[Senate Report 110-228]
[From the U.S. Government Publishing Office]





                                                       Calendar No. 482
110th Congress                                                   Report
                                 SENATE
 1st Session                                                    110-228

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



 
     AMERICAN INFRASTRUCTURE INVESTMENT AND IMPROVEMENT ACT OF 2007

                                _______
                                

               November 13, 2007.--Ordered to be printed

                                _______
                                

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

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                         [To accompany S. 2345]

    The Committee on Finance, having considered an original 
bill, S. 2345, to amend the Internal Revenue Code of 1986 and 
to extend the financing for the Airport and Airway Trust Fund, 
and for other purposes, having considered the same, reports 
favorably thereon and recommends that the bill do pass.

                                CONTENTS

                                                                   Page
  I. LEGISLATIVE BACKGROUND...........................................2
 II. EXPLANATION OF THE BILL..........................................3
     TITLE I--AIRPORT AND AIRWAY TRUST FUND EXTENSION.................3
          A. Extension of Airport and Airway Trust Fund Tax and 
              Expenditure Provisions (secs. 101 and 102 of the 
              bill and secs. 4081, 4261, 4271, and 9502 of the 
              Code)..............................................     3
          B. Modification of Excise Tax on Kerosene for Use in 
              Aviation (sec. 103 of the bill and secs. 4081, 
              4082, 6427, 9502, and 9503 of the Code)............     8
          C. Use of International Travel Facilities Tax (sec. 104 
              of the bill and sec. 4261 of the Code).............    12
          D. Air Traffic Control System Modernization Sub-Account 
              (sec. 105 of the bill and sec. 9502 of the Code)...    13
          E. Treatment of Fractional Aircraft Ownership Programs 
              (sec. 106 of the bill and sec. 4083 and new sec. 
              4266 of the Code)..................................    14
          F. Repeal Exemption for Small Aircraft Operating on 
              Nonestablished Lines (sec. 107 of the bill and sec. 
              4281 of the Code)..................................    15
          G. Transparency in Passenger Tax Disclosures (sec. 108 
              of the bill and sec. 7275 of the Code).............    16
          H. Modification of Pension Funding Rules of Certain 
              Eligible Plans (sec. 109 of the bill and sec. 402 
              of the Pension Protection Act of 2006).............    16
     TITLE II--INCREASED FUNDING FOR THE HIGHWAY TRUST FUND..........19
          A. Replenish Emergency Spending From the Highway Trust 
              Fund (sec. 201 of the bill and sec. 9503 of the 
              Code)..............................................    19
          B. Suspension of Transfers from Highway Trust Fund for 
              Certain Repayments and Credit (sec. 202 of the bill 
              and sec. 9503(c)(2) of the Code)...................    20
          C. Impose Excise Tax on Certain Removals of Taxable 
              Fuel from Foreign Trade Zones (sec. 203 of the bill 
              and secs. 4081 and 4083 of the Code)...............    20
          D. Clarification of Penalty for Sale of Fuel Failing to 
              Meet EPA Regulations (sec. 204 of the bill and sec. 
              6720A of the Code).................................    23
          E. Treatment of Qualified Alcohol Fuel Mixtures and 
              Qualified Biodiesel Fuel Mixtures as Taxable Fuel 
              (sec. 205 of the bill and sec. 4083 of the Code)...    24
          F. Excluding Volume of Denaturants from the Alcohol 
              Fuels Credit (sec. 206 of the bill and sec. 40 of 
              the Code)..........................................    26
          G. Bulk Transfer Exception Not to Apply to Finished 
              Gasoline (sec. 207 of the bill and sec. 4081 of the 
              Code)..............................................    26
          H. Oil Spill Liability Trust Fund Tax (sec. 208 of the 
              bill and sec. 4611 of the Code)....................    27
          I. Tax Treatment of Certain Inverted Corporate Entities 
              (sec. 209 of the bill and sec. 7874 of the Code)...    28
          J. Denial of Deduction for Punitive Damages (sec. 210 
              of the bill and sec. 162(g) of the Code)...........    33
          K. Fuel Technical Corrections (sec. 211 of the bill)...    34
          L. Motor Fuel Tax Enforcement Advisory Commission (sec. 
              212 of the bill)...................................    37
          M. Conform Highway Trust Fund provisions in the Code to 
              include Public Law No. 110-56 (sec. 213 of the bill 
              and section 9503 of the Code)......................    38
     TITLE III--ADDITIONAL INFRASTRUCTURE MODIFICATIONS AND REVENUE 
     PROVISIONS......................................................39
          A. Restructure New York Liberty Zone Tax Incentives 
              (sec. 301 of the bill and secs. 1400K and 1400L of 
              the Code)..........................................    39
          B. Option to Treat Elective Deferrals as After-Tax 
              Contributions (sec. 302 of the bill)...............    45
          C. Increase in Information Return Penalties (sec. 303 
              of the bill and secs. 6721, 6722, and 6723 of the 
              Code)..............................................    47
          D. Exemption of Certain Commercial Cargo from Harbor 
              Maintenance Tax (sec. 304 of the bill and sec. 4462 
              of the Code).......................................    48
          E. Tax Exempt and Tax Credit Bonds for Rail 
              Infrastructure (sec. 305 of the bill and new sec. 
              54A of the Code)...................................    49
          F. Repeal of Suspension of Interest and Penalties Where 
              Internal Revenue Service Fails to Contact Taxpayer 
              (sec. 306 of the bill and sec. 6404(g) of the Code)    56
          G. Denial of Deduction for Certain Fines, Penalties, 
              and Other Amounts (sec. 307 of the bill and sec. 
              162(f) and new sec. 6050W of the Code).............    57
          H. Revision of Tax Rules on Expatriation of Individuals 
              (sec. 308 of the bill and new secs. 877A and 2801 
              of the Code).......................................    61
III. BUDGET EFFECTS OF THE BILL......................................71
 IV. VOTES OF THE COMMITTEE..........................................78
  V. REGULATORY IMPACT AND OTHER MATTERS.............................78
 VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........79
VII. ADDITIONAL VIEWS................................................80
VIII.STATEMENT REGARDING SENATE RULE XLIV............................81


                       I. LEGISLATIVE BACKGROUND

    The taxes dedicated to the Airport and Airway Trust Fund 
generally do not apply after September 30, 2007. The Airport 
and Airway Trust Fund expenditure authority also terminates on 
October 1, 2007.\1\ On July 12, 2007, and July 19, 2007, the 
Committee on Finance held hearings on aviation taxes. The 
Committee heard from a variety of witnesses regarding the 
financing for the Airport and Airway Trust Fund, including 
representatives from industry and government. With respect to 
the Highway Trust Fund, the Committee has been advised that a 
shortfall of $4.3 billion is forecast for fiscal year 2009.
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    \1\This report does not reflect the subsequent extension of the 
taxes and expenditure authority through November 16, 2007, as provided 
by sec. 149 of Pub. L. No. 110-92.
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    The Senate Committee on Finance marked up an original bill, 
S. 2345 (the ``American Infrastructure Investment and 
Improvement Act of 2007'') on September 21, 2007, and, with a 
majority and quorum present, ordered the bill favorably 
reported, with an amendment on that date. This report describes 
the provisions of the bill.

                      II. EXPLANATION OF THE BILL


            TITLE I--AIRPORT AND AIRWAY TRUST FUND EXTENSION


   A. Extension of Airport and Airway Trust Fund Tax and Expenditure 
                               Provisions


(Secs. 101 and 102 of the bill and secs. 4081, 4261, 4271, and 9502 of 
        the Code)

                              PRESENT LAW

Taxes on transportation of persons by air

    The Code imposes an excise tax on both domestic and certain 
international transportation of passengers by air. The AATF is 
credited with amounts equivalent to these taxes. The taxes do 
not apply after September 30, 2007.\2\
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    \2\Sec. 4261(j)(1)(A)(ii). The person making the payment (generally 
the passenger) is liable for the tax; airlines and others receiving 
payments are liable for remitting tax and are primarily liable if they 
fail to collect the tax. Secs. 4261(d) and 4263(c).
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            Domestic air passenger excise tax
    Domestic air passenger transportation generally is subject 
to a two-part excise tax. The first component is an ad valorem 
tax imposed at the rate of 7.5 percent of the amount paid for 
the taxable transportation. The second component is a domestic 
segment tax. For 2007, the domestic segment tax rate is 
$3.40.\3\ A domestic segment is defined as taxable 
transportation involving a single take-off and a single 
landing. For example, travel from New York to San Francisco, 
with an intermediate stop in Chicago, consists of two segments 
(without regard to whether the passenger changes aircraft in 
Chicago).
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    \3\Sec. 4261(b)(1) and 4261(d)(4). The Code provides for a $3 tax 
indexed annually for inflation, effective each January 1, resulting in 
the current rate of $3.40.
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    The domestic segment component of the tax does not apply to 
segments to or from qualified ``rural airports.'' For any 
calendar year, a rural airport is defined as an airport that in 
the second preceding calendar year had fewer than 100,000 
commercial passenger departures and meets one of the following 
three additional requirements: (1) the airport is not located 
within 75 miles of another airport that had more than 100,000 
such departures in that year, (2) the airport is receiving 
payments under the Federal ``essential air service'' program, 
or (3) the airport is not connected by paved roads to another 
airport.\4\
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    \4\In the case of an airport qualifying as ``rural'' because it is 
not connected by paved roads to another airport, only departures for 
flight segments of 100 miles or more are considered in calculating 
whether the airport has fewer than 100,000 commercial passenger 
departures. The Department of Transportation has published a list of 
airports that meet the definition of rural airports. See Rev. Proc. 
2005-45.
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    The domestic air passenger excise tax applies to ``taxable 
transportation.'' Taxable transportation means transportation 
by air that begins in the United States or in the portion of 
Canada or Mexico that is not more than 225 miles from the 
nearest point in the continental United States and ends in the 
United States or in such 225-mile zone. If the domestic 
transportation is paid for outside of the United States, it is 
taxable only if it begins and ends in the United States.
    For purposes of the domestic air passenger excise tax, 
taxable transportation does not include ``uninterrupted 
international air transportation.'' Uninterrupted international 
air transportation is any transportation that does not both 
begin and end in the United States or in the 225-mile zone and 
does not have a layover time of more than 12 hours. The tax on 
international air passenger transportation is discussed below.
            Use of international travel facilities
    For 2007, international air passenger transportation is 
subject to a tax of $15.10 per arrival or departure in lieu of 
the taxes imposed on domestic air passenger transportation if 
the transportation begins or ends in the United States.\5\ The 
definition of international transportation includes certain 
purely domestic transportation that is associated with an 
international journey. Under these rules, a passenger traveling 
on separate domestic segments integral to international travel 
is exempt from the domestic passenger taxes on those segments 
if the stopover time at any point within the United States does 
not exceed 12 hours.
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    \5\Secs. 4261(c) and 4261(d)(4). The international travel 
facilities tax rate of $12 is indexed annually for inflation, effective 
each January 1, resulting in the current rate of $15.10.
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    In the case of a domestic segment beginning or ending in 
Alaska or Hawaii, the tax applies to departures only and is 
$7.50 for calendar year 2007.
            ``Free'' travel
    Both the domestic air passenger tax and the use of 
international travel facilities tax apply only to 
transportation for which an amount is paid. Thus, free travel, 
such as that awarded in ``frequent flyer'' programs and 
nonrevenue travel by airline industry employees, is not subject 
to tax. However, amounts paid to air carriers (in cash or in 
kind) for the right to award free or reduced-fare 
transportation are treated as amounts paid for taxable air 
transportation and are subject to the 7.5 percent ad valorem 
tax (but not the flight segment tax or the use of international 
travel facilities tax). Examples of such payments are purchases 
of miles by credit card companies and affiliates (including 
airline affiliates) for use as ``rewards'' to cardholders.
            Disclosure of air passenger transportation taxes on tickets 
                    and in advertising
    Transportation providers are subject to special penalties 
if they do not separately disclose the amount of the passenger 
taxes on tickets and in advertising. Failure to satisfy these 
disclosure requirements is a misdemeanor, upon conviction of 
which the guilty party is fined not more than $100 per 
violation.\6\
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    \6\Sec. 7275.
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Tax on transportation of property (cargo) by air

    The AATF is credited with amounts equivalent to the taxes 
received from the transportation of property by air. Domestic 
air cargo transportation is subject to a 6.25 percent ad 
valorem excise tax on the amount paid for the 
transportation.\7\ The tax applies only to transportation that 
both begins and ends in the United States. Unlike the air 
passenger taxes, only shippers (the persons paying for the 
transportation) are liable for payment of the air cargo tax. 
There is no disclosure requirement for the air cargo tax. This 
tax does not apply after September 30, 2007.\8\
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    \7\Sec. 4271.
    \8\Sec. 4271(d).
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Aviation fuel taxes

    The Code imposes excise taxes on gasoline used in 
commercial aviation and noncommercial aviation, and on jet fuel 
(kerosene) and other aviation fuels used in commercial aviation 
and noncommercial aviation. Amounts equivalent to these taxes 
are credited to the AATF. With the exception of 4.4 cents per 
gallon, the fuel taxes will not apply after September 30, 2007. 
Table 1 below summarizes the taxes on fuel used in aviation:

                TABLE 1.--TAXES ON FUEL USED IN AVIATION
------------------------------------------------------------------------
                                                 Tax rate (including 0.1
                                                     cent for Leaking
                   Fuel type                       Underground Storage
                                                   Tank Trust Fund Tax)
                                                    (cents per gallon)
------------------------------------------------------------------------
Jet fuel and liquids other than aviation
 gasoline
    Commercial aviation........................                      4.4
    Noncommercial aviation.....................                     21.9
    Exempt use.................................                      0.1
Aviation gasoline
    Commercial.................................                      4.4
    Noncommercial..............................                     19.4
    Exempt use.................................                      0.1
------------------------------------------------------------------------

Trust Fund expenditure provisions

            In general
    The AATF was created in 1970 to finance a major portion of 
the Federal expenditures on national aviation programs. Prior 
to that time, these expenditures had been financed with General 
Fund monies. The statutory provisions relating to the AATF were 
placed in the Code in 1982.\9\
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    \9\Sec. 9502.
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    Expenditures from the fund support the Federal Aviation 
Administration (``FAA'') and the majority of the FAA's programs 
and activities. The FAA budget has four major components: (1) 
operations and maintenance; (2) facilities and equipment; (3) 
research, engineering, and development; and (4) the airport 
improvement program.\10\ Operations and maintenance are the 
only segments of the FAA budget that are funded by both a trust 
fund contribution and a General Fund contribution.\11\ The 
remaining three items receive all their funding from the AATF.
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    \10\Congressional Research Service, Aviation Taxes and the Airport 
and Airway Trust Fund, CRS Report 97-657E at CRS-2 (1997). The airport 
improvement program is only for airports in the National Plan of 
Integrated Airport Systems.
    \11\Id.
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    The current expenditure purposes for the AATF are:
    1. obligations incurred under provisions of previous 
aviation authorizing legislation enacted since 1970, as those 
provisions were in effect on the date of enactment of the 
Vision 100-Century of Aviation Reauthorization Act (December 
12, 2003);\12\
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    \12\The Acts (or provisions of Acts) pursuant to which aviation 
trust fund expenditures are allowed are Title I of the Airport and 
Airway Development Act of 1970; the Airport and Airway Development Act 
Amendments of 1976; the Aviation Safety and Noise Abatement Act of 
1979; the Fiscal Year 1981 Airport Development Authorization Act; the 
provisions of the Airport and Airway Improvement Act of 1982; the 
Airport and Airway Safety and Capacity Expansion Act of 1987; the 
Federal Aviation Administration Research, Engineering, and Development 
Authorization Act of 1990; the Aviation Safety and Capacity Expansion 
Act of 1990; the Airport and Airway Safety, Capacity, Noise 
Improvement, and Intermodal Transportation Act of 1992; the Airport 
Improvement Program Temporary Extension Act of 1994; Federal Aviation 
Administration Authorization Act of 1994; Federal Aviation 
Reauthorization Act of 1996; the provisions of the Omnibus Consolidated 
and Emergency Supplemental Appropriations Act, 1999 providing for 
payments from the Airport and Airway Trust Fund; the Interim Federal 
Aviation Administration Authorization Act; section 6002 of the 1999 
Emergency Supplemental Appropriations Act; Public Law 106-59; the 
Wendell H. Ford Aviation Investment and Reform Act for the 21st 
Century; the Aviation and Transportation Security Act; and the Vision 
100--Century of Aviation Reauthorization Act.
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    2. obligations incurred under part A of subtitle VII of 
Title 49, United States Code (generally, FAA programmatic 
provisions), which are attributable to planning, research and 
development, construction, or operation and maintenance of--
          a. air traffic control,
          b. air navigation,
          c. communications, or
          d. supporting services for the airway system; and
    3. obligations incurred for administrative expenses of the 
Department of Transportation that are attributable to 
activities described in items (1) and (2).
    No expenditures are permitted to be made from the AATF 
after September 30, 2007. Because the purposes for which AATF 
funds are permitted to be expended are fixed as of the date of 
enactment of the Vision 100--Century of Aviation 
Reauthorization Act (December 12, 2003), the Code must be 
amended in order to accommodate new purposes. In addition, the 
Code contains a special enforcement provision to prevent 
expenditure of AATF monies for purposes not authorized in 
section 9502.\13\ This provision provides that, should such 
unapproved expenditures occur, no further excise tax receipts 
will be transferred to the AATF. Rather, the taxes will 
continue to be imposed but the receipts will be retained in the 
General Fund. This enforcement provision provides specifically 
that it applies not only to unauthorized expenditures under the 
current Code provisions, but also to expenditures pursuant to 
future legislation that may provide for them unless the 
legislation providing for the expenditure either amends section 
9502's expenditure authorization provisions or otherwise 
authorizes the expenditure as part of a revenue Act.
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    \13\Sec. 9502(f)(1).
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            Specific AATF expenditure programs
    Authorized expenditures for the following airport and 
airway programs are included under the general purposes 
described above.
    1. Airport Improvement Program (AIP).--
    a. Airport planning.--Planning for airport systems for 
airport master plans; also, airport noise compatibility 
planning for air carrier airports eligible for terminal 
development costs.
    b. Airport construction.--Construction, improvement, or 
repair of a public airport (includes removal of airport hazards 
and construction of physical barriers and landscaping to 
diminish noise).\14\
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    \14\Airport construction is usually limited to construction or 
improvements related to aircraft operations, such as runways, taxiways, 
etc.
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    c. Airport terminal facilities.--Non-revenue-producing 
public-use areas that are directly related to movement of 
passengers and baggage at certified air carrier airports; also, 
development of revenue-producing areas and construction of non- 
revenue-producing parking lots for nonhub airports (subject to 
certification that the grant will not defer needed development 
with respect to safety, security, or capacity).
    d. Land acquisition.--Includes land or property interests 
for airport noise control purposes; also includes acquisition 
of land for, or work necessary to construct, pads suitable for 
aircraft deicing (subject to certain limitations).
    e. Airport-related equipment.--Airport security equipment 
required by Department of Transportation regulations, snow 
removal equipment, noise suppressing equipment, firefighting 
equipment, navigation aids, and safety equipment required for 
airport certification; also includes construction or purchase 
of capital equipment necessary for compliance by an airport 
with the Americans with Disabilities Act, the Clean Air Act, or 
the Federal Water Pollution Control Act, other than capital 
equipment that would primarily benefit a revenue-producing area 
of the airport used by a nonaeronautical business.
    f. Airport noise compatibility programs.--Includes sound-
proofing of public buildings; local governmental units are 
eligible for project grants as well as airports.
    2. Facilities and Equipment Program (F&E).--Costs of 
acquiring, establishing, and improving air navigation 
facilities.
    3. Research, Engineering, Development, and Demonstration 
Program (R&D).--Projects in connection with FAA research and 
development activities.
    4. Operations and Maintenance Programs (O&M).--Operations 
and maintenance of air navigation facilities, including air 
traffic control and flight checks; services provided under 
international agreements relating to the U.S. share of joint 
provision of air navigation services; weather reporting 
services provided to the FAA by the National Oceanic and 
Atmospheric Administration.
    5. Small Community Air Service Development Pilot Program.--
Payments to ensure that eligible localities receiving airline 
service at the time of deregulation continue to have airline 
service.
    6. Vocational Technical Institutions.--Grants to up to four 
vocational technical institutions for the acquisition of 
facilities for the advanced training of maintenance technicians 
for air carrier aircraft.
    7. Airway Science Curriculum Grants.--Grants for higher 
education airway science study programs, including equipment, 
buildings, and associated facilities.
    8. Civil Aircraft Security Research and Development.--
Grants relating to technologies and procedures to counteract 
terrorist activities against civil aviation.

                           REASONS FOR CHANGE

    To ensure a stable and uninterrupted funding source, the 
Committee believes it is appropriate to further extend the 
taxes that finance the AATF.

