, the 
individual is subject to U.S. gift tax on any transfer of his 
or her worldwide assets by gift during that taxable year.
    For purposes of these rules, an individual is treated as 
present in the United States on any day if such individual is 
physically present in the United States at any time during that 
day. The present-law exceptions to the U.S. presence rules for 
residency purposes\149\ generally do not apply. However, for 
individuals with certain ties to countries other than the 
United States\150\ and individuals with minimal prior physical 
presence in the United States,\151\ a day of physical presence 
in the United States is disregarded if the individual is 
performing services in the United States on such day for an 
unrelated employer (within the meaning of sections 267 and 
707(b)), that meets such requirements as the Secretary may 
prescribe in regulations. No more than 30 days may be 
disregarded during any calendar year under this rule.
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    \149\Secs. 7701(b)(3)(D), 7701(b)(5), and 7701(b)(7)(B)-(D).
    \150\An individual has such a relationship to a foreign country if 
(1) the individual becomes a citizen or resident of the country in 
which the individual was born, such individual's spouse was born, or 
either of the individual's parents was born, and (2) the individual 
becomes fully liable for income tax in such country.
    \151\An individual has a minimal prior physical presence in the 
United States if the individual was physically present for no more than 
30 days during each year in the ten-year period ending on the date of 
loss of United States citizenship or termination of residency. However, 
for purposes of this test, an individual is not treated as being 
present in the United States on a day if the individual remained in the 
United States because of a medical condition that arose while the 
individual was in the United States. Sec. 7701(b)(3)(D)(ii).
---------------------------------------------------------------------------

Annual return

    Former citizens and former long-term residents are required 
to file an annual return for each year in which they are 
subject to the alternative tax regime. The annual return is 
required even if no U.S. Federal income tax is due. The annual 
return requires certain information, including information on 
the permanent home of the individual, the individual's country 
of residence, the number of days the individual was present in 
the United States for the year, and detailed information about 
the individual's income and assets that are subject to the 
alternative tax regime. This requirement includes information 
relating to foreign stock potentially subject to the special 
estate and gift tax rules.
    If the individual fails to file the statement in a timely 
manner or fails correctly to include all the required 
information, the individual is required to pay a penalty of 
$10,000. The $10,000 penalty does not apply if it is shown that 
the failure is due to reasonable cause and not to willful 
neglect.

                           REASONS FOR CHANGE

    The Committee is aware that each year some individuals 
relinquish their U.S. citizenship or terminate their long-term 
U.S. residency for the purpose of avoiding U.S. income, estate, 
and gift taxes. By so doing, such individuals may reduce their 
annual U.S. income tax liability and may reduce or eliminate 
their future U.S. estate or gift tax liability.
    The Committee recognizes that citizens and long-term 
residents of the United States have a right not only to 
physically leave the United States to live elsewhere, but also 
to relinquish their citizenship or terminate their residency. 
The Committee does not believe that the Internal Revenue Code 
should be used to stop U.S. citizens and long-term residents 
from relinquishing citizenship or terminating residency; 
however, the Committee also does not believe that the Code 
should provide a tax incentive for doing so. In other words, to 
the extent possible, an individual's decision to relinquish 
citizenship or terminate long-term residency should be tax-
neutral.
    The Committee recognizes that the American Jobs Creation 
Act of 2004 altered prior law regarding expatriation in a 
number of respects, including replacing the subjective 
``principal purpose of tax avoidance test'' with objective 
rules. Notwithstanding these changes, the Committee remains 
concerned that the present-law expatriation tax rules (as 
modified in 2004) could be made more effective. In addition, 
the Committee is concerned that the alternative method of 
taxation under section 877 can be avoided by postponing the 
realization of U.S.-source income for 10 years.
    Consequently, the Committee believes that the present-law 
expatriation tax rules should be augmented by a new tax regime 
applicable to former citizens and long-term residents. Because 
U.S. citizens and residents who retain their citizenship or 
residency generally are subject to income tax on accrued 
appreciation when they dispose of their assets, as well as 
estate tax on the full value of assets that are held until 
death, the Committee believes it fair to tax individuals on the 
appreciation in their assets when they relinquish their 
citizenship or terminate their long-term residency. The 
Committee believes that an exception from such a tax should be 
provided for individuals with a relatively modest amount of 
income and net worth, or appreciated assets. The Committee also 
believes that, where U.S. estate or gift taxes are avoided with 
respect to a transfer of property to a U.S. person by reason of 
the expatriation of the donor, it is appropriate for the 
recipient to be subject to a transfer tax similar to the 
avoided transfer taxes.

                        EXPLANATION OF PROVISION

In general

    In general, the provision imposes tax on certain U.S. 
citizens who relinquish their U.S. citizenship and certain 
long-term U.S. residents who terminate their U.S. residency. 
Such individuals are subject to income tax on the net 
unrealized gain in their property as if the property had been 
sold for its fair market value on the day before the 
expatriation or residency termination (``mark-to-market tax''). 
Gain from the deemed sale is taken into account at that time 
without regard to other Code provisions. Any loss from the 
deemed sale generally is taken into account to the extent 
otherwise provided in the Code, except that the wash sale rules 
of section 1091 do not apply. Any net gain on the deemed sale 
is recognized to the extent it exceeds $600,000. The $600,000 
amount is increased by a cost of living adjustment factor for 
calendar years after 2008. Any gains or losses subsequently 
realized are to be adjusted for gains and losses taken into 
account under the deemed sale rules, without regard to the 
$600,000 exemption.
    The mark-to-market tax described above applies to most 
types of property interests held by the individual on the date 
of relinquishment of citizenship or termination of residency, 
with certain exceptions. Deferred compensation items, interests 
in nongrantor trusts, and specified tax deferred accounts are 
excepted from the mark-to-market tax but are subject to the 
special rules described below.
    In addition, the provision imposes a transfer tax on 
certain transfers to U.S. persons from certain U.S. citizens 
who relinquished their U.S. citizenship and certain long-term 
U.S. residents who terminated their U.S. residency, or from 
their estates.

Individuals covered

    The provision applies to any U.S. citizen who relinquishes 
citizenship and any long-term resident who terminates U.S. 
residency, if such individual (``covered expatriate'') (1) has 
an average annual net income tax liability for the five 
preceding years ending before the date of the loss of U.S. 
citizenship or residency termination that exceeds $124,000 (as 
adjusted for inflation after 2004--$136,000 in 2007\152\); (2) 
has a net worth of $2 million or more on such date; or (3) 
fails to certify under penalties of perjury that he or she has 
complied with all U.S. Federal tax obligations for the 
preceding five years or fails to submit such evidence of 
compliance as the Secretary may require.
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    \152\Rev. Proc. 2006-53, sec. 3.29, 2006-48 I.R.B. 996.
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    Exceptions to an individual's classification as a covered 
expatriate due to (1) or (2) above (but not (3)) are provided 
in two situations. The first exception applies to an individual 
who was born with citizenship both in the United States and in 
another country; provided that (1) as of the expatriation date 
the individual continues to be a citizen of, and is taxed as a 
resident of, such other country, and (2) the individual has 
been a resident of the United States (under the substantial 
presence test of section 7701(b)(1)(A)(ii)) for not more than 
10 taxable years during the 15-year taxable year period ending 
with the taxable year of expatriation. The second exception 
applies to a U.S. citizen who relinquishes U.S. citizenship 
before reaching age 18\1/2\, provided that the individual was a 
resident of the United States (under the substantial presence 
test of section 7701(b)(1)(A)(ii)) for no more than 10 taxable 
years before such relinquishment.
    The definition of ``long-term resident'' under the 
provision is generally the same as that under present law. As 
under present law, an individual is considered to terminate 
long-term U.S. residency when the individual ceases to be a 
lawful permanent resident of the United States (i.e., loses his 
or her green card status through revocation or has been 
administratively or judicially determined to have abandoned 
such status). Under the provision, however, an individual 
ceases to be treated as a lawful permanent resident of the 
United States for all tax purposes (including for purposes of 
section 877) if such individual commences to be treated as a 
resident of a foreign country under a tax treaty between the 
United States and such foreign country, does not waive the 
benefits of the treaty applicable to residents of such foreign 
country, and notifies the Secretary of the commencement of such 
treatment.
    The provision provides that, for all tax purposes 
(including for purposes of section 877), a U.S. citizen 
continues to be treated as a U.S. citizen for tax purposes 
until that individual's citizenship is treated as relinquished 
under the rules of the immediately preceding paragraph. 
However, under Treasury regulations, relinquishment may occur 
earlier with respect to an individual who became at birth a 
citizen of the United States and of another country. For 
purposes of the provision, an individual is treated as having 
relinquished U.S. citizenship on the earliest of four possible 
dates: (1) the date that the individual renounces U.S. 
nationality before a diplomatic or consular officer of the 
United States (provided that the voluntary relinquishment is 
later confirmed by the issuance of a certificate of loss of 
nationality); (2) the date that the individual furnishes to the 
State Department a signed statement of voluntary relinquishment 
of U.S. nationality confirming the performance of an 
expatriating act (again, provided that the voluntary 
relinquishment is later confirmed by the issuance of a 
certificate of loss of nationality); (3) the date that the 
State Department issues a certificate of loss of nationality; 
or (4) the date that a U.S. court cancels a naturalized 
citizen's certificate of naturalization.
    In the case of a long-term resident, the date that long-
term residency is terminated is the ``expatriation date.'' In 
the case of a citizen, the date that the individual 
relinquishes citizenship is the ``expatriation date.''
    The foregoing rules replace the present-law rules that 
provide that an individual continues to be treated as a U.S. 
citizen or long-term resident for U.S. Federal tax purposes 
until the individual gives notice of an expatriating act or 
termination of residency.
    If an individual who is a covered expatriate becomes 
subject to tax as a citizen or resident of the United States 
for any period beginning after the expatriation date, the 
individual is not treated as a covered expatriate during that 
period for purposes of applying the withholding rules relating 
to deferred compensation items, the rules relating to interests 
in nongrantor trusts, and the rules relating to gifts and 
bequests from covered expatriates. If the individual again 
relinquishes citizenship or terminates long-term residency 
(after meeting anew the requirements to become a long-term 
resident), the mark-to-market tax and other provisions are re-
triggered with the new expatriation date.

Deferral of payment of mark-to-market tax

    Under the provision, an individual may elect to defer 
payment of the mark-to-market tax imposed on the deemed sale of 
property. Interest is charged for the period the tax is 
deferred at the rate normally applicable to individual 
underpayments. The election is irrevocable and is made on a 
property-by-property basis. Under the election, the deferred 
tax attributable to a particular property is due when the 
return is due for the taxable year in which the property is 
disposed (or, if the property is disposed of in a transaction 
in which gain is not recognized in whole or in part, at such 
other time as the Secretary may prescribe). The deferred tax 
attributable to a particular property is an amount which bears 
the same ratio to the total mark-to-market tax as the gain 
taken into account with respect to such property bears to the 
total gain taken into account for the mark-to-market tax. The 
deferral of the mark-to-market tax may not be extended beyond 
the due date of the return for the taxable year which includes 
the individual's death.
    In order to elect deferral of the mark-to-market tax, the 
individual is required to furnish a bond to the Secretary. The 
bond must be conditioned upon payment of the amount of tax due, 
plus interest thereon, and must be in accordance with such 
requirements relating to terms, conditions, form of the bond, 
and sureties, as may be specified by regulations. The bond must 
be accepted by the Secretary. Other security mechanisms, 
including letters of credit, are permitted provided that they 
meet such requirements as the Secretary may prescribe. In the 
event that the security provided with respect to a particular 
property subsequently fails to meet the requirements of these 
rules and the individual fails to correct such failure, the 
deferred tax and the interest with respect to such property 
will become due. As a further condition to making the election, 
the individual is required to consent to the waiver of any 
treaty rights that would preclude the assessment or collection 
of the tax.

Deferred compensation items

    The provision contains special rules for interests in 
deferred compensation items. For purposes of the provision, a 
``deferred compensation item'' means any interest in a plan or 
arrangement described in section 219(g)(5), any interest in a 
foreign pension plan or similar retirement arrangement or 
program, any item of deferred compensation, and any property, 
or right to property, which the individual is entitled to 
receive in connection with the performance of services to the 
extent not previously taken into account under section 83 or in 
accordance with section 83.
    The plans and arrangements described in section 219(g)(5) 
are (i) a plan described in section 401(a), which includes a 
trust exempt from tax under section 501(a); (ii) an annuity 
plan described in section 403(a); (iii) a plan established for 
its employees by the United States, by a State or political 
subdivision thereof, or by an agency or instrumentality of any 
of the foregoing, but excluding an eligible deferred 
compensation plan (within the meaning of section 457(b)); (iv) 
an annuity contract described in section 403(b); (v) a 
simplified employee pension (within the meaning of section 
408(k)); (vi) a simplified retirement account (within the 
meaning of section 408(p)); and (vii) a trust described in 
section 501(c)(18).
    If a deferred compensation item is an eligible deferred 
compensation item, the payor must deduct and withhold from a 
``taxable payment'' to the covered expatriate a tax equal to 30 
percent of such taxable payment. This withholding requirement 
is in lieu of any withholding requirement under present law. A 
taxable payment is subject to withholding to the extent it 
would be included in gross income of the covered expatriate if 
such person were subject to tax as a citizen or resident of the 
United States. A deferred compensation item is taken into 
account as a payment when such item would be so includible. A 
deferred compensation item that is subject to the 30 percent 
withholding requirement is subject to tax under section 871.
    If a deferred compensation item is not an eligible deferred 
compensation item, an amount equal to the present value of the 
covered expatriate's deferred compensation item is treated as 
having been received on the day before the expatriation date. 
In the case of a deferred compensation item that is subject to 
section 83, the item is treated as becoming transferable and no 
longer subject to a substantial risk of forfeiture on the day 
before the expatriation date. Appropriate adjustments shall be 
made to subsequent distributions to take into account the 
foregoing treatment. In addition, these deemed distributions 
are not subject to early distribution tax. For this purpose, 
``early distribution tax'' means any increase in tax imposed 
under section 72(t), 220(e)(4), 223(f)(4), 409A(a)(1)(B), 
529(c)(6), or 530(d)(4).
    An ``eligible deferred compensation item'' means any 
deferred compensation item with respect to which (i) the payor 
is either a U.S. person or a non-U.S. person who elects to be 
treated as a U.S. person for purposes of withholding and who 
meet the requirements prescribed by the Secretary to ensure 
compliance with the withholding requirements, and (ii) the 
covered expatriate notifies the payor of his status as a 
covered expatriate and irrevocably waives any claim of 
withholding reduction under any treaty with the United States.
    The foregoing taxing rules regarding eligible deferred 
compensation items and items that are not eligible deferred 
compensation items do not apply to deferred compensation items 
that are attributable to services performed outside the United 
States while the covered expatriate was not a citizen or 
resident of the United States.

Specified tax deferred accounts

    There are special rules for interests in specified tax 
deferred accounts. If a covered expatriate holds any interest 
in a specified tax deferred account on the day before the 
expatriation date, such covered expatriate is treated as 
receiving a distribution of his entire interest in such account 
on the day before the expatriation date. Appropriate 
adjustments are made for subsequent distributions to take into 
account this treatment. As with deferred compensation items, 
these deemed distributions are not subject to early 
distribution tax.
    The term ``specified tax deferred account'' means an 
individual retirement plan (as defined in section 7701(a)(37)), 
a qualified tuition plan (as defined in section 529), a 
Coverdell education savings account (as defined in section 
530), a health savings account (as defined in section 223), and 
an Archer MSA (as defined in section 220). However, simplified 
employee pensions (within the meaning of section 408(k)) and 
simplified retirement accounts (within the meaning of section 
408(p)) of a covered expatriate are treated as deferred 
compensation items and not as specified tax deferred accounts.

Interests in trusts

            Grantor trusts
    In the case of the portion of any trust for which the 
covered expatriate is treated as the owner under the grantor 
trust provisions of the Code, as determined immediately before 
the expatriation date, the assets held by that portion of the 
trust are subject to the mark-to-market tax. If a trust that is 
a grantor trust immediately before the expatriation date 
subsequently becomes a nongrantor trust, such trust remains a 
grantor trust for purposes of the provision.
            Nongrantor trusts
    Special rules apply to trusts with respect to which the 
covered expatriate is a beneficiary on the day before the 
expatriation date. The mark-to-market tax does not apply with 
respect to the portion of any such trust not treated (under the 
grantor trust provisions of the Code) as owned by a covered 
expatriate immediately before the expatriation date. Instead, 
in the case of any direct or indirect distribution from such a 
portion of a trust (``nongrantor trust'') to a covered 
expatriate, the trustee must deduct and withhold from the 
distribution an amount equal to 30 percent of the portion of 
the distribution which would be includible in the gross income 
of the covered expatriate if the covered expatriate continued 
to be subject to tax as a citizen or resident of the United 
States. Such portion of such distribution (that is subject to 
the 30 percent withholding requirement) is subject to tax under 
section 871. The covered expatriate is treated as having waived 
any right to claim any reduction in withholding under any 
treaty with the United States.
    In addition, if the nongrantor trust distributes 
appreciated property to a covered expatriate, the trust must 
recognize gain as if the property were sold to the covered 
expatriate at its fair market value.
    If a trust that is a nongrantor trust immediately before 
the expatriation date subsequently becomes a grantor trust of 
which a covered expatriate is treated as the owner, directly or 
indirectly, such conversion is treated under the provision as a 
distribution to such covered expatriate to the extent of the 
portion of the trust of which the covered expatriate is treated 
as the owner.

Special rules

    Notwithstanding any other provision of the Code, any period 
for acquiring property which results in the reduction of gain 
recognized with respect to property disposed of by the taxpayer 
terminates on the day before the expatriation date. This rule 
applies to certain incomplete transactions such as deferred 
like-kind exchanges and involuntary conversions. In addition, 
notwithstanding any other provision of the Code, any extension 
of time for payment of tax ceases to apply on the day before 
relinquishment of citizenship or termination of residency, and 
the unpaid portion of such tax becomes due and payable at the 
time and in the manner prescribed by the Secretary.
    For purposes of determining the tax imposed under the mark-
to-market tax, property that was held by an individual on the 
date that such individual first became a resident of the United 
States (within the meaning of section 7701(b)) is treated as 
having a basis on such date of not less than the fair market 
value of such property on such date. An individual may make an 
irrevocable election not to have this rule apply.
    In the case of a domestic trust that becomes a foreign 
trust due to the expatriation of an individual, the general 
income tax rules pertaining to transfers by U.S. persons to 
foreign trusts (i.e., section 684) apply before the rules of 
the provision.

Regulatory authority

    The provision authorizes the Secretary to prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of the income tax rules of the provision.

Treatment of gifts and bequests from a former citizen or former long-
        term resident

    Under the provision, a special transfer tax applies to 
certain ``covered gifts or bequests'' received by a U.S. 
citizen or resident. A covered gift or bequest is any property 
acquired (i) by gift directly or indirectly from an individual 
who is a covered expatriate at the time of such acquisition, or 
(ii) directly or indirectly by reason of the death of an 
individual who was a covered expatriate. A covered gift or 
bequest, however, does not include (i) any property shown as a 
taxable gift on a timely filed gift tax return by the covered 
expatriate, and (ii) any property included in the gross estate 
of the covered expatriate for estate tax purposes and shown on 
a timely filed estate tax return of the estate of the covered 
expatriate.
    The tax is calculated as the product of (i) the highest 
marginal rate of tax specified in the table applicable to 
estate tax (i.e., section 2001(c)) or, if greater, the highest 
marginal rate of tax specified in the table applicable to gift 
tax (i.e., section 2502(a)), both as in effect on the date of 
receipt of the covered gift or bequest; and (ii) the value of 
the covered gift or bequest.
    The tax is imposed upon the recipient of the covered gift 
or bequest and is imposed on a calendar-year basis. The tax 
applies to a recipient of a covered gift or bequest only to the 
extent that the total value of covered gifts and bequests 
received by such recipient during a calendar year exceeds 
$10,000. The tax on covered gifts and bequests is reduced by 
the amount of any gift or estate tax paid to a foreign country 
with respect to such covered gift or bequest.
    Special rules apply to the tax on covered gifts or bequests 
made to domestic or foreign trusts. In the case of a covered 
gift or bequest made to a domestic trust, the tax applies as if 
the trust is a U.S. citizen, and the trust is required to pay 
the tax. In the case of a covered gift or bequest made to a 
foreign trust, the tax applies to any distribution from such 
trust (whether from income or corpus) attributable to such 
covered gift or bequest to a recipient that is a U.S. citizen 
or resident, in the same manner as if such distribution were a 
covered gift or bequest. Such a recipient is entitled to deduct 
the amount of such tax for income tax purposes to the extent 
such tax is imposed on the portion of such distribution that is 
included in the gross income of the recipient. For purposes of 
these rules, a foreign trust may elect to be treated as a 
domestic trust. The election may not be revoked without the 
Secretary's consent.