                        EXPLANATION OF PROVISION

    The provision extends the taxes imposed on the 
transportation of persons by air and on the transportation of 
property by air through September 30, 2011. The provision 
extends the taxes imposed on aviation fuels through September 
30, 2011. The provision extends the expenditure authority for 
the AATF through September 30, 2011, and conforms the purposes 
for which AATF funds are permitted to be expended to include 
those obligations authorized by the reauthorization bill.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

     B. Modification of Excise Tax on Kerosene for Use in Aviation


(Sec. 103 of the bill and secs. 4081, 4082, 6427, 9502, and 9503 of the 
        Code)

                              PRESENT LAW

In general

    Under section 4081, an excise tax is imposed upon (1) the 
removal of any taxable fuel from a refinery or terminal,\15\ 
(2) the entry of any taxable fuel into the United States, or 
(3) the sale of any taxable fuel to any person who is not 
registered with the IRS to receive untaxed fuel, unless there 
was a prior taxable removal or entry.\16\ The tax does not 
apply to any removal or entry of taxable fuel transferred in 
bulk by pipeline or vessel to a terminal or refinery if the 
person removing or entering the taxable fuel, the operator of 
such pipeline or vessel (excluding deep draft vessels), and the 
operator of such terminal or refinery are registered with the 
Secretary.\17\ If the bulk transfer exception applies, tax is 
not imposed until the fuel ``breaks bulk,'' i.e., when it is 
removed from the terminal, typically by rail car or truck, for 
delivery to a smaller wholesale facility or retail outlet, or 
removed directly from the terminal into the fuel tank of an 
aircraft.\18\
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    \15\A ``terminal'' is a taxable fuel storage and distribution 
facility that is supplied by pipeline or vessel and from which taxable 
fuel may be removed at a rack. A ``rack'' is a mechanism capable of 
delivering taxable fuel into a means of transport other than a pipeline 
or vessel. A terminal can be located at an airport, or fuel may be 
delivered to the airport from a terminal located off the airport 
grounds.
    \16\Sec. 4081(a)(1).
    \17\Sec. 4081(a)(1)(B).
    \18\In general, the party liable for payment of the taxes when the 
fuel breaks bulk at the terminal is the ``position holder,'' the person 
shown on the records of the terminal facility as holding the inventory 
position in the fuel. However, when fuel is removed directly into the 
fuel tank of an aircraft for use in commercial aviation, the person who 
uses the fuel is liable for the tax. The fuel is treated as used when 
such fuel is removed into the fuel tank. Sec. 4081(a)(4).
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    The term ``taxable fuel'' means gasoline, diesel fuel 
(including any liquid, other than gasoline, that is suitable 
for use as a fuel in a diesel-powered highway vehicle or 
train), and kerosene.\19\ The term includes kerosene used in 
aviation (jet fuel) as well as aviation gasoline.
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    \19\Sec. 4083(a).
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    Section 4041(c) provides a back-up tax for liquids (other 
than aviation gasoline) that are sold for use as a fuel in 
aircraft and that have not been previously taxed under section 
4081.\20\
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    \20\Sec. 4041(c).
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Kerosene for use in aviation

            In general
    Present law generally imposes a tax of 24.4 cents per 
gallon on kerosene. However, reduced rates apply for kerosene 
removed directly from a terminal into the fuel tank of an 
aircraft.\21\ For kerosene removed directly from a terminal 
into the fuel tank of an aircraft for use in commercial 
aviation, the tax rate is 4.4 cents per gallon.\22\ For 
kerosene removed directly from a terminal into the fuel tank of 
an aircraft for use in noncommercial aviation, the tax rate is 
21.9 cents per gallon. All of these tax rates include a 0.1 
cent per gallon component for the Leaking Underground Storage 
Tank Trust Fund. For kerosene removed directly from a terminal 
into the fuel tank of an aircraft for an exempt use (such as 
foreign trade or for the exclusive use of a State or local 
government), only the Leaking Underground Storage Tank Trust 
Fund tax of 0.1 cent per gallon applies.
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    \21\If certain conditions are met, present law permits the removal 
of kerosene from a refueler truck, tanker, or tank wagon to be treated 
as a removal from a terminal for purposes of determining whether 
kerosene is removed directly into the fuel tank of an aircraft. A 
refueler truck, tanker, or tank wagon is treated as part of a terminal 
if: (1) the terminal is located within an airport, (2) any kerosene 
that is loaded in such truck, tanker, or wagon at such terminal is for 
delivery only into aircraft at the airport in which such terminal is 
located, and (3) no vehicle licensed for highway use is loaded with 
kerosene at such terminal, except in exigent circumstances identified 
by the Secretary in regulations. In order to qualify for the special 
rule, a refueler truck, tanker, or tank wagon must: (1) have storage 
tanks, hose, and coupling equipment designed and used for the purposes 
of fueling aircraft; (2) not be registered for highway use; and (3) be 
operated by the terminal operator (who operates the terminal rack from 
which the fuel is unloaded) or by a person that makes a daily 
accounting to such terminal operator of each delivery of fuel from such 
truck, tanker, or tank wagon. Sec. 4081(a)(3).
    \22\Tax is imposed at this rate if the commercial aircraft operator 
is registered with the IRS. Tax is imposed on fuel removed directly 
into the fuel tank of an aircraft by a qualified refueler truck at this 
rate if the fuel terminal is located within a secured area of an 
airport. The IRS has published a list of airports with secured areas in 
which a terminal is located. See Notice 2005-4, 2005-1 C.B. 289, at 
sec. 4(d)(2)(ii) (2005) (adopting the list from H.R. Conf. Rep. No. 
755, 108th Cong., 2d Sess. 692 n.718 (2004) with modifications) and 
Notice 2005-80, 2005-2 C.B. 953, at sec. 3(c)(2) (2005). If the fuel 
terminal is located at an airport that is not on the list of secured 
airports, the fuel is taxed at 21.9 cents per gallon if the fuel is 
removed directly from the terminal into the fuel tank of an aircraft by 
a qualified refueler truck.
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    ``Commercial aviation'' generally means any use of an 
aircraft in the business of transporting by air persons or 
property for compensation or hire.\23\ Commercial aviation does 
not include transportation exempt from the ticket taxes and air 
cargo taxes by reason of sections 4281 or 4282 or by reason of 
section 4261(h) or 4261(i). Thus, small aircraft operating on 
nonestablished lines (sec. 4281), air transportation for 
affiliated group members (sec. 4282), air transportation for 
skydiving (sec. 4261(h)), and certain air transportation by 
seaplane (sec. 4261(i)) are excluded from the definition of 
commercial aviation, and accordingly are subject to the tax 
regime applicable to noncommercial aviation.
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    \23\Sec. 4083(b).
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            Refunds and credits to obtain the appropriate aviation tax 
                    rate
    If the kerosene is not removed directly into the fuel tank 
of an aircraft, the fuel is taxed at the rate of 24.4 cents per 
gallon. (This is generally the rate applied to diesel fuel and 
kerosene used in highway vehicles). A claim for credit or 
payment may be made for the difference between the tax paid and 
the appropriate aviation rate (21.9 cents per gallon for 
noncommercial aviation, 4.4 cents per gallon for commercial 
aviation, and 0.1 cent per gallon for an exempt use).\24\
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    \24\Sec. 6427(l)(4).
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    For noncommercial aviation, other than for an exempt use, 
only the registered ultimate vendor may make the claim for the 
2.5-cents-per-gallon difference between the 24.4 cents per 
gallon rate and the noncommercial aviation rate of 21.9 cents 
per gallon.\25\ For commercial aviation and exempt use (other 
than State and local government use), the ultimate purchaser 
may make a claim for the difference in tax rates, or the 
ultimate purchaser may waive the right to make the claim for 
payment to the ultimate vendor.\26\ For State and local 
government use, the registered ultimate vendor is the proper 
claimant.\27\
---------------------------------------------------------------------------
    \25\Sec. 6427(l)(4)(C)(ii).
    \26\Sec. 6427(l)(4)(C)(i).
    \27\See sec. 6427(l)(5). Special rules apply if the kerosene is 
purchased with a credit card issued to a State or local government.
---------------------------------------------------------------------------
    Commercial aviation claimants are permitted to credit their 
fuel tax claims against their other excise tax liabilities, 
thereby reducing the amount of excise tax to be paid with the 
excise tax return.
            Transfers between the Highway Trust Fund and the AATF to 
                    account for aviation use
    Kerosene that is not removed directly from the terminal 
into an airplane (e.g., the jet fuel is transferred from the 
terminal by highway vehicle to the airport) is taxed at the 
highway fuel rate of 24.4 cents per gallon. The Highway Trust 
Fund is credited with 24.3 cents per gallon of the 24.4 cents 
per gallon imposed. The remaining 0.1 cent is credited to the 
Leaking Underground Storage Tank Trust Fund. If a claim for 
payment is later made indicating that the fuel was used in 
aviation, the Secretary then transfers to the AATF 4.3 cents 
per gallon for commercial aviation use and 21.8 cents per 
gallon for noncommercial aviation use. These transfers 
initially are based on estimates, and proper adjustments are 
made in amounts subsequently transferred, to the extent that 
prior estimates were in excess of or less than the amounts 
required to be transferred. Thus, to the extent that claims for 
credit or payment are not made for the difference between the 
highway rate and the aviation rate, the AATF will not be 
credited for fuel used in aviation that was taxed at the 24.4 
cents per gallon rate.

Aviation gasoline

    The tax on aviation gasoline is 19.4 cents per gallon 
(including a 0.1 cent per gallon Leaking Underground Storage 
Tank Trust Fund component). If aviation gasoline is used in 
commercial aviation, the ultimate purchaser may obtain a credit 
or payment in the amount of 15 cents per gallon, such that the 
tax rate on such gasoline is 4.4 cents per gallon.\28\ If 
aviation gasoline is sold for an exempt use, a credit or refund 
is allowable for all but the Leaking Underground Storage Tank 
Trust Fund tax (0.1 cent per gallon).\29\
---------------------------------------------------------------------------
    \28\Sec. 6421(f)(2).
    \29\Sec. 6416(a); sec. 6420 (farming purposes); sec. 6421(c); and 
sec. 6430.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is concerned with the congestion at our 
airports and in our airways. The Committee believes that action 
must be taken to address increasing air travel delays, 
passenger frustrations, and safety concerns. The Committee 
believes that modernization of the air traffic control system 
must be adequately funded. The Committee has provided for an 
increase in the taxes imposed on aviation-grade kerosene used 
in noncommercial aviation to ensure that funding is available 
to alleviate congestion through modernization of the air 
traffic control system. The Committee will continue to look at 
ways to make the taxes that fund the AATF more equitable.

                        EXPLANATION OF PROVISION

    The provision creates a separate category of kerosene for 
tax purposes: aviation-grade kerosene.\30\ Aviation-grade 
kerosene is taxed at 35.9 cents per gallon plus 0.1 cent per 
gallon for the Leaking Underground Storage Tank Trust Fund. 
Under the provision, aviation-grade kerosene used in 
noncommercial aviation will bear the full rate of tax. The rate 
of tax for aviation-grade kerosene used in commercial aviation 
and for exempt use remains unchanged.\31\
---------------------------------------------------------------------------
    \30\Aviation-grade kerosene means, as defined by the Internal 
Revenue Service, kerosene-type jet fuel covered by ASTM specification 
D1655, or military specification MIL-DTL-5624 (Grade JP-5) or MIL-DTL-
83133E (Grade JP-8). See section 4(b) of Notice 2005-4.
    \31\Accordingly, commercial aviation use will continue to be 
subject to a tax of 4.4 cents per gallon and exempt use will be subject 
to 0.1 cent per gallon.
---------------------------------------------------------------------------
    Because the tax on aviation-grade kerosene used in 
noncommercial aviation is equal to the applicable rate of tax 
collected, the provision repeals the ultimate vendor refund 
provisions for noncommercial aviation. In addition, the 
provision eliminates the inter-fund transfers from the Highway 
Trust Fund to the AATF for kerosene used in aviation. Instead, 
the taxes imposed on aviation-grade kerosene will be credited 
to the AATF only. As a result, the AATF, rather than the 
Highway Trust Fund, will reimburse the General Fund for any 
amounts paid with respect to the use of aviation-grade kerosene 
for a nontaxable use. The provision also provides a refund 
mechanism for aviation-grade kerosene used for a taxable 
purpose other than in an aircraft and the related-trust fund 
accounting.
    In the case of aviation-grade kerosene held by any person 
on January 1, 2008, a floor stocks tax is imposed equal to the 
tax that would have been imposed if the increased rates had 
been in effect before such date, less (1) the tax actually 
imposed on such fuel and (2) for fuel held by a person for his 
own use, the amount that such person would reasonably expect to 
be paid as a refund. The tax is to be paid at such time and in 
such manner as the Secretary shall prescribe.
    The floor stocks tax does not apply to fuel held in the 
fuel tank of an aircraft on January 1, 2008. Nor does it apply 
to fuel held exclusively for any use to the extent a refund or 
credit of tax is allowable under the Code. The floor stocks tax 
does not apply if the amount of fuel held by a person does not 
exceed 2,000 gallons.
    For purposes of the floor stocks tax, a controlled group is 
treated as one person. ``Controlled group'' for these purposes 
means a parent-subsidiary, brother-sister, or combined 
corporate group with more than 50-percent ownership with 
respect to either combined voting power or total value. Under 
regulations, similar principles may apply to a group of persons 
under common control where one or more persons are not a 
corporation.
    All provisions of law, including penalties, applicable with 
respect to the taxes imposed by section 4081, also apply to the 
floor stocks taxes to the extent not inconsistent with the 
provisions of the proposal. For purposes of determining 
receipts to the AATF, the floor stocks tax is treated as if it 
were imposed by section 4081(a)(2)(A)(iv).

                             EFFECTIVE DATE

    The provision generally is effective for fuel removed, 
entered, or sold after December 31, 2007. The floor stocks tax 
is effective January 1, 2008.

             C. Use of International Travel Facilities Tax


(Sec. 104 of the bill and sec. 4261 of the Code)

                              PRESENT LAW

    For 2007, international air passenger transportation is 
subject to a tax of $15.10 per arrival or departure in lieu of 
the taxes imposed on domestic air passenger transportation if 
the transportation begins or ends in the United States.\32\ The 
definition of international transportation includes certain 
purely domestic transportation that is associated with an 
international journey. Under these rules, a passenger traveling 
on separate domestic segments integral to international travel 
is exempt from the domestic passenger taxes on those segments 
if the stopover time at any point within the United States does 
not exceed 12 hours.
---------------------------------------------------------------------------
    \32\Secs. 4261(c) and 4261(d)(4). The international travel 
facilities tax rate of $12 is indexed annually for inflation, effective 
each January 1, resulting in the current rate of $15.10.
---------------------------------------------------------------------------
    In the case of a domestic segment beginning or ending in 
Alaska or Hawaii, the tax applies to departures only and is 
$7.50 for calendar year 2007.

                           REASONS FOR CHANGE

    The Committee notes that additional funding is needed for 
the modernization of the air traffic control system. As all air 
travelers will use the modernized system, the Committee 
believes that the burden for funding a modernized system should 
be broadly shared. Therefore, the Committee believes it is 
appropriate to increase the tax on the use of international 
travel facilities from $15.10 to $16.65.

                        EXPLANATION OF PROVISION

    Beginning January 1, 2008, the provision increases the tax 
on the use of international travel facilities to $16.65. This 
amount is indexed as under present law. The special rule for 
Alaska and Hawaii is unchanged by the provision.

                             EFFECTIVE DATE

    The provision is effective on January 1, 2008.

        D. Air Traffic Control System Modernization Sub-Account


(Sec. 105 of the bill and sec. 9502 of the Code)

                              PRESENT LAW

    Under present law, there is no special sub-account of the 
AATF to which funds are dedicated for air traffic control 
systems modernization.

                           REASONS FOR CHANGE

    The Committee has provided for an increase in the taxes 
supporting the AATF to ensure that sufficient funding is 
available to modernize the air traffic control system. To 
ensure that the funds are not diverted to other purposes, the 
Committee has created a separate account within the AATF 
specifically for air traffic control modernization.

                        EXPLANATION OF PROVISION

    The provision creates an Air Traffic Modernization Sub-
Account within the AATF. The Modernization Sub-Account is 
supported through annual transfers of approximately $400 
million from the parent AATF. The funds are made available to 
the FAA through mandatory spending specifically dedicated to 
modernization costs approved by the Air Traffic Control 
Modernization Oversight Board. The funds also may be used for 
the FAA's Facility and Equipment account expenditures.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

         E. Treatment of Fractional Aircraft Ownership Programs


(Sec. 106 of the bill and sec. 4083 and new sec. 4266 of the Code)

                              PRESENT LAW

    For excise tax purposes, fractional ownership flights are 
treated as commercial aviation. As commercial aviation, such 
flights are subject to the ad valorem tax of 7.5 percent of the 
amount paid for the transportation, a $3.40 segment tax, and 
tax of 4.4 cents per gallon on fuel. For international flights, 
fractional ownership flights are subject to the $15.10 
international travel facilities use tax and a fuel tax of a 0.1 
cent per gallon.
    For purposes of the FAA safety regulations, fractional 
aircraft ownership programs are treated as a special category 
of general aviation.\33\
---------------------------------------------------------------------------
    \33\14 C.F.R. Part 91, subpart k.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee notes that the IRS and FAA classify flights 
on aircraft that are part of a fractional ownership program 
differently. Under the FAA safety regulations, such flights are 
considered general aviation, while the IRS classifies such 
flights as commercial aviation for tax purposes. The Committee 
wishes to make clear that fractional flights should be 
considered as noncommercial aviation for tax purposes. In 
keeping with the Committee's view that the burden of funding a 
modernized system should be broadly shared, the Committee 
believes it is appropriate to subject such flights to the fuel 
taxes applicable to noncommercial aviation, as well as a 
departure tax of $58.

                        EXPLANATION OF PROVISION

    Under the provision, special rules apply to flights on 
aircraft that are part of a ``fractional ownership aircraft 
program.'' For this purpose, ``fractional ownership aircraft 
program'' is defined as a program in which:
           A single fractional ownership program 
        manager provides fractional ownership program 
        management services on behalf of the fractional owners;
           Two or more airworthy aircraft are part of 
        the program;
           There are one or more fractional owners per 
        program aircraft, with at least one program aircraft 
        having more than one owner;
           Each fractional owner possesses at least a 
        minimum fractional ownership interest in one or more 
        program aircraft;\34\
---------------------------------------------------------------------------
    \34\A minimum fractional ownership interest means: (1) A fractional 
ownership interest equal to or greater than one-sixteenth of at least 
one subsonic, fixed wing or powered lift program aircraft; or (2) a 
fractional ownership interest equal to or greater than one-thirty-
second of a least one rotorcraft program aircraft.
---------------------------------------------------------------------------
           There exists a dry-lease exchange 
        arrangement among all of the fractional owners;\35\
---------------------------------------------------------------------------
    \35\A ``dry-lease aircraft exchange'' means an agreement, 
documented by the written program agreements, under which the program 
aircraft are available, on an as-needed basis without crew, to each 
fractional owner.
---------------------------------------------------------------------------
           There are multi-year program agreements 
        covering the fractional ownership, fractional ownership 
        program management services, and dry-lease aircraft 
        exchange aspects of the program.
    Under the provision, in lieu of the present-law taxes on 
domestic commercial aviation and international flights, every 
flight on an aircraft that is part of a fractional ownership 
aircraft program is subject to a $58 departure tax and a 36-
cents-per-gallon fuel tax. The presence or absence of the 
fractional owner during the flight has no bearing on the amount 
of tax imposed on the flight. Thus, positioning the aircraft 
for the owner, as well as charter flights for non-owners are 
subject to the new tax regime.

                             effective date

    The provision is effective for transportation beginning 
after, and fuel sold or used after, December 31, 2007.

  F. Repeal Exemption for Small Aircraft Operating on Nonestablished 
                                 Lines


(Sec. 107 of the bill and sec. 4281 of the Code)

                              PRESENT LAW

    Under present law, transportation by aircraft with a 
certificated maximum takeoff weight of 6,000 pounds or less is 
exempt from the excise taxes imposed on the transportation of 
persons by air and the transportation of cargo by air when 
operating on a nonestablished line. Similarly, when such an 
aircraft is operating on a flight for the sole purpose of 
sightseeing, the taxes imposed on the transportation of persons 
or cargo by air do not apply.

                           REASONS FOR CHANGE

    The Committee is concerned with the increasing congestion 
of the nation's airspace. It is the understanding of the 
Committee that a significant portion of the congestion is, and 
will continue to be, attributable to the increasing number of 
small aircraft utilizing FAA resources. As technology advances 
and permits aircraft to weigh significantly less while carrying 
a similar load, it is believed that more aircraft will take 
advantage of the exemption, thus reducing the resources 
available for the AATF. The Committee believes that small 
aircraft utilizing FAA resources should contribute to the 
modernization of the nation's air traffic control system. 
Therefore, the Committee believes it is appropriate to repeal 
the exemption from tax for small aircraft operating on 
nonestablished lines for all flights, except those flights for 
which the sole purpose is sightseeing.

                        EXPLANATION OF PROVISION

    The provision repeals the exemption for transportation by 
small aircraft operating on nonestablished lines. The present-
law exemption for flights operated for the sole purpose of 
sightseeing is unchanged by the proposal.

                             EFFECTIVE DATE

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

              G. Transparency in Passenger Tax Disclosures


(Sec. 108 of the bill and sec. 7275 of the Code)

                              PRESENT LAW

    Transportation providers are subject to special penalties 
if they do not separately disclose the amount of the passenger 
taxes on tickets and in advertising. Failure to satisfy these 
disclosure requirements is a misdemeanor, upon conviction of 
which the guilty party is fined not more than $100 per 
violation.\36\
---------------------------------------------------------------------------
    \36\Sec. 7275.
---------------------------------------------------------------------------
    There is no prohibition against airlines including other 
charges in the required passenger taxes disclosure (e.g., fuel 
surcharges retained by the commercial airline). In practice, 
some but not all airlines include such other charges in the 
required passenger taxes disclosure.

                           REASONS FOR CHANGE

    The Committee believes that separating charges payable to a 
government entity from those paid to a transportation provider 
will reduce confusion on the part of consumers.

                        EXPLANATION OF PROVISION

    The bill prohibits all transportation providers from 
including amounts other than charges payable to a government 
entity in the required disclosure of passenger taxes on tickets 
and in advertising. Disclosure elsewhere on tickets and in 
advertising (e.g., as an amount paid for transportation) of 
charges not payable to a government entity is allowed.

                             EFFECTIVE DATE

    The provision is effective for tickets sold after December 
31, 2007.

   H. Modification of Pension Funding Rules of Certain Eligible Plans


(Sec. 109 of the bill and sec. 402 of the Pension Protection Act of 
        2006)

                              PRESENT LAW

    Single-employer defined benefit pension plans are subject 
to minimum funding requirements under the Code.\37\ The Pension 
Protection Act of 2006 provides for new minimum funding rules, 
which are generally effective for plan years beginning after 
December 31, 2007.
---------------------------------------------------------------------------
    \37\Sec. 412. Similar rules apply to single-employer defined 
benefit pension plans under ERISA.
---------------------------------------------------------------------------
    Under the new minimum funding rules, the minimum required 
contribution to a single- employer defined benefit pension plan 
for a plan year generally depends on a comparison of the value 
of the plan's assets with the plan's funding target and target 
normal cost. The plan's funding target is the present value of 
all benefits accrued or earned as of the beginning of the plan 
year. A plan's target normal cost for a plan year is the 
present value of benefits expected to accrue or be earned 
during the plan year.
    In general, a plan has a funding shortfall if the plan's 
funding target for the year exceeds the value of the plan's 
assets (reduced, if applicable, by any prefunding balance and 
funding standard carryover balance). If the value of a plan's 
assets (reduced by any funding standard carryover balance and 
prefunding balance) is less than the plan's funding target for 
a plan year, so that the plan has a funding shortfall, the 
minimum required contribution is generally equal to the plan's 
target normal cost, increased by a shortfall amortization 
charge. Alternatively, if the value of a plan's assets (reduced 
by any funding standard carryover balance and prefunding 
balance) is equal to or exceeds the plan's funding target for a 
plan year, the minimum required contribution is equal to the 
plan's target normal cost, reduced by the amount by which the 
plan's assets exceed the funding target.
    The shortfall amortization charge for a plan year is the 
aggregate total of the shortfall amortization installments for 
the plan year with respect to any shortfall amortization bases 
for that plan year and the six preceding plan years. A 
shortfall amortization base is generally required to be 
established for a plan year if the plan has a funding shortfall 
for a plan year. The shortfall amortization base for a plan 
year is (1) the plan's funding shortfall, minus (2) the present 
value, determined using the segment interest rates (discussed 
below), of the aggregate total of the shortfall amortization 
installments (and, if applicable, waiver amortization 
installments) that have been determined for the plan year and 
any succeeding plan year with respect to any shortfall 
amortization bases (and waiver amortization bases) for 
preceding plan years. The shortfall amortization installments 
with respect to a shortfall amortization base for a plan year 
are the amounts necessary to amortize the shortfall 
amortization base in level annual installments over the seven-
plan-year period beginning with the plan year. The shortfall 
amortization installment with respect to a shortfall 
amortization base for any plan year in the seven-year period is 
the annual installment determined for that year for that 
shortfall amortization base. Shortfall amortization 
installments are determined using the appropriate segment 
interest rates.
    The new minimum funding rules specify the interest rates 
and other actuarial assumptions that must be used in 
determining a plan's target normal cost and funding target. 
Under the rules, present value is determined using three 
interest rates (``segment'' rates), each of which applies to 
benefit payments expected to be made from the plan during a 
certain period. The first segment rate applies to benefits 
reasonably determined to be payable during the five-year period 
beginning on the first day of the plan year; the second segment 
rate applies to benefits reasonably determined to be payable 
during the 15-year period following the initial five-year 
period; and the third segment rate applies to benefits 
reasonably determined to be payable at the end of the 15-year 
period. Each segment rate is a single interest rate determined 
monthly by the Secretary of the Treasury on the basis of a 
corporate bond yield curve, taking into account only the 
portion of the yield curve based on corporate bonds maturing 
during the particular segment rate period. In general, the 
corporate bond yield curve used for this purpose is to be 
prescribed on a monthly basis by the Secretary of the Treasury 
and reflects the average, for the 24-month period ending with 
the preceding month, of yields on investment grade corporate 
bonds with varying maturities and that are in the top three 
quality levels available. A special transition rule applies for 
plan years beginning in 2008 and 2009 (other than for plans 
first effective after December 31, 2007).
    In addition to the new minimum funding rules described 
above, the Pension Protection Act of 2006 also provided for 
special funding rules to apply for certain eligible plans. An 
eligible plan is a single-employer defined benefit pension plan 
sponsored by an employer that is a commercial passenger airline 
or the principal business of which is providing catering 
services to a commercial passenger airline.
    The plan sponsor of an eligible plan may make one of two 
alternative elections. In the case of a plan that meets certain 
benefit accrual and benefit increase restrictions, an election 
allowing a 17-year amortization of the plan's unfunded 
liability is available. In lieu of this election, a plan 
sponsor may alternatively elect, for the first taxable year 
beginning in 2008, to amortize the shortfall amortization base 
for such taxable year over a period of 10 plan years (rather 
than 7 plan years) beginning with such plan year. Under this 
alternative election, the benefit accrual and benefit increase 
restrictions do not apply. This 10-year amortization election 
must be made by December 31, 2007. Public Law No. 110-28 
modified the 10-year amortization election. As modified, if a 
plan sponsor elects to amortize the shortfall amortization base 
over a period of 10 plan years, the plan is to use an interest 
rate of 8.25 percent for purposes of determining the funding 
target for each of the 10 plan years during such period 
(instead of the segment rates calculated on the basis of the 
corporate bond yield curve).

                           REASONS FOR CHANGE

    The Committee is concerned about the underfunding of many 
defined benefit pension plans. The Committee believes that it 
is appropriate to require defined benefit pension plans to fund 
for annual accruals so as not to create larger deficiencies in 
plan funding. As a result of the favorable interest rate, the 
sponsor of an eligible plan may have a minimum required 
contribution that is less than the plan's target normal cost 
for the plan year (or may even have no minimum required 
contribution). The Committee believes that it is appropriate 
that an employer that uses the favorable interest rate be 
required to contribute no less than the plan's target normal 
cost for the year so that current accruals do not increase the 
plan's funding shortage.

                        EXPLANATION OF PROVISION

    The provision provides that, in the case of a plan sponsor 
that elects to amortize the shortfall amortization base over a 
period of 10 plan years, an election must be made for the plan 
to use the 8.25 percent interest rate instead of the segment 
rate for purposes of determining the plan's funding target. The 
election can be made no more than once and is revocable. If the 
election is in effect, the minimum required contribution is not 
less than the target normal cost (which is calculated using the 
segment rates). Such minimum contribution is required even if 
the plan's assets exceed the plan's funding target (determined 
using 8.25%) plus normal cost. The provision also clarifies 
that the election to amortize the shortfall amortization base 
over 10 plan years applies to the first plan year beginning in 
2008.

                             EFFECTIVE DATE

    The provision is effective as if included in section 402 of 
the Pension Protection Act of 2006.

         TITLE II--INCREASED FUNDING FOR THE HIGHWAY TRUST FUND


      A. Replenish Emergency Spending From the Highway Trust Fund


(Sec. 201 of the bill and sec. 9503 of the Code)

                              PRESENT LAW

    Certain trust funds defined under the Code receive amounts 
equivalent to the receipts from taxes dedicated to such trust 
funds, e.g., the Airports and Airways Trust Fund and the 
Highway Trust Fund. Receipts from undedicated taxes are 
deposited in the General Fund of the Treasury.
    The Safe, Accountable, Flexible, and Efficient 
Transportation Equity Act: A Legacy for Users (``SAFETEA'') and 
previous legislation specifically allowed emergency relief to 
be paid out of the Highway Trust Fund. Since 1998, there have 
been six emergency appropriations (excluding regular annual 
appropriations of $100 million for emergencies) from the 
Highway Trust Fund, including responses to disaster relief from 
terrorism and from natural disasters.\38\ Infrastructure 
otherwise benefited by trust funds has previously received its 
disaster relief from the General Fund.
---------------------------------------------------------------------------
    \38\See Pub. L. No. 105-174 ($259 million), Pub. L. No. 106-346 
($720 million), Pub. L. No. 107-117 ($175 million), Pub. L. No. 107-206 
($265 million), Pub. L. No. 324 ($1.2 billion), and Pub. L. No. 108-447 
($741 million).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Congressional Budget Office has projected that the 
Highway Trust Fund will face a shortfall of $4.3 billion in 
2009. Since 1998, more than $3.3 billion has been spent from 
the Highway Trust Fund to respond to emergencies. The Committee 
believes that unforeseen expenses that result from terrorism or 
natural disasters should be met by the General Fund. To ensure 
solvency of the Highway Trust Fund through 2009, the provision 
replenishes the Highway Trust Fund with a total of $3.4 
billion.

                        EXPLANATION OF PROVISION

    The provision replenishes the Highway Trust Fund for 
emergency appropriations by transferring $3.4 billion from the 
General Fund of the Treasury to the Highway Trust Fund.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

    B. Suspension of Transfers From Highway Trust Fund for Certain 
                         Repayments and Credit


(Sec. 202 of the bill and sec. 9503(c)(2) of the Code)

                              PRESENT LAW

    Under sec. 9503(c)(2), certain transfers are made from the 
Highway Trust Fund to reimburse the General Fund for amounts 
paid in respect of gasoline used on farms,\39\ amounts paid in 
respect of gasoline used for certain nonhighway purposes or by 
local transit systems,\40\ amounts relating to fuels not used 
for taxable purposes,\41\ and income tax credits allowed with 
respect to the nontaxable uses of fuels.\42\
---------------------------------------------------------------------------
    \39\Sec. 6420.
    \40\Sec. 6421.
    \41\Sec. 6427.
    \42\Sec. 34.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee notes that some nontaxable uses of fuel 
involve the use of public highways (e.g., use in school buses 
and in the vehicles of State and local governments) but because 
of the exemption do not contribute to the maintenance of the 
highway system. The Committee believes it is appropriate to 
temporarily suspend the transfers from the Highway Trust Fund 
to the General Fund that are attributable to the nontaxable 
uses.

                        EXPLANATION OF PROVISION

    Section 9503(c)(2), relating to certain transfers from the 
Highway Trust Fund to the General Fund, is suspended on the 
date of enactment and for six months thereafter.

                             EFFECTIVE DATE

    The provision applies to amounts paid for which no transfer 
has been made before the date of enactment.

 C. Impose Excise Tax on Certain Removals of Taxable Fuel From Foreign 
                              Trade Zones


(Sec. 203 of the bill and secs. 4081 and 4083 of the Code)

                              PRESENT LAW

In general

    Generally, excise taxes are imposed on gasoline, diesel 
fuel and kerosene (collectively referred to as ``taxable 
fuel'') when taxable fuel is removed from a refinery or 
terminal or upon its entry into the United States.\43\ The tax 
does not apply to any removal or entry of taxable fuel 
transferred in bulk by pipeline or vessel to a terminal or 
refinery, if the person removing or entering the fuel, the 
pipeline or vessel operator, and the terminal or refinery 
operator are all registered with the IRS.\44\
---------------------------------------------------------------------------
    \43\Sec. 4081(a)(1)(A).
    \44\Sec. 4081(a)(1)(B)(i). A vessel operator is not required to be 
registered with respect to certain deep draft ocean-going vessels. Sec. 
4081(a)(1)(B)(ii).
---------------------------------------------------------------------------
    The Code generally permits the Secretary of the Treasury to 
require persons to register with respect to taxable fuel.\45\ 
The American Jobs Creation Act of 2004 requires persons that 
operate a terminal or refinery within a foreign trade zone or 
within a customs bonded storage facility, or that hold an 
inventory position with respect to taxable fuel in such a 
terminal, to register with the Secretary of the Treasury.\46\ 
Treasury Regulations require blenders, enterers, pipeline 
operators, position holders, refiners, terminal operators, and 
vessel operators, among others, to register.\47\
---------------------------------------------------------------------------
    \45\Sec. 4101(a).
    \46\See Sec. 4101(a)(2), added by the American Jobs Creation Act of 
2004, Pub. L. 108-357, sec. 861(a)(2).
    \47\Treas. Reg. sec. 48.4101-1(c)(1).
---------------------------------------------------------------------------
    The Code also provides that the Secretary may require 
information reporting from any registered person.\48\ A 
Department of Treasury fuel information reporting program, the 
Excise Summary Terminal Activity Reporting System 
(``ExSTARS''), requires terminal operators and bulk transport 
carriers to report monthly on the movement of any liquid 
product into or out of an approved terminal. Terminal operators 
file Form 720-TO--Terminal Operator Report, which shows the 
monthly receipts and disbursements of all liquid products to 
and from an approved terminal.\49\ Bulk transport carriers 
(vessels and pipelines) that receive liquid product from an 
approved terminal or deliver liquid product to an approved 
terminal file Form 720-CS--Carrier Summary Report, which 
details such receipts and disbursements.
---------------------------------------------------------------------------
    \48\Sec. 4101(d)(1). See also Treas. Reg. sec. 48.4101-2. The 
reports are required to be filed by the end of the month following the 
month to which the report relates.
    \49\See Announcement 2001-48, 2001-1 C.B. 1168. An approved 
terminal is a terminal that is operated by a taxable fuel registrant 
that is a terminal operator. Treas. Reg. sec. 48.4081-1(b).
---------------------------------------------------------------------------

Foreign trade zones

    Foreign trade zones are established under chapter 1A of 
title 19 of the United States Code. Customs regulations issued 
pursuant to title 19 provide that merchandise taken into a 
foreign trade zone for the sole purpose of exportation or 
storage will be given ``zone restricted'' status on proper 
application and be considered exported for purposes of customs 
law. If merchandise is to be considered exported for the 
purpose of any Federal law other than customs laws, the port 
director shall be satisfied that all pertinent laws, 
regulations, and rules administered by the Federal agency 
concerned have been complied with before the application is 
approved. In general, zone restricted merchandise may not be 
returned to the customs territory of the United States for 
domestic consumption.\50\
---------------------------------------------------------------------------
    \50\19 C.F.R. sec. 146.44.
---------------------------------------------------------------------------
    Rev. Rul. 59-318 holds that an article subject to a 
manufacturers excise tax is ``exported'' when it is shipped to 
a foreign trade zone for the sole purpose of exportation.\51\ 
Consequently, any later removal from such a refinery or 
terminal in a foreign trade zone for ``actual'' export is not 
considered a taxable event.\52\ In contrast, if the terminal is 
located outside of a foreign trade zone, the removal for export 
is a taxable event unless certain conditions are met.\53\
---------------------------------------------------------------------------
    \51\1959-2 C.B. 310. Under Rev. Rul. 59-318, a bill of lading 
containing the statement ``Shipped into Foreign-Trade Zone for Export'' 
is acceptable as proof of exportation.
    \52\See, e.g., Priv. Ltr. Rul. 9351006 (Sept. 17, 1993), 
Transaction 4.
    \53\For example, regulations provide that the tax does not apply if 
the buyer is outside the United States, the sale occurs as the fuel is 
delivered into a vessel with a capacity of at least 20,000 barrels, the 
seller is registered and is the exporter of record, and the fuel is 
exported in due course. Treas. Reg. sec. 48.4081-3(f)(2).
---------------------------------------------------------------------------
    Many petroleum refineries and terminals are located within 
foreign trade zones or subzones\54\ or bonded warehouses. When 
taxable fuel is removed by truck or rail from such refinery or 
terminal, excise taxes may or may not be due at the rack, 
depending on the mode of removal, as follows. If the taxable 
fuel is entered into the United States upon such removal, 
excise taxes and duties are generally due at that point. 
However, the fuel may be removed under bonded transport without 
immediate tax or duties. Such transported fuel can be destined 
for export, for entry into another foreign trade zone (or 
subzone) or bonded warehouse, or may be entered into the United 
States at its destination. Excise tax only applies if and when 
the fuel is entered into the United States. No tax is due if 
the fuel is exported or re-entered into a foreign trade zone or 
subzone or bonded warehouse.
---------------------------------------------------------------------------
    \54\A subzone is a special-purpose zone established as an adjunct 
to a zone project for a limited purpose. The rules and regulations 
applicable to foreign trade zones apply equally to subzones. 15 C.F.R. 
sec. 400.2(n)-(o).
---------------------------------------------------------------------------
    U.S. Customs enforcement procedures, which may include 
forfeiture of the full value of the goods, are triggered if 
fuel removed under bonded transport is not reported within 30 
days as exported, entered into another foreign trade zone or 
subzone or bonded warehouse, or entered into the United 
States.\55\ Customs also tracks all entries and removals from 
foreign trade zones and subzones.
---------------------------------------------------------------------------
    \55\See, e.g., 19 C.F.R. secs. 18.25 and 18.26.
---------------------------------------------------------------------------
    Refineries in general, and terminals within foreign trade 
zones or subzones or bonded warehouses, are not currently 
required to report under Ex-STARS.

                           REASONS FOR CHANGE

    The Committee is concerned about the potential for 
diversion of certain taxable fuel without the payment of 
Federal excise tax. The Committee's concern is that taxable 
fuel removed under bonded, non-bulk transport from a refinery 
or terminal located in a foreign trade zone, subzone, or bonded 
warehouse could be diverted from the stream of export or from 
its designated destination of a second foreign trade zone, 
subzone or bonded warehouse, without the payment of tax. The 
Committee believes that imposing tax upon the non-bulk removal 
of taxable fuel from such refineries and terminals will 
eliminate the potential for such diversion.

                        EXPLANATION OF PROVISION

    Under the provision, excise tax is generally imposed on the 
non-bulk removal (i.e., removal by truck or train) of taxable 
fuel from terminals or refineries within a foreign trade zone 
or subzone or bonded warehouse at the same time and in the same 
manner as if such terminal or refinery were not located in such 
foreign trade zone or subzone or bonded warehouse, 
notwithstanding any Customs statute, rule, or regulation. Tax 
is imposed upon such removal even if the fuel is entered into 
another foreign trade zone or subzone or bonded warehouse or is 
eventually exported. If such taxable fuel is later exported, a 
credit or refund may be claimed. No interest shall be due on 
such credits or refunds.
    Under the provision, a removal from a refinery or terminal 
in a foreign trade zone or subzone or bonded warehouse is not 
treated any worse than would be the case if the refinery or 
terminal were not in such a foreign trade zone or subzone or 
bonded warehouse. Consequently, any removal that would be 
exempt if the refinery or terminal were not in a foreign trade 
zone or subzone or bonded warehouse will be exempt where the 
refinery or terminal is in a foreign trade zone or subzone or 
bonded warehouse.
    The present-law rules continue to apply to any removal by 
pipeline or vessel of taxable fuel from a terminal or refinery 
located in a foreign trade zone or subzone or bonded warehouse.
    It is intended that the Secretary of the Treasury will 
require owners and operators of terminals within a foreign 
trade zone or subzone or bonded warehouse to electronically 
report monthly all removals of taxable fuel, to the same extent 
as if such terminal were not located in a foreign trade zone or 
subzone or bonded warehouse, and it is anticipated that such 
reporting will be required to be done through Ex-STARS or in 
some other reasonable form.

                             EFFECTIVE DATE

    The provision is effective for removals and entries after 
December 31, 2007.

   D. Clarification of Penalty for Sale of Fuel Failing To Meet EPA 
                              Regulations


(Sec. 204 of the bill and sec. 6720A of the Code)

                              PRESENT LAW

    Under present law, any person other than a retailer who 
knowingly transfers for resale, sells for resale, or holds out 
for resale for use in a diesel-powered highway vehicle (or 
train) any liquid that does not meet applicable Environmental 
Protection Agency (``EPA'') regulations (as defined in section 
45H(c)(3)) is subject to a penalty of $10,000 for each such 
transfer, sale, or holding out for resale, in addition to the 
tax on such liquid, if any.\56\ Any retailer who knowingly 
holds out for sale (other than for resale) any such liquid is 
subject to a $10,000 penalty for each such holding out for 
sale, in addition to the tax on such liquid, if any.
---------------------------------------------------------------------------
    \56\Sec. 6720A.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes the current penalty should be 
expanded beyond failure to meet the EPA sulfur standards to 
encompass any fuel held out for sale that does not meet the 
standards for distribution to the public. The Committee 
believes that expansion of the penalty will discourage the sale 
of fuel adulterated with hazardous materials, used lube oil, 
and other contaminants that are used to increase and extend the 
volume of the fuel being sold.

                        EXPLANATION OF PROVISION

    The provision expands the penalty to include any fuel that 
does not meet EPA standards for distribution to the public. The 
provision reaffirms that the Secretary is authorized to make 
the determination that the fuel does not comply with the 
applicable EPA regulations and standards for purposes of 
asserting the penalty.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

E. Treatment of Qualified Alcohol Fuel Mixtures and Qualified Biodiesel 
                     Fuel Mixtures as Taxable Fuel


(Sec. 205 of the bill and sec. 4083 of the Code)

                              PRESENT LAW

    An excise tax is imposed upon (1) the removal of any 
taxable fuel from a refinery or terminal, (2) the entry of any 
taxable fuel into the United States, or (3) the sale of any 
taxable fuel to any person who is not registered with the IRS 
to receive untaxed fuel, unless there was a prior taxable 
removal or entry.\57\ The tax does not apply to any removal or 
entry of taxable fuel transferred in bulk by pipeline or vessel 
to a terminal or refinery if the person removing or entering 
the taxable fuel, the operator of such pipeline or vessel 
(excluding deep draft vessels), and the operator of such 
terminal or refinery are registered with the Secretary.\58\ The 
term ``taxable fuel'' means gasoline, diesel fuel, and 
kerosene.\59\
---------------------------------------------------------------------------
    \57\Sec. 4081(a)(1).
    \58\Sec. 4081(a)(1)(B).
    \59\Sec. 4083(a).
---------------------------------------------------------------------------
    Diesel fuel is (1) any liquid suitable for use in a diesel 
powered highway vehicle or diesel powered train, (2) transmix, 
and (3) diesel fuel blendstocks identified by the 
Secretary.\60\ By regulation, diesel fuel does not include 
kerosene, gasoline, No. 5 and No. 6 fuel oils (as described in 
ASTM Specification D 396), or F-76 (Fuel Naval Distillates MIL-
F-16884), any liquid that contains less than four percent 
normal paraffins, or any liquid that has a distillation range 
of 125 degrees Fahrenheit or less, sulfur content of 10 ppm or 
less, and minimum color of +27 Saybolt.\61\
---------------------------------------------------------------------------
    \60\Sec. 4083(a)(3).
    \61\Treas. Reg. sec. 48.4081-1(c)(2)(ii).
---------------------------------------------------------------------------
    Biodiesel is not a taxable fuel because it has less than 
four percent paraffin content. Ethanol and other fuel alcohols 
also are not treated as taxable fuel. However, such fuels are 
subject to the backup tax under section 4041 if sold for use or 
used as a fuel in a diesel-powered highway vehicle or diesel-
powered train and not for a nontaxable use.
    In addition, such fuels are taxable if used in the 
production of a blended taxable fuel.\62\
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    \62\Under Treas. Reg. sec. 48.4081-1(c), blended taxable fuel 
generally means any taxable fuel that is produced (1) outside the bulk 
transfer/terminal system (2) by mixing taxable fuel with respect to 
which tax has been imposed under sec. 4081(a) (gasoline, diesel fuel, 
or kerosene) with any other liquid on which tax has not been imposed 
under sec. 4081.
---------------------------------------------------------------------------
    The Code provides per-gallon tax incentives relating to 
biodiesel fuel used in a qualified mixture. The taxpayer may 
take the credit amount as an income tax credit, as an excise 
tax credit against the tax imposed on taxable fuels (``section 
4081 liability''), or as a payment from the Secretary in the 
amount of the credit. The credit is 50 cents for each gallon of 
biodiesel used by the taxpayer in producing a biodiesel mixture 
for sale or use in a trade or business of the taxpayer. In the 
case of agri-biodiesel, the credit is $1 per gallon.
    A qualified biodiesel mixture is a mixture of biodiesel and 
diesel fuel that is (1) sold by the taxpayer producing such 
mixture to any person for use as a fuel, or (2) used as a fuel 
by the taxpayer producing such mixture. Pursuant to Treasury 
Notice, a mixture of 99.9 percent biodiesel and diesel fuel is 
considered a mixture, but such mixture is not a blended taxable 
fuel because it contains less than four percent paraffin 
content. Thus, while eligible for the biodiesel fuel mixture 
tax credit and payment provisions, such fuel generally would 
not be subject to tax until put in a motor vehicle for a 
taxable use.
    The Code also provides per-gallon tax incentives relating 
to alcohol used in a qualified mixture. A qualified mixture 
means a mixture of alcohol and gasoline (or of alcohol and a 
special fuel) sold by the taxpayer as fuel, or used as fuel by 
the taxpayer producing such mixture. The credit is 51 cents if 
the alcohol is ethanol (60 cents in the case of other 
alcohols).