Coordination with present-law alternative tax regime

    Under the provision, the present-law expatriation income 
tax rules under section 877 generally continue to apply to a 
covered expatriate whose expatriation or residency termination 
occurs before, on, or after the date of enactment.

Information reporting

    Certain information reporting requirements under the law 
presently applicable to former citizens and former long-term 
residents (sec. 6039G) also apply for purposes of the 
provision.

                             EFFECTIVE DATE

    The provision generally is effective for U.S. citizens who 
relinquish citizenship or long-term residents who terminate 
their residency on or after the date of enactment. However, the 
portion of the provision relating to covered gifts and bequests 
is effective for gifts and bequests received from former 
citizens or former long-term residents (or their estates) on or 
after the date of enactment, regardless of when the transferor 
expatriated.

 E. Repeal of Provision Regarding Suspension of Interest and Penalties


(Sec. 505 of the bill and sec. 6404(g) of the Code)

                              PRESENT LAW

    In general, interest and penalties accrue during periods 
for which taxes were unpaid without regard to whether the 
taxpayer was aware that there was tax due. Prior to amendment 
by the Small Business and Work Opportunity Tax Act of 2007, the 
accrual of certain penalties and interest is suspended starting 
18 months after the filing of the tax return if the IRS has not 
sent the taxpayer a notice specifically stating the taxpayer's 
liability and the basis for the liability within the specified 
period. If a tax return is filed before the due date, for 
purposes of interest suspension it is considered to have been 
filed on the due date. Interest and penalties resume 21 days 
after the IRS sends the required notice to the taxpayer. The 
provision is applied separately with respect to each item or 
adjustment. The provision does not apply where a taxpayer has 
self-assessed the tax. The suspension only applies to 
individuals who file a timely tax return. The provision does 
not apply to the following: the penalty for failing to pay; any 
interest, penalty, addition to tax, or additional amount in a 
case involving fraud; any interest, penalty, addition to tax, 
or additional amount with respect to any gross misstatement; 
and any criminal penalty. Generally, the suspension of interest 
also does not apply to interest accruing with respect to 
underpayments resulting from listed transactions or undisclosed 
reportable transactions.
    For IRS notices issued after November 25, 2007, the Small 
Business and Work Opportunity Tax Act of 2007 provides that the 
accrual of penalties and interest is suspended starting 36 
months after the filing of the tax return.\153\ Because the 
general statute of limitations on assessment of tax is 36 
months after the filing of a tax return, the effect of the 
provision in the Small Business and Work Opportunity Tax Act of 
2007 is that interest suspension only applies to tax 
liabilities eligible for suspension which may be assessed more 
than three years after the filing of the tax return to which 
the liability relates.
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    \153\Pub. L. No. 110-28, sec. 7542 (2007).
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                           REASONS FOR CHANGE

    As a result of the provision in the Small Business and Work 
Opportunity Tax Act of 2007, interest suspension only applies 
in the small number of cases in which the IRS may assess an 
additional tax more than three years after the filing of the 
tax return to which such additional tax liability relates. The 
Committee believes that the rules regarding the accrual of 
interest on underpayments of tax should be applied, to the 
extent possible, in a consistent manner. Thus, the Committee 
believes the suspension of interest and penalties provision 
should be repealed. The Committee believes this change is 
appropriate for effective administration of the tax system.

                        EXPLANATION OF PROVISION

    The provision repeals the suspension of interest and 
certain penalties provision. The Small Business and Work 
Opportunity Tax Act of 2007 provides that the accrual of 
penalties and interest is suspended starting 36 months after 
the filing of a tax return. Thus, the effect of the provision 
is to eliminate interest suspension for liabilities which may 
be assessed more than three years after the filing of a tax 
return.

                             EFFECTIVE DATE

    The provision is effective for IRS notices issued after the 
date which is 6 months after the date of the enactment of the 
Small Business and Work Opportunity Tax Act of 2007 (November 
25, 2007).

                     F. Unused Merchandise Drawback


1. Unused Merchandise Drawback (section 506 of the bill)

                              PRESENT LAW

    Section 313(j) of the Tariff Act of 1930 (19 U.S.C. 
1313(j)) currently provides for unused merchandise drawback. 
Unused drawback is permitted if imported merchandise is 
exported or destroyed within 3 years of import without being 
used in the United States. Pursuant to section 313(j)(2) of the 
Tariff Act of 1930 (19 U.S.C. 1313(j)(2)), domestic or imported 
merchandise that is commercially interchangeable with the 
imported merchandise may be substituted for the imported 
merchandise and drawback granted on the export or destruction 
of the substituted merchandise within the 3-year period 
beginning on the date of importation. The drawback is limited 
to 99% of the duty, tax and fee imposed under Federal law on 
the imported merchandise upon entry or importation.

                           REASONS FOR CHANGE

    Section 313(j)(2) of the Tariff Act of 1930 does not 
contain a definition of ``commercially interchangeable.'' From 
late 2001 to May 2007, Customs and Border Protection (CBP) paid 
drawback claims on wine based on white domestic and imported 
table wine being commercially interchangeable with relatively 
valued imported white table wine. Red domestic and imported 
table wine was also considered to be commercially 
interchangeable with relatively valued imported red table wine. 
Relatively valued wine was considered to be wine within a price 
range of 50%.
    CBP informed wine drawback claimants in May 2007 that, 
effective immediately, the above standard for commercial 
interchangeability was no longer applicable. CBP did not 
provide a definitive new standard but stated that the criterion 
of the varietal wine should have been a determining factor in 
determining commercial interchangeability.
    The new provision carries forward the standard used for 
commercial interchangeability from 2001 to May 2007, and 
provides certainty for the filing and processing of unused 
drawback claims for imported and exported wine.

                        EXPLANATION OF PROVISION

    The provision amends section 313(j)(2) of the Tariff Act of 
1930, to provide a standard for what is considered to be 
``commercially interchangeable'' for purposes of unused 
merchandise drawback for wine.

                             EFFECTIVE DATE

    The provision is effective for claims filed for drawback on 
or after the date of enactment.

                      TITLE VI--REVENUE PROVISIONS


  A. Nonqualified Deferred Compensation From Certain Tax Indifferent 
                                Parties


1. Offshore nonqualified deferred compensation (sec. 601 of the bill 
        and new sec. 457A of the Code)

                              PRESENT LAW

In general

    Under present law, the determination of when amounts 
deferred under a nonqualified deferred compensation arrangement 
are includible in the gross income of the person earning the 
compensation depends on the facts and circumstances of the 
arrangement. A variety of tax principles and Code provisions 
may be relevant in making this determination, including the 
doctrine of constructive receipt, the economic benefit 
doctrine,\154\ the provisions of section 83 relating generally 
to transfers of property in connection with the performance of 
services, provisions relating specifically to nonexempt 
employee trusts (sec. 402(b)) and nonqualified annuities (sec. 
403(c)), and the requirements of section 409A.
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    \154\See, e.g., Sproull v. Commissioner, 16 T.C. 244 (1951), aff'd, 
per curiam, 194 F.2d 541 (6th Cir. 1952); Rev. Rul. 60-31, 1960-1 C.B. 
174.
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    In general, the time for income inclusion of nonqualified 
deferred compensation depends on whether the arrangement is 
unfunded or funded. If the arrangement is unfunded, then the 
compensation generally is includible in income by a cash-basis 
taxpayer when it is actually or constructively received. If the 
arrangement is funded, then income is includible for the year 
in which the individual's rights are transferable or not 
subject to a substantial risk of forfeiture.
    An arrangement generally is considered funded if there has 
been a transfer of property under section 83. Under that 
section, a transfer of property occurs when a person acquires a 
beneficial ownership interest in such property. The term 
``property'' is defined very broadly for purposes of section 
83.\155\ Property includes real and personal property other 
than money or an unfunded and unsecured promise to pay money in 
the future. Property also includes a beneficial interest in 
assets (including money) that are transferred or set aside from 
claims of the creditors of the transferor; for example, in a 
trust or escrow account. Accordingly, if, in connection with 
the performance of services, vested contributions are made to a 
trust on an individual's behalf and the trust assets may be 
used solely to provide future payments to the individual, the 
payment of the contributions to the trust constitutes a 
transfer of property to the individual that is taxable under 
section 83. On the other hand, deferred amounts generally are 
not includible in income if nonqualified deferred compensation 
is payable from general corporate funds that are subject to the 
claims of general creditors, as such amounts are treated as 
unfunded and unsecured promises to pay money or property in the 
future.
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    \155\Treas. Reg. sec. 1.83-3(e). This definition, in part, reflects 
previous IRS rulings on nonqualified deferred compensation.
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    As discussed above, if the arrangement is unfunded, then 
the compensation generally is includable in income by a cash-
basis taxpayer when it is actually or constructively received 
under section 451.\156\ Income is constructively received when 
it is credited to a person's account, set apart, or otherwise 
made available so that it may be drawn on at any time. Income 
is not constructively received if the taxpayer's control of its 
receipt is subject to substantial limitations or restrictions. 
A requirement to relinquish a valuable right in order to make 
withdrawals is generally treated as a substantial limitation or 
restriction.
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    \156\Treas. Reg. secs. 1.451-1 and 1.451-2.
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    Prior to the enactment of section 409A, arrangements had 
developed in an effort to provide employees with security for 
nonqualified deferred compensation, while still allowing 
deferral of income inclusion under the constructive receipt 
doctrine (which applies to unfunded arrangements). One such 
arrangement is a ``rabbi trust.'' A rabbi trust is a trust or 
other fund established by the employer to hold assets from 
which nonqualified deferred compensation payments will be made. 
The trust or fund is generally irrevocable and does not permit 
the employer to use the assets for purposes other than to 
provide nonqualified deferred compensation, except that the 
terms of the trust or fund provide that the assets are subject 
to the claims of the employer's creditors in the case of 
insolvency or bankruptcy. In the case of a rabbi trust, these 
terms have been the basis for the conclusion that the creation 
of a rabbi trust does not cause the related nonqualified 
deferred compensation arrangement to be funded for income tax 
purposes.\157\ As a result, no amount is included in income by 
reason of the rabbi trust; generally income inclusion occurs as 
payments are made from the trust.
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    \157\This conclusion was first provided in a 1980 private ruling 
issued by the IRS with respect to an arrangement covering a rabbi; 
hence, the popular name ``rabbi trust.'' Priv. Ltr. Rul. 8113107 (Dec. 
31, 1980).
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Section 409A

            Reason for enactment
    The Congress enacted section 409A\158\ because it was 
concerned that many nonqualified deferred compensation 
arrangements had developed which allowed improper deferral of 
income. Executives often used arrangements that allowed 
deferral of income, but also provided security of future 
payment and control over amounts deferred. For example, 
nonqualified deferred compensation arrangements often contained 
provisions that allowed participants to receive distributions 
upon request, subject to forfeiture of a minimal amount (i.e., 
a ``haircut'' provision). In addition, Congress was aware that 
since the concept of a rabbi trust was developed, techniques 
had been used that attempted to protect the assets from 
creditors despite the terms of the trust. For example, the 
trust or fund would be located in a foreign jurisdiction, 
making it difficult or impossible for creditors to reach the 
assets.
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    \158\Section 409A was added to the Code by sec. 885 of the American 
Job Creation Act of 2004, Pub. L. No. 108-357.
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    Prior to the enactment of section 409A, while the general 
tax principles governing deferred compensation were well 
established, the determination whether a particular arrangement 
effectively allowed deferral of income was generally made on a 
facts and circumstances basis. There was limited specific 
guidance with respect to common deferral arrangements. The 
Congress believed that it was appropriate to provide specific 
rules regarding whether deferral of income inclusion should be 
permitted and to provide a clear set of rules that would apply 
to these arrangements. The Congress believed that certain 
arrangements that allow participants inappropriate levels of 
control or access to amounts deferred should not result in 
deferral of income inclusion. The Congress also believed that 
certain arrangements, such as offshore trusts, which 
effectively protect assets from creditors of the employer, 
should be treated as funded and not result in deferral of 
income inclusion to the extent the amounts are vested.
            General requirements of section 409A
    In general.--Under section 409A, all amounts deferred by a 
service provider under a nonqualified deferred compensation 
plan\159\ for all taxable years are currently includible in 
gross income of the service provider to the extent such amounts 
are not subject to a substantial risk of forfeiture\160\ and 
not previously included in gross income, unless certain 
requirements are satisfied. If the requirements of section 409A 
are not satisfied, in addition to current income inclusion, 
interest at the rate applicable to underpayments of tax plus 
one percentage point is imposed on the underpayments that would 
have occurred had the compensation been includible in income 
when first deferred, or if later, when not subject to a 
substantial risk of forfeiture. The amount required to be 
included in income is also subject to a 20-percent additional 
tax.
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    \159\A plan includes an agreement or arrangement, including an 
agreement or arrangement that includes one person. Amounts deferred 
also include actual or notional earnings.
    \160\The rights of a person to compensation are subject to a 
substantial risk of forfeiture if the person's rights to such 
compensation are conditioned upon the performance of substantial 
services by any individual.
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    Section 409A does not limit the amount that may be deferred 
under a nonqualified deferred compensation plan. The Secretary 
of the Treasury is authorized to prescribe regulations as are 
necessary or appropriate to carry out the purposes of section 
409A. The Secretary of the Treasury published final regulations 
under section 409A on April 17, 2007.
    Under these regulations, the term ``service provider'' 
includes an individual, corporation, subchapter S corporation, 
partnership, personal service corporation (as defined in 
section 269A(b)(1)), noncorporate entity that would be a 
personal service corporation if it were a corporation, or 
qualified personal service corporation (as defined in section 
448(d)(2)) for any taxable year in which such individual or 
entity accounts for gross income from the performance of 
services under the cash receipts and disbursements method of 
accounting.\161\ Section 409A does not apply to a service 
provider that provides significant services to at least two 
service recipients that are not related to each other or the 
service provider. This exclusion does not apply to a service 
provider who is an employee or a director of a corporation (or 
similar position in the case of an entity that is not a 
corporation).\162\ In addition, the exclusion does not apply to 
an entity that operates as the manager of a hedge fund or 
private equity fund. This is because the exclusion does not 
apply to the extent that a service provider provides management 
services to a service recipient. Management services for this 
purpose means services that involve the actual or de facto 
direction or control of the financial or operational aspects of 
a trade or business of the service recipient or investment 
management or advisory services provided to a service recipient 
whose primary trade or business includes the investment of 
financial assets, such as a hedge fund.\163\
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    \161\Treas. Reg. sec. 1.409A-1(f)(1).
    \162\Treas. Reg. sec. 1.409A-1(f)(2).
    \163\Treas. Reg. sec. 1.409A-1(f)(2)(iv).
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    Permissible distribution events.--Under section 409A, 
distributions from a nonqualified deferred compensation plan 
may be allowed only upon separation from service (as determined 
by the Secretary of the Treasury), death, a specified time (or 
pursuant to a fixed schedule), change in control of a 
corporation (to the extent provided by the Secretary of the 
Treasury), occurrence of an unforeseeable emergency, or if the 
service provider becomes disabled. A nonqualified deferred 
compensation plan may not allow distributions other than upon 
the permissible distribution events and, except as provided in 
regulations by the Secretary of the Treasury, may not permit 
acceleration of a distribution. In the case of a specified 
employee who separates from service, distributions may not be 
made earlier than six months after the date of the separation 
from service or upon death. Specified employees are key 
employees\164\ of publicly-traded corporations.
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    \164\Key employees are defined in section 416(i) and generally 
include officers (limited to 50 employees) having annual compensation 
greater than $145,000 (for 2007), five percent owners, and one percent 
owners having annual compensation from the employer greater than 
$150,000.
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    Elections.--Section 409A requires that a plan must provide 
that compensation for services performed during a taxable year 
may be deferred at the service provider's election only if the 
election to defer is made no later than the close of the 
preceding taxable year, or at such other time as provided in 
Treasury regulations. In the case of any performance-based 
compensation based on services performed over a period of at 
least 12 months, such election may be made no later than six 
months before the end of the service period. The time and form 
of distributions must be specified at the time of initial 
deferral. A plan may allow changes in the time and form of 
distributions subject to certain requirements.
    Back-to-back arrangements.--Back-to-back service recipients 
(i.e., situations under which an entity receives services from 
a service provider such as an employee, and the entity in turn 
provides services to a client) that involve back-to-back 
nonqualified deferred compensation arrangements (i.e., the fees 
payable by the client are deferred at both the entity level and 
the employee level) are subject to special rules under section 
409A. For example, the final regulations generally permit the 
deferral agreement between the entity and its client to treat 
as a permissible distribution event those events that are 
specified as distribution events in the deferral agreement 
between the entity and its employee. Thus, if separation from 
employment is a specified distribution event between the entity 
and the employee, the employee's separation generally is a 
permissible distribution event for the deferral agreement 
between the entity and its client.\165\
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    \165\Treas. Reg. sec. 1.409A-3(i)(6).
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    Offshore funding arrangements.--Section 409A requires 
current income inclusion in the case of certain offshore 
funding of nonqualified deferred compensation. Under section 
409A, in the case of assets set aside (directly or indirectly) 
in a trust (or other arrangement determined by the Secretary of 
the Treasury) for purposes of paying nonqualified deferred 
compensation, such assets are treated as property transferred 
in connection with the performance of services under section 83 
(whether or not such assets are available to satisfy the claims 
of general creditors) at the time set aside if such assets (or 
trust or other arrangement) are located outside of the United 
States or at the time transferred if such assets (or trust or 
other arrangement) are subsequently transferred outside of the 
United States. Any subsequent increases in the value of, or any 
earnings with respect to, such assets are treated as additional 
transfers of property.
    Interest at the underpayment rate plus one percentage point 
is imposed on the underpayments of tax that would have occurred 
had the amounts set aside been includible in income for the 
taxable year in which first deferred or, if later, the first 
taxable year not subject to a substantial risk of forfeiture. 
The amount required to be included in income also is subject to 
an additional 20-percent tax.
    The special funding rule does not apply to assets located 
in a foreign jurisdiction if substantially all of the services 
to which the nonqualified deferred compensation relates are 
performed in such foreign jurisdiction. The Secretary of the 
Treasury has authority to exempt arrangements from the 
provision if the arrangements do not result in an improper 
deferral of U.S. tax and will not result in assets being 
effectively beyond the reach of creditors.
            Definition of substantial risk of forfeiture
    Under the Treasury regulations, compensation is subject to 
a substantial risk of forfeiture if entitlement to the amount 
is conditioned upon either the performance of substantial 
future services by any person or the occurrence of a condition 
related to a purpose of the compensation, provided that the 
possibility of forfeiture is substantial.\166\
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    \166\Treas. Reg. sec. 1.409A-1(d)(1).
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            Definition of nonqualified deferred compensation
    Under section 409A, a nonqualified deferred compensation 
plan generally includes any plan that provides for the deferral 
of compensation other than a qualified employer plan or any 
bona fide vacation leave, sick leave, compensatory time, 
disability pay, or death benefit plan. A qualified employer 
plan means a qualified retirement plan, tax-deferred annuity, 
simplified employee pension, and SIMPLE. A qualified 
governmental excess benefit arrangement (sec. 415(m)) and an 
eligible deferred compensation plan (sec. 457(b)) is a 
qualified employer plan.
    The Treasury regulations also provide that certain other 
types of plans are not considered deferred compensation, and 
thus are not subject to section 409A. For example, if a service 
recipient transfers property to a service provider, there is no 
deferral of compensation merely because the value of the 
property is not includible in income under section 83 by reason 
of the property being substantially nonvested.\167\ Another 
exception applies to amounts that are not deferred beyond a 
short period of time after the amount is no longer subject to a 
substantial risk of forfeiture.\168\ Under this exception, 
there generally is no deferral for purposes of section 409A if 
the service provider actually or constructively receives the 
amount on or before the last day of the applicable 2\1/2\ month 
period. The applicable 2\1/2\ month period is the period ending 
on the later of the 15th day of the third month following the 
end of: (1) the service provider's first taxable year in which 
the right to the payment is no longer subject to a substantial 
risk of forfeiture; or (2) the service recipient's first 
taxable year in which the right to the payment is no longer 
subject to a substantial risk of forfeiture.
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    \167\Treas. Reg. sec. 1.409A-1(b)(6).
    \168\Treas. Reg. sec. 1.409A-1(b)(4).
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    Special rules apply in the case of stock appreciation 
rights (``SARs'').\169\ Under the final Treasury regulations, a 
SAR is a right to compensation based on the appreciation in 
value of a specified number of shares of service recipient 
stock occurring between the date of grant and the date of 
exercise of such right. The final regulations generally provide 
that a SAR does not result in a deferral of compensation for 
purposes of section 409A (and thus is not subject to section 
409A) if the compensation payable under the SAR is not greater 
than the excess of the fair market value of the underlying 
stock on the date the SAR is exercised over the fair market 
value of the underlying stock on the date the SAR is 
granted.\170\
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    \169\Treas. Reg. sec. 1.409A-1(b)(5).
    \170\Treas. Reg. sec. 1.409A-1(b)(5)(i)(B).
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    The Treasury regulations provide exclusions from the 
definition of nonqualified deferred compensation in the case of 
services performed by individuals who participate in certain 
foreign plans, including plans covered by an applicable treaty 
and broad-based foreign retirement plans.\171\ In the case of a 
U.S. citizen or lawful permanent alien, nonqualified deferred 
compensation plan does not include a broad-based foreign 
retirement plan, but only with respect to the portion of the 
plan that provides for nonelective deferral of foreign earned 
income and subject to limitations on the annual amount deferred 
under the plan or the annual amount payable under the plan. In 
general, foreign earned income refers to amounts received by an 
individual from sources within a foreign country that 
constitutes earned income attributable to services.
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    \171\Treas. Reg. sec. 1.409A-1(a)(3).
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Timing of the service recipient's deduction