                           REASONS FOR CHANGE

    The Committee notes that when it provided the credit for 
qualified biodiesel fuel mixtures, it intended that the 
resulting mixture of biodiesel and diesel fuel would be a 
taxable fuel and that the credit would be taken against the tax 
imposed on that fuel if not used for a nontaxable purpose. For 
biodiesel not in a mixture, it was intended that tax be imposed 
on the fuel, and the credit be available when the biodiesel was 
sold at retail into the fuel tank of a motor vehicle. It has 
come to the Committee's attention that persons are exploiting 
the Treasury Notice by adding minute amounts of diesel fuel to 
biodiesel in order to claim the full amount of credit for 
biodiesel fuel mixtures, while not paying any tax on the fuel 
because the ``mixture'' does not meet the regulatory definition 
of diesel fuel. The Committee believes that such exploitation 
occurs to avoid both the imposition of tax and the more 
restrictive rules governing biodiesel that is not in a mixture, 
which require that the fuel be sold as motor fuel at retail. 
The Committee believes it is consistent with Committee intent 
and appropriate to subject all fuel mixtures eligible for the 
fuel mixture credits to the taxes applicable to diesel fuel.

                        EXPLANATION OF PROVISION

    The provision adds qualified alcohol fuel mixtures and 
qualified biodiesel fuel mixtures to the definition of taxable 
fuel.

                             EFFECTIVE DATE

    The provision is effective for fuels removed, entered, or 
sold after December 31, 2007.

    F. Excluding Volume of Denaturants From the Alcohol Fuels Credit


(Sec. 206 of the bill and sec. 40 of the Code)

                              PRESENT LAW

    The Code provides a per-gallon credit for the volume of 
alcohol used as a fuel or in a qualified mixture. For purposes 
of determining the number of gallons of alcohol with respect to 
which the credit is allowable, the volume of alcohol includes 
any denaturant, including gasoline.\63\ The denaturant must be 
added under a formula approved by the Secretary, and the 
denaturant cannot exceed five percent of the volume of such 
alcohol (including denaturants).
---------------------------------------------------------------------------
    \63\Sec. 40(d)(4).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Gasoline can be used as a denaturant of alcohol. The 
Committee believes it is inappropriate to allow a credit that 
is intended to be for alcohol to be claimed on liquids that do 
not constitute alcohol.

                        EXPLANATION OF PROVISION

    The provision provides that the volume of alcohol eligible 
for the credit does not include the volume of any denaturant.

                             EFFECTIVE DATE

    The provision is effective January 1, 2008.

      G. Bulk Transfer Exception Not To Apply to Finished Gasoline


(Sec. 207 of the bill and sec. 4081 of the Code)

                              PRESENT LAW

    An excise tax is imposed upon (1) the removal of any 
taxable fuel from a refinery or terminal, (2) the entry of any 
taxable fuel into the United States, or (3) the sale of any 
taxable fuel to any person who is not registered with the IRS 
to receive untaxed fuel, unless there was a prior taxable 
removal or entry.\64\ The tax does not apply to any removal or 
entry of taxable fuel transferred in bulk by pipeline or vessel 
to a terminal or refinery if the person removing or entering 
the taxable fuel, the operator of such pipeline or vessel 
(excluding deep draft vessels), and the operator of such 
terminal or refinery are registered with the Secretary (the 
``bulk transfer exception'').\65\ The term ``taxable fuel'' 
means gasoline, diesel fuel (including any liquid, other than 
gasoline, which is suitable for use as a fuel in a diesel-
powered highway vehicle or train), and kerosene.\66\
---------------------------------------------------------------------------
    \64\Sec. 4081(a)(1).
    \65\Sec. 4081(a)(1)(B).
    \66\Sec. 4083(a).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that there is potential for fuel to 
be diverted from pipelines and barges and escape taxation, 
notwithstanding that the operators of such pipelines and barges 
must be registered with the IRS. As the base components of 
gasoline (other than oxygenates and detergents that are added 
at the fuel terminal) are blended at the refinery, the 
Committee believes it is appropriate to move the point of 
taxation for gasoline generally from the point of removal from 
a terminal to removal from the refinery or upon entry into the 
United States.

                        EXPLANATION OF PROVISION

    The provision asserts the point of taxation for finished 
gasoline upon removal from the refinery or entry into the 
United States.\67\ The bulk transfer exception does not apply 
to such removals or entries. Only the increased volume 
resulting from the addition of oxygenates, detergents and other 
untaxed liquids after the gasoline leaves the refinery would be 
subject to a subsequent tax.
---------------------------------------------------------------------------
    \67\It is intended that finished gasoline include all products that 
are commonly or commercially known as gasoline capable of being used in 
gasoline-powered motor vehicles.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for fuel removed, entered, or 
sold after December 31, 2007.

                 H. Oil Spill Liability Trust Fund Tax


(Sec. 208 of the bill and sec. 4611 of the Code)

                              PRESENT LAW

    The Oil Spill Liability Trust Fund financing rate (``oil 
spill tax'') was reinstated effective April 1, 2006.\68\ The 
oil spill tax rate is five cents per barrel and generally 
applies to crude oil received at a U.S. refinery and to 
petroleum products entered into the United States for 
consumption, use, or warehousing.\69\
---------------------------------------------------------------------------
    \68\Sec. 4611(f).
    \69\The term ``crude oil'' includes crude oil condensates and 
natural gasoline. The term ``petroleum product'' includes crude oil.
---------------------------------------------------------------------------
    The oil spill tax also applies to certain uses and the 
exportation of domestic crude oil.\70\ If any domestic crude 
oil is used in or exported from the United States, and before 
such use or exportation no oil spill tax was imposed on such 
crude oil, then the oil spill tax is imposed on such crude oil. 
The tax does not apply to any use of crude oil for extracting 
oil or natural gas on the premises where such crude oil was 
produced.
---------------------------------------------------------------------------
    \70\The term ``domestic crude oil'' means any crude oil produced 
from a well located in the United States.
---------------------------------------------------------------------------
    For crude oil received at a refinery, the operator of the 
U.S. refinery is liable for the tax. For imported petroleum 
products, the person entering the product for consumption, use, 
or warehousing is liable for the tax. For certain uses and 
exports, the person using or exporting the crude oil is liable 
for the tax. No tax is imposed with respect to any petroleum 
product if the person who would be liable for such tax 
establishes that a prior oil spill tax has been imposed with 
respect to such product.
    The imposition of the tax is dependent in part on the 
balance of the Oil Spill Liability Trust Fund. The oil spill 
tax does not apply during a calendar quarter if the Secretary 
estimates that, as of the close of the preceding calendar 
quarter, the unobligated balance of the Oil Spill Liability 
Trust Fund exceeds $2.7 billion. If the Secretary estimates 
that the unobligated balance in the Oil Spill Liability Trust 
Fund is less than $2 billion at close of any calendar quarter, 
the oil spill tax will apply on the date that is 30 days from 
the last day of that quarter. The tax does not apply to any 
periods after December 31, 2014.

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to increase the 
rate of taxation for the oil spill tax from five cents to ten 
cents per barrel and to extend the tax through December 31, 
2017. The Committee believes that recent legislation, to 
include the Gulf of Mexico Energy Security Act of 2006 passed 
last Congress, opens thousands of new wells and millions of new 
acres of offshore drilling. The current tax rate does not 
reflect the new potential for oil spills that may result from 
the recent opening of an estimated 8.3 million acres of the 
Outer Continental Shelf. This increase and extension will 
ensure adequate funding for the Oil Spill Liability Trust Fund. 
The Committee also believes that the administration of the tax 
will be simplified by repealing the requirement that the tax be 
suspended when the unobligated balance exceeds $2.7 billion and 
then reinstated when the unobligated balance falls below $2 
billion.

                        EXPLANATION OF PROVISION

    The provision extends the oil spill tax through December 
31, 2017. The provision increases the tax rate from five cents 
to ten cents per barrel. The provision also repeals the 
requirement that the tax be suspended when the unobligated 
balance exceeds $2.7 billion.

                             EFFECTIVE DATE

    The provision increasing the tax rate is effective 
beginning the first quarter that is more than 60 days after the 
date of enactment. The remaining provisions are effective on 
the date of enactment.

        I. Tax Treatment of Certain Inverted Corporate Entities


(Sec. 209 of the bill and sec. 7874 of the Code)

                              PRESENT LAW

Determination of corporate residence

    The U.S. tax treatment of a multinational corporate group 
depends significantly on whether the parent corporation of the 
group is domestic or foreign. For purposes of U.S. tax law, a 
corporation is treated as domestic if it is incorporated under 
the law of the United States or of any State. Other 
corporations (i.e., those incorporated under the laws of 
foreign countries or U.S. possessions) generally are treated as 
foreign.

U.S. taxation of domestic corporations

    The United States employs a ``worldwide'' tax system, under 
which domestic corporations generally are taxed on all income, 
whether derived in the United States or abroad. In order to 
mitigate the double taxation that may arise from taxing the 
foreign-source income of a domestic corporation, a foreign tax 
credit for income taxes paid to foreign countries is provided 
to reduce or eliminate the U.S. tax owed on such income, 
subject to certain limitations.
    Income earned by a domestic parent corporation from foreign 
operations conducted by foreign corporate subsidiaries 
generally is subject to U.S. tax when the income is distributed 
as a dividend to the domestic corporation. Until such 
repatriation, the U.S. tax on such income generally is 
deferred, and U.S. tax is imposed on such income when 
repatriated. However, certain anti-deferral regimes may cause 
the domestic parent corporation to be taxed on a current basis 
in the United States with respect to certain categories of 
passive or highly mobile income earned by its foreign 
subsidiaries, regardless of whether the income has been 
distributed as a dividend to the domestic parent corporation. 
The main anti-deferral regimes in this context are the 
controlled foreign corporation rules of subpart F (secs. 951-
964) and the passive foreign investment company rules (secs. 
1291-1298). A foreign tax credit is generally available to 
offset, in whole or in part, the U.S. tax owed on this foreign-
source income, whether such income is repatriated as an actual 
dividend or included under one of the anti-deferral regimes.

U.S. taxation of foreign corporations

    The United States taxes foreign corporations only on income 
that has a sufficient nexus to the United States. Thus, a 
foreign corporation is generally subject to U.S. tax only on 
income that is ``effectively connected'' with the conduct of a 
trade or business in the United States. Such ``effectively 
connected income'' generally is taxed in the same manner and at 
the same rates as the income of a U.S. corporation. An 
applicable tax treaty may limit the imposition of U.S. tax on 
business operations of a foreign corporation to cases in which 
the business is conducted through a ``permanent establishment'' 
in the United States.
    In addition, foreign corporations generally are subject to 
a gross-basis U.S. tax at a flat 30-percent rate on the receipt 
of interest, dividends, rents, royalties, and certain similar 
types of income derived from U.S. sources, subject to certain 
exceptions. The tax generally is collected by means of 
withholding by the person making the payment. This tax may be 
reduced or eliminated under an applicable tax treaty.

U.S. tax treatment of inversion transactions prior to the American Jobs 
        Creation Act of 2004

    Prior to the American Jobs Creation Act of 2004 (``AJCA''), 
a U.S. corporation could reincorporate in a foreign 
jurisdiction and thereby replace the U.S. parent corporation of 
a multinational corporate group with a foreign parent 
corporation. These transactions were commonly referred to as 
inversion transactions. Inversion transactions could take many 
different forms, including stock inversions, asset inversions, 
and various combinations of and variations on the two. Most of 
the known transactions were stock inversions. In one example of 
a stock inversion, a U.S. corporation forms a foreign 
corporation, which in turn forms a domestic merger subsidiary. 
The domestic merger subsidiary then merges into the U.S. 
corporation, with the U.S. corporation surviving, now as a 
subsidiary of the new foreign corporation. The U.S. 
corporation's shareholders receive shares of the foreign 
corporation and are treated as having exchanged their U.S. 
corporation shares for the foreign corporation shares. An asset 
inversion could be used to reach a similar result, but through 
a direct merger of the top-tier U.S. corporation into a new 
foreign corporation, among other possible forms. An inversion 
transaction could be accompanied or followed by further 
restructuring of the corporate group. For example, in the case 
of a stock inversion, in order to remove income from foreign 
operations from the U.S. taxing jurisdiction, the U.S. 
corporation could transfer some or all of its foreign 
subsidiaries directly to the new foreign parent corporation or 
other related foreign corporations.
    In addition to removing foreign operations from U.S. taxing 
jurisdiction, the corporate group could seek to derive further 
advantage from the inverted structure by reducing U.S. tax on 
U.S.-source income through various earnings stripping or other 
transactions. This could include earnings stripping through 
payment by a U.S. corporation of deductible amounts such as 
interest, royalties, rents, or management service fees to the 
new foreign parent or other foreign affiliates. In this 
respect, the post-inversion structure could enable the group to 
employ the same tax-reduction strategies that are available to 
other multinational corporate groups with foreign parents and 
U.S. subsidiaries, subject to the same limitations (e.g., secs. 
163(j) and 482).
    Inversion transactions could give rise to immediate U.S. 
tax consequences at the shareholder and/or the corporate level, 
depending on the type of inversion. In stock inversions, the 
U.S. shareholders generally recognized gain (but not loss) 
under section 367(a), based on the difference between the fair 
market value of the foreign corporation shares received and the 
adjusted basis of the domestic corporation stock exchanged. To 
the extent that a corporation's share value had declined, and/
or it had many foreign or tax-exempt shareholders, the impact 
of this section 367(a) ``toll charge'' was reduced. The 
transfer of foreign subsidiaries or other assets to the foreign 
parent corporation also could give rise to U.S. tax 
consequences at the corporate level (e.g., gain recognition and 
earnings and profits inclusions under secs. 1001, 311(b), 304, 
367, 1248 or other provisions). The tax on any income 
recognized as a result of these restructurings could be reduced 
or eliminated through the use of net operating losses, foreign 
tax credits, and other tax attributes.
    In asset inversions, the U.S. corporation generally 
recognized gain (but not loss) under section 367(a) as though 
it had sold all of its assets, but the shareholders generally 
did not recognize gain or loss, assuming the transaction met 
the requirements of a reorganization under section 368.

U.S. tax treatment of inversion transactions under AJCA

            In general
    AJCA added new section 7874 to the Code, which defines two 
different types of corporate inversion transactions and 
establishes a different set of consequences for each type. 
Certain partnership transactions also are covered.
            Transactions involving at least 80 percent identity of 
                    stock ownership
    The first type of inversion is a transaction in which, 
pursuant to a plan\71\ or a series of related transactions: (1) 
a U.S. corporation becomes a subsidiary of a foreign-
incorporated entity or otherwise transfers substantially all of 
its properties to such an entity in a transaction completed 
after March 4, 2003; (2) the former shareholders of the U.S. 
corporation hold (by reason of holding stock in the U.S. 
corporation) 80 percent or more (by vote or value) of the stock 
of the foreign-incorporated entity after the transaction; and 
(3) the foreign-incorporated entity, considered together with 
all companies connected to it by a chain of greater than 50 
percent ownership (i.e., the ``expanded affiliated group''), 
does not have substantial business activities in the entity's 
country of incorporation, compared to the total worldwide 
business activities of the expanded affiliated group. The 
provision denies the intended tax benefits of this type of 
inversion (``80-percent inversion'') by deeming the top-tier 
foreign corporation to be a domestic corporation for all 
purposes of the Code.\72\
---------------------------------------------------------------------------
    \71\Acquisitions with respect to a domestic corporation or 
partnership are deemed to be ``pursuant to a plan'' if they occur 
within the four-year period beginning on the date which is two years 
before the ownership threshold under the provision is met with respect 
to such corporation or partnership.
    \72\Since the top-tier foreign corporation is treated for all 
purposes of the Code as domestic, the shareholder-level ``toll charge'' 
of sec. 367(a) does not apply to these inversion transactions.
---------------------------------------------------------------------------
    In determining whether a transaction meets the definition 
of an inversion under the provision, stock held by members of 
the expanded affiliated group that includes the foreign 
incorporated entity is disregarded. For example, if the former 
top-tier U.S. corporation receives stock of the foreign 
incorporated entity (e.g., so-called ``hook'' stock), the stock 
would not be considered in determining whether the transaction 
meets the definition. Similarly, if a U.S. parent corporation 
converts an existing wholly owned U.S. subsidiary into a new 
wholly owned controlled foreign corporation, the stock of the 
new foreign corporation would be disregarded, with the result 
that the transaction would not meet the definition of an 
inversion under the provision. Stock sold in a public offering 
related to the transaction also is disregarded for these 
purposes.
    Transfers of properties or liabilities as part of a plan a 
principal purpose of which is to avoid the purposes of the 
provision are disregarded. In addition, the Treasury Secretary 
is to provide regulations to carry out the provision, including 
regulations to prevent the avoidance of the purposes of the 
provision, including avoidance through the use of related 
persons, pass-through or other noncorporate entities, or other 
intermediaries, and through transactions designed to qualify or 
disqualify a person as a related person or a member of an 
expanded affiliated group. Similarly, the Treasury Secretary 
has the authority to treat certain non-stock instruments as 
stock, and certain stock as not stock, where necessary to carry 
out the purposes of the provision.
            Transactions involving at least 60 percent but less than 80 
                    percent identity of stock ownership
    The second type of inversion is a transaction that would 
meet the definition of an inversion transaction described 
above, except that the 80-percent ownership threshold is not 
met. In such a case, if at least a 60-percent ownership 
threshold is met, then a second set of rules applies to the 
inversion. Under these rules, the inversion transaction is 
respected (i.e., the foreign corporation is treated as 
foreign), but any applicable corporate-level ``toll charges'' 
for establishing the inverted structure are not offset by tax 
attributes such as net operating losses or foreign tax credits. 
Specifically, any applicable corporate-level income or gain 
required to be recognized under sections 304, 311(b), 367, 
1001, 1248, or any other provision with respect to the transfer 
of controlled foreign corporation stock or the transfer or 
license of other assets by a U.S. corporation as part of the 
inversion transaction or after such transaction to a related 
foreign person is taxable, without offset by any tax attributes 
(e.g., net operating losses or foreign tax credits). This rule 
does not apply to certain transfers of inventory and similar 
property. These measures generally apply for a 10-year period 
following the inversion transaction.
            Other rules
    Under section 7874, inversion transactions include certain 
partnership transactions. Specifically, the provision applies 
to transactions in which a foreign-incorporated entity acquires 
substantially all of the properties constituting a trade or 
business of a domestic partnership, if after the acquisition at 
least 60 percent (or 80 percent, as the case may be) of the 
stock of the entity is held by former partners of the 
partnership (by reason of holding their partnership interests), 
provided that the other terms of the basic definition are met. 
For purposes of applying this test, all partnerships that are 
under common control within the meaning of section 482 are 
treated as one partnership, except as provided otherwise in 
regulations. In addition, the modified ``toll charge'' rules 
apply at the partner level.
    A transaction otherwise meeting the definition of an 
inversion transaction is not treated as an inversion 
transaction if, on or before March 4, 2003, the foreign-
incorporated entity had acquired directly or indirectly more 
than half of the properties held directly or indirectly by the 
domestic corporation, or more than half of the properties 
constituting the partnership trade or business, as the case may 
be.

                           REASONS FOR CHANGE

    The Committee believes that the inversions regime should 
generally apply to companies that completed 80-percent 
inversion transactions after public notice was given that 
eventual legislation on this issue could be effective after 
March 20, 2002.

                        EXPLANATION OF PROVISION

    The provision generally extends the 80-percent inversion 
regime of section 7874 to 80-percent inversions completed after 
March 20, 2002 but on or before March 4, 2003, with certain 
modifications as described below. A transaction otherwise 
meeting the definition of an 80-percent inversion under the 
provision (i.e., one completed after March 20, 2002 but on or 
before March 4, 2003) is not treated as an 80-percent inversion 
if, on or before March 20, 2002, the foreign-incorporated 
entity had acquired directly or indirectly more than half the 
properties held directly or indirectly by the domestic 
corporation, or more than half the properties constituting the 
partnership trade or business, as the case may be.
    Under the provision, an 80-percent inversion that is 
completed after March 20, 2002 but on or before March 4, 2003 
is respected until the end of the last day of the foreign-
incorporated entity's first taxable year ending after the date 
of enactment. At the end of that day, the inverted foreign-
incorporated entity that completed the 80-percent inversion (or 
if relevant, any successor entity) is deemed to have 
transferred all of its assets and liabilities to a domestic 
corporation in a transaction that is generally treated as a 
nontaxable inbound reorganization (``repatriation''). The basis 
of the assets of the foreign-incorporated entity generally 
remains the same in the hands of the domestic corporation, 
subject to any special adjustments for importing built-in 
losses (e.g., sec. 362(e)). Shareholders of the domestic 
corporation inherit the respective bases of their shares of the 
foreign-incorporated entity.
    On the day of the repatriation, the earnings and profits of 
the inverted foreign-incorporated entity transfer over to the 
domestic corporation. The transfer of such earnings and profits 
is not a deemed dividend and does not result in a tax upon the 
domestic corporation or its shareholders. In addition, any 
foreign taxes attributable to such earnings and profits are not 
creditable. However, shareholders may be subject to tax on 
distributions of such earnings and profits.
    Beginning on the day after the repatriation, the inverted 
foreign-incorporated entity is treated for all tax purposes as 
a domestic corporation. Thus, any income earned by the inverted 
foreign-incorporated entity after the date of repatriation is 
deemed to be earned by a domestic corporation, and therefore, 
is fully taxable at U.S. corporate income tax rates. As a 
further consequence of the repatriation of the inverted 
foreign-incorporated entity, foreign subsidiaries become 
controlled foreign corporations, subject to the rules of 
subpart F.
    It is intended that the Secretary will prescribe 
regulations that are necessary or appropriate to carry out the 
provision, including, but not limited to, regulations to 
prevent the avoidance of the purposes of the provision.

                             EFFECTIVE DATE

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

              J. Denial of Deduction for Punitive Damages


(Sec. 210 of the bill and sec. 162(g) of the Code)

                              present law

    In general, a deduction is allowed for all ordinary and 
necessary expenses that are paid or incurred by the taxpayer 
during the taxable year in carrying on any trade or 
business.\73\ However, no deduction is allowed for any payment 
that is made to an official of any governmental agency if the 
payment constitutes an illegal bribe or kickback or if the 
payment is to an official or employee of a foreign government 
and is illegal under Federal law.\74\ In addition, no deduction 
is allowed under present law for any fine or similar payment 
made to a government for violation of any law.\75\ Furthermore, 
no deduction is permitted for two-thirds of any damage payments 
made by a taxpayer who is convicted of a violation of the 
Clayton antitrust law or any related antitrust law.\76\
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    \73\Sec. 162(a).
    \74\Sec. 162(c).
    \75\Sec. 162(f).
    \76\Sec. 162(g).
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    In general, gross income does not include amounts received 
on account of personal physical injuries and physical 
sickness.\77\ However, this exclusion does not apply to 
punitive damages.\78\
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    \77\Sec. 104(a).
    \78\Sec. 104(a)(2).
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                           REASONS FOR CHANGE

    The Committee believes that allowing a tax deduction for 
punitive damages undermines the societal role of punitive 
damages in discouraging and penalizing the activities or 
actions for which punitive damages are imposed. Furthermore, 
the Committee believes that determining the amount of punitive 
damages to be disallowed as a tax deduction is not 
administratively burdensome because taxpayers generally can 
make such a determination readily by reference to pleadings 
filed with a court, and plaintiffs already make such a 
determination in determining the taxable portion of any 
payment.