    Special statutory provisions govern the timing of the 
deduction for nonqualified deferred compensation, regardless of 
whether the arrangement covers employees or nonemployees and 
regardless of whether the arrangement is funded or 
unfunded.\172\ Under these provisions, the amount of 
nonqualified deferred compensation that is includible in the 
income of the service provider is deductible by the service 
recipient for the taxable year in which the amount is 
includible in the service provider's income.\173\ Thus, for 
example, in the case of an unfunded nonqualified deferred 
compensation plan, a deduction to the taxable service recipient 
is deferred until the deferred compensation is actually paid or 
made available to the service provider.
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    \172\Secs. 404(a)(5), (b) and (d) and sec. 83(h).
    \173\In the case of a publicly held corporation, no deduction is 
allowed for a taxable year for remuneration with respect to a covered 
employee to the extent that the remuneration exceeds $1 million. Code 
sec. 162(m). The Code defines the term ``covered employee'' in part by 
reference to Federal securities law. In light of changes to Federal 
securities law, the Internal Revenue Service interprets the term 
covered employee as the principal executive officer of the taxpayer as 
of the close of the taxable year or the 3 most highly compensated 
employees of the taxpayer for the taxable year whose compensation must 
be disclosed to the taxpayer's shareholders (other than the principal 
executive officer or the principal financial officer). Notice 2007-49, 
2007-25 I.R.B. 1429. For purposes of the deduction limit, remuneration 
generally includes all remuneration for which a deduction is otherwise 
allowable, although commission-based compensation and certain 
performance-based compensation are not subject to the limit. 
Remuneration does not include compensation for which a deduction is 
allowable after a covered employee ceases to be a covered employee. 
Thus, the deduction limitation often does not apply to deferred 
compensation that is otherwise subject to the deduction limitation 
(e.g., is not performance-based compensation) because the payment of 
the compensation is deferred until after termination of employment.
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Section 457

    Special income recognition rules apply in the case of a 
participant in a deferred compensation plan that is sponsored 
by a State or local government or an organization that is 
exempt from Federal income tax under section 501(a). Section 
457 provides for different income inclusion rules for two basic 
types of deferred compensation arrangements: (1) arrangements 
that limit the amount of compensation that may be deferred 
(generally, $15,500 in 2007) and that meet certain other 
requirements specified in section 457(b) (referred to as a 
``section 457(b) plan'' or an ``eligible deferred compensation 
plan''); and (2) arrangements that do not satisfy the 
requirements of section 457(b) (referred to as a ``section 
457(f) plan'' or an ``ineligible deferred compensation plan''). 
Section 457 does not provide a limit on the amount of 
compensation that may be deferred under a section 457(f) plan.
    A participant in a section 457(b) plan does not recognize 
income with respect to the participant's interest in such plan 
until the time of actual distribution (or, if earlier, the time 
the participant's interest is made available to the 
participant, but only in the case of a section 457(b) plan 
maintained by a tax-exempt sponsor other than a State or local 
government). In contrast, a participant in a section 457(f) 
plan must include amounts deferred under such a plan in gross 
income for the first taxable year in which there is no 
substantial risk of forfeiture of the rights to such 
compensation.

                           REASONS FOR CHANGE

    Under present law, there is a tension in the case of a 
nonqualified deferred compensation agreement between a service 
provider and a taxable service recipient. This arises because 
the timing rule under the Code defers the service recipient's 
deduction for nonqualified deferred compensation until the 
taxable year in which such compensation is includible in the 
service provider's gross income. This tension may limit the 
amount of compensation that a service recipient is willing to 
permit a service provider to defer under a nonqualified 
deferred compensation arrangement. Even where this tension does 
not limit the amount of compensation that a service recipient 
is willing to permit a service provider to defer under a 
nonqualified deferred compensation arrangement, this tension 
ensures that the cost of allowing this deferral is borne by the 
service recipient.
    Under present law, the ability to defer nonqualified 
deferred compensation is limited in certain cases in which this 
tension is not present. Where this tension is not present, the 
cost of allowing service providers to defer under a 
nonqualified deferred compensation arrangement is not borne by 
the service recipient. Instead, this cost is borne by the 
Treasury. In order to limit the cost to the Treasury, Congress 
passed special rules limiting deferral in certain situations. 
Specifically, section 457 provides special rules that limit 
deferred compensation arrangements sponsored by State and local 
governments and other tax-exempt entities.
    The Committee has become aware of other situations in which 
the present law tension does not exist. Specifically, foreign 
corporations that are not subject to a comprehensive income tax 
and partnerships that are comprised of foreign persons and U.S. 
tax-exempt entities are indifferent to the timing of deductions 
for nonqualified deferred compensation. The Committee believes 
that in such cases additional rules should apply that limit the 
ability to defer service provider compensation.

                        EXPLANATION OF PROVISION

    Under the provision, any compensation that is deferred 
under a nonqualified deferred compensation plan of a 
nonqualified entity is includible in gross income by the 
service provider when there is no substantial risk of 
forfeiture of the service provider's rights to such 
compensation. The provision applies in addition to the 
requirements of section 409A (or any other provision of the 
Code or general tax law principle) with respect to nonqualified 
deferred compensation.
    For purposes of the provision, the term nonqualified 
deferred compensation is defined in the same manner as for 
purposes of section 409A. As under section 409A, the term 
nonqualified deferred compensation includes earnings with 
respect to previously deferred amounts. Under the provision, 
nonqualified deferred compensation includes any arrangement 
under which compensation is based on the increase in value of a 
specified number of equity units of the service recipient. 
Thus, stock appreciation rights (SARs) are treated as 
nonqualified deferred compensation under the provision, 
regardless of the exercise price of the SAR.
    The term nonqualified entity includes certain foreign 
corporations and certain partnerships (either domestic or 
foreign). A foreign corporation is a nonqualified entity unless 
substantially all of such income is effectively connected with 
the conduct of a United States trade or business or is subject 
to a comprehensive foreign income tax. A partnership is a 
nonqualified entity unless substantially all of such income is 
allocated to persons other than foreign persons with respect to 
whom such income is not subject to a comprehensive income tax 
and organizations which are exempt from U.S. income tax.
    The term comprehensive foreign income tax means with 
respect to a foreign person, the income tax of a foreign 
country if (1) such person is eligible for the benefits of a 
comprehensive income tax treaty between such foreign county and 
the United States, or (2) such person demonstrates to the 
satisfaction of the Secretary of the Treasury that such foreign 
country has a comprehensive income tax. A comprehensive foreign 
income tax does not include any tax unless the tax includes 
rules for the deductibility of deferred compensation which are 
similar to the rules under the Code.
    For purposes of the provision, compensation of a service 
provider is subject to a substantial risk of forfeiture only if 
such person's right to the compensation is conditioned upon the 
future performance of substantial services by any person. Thus, 
compensation is subject to a substantial risk of forfeiture 
only if entitlement to the compensation is conditioned on the 
performance of substantial future services and the possibility 
of forfeiture is substantial. Substantial risk of forfeiture 
does not include a condition related to a purpose of the 
compensation (other than future performance of substantial 
services), regardless of whether the possibility of forfeiture 
is substantial.
    Under the provision, if the amount of any deferred 
compensation is not ascertainable at the time that such 
compensation is otherwise required to be taken into income 
under the provision, the amount is taken into account when such 
amount becomes ascertainable. In addition, the income tax with 
respect to such amount is increased by the sum of (1) an 
interest charge, and (2) an amount equal to 20 percent of such 
compensation. The interest charge is equal to the interest at 
the rate applicable to underpayments of tax plus one percentage 
point imposed on the underpayments that would have occurred had 
the compensation been includible in income when first deferred, 
or if later, when not subject to a substantial risk of 
forfeiture.
    It is intended that the Secretary of the Treasury issue 
regulations as to when an amount is unascertainable for 
purposes of the provision. It is intended that an amount of 
deferred compensation is unascertainable at the time the amount 
is no longer subject to a substantial risk of forfeiture if the 
amount varies depending on the satisfaction of an objective 
condition. For example, if a deferred amount varies depending 
on the satisfaction of an objective condition at the time the 
amount is no longer subject to substantial risk of forfeiture 
(e.g., 20 percent of the amount is paid if a certain threshold 
is achieved, 100 percent is paid if a higher threshold is 116 
achieved, and 200 percent is paid if a still higher threshold 
is achieved), the amount deferred is unascertainable.
    The Secretary of the Treasury is also authorized to issue 
such regulations as may be necessary or appropriate to carry 
out the purposes of the provision, including regulations 
disregarding a substantial risk of forfeiture as necessary to 
carry out such purposes.
    Under the provision, aggregation rules similar to those 
that apply under section 409A apply for purposes of determining 
whether a plan sponsor is a nonqualified entity. It is 
intended, however, that such aggregation rules are limited by 
the Secretary to operate in accordance with the purposes of the 
provision. For example, it is intended that the aggregation 
rules do not result in the application of the provision to 
employees of a U.S. subsidiary C corporation that is wholly 
owned by a nonqualified entity when the U.S. subsidiary 
sponsors the nonqualified deferred compensation plan in which 
the employees of the subsidiary participate. This is because 
the subsidiary is subject to the timing rule with respect to 
its deduction of its employees' nonqualified deferred 
compensation.

                             EFFECTIVE DATE

    The provision is effective with respect to amounts deferred 
which are attributable to services performed after December 31, 
2007. In the case of an amount deferred which is attributable 
to services performed on or before December 31, 2007, to the 
extent such amount is not includible in gross income in a 
taxable year beginning before 2017, then such amount is 
includible in gross income in the later of (1) the last taxable 
year beginning before 2017, or (2) the taxable year in which 
there is no substantial risk of forfeiture of the rights to 
such compensation.
    No later than 60 days after date of enactment, the 
Secretary shall issue guidance providing a limited period of 
time during which a nonqualified deferred compensation 
arrangement attributable to services performed on or before 
December 31, 2007, may, without violating the requirements of 
section 409A(a), be amended to conform the date of distribution 
to the date the amounts are required to be included in income.

        B. Provisions Related to Certain Investment Partnerships


1. Income of partners for performing investment management services 
        treated as ordinary income received for performance of services 
        (sec. 611 of the bill and new sec. 710 and secs. 856(c), 6662, 
        and 6664 of the Code)

                              PRESENT LAW

Partnership profits interest for services

    A profits interest in a partnership is the right to receive 
future profits in the partnership but does not generally 
include any right to receive money or other property upon the 
immediate liquidation of the partnership. The treatment of the 
receipt of a profits interest in a partnership in exchange for 
the performance of services has been the subject of 
controversy. In general, a taxpayer receiving a profits 
interest for performing services has not been taxable upon the 
receipt of the partnership interest.\174\
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    \174\Only a handful of cases have ruled on this issue. Though one 
case required the value to be included currently, where value was 
easily determined by a sale of the profits interest soon after receipt 
(Diamond v. Commissioner, 56 T. C. (1971), aff'd 492 F. 2.2d 286 (7th 
Cir, 1974)), a more recent case concluded that partnership profits 
interests were not includable on receipt, because the profits interests 
were speculative and without fair market value (Campbell v. 
Commissioner (943 F. 2d. 815 (8th Cir. 1991))).
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    In 1993, the Internal Revenue Service, referring to the 
results of cases, specifically ruled that the receipt of a 
partnership profits interests for services generally is not a 
taxable event for the partnership or the partner.\175\ Under 
the ruling, this treatment does not apply, however, if: (1) the 
profits interest relates to a substantially certain and 
predictable stream of income from partnership assets, such as 
income from high-quality debt securities or a high-quality net 
lease; (2) within two years of receipt, the partner disposes of 
the profits interest; or (3) the profits interest is a limited 
partnership interest in a publicly traded partnership. A more 
recent ruling\176\ clarifies that this result applies provided 
the service partner takes into income his distributive share of 
partnership income, and the partnership does not deduct any 
amount either on grant or on vesting of the profits 
interest.\177\
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    \175\Rev. Proc. 93-27, 1993-2 C.B. 343, citing the Diamond and 
Campbell cases, supra.
    \176\Rev. Proc. 2001-43 (2001-2 C.B. 191).
    \177\A similar result would occur under the ``safe harbor'' 
election of proposed regulations regarding the application of section 
83 to the compensatory transfer of a partnership interest. REG-105346-
03, 70 Fed. Reg. 29675 (May 24, 2005).
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    By contrast, a partnership capital interest received for 
services is includable in the partner's income under generally 
applicable rules relating to the receipt of property for the 
performance of services.\178\ A partnership capital interest 
for this purpose is an interest that would entitle the 
receiving partner to a share of the proceeds if the 
partnership's assets were sold at fair market value and the 
proceeds were distributed in liquidation.\179\
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    \178\Secs. 61 and 83; Treas. Reg. sec. 1.721-1(b)(1); see U.S. v. 
Frazell, 335 F.2d 487 (5th Cir. 1964), cert denied, 380 U.S. 961 
(1965).
    \179\Rev. Proc. 93-27, 1993-2 C.B. 343.
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Passthrough tax treatment of partnerships

    The character of partnership items passes through to the 
partners, as if the items were realized directly by the 
partners.\180\ Thus, for example, long-term capital gain of the 
partnership is treated as long-term capital gain in the hands 
of the partners.
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    \180\Section 702.
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    A partner holding a partnership interest includes in income 
its distributive share (whether or not actually distributed) of 
partnership items of income and gain, including capital gain 
eligible for the lower income tax rates. A partner's basis in 
the partnership interest is increased by any amount of gain 
thus included and is decreased by losses. These basis 
adjustments prevent double taxation of partnership income to 
the partner, preserving the partnership's tax status as a 
passthrough entity. Amounts distributed to the partner by the 
partnership are taxed to the extent the amount exceeds the 
partner's basis in the partnership interest.

Employment tax treatment of partners

    As part of the financing for Social Security and Medicare 
benefits, a tax is imposed on the wages of an individual 
received with respect to his or her employment under the 
Federal Insurance Contributions Act (``FICA'').\181\ A similar 
tax is imposed on the net earnings from self-employment of an 
individual under the Self-Employment Contributions Act 
(``SECA'').\182\
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    \181\See Chapter 21 of the Code.
    \182\Sec. 1401.
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    The FICA tax has two components. Under the old-age, 
survivors, and disability insurance component (``OASDI''), the 
rate of tax is 12.40 percent, half of which is imposed on the 
employer, and the other half of which is imposed on the 
employee.\183\ The amount of wages subject to this component is 
capped at $97,500 for 2007. Under the hospital insurance 
component (``HI''), the rate is 2.90 percent, also split 
equally between the employer and the employee. The amount of 
wages subject to the HI component of the tax is not capped. The 
wages of individuals employed by a business in any form (for 
example, a C corporation) generally are subject to the FICA 
tax.\184\
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    \183\Secs. 3101 and 3111.
    \184\S corporation shareholders who are employees of the S 
corporation are subject to FICA taxes. A considerable body of case law 
has addressed the issue of whether amounts paid to S corporation 
shareholder-employees are reasonable compensation for services and 
therefore are wages subject to FICA tax or are properly characterized 
as another type of income (typically, dividends) and therefore not 
subject to FICA tax.
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    The SECA tax rate is the combined employer and employee 
rate for FICA taxes. Under the OASDI component, the rate of tax 
is 12.40 percent and the amount of earnings subject to this 
component is capped at $97,500 (for 2007). Under the HI 
component, the rate is 2.90 percent, and the amount of self-
employment income subject to the HI component is not capped.
    For SECA tax purposes, net earnings from self-employment 
means the gross income derived by an individual from any trade 
or business carried on by the individual, less the deductions 
attributable to the trade or business that are allowed under 
the self-employment tax rules.\185\ Specified types of income 
or loss are excluded, such as rentals from real estate in 
certain circumstances, dividends and interest, and gains or 
loss from the sale or exchange of a capital asset or from 
timber, certain minerals, or other property that is neither 
inventory nor held primarily for sale to customers.
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    \185\For purposes of determining net earnings from self-employment, 
taxpayers are permitted a deduction from net earnings from self-
employment equal to the product of the taxpayer's net earnings 
(determined without regard to this deduction) and one-half of the sum 
of the rates for OASDI (12.4 percent) and HI (2.9 percent), i.e., 7.65 
percent of net earnings. This deduction reflects the fact that the FICA 
rates apply to an employee's wages, which do not include FICA taxes 
paid by the employer, whereas a self-employed individual's net earnings 
are economically the equivalent of an employee's wages plus the 
employer share of FICA taxes. The deduction is intended to provide 
parity between FICA and SECA taxes. In addition, self-employed 
individuals may deduct one-half of self-employment taxes for income tax 
purposes (sec. 164(f)).
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    For an individual who is a partner in a partnership, the 
net earnings from self-employment generally include the 
partner's distributive share (whether or not distributed) of 
income or loss from any trade or business carried on by the 
partnership (excluding specified types of income, such as rents 
and dividends, as described above). This rule applies to 
individuals who are general partners. A special rule applies 
for limited partners of a partnership.\186\ In determining a 
limited partner's net earnings from self-employment, an 
exclusion is provided for his or her distributive share of 
partnership income or loss. The exclusion does not apply with 
respect to guaranteed payments to the limited partner for 
services actually rendered to or on behalf of the partnership 
to the extent that those payments are established to be in the 
nature of remuneration for those services.
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    \186\Sec. 1402(a)(13).
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Income tax treatment of publicly traded partnerships

    Under present law, a publicly traded partnership generally 
is treated as a corporation for Federal tax purposes (sec. 
7704(a)). For this purpose, a publicly traded partnership means 
any partnership if interests in the partnership are traded on 
an established securities market, or interests in the 
partnership are readily tradable on a secondary market (or the 
substantial equivalent thereof).
    An exception from corporate treatment is provided for 
certain publicly traded partnerships, 90 percent or more of 
whose gross income is qualifying income (sec. 7704(c)(2)). 
However, this exception does not apply to any partnership that 
would be described in section 851(a) if it were a domestic 
corporation, which includes a corporation registered under the 
Investment Company Act of 1940 as a management company or unit 
investment trust.
    Qualifying income includes interest, dividends, and gains 
from the disposition of a capital asset (or of property 
described in section 1231(b)) that is held for the production 
of income that is qualifying income. Qualifying income also 
includes rents from real property, gains from the sale or other 
disposition of real property, and income and gains from the 
exploration, development, mining or production, processing, 
refining, transportation (including pipelines transporting gas, 
oil, or products thereof), or the marketing of any mineral or 
natural resource (including fertilizer, geothermal energy, and 
timber). It also includes income and gains from commodities 
(not described in section 1221(a)(1)) or futures, options, or 
forward contracts with respect to such commodities (including 
foreign currency transactions of a commodity pool) in the case 
of partnership, a principal activity of which is the buying and 
selling of such commodities, futures, options or forward 
contracts.
    The rules generally treating publicly traded partnerships 
as corporations were enacted in 1987 to address concern about 
long-term erosion of the corporate tax base. At that time, 
Congress stated, ``[t]o the extent that activities would 
otherwise be conducted in corporate form, and earnings would be 
subject to two levels of tax (at the corporate and shareholder 
levels), the growth of publicly traded partnerships engaged in 
such activities tends to jeopardize the corporate tax base.'' 
(H.R. Rep. No. 100-391, 100th Cong., 1st Sess. 1065.) Referring 
to recent tax law changes affecting corporations, the Congress 
stated, ``[t]hese changes reflect an intent to preserve the 
corporate level tax. The committee is concerned that the intent 
of these changes is being circumvented by the growth of 
publicly traded partnerships that are taking advantage of an 
unintended opportunity for disincorporation and elective 
integration of the corporate and shareholder levels of tax.'' 
(H.R. Rep. No. 100-391, 100th Cong., 1st Sess. 1066.)