                        EXPLANATION OF PROVISION

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

                             EFFECTIVE DATE

    The provision is effective for punitive damages that are 
paid or incurred on or after the date of enactment.

                     K. Fuel Technical Corrections


(Sec. 211 of the bill)

Energy-related technical corrections

    Except as otherwise provided, the amendments made by the 
technical corrections contained in the bill take effect as if 
included in the original legislation to which each amendment 
relates.

Amendments to the Safe, Accountable, Flexible, Efficient Transportation 
        Equity Act: A Legacy for Users

            Timing of claims for excess alternative fuel (not in a 
                    mixture) credit and liquid hydrocarbons from 
                    biomass (Act sec. 11113)
    The Code makes the alternative fuel (not in a mixture) 
credit refundable. Section 6427(i)(3) permits claims to be 
filed on a weekly basis with respect to alcohol, biodiesel, and 
alternative fuel mixtures if certain requirements are met. This 
rule, however, does not reference the alternative fuel credit 
(for alternative fuel not in a mixture). The amendment 
clarifies that the same rules for filing claims with respect to 
fuel mixtures apply to the alternative fuel credit.
    The Code provides that alternative fuel includes ``liquid 
hydrocarbons derived from biomass.'' It was intended that 
liquid hydrocarbons from biomass include fuels made from 
biomass such as fish oil, which contains some oxygen in 
addition to hydrogen and carbon. The amendment provides that 
alternative fuel includes ``liquid fuel from biomass'' and 
clarifies that fuels described in section 6426(b) or (c), or 
sections 40 or 40A (alcohol, biodiesel, and renewable diesel), 
do not qualify for the alternative fuel credit or alternative 
fuel mixture credit.

Amendments to the Energy Policy Act of 2005

            Clarify limitation on the credit of installing alternative 
                    fuel refueling property (Act sec. 1342)
    The present-law credit for qualified alternative fuel 
vehicle refueling property for a taxable year is limited to 
$30,000 per property subject to depreciation, and $1,000 for 
other property (sec. 30C(b)). The provision clarifies that the 
$30,000 and $1,000 limitations apply to all alternative fuel 
vehicle refueling property placed in service by the taxpayer at 
a location. The provision is consistent with similar deduction 
limitations imposed under section 179A(b)(2)(A) (relating to 
the deduction for clean-fuel vehicles and certain refueling 
property).
    In addition, section 30C(c)(1) provides that qualified 
alternative fuel vehicle refueling property has the meaning 
given to the term by section 179A(d). However, section 179A(d) 
defines a different term, qualified clean-fuel vehicle 
refueling property. The provision coordinates the reference to 
this definition.
            Double taxation of rail and inland waterway fuel resulting 
                    from the use of dyed fuel on which the Leaking 
                    Underground Storage Tank Trust Fund tax has already 
                    been imposed; off-highway business use (Act sec. 
                    1362)
    Section 4081(a)(2)(B) imposes tax at the Leaking 
Underground Storage Tank Trust Fund financing tax rate of 0.1 
cent per gallon on diesel fuel at the time it is removed from a 
terminal. Section 4082(a) provides that none of the generally 
applicable exemptions other than the exemption for export apply 
to this removal even if the fuel is dyed. When dyed fuel is 
used or sold for use in a diesel-powered highway vehicle or 
train (sec. 4041), or such fuel is subject to the inland 
waterway tax (sec. 4042), the Code inadvertently imposes the 
Leaking Underground Storage Tank Trust Fund tax a second time. 
Section 6430 prohibits the refund of taxes imposed at the 
Leaking Underground Storage Tank Trust Fund financing rate, 
except in the case of fuel destined for export. The amendment 
eliminates the imposition of the 0.1 cent tax a second time if 
the Leaking Underground Storage Tank Trust Fund tax was imposed 
previously under section 4081. The amendment permits a refund 
in the amount of the Leaking Underground Storage Tank Trust 
Fund financing rate if such tax was imposed a second time under 
4041 or 4042. The amendment also clarifies that off-highway 
business use is not exempt from the Leaking Underground Storage 
Tank Trust Fund tax, effective for fuel sold for use or used 
after the date of enactment.
            Exemption from the Leaking Underground Storage Tank Trust 
                    Fund financing rate for aircraft and vessels 
                    engaged in foreign trade (Act sec. 1362)
    Fuel supplied in the United States for use in aircraft 
engaged in foreign trade is exempt from U.S. customs duties and 
internal revenue taxes so long as, where the aircraft is 
registered in a foreign State, the State of registry provides 
substantially reciprocal privileges for U.S.-registered 
aircraft. However, the Energy Policy Act of 2005 imposed, 
without exemption, the Leaking Underground Storage Tank Trust 
Fund financing rate on all taxable fuels, except in the case of 
export. As a result, aviation fuel is no longer exempt from the 
Leaking Underground Storage Tank Trust Fund financing rate. 
According to the State Department, almost all of the United 
States' bilateral air services agreements contain provisions 
exempting from taxation all fuel supplied in the territory of 
one party for use in the aircraft of the other party. The 
United States has interpreted these provisions to prohibit the 
taxation, in any form, of aviation fuel supplied in the United 
States to the aircraft of airlines of the foreign countries 
that are parties to these air services agreements. The 
amendment provides that fuel for use in vessels (including 
civil aircraft) employed in foreign trade or trade between the 
United States and any of its possessions is exempt from the 
Leaking Underground Storage Tank Trust Fund financing rate.

Amendment to the American Jobs Creation Act of 2004

            Interaction of rules relating to credit for low sulfur 
                    diesel fuel (Act sec. 339)
    Section 45H of the Code allows a credit at the rate of five 
cents per gallon for low sulfur diesel fuel produced at certain 
small business refineries. The aggregate credit with respect to 
any refinery is limited to 25 percent of the costs of the type 
deductible under section 179B of the Code. Section 179B allows 
a deduction for 75 percent of certain costs paid or incurred 
with respect to these refineries. The basis of the property is 
reduced by the amount of any credit determined with respect to 
any expenditure (sec. 45H(d)). Further, no deduction is allowed 
for the expenses otherwise allowable as a deduction in an 
amount equal to the amount of the credit under section 45H 
(sec. 280C(d)). The interaction of these provisions is unclear, 
and the basis reduction and deduction denial rules may have an 
unintentionally duplicative effect. Under the provision, 
deductions are denied in an amount equal to the amount of the 
credit under section 45H, and the provisions of present law 
reducing basis and denying a deduction are repealed.

           L. Motor Fuel Tax Enforcement Advisory Commission


(Sec. 212 of the bill)

                              PRESENT LAW

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

                           REASONS FOR CHANGE

    The Government Accountability Office has recommended 
certain changes regarding the operation of the Motor Fuel Tax 
Advisory Commission. The Committee believes it is appropriate 
to make limited changes regarding the composition and operation 
of the Motor Fuel Tax Advisory Commission.

                        EXPLANATION OF PROVISION

    The provision limits the Commission to 14 members. Under 
the proposal, the Commission is composed of:
           One member from the Department of 
        Transportation;
           One member from the Department of 
        Transportation--Federal Highway Administration;
           One member from the Department of 
        Transportation--Inspector General;
           One member from the Department of Homeland 
        Security;
           One member from the Department of Defense;
           One member from the Department of Justice;
           Two members shall be appointed by the 
        Chairman of the Senate Committee on Finance;
           Two members shall be appointed by the 
        Ranking Member of the Senate Committee of Finance;
           Two members shall be appointed by the 
        Chairman of the House Committee on Ways and Means;
           Two members shall be appointed by the 
        Ranking Member of the House Committee on Ways and 
        Means.
    The appointed members are to include at least one 
representative from the Federation of State Tax Administrators, 
at least one representative from a State department of 
transportation, at least one representative from industries 
relating to fuel distribution (refiners, distributors, 
pipelines, and terminal operators), and at least one 
representative from the retail fuel industry. Not later than 
September 30, 2009, the Commission is to submit to Congress a 
final report that contains a detailed statement of the findings 
and conclusions of the Commission; and the recommendations of 
the Commission for such legislation and administrative action 
as the Commission considers appropriate and necessary. The 
provision also makes other administrative changes.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

M. Conform Highway Trust Fund Provisions in the Code To Include Public 
                             Law No. 110-56


(Sec. 213 of the bill and sec. 9503 of the Code)

                              PRESENT LAW

    Public Law No. 110-56 authorized additional funds for 
emergency repairs and reconstruction of the Interstate I-35 
bridge, located in Minneapolis, Minnesota, that collapsed on 
August 1, 2007. That Act also amended section 1112 of the Safe, 
Accountable, Flexible, Efficient Transportation Equity Act: A 
Legacy for Users (``SAFETEA'') to authorize the use of not more 
than $5 million of funds to reimburse the Minnesota State 
Department of Transportation for actual and necessary costs of 
maintenance and operation for providing temporary substitute 
highway traffic service following the collapse. While the Act 
amended SAFETEA, it did not make conforming amendments to the 
Code.
    The purposes for which Highway Trust Fund funds are 
permitted to be expended are fixed as of the date of enactment 
of SAFETEA (August 10, 2005), and the Code must be amended in 
order to accommodate new purposes. In addition, the Code 
contains a special enforcement provision to prevent expenditure 
of Highway Trust Fund monies for purposes not authorized in 
section 9503.\79\ This provision provides that, should such 
unapproved expenditures occur, no further excise tax receipts 
will be transferred to the Highway Trust Fund. Rather, the 
taxes will continue to be imposed but the receipts will be 
retained in the General Fund. This enforcement provision 
specifically provides that it applies not only to unauthorized 
expenditures under the current Code provisions, but also to 
expenditures pursuant to future legislation unless either the 
legislation providing for the expenditure either amends the 
expenditure authorization provisions of section 9503 or 
otherwise authorizes the expenditure as part of a revenue Act.
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    \79\Sec. 9503(b)(6).
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                           REASONS FOR CHANGE

    The Committee believes it is appropriate to make this 
technical change to the Code to ensure payment of funds as 
intended by Public Law No. 110-56.

                        EXPLANATION OF PROVISION

    The provision adds section 1112 of SAFETEA as amended by 
Public Law No. 110-56 to the list of legislation authorizing 
the expenditure of funds from the Highway Trust Fund.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

    TITLE III--ADDITIONAL INFRASTRUCTURE MODIFICATIONS AND REVENUE 
                               PROVISIONS


          A. Restructure New York Liberty Zone Tax Incentives


(Sec. 301 of the bill and secs. 1400K and 1400L of the Code)

                              PRESENT LAW

In general

    Present law includes a number of incentives to invest in 
property located in the New York Liberty Zone (``NYLZ''), which 
is the area located on or south of Canal Street, East Broadway 
(east of its intersection with Canal Street), or Grand Street 
(east of its intersection with East Broadway) in the Borough of 
Manhattan in the City of New York, New York. These incentives 
were enacted following the terrorist attack in New York City on 
September 11, 2001.\80\
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    \80\In addition to the NYLZ provisions described above, other NYLZ 
incentives are provided: (1) $8 billion of tax-exempt private activity 
bond financing for certain nonresidential real property, residential 
rental property and public utility property is authorized to be issued 
after March 9, 2002, and before January 1, 2010; and (2) $9 billion of 
additional tax-exempt advance refunding bonds is available after March 
9, 2002, and before January 1, 2006, with respect to certain State or 
local bonds outstanding on September 11, 2001.
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Special depreciation allowance for qualified New York Liberty Zone 
        property

    Section 1400L(b) allows an additional first-year 
depreciation deduction equal to 30 percent of the adjusted 
basis of qualified NYLZ property.\81\ In order to qualify, 
property generally must be placed in service on or before 
December 31, 2006 (December 31, 2009 in the case of 
nonresidential real property and residential rental property).
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    \81\The amount of the additional first-year depreciation deduction 
is not affected by a short taxable year.
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    The additional first-year depreciation deduction is allowed 
for both regular tax and alternative minimum tax purposes for 
the taxable year in which the property is placed in service.
    A taxpayer is allowed to elect out of the additional first-
year depreciation for any class of property for any taxable 
year.
    In order for property to qualify for the additional first-
year depreciation deduction, it must meet all of the following 
requirements. First, the property must be property to which the 
general rules of the Modified Accelerated Cost Recovery System 
(``MACRS'')\82\ apply with (1) an applicable recovery period of 
20 years or less, (2) water utility property (as defined in 
section 168(e)(5)), (3) certain nonresidential real property 
and residential rental property, or (4) computer software other 
than computer software covered by section 197. A special rule 
precludes the additional first-year depreciation under this 
provision for (1) qualified NYLZ leasehold improvement 
property\83\ and (2) property eligible for the additional 
first-year depreciation deduction under section 168(k) (i.e., 
property is eligible for only one 30 percent additional first-
year depreciation). Second, substantially all of the use of 
such property must be in the NYLZ. Third, the original use of 
the property in the NYLZ must commence with the taxpayer on or 
after September 11, 2001. Finally, the property must be 
acquired by purchase\84\ by the taxpayer after September 10, 
2001 and placed in service on or before December 31, 2006.\85\
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    \82\A special rule precludes the additional first-year depreciation 
deduction for property that is required to be depreciated under the 
alternative depreciation system of MACRS. For qualifying nonresidential 
real property and residential rental property the property must be 
placed in service on or before December 31, 2009 in lieu of December 
31, 2006. Property will not qualify if a binding written contract for 
the acquisition of such property was in effect before September 11, 
2001.
    \83\Qualified NYLZ leasehold improvement property is defined in 
another provision. Leasehold improvements that do not satisfy the 
requirements to be treated as ``qualified NYLZ leasehold improvement 
property'' may be eligible for the 30 percent additional first-year 
depreciation deduction
    \84\For purposes of this provision, purchase is defined as under 
section 179(d).
    \85\Property is not precluded from qualifying for the additional 
first-year depreciation merely because a binding written contract to 
acquire a component of the property is in effect prior to September 11, 
2001.
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    Nonresidential real property and residential rental 
property are eligible for the additional first-year 
depreciation only to the extent such property rehabilitates 
real property damaged, or replaces real property destroyed or 
condemned as a result of the terrorist attacks of September 11, 
2001.
    Property that is manufactured, constructed, or produced by 
the taxpayer for use by the taxpayer qualifies for the 
additional first-year depreciation deduction if the taxpayer 
begins the manufacture, construction, or production of the 
property after September 10, 2001, and the property is placed 
in service on or before December 31, 2006\86\ (and all other 
requirements are met). Property that is manufactured, 
constructed, or produced for the taxpayer by another person 
under a contract that is entered into prior to the manufacture, 
construction, or production of the property is considered to be 
manufactured, constructed, or produced by the taxpayer.
---------------------------------------------------------------------------
    \86\December 31, 2009 with respect to qualified nonresidential real 
property and residential rental property.
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Depreciation of New York Liberty Zone leasehold improvements

    Generally, depreciation allowances for improvements made on 
leased property are determined under MACRS, even if the MACRS 
recovery period assigned to the property is longer than the 
term of the lease.\87\ This rule applies regardless of whether 
the lessor or the lessee places the leasehold improvements in 
service.\88\ If a leasehold improvement constitutes an addition 
or improvement to nonresidential real property already placed 
in service, the improvement generally is depreciated using the 
straight-line method over a 39-year recovery period, beginning 
in the month the addition or improvement is placed in 
service.\89\
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    \87\Sec. 168(i)(8). The Tax Reform Act of 1986 modified the 
Accelerated Cost Recovery System (``ACRS'') to institute MACRS. Prior 
to the adoption of ACRS by the Economic Recovery Tax Act of 1981, 
taxpayers were allowed to depreciate the various components of a 
building as separate assets with separate useful lives. The use of 
component depreciation was repealed upon the adoption of ACRS. The Tax 
Reform Act of 1986 also denied the use of component depreciation under 
MACRS.
    \88\Former sections 168(f)(6) and 178 provided that, in certain 
circumstances, a lessee could recover the cost of leasehold 
improvements made over the remaining term of the lease. The Tax Reform 
Act of 1986 repealed these provisions.
    \89\Secs. 168(b)(3), (c), (d)(2), and (i)(6). If the improvement is 
characterized as tangible personal property, ACRS or MACRS depreciation 
is calculated using the shorter recovery periods, accelerated methods, 
and conventions applicable to such property. The determination of 
whether improvements are characterized as tangible personal property or 
as nonresidential real property often depends on whether or not the 
improvements constitute a ``structural component'' of a building (as 
defined by Treas. Reg. sec. 1.48-1(e)(1)). See, e.g., Metro National 
Corp v. Commissioner, 52 TCM (CCH) 1440 (1987); King Radio Corp. Inc. 
v. U.S., 486 F.2d 1091 (10th Cir. 1973); Mallinckrodt, Inc. v. 
Commissioner, 778 F.2d 402 (8th Cir. 1985) (with respect to various 
leasehold improvements).
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    A special rule exists for qualified NYLZ leasehold 
improvement property, which is recovered over five years using 
the straight-line method. The term qualified NYLZ leasehold 
improvement property means property defined in section 
168(e)(6) that is acquired and placed in service after 
September 10, 2001, and before January 1, 2007 (and not subject 
to a binding contract on September 10, 2001), in the NYLZ. For 
purposes of the alternative depreciation system, the property 
is assigned a nine-year recovery period. A taxpayer may elect 
out of the 5-year (and 9-year) recovery period for qualified 
NYLZ leasehold improvement property.

Increased section 179 expensing for qualified New York Liberty Zone 
        property

    In lieu of depreciation, a taxpayer with a sufficiently 
small amount of annual investment may elect to deduct (or 
``expense'') such costs under section 179. The Small Business 
and Work Opportunity Tax Act of 2007\90\ increased the amount a 
taxpayer may deduct, for taxable years beginning in 2007 
through 2010, to $125,000 of the cost of qualifying property 
placed in service for the taxable year.\91\ In general, 
qualifying property is defined as depreciable tangible personal 
property that is purchased for use in the active conduct of a 
trade or business. Off-the-shelf computer software placed in 
service in taxable years beginning before 2010 is treated as 
qualifying property. The $125,000 amount is reduced (but not 
below zero) by the amount by which the cost of qualifying 
property placed in service during the taxable year exceeds 
$500,000. The $125,000 and $500,000 amounts are indexed for 
inflation in taxable years beginning after 2007 and before 
2011.\92\ In general, qualifying property for this purpose is 
defined as depreciable tangible personal property that is 
purchased for use in the active conduct of a trade or business.
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    \90\Pub. L. No. 110-28, sec. 8212 (2007).
    \91\Additional section 179 incentives are provided with respect to 
qualified property meeting applicable requirements that is used by a 
business in an empowerment zone (sec. 1397A), a renewal community (sec. 
1400J), or the Gulf Opportunity Zone (sec. 1400N(e)).
    \92\For taxable years beginning in 2011 and thereafter (or before 
2003), the following rules apply. A taxpayer with a sufficiently small 
amount of annual investment may elect to deduct up to $25,000 of the 
cost of qualifying property placed in service for the taxable year. The 
$25,000 amount is reduced (but not below zero) by the amount by which 
the cost of qualifying property placed in service during the taxable 
year exceeds $200,000. The $25,000 and $200,000 amounts are not indexed 
for inflation.
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    The amount eligible to be expensed for a taxable year may 
not exceed the taxable income for a taxable year that is 
derived from the active conduct of a trade or business 
(determined without regard to this provision). Any amount that 
is not allowed as a deduction because of the taxable income 
limitation may be carried forward to succeeding taxable years 
(subject to similar limitations). No general business credit 
under section 38 is allowed with respect to any amount for 
which a deduction is allowed under section 179.
    The amount a taxpayer can deduct under section 179 is 
increased for qualifying property used in the NYLZ. 
Specifically, the maximum dollar amount that may be deducted 
under section 179 is increased by the lesser of (1) $35,000 or 
(2) the cost of qualifying property placed in service during 
the taxable year. This amount is in addition to the amount 
otherwise deductible under section 179.
    Qualifying property for purposes of the NYLZ provision 
means section 179 property\93\ purchased and placed in service 
by the taxpayer after September 10, 2001 and before January 1, 
2007, where (1) substantially all of the use of such property 
is in the NYLZ in the active conduct of a trade or business by 
the taxpayer in the NYLZ, and (2) the original use of which in 
the NYLZ commences with the taxpayer after September 10, 
2001.\94\
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    \93\As defined in sec. 179(d)(1).
    \94\See Rev. Proc. 2002-33, 2002-1 C.B. 963 (May 20, 2002), for 
procedures on claiming the increased section 179 expensing deduction by 
taxpayers who filed their tax returns before June 1, 2002.
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    The phase-out range for the section 179 deduction 
attributable to NYLZ property is applied by taking into account 
only 50 percent of the cost of NYLZ property that is section 
179 property. Also, no general business credit under section 38 
is allowed with respect to any amount for which a deduction is 
allowed under section 179.
    The provision is effective for property placed in service 
after September 10, 2001 and before January 1, 2007.

Extended replacement period for New York Liberty Zone involuntary 
        conversions

    A taxpayer may elect not to recognize gain with respect to 
property that is involuntarily converted if the taxpayer 
acquires within an applicable period (the ``replacement 
period'') property similar or related in service or use.\95\ If 
the taxpayer does not replace the converted property with 
property similar or related in service or use, then gain 
generally is recognized. If the taxpayer elects to apply the 
rules of section 1033, gain on the converted property is 
recognized only to the extent that the amount realized on the 
conversion exceeds the cost of the replacement property. In 
general, the replacement period begins with the date of the 
disposition of the converted property and ends two years after 
the close of the first taxable year in which any part of the 
gain upon conversion is realized.\96\ The replacement period is 
extended to three years if the converted property is real 
property held for the productive use in a trade or business or 
for investment.\97\
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    \95\Sec. 1033(a).
    \96\Sec. 1033(a)(2)(B).
    \97\Sec. 1033(g)(4).
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    The replacement period is extended to five years with 
respect to property that was involuntarily converted within the 
NYLZ as a result of the terrorist attacks that occurred on 
September 11, 2001. However, the five-year period is available 
only if substantially all of the use of the replacement 
property is in New York City. In all other cases, the present-
law replacement period rules continue to apply.