Real estate investment trusts (REITs)

    A real estate investment trust (``REIT'') is an entity that 
derives most of its income from passive real-estate-related 
investments. A REIT must satisfy a number of tests on an annual 
basis that relate to the entity's organizational structure, the 
source of its income, and the nature of its assets. If an 
electing entity meets the requirements for REIT status, the 
portion of its income that is distributed to its investors each 
year generally is treated as a dividend deductible by the REIT 
and includible in income by its investors. In this manner, the 
distributed income of the REIT is not taxed at the entity 
level. The distributed income is taxed only at the investor 
level. A REIT generally is required to distribute 90 percent of 
its income (other than net capital gain) to its investors 
before the end of its taxable year.
    In order for an entity to qualify as a REIT, at least 95 
percent of its gross income generally must be derived from 
certain passive sources (the ``95-percent income test''). In 
addition, at least 75 percent of its income generally must be 
from certain real estate sources (the ``75-percent income 
test''), including rents from real property (as defined) and 
gain from the sale or other disposition of real property. 
Amounts received as impermissible ``tenant services income'' 
are not treated as rents from real property.\187\ In general, 
such amounts are for services rendered to tenants that are not 
``customarily furnished'' in connection with the rental of real 
property. In addition, at least 75 percent of the value of its 
total assets must be represented by real estate assets, cash 
and cash items (including receivables), and Government 
securities, and maximum percentages apply to ownership of other 
types of securities (the ``asset test'').
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    \187\A REIT is not treated as providing services that produce 
impermissible tenant services income if such services are provided by 
an independent contractor from whom the REIT does not derive or receive 
any income. An independent contractor is defined as a person who does 
not own, directly or indirectly, more than 35 percent of the shares of 
the REIT. Also, no more than 35 percent of the total shares of stock of 
an independent contractor (or of the interests in net assets or net 
profits, if not a corporation) can be owned directly or indirectly by 
persons owning 35 percent or more of the interests in the REIT.
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                           REASONS FOR CHANGE

    The Committee has become aware that some types of service 
providers in the asset management business have been paying tax 
at capital gains rates on service income through the use of a 
partnership profits interest,\188\ known as a ``carried 
interest.'' Because the character of a partnership's income 
passes through to partners, income from a carried interest may 
take the form of long-term or short-term capital gain realized 
by the underlying investment fund as the fund sells off 
investment assets. In 2007, for individuals generally, the top 
rate of tax on longterm capital gain is 15 percent, while the 
top income tax rate on ordinary labor income is 35 percent 
(plus the applicable employment tax rate).
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    \188\A partnership profits interest generally gives the partner a 
right to receive a percentage of a partnership's profits without an 
obligation to contribute to partnership capital and without a right to 
partnership assets on liquidation.
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    The Committee held a hearing\189\ covering Federal tax 
issues arising from the use of carried interests in asset 
management businesses. In these arrangements, the investment 
fund typically is a partnership. The investors are limited 
partners that contribute capital to acquire fund assets, and 
the fund manager is the general partner of the investment fund 
partnership. The general partner is itself a partnership of 
individuals with investment management expertise. The fund 
manager receives management fees along with a carried interest.
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    \189\The Ways and Means Committee hearing took place September 6, 
2007. See Joint Committee on Taxation, ``Present Law and Analysis 
Relating to Tax Treatment of Partnership Carried Interests and Related 
Issues, Part I,'' (JCX-62-07), September 4, 2007, and Joint Committee 
on Taxation, ``Present Law and Analysis Relating to Tax Treatment of 
Partnership Carried Interests and Related Issues, Part II,'' (JCX-63-
07), September 4, 2007.
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    The Committee believes that in the case of an investment 
services partnership interest the carried interest arrangement 
primarily involves the performance of services by individuals 
whose professional skill generates capital income for investors 
in the fund. While these individuals' economic interests are 
aligned with those of the fund investors to the extent their 
compensation is based on the positive investment yield of the 
fund, the individuals are nevertheless performing services. 
Therefore, the income should be taxed as ordinary compensation 
income for the performance of services.
    The Committee believes this result is needed to protect the 
neutrality of the tax law with respect to income for different 
types of services, and is necessary to provide fairness in the 
tax law. The tax rules should not permit investment managers to 
structure their compensation so it is subject to preferential 
capital gains rates of 15 percent, and to pay no employment tax 
on these amounts, while wage-earners who have no such 
restructuring opportunities are subject to tax on ordinary 
income up to a top rate of 35 percent, plus employment tax.
    The Committee understands that the Internal Revenue Service 
currently takes the position that the receipt of a partnership 
profits interest is not generally a taxable event to the 
partner or to the partnership unless unusual circumstances 
indicate the interest is easy to value and it is held for a 
relatively short time. As acknowledged by the Internal Revenue 
Service in taking this position, however, courts have reasoned 
that the value of the profits interest for services should be 
included in income on receipt, but valuation of these interests 
is often difficult due to factors such as the speculative 
nature of future business profits. Therefore, efforts to 
measure the amount of compensation for services by including in 
income the value of a partnership profits interest received for 
services at the time of receipt have not been successful.
    The Committee bill consequently takes a different approach, 
the approach of treating net income and gain from an investment 
services partnership interest as ordinary income for the 
performance of services except to the extent it is attributable 
to the partner's invested capital. Capital gains tax treatment 
will still be available to the extent that gain is attributable 
to the partner's invested capital.
    It is intended that the present-law employment tax rules 
apply to this income to the same extent they apply to other 
compensation income. To ensure that the substance of the 
provision applies regardless of the use of vehicles other than 
partnerships to seek reduction of tax on compensation income 
for investment services, the provision also recharacterizes as 
ordinary income for the performance of services the income or 
gain with respect to certain other interests, including 
interests in certain entities other than partnerships, that are 
held by a person who performs, directly or indirectly, 
investment management services for the entity. In addition, to 
strongly ensure compliance with the provision, a 40-percent 
strict liability penalty applies to underpayments attributable 
to such techniques to seek to avoid ordinary income tax rates 
under the provision. It is expected that in enforcement, in 
coordinating with present-law rules relating to partners and 
partnerships, and in providing other guidance under the 
provision, the Treasury Department will consistently limit 
opportunities to avoid ordinary income tax on compensation 
within the scope of the provision.
    The income recharacterized as ordinary compensation income 
under the provision is not treated as qualifying income of a 
publicly traded partnership, because it is in the nature of 
compensation (rather than the types of income listed as 
qualifying income). The effective date of the provision as it 
applies with respect to publicly traded partnerships is 
deferred until taxable years beginning after December 31, 2009, 
to permit compliance with the provision.

                        EXPLANATION OF PROVISION

Recharacterization as ordinary income for performance of services

    The provision generally treats net income from an 
investment services partnership interest as ordinary income for 
the performance of services except to the extent it is 
attributable to the partner's invested capital. Thus, the 
provision recharacterizes the partner's distributive share of 
income from the partnership, regardless of whether such income 
would otherwise be treated as capital gain, dividend income, or 
any other type of income in the hands of the partner. Such 
income is taxed at ordinary income rates and is subject to 
self-employment tax.
    Net income means, with respect to an investment services 
partnership interest, the excess (if any) of (1) all items of 
income and gain taken into account by the partner with respect 
to the partnership interest for the partnership taxable year, 
over (2) all items of deduction and loss taken into account by 
the partner with respect to the partnership interest for the 
partnership taxable year.
    The provision provides that an investment services 
partnership interest is a partnership interest held by any 
person who provides (directly or indirectly) a substantial 
quantity of certain services to the partnership in the conduct 
of the trade or business of providing such services. The 
services are: (1) advising the partnership as to the 
advisability of investing in, purchasing, or selling any 
specified asset; (2) managing, acquiring, or disposing of any 
specified asset; (3) arranging financing with respect to 
acquiring specified assets; (4) any activity in support of any 
of the foregoing services.
    For this purpose, specified assets means securities (as 
defined in section 475(c)(2)), real estate, commodities (as 
defined in section 475(e)(2)), or options or derivative 
contracts with respect to such securities, real estate, or 
commodities. A security for this purpose means any (1) share of 
corporate stock, (2) partnership interest or beneficial 
ownership interest in a widely held or publicly traded 
partnership or trust, (3) note, bond, debenture, or other 
evidence of indebtedness, (4) interest rate, currency, or 
equity notional principal contract, (5) interest in, or 
derivative financial instrument in, any such security or any 
currency (regardless of whether section 1256 applies to the 
contract), and (6) position that is not such a security and is 
a hedge with respect to such a security and is clearly 
identified. A commodity for this purpose means a (1) commodity 
that is actively traded, (2) notional principal contract with 
respect to such a commodity, (3) interest in, or derivative 
financial instrument in, such a commodity, or (4) position that 
is not such a commodity and is a hedge with respect to such a 
commodity and is clearly identified.

Exception for invested capital

    The provision provides an exception to recharacterization 
as ordinary income for performance of services in the case of 
the portion of the partner's distributive share of partnership 
items with respect to the partner's invested capital. Invested 
capital means the fair market value at the time of contribution 
of any money or other property contributed to the partnership. 
The exception applies provided that the partnership makes 
reasonable allocation of partnership items between the portion 
of the partner's distributive share attributable to invested 
capital and the remaining portion. An allocation is not treated 
as reasonable if it would result in the allocation of a greater 
portion of income to invested capital than any other partner 
not providing services would have been allocated with respect 
to the same amount of invested capital. The exception to 
recharacterization also applies to gain or loss attributable to 
invested capital on disposition of the partnership interest, 
which is the portion that would have been allocable to invested 
capital if the partnership had sold all its assets immediately 
before the disposition.
    For this purpose, an investment services partnership 
interest is not treated as acquired by contribution of invested 
capital to the extent of any loan or other advance made or 
guaranteed, directly or indirectly, by any partner or the 
partnership. For example, if partner A loans partner B funds 
that partner B contributes to the partnership, the loaned 
amount is not invested capital of partner B.
    In addition, for this purpose, any loan or other advance to 
the partnership made or guaranteed, directly or indirectly by a 
partner not providing services to the partnership is treated as 
invested capital of that partner. Income and loss treated as 
allocable to invested capital are adjusted accordingly. For 
example, if investors in a private equity fund that is a 
partnership contribute capital as debt rather than as equity, 
while the manager of the fund contributes only equity so that 
his invested capital appears to be a large percentage of the 
total equity contributed, the provision treats the partnership 
debt to the investors as the investors' invested capital. The 
percentage of total invested capital that is attributable to 
the fund manager in this example is determined taking into 
account this debt as well as the equity contributed to the 
fund, so the manager's invested capital is a smaller percentage 
of total invested capital than if only equity contributions 
were taken into account.

Losses, dispositions, and partnership distributions

    The provision provides rules for the treatment of losses 
with respect to an investment services partnership interest, as 
well as for disposition of all or a portion of such a 
partnership interest, and distributions of partnership property 
with respect to such a partnership interest.
    Consistently with the general rule providing that net 
income with respect to such a partnership interest is ordinary 
income for the performance of services, the provision provides 
that net loss with respect to such a partnership interest (to 
the extent not disallowed) generally is treated as ordinary 
loss. For this purpose, net loss means, with respect to an 
investment services partnership interest, the excess (if any) 
of (1) all items of deduction and loss taken into account by 
the partner with respect to the partnership interest for the 
partnership taxable year, over (2) all items of income and gain 
taken into account by the partner with respect to the 
partnership interest for the partnership taxable year. The net 
loss is allowed for a partnership taxable year, however, only 
to the extent that the loss does not exceed the excess (if any) 
of (1) aggregate net income with respect to the partnership 
interest for prior partnership taxable years, over (2) the 
aggregate net loss with respect to the partnership interest not 
disallowed for prior partnership years. Any net loss that is 
not allowed for the partnership taxable year is carried forward 
to the next partnership taxable year. Notwithstanding the 
present-law rule that the basis of a partnership interest 
generally is reduced by the partner's distributive share of 
partnership losses and deductions (sec. 705(a)(2)), the 
provision provides that no adjustment is made to the basis of a 
partnership interest on account of a net loss that is not 
allowed for the partnership taxable year. When any such net 
loss that is carried forward is allowed in a subsequent year, 
the adjustment is made to the basis of the partnership 
interest.
    Net loss with respect to an investment services partnership 
interest that was acquired by purchase, however, is not treated 
as ordinary, to the extent of net loss not exceeding the excess 
of (1) the basis of the interest immediately after the 
purchase, over (2) the aggregate net loss not treated as 
ordinary under this rule in prior taxable years. Such net loss 
is not taken into account in determining the amount of net 
income that is treated as ordinary under the provision.
    On the disposition of an investment services partnership 
interest, gain is treated as ordinary income for the 
performance of services, notwithstanding the present-law rule 
that gain or loss from the disposition of a partnership 
interest generally is considered as capital gain or loss (sec. 
741; except ordinary treatment applies to the extent 
attributable to inventory and unrealized receivables, sec. 
751). Loss on the disposition of an investment services 
partnership interest is treated as ordinary loss, but only to 
the extent of the amount by which aggregate net income 
previously treated as ordinary exceeds aggregate net loss 
previously allowed as ordinary under the provision. The amount 
of net loss that otherwise would have reduced the basis of the 
investment services partnership interest is disregarded for 
purposes of the provision, in the event of any disposition of 
the interest.
    On the distribution of appreciated property by a 
partnership to a partner with respect to an investment services 
partnership interest, the present-law rule providing that no 
gain or loss generally is recognized to a partnership on a 
distribution to a partner of property or money does not apply. 
Rather, the partnership recognizes gain as if the partnership 
had sold the property at its fair market value at the time of 
the distribution. For this purpose, appreciated property means 
property with respect to which gain would be realized if sold 
by the partnership at the time of distribution.
    In applying the present-law rules relating to ordinary 
income treatment of amounts attributable to unrealized 
receivables and inventory items on sale or exchange of a 
partnership interest (sec. 751(a)), an investment services 
partnership interest is treated as an inventory item of the 
partnership. Thus, for example, upon the sale or exchange of an 
interest in a partnership that in turn holds an investment 
services partnership interest, amounts received by the 
transferor partner that are attributable to the investment 
services partnership interest are considered as ordinary 
income.

Other entities

    The provision also recharacterizes as ordinary income for 
the performance of services the income or gain with respect to 
certain other interests, including interests in certain 
entities other than partnerships, that are held by a person who 
performs, directly or indirectly, investment management 
services for the entity.
    This rule applies if (1) a person performs (directly or 
indirectly) investment management services for any entity, (2) 
the person holds a disqualified interest with respect to the 
entity, and (3) the value of the interest (or payments 
thereunder) is substantially related to the amount of realized 
or unrealized income or gain from the assets with respect to 
which the investment management services are performed. In this 
case, any income or gain with respect to the interest is 
treated as ordinary income for the performance of services. 
Rules similar to the exception for a partner's invested capital 
apply for this purpose. For this purpose, a disqualified 
interest in an entity means (1) any interest other than debt, 
(2) convertible or contingent debt, (3) an option or other 
right to acquire either of the foregoing, or (4) a derivative 
instrument entered into (directly or indirectly) with the 
entity or an investor in the entity. A disqualified interest 
does not include a partnership interest. A disqualified 
interest also does not include stock in a taxable corporation, 
which for this purpose means either a domestic C corporation or 
a foreign corporation that is subject to a comprehensive 
foreign income tax. Under this rule, a comprehensive income tax 
has the meaning set forth in section 457A(d)(4): the income tax 
of a foreign country if the foreign corporation is eligible for 
the benefits of a comprehensive income tax treaty between that 
country and the U.S., or if the corporation demonstrates to the 
satisfaction of the Treasury Secretary that the foreign country 
has a comprehensive income tax.
    For example, if a hedge fund manager holds stock of a 
Cayman Islands corporation that in turn is a partner in a hedge 
fund partnership, the manager performs investment management 
services for the hedge fund, and the value of the stock (or 
dividends) is substantially related to the growth and income in 
hedge fund assets for which the manager provides investment 
management services, then gain in the value of the stock, and 
dividends, are treated as ordinary income for the performance 
of services. The fact that the services are performed for the 
hedge fund, rather than directly for the Cayman Islands 
corporation in which the manager has a disqualified interest, 
does not change this result under the provision. Thus, the gain 
is not eligible for the capital gain tax rate, the dividend is 
not eligible for the special rate on qualified dividends, but 
rather, are subject to tax at ordinary rates as income from the 
performance of services. The income is treated as net earnings 
from self-employment for purposes of the self-employment tax of 
the individual who performs the services. Though the amounts 
received may exceed the cap (imposed by reason of section 
1402(b)) on the old-age, survivors, and disability insurance 
portion of the self-employment tax, the hospital insurance 
portion of the self-employment tax is not capped, and applies 
to the income.

Underpayment penalty

    The provision provides that the accuracy-related penalty 
under section 6662 on underpayments applies to underpayments 
attributable the failure to comply with section 710(d) 
(relating to the treatment of income in connection with 
investment management services unrelated to partnership 
interests) or the regulations under section 710 preventing the 
avoidance of the purposes of section 710. The penalty rate is 
40 percent. The present-law reasonable cause exception of 
section 6664 does not apply with respect to these 
underpayments, resulting in an automatic penalty.

Self-employment tax treatment

    Under the provision, net income from an investment services 
partnership interest is subject to self-employment tax. Net 
income from an investment services partnership interest is 
derived from the performance by a person of a substantial 
quantity of services to the partnership in the course of the 
active conduct of a trade or business. This income falls within 
the definition of net earnings from self-employment, which 
generally includes a partner's distributive share (whether or 
not distributed) of income or loss from any trade or business 
carried on by the partnership (sec. 1402(a)), with certain 
exclusions. Because net income from an investment services 
partnership is treated as ordinary income for the performance 
of services, the present-law exception for gain or loss from 
the sale or exchange of a capital asset does not apply, even 
though the net income from the investment service partnership 
interest might otherwise be characterized as capital gain. The 
provision also provides that, in the case of a limited partner, 
the present-law exclusion for limited partners does not apply 
to any income treated as ordinary income from an investment 
services partnership interest that is received by an individual 
who provides a substantial quantity of the specified services.