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to restructure 
certain of the tax benefits that were provided to stimulate the 
redevelopment of the portions of the City of New York that were 
directly affected by the terrorist attacks of September 11, 
2001. The restructuring will assist in the development of 
transit connections necessary for the ongoing redevelopment of 
the New York Liberty Zone area.

                        EXPLANATION OF PROVISION

Repeal of certain NYLZ incentives

    The provision repeals the first-year depreciation allowance 
of 30 percent and the additional section 179 expensing in the 
case of nonresidential real property and residential rental 
property as of the date of enactment of this provision.\98\
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    \98\In the case of nonresidential real property and residential 
rental property acquired pursuant to a binding contract in effect on 
such enactment date, the first-year depreciation allowance of 30 
percent and the additional section 179 expensing provisions terminate 
on December 31, 2009.
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Creation of New York Liberty Zone Tax Credits

    The provision provides a credit against tax imposed for any 
payroll period by section 3402 (related to withholding for 
wages paid) for which a New York Liberty Zone governmental unit 
is liable under section 3403. The credit is equal to such 
portion of the qualifying project expenditure amounts allocated 
to the governmental unit for the calendar year that such 
governmental unit allocates to such period. The amount of the 
credit allowed for any payroll period shall be treated as a 
payment to the Secretary on the day on which the wages were 
paid to the employee, but only to the extent the governmental 
unit actually deducted and withheld such wages for the 
applicable period. A New York Liberty Zone governmental unit is 
the State of New York, the City of New York, or any agency or 
instrumentality of such State or city.
    Qualifying project expenditure amount means, with respect 
to any calendar year, the sum of (1) the total expenditures 
paid or incurred during such calendar year by all New York 
Liberty Zone governmental units and the Port Authority of New 
York and New Jersey for any portion of qualifying projects 
located wholly within the City of New York, and (2) any such 
expenditures paid or incurred in any preceding calendar year 
beginning after the date of enactment of this provision and not 
previously allocated.
    A qualifying project is any transportation infrastructure 
project, including highways, mass transit systems, railroads, 
airports, ports, and waterways, in or connecting with the New 
York Liberty Zone, which is designated as a qualifying project 
by the Governor of the State of New York and the Mayor of the 
City of New York.
    The Governor of the State of New York and the Mayor of the 
City of New York are to jointly allocate to each New York 
Liberty Zone governmental unit the portion of the qualifying 
expenditure amount that may be taken into account by such 
governmental unit to determine the credit for any calendar year 
in the credit period. The credit period is the 12-year period 
beginning on January 1, 2008. Aggregate amounts allocated may 
not exceed $2 billion during the credit period. There is also 
an annual limit on allocations equal to (1) $169 million for 
each year of the credit period, plus (2) any amounts in (1) 
that were authorized to be allocated for prior calendar years 
in the credit period but not so allocated.
    If amounts allocated to a New York Liberty Zone 
governmental unit exceed the aggregate taxes for which such 
unit is liable under section 3403, the excess may be carried to 
the succeeding calendar year and added to the allocation for 
that calendar year. If a New York Liberty Zone governmental 
unit does not use an amount allocated to it within the time 
prescribed by the Governor of the State of New York and the 
Mayor of the City of New York, such amounts will be treated as 
if never allocated, and thus they may be reallocated by the 
Governor and Mayor.
    Under the provision, any expenditure for a qualifying 
project taken into account for purposes of the credit shall be 
considered State and local funds for the purpose of any Federal 
program.
    The Governor of the State of New York and the Mayor of the 
City of New York must jointly submit to the Secretary an annual 
report that certifies the qualifying project expenditure 
amounts for the calendar year, the amount allocated to each New 
York Liberty Zone governmental unit, and any other such 
information as the Secretary may require.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

    B. Option To Treat Elective Deferrals as After-Tax Contributions


(Sec. 302 of the bill)

                              PRESENT LAW

    Among the various types of tax-favored retirement plans 
under present law are eligible deferred compensation plans 
under section 457(b). A section 457(b) plan is a plan 
maintained by a State or local government or a tax-exempt 
organization and that meets certain requirements. Generally, 
the maximum amount that can be deferred under a section 457(b) 
plan by an individual during any taxable year is limited to the 
lesser of 100 percent of the participant's includible 
compensation or the applicable dollar amount for the taxable 
year. The applicable dollar amount for 2007 is $15,500, and is 
indexed for future taxable years. A participant's includible 
compensation means the compensation of the participant from the 
eligible employer for the taxable year.
    Over time, the rules relating to section 457(b) plans of 
State and local governments (``governmental section 457(b) 
plans'') and those of tax-exempt entities have diverged. Some 
of the rules relating to governmental section 457(b) plans are 
similar to those relating to qualified retirement plans. For 
example, assets under a governmental section 457(b) plan are 
required to be held in trust for the exclusive benefit of plan 
participants. Compensation deferred under a governmental 
section 457(b) plan (and income attributable to the deferral) 
is generally includible in gross income only for the taxable 
year in which such compensation (and income) is paid. Rollovers 
between governmental section 457(b) plans and other tax-favored 
arrangements (subject to separate accounting requirements) are 
permitted.
    Under present law, section 402A provides that an applicable 
retirement plan may include a qualified Roth contribution 
program. A qualified Roth contribution program means a program 
under which an employee may elect to make designated Roth 
contributions in lieu of all or a portion of the elective 
deferrals the employee is otherwise eligible to make under the 
applicable retirement plan. Designated Roth contributions are 
treated as elective deferrals (and thus, for example, subject 
to applicable nondiscrimination rules), except that designated 
Roth contributions are includible in an employee's gross 
income. Qualified distributions from a designated Roth account 
are excludable from gross income.
    Applicable retirement plans permitted to include a Roth 
contribution program are plans qualified under Code section 
401(a) and tax-sheltered annuities described in section 403(b). 
Elective deferral for purposes of a qualified Roth contribution 
program means an employer contribution under a qualified cash 
or deferred arrangement (within the meaning of section 401(k)) 
or an employer contribution to purchase an annuity contract 
under section 403(b) under a salary reduction agreement.
    As part of establishing a qualified Roth contribution 
program, an applicable retirement plan must establish a 
separate account, referred to as a designated Roth account, for 
the designated Roth contributions of each employee and any 
earnings on such contributions. In addition, the plan must 
maintain separate recordkeeping with respect to each account.
    The maximum amount that can be designated as a Roth 
contribution by an employee for a taxable year is the maximum 
amount of elective deferrals that the employee could have 
excluded from gross income for the taxable year, less the 
aggregate elective deferrals that the employee does not 
designate as Roth contributions.
    A qualified distribution from a designated Roth account 
generally means a distribution that is made after the end of a 
specified nonexclusion period and that is (1) made on or after 
the date on which the participant attains age 59\1/2\, (2) made 
to a beneficiary (or to the estate of the participant) on or 
after the death of the participant, or (3) attributable to the 
participant's being disabled. The nonexclusion period is the 
five-taxable-year period beginning with the earlier of (1) the 
first taxable year for which the participant made a designated 
Roth contribution to any designated Roth account established 
for the participant under the plan, or (2) if the participant 
has made a rollover contribution to the designated Roth account 
that is the source of the distribution from a designated Roth 
account established for the participant under another plan, the 
first taxable year for which the participant made a designated 
Roth contribution to the previously established account.

                           REASONS FOR CHANGE

    The Roth designated account provisions enacted in 2001 
provided participants in section 401(k) plans and tax-sheltered 
annuities with another form of tax-favored retirement savings. 
For a variety of reasons, some individuals may prefer to save 
through a Roth designated account rather than a traditional 
pre-tax elective deferral or salary reduction contribution to a 
section 401(k) plan or tax-sheltered annuity. The Committee 
believes that similar savings choices should be extended to 
participants in governmental section 457(b) plans.

                        EXPLANATION OF PROVISION

    Under the provision, governmental section 457(b) plans may 
include a qualified Roth contribution program under which plan 
participants are permitted to designate elective deferrals that 
could be otherwise deferred under the plan as Roth 
contributions subject to the present-law rules. Thus, as under 
present law, such a designated Roth contribution is includible 
in gross income in the year of deferral and a subsequent 
distribution of such a contribution (and the income on such 
contribution) is excluded from gross income if the distribution 
is a qualified distribution. Similarly, the present-law 
separate accounting requirements apply to qualified Roth 
contribution programs permitted under the provision.

                             EFFECTIVE DATE

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

              C. Increase in Information Return Penalties


(Sec. 303 of the bill and secs. 6721, 6722, and 6723 of the Code)

                              PRESENT LAW

    Present law imposes information reporting requirements on 
participants in certain transactions. Under section 6721 of the 
Code, any person required to file a correct information return 
who fails to do so on or before the prescribed filing date is 
subject to a penalty that varies based on when, if at all, the 
correct information return is filed. If a person files a 
correct information return after the prescribed filing date, 
but on or before the date that is 30 days after the prescribed 
filing date, the amount of the penalty is $15 per return (the 
``first-tier penalty''), with a maximum penalty of $75,000 per 
calendar year. If a person files a correct information return 
more than 30 days after the prescribed filing date, but on or 
before August 1, the amount of the penalty is $30 per return 
(the ``second-tier penalty''), with a maximum penalty of 
$150,000 per calendar year. If a correct information return is 
not filed on or before August 1, the amount of the penalty is 
$50 per return (the ``third-tier penalty''), with a maximum 
penalty of $250,000 per calendar year.
    Special lower maximum levels for this penalty apply to 
small businesses. Small businesses are defined as firms having 
average annual gross receipts for the most recent three taxable 
years that do not exceed $5 million. The maximum penalties for 
small businesses are: $25,000 (instead of $75,000) if the 
failures are corrected on or before 30 days after the 
prescribed filing date; $50,000 (instead of $150,000) if the 
failures are corrected on or before August 1; and $100,000 
(instead of $250,000) if the failures are not corrected on or 
before August 1.
    Section 6722 of the Code also imposes penalties for failing 
to furnish correct payee statements to taxpayers. In addition, 
section 6723 imposes a penalty for failing to comply with other 
information reporting requirements. Under both section 6722 and 
section 6723, the penalty amount is $50 for each failure, up to 
a maximum of $100,000.

                           REASONS FOR CHANGE

    The Committee believes the present law penalties for 
failing to file accurate information returns are too low to 
discourage noncompliance. The Committee believes that 
increasing the information return penalties will encourage the 
filing of timely and accurate information returns and generally 
will improve tax administration and tax compliance.

                        EXPLANATION OF PROVISION

    The provision increases the penalties for failing to file 
correct information returns, failing to furnish correct payee 
statements, and failing to comply with other information 
reporting requirements. Specifically, the provision increases 
the failure to file correct information returns as follows: the 
first-tier penalty would be increased from $15 to $50, with a 
maximum penalty of $500,000 per calendar year; the second-tier 
penalty would be increased from $30 to $100, with a maximum 
penalty of $1,500,000 per calendar year; and the third-tier 
penalty would be increased from $50 to $250, with a maximum 
penalty of $3,000,000 per calendar year. The maximum penalties 
for small businesses would be: $175,000 if the failures are 
corrected on or before 30 days after the prescribed filing 
date; $500,000 if the failures are corrected on or before 
August 1; and $1,000,000 if the failures are not corrected on 
or before August 1.
    The provision increases both the penalty for failing to 
furnish correct payee statements to taxpayers and the penalty 
for failing to comply with other information reporting 
requirements penalties to $250 for each such failure, up to a 
maximum of $1,000,000 in a calendar year.

                             EFFECTIVE DATE

    The provision is effective with respect to information 
returns required to be filed on or after January 1, 2008.

  D. Exemption of Certain Commercial Cargo From Harbor Maintenance Tax


(Sec. 304 of the bill and sec. 4462 of the Code)

                              PRESENT LAW

    The Code contains provisions imposing a 0.125-percent 
excise tax on the value of most commercial cargo loaded or 
unloaded at U.S. ports (other than ports included in the Inland 
Waterway Trust Fund system). The tax also applies to amounts 
paid for passenger transportation using these U.S. ports. 
Exemptions are provided for (1) exported commercial cargo, (2) 
cargo shipped between the U.S. mainland and Alaska (except for 
crude oil), Hawaii, and/or U.S. possessions, and (3) cargo 
shipped between Alaska, Hawaii, and/or U.S. possessions. 
Receipts from this tax are deposited in the Harbor Maintenance 
Trust Fund.

                           REASONS FOR CHANGE

    The Committee believes that exempting from the Harbor 
Maintenance tax non-bulk commercial cargo shipped to U.S. ports 
located in the Great Lakes Saint Lawrence Seaway System has the 
potential to enhance the economies of the areas in which such 
ports are located, while reducing on-road congestion caused by 
heavy trucks.

                        EXPLANATION OF PROVISION

    The provision exempts from the Harbor Maintenance tax 
commercial cargo, other than bulk cargo, loaded at a U.S. or 
Canadian port located in the Great Lakes Saint Lawrence Seaway 
System and unloaded at another U.S. port located in such 
system.
    For purposes of the provision, the term ``bulk cargo'' has 
the meaning given such term by 46 U.S.C. sec. 53101(1), as in 
effect on the date of the enactment.\99\
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    \99\Under 46 U.S.C. sec. 53101(1), the term ``bulk cargo'' means 
cargo that is loaded and carried in bulk without mark or count.
---------------------------------------------------------------------------
    For purposes of the provision, the term ``Great Lakes Saint 
Lawrence Seaway System'' means the waterway between Duluth, 
Minnesota and Sept. Iles, Quebec, encompassing the five Great 
Lakes, their connecting channels, and the Saint Lawrence River.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

       E. Tax Exempt and Tax Credit Bonds for Rail Infrastructure


(Sec. 305 of the bill and new sec. 54A of the Code)

                              PRESENT LAW

Tax-exempt bonds

            In general
    Subject to certain Code restrictions, interest on bonds 
issued by State and local government generally is excluded from 
gross income for Federal income tax purposes. Bonds issued by 
State and local governments may be classified as either 
governmental bonds or private activity bonds. Governmental 
bonds are bonds the proceeds of which are primarily used to 
finance governmental functions or which are repaid with 
governmental funds. Private activity bonds are bonds in which 
the State or local government serves as a conduit providing 
financing to nongovernmental persons. For this purpose, the 
term ``nongovernmental person'' generally includes the Federal 
government and all other individuals and entities other than 
States or local governments. The exclusion from income for 
interest on State and local bonds does not apply to private 
activity bonds, unless the bonds are issued for certain 
permitted purposes (``qualified private activity bonds'') and 
other Code requirements are met.
            Private activity bond tests
    Present law provides two tests for determining whether a 
State or local bond is in substance a private activity bond, 
the private business test and the private loan test.\100\
---------------------------------------------------------------------------
    \100\Sec. 141(b) and (c).
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            Private business tests
    Private business use and private payments result in State 
and local bonds being private activity bonds if both parts of 
the two-part private business test are satisfied--
          1. More than 10 percent of the bond proceeds is to be 
        used (directly or indirectly) by a private business 
        (the ``private business use test''); and
          2. More than 10 percent of the debt service on the 
        bonds is secured by an interest in property to be used 
        in a private business use or to be derived from 
        payments in respect of such property (the ``private 
        payment test'').\101\
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    \101\The 10-percent private business use and payment threshold is 
reduced to five percent for private business uses that are unrelated to 
a governmental purpose also being financed with proceeds of the bond 
issue. In addition, as described more fully below, the 10-percent 
private business use and private payment thresholds are phased-down for 
larger bond issues for the financing of certain output facilities. The 
term ``output facility'' includes electric generation, transmission, 
and distribution facilities.
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    Private business use generally includes any use by a 
business entity (including the Federal government), which 
occurs pursuant to terms not generally available to the general 
public. For example, if bond-financed property is leased to a 
private business (other than pursuant to certain short-term 
leases for which safe harbors are provided under Treasury 
regulations), bond proceeds used to finance the property are 
treated as used in a private business use, and rental payments 
are treated as securing the payment of the bonds. Private 
business use also can arise when a governmental entity 
contracts for the operation of a governmental facility by a 
private business under a management contract that does not 
satisfy Treasury regulatory safe harbors regarding the types of 
payments made to the private operator and the length of the 
contract.\102\
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    \102\See Treas. Reg. sec. 1.141-3(b)(4) and Rev. Proc. 97-13, 1997-
1 C.B. 632.
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            Private loan test
    The second standard for determining whether a State or 
local bond is a private activity bond is whether an amount 
exceeding the lesser of (1) five percent of the bond proceeds 
or (2) $5 million is used (directly or indirectly) to finance 
loans to private persons. Private loans include both business 
and other (e.g., personal) uses and payments by private 
persons; however, in the case of business uses and payments, 
all private loans also constitute private business uses and 
payments subject to the private business test. Present law 
provides that the substance of a transaction governs in 
determining whether the transaction gives rise to a private 
loan. In general, any transaction which transfers tax ownership 
of property to a private person is treated as a loan.
            Qualified private activity bonds
    As stated, interest on private activity bonds is taxable 
unless the bonds meet the requirements for qualified private 
activity bonds. Qualified private activity bonds permit States 
or local governments to act as conduits providing tax-exempt 
financing for certain private activities. The definition of 
qualified private activity bonds includes an exempt facility 
bond, or qualified mortgage, veterans' mortgage, small issue, 
redevelopment, 501(c)(3), or student loan bond (sec. 141(e)). 
The definition of exempt facility bond includes bonds issued to 
finance certain transportation facilities (airports, ports, 
mass commuting, and high-speed intercity rail facilities); 
qualified residential rental projects; privately owned and/or 
operated utility facilities (sewage, water, solid waste 
disposal, and local district heating and cooling facilities, 
certain private electric and gas facilities, and hydroelectric 
dam enhancements); public/private educational facilities; 
qualified green building and sustainable design projects; and 
qualified highway or surface freight transfer facilities (sec. 
142(a)).
    In most cases, the aggregate volume of these tax-exempt 
private activity bonds is restricted by annual aggregate volume 
limits imposed on bonds issued by issuers within each State. 
For calendar year 2007, the State volume cap, which is indexed 
for inflation, equals $85 per resident of the State, or $256.24 
million, if greater.
            Exempt facility bonds for high-speed intercity rail 
                    facilities
    The definition of an exempt facility bond includes bonds 
issued to finance high-speed intercity rail facilities.\103\ A 
facility qualifies as a high-speed intercity rail facility if 
it is a facility (other than rolling stock) for fixed guideway 
rail transportation of passengers and their baggage between 
metropolitan statistical areas.\104\ The facilities must use 
vehicles that are reasonably expected to operate at speeds in 
excess of 150 miles per hour between scheduled stops. In 
addition, the facilities must be made available to members of 
the general public as passengers. If the bonds are to be issued 
for a nongovernmental owner of the facility, such owner must 
irrevocably elect not to claim depreciation or credits with 
respect to the property financed by the net proceeds of the 
issue.\105\
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    \103\Sec. 142(a)(11) and sec. 142(i).
    \104\A metropolitan statistical area for this purpose is defined by 
reference to section 143(k)(2)(B). Under that provision, the term 
metropolitan statistical area includes the area defined as such by the 
Secretary of Commerce.
    \105\Sec. 142(i)(2).
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    The Code imposes a special redemption requirement for these 
types of bonds. Any proceeds not used within three years of the 
date of issuance of the bonds must be used within the following 
six months to redeem such bonds.\106\
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    \106\Sec. 142(i)(3).
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    Seventy-five percent of the principal amount of the bonds 
issued for high-speed rail facilities is exempt from the volume 
limit.\107\ If all the property to be financed by the net 
proceeds of the issue is to be owned by a governmental unit, 
then such bonds are completely exempt from the volume limit.
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    \107\Sec. 146(g)(4).
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            Arbitrage restrictions
    The tax exemption for State and local bonds also does not 
apply to any arbitrage bond.\108\ 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.\109\ 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.
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    \108\Sec. 103(a) and (b)(2).
    \109\Sec. 148.
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Tax credit bonds

            In general
    As an alternative to traditional tax-exempt bonds, the Code 
permits three types of tax-credit bonds. States and local 
governments have the authority to issue qualified zone academy 
bonds (``QZABS''), clean renewable energy bonds (``CREBS''), 
and ``Gulf tax credit bonds.''\110\
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    \110\Secs. 1397E, 54, and 1400N(l), respectively.
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    A common feature of the present-law tax-credit bonds is 
that the taxpayer holding such a bond receives a tax credit, 
rather than an interest payment. The amount of the credit is 
determined by multiplying the bond's credit rate by the face 
amount on the taxpayer's bond. The credit rate on the bonds is 
determined by the Secretary and is to be a rate that permits 
issuance of such bonds without discount and interest cost to 
the qualified issuer. The credit is includible in gross income 
(as if it were an interest payment on the bond), and can be 
claimed against regular income tax liability and alternative 
minimum tax liability.
            Clean renewable energy bonds
    CREBs are defined as bonds issued by a qualified issuer if, 
in addition to the requirements discussed below, 95 percent or 
more of the proceeds of such bonds are used to finance capital 
expenditures incurred by qualified borrowers for qualified 
projects. ``Qualified projects'' are facilities that qualify 
for the tax credit under section 45 (other than Indian coal 
production facilities), without regard to the placed-in-service 
date requirements of that section.\111\ The term ``qualified 
issuers'' includes (1) governmental bodies (including Indian 
tribal governments); (2) mutual or cooperative electric 
companies (described in section 501(c)(12) or section 
1381(a)(2)(C), or a not-for-profit electric utility which has 
received a loan or guarantee under the Rural Electrification 
Act); and (3) clean renewable energy bond lenders. The term 
``qualified borrower'' includes a governmental body (including 
an Indian tribal government) and a mutual or cooperative 
electric company. A clean renewable energy bond lender means a 
cooperative which is owned by, or has outstanding loans to, 100 
or more cooperative electric companies and is in existence on 
February 1, 2002.
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    \111\In addition, Notice 2006-7 provides that qualified projects 
include any facility owned by a qualified borrower that is functionally 
related and subordinate to any facility described in section 45(d)(1) 
through (d)(9) and owned by such qualified borrower.
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    In addition to the above requirements, at least 95 percent 
of the proceeds of CREBs must be spent on qualified projects 
within the five-year period that begins on the date of 
issuance. To the extent less than 95 percent of the proceeds 
are used to finance qualified projects during the five-year 
spending period, bonds will continue to qualify as CREBs 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 upon 
the qualified issuer's request demonstrating that the failure 
to satisfy the five-year requirement is due to reasonable cause 
and the projects will continue to proceed with due diligence.
    CREBs also are subject to the arbitrage requirements of 
section 148 that apply to tax-exempt bonds. Principles under 
section 148 and the regulations thereunder apply for purposes 
of determining the yield restriction and arbitrage rebate 
requirements applicable to CREBs.
    Issuers of CREBs are required to report issuance to the IRS 
in a manner similar to the information returns required for 
tax-exempt bonds. There is a national CREB limitation of $1.2 
billion. The maximum amount of CREBs that may be allocated to 
qualified projects of governmental bodies is $750 million. 
CREBs must be issued before January 1, 2009.
            Qualified zone academy bonds
    ``QZABs'' 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. Eligible holders of QZABs are limited to 
financial institutions.
    An issuer of QZABs 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 QZABs if unspent proceeds are used 
within 90 days from the end of such five-year period to redeem 
any nonqualified bonds. For these purposes, the amount of 
nonqualified bonds is to be determined in the same manner as 
Treasury regulations under section 142. The provision provides 
that 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.
    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 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.
    Issuers of QZABs are required to report issuance to the IRS 
in a manner similar to the information returns required for 
tax-exempt bonds. In addition, QZABs are subject to the 
arbitrage requirements of section 148 that apply to tax-exempt 
bonds. Principles under section 148 and the regulations 
thereunder apply for purposes of determining the yield 
restriction and arbitrage rebate requirements applicable to 
QZABs.
            Gulf tax credit bonds
    Gulf tax credit bonds may be issued by the States of 
Louisiana, Mississippi, and Alabama. To qualify as Gulf tax 
credit bonds, 95 percent or more of the proceeds of such bonds 
must be used to (i) pay principal, interest, or premium on a 
bond (other than a private activity bond) that was outstanding 
on August 28, 2005, and was issued by the State issuing the 
Gulf tax credit bonds, or any political subdivision thereof, or 
(ii) make a loan to any political subdivision of such State to 
pay principal, interest, or premium on a bond issued by such 
political subdivision. In addition, the issuer of Gulf tax 
credit bonds must provide additional funds to pay principal, 
interest, or premium on outstanding bonds equal to the amount 
of Gulf tax credit bonds issued to repay such outstanding 
bonds. Gulf tax credit bonds must be a general obligation of 
the issuing State and must be designated by the Governor of 
such State. The maximum maturity on Gulf tax credit bonds is 
two years. In addition, present-law arbitrage rules that 
restrict the ability of State and local governments to invest 
bond proceeds apply to Gulf tax credit bonds.
    Gulf tax credit bonds must have been issued in calendar 
year 2006. The maximum amount of Gulf tax credit bonds 
authorized to be issued was $200 million in the case of 
Louisiana, $100 million in the case of Mississippi, and $50 
million in the case of Alabama. Gulf tax credit bonds may not 
be used to pay principal, interest, or premium on any bond with 
respect to which there is any outstanding refunded or refunding 
bond. Moreover, Gulf tax credit bonds may not be used to pay 
principal, interest, or premium on any prior bond if the 
proceeds of such prior bond were used to provide any property 
described in section 144(c)(6)(B) (i.e., any private or 
commercial golf course, country club, massage parlor, hot tub 
facility, suntan facility, racetrack or other facility used for 
gambling, or any store the principal purpose of which is the 
sale of alcoholic beverages for consumption off premises).
    As with CREBs and QZABs, issuers of Gulf tax credit bonds 
are required to report issuance to the IRS in a manner similar 
to the information returns required for tax-exempt bonds.

                           REASONS FOR CHANGE

    The Committee believes the establishment, maintenance, and 
improvement of the nation's rail infrastructure are a national 
priority. Investing in rail transportation infrastructure 
creates long-term capital assets for the nation that will help 
address infrastructure needs and improve the nation's economic 
productivity. The Committee believes that existing programs are 
not meeting the financing needs of long-term rail 
infrastructure projects. Thus, the Committee believes it is 
important to explore financing alternatives to assist the 
economic viability of rail transportation and infrastructure 
projects.

                        EXPLANATION OF PROVISION

    The provision creates a new category of tax-credit bonds, 
Qualified Rail Infrastructure Bonds. A Qualified Rail 
Infrastructure Bond means any bond if: (1) the Secretary has 
designated the bond as such; (2) 95 percent or more of the 
proceeds of the bond are to be used for capital expenditures 
incurred after the date of enactment for a qualified project; 
(3) the term of each bond satisfies the maximum maturity 
limitations; and (4) the issue meets certain spending and 
arbitrage requirements (described below).
    The Secretary may designate Qualified Rail Infrastructure 
Bonds if the following requirements are met.
     First, a State or a group or compact of States 
must be the proposed issuer of the bonds.
     Second, the bonds must finance qualified projects. 
A qualified project is defined as a project eligible under 
section 26101(b) of title 49, United States Code, which the 
Secretary of Treasury determines was selected using the 
criteria of section 26101(c) of title 49, United States Code, 
by the Secretary of Transportation, that makes a substantial 
contribution to improving a rail transportation corridor for 
intercity passenger rail use.
     Third, if the rail corridor includes the use of 
rights-of-way owned by a freight railroad, the applicant must 
demonstrate that it has entered into a written agreement with 
such freight railroad regarding the use of the rights-of-way, 
and that collective bargaining agreements with freight railroad 
employees (including terms regarding the contracting of work 
performed on such corridor) shall remain in full force and 
effect.
     Any person or entity that provides railroad 
transportation over infrastructure improved or acquired 
pursuant to this section, is a rail carrier as defined by 
section 10102 of title 49, United States Code.
     Finally, with respect to qualified projects, the 
applicant shall comply with the standards applicable to 
construction work in title 49 in the same manner in which the 
National Railroad Passenger Corporation is required to comply 
with such standards.
    As with present-law tax credit bonds, the taxpayer holding 
Qualified Rail Infrastructure Bonds on a credit allowance date 
is entitled to a tax credit. The amount of the credit is 
determined by multiplying the bond's credit rate by the face 
amount on the taxpayer's bond. The credit rate on the bonds is 
determined by the Secretary and is to be a rate that permits 
issuance of such bonds without discount and interest cost to 
the qualified issuer. The credit is includible in gross income 
(as if it were an interest payment on the bond), and can be 
claimed against regular income tax liability and alternative 
minimum tax liability.
    Under the provision, at least 95 percent or more of the 
proceeds of Qualified Rail Infrastructure Bonds must be spent 
on qualified projects within the five-year period that begins 
on the date of issuance of such bonds. To the extent less than 
95 percent of the proceeds are spent as required during the 
five-year spending period, bonds will continue to qualify as 
Qualified Rail Infrastructure Bonds only if unspent proceeds 
are used within 90 days from the end of such five-year period 
to redeem outstanding bonds. The five-year spending period may 
be extended by the Secretary upon the qualified issuer's 
request demonstrating that the failure to satisfy the five-year 
requirement is due to reasonable cause and the projects will 
continue to proceed with due diligence. The provision also 
requires level amortization of Qualified Rail Infrastructure 
Bonds during the period such bonds are outstanding.
    Qualified Rail Infrastructure Bonds are subject to a 
maximum maturity limitation. The maximum maturity is the term 
which the Secretary estimates will result in the present value 
of the obligation to repay the principal on Qualified Rail 
Infrastructure Bonds being equal to 50 percent of the face 
amount of such bonds. The discount rate used to determine the 
present value amount is the average annual interest rate of 
tax-exempt obligations having a term of 10 years or more which 
are issued during the month the bonds are issued.
    Issuers of Qualified Rail Infrastructure Bonds are required 
to report issuance to the IRS in a manner similar to the 
information returns required for tax-exempt bonds. In addition, 
Qualified Rail Infrastructure Bonds are subject to the 
arbitrage requirements of section 148 that apply to tax-exempt 
bonds. Principles under section 148 and the regulations 
thereunder apply for purposes of determining the yield 
restriction and arbitrage rebate requirements applicable to 
Qualified Rail Infrastructure Bonds.
    The provision establishes a $900 million annual limitation 
for 2008, 2009, and 2010 on the amount of bonds that may be 
designated by the Secretary as Qualified Rail Infrastructure 
Bonds. The provision allows carryover of unused annual 
limitation to the two following calendar years.

                             EFFECTIVE DATE

    The provision applies to bonds issued after the date of 
enactment.

   F. Repeal of Suspension of Interest and Penalties Where Internal 
               Revenue Service Fails To Contact Taxpayer


(Sec. 306 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 18-month 
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 taxpayers 
who file a timely tax return. The provision applies only to 
individuals and does not apply to the failure to pay penalty, 
in the case of fraud, or with respect to criminal penalties. 
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 October 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.\112\ 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 that may be assessed more than three years after 
the filing of a tax return.
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    \112\Pub. L. No. 118-28, 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 those 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.

                             EFFECTIVE DATE

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

 G. Denial of Deduction for Certain Fines, Penalties, and Other Amounts


(Sec. 307 of the bill and sec. 162(f) and new sec. 6050W of the Code)

                              PRESENT LAW

    Under present law, no deduction is allowed as a trade or 
business expense under section 162(a) for the payment to a 
government of a fine or similar penalty for the violation of 
any law (sec. 162(f)). The enactment of section 162(f) in 1969 
codified existing case law that denied the deductibility of 
fines as ordinary and necessary business expenses on the 
grounds that ``allowance of the deduction would frustrate 
sharply defined national or State policies proscribing the 
particular types of conduct evidenced by some governmental 
declaration thereof.''\113\
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    \113\S. Rep. No. 91-552, 91st Cong, 1st Sess., 273-74 (1969), 
referring to Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30 
(1958).
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    Treasury regulation section 1.162-21(b)(1) provides that a 
fine or similar penalty includes an amount: (1) paid pursuant 
to conviction or a plea of guilty or nolo contendere for a 
crime (felony or misdemeanor) in a criminal proceeding; (2) 
paid as a civil penalty imposed by Federal, State, or local 
law, including additions to tax and additional amounts and 
assessable penalties imposed by chapter 68 of the Code; (3) 
paid in settlement of the taxpayer's actual or potential 
liability for a fine or penalty (civil or criminal); or (4) 
forfeited as collateral posted in connection with a proceeding 
which could result in imposition of such a fine or penalty. 
Treasury regulation section 1.162-21(b)(2) provides, among 
other things, that compensatory damages (including damages 
under section 4A of the Clayton Act (15 U.S.C. sec. 15a), as 
amended) paid to a government do not constitute a fine or 
penalty.

                           REASONS FOR CHANGE

    The Committee is concerned that there is a lack of clarity 
and consistency under present law regarding when taxpayers may 
deduct payments made in settlement of government investigations 
of potential wrongdoing, as well as in situations where there 
has been a final determination of wrongdoing. If a taxpayer 
deducts payments made in settlement of an investigation of 
potential wrongdoing or as a result of a finding of wrongdoing, 
the publicly announced amount of the settlement payment does 
not reflect the true after-tax penalty on the taxpayer. The 
Committee also is concerned that allowing a deduction for such 
payments in effect shifts a portion of the penalty to the 
Federal government and to the public.

                        EXPLANATION OF PROVISION

    The provision modifies the rules regarding the 
determination whether payments are nondeductible payments of 
fines or penalties under section 162(f). In particular, the 
provision generally provides that amounts paid or incurred 
(whether by suit, agreement, or otherwise) to, or at the 
direction of, a government in relation to the violation of any 
law, or the investigation or inquiry into the potential 
violation of any law which is initiated by such 
government,\114\ are nondeductible under any provision of the 
income tax provisions.\115\ The provision applies to deny a 
deduction for any such payments, including those where there is 
no admission of guilt or liability and those made for the 
purpose of avoiding further investigation or litigation. An 
exception applies to payments that the taxpayer establishes are 
either restitution (including remediation of property) for 
damage or harm caused by, or which may be caused by, the 
violation or potential violation, or amounts paid to come into 
compliance with any law that was violated or involved in the 
investigation or inquiry. The exception for restitution does 
not apply to any amount paid or incurred as reimbursement to 
the government for the costs of any investigation or 
litigation\116\ unless such amount is paid or incurred for a 
cost or fee regularly charged for any routine audit or other 
customary review performed by the government.\117\
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    \114\The provision does not affect amounts paid or incurred in 
performing routine audits or reviews such as annual audits that are 
required of all organizations or individuals in a similar business 
sector, or profession, as a requirement for being allowed to conduct 
business. However, if the government or regulator raised an issue of 
compliance and payment is required in settlement of such issue, the 
provision would affect that payment.
    \115\The provision provides that such amounts are nondeductible 
under chapter 1 of the Internal Revenue Code.
    \116\This exception from deductibility for reimbursements is 
intended to include payments to reimburse a government for payments to 
whistleblowers.
    \117\The provision does not affect such costs or fees that are a 
regular charge for a routine audit or customary review, nor does it 
affect amounts paid or incurred in performing routine audits or reviews 
that are required of all organizations or individuals in a similar 
business sector, or profession, as a requirement for being allowed to 
conduct business. However, if the government or regulator raised an 
issue of compliance and a payment is required in settlement of such 
issue, the provision would affect that payment.
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    In the case of any court order or binding written 
settlement agreement, if the amounts required to be paid exceed 
$1 million, then the deduction is not allowed unless such court 
order or written settlement agreement specifies that the amount 
is for restitution, for remediation of property, or to come 
into compliance with the law.\118\ The IRS remains free to 
challenge the characterization of an amount so identified.\119\
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    \118\The provision does not affect the treatment of antitrust 
payments made under section 4 of the Clayton Act, which continue to be 
governed by the provisions of section 162(g).
    \119\If a settlement agreement does not specify a specific amount 
to be paid for the purpose of coming into compliance but instead simply 
requires the taxpayer to come into compliance, it is sufficient 
identification to so state. Amounts expended by the taxpayer for that 
purpose would then be considered identified. However, if an agreement 
specifies a specific dollar amount that must be paid or incurred, the 
amount would not be eligible to be deducted without a specification 
that it is for restitution (including remediation of property) or 
coming into compliance.
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    The provision does not apply to any amount paid or incurred 
by order of a court in a suit in which no government is a 
party.\120\
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    \120\Thus, for example, the provision would not apply to payments 
made by one private party to another in a lawsuit between private 
parties merely because a judge or jury acting in the capacity as a 
court directs the payment to be made. The mere fact that a court enters 
a judgment or directs a result in a private dispute does not cause a 
payment to be made ``at the direction of a government'' for purposes of 
the provision.
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    The provision does not apply to any amount paid or incurred 
as taxes due.\121\
---------------------------------------------------------------------------
    \121\Thus, amounts paid or incurred as taxes due are not affected 
by the provision (e.g., State taxes that are otherwise deductible). The 
reference to taxes due is also intended to include interest with 
respect to such taxes (but not interest, if any, with respect to any 
penalties imposed with respect to such taxes).
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    It is intended that a payment will be treated as 
restitution (including remediation of property) only if 
substantially all of the payment is required to be paid to the 
specific persons, or in relation to the specific property, 
actually harmed by the conduct of the taxpayer that resulted in 
the payment. Thus, a payment to or with respect to a class 
substantially broader than the specific persons or property 
that were actually harmed (e.g., to a class including similarly 
situated persons or property) does not qualify as restitution 
or included remediation of property.\122\ Restitution and 
included remediation of property is limited to the amount that 
bears a substantial quantitative relationship to the harm 
caused by the past conduct or actions of the taxpayer that 
resulted in the payment in question. If the party harmed is a 
government or other entity, then restitution and included 
remediation of property includes payment to such harmed 
government or entity, provided the payment bears a substantial 
quantitative relationship to the harm.
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    \122\Similarly, a payment to a charitable organization benefiting a 
broader class than the persons or property actually harmed, or to be 
paid out without a substantial quantitative relationship to the harm 
caused, would not qualify as restitution. Under the provision, such a 
payment not deductible under section 162 would also not be deductible 
under section 170.
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    It is intended that a payment will be treated as an amount 
paid to come into compliance only if it directly corrects a 
violation with respect to a particular requirement of law that 
was under investigation. For example, if the law requires a 
particular emission standard to be met or particular machinery 
to be used, amounts required to be paid under a settlement 
agreement to meet the required standard or install the 
machinery are deductible to the extent otherwise allowed. 
Similarly, if the law requires certain practices and procedures 
to be followed and a settlement agreement requires the taxpayer 
to pay to establish such practices or procedures, such amounts 
would be deductible. However, amounts paid for other purposes 
not directly correcting a violation of law are not deductible. 
For example, amounts paid to bring other machinery that is 
already in compliance up to a standard higher than required by 
the law, or to create other benefits (such as a park or other 
action not previously required by law), are not deductible if 
required under a settlement agreement. Similarly, amounts paid 
to educate consumers or customers about the risks of doing 
business with the taxpayer or about the field in which the 
taxpayer does business generally, which education efforts are 
not specifically required under the law, are not deductible if 
required under a settlement agreement.
    The provision requires government agencies to report to the 
IRS and to the taxpayer the amount of each settlement agreement 
or order entered where the aggregate amount required to be paid 
or incurred to or at the direction of the government under such 
settlement agreements and orders with respect to the violation, 
investigation, or inquiry is least $600 (or such other amount 
as may be specified by the Secretary of the Treasury as 
necessary to ensure the efficient administration of the 
Internal Revenue laws). The reports must be made within 30 days 
of the date the court order is issued or the settlement 
agreement is entered into, or such other time as may be 
required by Secretary. The report must separately identify any 
amounts that are restitution or remediation of property, or 
correction of noncompliance.\123\
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    \123\As in the case of the identification requirement, if the 
agreement does not specify a specific amount to be expended to come 
into compliance but simply requires that to occur, it is expected that 
the report may state simply that the taxpayer is required to come into 
compliance but no specific dollar amount has been specified for that 
purpose in the settlement agreement.
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    The IRS is encouraged to require taxpayers to identify 
separately on their tax returns the amounts of any such 
settlements with respect to which reporting is required under 
the provision, including separate identification of the 
nondeductible amount and of any amount deductible as 
restitution, remediation, or required to correct 
noncompliance.\124\
---------------------------------------------------------------------------
    \124\For example, the IRS might require such separate reporting as 
part of, or in addition to, reporting of amounts that are not deducted 
and that thus create a book tax difference on the schedule M-3.
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    Amounts paid or incurred (whether by suit, agreement, or 
otherwise) to, or at the direction of, any self-regulatory 
entity that regulates a financial market or other market that 
is a qualified board or exchange under section 1256(g)(7), and 
that is authorized to impose sanctions (e.g., the National 
Association of Securities Dealers) are likewise subject to the 
provision if paid in relation to a violation, or investigation 
or inquiry into a potential violation, of any law (or any rule 
or other requirement of such entity). To the extent provided in 
regulations, amounts paid or incurred to, or at the direction 
of, any other nongovernmental entity that exercises self-
regulatory powers as part of performing an essential 
governmental function are similarly subject to the provision. 
The exception for payments that the taxpayer establishes are 
paid or incurred for restitution, remediation of property, or 
coming into compliance; the rules requiring identification of 
those amounts in a court order or written settlement agreement 
of $1 million or greater; and all the other requirements of the 
provision including the requirement of reporting to the IRS and 
the taxpayer, likewise apply in such cases.
    No inference is intended as to the treatment of payments as 
nondeductible fines or penalties under present law. In 
particular, the provision is not intended to limit the scope of 
present-law section 162(f) or the regulations thereunder.

                             EFFECTIVE DATE

    The provision is effective for amounts paid or incurred on 
or after the date of enactment; however the provision does not 
apply to amounts paid or incurred under any binding order or 
agreement entered into before such date. Any order or agreement 
requiring court approval is not a binding order or agreement 
for this purpose unless such approval was obtained before the 
date of enactment.

        H. Revision of Tax Rules on Expatriation of Individuals


(Sec. 308 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.\125\
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    \125\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\126\ generally do not apply. However, for 
individuals with certain ties to countries other than the 
United States\127\ and individuals with minimal prior physical 
presence in the United States,\128\ 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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    \126\Secs. 7701(b)(3)(D), 7701(b)(5), and 7701(b)(7)(B)-(D).
    \127\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.
    \128\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.-sourced 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\129\); (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.
---------------------------------------------------------------------------
    \129\Rev. Proc. 2006-53, sec. 3.29, 2006-48 I.R.B. 996.
---------------------------------------------------------------------------
    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 interests in trusts that are not 
grantor trusts (``nongrantor trusts''). The mark-to-market tax 
does not apply with respect to the portion of any 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 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.

                    III. BUDGET EFFECTS OF THE BILL


                         A. Committee Estimates

    In compliance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the following statement is made 
concerning the estimated budget effects of the revenue 
provisions of the ``American Infrastructure Investment and 
Improvement Act of 2007'' as reported.


                B. Budget Authority and Tax Expenditures


Budget authority

    In compliance with section 308(a)(1) of the Budget Act, the 
Committee states that no provisions of the bill as reported 
involve new or increased budget authority.

Tax expenditures

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

            C. Consultation With Congressional Budget Office

    In accordance with section 403 of the Budget Act, the 
Committee advises that the Congressional Budget Office has not 
submitted a statement on the bill. The letter from the 
Congressional Budget Office will be provided separately.

                       IV. VOTES OF THE COMMITTEE

    In compliance with paragraph 7(b) of rule XXVI of the 
standing rules of the Senate, the Committee states that, with a 
majority and quorum present, the ``American Infrastructure 
Investment and Improvement Act of 2007,'' as amended, was 
ordered favorably reported on September 21, 2007 as follows:
    The Committee accepted by voice vote an amendment by 
Senator Kerry authorizing tax credit bonds for rail 
infrastructure projects.
    The bill as amended was ordered favorably reported by a 
roll call vote of 13 ayes and 0 nays (16 ayes and 5 nays if 
proxy votes were included in the tally of votes for favorably 
reporting a bill out of Committee). The vote was as follows:
    Ayes: Baucus, Rockefeller, Conrad, Bingaman, Kerry, 
Lincoln, Wyden (proxy), Schumer, Stabenow (proxy), Cantwell, 
Salazar, Grassley, Hatch (proxy), Snowe, Crapo, Roberts
    Nays: Lott (proxy), Kyl (proxy), Smith (proxy), Bunning 
(proxy), Ensign (proxy)

                 V. REGULATORY IMPACT AND OTHER MATTERS


                          A. Regulatory Impact

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

Impact on individuals and businesses, personal privacy and paperwork

    The bill increases the tax on aviation-grade kerosene, the 
international arrival and departure tax, and Oil Spill Trust 
Fund tax. For individuals and businesses engaged in activities 
subject to these taxes, the provisions should not result in 
additional recordkeeping responsibilities beyond that required 
for present law. The provisions increasing revenues to the 
Airport and Airway Trust Fund will fund improvements to the air 
traffic control system from which individuals and businesses 
using such system will benefit. The bill does not have any 
impact on personal privacy.