Rules relating to REITs and publicly traded partnerships

    In the case of a REIT to which income and asset limitations 
apply under present law (sec. 856(c)(2), (3), and (4)), these 
income and asset tests are applied without regard to the 
provision. Thus, a REIT may continue to satisfy the income and 
asset limitations without regard to the provision.
    Under the provision, a publicly traded partnership, more 
than 10 percent of whose gross income consists of net income 
from an investment services partnership interest, generally is 
treated as a corporation for Federal tax purposes under section 
7704. The present-law exception to corporate treatment for a 
publicly traded partnership, 90 percent or more of whose gross 
income is qualifying income within the meaning of section 
7704(c)(2), does not apply, because net income from an 
investment services partnership interest is not qualifying 
income within the meaning of section 7704(c)(2).
    The provision provides a special rule for certain 
partnerships that are owned by publicly traded REITs and that 
meet specific requirements, however. Under the special rule, 
the recharacterization of partnership income as ordinary income 
for the performance of services does not apply, provided the 
following requirements are met. The requirements are: (1) the 
partnership is treated as publicly traded (under section 7704) 
solely because interests in the partnership are convertible 
into interests in a publicly traded REIT; (2) 50 percent or 
more of the capital and profits interests of the partnership 
are owned, directly or indirectly, at all times during the 
taxable year, by the REIT (taking into account attribution 
rules under section 267(c)); and (3) the partnership itself 
satisfies the REIT income and asset limitations (secs. 
856(c)(2), (3), and (4), applied without regard to this 
provision). Thus, for example, this special rule provides that 
a partnership is not treated as a corporation under section 
7704, in an ``upreit'' structure in which a publicly traded 
REIT owns more than 50 percent of the capital and profits 
interests of the partnership, partnership interests held by 
persons other than the REIT are convertible into publicly 
traded REIT stock, and the partnership itself meets the income 
and asset limitations of the REIT rules (secs. 856(c)(2), (3), 
and (4)). For this purpose, if the partnership interest may be 
put to the REIT or the partnership for REIT stock, it is 
considered convertible into interests of the publicly traded 
REIT. It is not intended that convertibility of partnership 
interests into a class of publicly traded REIT stock that 
tracks the performance of particular partnership assets (such 
as assets of a type that, if held in excess, would cause the 
REIT asset or income limitations not to be satisfied), or 
performance of the partnership assets generally, satisfies this 
special rule; rather, it is intended that such a partnership 
does not meet the requirements of this special rule.

Regulatory authority

    The Treasury department shall prescribe such regulations as 
are necessary or appropriate to carry out the purpose of the 
provision, including regulations to prevent the avoidance of 
the purposes of the provision and regulations to coordinate the 
provision with other rules of subchapter K of the Code 
(relating to partnerships).

                             EFFECTIVE DATE

    The provision is effective generally for taxable years 
ending after November 1, 2007.
    In the case of a partnership taxable year that includes 
that date, the amount of net income of a partner that is 
recharacterized as ordinary income for the performance of 
services under the provision is limited to the lesser of (1) 
net income for the entire partnership taxable year, or (2) net 
income determined by taking into account only items 
attributable to the part of the taxable year after that date.
    The provision is effective for dispositions of partnership 
interests, and partnership distributions, after that date.
    The provision relating to income or gain with respect to 
interests in certain entities other than partnerships that are 
held by a person who performs, directly or indirectly, 
investment management services for the entity takes effect on 
November 1, 2007.
    For purposes of applying the rules relating to publicly 
traded partnerships (section 7704), the provision applies to 
taxable years beginning after December 31, 2009.

2. Provide that certain indebtedness incurred by a partnership in 
        acquiring qualified securities or commodities is not treated as 
        acquisition indebtedness for purposes of the unrelated debt-
        financed income rules (sec. 612 of the bill and sec. 514 of the 
        Code)

                              PRESENT LAW

Unrelated business income tax

    In general, an organization that otherwise is exempt from 
Federal income tax is taxed on income from a trade or business 
regularly carried on that is not substantially related to the 
organization's exempt purposes.\190\ Most exempt organizations 
are subject to the unrelated business income tax.\191\
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    \190\Secs. 511-514.
    \191\Organizations subject to the unrelated business income tax 
include all organizations described in section 501(c) (except for U.S. 
instrumentalities and certain charitable trusts), qualified pension, 
profit-sharing, and stock bonus plans described in section 401(a), and 
certain State colleges and universities. Sec. 511(a)(2).
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    Certain types of income are specifically exempt from the 
unrelated business income tax. These items include, among 
others, dividends, interest, royalties, and certain rents, 
unless derived from debt-financed property or from certain 50-
percent controlled subsidiaries.\192\ Organizations liable for 
tax on unrelated business taxable income (``UBTI'') may be 
liable for alternative minimum tax determined after taking into 
account adjustments and tax preference items.
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    \192\Sec. 512(b).
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    Special rules apply in the case of an exempt organization 
that owns a partnership interest in a partnership that holds 
UBTI-producing property. An exempt organization's share of 
partnership income that is derived from the property generally 
is taxed as UBTI unless an exception provides otherwise.\193\
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    \193\Sec. 512(c).
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Debt-financed property

            In general
    In general, income of a tax-exempt organization that is 
produced by debt-financed property is treated as unrelated 
business income in proportion to the acquisition indebtedness 
on the income-producing property. Special rules apply in the 
case of an exempt organization that owns an interest in a 
partnership (or a pass-through entity taxed as a partnership) 
that holds debt-financed property.\194\ In general, in such 
cases, if the partnership incurs acquisition indebtedness with 
respect to property that, if held directly by the exempt 
organization, would not qualify for an exception from the debt-
financed property rules, the receipt of income by the exempt 
organization with respect to such property may result in 
recognition of unrelated debt-finance income.
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    \194\Sec. 512(c).
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    Acquisition indebtedness generally means the amount of 
unpaid indebtedness incurred by an organization to acquire or 
improve the property and indebtedness that would not have been 
incurred but for the acquisition or improvement of the 
property.\195\ Acquisition indebtedness does not include, 
however, (1) certain indebtedness incurred in the performance 
or exercise of a purpose or function constituting the basis of 
the organization's exemption, (2) obligations to pay certain 
types of annuities, (3) an obligation, to the extent it is 
insured by the Federal Housing Administration, to finance the 
purchase, rehabilitation, or construction of housing for low 
and moderate income persons, or (4) indebtedness incurred by a 
qualified organization to acquire or improve real property (the 
``real property exception'').\196\
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    \195\Sec. 514(c)(1).
    \196\Sec. 514(c).
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            Exception for debt-financed real property investments by 
                    qualified organizations
    For purposes of the real property exception, a qualified 
organization is: (1) an educational organization described in 
section 170(b)(1)(A)(ii)\197\ and its affiliated supporting 
organizations; (2) a qualified trust described in section 
401(a) (hereinafter ``pension funds''); (3) a title holding 
company described in section 501(c)(25) (insofar as it holds 
shares of organizations described in (1) or (2)\198\); or (4) a 
retirement income account described in section 403(b)(9).\199\ 
To qualify for the real property exception, an acquisition or 
improvement by the qualified organization must meet several 
requirements. These include: (1) a requirement generally that 
the price of the property is a fixed amount determined as of 
the date of the acquisition or completion of the improvement; 
(2) restrictions against payment of the indebtedness of the 
arrangement being dependent upon the revenue, income, or 
profits derived from the property; (3) restrictions concerning 
sale-leaseback arrangements; and (4) in general, a prohibition 
against seller financing.\200\
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    \197\This Code section generally describes an educational 
organization that operates as a school (i.e., ``an educational 
organization which normally maintains a regular faculty and curriculum 
and normally has a regularly enrolled body of pupils or students in 
attendance at the place where its educational activities are regularly 
carried on'').
    \198\Sec. 514(c)(9)(C) & (F).
    \199\Sec. 514(c)(9)(C).
    \200\Sec. 514(c)(9)(B)(i)-(v).
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    Additional requirements must be met for the real property 
exception to apply where the real property is held by a 
partnership in which a qualified organization is a partner. To 
qualify for the real property exception, the partnership must 
meet all of the above-described general requirements and must 
meet one of the following three requirements: (1) all of the 
partners of the partnership are qualified organizations; (2) 
each allocation to a partner of the partnership which is a 
qualified organization is a qualified allocation (within the 
meaning of section 168(h)(6)); or (3) the partnership satisfies 
a rule prohibiting disproportionate allocations.\201\
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    \201\Sec. 514(c)(9)(B)(vi) & (E).
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    The disproportionate allocation rule requires two things: 
first, that the organization satisfy what commonly is referred 
to as the ``fractions rule,'' and second, that each allocation 
with respect to the partnership have substantial economic 
effect within the meaning of section 704(b)(2).\202\ Under the 
fractions rule, the allocation of items to any partner that is 
a qualified organization cannot result in such partner having a 
share of the overall partnership income for any taxable year 
greater than such partner's share of overall partnership loss 
for the taxable year for which such partner's loss share will 
be the smallest.\203\ A partnership generally must satisfy the 
fractions rule on an actual basis and on a prospective basis 
for each taxable year of the partnership in which it holds 
debt-financed property and has at least one partner that is a 
qualified organization.\204\ The fractions rule generally is 
intended to prevent the shifting of disproportionate income or 
gains to tax-exempt partners of the partnership or the shifting 
of disproportionate deductions, losses, or credits to taxable 
partners.
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    \202\Sec. 514(c)(9)(E)(i).
    \203\Sec. 514(c)(9)(E)(i)(I).
    \204\Treas. Reg. sec. 1.514(c)-2(b)(2)(i).
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                           REASONS FOR CHANGE

    The Committee believes the present-law debt-financed 
property rules create an incentive for universities, pension 
funds, and other tax-exempt organizations to invest in 
investment partnerships that hold debt-financed securities and 
commodities indirectly through ``blocker'' corporations 
established in foreign tax-haven jurisdictions. Such use of 
offshore blocker corporations may allow exempt organizations to 
avoid attribution of debt incurred by the investment 
partnership to the exempt organization and thereby to avoid 
application of the debt-financed property rules. By eliminating 
the incentive to invest through blocker corporations 
established in tax haven jurisdictions where an exempt 
organization is a partner with limited liability in an 
investment partnership, the Committee believes that such 
organizations will be more likely to invest directly in 
investment partnerships and in many cases will eliminate the 
use of offshore blocker corporations. In addition, the 
Committee believes that allowing pension funds, universities, 
and other exempt organizations to invest directly in certain 
investment partnerships domestically would reduce transaction 
costs and increase investment returns.

                        DESCRIPTION OF PROVISION

    In the case of an organization that is a partner with 
limited liability with respect to a partnership, the provision 
provides that indebtedness incurred or continued by such 
partnership in purchasing or carrying any qualified security or 
commodity is not treated as acquisition indebtedness for 
purposes of the debt-financed property rules. The term 
qualified security or commodity means: (1) any security (as 
defined in section 475(c)(2), with the exception of certain 
contracts to which section 1256 applies);\205\ (2) any 
commodity (as defined in section 475(e)(2));\206\ or (3) any 
option or derivative contract with respect to a security or 
commodity described in (1) or (2). Similar rules apply in the 
case of tiered partnerships and other flow-through entities. It 
is intended that, for purposes of the provision, an 
organization is treated as a partner with limited liability if 
its share of the liabilities of the partnership is no greater 
than the amount of its capital in the partnership.
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    \205\This generally includes any (1) share of stock in a 
corporation; (2) partnership or beneficial ownership interest in a 
widely held or publicly traded partnership or trust; (3) note, bond, 
debenture, or other evidence of indebtedness; (4) interest rate, 
currency, or equity notional principal contract; (5) evidence of an 
interest in, or a derivative financial instrument in any security 
described in (1), (2), (3) or (4), or any currency, including any 
option, forward contract, short position, and any similar financial 
instrument in such security or currency; or (6) certain hedges with 
respect to a security.
    \206\This generally includes (1) any commodity which is actively 
traded; (2) any notional principal contract with respect to a commodity 
described in (1); (3) any evidence of an interest in, or a derivative 
instrument in, any commodity described in (1) or (2), including any 
option, forward contract, futures contract, short position, and any 
similar instrument in such a commodity; and (4) certain hedges with 
respect to a commodity.
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    The provision authorizes the Secretary to prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of the provision, including regulations to prevent 
abuse of the provision.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after the date of enactment.

3. Application of section 1239 to partnership interests and tax-sharing 
        agreements (Sec. 613 of the bill and Sec. 1239 of the Code)

                              PRESENT LAW

    If property is sold or exchanged between related persons, 
directly or indirectly, the transferor's gain is treated as 
ordinary income if the property is, in the hands of the 
transferee, of a character which is subject to the allowance 
for depreciation.\207\ Such property includes property subject 
to the allowance for amortization of intangibles under section 
197.\208\
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    \207\Sec. 1239.
    \208\Sec. 197(f)(7).
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    The definition of related persons for this purpose includes 
persons that are related under a 50-percent value test, using 
specified constructive ownership attribution rules.\209\
---------------------------------------------------------------------------
    \209\Sec. 1239(b).
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    In some situations, taxpayers have transferred amortizable 
intangibles or other depreciable property to a transferee that 
may not be within the definition of a related party under 
section 1239, but in connection with the transfer the parties 
have contractually agreed, under a tax-sharing arrangement, 
that the transferor is entitled to a percentage of the tax 
benefits of depreciation or amortization in the hands of the 
transferee.
    If a partner transfers an interest in a partnership, the 
amount of money, or the fair market value of property, received 
by the transferor partner in exchange for all or a part of his 
interest in the partnership attributable to unrealized 
receivables or inventory items of the partnership is considered 
an amount realized from the sale or exchange of property other 
than a capital asset. Section 751(d) defines inventory items 
for this purpose to include any property which, on sale or 
exchange by the partnership, would be considered property other 
than a capital asset (and other than property described in 
section 1231),\210\ and also any other property held by the 
partnership which, if held by the selling partner would be 
considered property other than such property. Section 64 
provides that any gain from the sale or exchange of property 
which is `treated or considered as ordinary income' is treated 
as ``gain from the sale or exchange of property which is 
neither a capital asset nor property described in section 
1231(b).''\211\ If a partner transfers a partnership interest 
to a related party within the meaning of section 1239 and the 
partnership owns depreciable property, taxpayers might take the 
position that the application of section 64 and section 1239 to 
section 751 is unclear, or that the depreciable property was 
not transferred ``directly or indirectly'' to the related party 
within the meaning of section 1239.\212\
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    \210\Property described in section 1231 is, generally, property 
used in the trade or business subject to the allowance for depreciation 
and held for more than one year. Sec. 1231(b). Certain other property 
is also included.
    \211\Sec. 64.
    \212\See, e.g., McKee, Nelson, and Whitmire, Federal Taxation of 
Partnerships and Partners, (Fourth Ed. 2007) at par. 17.04[2] (see n. 
138) and at par. 18.02[4] (see n. 36).
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                           REASONS FOR CHANGE

    The Committee believes that taxpayers should not obtain 
capital gain treatment for the transfer of depreciable property 
(including intangibles amortizable under section 197) while 
retaining an interest in the tax benefits of the depreciation, 
which may be measured by reference to a higher, ordinary income 
tax rate of the transferee.
    The Committee also believes that the rules of section 1239 
should apply where depreciable property (including intangibles 
amortizable under section 197) is indirectly transferred to a 
related party through the transfer of a partnership interest.

                        EXPLANATION OF PROVISION

    Under the provision, regardless of whether any other 
relationship exists between the transferor and transferee, a 
transferor is related to a transferee for purposes of section 
1239 if there is a tax sharing agreement with respect to any 
sale or exchange. A tax sharing agreement for this purpose 
means any agreement that provides for the payment to the 
transferor of any amount that is determined by reference to any 
portion of the tax benefit realized by the transferee with 
respect to the depreciation (or amortization) of the property 
directly or indirectly transferred.\213\
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    \213\ The provision is not intended to apply to an outright sale of 
assets between otherwise unrelated parties in which the fixed sales 
price is negotiated to be higher because of the anticipated tax 
benefits that will be enjoyed by the transferee. However, in such a 
situation, if there is also a tax sharing agreement that returns to the 
transferor any portion of the benefits of deprecation or amortization 
realized by the transferee, notwithstanding the basic form of the 
transaction as a transfer of all the benefits to the transferee, then 
the parties will be treated as related for purposes of the provision.
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    Under the provision, gain recognized by the transferor of a 
partnership interest to a related party under section 1239 is 
treated as ordinary income to the extent attributable to 
unrealized appreciation in property which is of a character 
subject to depreciation. As under present law, such property 
includes intangible property which is of a character subject to 
amortization under section 197.
    In the case of a transfer of a partnership interest, the 
provision applies with respect to any agreement with respect to 
depreciation or amortization realized with respect to property 
transferred directly or indirectly in connection with the 
transfer of the partnership interest. As one example, if a 
transferor transfers an interest in a partnership, and is 
entitled to receive the benefits of any tax sharing agreement 
with respect to property held directly or indirectly by that 
partnership, then the transferor's gain on transfer of the 
partnership interest is ordinary income to the extent 
attributable to such property.
    No inference is intended as to the treatment under present 
law of any transfer subject to the provision.

                             EFFECTIVE DATE

    The provision is effective with respect to sales or 
exchanges after the date of enactment. However, the provision 
shall not apply to any sale or exchange pursuant to a written 
binding contract which includes a tax sharing agreement and 
which is in effect on November 1, 2007 and not modified 
thereafter in any material respect.

                          C. Other Provisions


1. Delay Implementation of Worldwide Interest Allocation (sec. 621 of 
        the bill and sec. 864(f) of the Code)

                              PRESENT LAW

In general

    In order to compute the foreign tax credit limitation, a 
taxpayer must determine the amount of its taxable income from 
foreign sources. Thus, the taxpayer must allocate and apportion 
deductions between items of U.S.-source gross income, on the 
one hand, and items of foreign-source gross income, on the 
other.
    In the case of interest expense, the rules generally are 
based on the approach that money is fungible and that interest 
expense is properly attributable to all business activities and 
property of a taxpayer, regardless of any specific purpose for 
incurring an obligation on which interest is paid.\214\ For 
interest allocation purposes, all members of an affiliated 
group of corporations generally are treated as a single 
corporation (the so-called ``one-taxpayer rule'') and 
allocation must be made on the basis of assets rather than 
gross income. The term ``affiliated group'' in this context 
generally is defined by reference to the rules for determining 
whether corporations are eligible to file consolidated returns.
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    \214\However, exceptions to the fungibility principle are provided 
in particular cases, some of which are described below.
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    For consolidation purposes, the term ``affiliated group'' 
means one or more chains of includible corporations connected 
through stock ownership with a common parent corporation that 
is an includible corporation, but only if: (1) the common 
parent owns directly stock possessing at least 80 percent of 
the total voting power and at least 80 percent of the total 
value of at least one other includible corporation; and (2) 
stock meeting the same voting power and value standards with 
respect to each includible corporation (excluding the common 
parent) is directly owned by one or more other includible 
corporations.
    Generally, the term ``includible corporation'' means any 
domestic corporation except certain corporations exempt from 
tax under section 501 (for example, corporations organized and 
operated exclusively for charitable or educational purposes), 
certain life insurance companies, corporations electing 
application of the possession tax credit, regulated investment 
companies, real estate investment trusts, and domestic 
international sales corporations. A foreign corporation 
generally is not an includible corporation.
    Subject to exceptions, the consolidated return and interest 
allocation definitions of affiliation generally are consistent 
with each other.\215\ For example, both definitions generally 
exclude all foreign corporations from the affiliated group. 
Thus, while debt generally is considered fungible among the 
assets of a group of domestic affiliated corporations, the same 
rules do not apply as between the domestic and foreign members 
of a group with the same degree of common control as the 
domestic affiliated group.
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    \215\One such exception is that the affiliated group for interest 
allocation purposes includes section 936 corporations that are excluded 
from the consolidated group.
---------------------------------------------------------------------------
            Banks, savings institutions, and other financial affiliates
    The affiliated group for interest allocation purposes 
generally excludes what are referred to in the Treasury 
regulations as ``financial corporations'' (Treas. Reg. sec. 
1.861-11T(d)(4)). These include any corporation, otherwise a 
member of the affiliated group for consolidation purposes, that 
is a financial institution (described in section 581 or section 
591), the business of which is predominantly with persons other 
than related persons or their customers, and which is required 
by State or Federal law to be operated separately from any 
other entity that is not a financial institution (sec. 
864(e)(5)(C)). The category of financial corporations also 
includes, to the extent provided in regulations, bank holding 
companies (including financial holding companies), subsidiaries 
of banks and bank holding companies (including financial 
holding companies), and savings institutions predominantly 
engaged in the active conduct of a banking, financing, or 
similar business (sec. 864(e)(5)(D)).
    A financial corporation is not treated as a member of the 
regular affiliated group for purposes of applying the one-
taxpayer rule to other non-financial members of that group. 
Instead, all such financial corporations that would be so 
affiliated are treated as a separate single corporation for 
interest allocation purposes.