                     B. Unfunded Mandates Statement

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform 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 104-4, the Unfunded 
Mandates Reform Act of 1995: (1) increasing the 21.9 cent per 
gallon tax on non-commercial aviation-grade kerosene to 36 
cents per gallon; (2) increasing the international arrival and 
departure tax to $16.65 and index for inflation; (3) 
eliminating the bulk transfer exception for finished gasoline, 
and (4) increasing the excise tax rate to 10 cents per barrel 
for the Oil Spill Liability Trust Fund.
    The tax provisions of the reported bill do not impose a 
Federal intergovernmental mandate on State, local, or tribal 
governments within the meaning of Public Law 104-4, the 
Unfunded Mandates Reform Act of 1995.
    The costs required to comply with each Federal private 
sector mandate generally are no greater than the aggregate 
estimated budget effects of the provision.

                       C. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (the ``IRS Reform Act'') 
requires the Joint Committee on Taxation (in consultation with 
the Internal Revenue Service and the Department of the 
Treasury) to provide a tax complexity analysis. The complexity 
analysis is required for all legislation reported by the Senate 
Committee on Finance, the House Committee on Ways and Means, or 
any committee of conference if the legislation includes a 
provision that directly or indirectly amends the Internal 
Revenue Code (the ``Code'') and has widespread applicability to 
individuals or small businesses.
    The staff of the Joint Committee on Taxation has determined 
that a complexity analysis is not required under section 
4022(b) of the IRS Reform Act because the bill contains no 
provisions that have ``widespread applicability'' to 
individuals or small businesses.

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

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

         VII. ADDITIONAL VIEWS OF SENATORS ROCKEFELLER AND LOTT

    We recognize the Finance Committee's efforts to fund the 
modernization of the next generation air transportation system. 
While we agree that now is the time to promote equity in the 
funding of our air traffic control system, we remain concerned 
that the proposal does not move far enough with respect to the 
contributions of commercial air carriers and general aviation 
aircraft.
    According to current data from the Federal Aviation 
Administration (FAA), 21.7 percent of expenditures for Air 
Traffic Control services are attributable to general aviation's 
usage of our aviation system. However, general aviation only 
contributes 3.2 percent of taxes paid into the Airport and 
Airways Trust Fund (AATF). In contrast, 73.5 percent of air 
traffic costs are attributable to commercial aviation while 
commercial aviation and airline passengers pay 96.8 percent of 
the taxes in the Trust Fund. This funding inequity needs to be 
corrected. The fleet of general aviation jet powered aircraft 
has been growing faster than the commercial airline fleet over 
the past decade, and the FAA estimates the fleet of business 
jets and air taxis will grow at twice the rate of commercial 
aircraft over the next 14 years. The increase in general 
aviation jet traffic is already being seen in critical segments 
of our nation's air transportation system, such as the New York 
City area airspace, controlled by the FAA's New York Terminal 
Approach facility. In this airspace, general aviation accounts 
for more than 30 percent of the air traffic flying under 
instrument flight rules, and accounts for more than half of all 
traffic. With few options to address congestion of our nation's 
airspace in the near-term, we believe that the financing must 
reflect the significant impact that increased general aviation 
traffic will have on chokepoints in the National Airspace 
System.
    While we recognize the Finance Committee's steps to address 
the funding inequity in our aviation system, we believe any 
final product will need to strike a greater balance. Under the 
Finance Committee's proposal, general aviation would only be 
paying 4.4 percent into the Trust Fund, whereas commercial 
aviation and airline passengers would be paying 95.3 percent. 
The proposal amounts to a tax increase on the average 
commercial airline passengers, which we cannot support.
    As we move forward, we are committed to continue working 
with the Chairman, Ranking Member, and the Members of the 
Finance Committee to resolve the current funding inequities 
that exist in our aviation system.

                                   John D. Rockefeller.
                                   Trent Lott.

               VIII. STATEMENT REGARDING SENATE RULE XLIV

    Rule XLIV of the Standing Rules of the Senate provides that 
``it shall not be in order to vote on a motion to proceed to 
consider a bill or joint resolution reported by any committee 
unless the chairman of the committee of jurisdiction, or 
majority leader or his or her designee certifies: (1) that each 
congressionally directed spending item, limited tax benefit, 
and limited tariff benefit, if any, in the bill or joint 
resolution, or the committee report accompanying the bill or 
joint resolution, has been identified through lists, charts, or 
other similar means including the name of each senator who 
submitted the request to the committee; and (2) that the 
information in clause (1) has been available on a publicly 
accessible website in a searchable format at least 48 hours 
before such vote.''
    In connection with the request for proposed amendments to 
the Chairman's mark, Senator Schumer filed a proposed amendment 
to restructure the Liberty Zone tax incentives to provide a tax 
credit to the City and State of New York against certain 
withholding taxes required to be paid by the City and State of 
New York to the Internal Revenue Service. The credit amount is, 
subject to certain limitations, determined by expenditures on 
qualifying infrastructure projects in (or connecting with) the 
New York Liberty Zone. The amendment was incorporated as part 
of the Chairman's modification.
    In making the determination required by Rule XLIV, a 
memorandum from the Chief of Staff of the Joint Committee on 
Taxation (set forth below) and other information were 
considered. In accordance with Rule XLIV, I have determined 
that section 301 of the bill, relating to the restructuring of 
New York Liberty Zone tax incentives, is a limited tax benefit.

                                                        Max Baucus.

                               MEMORANDUM

To: Bill Dauster, Deputy Chief of Staff, Senate Finance Committee.
From: Ed Kleinbard.
Date: October 30, 2007.
Subject: Application of Senate Rule XLIV (relating to limited tax 
        benefits) to sec. 301 of the American Infrastructure Investment 
        Improvement Act of 2007 (as passed by the Senate Finance 
        Committee on September 21, 2007).

Request

    You have requested that the staff of the Joint Committee on 
Taxation analyze the application of Senate Rule XLIV's limited 
tax benefit provision to section 301 of the American 
Infrastructure Investment and Improvement Act of 2007 
(``Section 301''), as passed by the Senate Finance Committee 
(relating to the restructuring of New York Liberty Zone tax 
incentives). I offer this analysis at your request to assist 
Chairman Baucus in making his determination of this issue, as 
contemplated by Rule XLIV.

Senate Rule XLIV

    Section 521 of the Honest Leadership and Open Government 
Act of 2007\130\ (the ``HLOGA'') provides for ``earmark'' 
reform. Specifically, HLOGA adds a new Rule XLIV to the 
Standing Rules of the Senate. Under this rule, ``it shall not 
be in order to vote on a motion to proceed to consider a bill 
or joint resolution reported by any committee unless the 
chairman of the committee of jurisdiction, or majority leader 
or his or her designee certifies: (1) that each congressionally 
directed spending item, limited tax benefit, and limited tariff 
benefit, if any, in the bill or joint resolution, or the 
committee report accompanying the bill or joint resolution, has 
been identified through lists, charts, or others similar means 
including the name of each senator who submitted the request to 
the committee; and (2) that the information in clause (1) has 
been available on a publicly accessible congressional website 
in a searchable format at least 48 hours before such vote''. 
Failure to satisfy this requirement makes a bill or joint 
resolution subject to a point of order until these requirements 
are satisfied under the rule.
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    \130\Public Law 110-81.
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    For purposes of the rule, the following definitions apply.
    A congressionally directed spending item ``means a 
provision or report language included primarily at the request 
of a Senator providing, authorizing, or recommending a specific 
amount of discretionary budget authority, credit authority, or 
other spending authority for a contract, loan, loan guarantee, 
grant, loan authority, or other expenditure with or to an 
entity, or targeted to a specific State, locality, or 
Congressional district, other than through a statutory or 
administrative formula-driven or competitive award process.''
    A limited tax benefit ``means any revenue provision that 
(A) provides a Federal tax deduction, credit, exclusion, or 
preference to a particular beneficiary or limited group of 
beneficiaries under the Internal Revenue Code of 1986; and (B) 
contains eligibility criteria that are not uniform in 
application with respect to potential beneficiaries of such 
provision.''
    A limited tariff benefit ``means a provision modifying the 
Harmonized Tariff Schedule of the United States in a manner 
that benefits 10 or fewer entities.''

Senate Floor Statement

    A colloquy\131\ between Senators Baucus, Durbin, and 
Grassley provides some guidance regarding how the new rule will 
be applied in the case of limited tax benefits. In relevant 
part the colloquy states:
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    \131\Congressional Record, August 2, 2007 (page S10699).

    For more guidance, we also recommend the interpretative 
guidelines developed by the staff of the Joint Committee on 
Taxation in response to the prior-law line item veto. These 
guidelines may also be applicable to the interpretation of the 
proposed earmark disclosure rules for limited tax benefits in 
this bill. The Joint Committee on Taxation documents are 
called, first, the ``Draft Analysis of Issues and Procedures 
for Implementation of Provisions Contained in the Line Item 
Veto Act, Public Law 104-130, relating to Limited Tax 
Benefits,'' that's Joint Committee on Taxation document number 
JCX-48-96, and second, the ``Analysis of Provisions Contained 
in the Line Item Veto Act, Public Law 104-130, relating to 
Limited Tax Benefits,'' that's Joint Committee on Taxation 
document number JCS-1-97.
    The proposed rule in this bill would require the disclosure 
of limited tax benefits. It would define a limited tax benefit 
to mean any revenue provision that, first, provides a Federal 
tax deduction, credit exclusion, or preference to a particular 
beneficiary or limited group of beneficiaries under the 
Internal Revenue Code of 1986; and second, contains eligibility 
criteria that are not uniform in application with respect to 
potential beneficiaries of such provision.
    The proposed rule would apply in most cases where the 
number of beneficiaries is 10 or fewer for a particular tax 
benefit. But the Finance Committee will not be bound by an 
arbitrary numerical limit such as ``10 or fewer.'' Rather, we 
will apply the standard appropriately within the unique 
circumstances of each proposal. For example, if a proposal gave 
a tax benefit directed only to each of the 11 head football 
coaches in the Big Ten Conference, we may conclude that the 
rule would nonetheless require disclosure of this benefit, even 
though the number of beneficiaries would be more than 10.
    We will not limit the application of the proposed rule to 
proposals that result in a reduction in Federal receipts 
relative to the applicable present-law baseline. We believe 
that the proposed rule would have application to limited tax 
benefits that provide a tax cut relative to present law for 
certain beneficiaries, like, for example, a tax rate reduction 
for certain beneficiaries. But we also believe that the rule 
would apply to limited tax benefits that provide a temporary or 
permanent tax benefit relative to a tax increase provided in 
the proposal, like, for example, exempting a limited group of 
beneficiaries from an otherwise applicable across-the-board tax 
rate increase.
    For example, a new tax credit for any National Basketball 
Association players who scored 100 points or more in a single 
game would be covered by the rule. And the rule would also 
cover a new income tax surtax on players in the National Hockey 
League that exempted from the new income surtax any players who 
were exempted from the league's requirement that players wear 
helmets when on the ice.
    The rule defines a beneficiary as a taxpayer; that is, a 
person liable for the payment of tax, who is entitled to the 
deduction, credit, exclusion, or preference. Beneficiaries 
include entities that are liable for payroll tax, excise tax, 
and the tax on unrelated business income on certain activities.
    The rule does not define a beneficiary as the person 
bearing the economic incidence of the tax. For example, in some 
instances, a taxpayer may pass the economic incidence of a tax 
liability or tax benefit to that taxpayer's customers or 
shareholders. The proposed rule would look to the number of 
taxpayers. That number is easier to identify than the number of 
persons who might bear the incidence of the tax.
    In determining the number of beneficiaries of a tax 
benefit, we will use rules similar to those used in the prior-
law line item veto legislation. For example, we will treat a 
related group of corporations as one beneficiary for these 
purposes. Without such a rule, a parent corporation could avoid 
application of the disclosure rule by simply creating a 
sufficient number of subsidiary corporations to avoid 
classification as a limited tax benefit under the proposed 
rule.
    For example, if a related group of corporations--like 
parent-subsidiary corporations or brother-sister corporations--
owns a football team, then the related group will be considered 
one beneficiary. That treatment is analogous to the team being 
one entity, not separate entities, like the coaching staff, 
offensive unit, defensive unit, specialty unit, and practice 
squad.
    The time period that we will use for measuring the 
existence of a limited tax benefit will be the same time period 
that is used for Budget Act purposes. That is the current 
fiscal year and 10 succeeding fiscal years. Those are also all 
the fiscal years for which the Joint Committee on Taxation 
staff regularly provide a revenue estimate.
    For purposes of determining whether eligibility criteria 
are uniform in application with respect to potential 
beneficiaries of such a proposal, we will need to determine the 
class of potential beneficiaries. In the case of a closed class 
of beneficiaries--for example, all individuals who hit at least 
755 career home-runs before July 2007--that class is not 
subject to interpretation, since only Henry Aaron satisfies 
this criteria. If, instead, the defined class of beneficiaries 
is all individuals who hit at least 755 career home-runs, then 
we will determine the class of potential beneficiaries by 
assessing the likelihood that others will join that class over 
the time period for measuring the existence of a limited tax 
benefit.
    Whether the eligibility criteria are not uniform in 
application with respect to potential beneficiaries will be a 
factual determination. To continue with the previous 
hypothetical, a proposal that provides a tax benefit to all 
individuals who hit at least 755 career home-runs may still not 
require disclosure if it is uniform in application. If the same 
proposal is altered so as to exclude otherwise eligible career 
home-run hitters who played for the Pittsburgh Pirates at some 
point in their career, then that kind of a limited tax benefit 
would require disclosure under the proposed rule.
    Some of the guidelines in the Joint Taxation Committee's 
reports numbered JCX-48-96 and JCS-1-97 would not be directly 
applicable, but may be helpful in determining the class of 
potential beneficiaries. For example, the same industry, same 
activity, and same property rules might provide useful 
analysis.

Provision to restructure the New York Liberty Zone tax incentives

    In addition to repealing certain depreciation and expensing 
provisions previously available in the New York Liberty Zone 
(the ``NYLZ''), Section 301 provides a Federal credit against 
the tax imposed for any payroll period by Code section 3402 
(related to withholding for wages paid) for which a NYLZ 
governmental unit is liable under Code section 3403. NYLZ 
governmental units are defined as the State of New York, the 
City of New York, or any agency or instrumentality of the first 
two.
    The credit may be claimed during the 12-year period 
beginning on January 1, 2008 and is equal to certain amounts 
expended by the governmental units on a qualifying project. A 
qualifying project is any transportation infrastructure project 
in or connecting with the NYLZ that is designated by the 
Governor of the State of New York and the Mayor of the City of 
New York as a qualifying project. The Governor of the State of 
New York and the Mayor of the City of New York are to allocate 
to the New York Liberty Zone governmental units their portion 
of the qualifying expenditure amount for purposes of claiming 
the credit. The provision is effective on the date of 
enactment.
            Congressionally Directed Spending Item or Limited Tax 
                    Benefit
    The threshold question is whether Section 301 should be 
analyzed as a ``congressionally directed spending item'' or as 
a ``limited tax benefit,'' because Rule XLIV treats the two 
somewhat differently. It can be argued that Section 301 
essentially constitutes a ``congressionally directed spending 
item,'' and therefore that the limited tax benefit analysis is 
irrelevant. The reasoning supporting this reading is that in 
the ordinary course, Federal withholdings on employee wages are 
effectively assets of the U.S. Treasury, and the tax credit 
made available by Section 301 may be claimed (and withholdings 
on wages therefore retained rather than being transmitted to 
the U.S. Treasury) only to the extent that the employer/
governmental unit in question incurs expenditures for 
specifically identified projects.
    Section 301 unquestionably has the economic effect of an 
appropriation: money otherwise due the U.S. Treasury will, by 
virtue of this provision, effectively fund (in light of the 
fungibility of money) a specific expenditure. Nonetheless, this 
memorandum proceeds upon the assumption that Section 301 is a 
``tax benefit'' and not a ``spending item.'' We believe that 
this is an area where legal form, not economic substance, 
controls. Accordingly, we are of the view that an amendment to 
the Internal Revenue Code that has an outlay effect is not by 
virtue of that fact alone a spending item. For example, we 
believe that the refundable portions of the child tax credit 
and earned income credit should be considered tax benefits for 
these purposes, notwithstanding the fact that these provisions 
have substantial outlay effects.
    Our mode of analysis is dictated by practical necessity: 
virtually every ``tax expenditure'' could equally well have 
been implemented by Congress as an appropriation. We take 
comfort as well in the observation made in the colloquy quoted 
above that, for purposes of Rule XLIV, the ``beneficiary'' of a 
limited tax benefit is determined by looking to the formal 
imposition of tax liability (i.e., by determining who is the 
relevant ``taxpayer''), not to the party bearing the economic 
incidence of the tax. The colloquy makes clear that the reason 
for doing so is one solely of administrative convenience (``The 
proposed rule would look to the number of taxpayers. That 
number is easier to identify than the number of persons who 
might bear the [economic] incidence of the tax.'')
    In this case, Section 301 is structured as a tax credit 
made available under the Internal Revenue Code to certain 
employers against their otherwise-existing obligation to remit 
employee withholdings to the U.S. Treasury. In light of our 
traditional analysis summarized above, we therefore think it 
appropriate to proceed on the basis that Section 301 should be 
analyzed under the ``limited tax benefit'' leg of Rule XLIV.
            Limited Group of Current Beneficiaries
    A second issue is whether Section 301 currently benefits a 
limited group of beneficiaries. Applying by analogy the 
colloquy's reference to treating a related group of 
corporations as one taxpayer, we believe that the agencies and 
instrumentalities of New York State and City should be treated 
as at most two taxpayers for purposes of whether a limited 
group of beneficiaries is affected by the provision. 
Accordingly, we believe that the statutory incidence of the 
provision falls on fewer than 10 beneficiaries (i.e., the State 
of New York, the City of New York and agencies or 
instrumentalities of the State or City). The economic incidence 
of the provision is not determinative for these purposes.
            Uniform Application to Potential Beneficiaries
    Under Rule XLIV, a tax provision that in practice applies 
only to a limited number of current beneficiaries nonetheless 
is not a ``limited tax benefit'' unless in addition that 
provision's ``eligibility criteria are not uniform in 
application with respect to the potential beneficiaries of the 
provision.'' (Emphasis supplied.) The only direct indication of 
what constitutes the ``uniform application'' of a taxing 
statute to potential beneficiaries is the colloquy described 
above.\132\ In this regard, the colloquy indicates that a tax 
benefit that applies equally to current and potential future 
beneficiaries will not constitute a limited tax benefit, just 
because the number of identifiable beneficiaries today is fewer 
than 10.
---------------------------------------------------------------------------
    \132\The JCT staff documents on the former line-item veto 
legislation to which the colloquy refers do not discuss the issue of 
``uniform application,'' because that concept was not part of the 
definition of a ``limited tax benefit'' under that legislation.
---------------------------------------------------------------------------
    We suggest that the most logical way to read Rule XLIV that 
is consistent with its obvious intended scope and with the 
colloquy is to conclude that Rule XLIV applies a two-step 
analysis towards ``potential'' beneficiaries. First, a sponsor 
of a Bill that has a limited number of current beneficiaries 
can rely on the existence of a sufficiently large class of 
reasonably-likely potential beneficiaries to demonstrate that 
the Bill applies to more than a limited number of taxpayers. In 
that case, however, Rule XLIV goes on to provide that the 
statute must be applied uniformly to them and to currently-
known beneficiaries. This reading finds direct support in the 
fact that Rule XLIV's ``uniform application'' clause applies 
only with respect to ``potential beneficiaries'' of a 
statute.\133\
---------------------------------------------------------------------------
    \133\In this regard, it is important to note that clause (A) of 
Rule XLIV refers to ``a particular beneficiary or limited group of 
beneficiaries.'' It is only the ``uniform application'' clause (clause 
(B)) that refers to ``potential'' beneficiaries.
---------------------------------------------------------------------------
    In other words, a Bill that has a large number of current 
beneficiaries is not a limited tax benefit provision, because 
by definition it does not apply to a limited number of 
taxpayers, without regard to whether future (``potential'') 
taxpayers are treated differently from current ones. If , 
however, a Bill today applies only to a limited number of 
beneficiaries, then the Bill's sponsor cannot rely on a 
sufficient number of ``potential'' beneficiaries emerging in 
the future to avoid the application of the limited tax benefit 
rule unless the statute would treat all current and potential 
beneficiaries equally.
    Under this reading, a statute that has no possible future 
(``potential'') beneficiaries and that applies today to a 
limited number of current beneficiaries must be a limited tax 
benefit. It cannot be the case, for example, that a rule 
identifying a class of taxpayers comprising only Hank Aaron 
nonetheless is not a limited tax benefit, on the theory that 
all those taxpayers (a single individual) are treated equally.
    Following this mode of analysis, the most important 
analytical step in applying Rule XLIV to a case (like this) 
where a statute's current beneficiaries are limited in number 
is to determine the relevant class of potential (i.e., future) 
beneficiaries. The colloquy concludes that a statute's class of 
potential beneficiaries is to be determined ``by assessing the 
likelihood'' that beneficiaries beyond those to whom the 
benefit applies today may appear at a later date.
    Thus, to continue with the colloquy's baseball analogy, a 
permanent tax benefit made available on a uniform basis to all 
individuals who hit a least 755 major league career home-runs 
is probably not a limited tax benefit (because the number of 
individuals who could qualify in the future is unlimited), but 
a comparable temporary provision expiring December 31, 2008, 
probably does constitute a limited tax benefit, because the 
class of individuals who could reasonably be expected to 
satisfy that test would come down to two identifiable 
individuals.
    Having identified the class of potential beneficiaries, and 
having determined that they are sufficiently numerous as to 
overcome the ``limited'' nature of the tax benefit in question, 
the final step in the analysis is to ensure that the statute 
will apply uniformly to all potential and current 
beneficiaries. In most cases, this determination will be 
straightforward.
    In sum, we acknowledge that the ``uniform application'' 
test is both vague and difficult to apply. The ``uniform 
application'' leg of the analysis should not be read, however, 
to undercut the entire purpose of Rule XLIV. If the only 
taxpayers that can reasonably be expected to satisfy a bill's 
definition of the class of beneficiaries of a tax benefit are 
both few in number and known to the Senator proposing the Bill 
at the time that the legislation is considered, then in our 
view that Bill must give rise to a Rule XLIV issue. Any other 
reading would vitiate the Rule of any meaning.
    This mode of analysis leads to a straightforward resolution 
of the present case. In practice, only New York State and New 
York City (and political subdivisions thereof) can be expected 
to qualify for the benefits of Section 301. The fact that these 
two identifiable beneficiaries are treated equally is not 
enough, in our view, to avoid the reach of Rule XLIV.
            Conclusion
    While we recognize that colorable arguments can be made in 
support of the contrary conclusion, we believe that Rule XLIV's 
disclosure requirement for limited tax benefits is applicable 
to Section 301.
    I would be pleased to discuss this issue further with you, 
should you wish. In any event, I hope that this memorandum is 
helpful to the Chairman's decision-making process.

                                  