Worldwide interest allocation

            In general
    The American Jobs Creation Act of 2004 (``AJCA'')\216\ 
modified the interest expense allocation rules described above 
(which generally apply for purposes of computing the foreign 
tax credit limitation) by providing a one-time election (the 
``worldwide affiliated group election'') under which the 
taxable income of the domestic members of an affiliated group 
from sources outside the United States generally is determined 
by allocating and apportioning interest expense of the domestic 
members of a worldwide affiliated group on a worldwide-group 
basis (i.e., as if all members of the worldwide group were a 
single corporation). If a group makes this election, the 
taxable income of the domestic members of a worldwide 
affiliated group from sources outside the United States is 
determined by allocating and apportioning the third-party 
interest expense of those domestic members to foreign-source 
income in an amount equal to the excess (if any) of (1) the 
worldwide affiliated group's worldwide third-party interest 
expense multiplied by the ratio which the foreign assets of the 
worldwide affiliated group bears to the total assets of the 
worldwide affiliated group,\217\ over (2) the third-party 
interest expense incurred by foreign members of the group to 
the extent such interest would be allocated to foreign sources 
if the principles of worldwide interest allocation were applied 
separately to the foreign members of the group.\218\
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    \216\Pub. L. No. 108-357, sec. 401 (2004).
    \217\For purposes of determining the assets of the worldwide 
affiliated group, neither stock in corporations within the group nor 
indebtedness (including receivables) between members of the group is 
taken into account.
    \218\Although the interest expense of a foreign subsidiary is taken 
into account for purposes of allocating the interest expense of the 
domestic members of the electing worldwide affiliated group for foreign 
tax credit limitation purposes, the interest expense incurred by a 
foreign subsidiary is not deductible on a U.S. return.
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    For purposes of the new elective rules based on worldwide 
fungibility, the worldwide affiliated group means all 
corporations in an affiliated group as well as all controlled 
foreign corporations that, in the aggregate, either directly or 
indirectly,\219\ would be members of such an affiliated group 
if section 1504(b)(3) did not apply (i.e., in which at least 80 
percent of the vote and value of the stock of such corporations 
is owned by one or more other corporations included in the 
affiliated group). Thus, if an affiliated group makes this 
election, the taxable income from sources outside the United 
States of domestic group members generally is determined by 
allocating and apportioning interest expense of the domestic 
members of the worldwide affiliated group as if all of the 
interest expense and assets of 80-percent or greater owned 
domestic corporations (i.e., corporations that are part of the 
affiliated group, as modified to include insurance companies) 
and certain controlled foreign corporations were attributable 
to a single corporation.
---------------------------------------------------------------------------
    \219\Indirect ownership is determined under the rules of section 
958(a)(2) or through applying rules similar to those of section 
958(a)(2) to stock owned directly or indirectly by domestic 
partnerships, trusts, or estates.
---------------------------------------------------------------------------
    The common parent of the domestic affiliated group must 
make the worldwide affiliated group election. It must be made 
for the first taxable year beginning after December 31, 2008, 
in which a worldwide affiliated group exists that includes at 
least one foreign corporation that meets the requirements for 
inclusion in a worldwide affiliated group. Once made, the 
election applies to the common parent and all other members of 
the worldwide affiliated group for the taxable year for which 
the election was made and all subsequent taxable years, unless 
revoked with the consent of the Secretary of the Treasury.
            Financial institution group election
    Taxpayers are allowed to apply the bank group rules to 
exclude certain financial institutions from the affiliated 
group for interest allocation purposes under the worldwide 
fungibility approach. The rules also provides a one-time 
``financial institution group'' election that expands the bank 
group. At the election of the common parent of the pre-election 
worldwide affiliated group, the interest expense allocation 
rules are applied separately to a subgroup of the worldwide 
affiliated group that consists of (1) all corporations that are 
part of the bank group, and (2) all ``financial corporations.'' 
For this purpose, a corporation is a financial corporation if 
at least 80 percent of its gross income is financial services 
income (as described in section 904(d)(2)(C)(i) and the 
regulations thereunder) that is derived from transactions with 
unrelated persons.\220\ For these purposes, items of income or 
gain from a transaction or series of transactions are 
disregarded if a principal purpose for the transaction or 
transactions is to qualify any corporation as a financial 
corporation.
---------------------------------------------------------------------------
    \220\See Treas. Reg. sec. 1.904-4(e)(2).
---------------------------------------------------------------------------
    The common parent of the pre-election worldwide affiliated 
group must make the election for the first taxable year 
beginning after December 31, 2008, in which a worldwide 
affiliated group includes a financial corporation. Once made, 
the election applies to the financial institution group for the 
taxable year and all subsequent taxable years. In addition, 
anti-abuse rules are provided under which certain transfers 
from one member of a financial institution group to a member of 
the worldwide affiliated group outside of the financial 
institution group are treated as reducing the amount of 
indebtedness of the separate financial institution group. 
Regulatory authority is provided with respect to the election 
to provide for the direct allocation of interest expense in 
circumstances in which such allocation is appropriate to carry 
out the purposes of these rules, to prevent assets or interest 
expense from being taken into account more than once, or to 
address changes in members of any group (through acquisitions 
or otherwise) treated as affiliated under these rules.
            Effective date of worldwide interest allocation under AJCA
    The worldwide interest allocation rules are effective for 
taxable years beginning after December 31, 2008.

                           REASONS FOR CHANGE

    The committee acknowledges that the worldwide interest 
allocation rules of AJCA were added to the Code in 2004, on a 
delayed effective date basis, as one of a number of changes to 
the Code's treatment of international investment and cross-
border activity of U.S. taxpayers. The committee also 
recognizes that the Code's rules governing cross-border 
activity of U.S. taxpayers are exceedingly complex, and the 
Committee is concerned that certain such international-related 
provisions of the Code, particularly in their interaction with 
other such provisions, can produce unintended consequences and 
may create unintended incentives for economically inefficient 
behavior by taxpayers seeking to minimize their overall global 
tax liability. Accordingly, the committee believes that it is 
desirable to delay implementation of the worldwide interest 
allocation rules of AJCA to provide further time to 
comprehensively review the Code's current approach to the 
taxation of cross-border activity of U.S. taxpayers.

                        EXPLANATION OF PROVISION

    The proposal delays by nine years the implementation of the 
worldwide interest allocation rules added by AJCA. Thus, the 
worldwide interest allocation rules are effective for taxable 
years beginning after December 31, 2017.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

2. Broker reporting of customer's basis in securities transactions 
        (sec. 622 of the bill and sec. 6045 of the Code)

                              PRESENT LAW

In general

    Gain or loss generally is recognized for Federal income tax 
purposes on realization of that gain or loss (for example, 
through the sale of property giving rise to the gain or loss). 
The taxpayer's gain or loss on a disposition of property is the 
difference between the amount realized and the adjusted 
basis.\221\
---------------------------------------------------------------------------
    \221\Sec. 1001.
---------------------------------------------------------------------------
    To compute adjusted basis, a taxpayer must first determine 
the property's unadjusted or original basis and then make 
adjustments prescribed by the Code.\222\ The original basis of 
property is its cost, except as otherwise prescribed by the 
Code (for example, in the case of property acquired by gift or 
bequest or in a tax-free exchange). Once determined, the 
taxpayer's original basis generally is adjusted downward to 
take account of depreciation or amortization, and generally is 
adjusted upward to reflect income and gain inclusions or 
capital outlays with respect to the property.
---------------------------------------------------------------------------
    \222\Sec. 1016.
---------------------------------------------------------------------------

Basis computation rules

    If a taxpayer has acquired stock in a corporation on 
different dates or at different prices and sells or transfers 
some of the shares of that stock, and the lot from which the 
stock is sold or transferred is not adequately identified, the 
shares deemed sold are the earliest acquired shares (the 
``first-in-first-out rule'').\223\ If a taxpayer makes an 
adequate identification of shares of stock that it sells, the 
shares of stock treated as sold are the shares that have been 
identified.\224\ A taxpayer who owns shares in a regulated 
investment company (``RIC'') generally is permitted to elect, 
in lieu of the specific identification or first-in-first-out 
methods, to determine the basis of RIC shares sold under one of 
two average-cost-basis methods described in Treasury 
regulations.\225\
---------------------------------------------------------------------------
    \223\Treas. Reg. sec. 1.1012-1(c)(1).
    \224\Treas. Reg. sec. 1.1012-1(c).
    \225\Tres. Reg. sec. 1.1012-1(e).
---------------------------------------------------------------------------

Information reporting

    Present law imposes information reporting requirements on 
participants in certain transactions. Under these requirements, 
information is generally reported to the IRS and furnished to 
taxpayers. These requirements are intended to assist taxpayers 
in preparing their income tax returns and to help the IRS 
determine whether taxpayers' tax returns are correct and 
complete. For example, every person engaged in a trade or 
business generally is required to file information returns for 
each calendar year for payments of $600 or more made in the 
course of the payor's trade or business.\226\
---------------------------------------------------------------------------
    \226\Sec. 6041(a).
---------------------------------------------------------------------------
    Section 6045(a) requires brokers to file with the IRS 
annual information returns showing the gross proceeds realized 
by customers from various sale transactions. The Secretary is 
authorized to require brokers to report additional information 
related to customers.\227\ Brokers are required to furnish to 
every customer information statements with the same gross 
proceeds information that is included in the returns filed with 
the IRS for that customer.\228\ These information statements 
are required to be furnished by January 31 of the year 
following the calendar year for which the return under section 
6045(a) is required to be filed.\229\
---------------------------------------------------------------------------
    \227\Sec. 6045(a).
    \228\Sec. 6045(b).
    \229\Id.
---------------------------------------------------------------------------
    A person who is required to file information returns but 
who fails to do so by the due date for the returns, includes on 
the returns incorrect information, or files incomplete returns 
generally is subject to a penalty of $50 for each return with 
respect to which such a failure occurs, up to a maximum of 
$250,000 in any calendar year.\230\ Similar penalties, with a 
$100,000 calendar year maximum, apply to failures to furnish 
correct information statements to recipients of payments for 
which information reporting is required.\231\
---------------------------------------------------------------------------
    \230\Sec. 6721.
    \231\Sec. 6722.
---------------------------------------------------------------------------
    Present law does not require information reporting with 
respect to a taxpayer's basis in property but does impose an 
obligation to keep records, as described below.

Basis recordkeeping requirements

    Taxpayers are required to ``keep such records . . . as the 
Secretary may from time to time prescribe.''\232\ Treasury 
regulations impose recordkeeping requirements on any person 
required to file information returns.\233\
---------------------------------------------------------------------------
    \232\Sec. 6001.
    \233\Treas. Reg. sec. 1.6001-1(a).
---------------------------------------------------------------------------
    Treasury regulations provide that donors and donees should 
keep records that are relevant in determining a donee's basis 
in property.\234\ IRS Publication 552 states that a taxpayer 
should keep basis records for property until the period of 
limitations expires for the year in which the taxpayer disposes 
of the property.
---------------------------------------------------------------------------
    \234\Treas. Reg. sec. 1.1015-1(g).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that there may be significant 
underreporting of capital gain income as a result of 
misreporting of basis. Requiring brokers to report basis to the 
IRS and taxpayers may reduce capital gain underreporting: When 
coupled with the present-law requirement to report gross 
proceeds, mandatory basis reporting will give both taxpayers 
and the IRS information needed to compute gain (or loss) from 
securities sales. The Committee, however, understands that 
imposing basis reporting requirements in all circumstances in 
which gross proceeds reporting is mandatory under present law 
would create significant costs and other difficulties for 
brokers. Consequently, the provision's reporting requirements 
include certain significant limitations, and the Secretary has 
broad discretion to provide rules to implement (and, if it 
deems it appropriate, to broaden) those requirements. The 
provision also includes rules--such as mandatory broker-to-
broker reporting and issuer reporting of certain organizational 
actions--intended to facilitate accurate reporting of tax 
basis.

                        EXPLANATION OF PROVISION

In general

    Under the provision, every broker that is required to file 
a return under section 6045(a) reporting the gross proceeds 
from the sale of a covered security must include in the return 
the (1) customer's adjusted basis in the security and (2) 
whether any gain or loss with respect to the security is long-
term or short-term (within the meaning of section 1222).

Covered securities

    A covered security is any specified security acquired on or 
after an applicable date if the security was (1) acquired 
through a transaction in the account in which the security is 
held or (2) was transferred to that account from an account in 
which the security was a covered security, but only if the 
transferee broker received a statement under section 6045A 
(described below) with respect to the transfer. Under this 
rule, securities acquired by gift or inheritance are not 
covered securities.
    A specified security is any share of stock in a corporation 
(including stock of a regulated investment company); any note, 
bond, debenture, or other evidence of indebtedness; any 
commodity or a contract or a derivative with respect to the 
commodity if the Secretary determines that adjusted basis 
reporting is appropriate; and any other financial instrument 
with respect to which the Secretary determines that adjusted 
basis reporting is appropriate.
    For stock in a corporation (including in a regulated 
investment company), the applicable date generally is January 
1, 2009. Open-end funds are permitted to elect to treat as a 
covered security any stock in the fund acquired before January 
1, 2009. This election is described below.
    For any specified security other than stock in a 
corporation, the applicable date is January 1, 2011 or a later 
date determined by the Secretary.

Computation of adjusted basis

    The customer's adjusted basis required to be reported to 
the IRS is determined under the following rules. The adjusted 
basis of stock in a corporation other than an open-end fund is 
determined under the first-in-first-out method (described in 
Treasury regulations under section 1012) unless the customer 
notifies the broker by means of making an adequate 
identification (under the rules of section 1012 for specific 
identification) of the stock sold or transferred. The adjusted 
basis of stock in an open-end fund acquired before January 1, 
2011 is determined in accordance with any permitted method 
under section 1012 (that is, the first-in-first-out method, the 
average-cost method, or the specific identification method). A 
broker's basis computation method used for open-end stock held 
in one account with that broker may differ from the basis 
computation method used for open-end stock held in another 
account with that broker. The adjusted basis of stock in an 
open-end fund acquired on or after January 1, 2011 is 
determined in accordance with the broker's default method 
(under section 1012) unless the customer notifies the broker 
that the customer elects another method permitted by section 
1012. This notification is made separately for each account in 
which open-end stock is held and, once made, applies to all 
open-end stock held in the account. The adjusted basis of any 
covered security other than stock is determined under the 
applicable rules provided in section 1012.
    An open-end fund is a regulated investment company that 
offers for sale or has outstanding any redeemable security of 
which it is the issuer and the shares of which are not traded 
on an established securities exchange. A mutual fund the stock 
of which is priced daily and is acquired from the fund is an 
open-end fund. So-called exchange traded funds, funds in which 
there is intra-day pricing and in which shares may be purchased 
on an exchange (rather than from the funds directly) are not 
open-end funds.
    For any sale, exchange, or other disposition of a specified 
security after the applicable date (defined previously), the 
provision modifies section 1012 so that the conventions 
prescribed by regulations under that section for determining 
adjusted basis (the first-in-first-out, specific 
identification, and average cost conventions) apply on an 
account-by-account basis. Under this rule, for example, if a 
customer holds shares of the same specified security in 
accounts with different brokers, each broker makes its adjusted 
basis determinations by reference only to the shares held in 
the account with that broker. Unless the election described 
next applies, stock in an open-end fund acquired before January 
1, 2009 is treated as a separate account. A consequence of this 
rule is that if adjusted basis is being determined using the 
average cost convention, average cost is computed without 
regard to any open-end stock acquired before January 1, 2009. 
An open-end fund, however, may elect (at the time and in the 
form and manner prescribed by the Secretary), on a stockholder-
by-stockholder basis, to treat as covered securities all stock 
in the fund held by the stockholder without regard to when the 
stock was acquired. When this election applies, the average 
cost of a customer's open-end stock is determined by taking 
into account shares of stock acquired before, on, and after 
January 1, 2009.

Exception for wash sales

    Unless the Secretary provides otherwise, customer's 
adjusted basis in a covered security generally is determined 
without taking into account the effect on basis of the wash 
sale rules of section 1091. If, however, the acquisition and 
sale transactions resulting in a wash sale under section 1091 
occur in the same account and are in identical securities, 
adjusted basis is determined by taking into account the effect 
of the wash sale rules. Securities are identical for this 
purpose only if they have the same Committee on Uniform 
Security Identification Procedures (CUSIP) number.

Reporting requirements for options

    The provision generally eliminates the present-law 
regulatory exception from section 6045(a) reporting for certain 
options. If a covered security is acquired by the exercise of 
an option and the option was acquired in the same account as 
the covered security, the amount of the premium received or 
paid for the option is treated as an adjustment to the gross 
proceeds from the subsequent sale of the covered security or as 
an adjustment to the customer's adjusted basis in that 
security. Gross proceeds and basis reporting also generally is 
required when there is a lapse of, or a closing transaction 
with respect to, an option on a covered security. These 
reporting rules related to options transactions apply only to 
options granted or acquired on or after January 1, 2011.

Time for providing statements to customers

    The provision changes to February 15 the present-law 
January 31 deadline for furnishing certain information 
statements to customers. The statements to which the new 
February 15 deadline applies are (1) statements showing gross 
proceeds (under section 6045(b)) or substitute payments (under 
section 6045(d)) and (2) consolidated reporting statements (as 
defined in regulations) for reporting gross proceeds, dividends 
(under section 6042(c)), interest (under section 
6049(c)(2)(A)), or royalties (under section 6050N(b)). The term 
``consolidated reporting statement'' is intended to refer to 
annual tax information statements that brokerage firms 
customarily provide to their customers.

Broker-to-broker and issuer reporting

    Every broker (as defined in section 6045(c)(1)), and any 
other person specified in Treasury regulations, that transfers 
to a broker (as defined in section 6045(c)(1)) a security that 
is a covered security when held by that broker or other person 
must, under new section 6045A, furnish to the transferee broker 
a written statement that allows the transferee broker to 
satisfy the provision's basis and holding period reporting 
requirements. The Secretary may provide regulations that 
prescribe the content of this statement and the manner in which 
it must be furnished. It is contemplated that the Secretary 
will permit statements to be provided electronically. The 
statement required by this rule must be furnished within 45 
days after the transfer of the covered security or, if earlier, 
by January 15 of the year in which the transfer occurred.
    Present law penalties for failure to furnish correct payee 
statements apply to failures to furnish correct statements in 
connection with the transfer of covered securities.
    New section 6045B requires, according to forms or 
regulations prescribed by the Secretary, any issuer of a 
specified security to file a return setting forth a description 
of any organizational action (such as a stock split or a merger 
or acquisition) that affects the basis of the specified 
security, the quantitative effect on the basis of that 
specified security, and any other information required by the 
Secretary. This return must be filed within 45 days after the 
date of the organizational action or, if earlier, by January 31 
of the year following the calendar year during which the action 
occurred. Every person required to file this return for a 
specified security also must furnish, according to forms or 
regulations prescribed by the Secretary, to the nominee with 
respect to that security (or to a certificate holder if there 
is no nominee) a written statement showing the name, address, 
and phone number of the information contact of the person 
required to file the return, the information required to be 
included on the return with respect to the security, and any 
other information required by the Secretary. This statement 
must be furnished to the nominee or certificate holder on or 
before January 31 of the year following the calendar year in 
which the organizational action took place. No return or 
information statement is required to be provided under new 
section 6045B for any action with respect to a specified 
security if the action occurs before the applicable date (as 
defined previously) for that security.
    The Secretary may waive the return filing and information 
statement requirements if the person to which the requirements 
apply makes publicly available, in the form and manner 
determined by the Secretary, the name, address, phone number, 
and email address of the information contact of that person, 
and the information about the organizational action and its 
effect on basis otherwise required to be included in the 
return.
    The present-law penalties for failure to file correct 
information returns apply to failures to file correct returns 
in connection with organizational actions. Similarly, the 
present-law penalties for failure to furnish correct payee 
statements apply to a failure under new section 6045B to 
furnish correct statements to nominees or holders or to provide 
required publicly-available information in lieu of returns and 
written statements.

                             EFFECTIVE DATE

    The provision takes effect on January 1, 2009.

3. Increase in penalty for failure to file partnership returns (sec. 
        623 of the bill and sec. 6698 of the Code)

                              PRESENT LAW

    A partnership generally is treated as a pass-through 
entity. Income earned by a partnership, whether distributed or 
not, is taxed to the partners. Distributions from the 
partnership generally are tax-free. The items of income, gain, 
loss, deduction or credit of a partnership generally are taken 
into account by a partner as allocated under the terms of the 
partnership agreement. If the agreement does not provide for an 
allocation, or the agreed allocation does not have substantial 
economic effect, then the items are to be allocated in 
accordance with the partners' interests in the partnership. To 
prevent double taxation of these items, a partner's basis in 
its interest is increased by its share of partnership income 
(including tax-exempt income), and is decreased by its share of 
any losses (including nondeductible losses).
    Under present law, a partnership is required to file a tax 
return for each taxable year. The partnership's tax return is 
required to include the names and addresses of the individuals 
who would be entitled to share in the taxable income if 
distributed and the amount of the distributive share of each 
individual. In addition to applicable criminal penalties, 
present law imposes a civil penalty for the failure to timely 
file a partnership return. The penalty is $50 per partner for 
each month (or fraction of a month) that the failure continues, 
up to a maximum of five months.

                           REASONS FOR CHANGE

    A recent report by the Treasury Inspector General for Tax 
Compliance (TIGTA) indicated that the incidence of late-filed 
returns, measured as a percentage of total returns filed, is 
nearly 2 to 4 times higher among partnerships and S 
corporations, respectively, than it is among individual 
taxpayers.\235\ The TIGTA report indicated that the present-law 
penalty for partnerships fails to address the most egregious 
late filers.
---------------------------------------------------------------------------
    \235\Treasury Inspector General for Tax Administration, Stronger 
Sanctions Are Needed to Encourage Timely Filing of Pass-Through Returns 
and Ensure Fairness in the Tax System the Informants' Rewards Program 
Needs More Centralized Management Oversight, 2005-30-048 (March 2005).
---------------------------------------------------------------------------
    The Committee is concerned that the level of filing 
noncompliance by partnerships adversely affects the compliance 
of the individual partners. The Committee believes that the 
present law penalty should be increased to a level that 
effectively discourages noncompliance. The Committee believes 
this will improve overall tax administration.

                        EXPLANATION OF PROVISION

    The provision increases the present-law failure to file 
penalty for partnership returns by $25 per partner times the 
number of shareholders in the partnership during any part of 
the taxable year for which the return was required, for each 
month (or a fraction of a month) during which the failure 
continues, up to a maximum of 12 months.

                             EFFECTIVE DATE

    The provision applies to returns required to be filed after 
the date of enactment.

4. Penalty for failure to file S corporation returns (sec. 624 of the 
        bill and new sec. 6699 of the Code)

                              PRESENT LAW

    In general, an S corporation is not subject to corporate-
level income tax on its items of income and loss. Instead, an S 
corporation passes through its items of income and loss to its 
shareholders. The shareholders take into account separately 
their shares of these items on their individual income tax 
returns.
    Under present law, S corporations are required to file a 
tax return for each taxable year. The S corporation's tax 
return is required to include the following: the names and 
addresses of all persons owning stock in the corporation at any 
time during the taxable year; the number of shares of stock 
owned by each shareholder at all times during the taxable year; 
the amount of money and other property distributed by the 
corporation during the taxable year to each shareholder and the 
date of such distribution; each shareholder's pro rata share of 
each item of the corporation for the taxable year; and such 
other information as the Secretary may require.

                           REASONS FOR CHANGE

    A recent report by the Treasury Inspector General for Tax 
Compliance (``TIGTA'') indicated that the incidence of late-
filed returns, measured as a percentage of total returns filed, 
is nearly 2 to 4 times higher among partnerships and S 
corporations, respectively, than it is among individual 
taxpayers.\236\ The TIGTA report attributed the high rate of 
late-filed S corporation returns to the lack of an effective 
penalty regime.
---------------------------------------------------------------------------
    \236\Treasury Inspector General for Tax Administration, Stronger 
Sanctions Are Needed to Encourage Timely Filing of Pass-Through Returns 
and Ensure Fairness in the Tax System the Informants' Rewards Program 
Needs More Centralized Management Oversight, 2005-30-048 (March 2005).
---------------------------------------------------------------------------
    The Committee believes the level of filing noncompliance by 
S corporations is unacceptably high. Late-filed S corporation 
returns can have an adverse effect on the filing and reporting 
compliance of the individual shareholders. Thus, the Committee 
believes that establishing an effective penalty for failing to 
timely file an S corporation return will improve overall tax 
administration.

                        EXPLANATION OF PROVISION

    The provision imposes a monthly penalty for any failure to 
timely file an S corporation return or any failure to provide 
the information required to be shown on such a return. The 
penalty is $25 times the number of shareholders in the S 
corporation during any part of the taxable year for which the 
return was required, for each month (or a fraction of a month) 
during which the failure continues, up to a maximum of 12 
months.

                             EFFECTIVE DATE

    The provision applies to returns required to be filed after 
the date of enactment.

5. Modifications to corporate estimated tax payments (sec. 625 of the 
        bill)

                              PRESENT LAW

    In general, corporations are required to make quarterly 
estimated tax payments of their income tax liability. For a 
corporation whose taxable year is a calendar year, these 
estimated tax payments must be made by April 15, June 15, 
September 15, and December 15.
    Under present law, in the case of a corporation with assets 
of at least $1 billion, the payments due in July, August, and 
September, 2012, shall be increased to 115 percent of the 
payment otherwise due and the next required payment shall be 
reduced accordingly.

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to adjust the 
corporate estimated tax payments.

                        EXPLANATION OF PROVISION

    The provision increases the percentage from 115 percent to 
181 percent.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the votes of the Committee on Ways and Means in its 
consideration of the bill, H.R. 3996, the ``Temporary Tax 
Relief Act of 2007.''
    The bill, H.R. 3996, was ordered favorably reported, as 
amended, by a rollcall vote of 22 yeas to 13 nays (with a 
quorum being present). The vote was as follows:

                    MOTION TO REPORT RECOMMENDATIONS

    The Chairman's Amendment in the Nature of a Substitute, as 
amended, was ordered favorably reported by a rollcall vote of 
22 yeas to 13 nays (with a quorum being present). The vote was 
as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. RANGEL.....................        X   ........  .........  Mr. McCRERY......  ........        X   .........
Mr. STARK......................        X   ........  .........  Mr. HERGER.......  ........        X   .........
Mr. LEVIN......................        X   ........  .........  Mr. CAMP.........  ........  ........  .........
Mr. McDERMOTT..................        X   ........  .........  Mr. RAMSTAD......  ........        X   .........
Mr. LEWIS (GA).................  ........  ........  .........  Mr. JOHNSON......  ........        X   .........
Mr. NEAL.......................        X   ........  .........  Mr. ENGLISH......  ........        X   .........
Mr. McNULTY....................  ........  ........  .........  Mr. WELLER.......  ........  ........  .........
Mr. TANNER.....................        X   ........  .........  Mr. HULSHOF......  ........        X   .........
Mr. BECERRA....................        X   ........  .........  Mr. LEWIS (KY)...  ........        X   .........
Mr. DOGGETT....................        X   ........  .........  Mr. BRADY........  ........        X   .........
Mr. POMEROY....................        X   ........  .........  Mr. REYNOLDS.....  ........        X   .........
Mrs. TUBBS JONES...............        X   ........  .........  Mr. RYAN.........  ........        X   .........
Mr. THOMPSON...................        X   ........  .........  Mr. CANTOR.......  ........        X   .........
Mr. LARSON.....................        X   ........  .........  Mr. LINDER.......  ........  ........  .........
Mr. EMANUEL....................        X   ........  .........  Mr. NUNES........  ........  ........  .........
Mr. BLUMENAUER.................        X   ........  .........  Mr. TIBERI.......  ........        X   .........
Mr. KIND.......................        X   ........  .........  Mr. PORTER.......  ........        X   .........
Mr. PASCRELL...................        X   ........  .........
Ms. BERKLEY....................        X   ........  .........
Mr. CROWLEY....................        X   ........  .........
Mr. VAN HOLLEN.................        X   ........  .........
Mr. MEEK.......................        X   ........  .........
Ms. SCHWARTZ...................        X   ........  .........
Mr. DAVIS......................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

                          VOTES ON AMENDMENTS

    A rollcall vote was conducted on the following amendments 
to the Chairman's Amendment in the Nature of a Substitute.
    An amendment by Mr. McCrery, which would strike all the 
offsets included in the Chairman's Amendment in the Nature of a 
Substitute, was defeated by a rollcall vote of 13 yeas to 23 
nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. RANGEL.....................  ........        X   .........  Mr. McCRERY......        X   ........  .........
Mr. STARK......................  ........        X   .........  Mr. HERGER.......        X   ........  .........
Mr. LEVIN......................  ........        X   .........  Mr. CAMP.........  ........  ........  .........
Mr. McDERMOTT..................  ........        X   .........  Mr. RAMSTAD......        X   ........  .........
Mr. LEWIS (GA).................  ........        X   .........  Mr. JOHNSON......        X   ........  .........
Mr. NEAL.......................  ........        X   .........  Mr. ENGLISH......        X   ........  .........
Mr. McNULTY....................  ........  ........  .........  Mr. WELLER.......  ........  ........  .........
Mr. TANNER.....................  ........        X   .........  Mr. HULSHOF......        X   ........  .........
Mr. BECERRA....................  ........        X   .........  Mr. LEWIS (KY)...        X   ........  .........
Mr. DOGGETT....................  ........        X   .........  Mr. BRADY........        X   ........  .........
Mr. POMEROY....................  ........        X   .........  Mr. REYNOLDS.....        X   ........  .........
Mrs. TUBBS JONES...............  ........        X   .........  Mr. RYAN.........        X   ........  .........
Mr. THOMPSON...................  ........        X   .........  Mr. CANTOR.......        X   ........  .........
Mr. LARSON.....................  ........        X   .........  Mr. LINDER.......  ........  ........  .........
Mr. EMANUEL....................  ........        X   .........  Mr. NUNES........  ........  ........  .........
Mr. BLUMENAUER.................  ........        X   .........  Mr. TIBERI.......        X   ........  .........
Mr. KIND.......................  ........        X   .........  Mr. PORTER.......        X   ........  .........
Mr. PASCRELL...................  ........        X   .........
Ms. BERKLEY....................  ........        X   .........
Mr. CROWLEY....................  ........        X   .........
Mr. VAN HOLLEN.................  ........        X   .........
Mr. MEEK.......................  ........        X   .........
Ms. SCHWARTZ...................  ........        X   .........
Mr. DAVIS......................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. English, which would repeal the 
individual Alternative Minimum Tax for tax years beginning 
after January 1, 2018, was defeated by a rollcall vote of 13 
yeas to 23 nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. RANGEL.....................  ........        X   .........  Mr. McCRERY......        X   ........  .........
Mr. STARK......................  ........        X   .........  Mr. HERGER.......        X   ........  .........
Mr. LEVIN......................  ........        X   .........  Mr. CAMP.........  ........  ........  .........
Mr. McDERMOTT..................  ........        X   .........  Mr. RAMSTAD......        X   ........  .........
Mr. LEWIS (GA).................  ........        X   .........  Mr. JOHNSON......        X   ........  .........
Mr. NEAL.......................  ........        X   .........  Mr. ENGLISH......        X   ........  .........
Mr. McNULTY....................  ........  ........  .........  Mr. WELLER.......  ........
Mr. TANNER.....................  ........        X   .........  Mr. HULSHOF......        X   ........  .........
Mr. BECERRA....................  ........        X   .........  Mr. LEWIS (KY)...        X   ........  .........
Mr. DOGGETT....................  ........        X   .........  Mr. BRADY........        X   ........  .........
Mr. POMEROY....................  ........        X   .........  Mr. REYNOLDS.....        X   ........  .........
Mrs. TUBBS JONES...............  ........        X   .........  Mr. RYAN.........        X   ........  .........
Mr. THOMPSON...................  ........        X   .........  Mr. CANTOR.......        X   ........  .........
Mr. LARSON.....................  ........        X   .........  Mr. LINDER.......  ........  ........  .........
Mr. EMANUEL....................  ........        X   .........  Mr. NUNES........  ........  ........  .........
Mr. BLUMENAUER.................  ........        X   .........  Mr. TIBERI.......        X   ........  .........
Mr. KIND.......................  ........        X   .........  Mr. PORTER.......        X   ........  .........
Mr. PASCRELL...................  ........        X   .........
Ms. BERKLEY....................  ........        X   .........
Mr. CROWLEY....................  ........        X   .........
Mr. VAN HOLLEN.................  ........        X   .........
Mr. MEEK.......................  ........        X   .........
Ms. SCHWARTZ...................  ........        X   .........
Mr. DAVIS......................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Hulshof, which would strike Section 
313, which clarifies that the deduction for State Legislators' 
travel expenses away from home includes Pro Forma session days, 
was defeated by a roll call vote of 13 yeas to 19 nays. The 
vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. RANGEL.....................  ........        X   .........  Mr. McCRERY......        X   ........  .........
Mr. STARK......................  ........        X   .........  Mr. HERGER.......        X   ........  .........
Mr. LEVIN......................  ........        X   .........  Mr. CAMP.........  ........  ........  .........
Mr. McDERMOTT..................  ........        X   .........  Mr. RAMSTAD......        X   ........  .........
Mr. LEWIS (GA).................  ........  ........  .........  Mr. JOHNSON......        X   ........  .........
Mr. NEAL.......................  ........        X   .........  Mr. ENGLISH......        X   ........  .........
Mr. McNULTY....................  ........  ........  .........  Mr. WELLER.......  ........  ........  .........
Mr. TANNER.....................  ........        X   .........  Mr. HULSHOF......        X   ........  .........
Mr. BECERRA....................  ........  ........  .........  Mr. LEWIS (KY)...        X   ........  .........
Mr. DOGGETT....................        X   ........  .........  Mr. BRADY........        X   ........  .........
Mr. POMEROY....................  ........        X   .........  Mr. REYNOLDS.....  ........        X   .........
Mrs. TUBBS JONES...............  ........        X   .........  Mr. RYAN.........        X   ........  .........
Mr. THOMPSON...................  ........        X   .........  Mr. CANTOR.......        X   ........  .........
Mr. LARSON.....................  ........        X   .........  Mr. LINDER.......  ........  ........  .........
Mr. EMANUEL....................  ........        X   .........  Mr. NUNES........  ........  ........  .........
Mr. BLUMENAUER.................        X   ........  .........  Mr. TIBERI.......        X   ........  .........
Mr. KIND.......................  ........        X   .........  Mr. PORTER.......  ........        X   .........
Mr. PASCRELL...................  ........        X   .........
Ms. BERKLEY....................  ........        X   .........
Mr. CROWLEY....................  ........        X   .........
Mr. VAN HOLLEN.................  ........        X   .........
Mr. MEEK.......................  ........        X   .........
Ms. SCHWARTZ...................  ........  ........  .........
Mr. DAVIS......................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Brady, which would strike real estate 
from the list of specified assets in Section 611, was defeated 
by a rollcall vote of 13 yeas to 22 nays. The vote was as 
follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. RANGEL.....................  ........        X   .........  Mr. McCRERY......        X   ........  .........
Mr. STARK......................  ........        X   .........  Mr. HERGER.......        X   ........  .........
Mr. LEVIN......................  ........        X   .........  Mr. CAMP.........  ........  ........  .........
Mr. McDERMOTT..................  ........        X   .........  Mr. RAMSTAD......        X   ........  .........
Mr. LEWIS (GA).................  ........  ........  .........  Mr. JOHNSON......        X   ........  .........
Mr. NEAL.......................  ........        X   .........  Mr. ENGLISH......        X   ........  .........
Mr. McNULTY....................  ........  ........  .........  Mr. WELLER.......  ........  ........  .........
Mr. TANNER.....................  ........        X   .........  Mr. HULSHOF......        X   ........  .........
Mr. BECERRA....................  ........        X   .........  Mr. LEWIS (KY)...        X   ........  .........
Mr. DOGGETT....................  ........        X   .........  Mr. BRADY........        X   ........  .........
Mr. POMEROY....................  ........        X   .........  Mr. REYNOLDS.....        X   ........  .........
Mrs. TUBBS JONES...............  ........        X   .........  Mr. RYAN.........        X   ........  .........
Mr. THOMPSON...................  ........        X   .........  Mr. CANTOR.......        X   ........  .........
Mr. LARSON.....................  ........        X   .........  Mr. LINDER.......  ........  ........  .........
Mr. EMANUEL....................  ........        X   .........  Mr. NUNES........  ........  ........  .........
Mr. BLUMENAUER.................  ........        X   .........  Mr. TIBERI.......        X   ........  .........
Mr. KIND.......................  ........        X   .........  Mr. PORTER.......        X   ........  .........
Mr. PASCRELL...................  ........        X   .........  .................  ........  ........  .........
Ms. BERKLEY....................  ........        X   .........  .................  ........  ........  .........
Mr. CROWLEY....................  ........        X   .........  .................  ........  ........  .........
Mr. VAN HOLLEN.................  ........        X   .........  .................  ........  ........  .........
Mr. MEEK.......................  ........        X   .........  .................  ........  ........  .........
Ms. SCHWARTZ...................  ........        X   .........  .................  ........  ........  .........
Mr. DAVIS......................  ........        X   .........  .................  ........  ........  .........
----------------------------------------------------------------------------------------------------------------

    An amendment by Mr. Brady, which would strike Section 404 
and include a new provision allowing participants in 
governmental 457(b) to treat elected deferrals as Roth 
contributions, was defeated by a rollcall vote of 13 yeas to 22 
nays. The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. RANGEL.....................  ........        X   .........  Mr. McCrery......        X   ........  .........
Mr. STARK......................  ........        X   .........  Mr. HERGER.......        X   ........  .........
Mr. LEVIN......................  ........        X   .........  Mr. CAMP.........  ........  ........  .........
Mr. McDERMOTT..................  ........        X   .........  Mr. RAMSTAD......        X   ........  .........
Mr. LEWIS (GA).................  ........  ........  .........  Mr. JOHNSON......        X   ........  .........
Mr. NEAL.......................  ........        X   .........  Mr. ENGLISH......        X   ........  .........
Mr. McNULTY....................  ........  ........  .........  Mr. WELLER.......  ........  ........  .........
Mr. TANNER.....................  ........        X   .........  Mr. HULSHOF......        X   ........  .........
Mr. BECERRA....................  ........        X   .........  Mr. LEWIS (KY)...        X   ........  .........
Mr. DOGGETT....................  ........        X   .........  Mr. BRADY........        X   ........  .........
Mr. POMEROY....................  ........        X   .........  Mr. REYNOLDS.....        X   ........  .........
Mrs. TUBBS JONES...............  ........        X   .........  Mr. RYAN.........        X   ........  .........
Mr. THOMPSON...................  ........        X   .........  Mr. CANTOR.......        X   ........  .........
Mr. LARSON.....................  ........        X   .........  Mr. LINDER.......  ........  ........  .........
Mr. EMANUEL....................  ........        X   .........  Mr. NUNES........  ........  ........  .........
Mr. BLUMENAUER.................  ........        X   .........  Mr. TIBERI.......        X   ........  .........
Mr. KIND.......................  ........        X   .........  Mr. PORTER.......        X   ........  .........
Mr. PASCRELL...................  ........        X   .........
Ms. BERKLEY....................  ........        X   .........
Mr. CROWLEY....................  ........        X   .........
Mr. VAN HOLLEN.................  ........        X   .........
Mr. MEEK.......................  ........        X   .........
Ms. SCHWARTZ...................  ........        X   .........
Mr. DAVIS......................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL


               A. Committee Estimate of Budgetary Effects

    In compliance with clause 3(d)(2) of rule XIII of the Rules 
of the House of Representatives, the following statement is 
made concerning the effects on the budget of the revenue 
provisions of the bill, H.R. 3996, as reported.
    The bill is estimated to have the following effects on 
Federal budget receipts for fiscal years 2008-2017:


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

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

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, requiring a cost estimate 
prepared by the CBO, the following statement by CBO is 
provided:

                                     U.S. Congress,
                                Congressional Budget Office
                                  Washington, DC, November 6, 2007.
Hon. Charles B. Rangel,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office and the 
Joint Committee on Taxation (JCT) have reviewed the provisions 
of H.R. 3996, the Temporary Tax Relief Act of 2007, as ordered 
reported by the Committee on Ways and Means on November 1, 
2007. Among its provisions, the legislation would provide 
relief from the alternative minimum tax (AMT), extend various 
expiring provisions for one year, make changes to certain tax 
administration methods (including repealing the authority to 
contract with private debt collectors), and raise revenue 
related to the taxation of income from carried interest and 
deferred compensation. It also would shift some corporate 
income tax receipts from 2013 into 2012.
    CBO and JCT estimate that the bill would increase revenues 
by $3.1 billion over the 2008-2012 period and by $2.7 billion 
over the 2008-2017 period. (Those estimates include reductions 
in off-budget revenues of $8 million over the 2008-2009 
period.) CBO and JCT estimate that, under the bill, direct 
spending would increase by $2.7 billion over the 2008-2012 
period and by $2.3 billion over the 2008-2017 period. The 
estimated budgetary impact of H.R. 3996 is shown in the 
attached table.
    The provision with the largest effect on revenues would 
raise the exemption amounts for the AMT and extend the use of 
nonrefundable credits for one year, through 2007, which JCT 
estimates would reduce revenues by $50.6 billion in 2008. Also, 
a set of one-year extensions of expiring provisions, such as 
the research and experimentation tax credit, would reduce 
revenues by about $21.0 billion over the 2008-2017 period, JCT 
estimates. In addition, JCT estimates that reducing an income 
threshold for the refundable child credit would increase direct 
spending by $2.8 billion in 2009.
    Three provisions account for the bulk of increases in 
revenues estimated for ER 3996. First, the bill would delay 
until 2018 the application of rules enacted in 2004 that 
pertain to the worldwide allocation of interest expenses, which 
JCT estimates would increase revenues by $26.2 billion over the 
2008-2017 period. In addition, the bill would treat certain 
income of partners from performing investment management 
services (called ``carried interest'') as ordinary income for 
tax purposes, rather than as capital gains, which JCT estimates 
would increase revenues by $25.6 billion over the 2008-2017 
period. Also, H.R. 3996 would require that certain deferred 
compensation from nontaxable entities be included in current 
taxable income, which JCT estimates would increase revenues by 
$23.9 billion over the 10-year period.
    CBO and JCT have determined that the bill contains no 
intergovernmental mandates as defined in the Unfunded Mandates 
Reform Act (UMRA). CBO has determined that the nontax provision 
of the bill (section 506) contains no private-sector mandates. 
JCT has determined that the tax provisions of the bill contain 
four private-sector mandates: (1) limitations on the 
applicability of the exclusion of gains on the sale of a 
principal residence; (2) the requirement that income of 
partners for performing investment management services be 
treated as ordinary income; (3) the delay in implementation of 
worldwide allocation of interest expense until 2018; and (4) 
the requirement that brokers report customers' basis in 
securities transactions. Based on information provided by JCT, 
CBO) estimates that the aggregate cost of mandates in the bill 
would exceed the annual threshold established in UMRA for 
private-sector mandates ($131 million in 2007, adjusted 
annually for inflation).
    Because section 611(d)(4) of the bill relates to the Old-
Age, Survivors, and Disability Insurance program (OASDI) under 
title II of the Social Security Act, it is excluded from review 
under UMRA. Therefore, CBO has not reviewed it for 
intergovernmental or private-sector mandates.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact for this 
estimate is Zachary Epstein.
            Sincerely,
                                        Robert A. Sunshine,
                                   (For Peter R. Orszag, Director).
    Enclosure.

                    D. Macroeconomic Impact Analysis

    In compliance with clause 3(h)(2) of rule XIII of the Rules 
of the House of Representatives, the following statement is 
made by the Joint Committee on Taxation with respect to the 
provisions of the bill amending the Internal Revenue Code of 
1986: the effects of the bill on economic activity are so small 
as to be incalculable within the context of a model of the 
aggregate economy.

                             E. PAY-GO Rule

    In compliance with clause 10 of rule XXI of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of title X of the bill, 
H.R. 3996, as reported: the provisions of the bill affecting 
revenues have the net effect of not increasing the deficit or 
reducing the surplus for either: (1) the period comprising the 
current fiscal year and the five fiscal years beginning with 
the fiscal year that ends in the following calendar year; and 
(2) the period comprising the current fiscal year and the ten 
fiscal years beginning with the fiscal year that ends in the 
following calendar year.

                                             ESTIMATED CHANGES IN DIRECT SPENDING AND REVENUES UNDER H.R. 3996, THE TEMPORARY TAX RELIEF ACT OF 2007
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         By fiscal year, in millions of dollars--
                                                         ---------------------------------------------------------------------------------------------------------------------------------------
                                                              2008         2009        2010       2011       2012       2013       2014       2015       2016       2017    2008-2012  2008-2017
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       CHANGES IN REVENUES

Title I: Individual AMT Relief..........................      -52,000         -559       -169        -18         -8        -67        -13          8         15         22    -52,754    -52,788
Title III: One-Year Extenders...........................       -4,724       -7,481     -2,121     -1,624     -1,592     -1,216       -719       -599       -511       -442    -17,540    -21,035
Title VI: Revenue Provisions............................        4.731        6,978      8,396      8,260     47,447    -32,365      6,758      6,415     12-569      9,128     75,810     78,325
Titles II, IV, and V: Other Provisions..................         -368       -1,440       -290     -6,280      5,941        -55          7         81        270        357     -2,438     -1,776
Total Changes in Revenus................................      -52,362       -2,502      5,816        338     51,788    -33,694      6,033      5,905     12,343      9,065      3,079      2,727
    On-budget...........................................      -52,359       -2,497      5,816        338     51,788    -33,694      6,033      5,905     12,343      9,065      3,087      2,735
    Off-budget..........................................           -3           -5          0          0          0          0          0          0          0          0         -8         -8

                                                                                   CHANGES IN DIRECT SPENDING

Refundable Tax Credits:
    Estimated Budget Authority..........................           65        2,843          0          0          0          0          0          0          0          0      2,908      2,908
    Estimated Outlays...................................           65        2,843          0          0          0          0          0          0          0          0      2,908      2,908
IRS Contracting for Debt Collection:
    Estimated Budget Authority..........................          -12          -65        -68        -74        -74        -74        -74        -74        -74        -74       -293       -663
    Estimated Outlays...................................          -12          -65        -68        -74        -74        -74        -74        -74        -74        -74       -293       -663
Payment of Tax Receipts on Distilled Spirits:
    Estimated Budget Authority..........................           74           19          0          0          0          0          0          0          0          0         93         93
    Estimated Budget Outlays............................           74           19          0          0          0          0          0          0          0          0         93         93
Tax Return Information for the Department of Veterans
 Affairs:
    Estimated Budget Authority..........................            0           -1          0          0          0          0          0          0          0          0         -1         -1
    Estimated Budget Outlays............................            0           -1          0          0          0          0          0          0          0          0         -1         -1
Total Changes in Direct Spending:
    Estimated Budget Authority..........................          127        2,796        -68        -74        -74        -74        -74        -74        -74        -74      2,707      2,337
    Estimated Outlays:..................................          127        2,796        -68        -74        -74        -74        -74        -74        -74        -74      2,707      2,337

                                                                           NET CHANGE IN THE BUDGET DEFICIT OR SURPLUS

Net Change in the Deficit or Surplus\1\.................       52,489        5,298     -5,884       -412    -51,862     33,620     -6,107     -5,979    -12,417     -9,139       -372       -390
    On-budget...........................................       52,486        5,293     -5,884       -412    -51,862     33,620     -6,107     -5,979    -12,417     -9,139       -380       -398
    Off-budget..........................................            3            5          0          0          0          0          0          0          0          0          8          8
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\Negative numbers indicate decreases in deficits (or increases in surpluses); positive numbers indicate increases in deficits (or decreases in surpluses).
Notes.--Components may not add to totals because of rounding AMT--Alternative Minimum Tax. IRS--Internal Revenue Service.
Sources: Congressional Budget Office and Joint Committee on Taxation.

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


          A. Committee Oversight Findings and Recommendations

    With respect to clause 3(c)(1) of rule XIII of the Rules of 
the House of Representatives (relating to oversight findings), 
the Committee advises that it is appropriate and timely to 
enact the provisions of the bill as reported.

        B. Statement of General Performance Goals and Objectives

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

                 C. Constitutional Authority Statement

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

              D. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Act of 1995 (Pub. L. No. 104-4).
    The Committee has determined that the following tax 
provisions of the reported bill contain Federal private sector 
mandates within the meaning of Public Law No. 104-4, the 
Unfunded Mandates Reform Act of 1995: (1) denial of the 
exclusion of gain on sale of principal residence related to 
nonqualified use (sec. 404 of the bill); (2) income of partners 
for performing investment management services treated as 
ordinary income received for the performance of services (sec. 
611 of the bill); (3) delay in application of worldwide 
allocation of interest expense (sec. 621 of the bill); and (4) 
broker reporting of customer's basis in securities transactions 
(sec. 622 of the bill). The costs required to comply with each 
Federal private sector mandate generally are no greater than 
the aggregate estimated budget effects of the provision.
    The Committee has determined that the revenue provisions of 
the bill do not impose a Federal intergovernmental mandate on 
State, local, or tribal governments.

                E. Applicability of House Rule XXI 5(b)

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

                       F. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service 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 
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 amend the Code and that have ``widespread 
applicability'' to individuals or small businesses.

                        G. Limited Tax Benefits

    Pursuant to clause 9 of rule XXI of the Rules of the House 
of Representatives, the Ways and Means Committee has determined 
that the bill as reported contains no congressional earmarks, 
limited tax benefits, or limited tariff benefits within the 
meaning of that rule.

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

    Due to the complexity of the legislation, compliance with 
clause 3(e) of rule XIII of the Rules of the House of 
Representatives was not practical.

                            DISSENTING VIEWS

    Although we cannot support this bill, we wish to be clear 
up-front. We strongly support extension of the AMT patch and 
the provisions of current law extended in this bill. This 
Committee should protect the 19 million Americans who are at 
risk of paying the AMT this year. This Committee should extend 
business tax incentives important to this nation's economy.
    Unfortunately, at its core, this bill is not about the 
extenders. This bill is about the sad triumph of form over 
substance, as Paygo's full reach, warts and all, has been fully 
revealed for all to see.

                       Distorts the Aims of Paygo

    While there are valid reasons to apply the principles of 
Paygo to spending changes, we think the calculus is far 
different in the case of tax policy.
    As was amply documented during the mark-up, by assuming 
that federal revenues must continue to equal what the 
Congressional Budget Office shows to be the current law 
baseline, the Paygo system effectively locks-in tax increases. 
The Majority's budget assumes that the federal government will 
generate revenue from allowing the AMT to continue to plague 
taxpayers and from allowing the 2001 and 2003 tax cuts to 
sunset. These budget assumptions will have the effect of 
raising taxes on Americans by $3.5 trillion over the next 
decade. Paygo posits that the only question for Congress is 
whether we will let those tax increases take place or replace 
them with other tax hikes.
    It is true that under the current iteration of Paygo, tax 
cuts could be ``paid for'' by spending cuts, but we have seen 
no appetite of the current Majority for such a sensible 
approach. From small bills--like one providing a vote in 
Congress for the District of Columbia--to large ones--like the 
Farm bill--the Ways and Means Committee has become an ATM for 
other Committees, spitting out tax increases of whatever shape 
or size is deemed necessary to meet the new Majority's appetite 
for additional spending.
    That was bad enough, but at least those changes can be said 
to be consistent with the underlying rationale of Paygo--that 
new spending is being ``offset.''
    What Paygo has become, as embodied in this bill, would be 
comical were it not so tragic. Here, it is being invoked as a 
reason for Congress to raise taxes in order to prevent a tax 
increase.
    If Congress does not enact this legislation, Americans will 
pay about $70 billion more in taxes over the next decade than 
if we just extend current law--with respect to both the AMT and 
other expiring tax provisions--for another year. So to prevent 
that set of Americans from facing these higher taxes, this bill 
proposes to find some other set of Americans to shoulder the 
burden.
    And let us keep in mind that this bill imposes permanent 
tax increases to pay for temporary tax cuts. We expect to be 
back here again next year--one would hope before November 1--
struggling again to find another $70-plus billion dollars to 
``rent'' one more year of preventing tax increases while 
permanently increasing another set of taxes.
    Unfortunately, this is just a baby step. Under the next 
President, we could face tax increases in order to ``prevent'' 
a tax increase on families with children, tax increases on 
marriage, marginal tax rate increases, or tax increases on 
death. And that's before we are asked to enact other tax 
increases to pay for new tax incentives or new spending 
programs.
    Raising taxes to prevent a tax increase is circular 
reasoning at its worst and shows the danger of turning a 
campaign slogan into a procedural strait-jacket.
    The irony of all this is that the very basis of Paygo, the 
assumption that the stream of revenue bureaucrats predict will 
come in to the federal government should be maintained, is 
divorced from reality.
    According to estimates by the Congressional Budget Office 
and the Joint Tax Committee, federal revenues in fiscal year 
2007 totaled about 18.6% of our economy, well above the 
historical average of 18.2%.
    In dollar figures, the Joint Tax Committee estimates that 
over the next decade, revenues will exceed 18.2% of GDP every 
single year and will reach 20.1% in 2017, a level seen only 
once since at least 1962.
    We could have adopted the Ranking Members' amendment to 
strike the offsets in the extenders section of the bill and 
still been assured that the bill would represent little more 
than a speed bump to federal revenues on their rapid climb to 
what Mr. Ryan pointed out would be never-before-seen levels by 
the middle of this century.
    But, having elevated legislative process over substance, 
the Majority rejected that approach.
    It is likely the House will soon pass this bill, but what 
happens next is anyone's guess. As the Chairman knows, the 
Senate has given us strong signals that they intend to reject 
offsets to pay for an extenders bill. Nine of the ten 
Republicans on the Finance Committee sent a letter to Chairman 
Baucus expressing their support for passing a bill patching the 
AMT and extending other provisions that expire this year 
without offsets. The Chairman of the Finance Committee has 
given signals that he does not believe he can get the votes 
needed to pass a fully offset extenders package.
    But even if the Senate were going to pass the bill we are 
marking up today, the Administration has indicated the 
President doesn't support it. That suggests we will spend more 
days debating this issue, even as the continued delay in 
passing an AMT patch will increase the havoc of the 2007 tax 
filing season.
    Two days before the mark-up, the Chairman and the Ranking 
Member, joined by their counterparts on the Senate Finance 
Committee, signed a letter to the Acting Commissioner of the 
IRS pledging to pass an AMT patch ``in a form mutually 
agreeable to the Congress and the President before the end of 
the year.''
    We would be thrilled if such a simple solution actually 
addressed the problem, but the letter back the following day 
from the Acting Commissioner of the IRS, Linda Stiff, made 
clear it would not. In her letter, she indicated that ``key 
systems can only accommodate one programming option without 
introducing excessive risk. . . . Therefore, until the 
legislation is passed and signed into law, our systems cannot 
be fully programmed for the proposed AMT patch. . . . Even with 
the planning and design that your letter facilitates, we still 
estimate a timeframe of approximately 10 weeks after enactment 
before we can process affected tax returns . . . .''
    Given the opposition of the Administration to this 
proposal; the clear indication from the IRS that they cannot 
address this without legislation; and the strong signals the 
Senate is sending about its unwillingness to take this up, we 
wish the Majority would heed the advice of the letter the 
Chairman signed last Tuesday and work toward passing a product 
that we know has a chance to get to the White House and be 
signed by the President as soon as possible.
    We have few legislative days left this year and are playing 
an expensive game of chicken with the American taxpayers who 
are facing the prospect of a massive tax increase from our 
inaction on the AMT.
    As the Secretary of the Treasury warned us last week, 
``enactment of a patch in mid-to-late December could delay 
issuance of approximately $75 billion in refunds to taxpayers 
who are likely to file their returns before March 31, 2008.'' 
That would be on top of the confusion it will cause taxpayers 
and the added costs the federal government will pay to print 
new forms and provide assistance to perplexed taxpayers.
    Simply put, we should stop this charade and recognize that 
we need to promptly pass a patch and extenders package that the 
Senate can pass and that the President can sign. Sadly, such a 
measure was rejected, and the cost of delay and inaction on the 
AMT patch will continue to mount.

           Failed To Accommodate Other Reasonable Amendments

    We are also disappointed that the majority chose to reject 
a number of reasonable amendments that we believe would have 
significantly improved the bill.
    An amendment offered by Mr. Hulshof would have struck the 
expansion of the provision which allows state legislators a per 
diem deduction that, we were informed, might allow some state 
legislators to claim tens of thousands of dollars in deductions 
for long stretches of time, including weekends, that their 
Chamber is largely dormant, meeting only in pro forma session a 
couple of times a week.
    This provision blocks the way for the Treasury Department 
to complete its regulatory guidance on this issue, and we were 
disappointed by rejection of the amendment.
    Another amendment offered by Mr. English would have 
repealed the AMT in 2018. Despite all the Congressional blather 
about the inequity of the AMT, this too was voted down. We are 
aware that the Chairman intends to repeal the AMT before 2018 
and we would support efforts to do so that aren't predicated on 
massive tax hikes. Yet that endeavor faces a number of 
significant challenges and it is far from certain that it will 
ultimately succeed. The aims of the Chairman and the English 
amendment are not mutually exclusive; rather they are 
complementary.
    Some suggested this amendment was simply an accounting 
gimmick, exploiting the scoring rules Congress has imposed upon 
itself. To this, we suggest that one need look no further than 
Paygo itself to see the greatest manipulation of self-imposed 
accounting rules to achieve a predetermined outcome. Indeed, 
this Amendment is far more sensible than the tortured logic of 
raising taxes to prevent a tax increase.
    Finally, Mr. Brady offered an amendment that would have 
allowed real estate transactions to continue to receive capital 
gains treatment on ``carried interest'' arrangements. Much has 
been said and written about the unfairness of hedge funds and 
private equity firms receiving capital gains treatment on their 
carried interest arrangements. We disagree with that assertion 
but the Brady Amendment was not an attempt to litigate that 
issue.
    Instead, it was an attempt to prevent this far-reaching 
change in partnership law from having such a broad reach that 
it interfered with transactions that are much more Main Street 
than Wall Street. Over the years we have learned that as goes 
real estate, so goes the rest of the economy. We should not 
compound the current struggles of the real estate sector with a 
tax hike that strikes many as more about class warfare than tax 
reform.
    Mr. Brady also sought to prevent another tax increase that 
could further weaken the real estate sector. To offset the cost 
of a provision giving relief for homeowners facing a tax burden 
from having all or part of the mortgage on their primary home 
forgiven, the bill reduces the amount of capital gains a 
homeowner could exclude from the sale of a second home. We are 
concerned this may discourage such investments. Mr. Brady's 
amendment offered a better way to pay for the mortgage relief 
without weakening the real estate investment market and would 
have improved the bill. We were disappointed by its defeat.

              Relitigates Private Collection Agency Issue

    This bill also relitigates the private collection agency 
(PCAs) issue. By using PCAs, the IRS is collecting tax 
liabilities that would otherwise go uncollected. This would be 
true even if the IRS had a greater enforcement budget. This 
program actually contributes to closing the tax gap. But the 
Democrats wish to end this program and ignore the revenue it 
produces by allowing tax liabilities to go unpaid.
    These are tax liabilities which are not in dispute. The 
taxpayer simply chose not to pay, even after the IRS sent 
multiple notices reminding the affected taxpayers of their 
unpaid obligation. The Majority is willing to raise taxes to 
pay for killing this tax gap closing program. We think there is 
a better way to cut taxes for hard-working Americans than to 
let tax deadbeats off the hook for their legitimate and legal 
tax obligations.

                               Conclusion

    As we have noted, this bill seems doomed to hit a brick 
wall, likely in the Senate, sending it back here for a new 
start. We wish the Majority would recognize that reality and 
begin the process now rather than waiting for the inevitable, 
which will only put the IRS further behind schedule in 
administering the 2007 tax filing season.
    The confusion and anger that inaction will cause will be 
easy to measure but difficult to solve.

                                   Jim McCrery.
                                   Wally Herger.
                                   Dave Camp.
                                   Jim Ramstad.
                                   Sam Johnson.
                                   Phil English.
                                   Jerry Weller.
                                   Kenny Hulshof.
                                   Ron Lewis.
                                   Kevin Brady.
                                   Paul Ryan.
                                   Eric Cantor.
                                   John Linder.
                                   Devin Nunes.
                                   Pat Tiberi.
                                   Jon Porter.

                                  
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